Taiwan, explained.
Fast or slow lane? (Timo Volz/Unsplash)
Taiwan’s two-speed AI economy
A boom masks pockets of economic pain but – for now, at least – belies Trump’s claims that the island is a “negotiating chip”.
Taiwan, explained.
Fast or slow lane? (Timo Volz/Unsplash)
A boom masks pockets of economic pain but – for now, at least – belies Trump’s claims that the island is a “negotiating chip”.
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Taiwan’s two-speed AI economyTaiwan’s two-speed AI economy
The rush to build the data centre infrastructure needed to train and run artificial intelligence (AI) models has led to some eye-catching (Opens in new window) statistics.
In this regard, Taiwan has thrown up a doozy of its own. Taiwan’s economy grew at a stupendous 15% (Opens in new window) clip in the first quarter of this year on an annualised basis.
GDP growth for 2026 is projected to reach up to 10% (Opens in new window), rates of growth not seen since the heady days of Taiwan’s “economic miracle”. Adding to the surreality is the fact that Taiwan’s stock market has now surpassed both (Opens in new window) the Indian and UK bourses in value.
TSMC’s commanding market share for advanced chip production is unsurprisingly a key driver behind this growth surge. TSMC makes most (Opens in new window) of Nvidia’s silicon and, tellingly, is also a crucial supplier for companies seeking (Opens in new window) to challenge or reduce their dependence on Nvidia. Nvidia has now taken the baton from Apple as TSMC’s (Opens in new window) largest customer.
But Taiwan’s indispensable role in AI supply chains goes far beyond TSMC.
The risk of overreliance on exports linked to a sector acutely exposed to the vicissitudes of technological innovation are very real.
When Nvidia CEO Jensen Huang visited Taiwan earlier this year, he dined (Opens in new window) with executives of relatively unheralded but vital companies such as Foxconn, Wistron, Quanta Computer and Delta Electronics. These companies are leading manufacturers of the nuts and bolts of data centres, including AI servers, graphics processing unit (GPU) modules and cooling solutions. Although TSMC’s dominant position in cutting-edge chip manufacturing is much better known, Taiwan also makes around (Opens in new window) 90% of the world’s AI servers.
So far, so good for the Taiwanese economy.
However, Taiwan’s boom times have severely accentuated the dual economy dynamic (Opens in new window) that characterises East Asia’s economies.
In Taiwan’s case, this means the bifurcation of the economy into globally competitive and indeed dominant exporters of semiconductors and adjacent goods, and typically smaller companies operating in traditional manufacturing sectors and services.
While parts of Taiwan Inc are making money hand over fist, less glamorous manufacturing sectors are stagnating or are in outright contraction territory.
When semiconductors and AI servers are excluded from Taiwan’s export figures, exports have fallen an alarming 40% (Opens in new window) since 2022. Factory output in these sectors has similarly fallen. Manufacturers of goods including machinery, metals and chemicals have been clobbered by fierce Chinese (Opens in new window) competition, and struggle (Opens in new window) to match the wages offered by Taiwan’s high flying tech manufacturers.
The risk of overreliance on exports linked to a sector acutely exposed to the vicissitudes of technological innovation is very real.
The release of new and highly competitive Chinese AI models requiring markedly fewer chips to train and run recently led markets to reprise fears that AI hardware stocks are significantly overvalued. Around 80% (Opens in new window) of Taiwanese exports fall into this category, up from half before the pandemic.
Taiwan is recording rates of growth not seen since the heady days of the “economic miracle” (Winston Chen/Unsplash)
The geopolitical implications of Taiwan’s recent economic boom are no less interesting and potentially fraught.
The combined effect of US tariffs, attendant re-routing of supply chains and Taiwan’s export surge means that Taiwan is, fantastically, exporting (Opens in new window) more to the US than China in dollar terms.
Of course, any sustained drawdown in US AI-related capital expenditure would render these figures anomalous.
But for the time being, there’s no denying the United States is ever more dependent on Taiwan for a sector which many in the White House believe will be critical for – to use an Americanism – “winning the 21st century”, and which comprises more than half (Opens in new window) of current US GDP growth.
TSMC is investing more than US$250 billion (Opens in new window) in the United States, and many of its compatriots in accompanying sectors like servers (Opens in new window) are following suit.
TSMC, however, is highly attuned to government fears about the loss of Taiwan’s “silicon shield (Opens in new window)”. It will keep its most advanced production and R&D functions in Taiwan. If TSMC’s existing US investments are any guide, these facilities will be very reliant on Taiwanese workers.
In the context of military sales to Taiwan, President Donald Trump mused that Taiwan was a “very good negotiating chip (Opens in new window)” in the broader US–China relationship.
At present, Taiwan looks less like a bargaining chip (Opens in new window) and more like a linchpin in future US economic prosperity.
About the author
Henry Storey
Henry Storey is Manager - Projects, Research and Analysis at Dragoman with a focus primarily on Asia and the South Pacific.
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