These agreements will further deepen the economic relationship between the US and Taiwan, while advancing both countries’ national interest in supporting the manufacturing and supply of advanced semiconductors.
As these agreements continue to move toward implementation, macroeconomic changes are already affecting US-Taiwan economic relations. America’s demand for artificial intelligence (AI) is insatiable and that demand continues to support the US and Taiwan’s economic growth. At the same time, this demand has worsened the trade imbalance between the US and Taiwan which could have implications for future US trade policy.
Current US trade policy is in a state of transition. After the US Supreme Court ruled against the Trump Administration back in February, it could no longer use the International Emergency Economic Powers Act (IEEPA) to apply tariffs on imports from Taiwan. This prompted trade negotiators to change the language of the US-Taiwan Agreement on Reciprocal Trade (ART). US officials have since applied tariffs on imports from Taiwan through Section 122 of the Trade Act of 1974. However, the application of tariffs through this law expires at the end of July and trade officials have to wait until new trade measures could be put in place to finalize language in the ART.
Since March of this year, the Trump administration has also been in the process of applying tariffs on imports through a another, more comprehensive trade law – commonly referred to as Section 301 of the Trade Act of 1974. This is the same trade law the Trump administration used to start its trade war with China in 2018. This time, the administration has undertaken two Section 301 investigations, one concerning forced labor and another on excess capacity.
At the beginning of June, USTR announced a conclusion of its investigation regarding forced labor and recommendations for tariffs. It found that certain countries, including Taiwan, were unfairly benefiting from global forced labor by not restricting imports of products found to be manufactured with forced labor. The recommendation was then to apply a 10 percent tariff on imports from Taiwan. The second investigation into excess capacity has yet to finish but may come out sometime in August – after the Section 122 tariffs officially expire.
Once both Section 301 investigations conclude, it will be on US trade officials to amend the language of the US-Taiwan ART to include these new laws. Only then will the final text of the ART be sent to Taipei for implementation, including approval by the Legislative Yuan (LY).
However, given the LY will be out during the month of September, moving the ART through the LY may not start until later this year.
There will be real difficulties in passing the ART. Lawmakers have already criticized the agreement, claiming that it could jeopardize food safety and harm Taiwanese industries (automotive, agricultural, etc.) that will have to open to competition from American companies.
November elections also add to the political challenge to getting the ART through the LY.
Unfortunately for the Lai administration, recent events with South Korea show that the White House is not interested in other country’s domestic politics where trade deals are concerned. The White House will expect a swift implementation of the ART, otherwise Taiwan’s potential tariff rate could be raised above regional neighbors like Japan and South Korea.
To further complicate matters, the original justification for Trump’s IEEPA tariffs was a concern for America’s large trade deficit with the world. Unfortunately, the US trade deficit with Taiwan continues to grow at an alarming rate due to high demand for servers and advanced semiconductors. The US monthly trade deficit with Taiwan is more than double what it was in 2024. The annual trade deficit with Taiwan is projected to be well-over $200 billion in 2026 – potentially making the US trade deficit with Taiwan the highest among all of America’s trade partners.
The changing language of the ART, timeline to implement the ART, and growing trade imbalance between the US and Taiwan are all challenges ahead for the US-Taiwan economic relationship. However, there is some good news from this changing trade and investment relationship. High demand for AI has made Taiwan the third largest source for American imports, after Mexico and Canada. It has also made the US the largest destination for Taiwan’s exports, exceeding exports to China.
Taiwan’s economy is thriving right now thanks to its economic relationship with the US. Domestically, private consumption and government spending are increasing. Companies, like those in the semiconductor industry, are investing more in fixed assets. Within Taiwan, private consumption is still the main driver of demand, but it’s the export of AI-related goods that are the main driver of Taiwan’s booming growth.
Taiwan’s annual GDP growth in the first quarter of 2026 was a whopping 13.7 percent - the highest it’s been since 1987. Since it doesn’t appear this AI demand is going to slow anytime soon, we can expect Taiwan’s economy to continue to see large double-digit growth in the second and third quarters of 2026. However, there are still some concerns regarding Taiwan’s economy, which could have a political impact on lawmaker’s interest in passing the ART.
One concern is there has been an uneven distribution of wealth from AI-driven growth. Wages are increasing, especially for those in the semiconductor industry. However, for those outside of the AI-boom, wage growth has been slow. Another concern is the increase in prices, especially energy prices.
Rising energy prices are a real concern for households. Every June, the monthly price of electricity for houses increases at least 20 percent. Taiwan is still importing enough LNG to fuel its gas-fired power plants, but global demand is driving up the price of LNG. Likewise, petroleum prices are also up about 20 percent from earlier this year – driving up transportation costs.
Household affordability and equitable economic growth will both become more of an issue for lawmakers later this year. Meanwhile, the Lai administration must convince the LY that the ART is also in the best interest of Taiwan. Anything that potentially hurts US-Taiwan trade negotiations, could hurt the thing supporting Taiwan’s economic growth right now: the US-Taiwan trade relationship.
