Economic, trade, innovation, and supply chain linkages between the United States and Taiwan are vitally important to the health of both nations’ advanced technology industries, enterprises, and broader economies. Taiwanese companies represent key suppliers to many “Tier 1” U.S. original equipment manufacturing (OEM) firms, meaning that the success of those U.S. OEMs, particularly in the information and communications technology (ICT) industry, depends on the vibrancy and innovation capacity of key Taiwanese suppliers. Especially in the semiconductor, related ICT, and electric vehicle (EV) industries, Taiwanese enterprises have become vital players in global supply chains for the manufacture of sophisticated advanced-technology products. Building off the Information Technology and Innovation Foundation’s (ITIF) prior report “Global Trade Interdependence: U.S. Trade Linkages With Korea, Mexico, and Taiwan,” this report examines the continually evolving Taiwanese trade, economic, innovation, and supply chain linkages with the United States and other global economies. The report further examines how countries are implementing strategies to promote reshoring and supply chain resiliency, and provides policy recommendations on a variety of issues such as how to advance supply chain resiliency, foster greater levels of technology and innovation collaboration and cooperation, and more broadly deepen trade and economic linkages between both Taiwan and the United States and Taiwan and the broader global innovation economy.
The Taiwan-U.S. trade relationship is highly complementary, interdependent, and increasingly characterized by trade in advanced-technology industries. Taiwan has become America’s 10th-largest goods trading partner and 13th-largest goods export destination, with U.S. goods and services trade with Taiwan totaling $103.9 billion in 2019. In fact, the United States now trades more with Taiwan than it does with France, India, or Italy. In 2019, the United States exported $42.3 billion worth of goods and services to Taiwan, while importing $61.6 billion, producing a trade deficit of $19.3 billion. Conversely, the United States represents Taiwan’s second-largest trading partner, accounting for 13.2 percent of Taiwan’s total trade and receiving about one-third of Taiwan’s exports of ICT goods. Foreign direct investment (FDI) also represents an important facet of the relationship, with the total stock of FDI from Taiwanese companies in the United States at $47 billion, per the latest data available from the American Institute in Taiwan at the end 2019. Taiwanese companies currently operating in the United States support 19,100 U.S. jobs, invest almost $159 million annually in research and development (R&D), and contribute $1.6 billion to U.S. goods exports. Despite the fact that global FDI flows fell 49 percent worldwide in the first half of 2020 compared with 2019, Taiwan actually remained a quite attractive location for investment, attracting 1,220 FDI projects worth a total value of $2.96 billion from January to April 2020, which represents an increase of 8.9 percent in the number of cases and 48.7 percent in FDI value compared with the same period in 2019.
In 2020, chip maker Taiwan Semiconductor Manufacturing Company (TSMC) announced it would invest up to $12 billion to build a new 5 nanometer (nm) capable foundry near Phoenix, Arizona, and in May 2021, TSMC officials confirmed that they were considering doubling the company’s initially planned investment by constructing a $25 billion second factory capable of building 3 nm chips. (TSMC indicated that it may build as many as seven total facilities in Arizona.) Importantly, TSMC will also be bringing its own key suppliers, with as many as 12 TSMC suppliers indicating that they will also open facilities in the United States. For instance, LCY Chemical, one of the world’s biggest producers of chemicals for semiconductor plants (producing isopropyl alcohol, which is essential for cleaning wafers and equipment in the chip manufacturing process) announced in February 2021 it would build a new chemical-purifying factory in Arizona that will represent its largest-ever overseas investment. These investments are helping deepen U.S. supply chains in the critical semiconductor industry. This type of FDI also explains why, once again, Taiwan sent the largest delegation to the June 2021 Select USA Summit (America’s annual FDI attraction conference), with 220 delegates representing 153 companies from across Taiwan.
The percentage of Taiwan’s exports feeding into the U.S. global supply chain is greater than those of Indonesia, the Philippines, and Thailand combined.
However, as the Congressional Research Service (CRS) has written, “U.S. data on trade with Taiwan may understate the importance of Taiwan to the U.S. economy because of the role of global supply chains.” For instance, 86 percent of Taiwan’s exports to the United States comprise intermediate goods, such as semifinished products, parts, and capital goods U.S. companies use to make final products in the United States. Indeed, Taiwanese inputs play a critical role in U.S.-manufactured final products in a wide range of industries, and not just for ICT goods but also others including medical devices and pharmaceuticals, automobiles (especially EVs), heavy machinery, and transportation equipment. In fact, the United States has deeper inter-industry trade linkages with Taiwan than with almost any other East Asian trade partner, with the percentage of Taiwan’s exports feeding into the U.S. global supply chain greater than those of Indonesia, the Philippines, and Thailand combined.
As noted previously, Taiwan ran a slight trade surplus with the United States in 2019 of $19.3 billion. This represents a slight fraction of the U.S. global trade deficit and is in many ways far outweighed by the value Taiwanese exports produce in the U.S. economy. On a trade-in value added (TiVA) basis in 2020 for six high-tech industries—automobiles, chemicals, computers and electronics, machinery, pharmaceuticals, and other transportation (including aerospace)—Taiwan ran a trade surplus of more than $17 billion, including $8.9 billion in computers and electronics and $8.4 billion in machinery. Conversely, the United States ran a trade surplus in value-added terms in the automobiles, chemicals, pharmaceuticals, and other transportation sectors. (See table 1.) However, as noted earlier, it’s vital to recognize that the value produced by America’s Taiwanese suppliers—especially in ICT-based sectors such as semiconductors—far outstrip any minor sector-specific trade deficits, as evidenced alone by the fact that a global shortfall in semiconductor production (which would have been far worse in the absence of Taiwanese production) may cause a 1.28 million-vehicle shortfall in U.S. automotive production in 2021 at a cost of $110 billion. In short, U.S.-Taiwan trade flows overall are mutually productive and beneficial to both nations.
Table 1: U.S. trade with Taiwan, select industries, 2018–2020 (millions)
Taiwan represents a key link in global supply chains for the production of advanced-technology goods. Taiwan’s strength in these value chains is a reflection of the country’s decision, made as early as the 1950s, to adapt its economic development strategy, shelving the then-fashionable import substitution industrialization strategy of the day for a focus on exports and integration into global markets. Manufacturing today accounts for just under 30 percent of Taiwan’s gross domestic product (GDP) and a roughly equivalent share of job creation. However, when downstream effects are considered (i.e., the economic and employment multiplier effects of Taiwan’s manufacturing and export sectors), the U.S. Congressional Research Service found that Taiwan’s economy is highly export dependent, with exports accounting for almost 70 percent of the country’s GDP.
Taiwan is heavily dependent on global trade, with 70 percent of its GDP relying on exports and ranking as the seventh-most dependent economy in participation in global value chains.
In fact, Taiwan ranks among the world’s most global value chain (GVC)-dependent countries, ranking seventh in terms of Organization for Economic Cooperation and Development (OECD) countries’ GVC participation rates as a share of total exports (which is slightly down from being the second-most GVC-dependent country for exports in 2013). (See figure 1.) Taiwan mainly exports semifinished products, with finished products accounting for only a relatively small share of Taiwan’s total exports.
Figure 1: Countries’ global value chain participation rate, as share of total exports (2018)
Taiwan’s position within the global trade system continues to evolve. Its share of total global trade has fallen over the first two decades of this century, and its share of exports accounted for 2.3 percent of the global total in 2000, which declined to represent 1.8 percent of the global total in 2019 (as its global export ranking fell from 14th to 17th). Likewise, Taiwan’s share of total global imports fell from 2.1 to 1.5 percent over that time period (as its global import ranking fell from 15th to 17th place). Factors broadly accounting for these decreases include the difficulty Taiwan has experienced in completing free trade agreements (FTAs) with other nations and, as a trade-oriented economy with a small domestic market, being more exposed to recent systemic global economic shocks, such as the Great Recession and COVID-19 pandemic.
Table 2: Taiwan’s evolving position within world trade
From 2005 to 2015, Taiwan’s real manufacturing value added increased from $105 billion to $163 billion, as its share of world manufacturing value added stayed roughly consistent, slipping only from 1.30 to 1.24 percent. (See table 3.) By contrast, the U.S. share of world manufacturing value added fell by almost a quarter between 2005 and 2015, from 21.0 to 16.8 percent; and Japan’s was nearly halved, shrinking from 12.6 percent to 6.9 percent, while China’s share increased nearly threefold, from 9 to 24.5 percent.
Table 3: Manufacturing output among select nations
The domestic value added of Taiwan’s exports has fallen over time. In fact, whereas the domestic content in Taiwan’s exports peaked in 1969 at 79 percent, domestic content fell to 48 percent by 2011 (a 30 percentage-point decline, a period during which the world average ratio of domestic value added declined by about 10 percentage points). (See figure 2.) However, this is not an unfortunate story, as it illustrates Taiwan effectively integrating into GVCs. In its report, “Technological Innovation, Supply Chain Trade, and Workers in a Globalized World,” the World Trade Organization (WTO) wrote, “Given the growth of international production fragmentation, along with Chinese Taipei’s steady trade liberalization, it is expected that the ratio of domestic content to exports would see a sharp decline. As a strategy for the developing regions to integrate into the world economy, joining global production is one of the shortcuts.”
Figure 2: Domestic value added of Taiwan’s exports, 1965–2010
Across Association of Southeast Asian Nations (ASEAN) countries from 1995 to 2011, the domestic value-added share of exports fell from 71 to 67 percent; however, the region’s absolute exports grew nearly fourfold, with “much of this increase attributed to an increase in intermediate exports (i.e., exports related to global value chains).” (See figure 3.) Lopez-Gonzalez concluded that the foreign value added, in the form of intermediate imports as well as services, has played a significantly positive role in enhancing both employment and productivity (value added per worker) in the ASEAN countries.
Figure 3: Value added content of ASEAN exports, 1995 and 2011
This matters because Taiwan has been among the most-effective nations at integrating itself into GVCs, in terms of both backward and forward linkages. (Backward linkages refer to the use of imported goods and services in the production of exports, while forward linkages refers to the use of a country’s exports in the production of other goods and services.) By 2011, Taiwan had achieved the deepest backward GVC trade linkages among any ASEAN country, and achieved some of the strongest forward trade linkages, which have undoubtedly deepened in the decade since, given the country’s increasing strength in semiconductor exports, which have become a critical input to a wide variety of downstream industries. (See figure 4.)
Figure 4: Selected ASEAN nations’ GVC participation in factory Asia, 1995–2011
Moreover, updating this data to 2015 shows that Taiwan’s domestic value added in manufacturing, electronics, and information industries began to rise considerably over the last half of the prior decade. Starting in 2010, the domestic value added produced in Taiwanese electronics and information industries, and even across its broader manufacturing economy, rose approximately 10 percentage points. By 2015, Taiwanese domestic value added accounted for about 70 percent of the value of Taiwan’s gross exports from both the electronics and information industry sectors, and about 62 percent of all manufactured exports. (See figure 5.)
Figure 5: Share of domestic value added in Taiwanese gross exports, 2005–2015