As January 20 approaches, countries around the world are preparing to navigate new geopolitical dynamics under the Trump 2.0 administration. For Taiwan, the second Trump administration will differ significantly from the first, as demonstrated, for example, by the president-elect’s contrasting decisions regarding whether to hold a post-election phone call with the Taiwanese president.
Taiwan is bracing for reduced patience and heightened pressure from the incoming Trump administration, but whether it can effectively manage these new dynamics remains uncertain.
During Trump’s recent presidential campaign, Taiwan figured prominently in his rhetoric, with two key issues taking center stage: semiconductors and defense.
In an interview with Bloomberg, Trump accused Taiwan of “stealing chip jobs” from the United States. Since the beginning of his campaign, Trump frequently, if not always, emphasized the issue of job opportunities in the semiconductor industry when addressing Taiwan-related questions, including his willingness to defend Taiwan.
Once, when answering the critical question of whether to defend Taiwan, Trump declared, “Taiwan should pay us for defense.” In light of Taiwan not hosting any U.S. military bases, Trump called for Taiwan to raise its defense spending from the current 2.5 percent of GDP to as much as 10 percent to bolster its deterrence against a potential Chinese invasion. Making matters real for Taiwan, the nomination of Elbridge Colby, who has been tapped by Trump to serve as the next under secretary of defense for policy, pending confirmation by the Senate, has sent a more credible message to Taiwanese leaders, advocating for a minimum defense spending level of 5 percent of GDP.
Despite the looming Trump-related challenges, Taiwan’s domestic politics are ill-prepared to meet the demands of Trump 2.0. Regarding defense spending, while the Taiwanese government has raised its defense budget to an unprecedented 647 billion New Taiwan dollars ($19.7 billion) – a 7.7 percent increase – the ratio of defense spending to GDP has slightly decreased from 2.5 percent to 2.45 percent. Some observers may attribute this to higher-than-expected GDP growth or the ongoing government transition from Tsai Ing-wen to Lai Ching-te, but this trend is unlikely to satisfy Trump’s demands.
Taiwan’s low average tax rate further limits the government’s fiscal capacity to substantially increase defense spending as a proportion of GDP. In 2023, Taiwan’s average tax rate stood at 14.6 percent, significantly lower than that of most developed countries. By comparison, Israel’s net average tax rate in 2023 was 18.8 percent, South Korea’s was 16.2 percent, and the OECD average was 24.9 percent. Although Taiwan must raise its tax rates to meet defense spending goals, the ruling Democratic Progressive Party (DPP) losing its legislative majority further complicates the situation, making such a move politically difficult, if not impossible.
To complicate matters further, an amendment passed on December 20, 2024 will strain Taiwan’s central government finances. The amendment to the Act Governing the Allocation of Government Revenues and Expenditures mandates increased revenue transfers from the central government to local governments. For example, under the new rule, the entire land value increment tax will be classified as local government revenue. The opposition Kuomintang (KMT) estimates that local governments will receive an additional 375.3 billion NTD annually, equivalent to 58 percent of the current defense budget. Without raising tax rates, this amendment offers no benefit to defense funding and instead undermines the central government’s ability to meet the “3 percent of GDP” defense spending target pledged by all presidential candidates in the 2024 election.
In the semiconductor sector, Taiwan and the U.S. face at least two areas of friction. First, as previously noted, Taiwan seeks to maintain its dominant position in chip manufacturing, while Trump aims to bring more chip production and jobs back to the U.S. The concept of the “Silicon Shield” highlights how Taiwan ensures its security by integrating itself into global supply chains, thereby increasing the U.S. and other countries’ vested interest in maintaining the status quo in the Taiwan Strait. Both the Taiwanese government and people understand this strategic logic and are resistant to compromising their dominance under U.S. pressure.
The divergence is also utilized to either gain political benefits by populism or undermine Taiwan-U.S. relations. Since TSMC has started to establish a semiconductor facility in Phoenix, Arizona, supported by President Joe Biden’s CHIPS Act, Chinese state media has framed TSMC’s Arizona venture as part of a U.S. plot to hollow out Taiwan’s chip industry. This narrative has gained resonance in Taiwan, with the KMT spreading skepticism about U.S. intentions and accusing the DPP of betraying Taiwan’s interests. After U.S. National Security Adviser Jake Sullivan announced that Taiwan would not be included in the Indo-Pacific Economic Framework for Prosperity, the Taiwan People’s Party criticized the lack of reciprocal benefits from TSMC’s U.S. investments, further questioning America’s credibility. Therefore, the Taiwanese government has faced a dilemma with challenges in responding both demand from the U.S. and disinformation and criticism spread by opposition parties.
Beyond jobs, Taiwan and the U.S. remain divided over the issue of a semiconductor export ban on China. Despite their rivalry, both Kamala Harris and Donald Trump during a debate on September 10, 2024 implied agreement on curbing chip exports to China. Trump went further, accusing Taiwan of selling chips to China. Indeed, by exporting semiconductors to China, Taiwan earned $90.4 billion in 2023, which represented 54.2 percent of its total semiconductor exports. This revenue serves as a critical source of government tax income and industry profit, funding Taiwan’s defense and technological development to maintain its national security. Without alternative revenue sources, a total export ban would jeopardize Taiwan’s security and destabilize the Taiwan Strait. On the other hand, failing to implement any export controls would enable China to continue strengthening its technology, electric vehicle sector, and military with Taiwan’s semiconductors. Despite the risks, Taiwan and the U.S. have yet to reach a consensus on how to balance these competing concerns.
Looking ahead to 2025 and beyond, it remains unlikely that Taiwan will impose strict export controls on chips to China, aside from the most advanced and critical semiconductors. While Taiwan has worked to diversify its export markets, China continues to play a vital role in the global supply chain as a key assembler of electronic products. Many chips and components are still shipped to China for final assembly before re-entering the global market.
Also, even during the past nine years of governance by the DPP, which is widely viewed as pro-American, Taiwan has not implemented export bans that fully align with U.S. expectations. Now, with a KMT-led opposition coalition holding a majority in the Legislative Yuan, any proposed export bans are likely to face strong resistance, given the opposition’s emphasis on maintaining a balanced foreign policy between the U.S. and China.
In conclusion, optimism regarding U.S.-Taiwan relations in 2025 is difficult to sustain. Not only is it because Trump 2.0 will be different than Trump 1.0, but Taiwan’s political environment has also undergone significant changes. With the political turbulence seen in Taiwan in 2024, driven largely by domestic strife, it is foreseeable that intensified polarized political division will negatively affect Taiwan’s defense policy, foreign relations, and its partnership with the U.S.
A Trump 2.0 administration is likely to place high demands on Taiwan, particularly in terms of defense spending. However, Taiwan’s political instability and fiscal constraints hinder its ability to meet these expectations. To navigate these challenges, Taiwan’s leaders must improve political communication, initiate national dialogues with opposition parties, and engage both domestic stakeholders and international partners like the U.S. in transparent discussions about defense priorities and timelines.
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