GDP is growing at a torrid clip thanks to massive AI demand, but Taiwan is increasingly putting all its economic eggs in one basket.

Taiwan’s exports hit an all-time high of US$640 billion in 2025, driven by insatiable global demand for its advanced semiconductors, servers, and other data center hardware used in AI applications. The Taiwan government estimates that the economy grew 7.37% in 2025, up from 4.27% the year before.

To put Taiwan’s 2025 growth in perspective, it was the fastest pace since 2010, when the economy rebounded from the global financial crisis, and an unusually strong showing for an advanced economy. From 1981 to 1995, Taiwan grew at an average annual rate of about 7.5%. At the time, per-capita GDP was less than one-third of today’s roughly US$38,000 to US$40,000.

No Taiwanese company has benefited more from the AI boom than Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest contract chipmaker. The Hsinchu-based company makes about 90% of the world’s leading-edge semiconductors. About 40% of Taiwan’s exports are semiconductors.  

TSMC achieved record-breaking sales in 2025, with full-year revenue reaching approximately NT$3.81 trillion, up 31.6% year-over-year. Profit increased by 46.4% to NT$1.72 trillion, and AI demand and high-performance computing accounted for 55% of total sales, according to the company.

“Recent developments in the AI market continue to be very positive,” TSMC Chairman and CEO CC Wei said in a fourth-quarter earnings call. “Looking ahead, we observe increasing AI model adoption across [the] consumer enterprise and sovereign AI segments. This is driving need for more and more computation, which supports the robust demand for leading-edge silicon.”

Responding to an analyst’s question, Wei said the key issue was determining “whether the AI demand is real or not.” He admitted that he was “very nervous” about the outlook, given TSMC’s plans to spend between US$52 billion and US$56 billion on related capital expenditures.

However, based on conversations with customers over the past few months, Wei said he now believes AI demand is genuine. TSMC customers, he added, “have shown me the evidence that AI really helps their business.”

Growth in shipments and higher pricing of AI accelerator chips from companies such as NVIDIA and AMD have driven continued expansion in orders for leading-edge foundry processes, analysts at the semi-governmental Market Intelligence & Consulting Institute (MIC) say. This has supported sustained growth in Taiwan’s semiconductor output, making it a key contributor to Taiwan’s overall GDP growth.

U.S. expansion

As demand for AI hardware surges, TSMC is expanding capacity at its Arizona manufacturing facilities. What began as a US$12 billion plan for a single fabrication plant announced in 2020 has since grown into a US$165 billion investment encompassing five fabs.

Under the U.S.-Taiwan tariff arrangement announced in January, Taiwanese semiconductor and other technology companies will collectively make new, direct investments of US$250 billion “to build and expand advanced semiconductor, energy, and artificial intelligence production and innovation capacity in the United States,” according to a United States Commerce Department fact sheet.

The Taiwan government will also provide US$250 billion in credit guarantees to facilitate additional investment by Taiwanese companies, “supporting the establishment and expansion of the full semiconductor supply chain and ecosystem in the United States,” the Commerce Department said.

TSMC is expected to account for a large share of the $250 billion of direct U.S. investment, though the company has yet to disclose how much it will invest.

“TSMC is aiming to diversify its global footprint and strengthen its relationship with its key benefactor,” says J. Travis Mosier, a nonresident fellow at the Center for a New American Security (CNAS) and former Commerce Department official. “They will always keep the crown jewels in Taiwan, but an increasing share of the ever-growing pie will certainly end up in the Arizona desert.”

Analysts at MIC note that Taiwan has long been a strategic partner of the United States in the AI sector. Beyond the manufacturing and advanced packaging of leading-edge AI accelerator chips, cooperation also spans the design, development, and assembly of AI servers and data-center equipment. The relationship builds on decades of close collaboration in smartphones, personal computers, and servers, pointing to a deep alignment between the two technology ecosystems, the analysts say.

That interdependence was underscored during TSMC’s recent earnings call, when Wei said, “All my AI customers are in the U.S.,” adding that the concentration of demand was driving the company to accelerate its fab expansion in Arizona. NVIDIA, Apple, Broadcom, Amazon, Qualcomm, and Intel are among TSMC’s major customers for advanced AI-capable chips. While Apple has long been TSMC’s largest customer, analysts expect NVIDIA to overtake it this year, reflecting surging AI chip sales and heavy investment in AI infrastructure.

Data center demand

As the power consumption of AI chips continues to rise, servers and rack-level infrastructure must be upgraded in parallel to ensure stable and energy-efficient operation. This need for upgrades has accelerated demand for advanced liquid-cooling solutions and higher-capacity power systems in servers and data center racks.

Chen Yi-ling, a senior industry analyst at MIC, notes that Taiwanese data center equipment manufacturers have long specialized in high-end server components and system integration. They offer comprehensive capabilities across critical technologies such as liquid cooling systems, power supplies, and rack-level design, and have become key partners to global cloud service providers.

As liquid cooling rapidly penetrates the AI server market, Taiwan’s supply chain is benefiting from growing demand for in-rack liquid cooling components, including cold plates, manifolds, and quick disconnects, Chen explains. On the power side, rising demand for high-end power supply units is also driving upgrades to data center facility-level power systems, “reinforcing Taiwan’s competitive advantage in providing one-stop solutions for data center infrastructure,” she says.

NVIDIA is widely regarded as the dominant supplier of chips for AI-driven data centers, commanding more than 90% of the specialized AI GPU market. While companies like Amazon Web Services (AWS) and Microsoft Azure lead in the ownership and operation of physical, cloud-based data centers (measured by facilities), NVIDIA is the paramount provider of the critical technology, hardware, and AI chips that power them.

Quanta Computer, a Taiwanese contract electronics manufacturer focusing on the data center market, expects its AI-related business to grow by at least a triple-digit percentage this year. It is thus considering increasing its capital expenditure, mostly in the United States and Thailand. In 2026, Quanta expects AI servers to account for about 80% of its total server revenue.

In the next three years, AI would not only continue to grow rapidly, “but enter a blooming era,” Quanta Chairman Barry Lam told the Taipei Times in January, adding that Quanta has secured a competitive edge by transitioning from air-cooled AI servers to liquid-cooled supercomputers. The New Taipei City-based manufacturer expects to begin shipping servers powered by NVIDIA’s latest Rubin platform in August, though revenue contributions this year are likely to be limited given the early stage of the rollout, he said.

Unbalanced growth

While the AI boom has been a windfall for Taiwan’s information and communications technology exporters, overall growth has been uneven, with gains failing to spread across the broader economy. The struggles of traditional manufacturers illustrate the imbalance.

Exporters of products such as machine tools, chemicals, and metals did not benefit from the broad tariff exemptions granted to Taiwan’s technology hardware sector. With the United States among their most important markets, many traditional manufacturers were hit hard as double-digit tariffs eroded sales and compressed margins.

In January, machine toolmaker Litz Hitechtold the Taipei Times that its exports had fallen 30% due to tariffs. Though the U.S.-Taiwan trade deal reduces the tariff rate to 15%, that is still nearly three times the company’s profit margin. “I don’t think there is a single Taiwanese machine toolmaker that can negotiate to absorb [the tariff] in full — maybe 2 to 3%,” Litz Hitech sales director Chris Wu told the newspaper.  

Beyond the recently imposed U.S. tariffs, Taiwan’s non-tech manufacturing has long been disadvantaged by Taiwan’s exclusion from multilateral trade agreements, notes Ross Darrell Feingold, a Taipei-based lawyer and political risk consultant. These include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Regional Comprehensive Economic Partnership (RCEP), the ASEAN Free Trade Area (AFTA), and the ASEAN-China Free Trade Area.

“Taiwan’s [non-tech] manufacturers are excellent at what they do,” Feingold says. “But if at the destination country, products made in Taiwan are assessed higher tariffs versus products made elsewhere, then the Taiwan manufacturers will make the obvious choice, which is to relocate their manufacturing to other locations. Higher costs in Taiwan for labor and land versus other potential manufacturing locations are also a significant factor.”

Traditional manufacturers have also been squeezed by the strength of the New Taiwan dollar. The currency appreciated 4.27% in 2025, its largest annual gain in five years, reflecting Taiwan’s record US$157.14 billion trade surplus — driven largely by AI-related ICT exports — as well as heavy foreign inflows into Taiwanese equities and a broadly weaker U.S. dollar. In trade-weighted terms, the New Taiwan dollar fell by roughly 8% in 2025 and declined by about 10% against other major global currencies.

Doubling down on tech hardware and AI  

While Taiwan’s government has sought to cushion the blow for traditional manufacturers with subsidies, export promotion, and industrial upgrade support, there appears to be little appetite to significantly diversify away from its reliance on technology hardware exports. Including semiconductors, ICT products accounted for 74% of Taiwan’s exports in 2025, the largest share on record.

In the short to medium term, Taiwan will continue to face substantial pressure from the Donald Trump administration to boost semiconductor manufacturing in the United States. Secretary of Commerce Howard Lutnick said in a mid-January CNBC interview that the objective of the trade deal is to bring 40% of Taiwan’s entire semiconductor manufacturing supply chain to America by the end of President Trump’s term.

“The typical time needed to build a semiconductor fab makes it unlikely that 40% of Taiwan’s current semiconductor production could occur in the United States by the time the Trump administration ends on January 20, 2029,” Feingold says.

He notes that land acquisition, regulatory approvals, construction, employee hiring and training, test production, and capacity ramp-up all take time. “TSMC has admirably built its initial fabs quickly in Arizona, though it also encountered, to its frustration, challenges with federal, state, and local regulatory approvals and other issues.”

Taiwanese economists have pushed back against the 40% figure. In a January Facebook post, Chung-Hua Institution for Economic Research President Lien Hsien-ming said that less than 15% of TSMC’s advanced manufacturing processes are expected to be relocated to the United States by the end of Trump’s second term.

Ultimately, the economic rationale for closer U.S.-Taiwan semiconductor cooperation is likely to prevail, analysts say, even if the two countries differ on where production should take place. CNAS’s Mosier puts it simply:

“Made-in-Taiwan silicon enables AI, so I expect that the U.S.-Taiwan strategic partnership will continue to focus on bilateral monetary and diplomatic investments around securing supply for cutting-edge chips in Taiwan, while encouraging TSMC to expand its advanced capabilities in the United States.”