Key Takeaways:
Taiwan is the US’s seventh-largest trading partner, with bilateral goods trade reaching $128 billion in 2023. The US is Taiwan’s second-largest export market, and the partnership covers a wide range of industries, including semiconductors, electric vehicles, and medical equipment.
Taiwan leads global semiconductor production, holding over two-thirds of the market share, largely through TSMC. This dominance is crucial for both US technology firms and Taiwan’s defence strategy. The US is working to diversify its chip supply chain via domestic production, but reliance on Taiwan remains significant.
Taiwan’s 98% reliance on foreign fossil fuels heightens its economic fragility amid regional geopolitical tensions. The US is likely to increase support for Taiwan’s energy sector, particularly in developing renewable energy infrastructure.
As US-Taiwan trade relations grow, China is expected to intensify pressure through sanctions, particularly targeting US arms sales to Taiwan, further escalating Indo-Pacific tensions.
US-Taiwan collaboration extends into clean energy, climate change, and biomedical research. Both countries are prioritising investments in sustainable infrastructure and healthcare, with significant opportunities for American firms despite the geopolitical risks.
Chess game, two kings stand confronting on China and US national flags. Trade war concept. Conflict between two big countries, USA and China concept. Copy space. © fukomuffin / shutterstock.com
Overview of US-Taiwan Trade Relations
As a society aligned with American values such as democracy, respect for the rule of law, and economic liberalism, Taiwan is a strong supporter of American interests in the Indo-Pacific and on the international stage. These interests are echoed by strong trade and investment relations:
The United States is Taiwan’s second-largest export market after China, and its third-largest source of inbound investment.
In 2023, Taiwan stood as the US’s seventh-largest merchandise trading partner, with a total of US$128 billion in goods trade. As of July 2024, US trade with Taiwan reached US$24.8 billion in exports and US$63.8 billion in imports.
The US is Taiwan’s most important arms provider, with more than US$37 billion in sales since 2010. This trend is likely to continue given increased US-China competition.
Washington is also helping Taipei address its talent and labour shortages, which have impeded its economic growth and may threaten its semiconductor sector.
Half the world's trade is conducted via channels passing through the Taiwan Strait, elevating Taiwan’s status as a key partner in supply chains and regional security.
Taiwan and the US enjoy many trade agreements such as the US.-Taiwan Initiative on 21st Century Trade, an economic initiative first signed in June 2023 and serves as a de facto free trade agreement set to increase bilateral trade. The deal targets digital trade, labour and regulatory standards, and various investment venues.
Other key industries, including 5G network security, clean energy, and health, are addressed in other initiatives such as the U.S.-Taiwan Economic Prosperity Partnership Dialogue and the Technology Trade and Investment Collaboration. However, due to pressure from the PRC, the lack of diplomatic recognition of Taiwan as an official state prevents official free trade agreements.
Semiconductors and Technological Interdependence
Taiwan boasts the most advanced semiconductor sector worldwide, currently valued at around US$500 billion. The value of the semiconductor sector is expected to double by 2030. With companies such as the world-leading Taiwan Semiconductor Manufacturing Company (TSMC) supplying Apple, Nvidia, AMD, Qualcomm, and other flagship US tech firms, Taiwan holds significant dominance over global chipmaking. This dominance is due to the difficulty of establishing a world-leading semiconductor ecosystem. Such an ecosystem requires an entire value chain (including manufacturers, foundries, and factories), constant investment, and the capacity to follow the rapid pace of innovation. As a result, only a handful of companies, most of which are Taiwanese, can stay ahead in the semiconductor race. As of 2024, the Taiwanese semiconductor sector accounts for more than two-thirds of the world’s market share, principally held by TSMC and United Microelectronics Corporation (UMC). This quasi-monopoly is vital to Taiwan’s defence strategies as it prompts third-party countries to contribute to its security, thus safeguarding access to the outputs of semiconductor firms.
Source: Counterpoint Research’s Foundry Quarterly Tracker, Pie Chart by KSG
However, US dependence on Taiwanese chips puts US industries in a precarious position given Taiwan’s proximity to China. To address this, Washington is championing its CHIPS and Science Act to relocate some chip production onto its own territory. The act boosts the development of semiconductor manufacturing, artificial intelligence (AI), 5G/6G communications, and high-performance computing. Recently, this has materialised in investments of more than US$65 billion in plants in Arizona, which can manufacture 3nm chips—the most advanced mass production technology to date. Washington expects that by 2030 the US will be producing approximately 20% of the world's most advanced chips. KSG assessment and consultations (with individuals in the semiconductor industry and government officials) concluded that this 20% estimate is highly likely to be achieved.
US-Taiwan Trade Development Efforts
Growing tensions between Beijing and Washington, as well as the COVID-19, pandemic have exposed the vulnerabilities of global supply chains. The US has since sought to reduce its reliance on trade with China. Reducing Taiwan’s reliance on China also benefits Washington's grand strategic objectives. Providing an alternative to Chinese economic relations drastically reduces the ability of China to conduct economic warfare against Taiwan, influence the island, and consequently increase its ability to dominate the Indo-Pacific.
To strengthen US-Taiwan trade relations, both actors have focused on reforming customs administration (e.g., using electronic customs forms), revising regulatory practices (especially for small and medium-sized companies by introducing public consultations on draft regulatory measures), increasing transparency, and boosting imports and exports. Beyond semiconductors, electric vehicles, agricultural products, and medical equipment are other key goods targeted in recent efforts to strengthen US-Taiwan economic ties. In addition, cybersecurity and anti-corruption co-operation to protect the highly vulnerable digital and maritime supply chains from external interference by Chinese espionage is a high priority. KSG consultations concluded that these efforts were widely considered to be having a positive effect on resilience.
Clean Energy, Health, and Climate Change
Besides semiconductors, clean energy, health, and climate change are key sectors in US-Taiwan trade. Taiwan’s energy security remains almost exclusively reliant (about 98%) on foreign fossil fuels. Any disruption to global supply chains, especially in the Indo-Pacific, would severely affect its economy and security. This extreme reliance makes Taiwan fragile amidst regional geopolitical tensions such as in the South China Sea and the Strait of Malacca, channels through which most of its energy imports pass. Washington views the island’s energy vulnerabilities as a critical issue for its own interests and global trade infrastructure. This geopolitical strategic vulnerability motivates US strategy toward Taiwan, in turn presenting business opportunities for Western companies.
At the regional level, Washington uses the IPEF and its Clean Economy Agreement to develop sustainable infrastructure, training programs, and research programs, with the latest investment announcement estimated at US$23 billion. At the bilateral level, Taiwan’s 'Five Plus Two Industry Innovation Plan', a comprehensive plan to address the Taiwanese economy's shortcomings, underlines a reappreciation to promote clean energy, with investments expected to reach US$29 billion by 2030. American public and private actors play a key role within this framework, and further economic opportunities are likely to keep growing. However, as per KSG’s previous assessment, Taiwan has stringent demands on companies, insisting on the use of Taiwanese suppliers both directly and indirectly in their operations.
As a leader in biomedical research, the US has a strong interest in maintaining its position. In this context, Taiwan’s expertise makes it a key partner in vaccine production and medicine, research and development, talent exchange, and commercial ventures. Taipei is also pivotal in contributing to American efforts to strengthen global health security.
Climate change is another focus in US-Taiwan relations. Environmental protection emerges as a transversal concern in every area of this bilateral engagement. US-Taiwan efforts include deepening environmental governance and enforcement, fighting administrative corruption leading to environmental degradation, and investing in countering climate change-related natural disasters. KSG assesses that these joint efforts are inhibiting the growth of Taiwan’s semiconductor sector. This in turn gives China more time to improve its rival companies and contest Taiwan’s global dominance, and the US’s strategy to increase its domestic capability.
Looking Forward
Effects of U.S. Election 2024
In the event of Kamala Harris winning, it is highly likely that she follows Biden’s approach: multi-level support while avoiding any official recognition. Trump strongly supported defending Taiwan during his first term, and KSG expects a similar policy during a second term. Some analysts assess that Trump may reduce support to Taiwan, given his rhetoric around Taipei needing to ‘do more’ for its own defence. KSG assesses that Trump would continue to insist on Taiwan doing more, however, Trump and many of his key advisors are highly astute to the grand strategic necessity of guaranteeing Taiwan’s security and preventing Chinese hegemony in the Indo-Pacific. For this reason, he would be more willing to strain relations than Harris to influence policy changes in Taipei, however, that the guarantee of Taiwan would not be the primary defence objective of a Trump term is assessed as highly unlikely.
Semiconductors
KSG estimates that US-Taiwan exchanges in technology, investment, and trade will likely continue growing. A second TSMC Arizona factory is already under construction, with plans to build a third. Based on these developments, it is likely that other plants will open on American territory in the coming years.
Concurrently, KSG expects that the US will amplify its endeavours to develop a world-class semiconductor ecosystem. Semiconductor, defence, technology and related industries can expect further opportunities presented by incentives, tax breaks, and procurement opportunities. Despite US efforts to diversify its value chains and strengthen its self-reliance, its advanced technologies still rely upon Taiwanese firms and will continue to do so over the next five years at least.
Energy
Taiwan’s energy security remains almost exclusively reliant (about 98%) on foreign fossil fuels. This extreme reliance makes Taiwan fragile amidst regional geopolitical tensions. Washington views the island’s energy vulnerabilities as a critical issue for its own interests and global trade infrastructure. KSG therefore assesses that the US is highly likely to increase its energy assistance to Taipei to develop its energy sector (with projects such as offshore wind farms in the case of a Harris victory). Taiwanese actors have already collaborated with American, European, and Asian companies such as Global Infrastructure Partners, Total Energy, Toshiba, Siemens, and the NKT Group to develop projects addressing this energy security vulnerability.
KSG assesses that a second Trump mandate could disrupt this trend from 2025 onwards given that Trump withdrew from several clean energy and climate change initiatives during his first term.
Despite the volatility of its security environment, Taiwan maintains its key position in biomedical research, clean energy development, and addressing climate change. KSG expects that the US will likely see its exchanges and investments with Taiwan in these key sectors grow steadily. Against the backdrop of the recent IPEF Agreement’s Supply Chain Council, efforts to better tackle regional healthcare, clean energy, and disaster-relief preparedness have been increasingly prioritised.
Despite these economic opportunities, KSG advises its private sector clients against investments in Taiwan that are long-term in nature where avoidable. Geopolitical tension is likely to increase, and operating in an area of reduced risk (Such as India, as per KSG recent assessment) is advised.
Chinese Reciprocation and Effects
KSG expects that China will further pressure state and non-state actors engaging with Taipei out to 2030. China will likely continue assertive actions in the Indo-Pacific as the American presence in its sphere of influence is perceived as a challenge to its rise. Likewise, the de facto American protection of Taiwan defies the Chinese Communist Party’s legitimacy. Concurrently, the growing Chinese presence encourages Washington to double down its Indo-Pacific involvement and expand its security networks, especially with South Korea, Japan, Australia, the Philippines and Taiwan. Regarding the latter, China recently announced sanctions on nine US companies selling arms to Taiwan, thereby reinforcing competition over the island and sanctions resulting from American assistance.
As KSG assesses that Taiwan-US relations are very likely to continue growing, it is therefore highly probable that further sanctions on American actors (public and private) will be issued, especially vis-à-vis arms sales. KSG consultations concluded that China is unlikely to utilise a large range of indirect sanctions against Western companies at this time, such as financial institutions investing in Taiwanese equities contrary to China’s influence objectives. Instead, Beijing is likely to continue preferring a targeted approach. However, Beijing will have contingencies in place to quickly harm Western companies through economic warfare should it feel the option is necessary. KSG’s network of sanctions specialists concluded that it would cause China more harm than strategic advantage.
Despite KSG’s assessment of limited sanctions being the preferred policy option in Beijing, these tensions inherently increase the probability of higher tariffs, sanctions, market access restrictions, capital flights, embargoes, and forced relocations (enforced by both China and the US).