As geopolitical tensions rise, Taiwan is shifting its economy to rely more on the U.S. and other countries but at a cost
6 min
TAIPEI—For years, Beijing hoped to win control of Taiwan by convincing its people their economic futures were inextricably tied to China.
Instead, more Taiwanese businesses are pivoting to the U.S. and other markets, reducing the island democracy’s dependence on China and angering Beijing as it sees its economic leverage over Taiwan ebb.
In one sign of the shift, the U.S. replaced mainland China as the top buyer of Taiwanese agricultural products for the first time last year.
Electronics firms such as chip maker Taiwan Semiconductor Manufacturing Co. are also selling more goods to American and other non-Chinese buyers, thanks in part to Washington’s chip restrictions and Apple’s bets on Taiwanese chips.
Overall, Taiwanese exports to the U.S. in the first 10 months of 2023 were more than 80% higher than in the same period of 2018, Taiwanese government data shows. Taiwanese exports to the mainland were 1% lower—a major change from a decade or so ago when China’s and Taiwan’s economies were rapidly integrating.
Taiwan’s outbound investment has also shifted. After flowing mostly to mainland China in the early 2000s, it has now moved decisively toward other destinations, including Southeast Asia, India and the U.S.
Taiwanese electronics giant Foxconn, which assembles iPhones in mainland China, is expanding in India and Vietnam after Apple began pushing its suppliers to diversify.
Chinese state media recently reported that China had opened tax and land-use probes into Foxconn. Though Taiwanese officials and analysts interpreted the probes as a sign that China wants Foxconn founder Terry Gou to drop plans to run in Taiwan’s presidential election in January, some have said Beijing may also be trying to pressure Foxconn into resisting decoupling with China.
“Any attempt to ‘talk down’ the mainland’s economy or to seek ‘decoupling’ is driven by ulterior motives and will be futile,” said a spokeswoman for Beijing’s Taiwan Affairs Office in September. “The mainland is always the best choice for Taiwanese compatriots and businesses.”
Fully decoupling from mainland China’s economy likely isn’t possible, and would be disastrous for Taiwan, not to mention China, even if it were.
Foxconn and other major Taiwanese companies depend heavily on China for parts, testing and buyers. Some 25% of Taiwan’s electronic-parts imports still come from the mainland.
If China’s weakened economy returns to strong growth, it could shift the calculus back in favour of the mainland, where the Communist Party claims Taiwan despite never having ruled it. About 21% of Taiwan’s total goods trade this year has been with mainland China, versus 14% for the U.S., though the U.S. share has risen from 11% in 2018.
“My hunch is that the large manufacturing sectors will try to stay in the Chinese market, even with harsh conditions,” said Alexander Huang, director of the international affairs department of the opposition Kuomintang Party, whose supporters include business people with mainland ties. “If you talk to those business owners, they say, ‘Nah, no way will I give it to my competitors.’”
Even so, many forces are pushing Taiwan to rewire its economic relationship with China.
Trump-era tariffs and Biden administration export controls have raised the cost of sourcing from China, and in some cases prohibited it. U.S. firms are pushing their Taiwanese suppliers to diversify sourcing, and rising wages in China have made it less attractive than before.
Long-running shifts in Taiwanese sentiment toward China—and China’s own efforts to punish the island using its economic leverage—are also factors. China has banned Taiwanese agricultural products such as pineapple and, in 2022, grouper fish, and restricted outbound tourism to Taiwan.
Those restrictions to some degree have backfired, pushing Taiwanese businesses to look elsewhere.
Chang Chia-sheng, who runs a fish farming operation in Taiwan, said his main export target a decade ago was mainland China. But as geopolitical tensions climbed, he looked elsewhere. Sales to Americans have jumped fivefold since 2018, he said. “In the U.S., things just seem to work out more easily,” Chang said.
The U.S. and Taiwan reached an agreement in May on a number of trade and investment measures to deepen ties, though the deal stopped short of reducing tariffs.
In the June quarter of 2023, 63% of revenue at TSMC, which makes most of the world’s most cutting-edge logic chips, came from the U.S., up from 54% in the same period in 2018, according to S&P Global data. Just 12% of TSMC’s revenue now comes from Chinese buyers, down from 22% in the second quarter of 2018.
Taiwan’s government is also encouraging closer economic links with Southeast Asia, South Asia, Australia and New Zealand. Its “New Southbound Policy,” rolled out in 2016, has been the subject of fierce debate in Taiwan, with the Kuomintang Party saying steps to boost relations—like handing out scholarships—aren’t worth the cost.
Exports to “New Southbound” partners have risen, however, to $66 billion in the first nine months of 2023, about 50% higher than the same period in 2016.
“Frankly speaking, we’re responding reactively” to the need for more diverse trading partners, Taiwan’s Economic Minister Wang Mei-hua said. “Taiwan needs to manage the risks on its own, but we also need our allies to join us more in mitigating these risks.”
Together, the U.S. and the six largest Southeast Asian economies accounted for 36% of Taiwanese exports in the third quarter of 2023, according to data from CEIC, surpassing the percentage sent to mainland China and Hong Kong on a quarterly basis for the first time since 2002.
In September, Taiwan sent less than 21% of its exports to the mainland, the lowest percentage since the global financial crisis.
Taiwanese foreign investment into mainland China, steady at around $10 billion a year for most of the early 2010s, plummeted in late 2018 and has since been running at about half that level, according to Taiwanese government data. In 2023 so far, just 13% of Taiwan’s investment went to mainland China; 25% went to other Asian locations, and nearly half went to the U.S.
A survey of Taiwanese businesses conducted last year on behalf of the Center for Strategic and International Studies, a Washington think tank, found that nearly 60% had moved or were considering moving some production or sourcing out of China—a significantly higher rate than European or American firms.
Jay Yen, chief executive of Yen and Brothers, a Taiwanese frozen-food processing company, said his firm received a government subsidy of around $75,000 to market his products to American consumers. China now only accounts for about 3% of its revenue, he said.
That said, “if you really have to consider the risks of a war between the U.S. and China and its potential impact on Taiwan, you might want to place your bets on a third country—neither China nor the U.S.,” Yen added.
After China began to open up its economy in the late 1970s, Taiwanese businesses were among the first investors.
By the 2000s, China seemed to be succeeding in its strategy of integrating the two economies, with more than 28% of Taiwan’s exports going to the mainland in 2010, from less than 4% a decade earlier.
Direct flights between the two sides were normalised for the first time in decades. Mainland tourists were allowed to visit Taiwan on their own.
By 2014, the tide was turning as more Taiwanese grew worried about over dependence on China. Student demonstrators protested against a trade pact, later abandoned, that would have deepened ties with China. President Tsai Ing-wen, who took office in 2016, has pushed to diversify Taiwan’s economy.
China has responded by moving trade issues more into the spotlight.
In April, it opened an investigation into Taiwanese trade restrictions that it says limit exports of more than 2,400 items from the mainland to the island in violation of World Trade Organization rules. In October, China’s Ministry of Commerce announced the probe would be extended until Jan. 12—the day before Taiwan’s coming election.
Taiwan’s government has called the probe politically motivated.
Chinese officials have implied that Beijing could suspend preferential tariff rates for some Taiwanese goods in China under a 2010 deal signed when Kuomintang’s Ma Ying-jeou was president. Beijing has also reacted angrily to Taiwan’s recent trade agreement with the U.S.
For Taiwanese companies, building and operating new factories in places other than China isn’t cheap or easy. Protests have at times disrupted operations at Indian plants operated by Foxconn and Wistron, another Apple supplier. In September, a fire halted production at a Taiwanese facility in Tamil Nadu.
Still, some Taiwanese businesspeople have clearly soured on China.
“The electronics industry has already become a Chinese empire, not a Taiwanese one,” says Leo Chiu, who worked in mainland China in quality control for an electronics manufacturer for 14 years before concluding he couldn’t move up further there and returning to Taiwan in 2019. Many of his old colleagues have left, he said.
“If Xi Jinping steps down, there’s still a chance it could change,” says Chiu. “But I think it’s very hard.”
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Strong family financial planning can help reduce taxes and support younger generations. From intrafamily loans and asset gifts to inheritance disclaimers, strategic cooperation can create meaningful financial benefits—when families have the trust and structure to make it work.
4 min
Happy is the family whose members—parents, grandparents and grown children—trust each other enough to cooperate on shared goals, especially financial ones. When that is truly the case, Uncle Sam’s tax rules can help as well.
This matters especially now that mortgage rates are above 7%, and many families are looking for ways to help younger members. If the elders have resources and are confident younger ones can cooperate, a family loan could make homeownership possible while providing the elders with a useful income stream.
Other strategies can actually lower taxes, such as when funding 529 plans or Roth IRAs, or when someone inherits a traditional IRA with required withdrawals larger than they will need.
Here are three strategies useful for functional families.
It is perfectly legal for families to lend money to a relative for a down payment or even a private mortgage.
But it is important not to cut corners, says Ryan McKeown, a CPA with Modern Wealth Enhancement in Minnesota. If the loan is for a down payment, be honest with the mortgage provider and have a formal agreement. The lender owes tax on the interest payments received.
If the loan is for a private mortgage, both sides should have legal representation with a formal written agreement, including payment terms. The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.
To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.
In addition, the lender could use the $19,000 annual gift-tax exemption (described below) to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.
If you’re going this route, McKeown advises against having a fixed plan to forgive the debt. Instead, do it in one-off letters specifying the amount—and keep careful records. Otherwise the IRS might try to treat the loan as a taxable gift.
Powerful tax-saving moves for families often use gift-tax provisions. Under current law, anyone can give anyone else up to $19,000 of assets annually, free of gift tax. That means a married couple with three grandchildren could give them a total of $114,000 in 2026.
The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient. So if someone buys $1,000 of stock and gives it away when it is worth $5,000, the recipient’s cost basis is $1,000. If the recipient later sells the shares for $8,000, the taxable gain is $7,000.
Here’s an example showing how gifts could save a family taxes. Grandma is a widow of modest means, while her child and spouse have prospered. The couple has two children, and they want to contribute $5,000 to a 529 college-savings plan for each—but they need to sell stock to do it. Their tax rate on the sale would be 18.8%, and they would need to sell about $11,000 of stock.
However, Grandma’s federal tax rate on the stock sale is 0%. If the couple gives $10,000 of shares to Grandma, she could sell them, pay no tax, and fund the grandchildren’s 529 plans. This saves about $1,000 of tax.
These moves are legal, and they could be used in other ways, such as to help a young person fund a Roth IRA.
But trust among family members is essential: Under the law, givers can’t put conditions on a gift. Grandma could use her stock proceeds to take a cruise, but she makes 529 contributions instead.
Mark Sellner, a retired tax attorney and CPA living in Sarasota, Fla., uses this strategy. His children sell stock he gives them and fund 529 plans for his grandchildren.
The family’s tax savings aren’t huge, but he likes other benefits. The sales by his children don’t boost his adjusted gross income, which in turn could raise his Medicare Irmaa premiums or his 3.8% surtax on net investment income.
Sellner doesn’t worry about his children using the funds for another purpose.
“There can’t be any strings attached to gifts. Of course, it is up to us to decide whether to make them in the future,” he says.
Two caveats: The “kiddie tax” applies to most children under age 24, and it is levied at the parents’ rate on investment income above $2,700 in 2026. Consider this before making gifts to a young person.
Investors who give away stock also forgo the step-up, an important provision that exempts assets held at death from capital-gains tax.
Sellner knows he’s losing a step-up, but says, “The children could use a little more now. Why should they wait 20 years to get it?”
A disclaimer is a highly useful strategy in which one heir renounces an inheritance in favor of another heir. Assuming family members cooperate, this can save taxes.
Here’s one example. Dad died and had a large traditional IRA that he left to Mom. She has enough assets and income to cover her expenses, and she lives in a state with a stiff estate tax. The inherited IRA would put her estate over the threshold.
Also surviving are three young-adult children. If Mom disclaims all or part of Dad’s IRA within nine months of his death, that amount could go directly to the children. They will have 10 years to empty the account, and the family as a whole will likely save estate and income taxes.
Disclaimers have many key details, especially regarding beneficiary documents. Although heirs have great freedom in choosing what assets to disclaim, the rules about who gets disclaimed property are rigid. It is best if the original owner names tiers of heirs so that if one disclaims, the next recipient is clear.
