Syaru Shirley Lin explains how Taiwan is navigating geopolitical tensions and economic shifts while walking a tightrope between the US and China
This op-ed was written by Syaru Shirley Lin. She attended the 2024 Salzburg Global weekend, which focused on "Looking 'East': Confronting Assumptions and Expectations of 'East' and 'West' in an Unstable and Multipolar World".
Geopolitical challenges and economic shifts
Since the 1970s, Taiwan has been a pioneer in embracing globalization by utilizing cutting-edge technology from the West while pursuing economic integration with China. However, Taiwan today finds itself in a rapidly shifting landscape of economics and geopolitics. This shift from integration to fragmentation is exemplified by the de-risking efforts led by the US targeting China. The regional dynamics in the Western Pacific have been tense, with increasing assertiveness from Beijing and intensified gray-zone coercion against Taipei and other US allies and partners. To pursue resilience, Taiwan needs to further diversify its economy, enhance policy coordination with like-minded partners, and identify a new frontier of innovation.
Taiwan is a key stakeholder in the contemporary world economy and has long served as the gateway between China and the global market. Today, the Taiwan Strait remains a crucial shipping route, with almost half of the global container fleet passing through it. For years, China (including Hong Kong) has been Taiwan’s most important trade partner, accounting for 40% of Taiwan’s exports. However, China also poses an imminent threat to Taiwan’s security. This “China Dilemma” is shared with others in the region, but the challenge for Taiwan is much more severe.
China has been utilizing gray-zone tactics against Taiwan, including military drills around Taiwan and economic, political, and diplomatic coercion. A total of 1,709 Chinese warplanes were tracked entering Taiwan’s air defense identification zone in 2023, doubling the record of 2021. Two weeks after DPP President Lai Ching-te’s inauguration speech, which Beijing interpreted as “dangerous signals that seek ‘independence’ provocations,” China scrapped preferential tariff treatment for 134 Taiwanese exports under the Economic Cooperation Framework Agreement. Internationally, Taiwan’s diplomatic space has been shrinking, with 10 countries switching recognition from Taiwan to China since 2016. The gap between the two sides across the Taiwan Strait not only persists but continues to widen.
Market diversification and trade strategies
US–China decoupling has accelerated Taiwan’s efforts to diversify its markets beyond China. The share of China and Hong Kong in Taiwan’s exports decreased to just over 35% in 2023, the lowest since 2002. Recent data also indicates a significant shift in Taiwanese investment patterns, with a marked decline in investments flowing to China. In 2023, Taiwanese investments in China were only $3.0 billion, a 40% decline from 2022. By contrast, foreign direct investment to the rest of the world (excluding China) rose by 136%—from $10.0 billion in 2022 to $23.6 billion in 2023. Meanwhile, Taiwan’s New Southbound Policy (NSP), implemented 8 years ago, has significantly enhanced economic engagement with Southeast Asia and South Asia. Taiwanese investments in NSP countries surpassed those in China for the first time in 2022 and were nearly double ($5.7 billion) those in China ($3.0 billion) in 2023.
More importantly, Taiwan needs to forge institutional arrangements that facilitate broader market access. It continues to pursue membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), seizing the opportunity as Canada chairs the CPTPP Commission this year. This is important for Taiwan as an export-oriented economy, especially given its limited prospects for joining other free trade agreements like the China-backed Regional Comprehensive Economic Partnership (RCEP).
Given the economic and geopolitical challenges it faces, closer cooperation with Washington remains important for Taipei. The US has upgraded political relations with Taiwan, evidenced by five Taiwan-specific laws passed in the past 6 years and over 60 visits by US congressional delegations in the past 3 years, and the offering of significant arms packages. However, Taiwan needs more comprehensive economic agreements with the US, including increased tariff reductions, broader market access, and enhanced communication between civil societies and think tanks. More concrete progress in negotiations with the US through the US–Taiwan Initiative on 21st Century Trade is a high priority.
Taiwan's pivotal role in the semiconductor industry
The semiconductor industry is a vivid example of the tightrope Taiwan is walking between the US and China. Taiwan is a cornerstone of the global semiconductor supply chain, producing 60% of the world’s integrated circuit chips and over 90% of the most advanced ones. However, amid the current US–China tech rivalry, the world now views Taiwan’s dominance in advanced semiconductor manufacturing as a potential vulnerability. From Washington to Brussels, the West is reshoring supply chains and enacting protectionist policies that undermine global supply chain resilience and hurt Taiwan. Unilateral US initiatives such as the CHIPS and Science Act and expanded export controls are creating additional compliance costs for Taiwanese firms to adjust their supply chains. Additionally, China is intensifying its efforts to invest in indigenous innovation and legacy chip production, with SMIC becoming the world’s third-largest foundry and posing increasing pressure on Taiwanese stakeholders in the industry.
To navigate these challenges and maintain its technological edge, Taiwan needs to strengthen institutional coordination with the US, Europe, and other East Asian partners in supply chain policy design and implementation. In the long term, Taiwan should expand its innovative focus to other high-value industries, such as integrated circuit design, biotechnology, and renewable energy. This will enable Taiwan to leverage its existing strengths in technology and industrial production while exploring new growth opportunities. Indeed, Taiwan’s economic resilience rests crucially on interdisciplinary research, cross-sector collaboration, and international talent cultivation.
Syaru Shirley Lin is a nonresident senior fellow in the Foreign Policy program at Brookings and a research professor at the Miller Center of Public Affairs at the University of Virginia. She is an adjunct professor at the Chinese University of Hong Kong and also chairs the Center for Asia-Pacific Resilience and Innovation. Her research and teaching focus on cross-Strait relations, international and comparative political economy, as well as the challenges facing high-income societies in East Asia.
