Taiwan soars on AI boom but two-tier economy risks run deep

Taiwan has a habit of surprising the world.

In the second quarter of this year, its economy roared ahead by 8% compared with a year earlier—the fastest pace in four years. That number alone would be enough to turn heads, but the context makes it even more remarkable.

Taiwan is not a resource-rich country, nor does it enjoy the geopolitical breathing space of a large domestic market. Instead, it thrives on agility, on building industries that are both indispensable and nearly impossible to replicate. Today, that edge is sharper than ever because of one thing: artificial intelligence.

The AI revolution is everywhere these days, and the hype is often louder than the reality. But in Taiwan’s case, the reality is striking. Nvidia’s most recent earnings showed that global demand for AI chips remains very strong, even if not quite as sky-high as some investors had hoped.

Behind every one of those chips lies a Taiwanese success story. The country has become the workshop of the AI revolution, and as a result, its economy is riding a wave unlike anything it has seen since the early smartphone era.

Economists have had to scramble to keep up; Taiwan’s GDP growth forecast for 2025 has been revised upward to 5.2%, nearly double what was expected just a few months ago. This surge is not evenly shared, though, and that is where the story becomes complicated. At the heart of the boom are a handful of companies.

TSMC, Taiwan’s crown jewel company, has built a global near-monopoly in producing the high-performance computing chips that AI systems need to function. Foxconn, too, has managed to shift from being a symbol of the old consumer electronics supply chain to a key supplier of cloud and networking gear. These firms are not just winners—they are indispensable actors in the emerging new global economy.

But look beyond the gleaming towers of Hsinchu Science Park, and a more uneven picture emerges. Taiwan risks becoming a one-trick pony: dazzling in semiconductors, yet fragile everywhere else. Traditional exporters—makers of machinery, auto parts, chemicals—do not share in the same fortune.

A surge in the Taiwan dollar earlier this year left many of them struggling to compete in global markets. New US tariffs, harsher on Taiwan than on South Korea or Japan, will only pile on the pressure. And while the tech titans can rely on complexity—their products are so advanced that no other country can simply swap them out—Taiwan’s traditional industries do not enjoy that same shield.

This divergence matters. It is easy to cheer record export numbers, but a healthy economy needs more than one booming sector. The question is whether the AI windfall can filter through into wages, services and consumption.

Will Taiwanese families see their living standards lifted, or will the benefits of the boom stay bottled up with the semiconductor giants? That is the crux of Taiwan’s challenge. Growth that relies too heavily on one industry may look impressive on paper, but will feel less secure in practice.

Adding to the unease is the geopolitical landscape. Taiwan’s dependency on the United States is greater than ever: a third of its exports now go to America, up from just 15% in 2021. That makes Taiwan highly vulnerable to the shifting winds of US politics.

Under President Donald Trump’s second administration, tariffs have become a blunt instrument once again. Yes, exemptions exist for companies that invest directly in the US, but such carve-outs are hardly a stable foundation on which to build a long-term strategy. Taiwan has built itself into a global linchpin, yet remains exposed to the whims of one powerful partner.

And then there is China. While it still trails Taiwan in advanced semiconductors, Beijing is determined to close the gap by pouring massive resources into incubating domestic champions. Its progress in mature chips has been rapid, and its willingness to undercut prices poses a very real threat to Taiwan’s margins.

The so-called “red supply chain” may not topple Taiwan’s lead in cutting-edge chips anytime soon, but it could chip away at the foundations. For a small island whose prosperity depends on remaining irreplaceable, that is not a risk to dismiss.

What all this suggests is a two-speed economy. At the top, the semiconductor sector soars, buoyed by global demand and protected by complexity. Beneath it, traditional industries grind along, struggling with an overvalued currency and international headwinds.

The danger is that Taiwan becomes too comfortable with this imbalance, assuming that as long as TSMC thrives, the whole nation will. But that assumption ignores the lessons of past tech booms. Markets shift. Demand cycles slow. Rivals catch up.

For now, 2025 looks like a golden year. A growth rate north of 5% is enviable in a world where most advanced economies are crawling at half that pace. Taiwan has once again defied the odds, proving that even in a turbulent global economy, excellence in the right industry can deliver extraordinary results.

But this moment of triumph carries the seeds of tomorrow’s challenges. By 2026, growth is expected to slow sharply, perhaps down to 2.5%. That is not a crisis, but it is a sobering reminder that nations cannot build a resilient future on a single pillar, however sturdy it seems today.

Taiwan’s story, in many ways, is a parable of our times. A small democracy constantly under geopolitical pressure has turned itself into a global powerhouse by mastering the hardest technology in the world to produce.

That is cause for admiration. But it is also a reminder of vulnerability. Taiwan must ensure that the AI story is not just about chips, but about broadening opportunity, strengthening resilience and building an economy that can weather the next storm.

For now, Taiwan is basking in the glow of AI-driven prosperity. The real question is whether it can turn this moment into something more lasting or whether the AI boom will ultimately be remembered as just another fleeting chapter in the self-governing island’s long history of defying the odds.

Alicia Garcia Herrero is chief economist for Asia Pacific at NATIXIS and senior research fellow at Bruegel.