The Strengthening U.S.-Taiwan Economic Connection

Taiwan’s Office of Trade Negotiations, led by Minister without Portfolio John Deng (left) has worked hard to secure closer trade relations with the United States.

Bilateral commerce is booming and technological cooperation is growing. Ongoing trade negotiations and potential double-tax-avoidance legislation may boost the relationship further.

In the first quarter this year, Taiwan’s exports to the United States surpassed those to China for the first time since 2003, the latest manifestation of a deepening commercial relationship between Taipei and Washington. Data compiled by the U.S. Department of Commerce (DOC) show that Taiwan shipped US$26.6 billion in exports to the United States between January and March, compared to US$22.4 billion to China (excluding Hong Kong). In March alone, Taiwan’s exports to the United States surged by nearly 66% year-on-year to US$9.1 billion, while exports to China ticked up just 6% to US$7.9 billion. 

While the United States and Taiwan have long enjoyed a strong commercial relationship, the strategic importance of these ties has heightened in recent years amid a broad realignment of global technology supply chains. Yet given tense U.S.-China and cross-Strait relations, policymakers in Washington have sometimes focused disproportionately on the security side of collaboration with Taipei. 

“The relationships between U.S. and Taiwan firms, for the most part, are characterized not so much by competition as by collaboration, specialization, and division of labor, making the two countries natural partners and making their economic ties among the most important in the world,” says Michael Cunningham, a research fellow in the Heritage Foundation’s Asian Studies Center.  

Cunningham suggests that to further develop these ties, the United States and Taiwan should “get serious about negotiating bilateral trade, investment, and double taxation agreements,” since  “such agreements would not only bolster U.S.-Taiwan trade but also make it easier for U.S. companies to invest in Taiwan and Taiwanese companies to invest and operate in the U.S.”  

The past year has seen some movement in this area. In June 2023, the two sides signed the first agreement under the U.S.-Taiwan Initiative on 21st-Century Trade framework, effectively addressing customs procedures, regulatory practices, anti-corruption measures, and support for small and medium-sized enterprises. The customs agreement in particular is expected to better facilitate U.S. exports to Taiwan.  

Minister without Portfolio John Deng, Taiwan’s lead trade negotiator, speaks at an event on the benefits and impacts of the U.S.-Taiwan Initiative on 21st-Century Trade.

Although the People’s Republic of China (PRC) opposes the trade pact, claiming that it “contravenes the U.S. own commitment of maintaining only unofficial relations with Taiwan,” opposition from Beijing will not derail the agreement, analysts say.  

In its engagement with major democracies, “Taiwan has effectively blurred the line between official and unofficial relations,” allowing it to reap many of the benefits of a formal diplomatic relationship, says Timothy Rich, a professor of political science at Western Kentucky University. “I expect these efforts can lead to forms of free trade agreements, or at least lower trade barriers,” he adds.  

A new round of talks kicked off in Taipei on April 29, focusing on agriculture, labor, digital trade, environment, and state-owned enterprises. The American delegation was led by Assistant U.S. Trade Representative Terry McCartin and included representatives from various U.S. government agencies. Speaking before this latest session, Rupert Hammond-Chambers, president of the U.S.-Taiwan Business Council (USTBC), said that discussions appeared to be progressing well. “It’s taking a wee bit longer as the issues the two sides are working on are more complex than round one,” he adds.  

Taxation and chips  

In addition to the trade-related agreement, the United States and Taiwan are addressing the issue of double taxation. Although some politicians and organizations – including AmCham Taiwan –  have been advocating for such an agreement for more than a decade, substantial movement on the issue has only been seen in the past couple of years. Legislation with broad bipartisan support is currently making its way through Congress. If passed, it would reduce the tax burden on Taiwanese companies and individuals doing business in the United States, conferring the same benefits on Taiwan that nations with formal tax treaties with the United States enjoy. Since the legislation requires full reciprocal benefits, it will not come into full effect until Taiwan provides the same set of benefits to U.S. persons with income subject to taxation in Taiwan. 

The Taiwan government estimates that Taiwanese companies in the United States pay an effective tax rate of 51% due to withholding charges on repatriated dividends. The new deal would cut the withholding rate on interest and royalties from 30% to 10%, and by 15% on most dividends.  

“At present, the tax regime that governs the U.S.-Taiwan bilateral economic relationship is arcane and places disincentives to investment on both Taiwan companies in the U.S. as well as U.S. companies in Taiwan,” says USTBC’s Hammond-Chambers. “Given the evolving importance of this relationship, particularly in America’s neo-industrial semiconductor policy, the status quo is viewed as a barrier to accelerating inbound investment.” This neo-industrial policy promotes the growth and development of industries within the United States through initiatives to support the transition toward high-tech, innovative, and sustainable industries.  

Still, Hammond-Chambers says that “domestic political issues in the U.S. are holding up passage of the vehicle presently being used to pass the Taiwan legislation.” While House and Senate committees passed a standalone bill focused on Taiwan double-tax relief last year, it has since been tied up in a larger US$78 billion tax cut package, which has stalled in the Senate due to objections by some key Senators to a portion of the package dealing with child tax credits. “There appears to be no appetite to break the Taiwan legislation out of this path, for now,” says Hammond-Chambers.  

Despite uncertainty around the fate of the tax deal, Taiwan’s semiconductor sector continues to increase its U.S. investments. In early April, the DOC and Taiwan Semiconductor Manufacturing Co. (TSMC) signed a preliminary memorandum of terms that aims to provide the world’s largest contract chipmaker with up to US$6.6 billion in direct funding under the U.S. CHIPS and Science Act.  

Further, TSMC announced plans to build a third fabrication facility in Arizona, citing “strong customer demand.” TSMC spokeswoman Nina Kao told The New York Times that the decision was also based on market opportunity and the chance to integrate overseas talent into TSMC’s corporate culture. The third fab would bring TSMC’s capital expenditure in Arizona to a total of US$65 billion, the most by a single company in the state’s history and the largest-ever foreign direct investment in an American greenfield project.  

High-level officials, including President-elect Lai Ching-te and Minister of Economic Affairs Wang Mei-hua (center), visit TSMC.

J. Travis Mosier, a former DOC official who worked on the Arizona initiative with TSMC and is now a semiconductor industry consultant, believes that it is crucial for the United States and Taiwan to cooperate in this sector as the PRC doubles down on its attempt to dominate chipmaking. Beijing’s National Integrated Circuit Industry Investment Fund is currently raising up to US$27 billion to fund indigenous advanced chip manufacturing.  

TSMC’s Arizona facilities will serve some of its most prominent customers, including several of the world’s largest companies by market capitalization. These tech giants have expressed enthusiasm over the developments, emphasizing the critical role of the world’s largest pure-play chip foundry in their supply chains. Apple CEO Tim Cook said in a news release that the company is “proud to play a key part in the expansion of TSMC’s U.S. production.” For his part, Nvidia CEO Jensen Huang noted that TSMC has been a long-standing partner of the company since its invention of the graphics processing unit in 1999, and that “our ongoing innovation in artificial intelligence (AI) would not have been possible without them.” 

While some industry analysts have raised concerns related to the chipmaker’s massive U.S. investment, pointing to production delays and high costs, Mosier reckons it’s the right long-term move.  

“The most advanced semiconductor IP, design, and manufacturing powerhouses on the planet must work together to chart the innovation roadmap, maintain global [industry] leadership, and build true resiliency,” he says. “There will be challenges, but given the rise of AI and other emerging technology applications, the semiconductor’s reign is only beginning.”