China has historically been Taiwan’s most significant trading partner, being the primary buyer of its exports and a key location for Taiwanese manufacturing. However, China also poses a substantial threat to Taiwan, claiming the island as part of its territory.
In response, Taiwan's ruling political party has announced intentions to reduce the commercial ties that have supported its economic growth for decades. President Lai Ching-te has urged semiconductor companies, which are central to Taiwan's economy, to cease transactions with China and instead focus on a supply chain involving only democratic nations.
Recently, Taiwan's government mandated that local businesses obtain licenses to sell products to major Chinese tech companies, including Huawei and Semiconductor Manufacturing International Corporation (SMIC), both crucial to China's chip production ambitions.
This initiative aligns with the United States' ongoing efforts to limit China's access to advanced semiconductor technology. It highlights Taiwan's precarious position between the two superpowers, as President Trump has threatened to impose tariffs on Taiwan and other trading partners.
Taiwan's ruling party aims to be viewed as a dependable ally of the United States, even at the potential cost of short-term economic challenges, according to analysts.
Historically, Taiwanese companies have heavily invested in China, with major firms like Taiwan Semiconductor Manufacturing Company (TSMC) and Foxconn benefiting from manufacturing operations and sales within the Chinese market. Foxconn, a significant producer of electronics for companies like Apple and Nvidia, has substantial manufacturing facilities in central China.
Despite the strong economic ties, there has been a shift in perspective among some Taiwanese businesses regarding their reliance on China, particularly following protests in 2014 against closer economic integration with Beijing. Over the past decade, the trade tensions and the COVID-19 pandemic have further prompted Taiwanese firms to reduce their investments in China, with only 7 percent of new foreign investments directed there last year, down from over 80 percent in 2010.
Nevertheless, analysts caution that fully decoupling the two economies is challenging, as China remains Taiwan's largest export market, especially for semiconductors. Additionally, Taiwan relies on U.S. political and military support to counter Beijing's influence.
In light of these dynamics, Taiwan has begun to increase its military spending, while TSMC has committed to significantly boosting its investments in the United States. The ongoing sale of technology to China is expected to remain a contentious issue in Taiwan's relations with the U.S.
Despite the pressures for separation, many Taiwanese companies continue to find compelling reasons to operate in China. Some business leaders express that replacing Chinese suppliers would be difficult, and others note that starting a business in China is often more accessible than in Taiwan.