- The agreement provides Taiwan a preferential and predictable reciprocal tariff framework
- Taiwan becomes the first economy to secure preferential treatment on semiconductor tariffs
- Domestic market opening pressure is minimal
- On the downside, the investment commitment by Taiwan is substantial and…
- … signals potential capital outflow pressures
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The American Institute in Taiwan and the Taipei Economic and Cultural Representative Office in the United States signed a historic trade deal on January 16. The US will lower the reciprocal tariff rate for Taiwan and provide preferential treatment on semiconductor tariffs. In exchange, Taiwan pledges a USD 500bn investment in the US, comprising USD 250bn in direct investment and USD 250bn in financial guarantees.
US tariffs on Taiwan
The agreement provides a preferential and predictable reciprocal tariff framework for Taiwan. The US reciprocal tariff rate applied to Taiwanese goods will total no more than 15%. Section 232 duties applied to Taiwanese auto parts, timber, lumber, and wood derivative products will also total no more than 15%. The US will apply a zero percent reciprocal tariff to generic pharmaceuticals, their generic ingredients, aircraft components, and unavailable natural resources.
The new reciprocal tariff rate for Taiwan is on par with those applied to Japan and South Korea, eliminating the competitiveness disadvantage previously faced by Taiwanese manufacturers in the US market. It also reduces tariff uncertainty stemming from US court rulings on Trump’s 2025 tariffs. If the US Supreme Court vetoes reciprocal tariffs and the administration resorts to alternative measures such as Sections 122 or 301, Taiwan would continue to face a predictable tariff regime.
The agreement also makes Taiwan the first economy to secure preferential treatment on semiconductor tariffs with clear quantitative details. The White House announced a two-phase Section 232 semiconductor tariff plan on January 15. Under the Taiwan–US trade deal, Taiwanese companies building new semiconductor capacity in the US may import up to 2.5 times their planned capacity without paying Section 232 tariffs during the approved construction period, with a lower preferential Section 232 rate applying to above-quota imports. After new US chip production projects are completed, Taiwanese companies will still be able to import up to 1.5 times their new US production capacity without paying Section 232 tariffs.
Assuming Taiwan’s USD 250bn direct investment in the US is largely concentrated in semiconductors, and that each semiconductor foundry costs around USD 20bn, this would imply the construction of roughly 12 foundries with total planned production capacity of about 4 million wafers per year. Under the agreement, this would allow Taiwan to export around 9 million wafers per year to the US with tariff exemptions during the construction period, with an estimated export value of about USD 160bn. By comparison, Taiwan’s total ICT exports to the US amounted to USD 161bn in 2025. It is therefore reasonable to infer that most of Taiwan’s semiconductor exports to the US will remain tariff-exempt in the coming years, provided Taiwanese semiconductor companies continue to fulfill the USD 250bn investment commitment.
Taiwan’s investment in the US
The investment commitment by Taiwan is large and implies capital outflow pressures. Taiwanese semiconductor and technology enterprises will make new direct investments totaling at least USD 250bn to build and expand advanced semiconductor, energy, and AI production and innovation capacity in the US. Taiwan will also provide credit guarantees of at least USD 250bn to facilitate additional investment by Taiwanese enterprises.
The total USD 500bn investment commitment is equivalent to about 55% of Taiwan’s GDP or 83% of its foreign reserves. By comparison, Japan has pledged USD 550bn, equivalent to 13% of its GDP or 40% of its foreign reserves, while South Korea has pledged USD 350bn, equivalent to 19% of GDP or 82% of foreign reserves. By any measure, Taiwan’s commitment is large.
The USD 250bn direct investment component is also sizable. If spread over a 10-year period, it would imply annual direct investment of USD 25bn. For comparison, Taiwan’s peak outward direct investment in the US was USD 14.1bn in 2024.
Domestic market opening
The agreement limits domestic market opening pressures. It does not include reductions in Taiwan’s import tariffs or non-tariff trade barriers for US products, such as agricultural and automobile goods. There had been concerns that increased US agricultural imports could raise food safety issues and intensify competition with local farmers. Expectations of lower automobile import tariffs had also led to postponed car purchases by local consumers. Issues related to import tariff reductions remain under examination.
US investment in Taiwan
The agreement also introduces provisions on US investment in Taiwan. Taiwan will support US investment in its semiconductor, AI, defense technology, telecommunications, and biotechnology industries. These sectors align with US comparative advantages, as reflected by RCA indices, and are also strategic industries that Taiwan aims to develop to maintain economic competitiveness and national security. Currently, US FDI into Taiwan remains small—no more than USD 1bn per year—suggesting significant potential for increased US investment.
Macro and market implications
The trade deal reinforces our base-case macro scenario for 2026, which assumes a modest reduction in reciprocal tariff rates, moderate semiconductor tariffs, and slower but still strong AI demand, resulting in GDP growth of 4–5%. It also tilts risks toward the bull-case scenario, which assumes semiconductor tariffs remain exempt and AI demand sustains a supercycle, yielding GDP growth of 6–7%. We maintain our forecast for GDP growth of 4.8% in 2026 and for the central bank to keep the policy rate unchanged at 2.00%, while acknowledging upside risks to the growth outlook.
Taiwan’s equity market reacted positively to the announcement, while the FX market remained relatively stable. The trade deal strengthens Taiwan’s growth outlook but leaves lingering concerns over capital outflows.
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Ma Tieying 馬鐵英, CFA
Senior Economist - Japan, South Korea, & Taiwan 經濟學家 - 日本, 南韓及台灣
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