WHAT YOU NEED TO KNOW
  • Taiwan remains in negotiations with the United States on a bilateral tariff agreement. In the absence of an earlier agreement, Taiwan products (other than semiconductor and digital products under the 232 investigation) have been subject to a 20 percent U.S. “reciprocal tariff” since August.
  • Taiwan hopes to consummate a tariff deal with the United States by the end of the year. Key objectives include reducing the U.S. tariff rate to at least 15 percent (comparable with Korea and Japan) and securing preferential treatment for products under a 232 investigation. Taiwan may make concessions in reducing import tariffs on U.S. cars, encourage semiconductor and digital companies to invest in the United States and increase procurement of U.S. products.
  • Taiwan seeks to strengthen defense capabilities. The government unveiled a 20 percent increase in defense spending for 2026 to 3.3 percent of the GDP, with plans to increase that to 5 percent by 2030.
ON THE HORIZON
  • The pending outcome of a U.S.-Taiwan tariff negotiation will have a political and economic impact on Taiwan. The government will likely receive criticism even if the tariff rate is on par with Japan’s and Korea’s and Taiwan deepens supply chain integration and trade ties with the United States. A worse-than-expected result could mean additional pressure from opposition parties and the business community on President Lai Ching-te’s government. A cabinet reshuffle is possible around mid-February (Lunar NY) in the run-up to the local elections in November.
  • While there were no major recent Chinese military exercises, China’s relentless gray-zone activity continues to pressure Taiwan and disrupt the status quo. Tensions include the use of social media to overwhelm domestic narratives and carrying out “united front” tactics by working with sympathetic voices in politics and media. Newly elected Kuomintang (KMT) Chairwoman Cheng Li-wen could seek to build direct communication channels with Beijing.
  • Taiwan seeks to boost technology investment via policy programs to capture artificial intelligence (AI) opportunities. It also plans to inject TWD 544.7 billion (US$17.7 billion) via a special budget to support businesses impacted by U.S. tariffs.

Taiwan Market Overview and Forecast


Political Climate
Trade Friction, Stable Security and Preelection Politics

If Taiwan is forced to concede too much on the semiconductor sector and other trade-barrier issues and the administration of U.S. President Donald Trump does not offer stronger security assurances, the Taiwan public’s dissatisfaction with the United States will deepen. Anti-U.S. sentiment may spread, and opposition parties could amplify the narrative that the United States is unreliable and that Taiwan should cooperate more with China. This could prompt the opposition to consider anti-U.S. candidates for local elections in November 2026, negatively affecting U.S.-Taiwan relations. If the talks produce clearly mutual, reciprocal gains, Taiwan’s trust could rebound.

U.S. security cooperation with Taiwan is expected to rapidly expand. Arms sales, training, co-development and co-production will continue. Multiple Trump administration officials have voiced support for Taiwan’s security, signaling that Taiwan Strait stability remains a major U.S. interest and supporting Taiwan’s defense a top priority. However, enabling Taiwan to take part in the Rim of the Pacific Exercise as an observer or in a coast guard capacity remains challenging, but U.S. policy is tracking in an increasingly flexible direction. This dual track — trade tension alongside security stability — will define the tone of U.S.-Taiwan relations in the first half of 2026.

No short-term improvements are likely in cross-strait relations with China. Beijing will continue its effort to normalize gray-zone operations — including incursions by military aircraft, maritime patrols, cyberattacks and global lawfare targeting Taiwan sovereignty through efforts to redefine the 1971 U.N. resolution 2758 — while leveraging economic tools and people-to-people political and civil exchanges to advance united-front work. The Lai administration will not embrace the so-called “1992 consensus;” the two sides are not subordinate to each other” remains its baseline. It will also not adopt a more radical line, assuaging any global concerns that the government seeks to redefine the cross-strait status quo by moving toward a Republic of Taiwan. As a result, official political dialogue will remain nearly frozen, though civil exchanges will continue, and cross-strait relations are unlikely to escalate abnormally.

On the domestic front, reconciliation between the ruling and opposition camps remains unlikely. Although both sides call for dialogue, substantive engagement remains minimal. With local elections slated for November 2026, partisan conflict will remain intense. While the two opposition parties, the KMT and the Taiwan Peoples Party, may quarrel over whether to field joint candidates in certain races, they are still expected to cooperate closely in the Legislative Yuan, often driving policy shifts and increasing uncertainty in government policy implementation.

Macroeconomic Climate
Steady Growth Amid Trade, Tech and Geopolitical Risks

Taiwan’s economy is expected to sustain steady but moderating growth in the first half of 2026, following a strong export rebound in 2025 fueled by AI-related semiconductor demand. The Directorate General of Budget, Accounting and Statistics projects GDP growth of about 3.5 percent for 2026, down from 7.4 percent in 2025, while the International Monetary Fund’s estimate is slightly more conservative at 2.1 percent. Export orders for high-end chips, servers and advanced packaging will likely remain resilient, though several factors could shape the overall outlook and Minister of Economic Affairs Kung Ming-hsin recently noted that he expects growth to top 3 percent if AI spending continues at the current pace.

A key concern is potential U.S. tariffs on semiconductor products under Section 232, which could affect trade, inflation and supply chains, and temporarily slow AI investment. Some technology firms may have advanced orders and shipments to avoid tariffs, creating a risk of export corrections in 2026. Another uncertainty is the pace of AI and high-performance computing and the infrastructure needed to support them, with domestic electricity supply constraints posing a potential bottleneck. There continue to be significant concerns about the robustness of the grid, its ability to fend off cyberattacks and overall production in gross terms.

Geopolitical risks also persist, particularly from China’s rare earth export controls, which could disrupt supply chains and fuel price volatility. Domestically, consumer prices are expected to rise roughly 1.5-1.7 percent, likely keeping the Central Bank of Taiwan’s policy rate steady, while unemployment is projected around 3.4 percent, reflecting a tight labor market in manufacturing and digital services.

Investment Environment
Strong Fundamentals Amid Political and Energy Uncertainty

Taiwan’s investment environment in 2026 remains fundamentally strong, supported by a skilled workforce, a robust semiconductor ecosystem and reliable institutions. Foreign firms continue to view Taiwan as a key destination for diversifying supply chains away from China.

Political uncertainty has increased since the mid-2025 recall campaign. With the opposition maintaining control of the legislature, the Executive Yuan faces tight constraints, raising the risk of policy gridlock and slowing structural and fiscal reforms. The 2026 local elections will be closely watched. A poor showing by the DPP could weaken influence over legislative negotiations and coordination with local governments. Divergent priorities between national and local authorities may lead to administrative delays and inconsistent implementation, heightening business uncertainty.

Energy supply remains a challenge. Rising electricity demand, limited new-generation infrastructure and the practical fallout over nuclear versus renewable energy could constrain industrial expansion. The midterm elections may determine Taiwan’s energy path, with an opposition victory favoring a resumption of nuclear power in the generation mix and a DPP win supporting primarily renewable investments. High-load industries, including data centers, semiconductor fabs and advanced manufacturing, will need to account for power constraints in project planning.

Despite these uncertainties, Taiwan remains an attractive hub for technology-intensive investment. Investors will closely monitor election outcomes and energy policy, because both will influence project timing, feasibility and regulatory risk.


We will continue to keep you updated on developments in Taiwan as they occur. If you have any comments or questions, please contact BGA Senior Adviser Rupert Hammond-Chambers at rupertjhc@bowergroupasia.com.

Best regards,

BGA Taiwan Team

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BowerGroupAsia