Taiwan's Semiconductor Dominance and the Risk of Dutch Disease

For better or worse, modern-day Taiwan is overwhelmingly known for two things. Making the world's most advanced microprocessors and its uneasy relationship with the People's Republic of China. Now, so far, the former has protected it from the latter. Taiwan produces chips that basically no other economy on Earth can. And while we are trying to close this gap, in the meantime, basically every institution that uses technology on the planet has a vested interest in keeping this country safe. If the rest of the world ever does catch up though, usefulness may have run its course. Now, this is obviously not an ideal situation to be in geopolitically, but it is also potentially compromising economically as

well. On the surface, Taiwan is booming. Demand for the hardware that goes into AI data centers has enabled explosive growth in high-v value exports. Last year, in 2025 alone, Taiwan's economy grew by 8.7%, which would be an astronomically strong result even in a developing economy. But Taiwan is not a developing economy. It's already one of the richest on Earth. Of course, because of the whole gray area around independent nationhood, robust economic statistics from international agencies are not quite as easy to find as they would be for most other countries. But based on estimates from the IMF, Taiwan is already the most productive economy in Asia on a per capita basis with the

exception of Singapore. And Singapore kind of cheats these statistics. So even that's not exactly a fair comparison. However, the country may now be becoming a victim of its own success in a somewhat familiar way, just with a bit of a twist. It is now so dependent on one single high-v value industry that the rest of the economy could be suffering. Not only does this create a single failure point with potential consequences beyond just purely economics, it also distorts the local market in ways that aren't necessarily ideal for the real people living there. Cost of living increases, housing affordability, a two-speed economy, and all of the problems that go with these issues are certainly not unique to

Taiwan, but the semiconductor industry is making them a whole lot worse and a whole lot harder to fix. So, has Taiwan developed its own unique brand of Dutch disease? If it does, how can it be fixed? And if it can't, what does this mean for regular people within Taiwan and the world that relies on them? AI is everywhere. That's why these semiconductors are so valuable. And yet, it still feels like some of these chat bots can't create a deck or slideshow, even though they should be able to. That's where our sponsor, Gamma, comes in. Gamma is an AI tool that can turn any prompt into a full functioning editable deck or presentation, allowing you, the builder, to focus only on the

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appreciation that actually negatively impacts other typically industrial sectors of the economy. In the 1960s, the Netherlands discovered a large natural gas field in the northeast corner of the country. The Groning gas field. Even today, Grooningan remains the largest reserve in Europe and one of the largest in the world. For a country that was still recovering from the impacts of a world war, the discovery was met with enthusiasm. Natural gas extraction quickly became the focus of the Dutch economy. And as outputs and exports increased, so did the nation's wealth. But it came with an unexpected side effect. At its core, Dutch disease describes the economic problems that arise when a country's currency suddenly

and sharply strengthens most often, such as, and in this particular case, due to a resource boom, making other sectors less competitive. As Dutch gas exports rapidly increased, so did the inflow of foreign currency. This massive inflow caused the value of the Dutch Gilder to appreciate. The result, every other Dutch export became more expensive and less competitive in the global market, and domestic businesses suddenly faced newfound competition from cheaper foreign imports. Meanwhile, investment in the now lagging manufacturing and agricultural industries dwindled. Workers lost their jobs, and the economic diversity of the country began to deteriorate. While economic theory generally argues that countries should

lean into their comparative advantage, specializing in what they do best or have the most of, in this case, hyperfocus on a single non-renewable commodity is akin to becoming a voluntary hostage to its boom bus cycles. And then there's the question of, well, what to do with all this newfound wealth? The Netherlands certainly put it to work. Building roads, schools, and a robust social safety net. All noble causes. The problem is overinvesting in the public sector also meant an underinvestment in the industrial and non-as business sectors of the economy. By the mid1970s, the symptoms of the disease began to show. Wage increases pressured production costs, and as gas prices cooled, the Netherlands found themselves with a bloated public sector and a

severely depleted manufacturing base unable to pick up the slack. Unemployment spiked, and citizens found themselves in a two-tiered economic system. those reaping the benefits of the gas boom and everyone else seemingly left behind a struggle as their industry stagnated and their cost of living increased. While coined as a term to describe a specific situation in the Netherlands, the Dutch are not unique in their disease. Oil rich nations like Venezuela and many in the Middle East continue to struggle with this exact conundrum. So what does any of this have to do with Taiwan, an economy quite devoid of any such natural resources?

Well, replace oil and gas exports with semiconductor exports, and the story starts to look concerningly familiar. Jensen Huang, the CEO of Nvidia, refers to this tiny island nation as the center of the world's computer ecosystem. Taiwan's globally dominant semiconductor industry has, in a sense, created a high-tech version of the Dutch disease. When you specialize in making a product that the entire world relies on to function and seemingly cannot get enough of, a remarkably similar set of parallels to that of the Netherlands becomes apparent. Tech giants like Google, Microsoft, and Meta are locked in an AI arms race that may top $700 billion in data center spending this year alone with no signs of slowing

down. At the same time, with geopolitical tensions on rise and the global order reshuffling, militaries around the world are racing to secure the chips they need for the production of their high-tech weaponry. Semiconductors are the foundational building blocks of it all. And in order to buy those chips, you have to buy new Taiwan dollars to pay for them. As with the Netherlands, this creates massive appreciation pressure on the local currency. If you're Taiwan's namesake semiconductor giant or an engineer working there, you don't mind. In fact, you benefit. But if you're a small to mediumsiz Taiwanese manufacturing company, you're not benefiting. You're

paying the price and struggling to stay competitive. When the AI boom appreciates a currency by double digits in a single year, it becomes a lot harder to stay competitive globally. This is leading to the same type of decline in Taiwan's non- techch industries that the Netherlands non- gas sectors experienced in the late60s and 70s. Taiwan's success in semiconductors is shifting the country into a two-speed economy. If you work in the Shinshu Science Park and show up for your shift in TSMC or United Micro Electronics Uniform, you are highly compensated and in high demand. For reference, the average annual salary at TSMC is 3.57 million new Taiwan dollars or

approximately $116,000. Quite the pay package in a country where the average cost of living for a single adult is $300,000 new Taiwan or $9,500 a year. But if like the majority of Taiwan citizens, you don't, your reality is very different. The median Taiwanese salary is just $546,000 new Taiwan or $17,000. Quite poulry in comparison. And while the tech and data industries are technically driving headline salary increases across the board, 70% of workers in Taiwan still earn less than the average monthly salary of $1,500. To make matters worse, this influx of highly concentrated tech wealth has led to increased domestic spending and consumption by those with money, driving up the cost of goods, services, and

housing for everyone, including those without. The semiconductor boom is making life more luxurious for its stakeholders, but increasingly unaffordable for the average citizen. They likely feel the impacts of this Dutch-like disease every time they pay rent or buy groceries. And the semis sector's lopsided contribution to economic output has well lopsided the economy. Taiwan is leaning so far into the AI boom that its economy is becoming perilously balanced on a single leg of the proverbial stool. In 2025, Taiwan's semiconductor foundaries accounted for nearly 77% of global production, led by TSMC with a staggering 70% market share.

TSMC grew sales by over 30% last year and expects to keep up the pace for years to come. While the rest of the world is struggling to kickstart economic growth post inflation, Taiwan is sprinting full speed ahead. The tiny island grew GDP by 8.7% in 2025, its strongest growth in over a decade. But while their exports have reached record levels, it's increasingly being driven by this one single industry. Exports to the US have more than doubled in the last year, driven by big tech's insatiable appetite for chips. However, even ignoring the domestic issues this creates, this whole economic model is incredibly risky. Semiconductors by their very nature have historically been a cyclical industry. And while many

claim this time is different, history shows that more often than not, this time ends up being not different. If we are in an AI bubble and it pops, well, that would be Taiwan's equivalent of oil prices crashing for a Middle East state. If America's big tech companies decide that their investments have reached the point of diminishing returns, then so will the Taiwanese economy. To complicate things, AI bubbles aren't the only risk factor for Taiwan's concentrated economy. The island nation finds itself smack dab in the middle of several colliding forces geologically and geopolitically. Geologically, Taiwan is a mountainous island born on the boundary of colliding tectonic plates and weather zones. In fact, the 100% of

the island is considered at high risk for tropical storms and earthquakes. And it's no stranger to either. But for an economy built on an industry that relies on highly sensitive precision machinery, one is far more of a risk than the other. In 2024, Taiwan was hit by the strongest earthquake in 25 years. The Taiwanese and global economy held its breath as TSMC operations were temporarily put on hold. Fortunately, the pause was short-lived, but the risk remains. Geopolitically, Taiwan is still very much in the crosshairs of CCP. And according to their one China principle, they will one day be reunified with the mainland through peace or by force. Even if nothing ever comes of this, the

geopolitical tension alone has had real economic consequences. Outside of direct investment in the semiconductor industry, Taiwan offers little in incentive to other foreign investors. Foreign companies typically turn to Asia for its cheap manufacturing. But labor costs of manufacturing in Taiwan are higher than its peers like Vietnam, Malaysia, and India. And those countries don't come with the risk of invasion. That risk also impacts the government's ability to borrow. Taiwan historically has maintained a reasonable debt to GDP ratio, partly due to laws limiting their borrowing and partly due to their semiconductor fueled GDP growth. But

even still, government borrowing remains a pillar of their strategy to fuel economic growth. Any increase in government borrowing costs makes that strategy more expensive. And while borrowing costs remain comparatively low, they are susceptible to sharp increases driven by perceived geopolitical risks. In 2022, the yield on the Taiwan tenure almost doubled in weeks after a high-profile visit from Nancy Pelosi, the highest ranking US official to do so in over 25 years. That visit came with a cost and interest rates on government debt has remained elevated and persistently sensitive to every US China Taiwan headline since. Taiwan is walking a geopolitical and economic tightroppe between the world's two superpowers and its two largest

trading partners, all while trying to navigate its unique technological version of the Dutch disease. So, how can it be fixed? Well, according to some in Taipei, while the situation may look like the 1960s Dutch disease, it isn't the same. Their point is that while Taiwan's semiconductor heavy exports may fit the bill at first glance, the reality is that the industry is heavily reliant on supply chain imports, meaning they have to spend a lot of the money they bring in back out again on things like equipment and raw materials, as opposed to pure natural resource exports, which largely produce cash flows in only one direction. And if you zoom out, they do have a point. Taiwan

still has a massive trade surplus for an economy of its size. But a lot of its exports still depend on the trade of component parts which is why its largest import and export category is integrated circuits. Now this is still very much an issue and technicalities don't take away from the fact that if demand for these chips fall or perhaps more concerningly if the supply of them catches up elsewhere their economic miracle could quickly come undone. So is there any way to fix this? One strategy to reduce the symptoms of Dutch disease is to weaken the currency in order to better support the non-dominant export industries of the island. And well, Taiwan is already trying that, but it's getting harder.

Taiwan is one of the world's largest holders of foreign currency reserves, holding a record 605.5 billion in 2026, driven by a robust trade surpluses and government policy aimed at stabilizing the local currency. In fact, while we have been discussing the problems that are arising from upward pressure on the currency, the United States is discussing the opposite. That Taiwan is keeping it artificially undervalued and the nation has landed itself on the Treasury's monitoring list of potential currency manipulators. Not an ideal place to be, particularly in the midst of trade negotiations and tariff tantrums. In its defense, Taiwan's central bank claims its exchange rate policy is simply to maintain the

stability of the Taiwan dollar, not to suppress the exchange rate to maintain competitiveness for exporters. But they have a habit of timely intervention whenever the currency begins to appreciate too much. In the name of stability or otherwise, the intended effect is the same. To make matters more complicated, currency depreciation is a double-edged sword. A weak currency makes imports more expensive, decreasing the purchasing power of those already left behind in the name of trying to support exporters. But now that they've caught the eye of the Treasury, they must walk a delicate path in order to not overdo their interventions. A difficult task in light of increased upward pressure from the world's insatiable demand for chips. And while

record revenues, orders, and profit margins will allow companies like TSMC to shrug off the impacts of appreciation, the same cannot be said for Taiwan's less glamorous manufacturers. The industries that Taiwan has been trying to prop up may end up even further behind along with their workers. Next on the list of fixes is diversifying the economy. Taiwan is attempting to do so with its 5 plus2 plan, an initiative aimed at investing in the left behind manufacturing and agricultural industries. In theory, this will increase their competitiveness while simultaneously raising wages for non-semi workers. The problem is despite these investments, the semiconductor space is speeding up, not slowing down,

making addressing the problem increasingly difficult. So, if you can't manipulate the currency or rapidly diversify the economy, what can you do? Well, you can do what you do best, export it, and managed to kill two birds with one stone. Kind of. Last month, Taiwan and the United States signed a breakthrough trade deal. In exchange for $250 billion in new investment to build foundaries and make chips in America, US tariffs on Taiwan, which started at 32%, then dropped to 20%, would now settle in at 15%. Hard to keep track, I know, but importantly, Taiwan's prized export semiconductors would be exempt. Sounds

like a good deal, and it is. TSMC has already committed $165 billion in investments to build out foundaries in Arizona. Good for America that is eager to reshore domestic chip production. And good for Taiwan that is eager to stabilize its currency. This massive capital outflow helps to relieve upward pressure on the TWWD by recycling excess USD back into the American economy rather than into TWWD. Taiwan also gets to protect its most important products from tariffs and its premier companies get to diversify geographically and further embed themselves in Western nations. But once again, Taiwan finds itself on yet another delicate path. If Taiwan shifts too much of its high-end

chip fabs off island, it may weaken the very silicon shield that has helped to keep it safe. Taiwan's biggest successes are responsible for some of its biggest problems. And some of its solutions to solve those problems, well, may make more problems. If Taiwan can't diversify its economy, it will remain one earthquake or blockade away from economic disaster. But on an individual level, the average Taiwan citizens will become increasingly stuck. Modern Taiwan has had one of the most impressive economies in the world, given the circumstances of its place in world affairs, and its GDP growth is the envy of many. It is one of the wealthiest nations on Earth with a GDP per capita of 41,600.

But to a lot of its people, it doesn't feel that way. And even to those reaping the rewards right now, it is still an economy built on an industry that barely existed 50 years ago. and there are certainly no guarantees it will be around in 50 years from now. Now, beyond just the pure economics, we have also briefly mentioned the elephant in the room of the People's Republic of China's increasingly aggressive stance towards the island. Now, obviously, this is an economic risk, but far more importantly, it is a significant strategic risk that will inevitably involve the most powerful militaries on the planet. And that begs the bigger question of why is China trying to do this? As we have seen

outside of this one single industry that wouldn't survive an invasion anyway, Taiwan doesn't exactly have much to offer the mainland and the geopolitical costs of such an action would be almost impossible to calculate. Now, we have actually made an entire video about China's economy. It gives some context on this situation. You should be able to click on that video on your screen now. Thanks for watching, mate. Bye.