Taiwan Shows Resilience in Trying Times

Taiwan Shows Resilience in Trying Times

Executive Summary:

• Taiwan is showing resilience in the face of headwinds ranging from domestic politic strife, increased military pressure from the People’s Republic of China (PRC), and uncertainty regarding U.S. political support.
• Taiwan’s semiconductor sector is benefitting massively from the global artificial intelligence (AI) boom. Its gains contributed to Taiwan posting almost 13 percent quarterly GDP growth and reaching record stock market highs.
• In a bid to strengthen its relationship with the United States, Taiwan is investing $265 billion into American semiconductor manufacturing through Taiwan Semiconductor Manufacturing Corporation (TSMC). Taiwan has also hosted multiple high profile bipartisan congressional visits since the beginning of 2026.
• Domestic political strife, now centered around a proposed drone procurement bill, may affect U.S. assessments of Taiwan’s will to fight. Taiwan is also waiting for the Trump administration to approve a delayed $14 billion arms sale, which will be critical to its defense against a potential military campaign by the PRC.

Taiwan today faces an unusually difficult geopolitical environment in which multifaceted pressure from a militarily powerful People’s Republic of China (PRC) is mounting, domestic political strife is undermining defense readiness, and support from the United States is inconsistent. Taiwan has dealt with each of these challenges separately in the past, but this is the first time it must grapple with all three simultaneously.

Despite the difficult geopolitical situation, Taiwan has shown impressive resilience. The island nation has become a leader in producing hardware for artificial intelligence (AI), which has made it the world’s fastest growing advanced economy. At the same time, Taiwanese officials have quietly worked with their American counterparts to deepen ties. The missing piece of the puzzle is its military resilience: legislation to support Taiwan’s drone industry remains stalled and a large U.S. arms sales package is still pending. These delays continue to raise questions about Taiwan’s defense readiness.

AI-Fueled Surge

As the world’s chief producer of advanced semiconductors, Taiwan is benefiting hugely from the AI boom, arguably more than any other country. In the second quarter of the year, the Taiwanese economy grew at a torrid clip of almost 13 percent. This was the third consecutive quarter of double-digit expansion and the briskest quarterly rate since 1988. Taiwan’s Directorate General of Budget Accounting and Statistics (行政院主計總處) forecasts annual GDP growth this year to reach 9.6 percent, which would be the best performance since 2010 (National Statistics, Republic of China (Taiwan), accessed August 5).

Taiwan’s foundry-centric semiconductor manufacturing model, best encapsulated by the Taiwan Semiconductor Manufacturing Company (TSMC), has never been more effective. Fabless designers at the vanguard of AI hardware, including U.S.-based Nvidia, AMD, and Broadcom, all rely on TSMC to fabricate their most advanced chips. Their demand for AI chips led TSMC to post record profits for the fifth consecutive quarter in July, with net income of roughly $22 billion. The company is projecting revenue to grow 40 percent this year to more than $171 billion (Taiwan Semiconductor Manufacturing Corporation [TSMC], accessed August 5).

The semiconductor sector’s robust growth has coincided with Taiwan’s stock exchange reaching a new all-time high. After the TAIEX reached 48,218 points in late June, the market cooled somewhat in the following weeks, before rallying back to roughly 43,000 points in early August (Unique Business News, June 23; Commercial Times, August 4). [1] This has apparently spurred a new wave of retail investors in Taiwan, where the number of people with brokerage accounts rose to a record 14.6 million in July, with investors under 30 accounting for nearly two-thirds of the increase over June (Taiwan Stock Exchange [TWSE], accessed August 5).

Deepening Ties With the United States

In tandem with its robust economic growth, Taiwan has managed to quietly strengthen ties with the United States this year. Taipei has done so by focusing on strategic industries in line with Trump administration priorities and avoiding criticism of President Trump, who has prioritized U.S.–PRC relations.

For the Trump administration, Taiwan’s AI capabilities are among its most attractive assets. Taiwan is leveraging this competitive advantage effectively through both government-to-government initiatives and massive private investment. At the sixth Taiwan–U.S. Economic Prosperity Partnership Dialogue in February, the two countries agreed to a “strategic alignment for AI development” (AI發展戰略對接) (Taiwan Ministry of Digital Affairs, February 2). In July, TSMC announced it would invest an additional $100 billion in its Arizona production facilities, bringing its total investment to $265 billion (UDN, July 17).

Drones are another area in which the United States and Taiwan are enhancing cooperation, though with more modest results than AI. In June, Taiwan’s semi-governmental Industrial Technology Research Institute (ITRI; 工業技術研究院) joined the Green UAS certification program of the Washington-based nonprofit Association for Uncrewed Vehicle Systems International (AUVSI), which verifies supply chain and cybersecurity compliance for commercial drones. The certification will facilitate the entry of more Taiwanese drone makers into the U.S. market (Industrial Technology Research Institute, June 4).

Bipartisan congressional delegations have made three visits to Taiwan so far in 2026, signaling continuity in the bilateral relationship at a crucial time. Drones came to the fore during the most recent visit (July 30–August 1), which was led by Representative Young Kim (R-CA). This time, the context was Taiwan’s strained domestic politics and a stalled $6.6 billion drone procurement bill (Focus Taiwan, June 18). In a meeting with Taiwan President Lai Ching-te (賴清德), Kim noted the intensifying military threat the PRC poses to Taiwan and urged Taipei to pass necessary legislation to support its drone industry, which has been delayed more than six months. [2] “Deterrence takes two to tango, so help us help you,” she said (Office of the President of the Republic of China (Taiwan), July 31). After her meeting with Lai, Kim told reporters, “We hope that the Legislative Yuan can send a strong demand signal to build and buy as many drones as possible, and do it quickly” (Taipei Times, August 1).

The Art of the Delay

Representative Kim’s comments well embody the sentiment among U.S. lawmakers that Taiwan needs to move quicker on drone legislation. While congressional support for Taiwan remains strong, the inability of the ruling and opposition parties to find a modus vivendi on the issue is causing some strain in the bilateral relationship. Skeptics of the U.S. security commitment to Taiwan can point to the drone issue and argue that Taipei does not take its own defense seriously, and therefore is not worth risking American blood and treasure to defend.

At the same time, the Trump administration has so far declined to approve a new arms sale to Taiwan, for undisclosed reasons. The package, estimated at $14 billion, has been delayed since early 2026. President Trump described the package as a “very good negotiating chip for us” with the PRC during a May Fox News interview, heightening speculation that his administration may withhold it as a result of PRC pressure (Taipei Times, May 18).

Republican lawmakers, however, say that the White House will approve the arms sale before long. Representative Michael McCaul (R-TX), said at the Ketagalan Forum in Taipei on August 4 that he was “confident the president will forward soon another package to Congress with an additional $14 billion in critical military defense articles” (Focus Taiwan; Office of the President of the Republic of China (Taiwan), August 4).

Conclusion

Taiwan has shown impressive resilience in a challenging geopolitical environment. Its centrality to the AI industry has helped it avoid the fractiousness that has characterized the Trump administration’s approach to its other allies and partners. Strong congressional support suggests Trump will greenlight the $14 billion arms sale, though likely not before Chinese leader Xi Jinping’s expected September 24 state visit to Washington (Fox News, July 23).

All eyes will be carefully watching the progress of drone legislation through the Legislative Yuan in the meantime.

Unlike the arms sale, this is entirely under Taiwan’s control. Whether it can pass smoothly—and inclusive of sufficient financial support for the industry—will be taken as a signal about Taipei’s commitment to military modernization.

Notes

[1] The TAIEX stands for the Taiwan Stock Exchange Capitalization Weighted Stock Index. It is the primary stock market index for companies listed on the Taiwan Stock Exchange (TWSE).

[2] The “more than 6 months delay” refers to the drone procurement efforts that were cut as part of the original special defense budget proposed in late 2025 (China Brief, May 29). A new special defense budget bill targeting domestic drone procurement was proposed by Taiwan’s Ministry of National Defense in late June and remains stalled in the Legislative Yuan (Focus Taiwan, June 18).