A historic surge in AI-driven exports has pushed Taiwan’s growth forecasts sharply upward, but looming U.S. tariffs and domestic strains cast a long shadow over 2026.

Taiwan’s economy surged in 2025 on the strength of a global wave of artificial-intelligence adoption. But uncertainty has mounted after the Donald Trump administration imposed tariffs on countries around the world at levels not seen in nearly a century, warning that more may follow amid rising American protectionism and widening trade tensions.

Over the past year, economists repeatedly upgraded their forecasts for Taiwan as demand for servers, graphics processors, and other AI-related hardware soared. Ultimately, the tariffs disrupted global commerce far less than most economists initially feared.

In recent months, forecasts for Taiwan’s GDP growth have climbed sharply. Estimates now range from the International Monetary Fund’s (IMF) relatively modest projections — 3.7% this year and 2.1% next year — to far more bullish outlooks, such as Singapore’s DBS Bank, which expects Taiwan’s economy to expand 7.2% this year and 4.8% in 2026. Ma Tieying, a senior economist at DBS, notes that 7.2% would mark Taiwan’s fastest pace since the post-global financial crisis rebound in 2010.

Other forecasts fall in the middle. Barclays expects growth of 6.2% this year and 1.9% next year, while Taiwan’s Central Bank in September projected 4.55% for 2025 and 2.68% for 2026, pointing to a high base effect as a reason for the slowdown. “Taiwan is definitely outperforming its peers” among the emerging-market countries of Asia, says Bum Ki Son, a senior regional economist at Barclays.

Regarding Taiwan’s major trade and investment partners, the IMF expects U.S. growth to slow to 2% this year before edging up to 2.1% next year. China’s economy is projected to expand 4.8% this year and 4.2% in 2026, weighed down by a prolonged property slump and faltering momentum. The euro area is forecast to grow 1.2% in 2025 and 1.1% in 2026.

AI boom drives growth

Enterprises and institutions — particularly in the United States — have been racing to build data centers and make other AI-related capital investments, fueling demand for AI servers, a sector in which Taiwan holds roughly 90% of the global market.

Barclays economist Son estimates that U.S. investments by AI “hyperscalers” have risen 60% to 70% year-over-year (YoY) in 2025, a surge he expects to continue. He adds that about a third of Taiwan’s exports are now tied to AI.

“We will eventually probably move in the direction where AI applications are used on smartphones and headsets, but for now the demand is coming from some of the data center operators,” Son notes. 

Ma of DBS says competition among countries and companies to secure a first-mover advantage in AI has become intense. She notes that roughly 90% of Taiwan’s economic growth in the first half of 2025 came from electronics sales.

In late November, Bloomberg reported that Nvidia — widely viewed as a bellwether for the AI sector — issued a sales forecast for Q4 of US$65 billion, about US$3 billion above expectations. And in early November, Nikkei Asia reported that Quanta Computer, a major supplier of servers for generative AI processing, said its exports were rising steeply and that it plans to at least double its production capacity by the end of 2026.

Liu Meng-chun, a research fellow at the Chung-Hua Institution for Economic Research (CIER), notes that many of Taiwan’s non-tech industries have already been squeezed by overcapacity in China, where the economic slowdown has led to lower prices that undercut Taiwanese producers. Ma says she expects non-tech exports to remain weak next year for the same reasons.

Ma notes that part of this year’s export surge reflected front-loading, as companies anticipating new tariffs rushed to stock up on goods. In October, exports jumped 49.7% from a year earlier to US$62 billion, according to the Ministry of Finance. Imports in October rose 14.6% YoY to US$39 billion. Over the first 10 months of the year, exports increased 31.8%, leaving a trade surplus of nearly US$23 billion in October.

Reflecting the AI boom, exports of information, communication, and audiovisual products rose by a hefty 138.2% in October from a year earlier, bringing growth for the first 10 months of the year to 77.9%. Chip orders for Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s leading foundry, also increased, driven in part by new Apple releases, including iPhones, iPads, and MacBooks.

The United States, now once again Taiwan’s largest trading partner, accounted for 34.2% of its exports. Shipments to the United States jumped 144.3% in October from a year earlier and rose 63.3% YoY over the first 10 months of the year. China took 23.2% of the exports to rank as Taiwan’s second largest market share, saw far more subdued growth: exports increased just 3.2% in October YoY and 13.1% in the first 10 months.

The China/Hong Kong share of Taiwan’s exports was the lowest in more than two decades.

Exports to ASEAN countries, which together made up 17.4% of Taiwan’s export market, also expanded strongly, rising 40% in October from a year earlier and 38% over the first 10 months.

Investment patterns shift

Another trend in 2025 was the rise in Taiwanese investment commitments in the United States, as companies moved to hedge against anticipated tariffs. The shift builds on an earlier turning point, when the United States overtook China several years ago as the top destination for Taiwan’s outbound investment. In 2024, approved Taiwanese investment in the United States surpassed US$14 billion, a 45.8% increase from the previous year.

Taiwan’s Directorate General of Budget, Accounting and Statistics (DGBAS) said in an August statement that several of the island’s leading exporters of electronics components and AI-server products were planning to expand production capacity in the United States to offset the impact of anticipated semiconductor-related tariffs. TSMC, which produces roughly 90% of the world’s most advanced chips, pledged in March to invest an additional US$100 billion in the United States, lifting its total commitments there to US$165 billion for a series of fabrication plants, processing facilities, and an R&D center.

Ma of DBS says Taiwanese investment in the United States is likely to continue rising, either because new commitments may be folded into a trade agreement or because Washington will step up efforts to attract semiconductor and related firms. But the trend, economists say, leaves Taiwan’s small and medium-sized enterprises — which make up the vast majority of local companies — at a disadvantage, since many lack the resources to shift production to the United States to avoid tariffs.

Overall, approved outbound investment reached US$44.93 billion in 2024, but only US$3.66 billion flowed to China. In 2010, more than 80% of Taiwan’s overseas investment went to China; today, the share is closer to 8%.

“The size remains large, but there is no growth,” Ma says. She adds that Taiwanese investment in Southeast Asia has also been increasing sharply. The shift began when rising wages in China pushed manufacturers toward the region for lower-cost production and accelerated during the first Trump administration as companies diversified amid escalating U.S.-China trade tensions.

Ma notes that ASEAN economies are now increasingly tied into global AI supply chains. “This will attract more Taiwanese investment and also deepen trade relations with Taiwan,” she says.

Another trend in the past year was increased investment in Taiwan. DGBAS forecast in August that real private fixed capital formation would increase by 9.9% this year.

“Leading domestic semiconductor firms have been expanding their capacity in advanced process and packaging technologies, prompting supply chain vendors to ramp up their investments,” the Directorate-General said. “The firms have also been scaling up their investments in R&D to strengthen their competitiveness.”

DGBAS notes that foreign investment in research and development facilities and data centers by international companies is bolstering private-sector investment momentum. In late November, for example, Google opened its largest AI hardware infrastructure engineering center outside the United States in Taipei, marking one of the company’s largest overseas technology investments.

Domestic pressures

When it comes to employment, wages, and consumption, the spillover from the booming tech sector into the broader economy remains limited, and many Taiwanese are not benefiting from the island’s headline growth.

Liu of CIER notes that Taiwan’s traditional industries — the sectors most affected by the United States’ 20% reciprocal tariff imposed on Taiwanese goods — account for roughly 60% to 70% of total employment, and their workers tend to be older. By contrast, the semiconductor industry, though a major driver of GDP, is far less labor-intensive and increasingly automated, offering fewer broad gains for the workforce.

As a result, Ma of DBS says cases of employees being put on unpaid leave have begun to rise. In September, the Ministry of Labor reported that more than 6,000 workers had been furloughed, with the machinery and equipment sector hit hardest. DGBAS said the seasonally adjusted unemployment rate in October edged down 0.02 percentage points to 3.33%. Ma expects joblessness to rise slightly next year, to around 3.5%.

DGBAS reported that average total earnings for Taiwanese nationals reached NT$60,860 in September, up 1.78% from a year earlier, while median regular earnings — considered more representative — rose 3.61% to NT$40,018.

Economists say wage growth will remain uneven, as traditional industries facing U.S. reciprocal tariffs and China-related overcapacity continue to struggle. At the same time, Taiwan’s working-age population, which stood at 16.17 million last year, is projected to shrink by roughly 200,000 people annually. This demographic shift could push wages upward in the short term even as it weighs on long-term growth, says Hsu Wen-tai, a research fellow with Academia Sinica’s Institute of Economics.

Ma notes that Taiwan’s GDP per capita is expected to reach US$38,000 (nearly NT$1.2 million) this year, surpassing South Korea’s for the first time. But economists, including Darson Chiu, director general of the Confederation of Asia-Pacific Chambers of Commerce and Industry (CACCI), and Chiang Min-hua, an adjunct fellow at the East-West Center in Washington, say that income inequality in Taiwan has worsened over the past several decades.

Some economists also warn that the downturn in traditional industries will soften consumer spending. CIER estimates that private consumption will grow 1.56% this year, down from 2.72% in 2024. It forecasts a rebound to 2.04% in 2026.

The NT$10,000 cash handouts distributed to citizens and permanent residents in November amounts to roughly 1% of Taiwan’s GDP. Barclays’ Son notes that not all recipients will spend the full NT$10,000 and expects the program to add about 40 basis points to fourth-quarter GDP growth.

Tourism, another important driver of consumption, is recovering but remains below pre-pandemic levels. A Tourism Administration official told Taipei Times that international arrivals could reach 9 million this year, still short of the more than 11 million visitors in 2019. Local media have also reported that the Ministry of Transportation and Communications plans to introduce new subsidy programs next year to encourage domestic travel.

With regard to monetary policy, the Central Bank kept interest rates unchanged at its September meeting. “The Board decided to keep the discount rate, the rate on refinancing of secured loans, and the rate on temporary accommodations unchanged at 2%, 2.375% and 4.25%, respectively,” it said in a statement.

The bank also said it expects inflation to ease, with the consumer price index projected to fall from 1.75% this year to 1.66% in 2026.

Ma of DBS expects the bank to keep rates unchanged throughout 2026. With GDP growth still relatively strong, she says, the bank is unlikely to see a compelling case for rate cuts. CACCI’s Chiu also expects rates to remain flat, provided the New Taiwan dollar does not appreciate sharply. Barclays’ Son, by contrast, foresees two rate cuts of 12.5 basis points each, one in the second quarter of next year and another in the fourth.

The Central Bank has also imposed a series of credit controls aimed at cooling property speculation. It noted that the ratio of real estate lending to total bank lending has eased from a peak of 37.61% at the end of June last year to 36.71% at the end of this August.

Focus Taiwan, the government-funded news agency, reported that transactions of residential and commercial properties in Taiwan’s six largest cities fell more than 36% in May from a year earlier, as uncertainties stemming from U.S. tariff policies made home buyers more cautious.

Meanwhile, the New Taiwan dollar has appreciated sharply this year — a challenge for an economy that depends heavily on exports. Barclays attributes the currency’s rise largely to strong equity inflows. CIER estimates the exchange rate averaged 32.11 to the U.S. dollar last year and 30.91 this year, and will strengthen further to 29.42 in 2026.

Taiwan has long faced external scrutiny for its exchange-rate practices. In June 2025, the U.S. Treasury kept Taiwan on its monitoring list of economies viewed as potentially engaging in “currency manipulation.” According to a November 2025 joint statement between the Treasury and Taiwan’s Central Bank, the two sides reaffirmed a commitment “to avoid manipulating exchange rates” and pledged increased transparency and regular disclosures of any foreign exchange interventions.

Hsu of Academia Sinica says many experts believe that once a potential U.S. trade deal with Taiwan is concluded, the Trump administration may press the Central Bank to allow the currency to appreciate even more. Such pressure, he warns, could deliver a more severe blow to Taiwan’s manufacturing sector than tariffs themselves.

Economists warn that Taiwan’s heavy reliance on semiconductors for its prosperity underscores the need to cultivate additional growth drivers. To this end, President Lai Ching-te has said Taiwan will step up investment in research and development across three strategic technologies — quantum computing, silicon photonics, and robotics — areas intended to build on the island’s existing strengths in AI.

The government aims to see Taiwan place among the world’s top five countries in computing power, according to Nikkei Asia, and plans to pursue dedicated research and development in each of the priority fields. To support this effort, it plans to invest US$3.2 billion in a program known as the “10 Major AI Projects.”

DBS senior economist Ma also points to biotechnology as a potential new growth engine. She defines Taiwan’s biotech sector broadly, encompassing pharmaceuticals, medical equipment, and health and welfare services. Although the industry accounts for less than 5% of Taiwan’s GDP, she says its contribution is increasing. “Taiwan has been doing well in medical devices, their exports have been increasing,” she says.

She adds that as Taiwan’s population ages, demand for healthcare products and services will continue to rise. In his National Day address on October 10, President Lai noted that the biomedical sector could become another “guardian mountain” for Taiwan — invoking the nickname often used for TSMC as the island’s protective economic pillar.

In his address, Lai also said the government is “building Taiwan into a hub for asset management.” With respect to this vision, Ma notes that Taiwan is a “savings economy,” with high levels of household and corporate savings and substantial accumulated assets. She sees domestic wealth management as a potential future growth driver and expects further liberalization in the financial sector next year.

Policy and power risks

Economists point to a range of uncertainties facing Taiwan’s economy, but notably cross-Strait tensions were not among the most frequently cited concerns. On this topic, Ma says she expects Chinese policymakers to focus more on domestic economic reforms in the coming year.

Barclays’ Son adds that the long-term geopolitical effects of TSMC’s overseas expansion — including new plants in Arizona, Dresden in Germany, and Kumamoto in Japan — could become more evident in the decades ahead, since part of that diversification reflects geopolitical risk. But for now, he says, tensions with China have limited impact on Taiwan’s near-term economic outlook.

More than China-Taiwan relations, economists warn of uncertainties surrounding U.S. trade policy. Taiwan’s resilience so far, they caution, does not mean the tariffs will be harmless in the long run.

The Trump administration has imposed a series of sector-specific tariffs under the national security-related Section 232 of the Trade Expansion Act of 1962. Semiconductors — along with the tools and components used to make them — are currently under investigation. In August, Trump floated the possibility of a 100% tariff on chips, but paired it with a sweeping exemption for companies that already manufacture in the United States or are building facilities with the intention to do so.

As an export-driven economy, Taiwan is more exposed to American tariffs than many of its regional peers. Trump’s trade policies toward Taiwan have taken several turns (see page 51), but the most consequential for now is the reciprocal tariff imposed in early August: a 20% rate, higher than the 15% applied to Japan and South Korea. As of the time of writing, a new deal has yet to be made.

Most of Taiwan’s key exports to the United States are temporarily exempt, including semiconductors, smartphones, computer parts, servers, and other personal electronics. But the exemptions are not guaranteed to last, and Washington has signaled that tariffs on these products could be introduced in the future.

Academia Sinica’s Hsu estimates that 20% of Taiwan’s exports have been slammed by the 20% reciprocal tariff and are suffering. They include such products as screws, textiles, machine tools, and petrochemicals (see page 53).

Taiwanese negotiators, led by Vice Premier Cheng Li-chiun and Chief Trade Representative Yang Jen-ni, have traveled to Washington several times in an effort to strike a deal to reduce the 20% reciprocal tariff. Trade rivals South Korea and Japan have reached their own agreements with the United States, cutting most of their reciprocal tariffs from 25% to 15% in exchange for investment pledges of US$350 billion and US$550 billion, respectively.

For Taiwan, economists say, the process has been slowed by the Trump administration’s decision to prioritize relations with Beijing. That shift culminated in a limited U.S.–China trade truce on November 1, which stopped short of a comprehensive agreement but included a one-year suspension of several punitive measures.

Hsu notes that Taipei is likely to wait for the results of the Section 232 investigations into semiconductors and electronics before making any major commitments.

According to Reuters, which cited five anonymous sources familiar with the matter, behind-the-scenes negotiations were moving toward a framework in which Taiwan would commit to new investment and to training U.S. workers in semiconductor manufacturing and other advanced industries.

One of the sources said the commitments would include support for developing science-park infrastructure in the United States, drawing on Taiwanese expertise. In mid-November, a Taiwanese Cabinet spokeswoman said Taipei is seeking reductions or exemptions for semiconductors as part of any agreement.

President Trump has long expressed disdain for trade deficits. Last year, the U.S. goods trade deficit with Taiwan reached US$74 billion, according to the Global Taiwan Brief — more than double the US$30 billion deficit recorded in 2020. Economists say the imbalance may be even larger this year, driven in large part by surging demand for AI-related products.

Some analysts posit that despite the flurry of closed-door negotiations between Taiwan and the United States, a deal may ultimately prove elusive. The political cost of meeting Washington’s demands, they argue, could simply be too high for President Lai. The public may fear that Taiwan’s “guardian mountain” or “silicon shield” would be weakened if TSMC shifts more investment or production to the United States. And Taiwan’s opposition-controlled legislature, known for its combative politics, could refuse to ratify any agreement at all.

“For President Lai, no deal may be just as attractive at this point when compared to the political risks a deal might bring,” wrote Riley Walters, a senior fellow at the Hudson Institute, in late October. 

Other risks cited by economists include a potential slowdown in AI-related industrial growth and the possibility of electricity shortages as Taiwan scales up power-intensive AI operations. The island’s last nuclear power plant went offline in May this year, and renewable energy generation has fallen short of initial targets. Chiu, among others, warns that Taiwan’s power supply remains unstable.

Ma of DBS underscores the uncertainty, saying she has both “bull” and “bear” scenarios for next year. Her base-case forecast of 4.8% GDP growth for 2026 could be revised up to 6% or even 7% if the AI boom continues in a supercycle, if semiconductor products receive broad exemptions from U.S. tariffs, and if reciprocal tariffs are significantly reduced under a Taiwan–U.S. trade agreement.

But growth could slow to between 2% and 3%, she warns, if the AI cycle loses momentum, if high semiconductor tariffs are imposed, and if reciprocal tariffs remain elevated.