Economic Armor: How U.S.-Taiwan Trade Can Forestall Coercive Chinese Tactics

One month before Taiwan’s 2024 elections, Beijing imposed tariffs on Taiwanese petrochemicals, sending a clear message: economic coercion is a weapon to undermine democracy. [1] With Taiwan producing over 90 percent of the world’s most advanced semiconductors, the stakes of PRC coercion are higher than ever. [2] Strengthening U.S.-Taiwan trade ties is not just an economic imperative but a strategic necessity. Addressing double taxation and implementing early harvest tariff reductions – targeted, phased tariff cuts in select sectors agreed upon before a complete trade agreement is finalized – in the agricultural, fishing, and petrochemical industries will enhance economic cooperation, increase investor and allied confidence in Taiwan, lay the groundwork for a potential U.S.-Taiwan Free Trade Agreement (FTA), and counter mutual coercion from the People’s Republic of China (PRC).

Taiwan’s Economic and Strategic Importance

Taiwan is the United States’ eighth largest trading partner, and the United States is Taiwan’s second-largest trading partner. Taiwan’s foreign direct investment (FDI) in the United States was more than $16 billion USD in 2022, up from $2.2 billion between 2013 and 2017. [3] Taiwan also plays a critical role in the U.S. technology sector; it leads in advanced manufacturing, information, and communications. Building upon these robust economic ties, the American Institute in Taipei (AIT) and the Taipei Economic and Cultural Representative Office in the United States (TECRO) signed the first of a series of proposed agreements under the U.S.-Taiwan Initiative on 21st-Century Trade on June 1, 2023. The agreement focused on streamlined customs administration and trade facilitation, transparent regulatory practices, anticorruption, and increased small and midsize enterprise (SME) investment. [4] Soon after, Congress passed the U.S.-Taiwan Initiative on 21st-Century Trade First Agreement Implementation Act, expressing approval of the first agreement and implementing legislative oversight mechanisms for future U.S.-Taiwan trade agreements. [5]

With the CHIPS and Science Act, the United States has also solicited Taiwanese semiconductor companies like TSMC to build domestic semiconductor fabrication plants. While these efforts are designed to reduce over-reliance on any single geographic region, including Taiwan, Taiwan remains indispensable since 92 percent of the world’s most advanced chips are still only produced there. [6] The absence of a U.S.-Taiwan tax treaty further raises the cost of cross-border investment, making U.S. reshoring efforts like the CHIPS and Science Act less effective. Investments on both sides are more expensive since mutual U.S.-Taiwan corporate withholding taxes are more than double the percentage of tax treaty countries like South Korea, Australia, and even China. The House of Representatives then overwhelmingly passed H.R.33 to help encourage U.S.-Taiwan corporate investment, providing double taxation relief for Taiwanese residents subject to U.S. income tax. [7] If the Senate passes the bill and President Trump signs it into law, Taiwan would be required to offer reciprocal tax relief to U.S. persons for the provisions to take effect, incentivizing Taiwan’s Legislative Yuan to discuss U.S.-Taiwan economic ties and formalize a U.S.-Taiwan tax treaty. [8]

Economic and Security Benefits of Stronger U.S.-Taiwan Ties

Strengthening U.S.-Taiwan economic ties is especially important now as the PRC more aggressively ramps up its efforts to manipulate Taiwan’s actions and elections. PRC economic coercion is not limited to pre-Taiwan-election tariffs on Taiwanese petrochemical exports. Since Taiwan’s largest trading partner is the PRC, the PRC can exert disproportionate coercive economic influence over Taiwan. The PRC and Taiwan retain an Economic Cooperation Framework Agreement (ECFA) and an FTA from the era of warmer cross-strait relations in 2010, but the PRC has recently implemented more coercive economic sanctions on key Taiwanese industries. [9] Soon after former House Speaker Nancy Pelosi visited Taiwan, the PRC banned several Taiwanese agricultural and fishing imports, violating the ECFA. [10] While the PRC has attempted to economically coerce Taiwan for decades, Taiwan’s intergenerational income inequality, stagnant inflation-adjusted real wages, high real estate prices, and demographic woes make recent PRC economic coercion efforts more acute. [11] Cross-strait fearmongering and Taiwan’s difficulty joining multilateral FTAs discourage FDI in Taiwan, further exposing Taiwan’s democratic system to PRC manipulation.

Bolstering U.S.-Taiwan economic ties enhances U.S. economic growth. Conservative economic estimates indicate that a U.S.-Taiwan FTA would be mutually beneficial. [12] An FTA would increase U.S. trade annually by $6.2 billion USD and Taiwan trade by $3.8 billion. All U.S. exports to Taiwan but rice would increase, and all Taiwanese exports to the United States but services would rise. While U.S. exports to the PRC would decrease in most sectors, U.S. gross domestic product (GDP) would increase by $246 million USD, and Taiwan’s GDP would increase by $641 million.

Beyond broad economic benefits, the proposed double taxation relief and tariff reductions will strengthen U.S. national security. Both measures will further the Indo-Pacific Strategy by expanding high-standard U.S.-Taiwan trade and investment and conveying sustained U.S. interest in cross-strait economic resilience. [13] Both would also help the United States neutralize PRC economic coercion against Taiwan and incentivize U.S. companies, allies, and partners to invest more in Taiwan. Tax relief would particularly incentivize Taiwanese corporate investment in the United States, which is especially relevant as the United States looks to attract critical Taiwanese high-tech industries like advanced semiconductor manufacturing.

Challenges to Enhanced U.S.-Taiwan Trade

Pursuing deeper U.S.-Taiwan economic ties faces multifaceted challenges, including potential shifts in U.S. trade policy. For instance, the prospect of new tariffs, such as those proposed by the Trump administration, which included an initial broad 32 percent tariff on Taiwanese goods, later temporarily adjusted to 10 percent for many items amid global outcry and negotiations, introduces significant uncertainty. [14] Such tariffs, if broadly implemented, could directly impact key Taiwanese export sectors, including some agricultural, fishing, and petrochemical industries identified as candidates for early harvest tariff reductions. The repercussions could extend to the numerous small-to-medium-sized enterprises in Taiwan, which contribute significantly to its export economy and employ a substantial portion of the workforce, potentially leading to job losses and economic strain.

U.S. tariff proposals underscore the critical need for formalized and stable trade frameworks, such as a comprehensive U.S.-Taiwan FTA and double taxation relief. The unpredictability and economic pressure stemming from such tariff actions could inadvertently make Taiwan more susceptible to the PRC’s coercive economic tactics, a risk this paper seeks to mitigate. Therefore, while new U.S. tariffs present a clear obstacle by potentially increasing costs and disrupting trade, they also amplify the strategic urgency for the United States to solidify its economic partnership with Taiwan through predictable, mutually beneficial agreements. These agreements would not only foster economic resilience but also signal a steadfast U.S. commitment to Taiwan’s stability amidst a complex geopolitical and trade environment. Current Taiwanese President Lai Ching-te aims to negotiate the removal of such U.S. tariffs, a goal that aligns with the objectives of securing a more open and reliable trade relationship. [15]

In addition to these potential U.S. policy headwinds, strengthening U.S.-Taiwan trade will not be without other challenges. Domestic labor unions and U.S. businesses with significant PRC investments may oppose U.S.-Taiwan tariff reductions. Labor unions will likely fear that the early harvest measures could lead to job losses in the U.S. agricultural, fishing, and petrochemical sectors, especially since many Taiwanese sectors have lower comparative wages. Furthermore, U.S. businesses with significant PRC investments may fear retaliation from Beijing, supply chain disruption, and reduced market access in response to closer U.S.-Taiwan economic ties.

Taiwan may also be reluctant to provide double taxation relief, lower tariffs, or remove other trade barriers. Without early harvest tariff reductions paving the way for a broader FTA, the potential tax revenue losses from a U.S.-Taiwan tax agreement could outweigh the anticipated benefits of increased investment. As a result, Taiwan might conditionally approve a tax agreement on tariff reductions. While former President Tsai Ing-wen eased some trade barriers in the proposed early harvest sectors, Taiwan continues to impose discriminatory labeling on U.S. pork and maintain import restrictions on rice, genetically modified food, ground beef, animal byproducts, agrochemicals, and sprouted potatoes. Additional foreign investment barriers persist in agriculture and chemical manufacturing. [16] Although President Lai supports stronger U.S.-Taiwan economic ties, he may not be willing to make politically sensitive first-term trade concessions. Even if Lai makes the requisite concessions, Taiwan’s hung Legislative Yuan, the country’s highest legislative body, could still refuse to ratify the tariff reductions.

Even if the United States and Taiwan overcome internal challenges and move forward with trade concessions, external pressures – particularly from the PRC – significantly threaten U.S.-Taiwan economic cooperation. The PRC will likely retaliate against the United States and Taiwan across the diplomatic, informational, military, and economic (DIME) spectrum. Diplomatically, the PRC may issue a statement claiming that such U.S.-Taiwan economic agreements violate its territorial sovereignty and further intensify its efforts to isolate Taiwan diplomatically. Informationally, the PRC may target American and Taiwanese government and commercial entities with offensive cyber operations and aggressively amplify disinformation narratives about increased U.S.-Taiwan economic ties. Militarily, the PRC may escalate its aerial and naval intrusions around Taiwan. Economically, the PRC may increase tariff and non-tariff barriers on American and Taiwanese imports, restrict mainland market access and investment opportunities, and continue coercing Taiwan in sectors not covered by the early harvest scheme. To effectively counter PRC retaliation and safeguard U.S.-Taiwan economic cooperation, the United States must take proactive measures to mitigate risks and reassure key stakeholders.

Bolstering Domestic and Diplomatic Support

The U.S. Trade Representative (USTR) should publicly engage unions and the business community throughout early harvest negotiations to proactively mitigate anti-FTA narrative development and maintain U.S. business confidence. USTR should incorporate strong labor provisions into the early harvest measures, reassuring unions and American workers that U.S. and Taiwanese tariff-free sectors will be held to the same labor standards. The new administration should also highlight how the proposed measures could create American jobs, particularly in high-tech industries where Taiwan has significant expertise and investment potential. These reassurances should be supplemented with overhauled worker retraining programs designed with affected industry consultation. To help U.S. businesses with significant PRC investments, USTR and the Department of Commerce should preemptively develop risk mitigation strategies with industry groups like the U.S. Chamber of Commerce and individual companies. [17] These measures may include leveraging federal support for derisking costs and providing legal support for companies facing unfair PRC trade practices. After all, given the PRC’s slowing economic growth and arbitrary economic mandates, the new administration should emphasize that retaliatory PRC economic measures in response to a U.S.-Taiwan FTA could help facilitate safer investment opportunities elsewhere. While securing domestic support for tariff reductions and tax agreements is crucial, directly engaging Taiwan through diplomatic efforts will be equally essential.

USTR should address Taiwan’s concerns through multi-track diplomacy efforts emphasizing high U.S. food quality standards, the economic benefits from agricultural, fishing, and petrochemical tariff reductions, and the strategic importance of closer U.S.-Taiwan economic ties. Official diplomatic efforts should leverage high-level Congressional delegations and executive branch visits to encourage Taiwanese trade negotiators and the Legislative Yuan to ratify a U.S.-Taiwan tax agreement and early harvest tariff reductions. AIT and TECRO-coordinated trade negotiations should follow these high-level talks. These negotiations should focus on alleviating temporary sectoral economic pain through phased tariff reductions, provisional quotas, interim exemptions for sensitive sectors, and other limited sector-specific protections. Public-private dialogues should engage multinational companies, SMEs, technical working groups, and business associations like the U.S.-Taiwan Business Council and the American Chamber of Commerce in Taiwan. Independent technical working groups should also certify U.S. food quality by conducting comprehensive food safety evaluations on restricted foods. Civil society-focused efforts could integrate public diplomacy and U.S.-Taiwan civil society collaborations. Educational initiatives, cultural exchanges, media engagement, and Taiwanese American communities could alleviate public concerns about food safety and economic impacts. U.S.-Taiwan think tanks and civil society groups could also collaboratively develop solutions for any negative early harvest sectoral impacts. Even with diplomatic engagement and financial incentives, however, the PRC’s likely retaliation remains a significant challenge.

The United States should proactively prepare for potential PRC DIME retaliation while minimizing tensions. The Trump administration should ground the U.S.-Taiwan tax agreement and tariff reductions on maintaining cross-strait stability. The National Security Agency and Office of the Director of National Intelligence’s Foreign Malign Influence Center (FMIC) should also transparently work with Taiwan to mutually enhance cybersecurity and counter PRC disinformation. Militarily, the Department of Defense should quietly continue to arm and train the Taiwanese armed forces. While a U.S.-Taiwan tax agreement and tariff reductions inherently serve as an economic hedge, the Department of Commerce and Department of Labor should accelerate derisking, support affected industries, and coordinate with allies to counter PRC coercion efforts. USTR should also work toward an eventual U.S.-Taiwan FTA to mitigate the PRC’s ability to coerce Taiwan through economic sectors not covered by the early harvest scheme.

Ensuring Long-Term Success

To ensure the longevity of these economic initiatives, the United States must secure legislative backing. Thus, the Trump administration should urge the Senate to pass H.R.33 as soon as possible if Taiwan’s Legislative Yuan passes similar measures to facilitate reduced withholding taxes on Taiwanese workers in the United States. These efforts would increase mutual investment in critical sectors. While Congress is generally averse to new FTAs, a U.S.-Taiwan FTA enjoys significant congressional support, as evidenced by the U.S.-Taiwan Initiative on 21st-Century Trade First Agreement Implementation Act (the “Act”). However, the Act also provides Congress extended timeframes to review negotiating texts before sharing them with Taiwan or outside the executive branch. Although transparency and congressional oversight are essential, specific provisions of the Act will make further trade negotiations with Taiwan almost impossible. The Trump administration should therefore encourage Congress to pass a durable Taiwan-specific Trade Promotion Authority (TPA) to help USTR expedite and prioritize U.S.-Taiwan trade negotiations. [18] Within such a TPA, Congress should mandate USTR reporting deadlines, integrate fair enforceability guidelines, and include agricultural, fishing, and petrochemical tariff reductions as key negotiating objectives.

While securing legislative support immediately is crucial for sustainable early harvest policy implementation, the long-term success of U.S.-Taiwan trade initiatives will depend on how effectively they lay the groundwork for deeper U.S.-Taiwan economic integration. USTR should thus use a U.S.-Taiwan tax agreement and early harvest tariff reductions to assess the potential for a U.S.-Taiwan FTA. A U.S.-Taiwan tax agreement will facilitate cheaper investment opportunities, encouraging mutual corporate investment, especially in high-tech sectors. Negotiating difficult agricultural, fishing, and petrochemical tariff reductions will help build trust and determine the feasibility of lowering other trade barriers in the future. These measures will provide solid groundwork for negotiating a future U.S.-Taiwan FTA, which will likely supply Taiwan with more comprehensive insulation against PRC economic coercion.

Beyond strengthening U.S.-Taiwan trade relations, these efforts should catalyze broader regional economic cooperation, encouraging U.S. allies and partners to enhance their engagements with Taiwan. The United States could leverage a successful U.S.-Taiwan trade agreement to invite Taiwan to the Indo-Pacific Economic Framework for Prosperity (IPEF) while maximizing interoperability and minimizing PRC coercive actions for U.S. allies and partners already in IPEF. [19]

U.S.-Taiwan economic agreements will help Taiwan contribute further to all four IPEF pillars: (1) trade; (2) supply chain resilience; (3) clean energy, decarbonization, and infrastructure; and (4) tax and anti-corruption. Beyond IPEF, a U.S.-Taiwan trade deal can also provide political cover for other countries to negotiate trade agreements with Taiwan, promoting a more connected and prosperous Indo-Pacific.

As the United States deepens economic ties with Taiwan, it must also assess how these initiatives influence Taiwan’s resilience against PRC coercion. All the early harvest measures encompass sectors in which the PRC has attempted to coerce Taiwan. While economic models predict otherwise, if reduced U.S. tariffs for these sectors hurt Taiwan more than the PRC’s economic coercion in the real world (e.g., the PRC suddenly embargoes key intermediate good flows to Taiwan), a U.S.-Taiwan FTA may play into the PRC’s malign influence efforts in Taiwan. If such is the case, the United States should explore alternative courses of action.

Strategic Communication

To ensure consistent public support, the United States should maintain clear and consistent messaging about the benefits of closer U.S.-Taiwan economic ties. Public statements, press releases, and social media campaigns should articulate how the tax agreement and tariff reductions promote American and Taiwanese economic growth. General public diplomacy efforts should be supplemented by engaging key stakeholders like Congress, businesses, labor unions, civil society groups, and Taiwanese-American organizations in tailored briefings, public hearings, and roundtable discussions. These outlets would provide opportunities for Congress and USTR to solicit input on the tax and trade agreements and address stakeholder concerns.

In addition to shaping clear and consistent narratives around U.S.-Taiwan economic ties, the United States must also prepare to counter PRC disinformation efforts to undermine these initiatives. The FMIC and civil society can monitor PRC state media and digital platforms to refute any inaccuracies with fact-based responses. U.S.-Taiwan intelligence sharing could likewise enable proactive strategic intelligence disclosures to mitigate the impact of PRC information operations.

U.S.-Taiwan Trade as a Pillar of Indo-Pacific Stability

Strengthening U.S.-Taiwan trade relations is not just an economic imperative but a necessity in countering PRC economic coercion and reinforcing stability in the Indo-Pacific. By reducing double taxation, implementing early harvest tariff reductions, and laying the groundwork for a broader free trade agreement, the United States can bolster Taiwan’s economic resilience while deepening ties that deter hostile economic and military actions. These measures will not only incentivize investment and innovation in critical sectors but also signal to allies and adversaries alike that economic partnerships rooted in democratic values are a pillar of regional security. A more integrated U.S.-Taiwan economic relationship will strengthen supply chain resilience and inspire other democracies to fortify their own economic defenses via cooperation with one another, fostering a more stable, resilient, and prosperous Indo-Pacific.

Ethan Chiu ’26 serves as an Officer at the AHS chapter at Yale University, where he is majoring in Global Affairs and History.

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Notes:

[1] Taiwan Ministry of Economic Affairs, “China’s suspension of select ECFA tariff reductions ‘regrettable,’” Focus Taiwan, 2023, https://focustaiwan.tw/cross-strait/202312210011

[2] Boston Consulting Group and the Semiconductor Industry Association, Strengthening the Global Semiconductor Supply Chain in an Uncertain Era, 2021, http://www.semiconductors.org/strengthening-the-global-semiconductor-supply-chain-in-an-uncertain-era/

[3] Department of Commerce International Trade Administration, “Market Overview.” Taiwan – Country Commercial Guide, 2024, https://www.trade.gov/country-commercial-guides/taiwan-market-overview

[4] “Agreement between the American Institute in Taiwan and the Taipei Economicand Cultural Representative Office in the United States regarding Trade between the United States of America and Taiwan,” AIT-TECRO, 2023, https://ustr.gov/sites/default/files/2023-05/AIT-TECRO%20Trade%20Agreement%20May%202023.pdf

[5] U.S. Congress, H.R.4004 — United States-Taiwan Initiative on 21st-Century Trade First Agreement Implementation Act, 2023, https://www.congress.gov/bill/118th-congress/house-bill/4004

[6] U.S. International Trade Commission, U.S. Exposure to the Taiwanese Semiconductor Industry, 2023, https://www.usitc.gov/publications/332/working_papers/us_exposure_to_the_taiwanese_semiconductor_industry_11-21-2023_508.pdf

[7] U.S. Congress, H.R.33 — To amend the Internal Revenue Code of 1986 to provide special rules for the taxation of certain residents of Taiwan with income from sources within the United States, 2025, https://www.congress.gov/bill/119th-congress/house-bill/33

[8] “Krishnamoorthi, Bipartisan Group of Lawmakers Urge Senate to Take Up Taiwan Double Taxation Agreement,” House Select Committee on the Strategic Competition between the United States and the Chinese Communist Party – Democrat 2024, https://democrats-selectcommitteeontheccp.house.gov/media/press-releases/krishnamoorthi-bipartisan-group-lawmakers-urge-senate-take-taiwan-double-tax

[9] Cross-Straits Economic Cooperation Framework Agreement,” 2010, https://rtais.wto.org/rtadocs/713/TOA/English/Combined%20ECFA%20Text.pdf

[10] Cissy Zhou, “China bans thousands of Taiwan food imports as Pelosi trip riles,” Nikkei Asia, 2022, https://asia.nikkei.com/Politics/International-relations/US-China-tensions/China-bans-thousands-of-Taiwan-food-imports-as-Pelosi-trip-riles

[11] Min-Hua Chiang, “Taiwan’s slowing growth and national security,” East Asia Forum, 2024, https://eastasiaforum.org/2024/01/04/taiwans-slowing-growth-and-national-security/

[12] Tori Smith, Gabriella Beaumont-Smith, and Rachael Wilfong, “U.S.–Taiwan Free Trade Agreement: The Economic Case,” The Heritage Foundation, 2022, https://www.heritage.org/trade/report/us-taiwan-free-trade-agreement-the-economic-case

[13] The White House, Indo-Pacific Strategy of the United States, 2022. https://www.whitehouse.gov/wp-content/uploads/2022/02/U.S.-Indo-Pacific-Strategy.pdf

[14] “Tough Trade Negotiations Ahead for Taiwan,” Global Taiwan Institute, 2025, https://globaltaiwan.org/2025/04/tough-trade-negotiations-ahead-for-taiwan/

[15] “President Lai delivers remarks on US tariff policy response,” Office of the President, Republic of China (Taiwan), 2025, https://english.president.gov.tw/News/6935

[16] U.S. Trade Representative, 2024 National Trade Estimate Report on Foreign Trade Barriers, https://ustr.gov/sites/default/files/2024%20NTE%20Report.pdf

[17] U.S. Chamber of Commerce Foundation. n.d., Resilience in a Box, https://www.uschamberfoundation.org/solutions/disaster-response-and-resiliency/resilience-in-a-box

[18] U.S. Trade Representative. n.d., Trade Promotion Authority, https://ustr.gov/trade-topics/trade-promotion-authority

[19] U.S. Trade Representative, Indo-Pacific Economic Framework for Prosperity (IPEF), 2022, https://ustr.gov/trade-agreements/agreements-under-negotiation/indo-pacific-economic-framework-prosperity-ipef

Image: “One of TSMC’s factories in Taichung’s Central Taiwan Science Park,” by Briáxis F. Mendes, retrieved from https://commons.wikimedia.org/wiki/File:TSMC_logo_on_Taichung_factory_building.jpg. This file is licensed under the Creative Commons Attribution-Share Alike 4.0 International license.