On May 2, the New Taiwan Dollar (NTD) surged 3.3% against the U.S. dollar, marking the largest single-day gain in 23 years. As an export-driven economy, with exports accounting for 70% of GDP, this sharp currency appreciation is devastating to Taiwan’s economy.
Since April 2, when Trump proposed “reciprocal tariffs” on trading partners, Asian currencies, except China’s, have appreciated throughout April, particularly those of U.S. allies. The NTD rose 3.64%, the Japanese yen 4.44%, the South Korean won 3.6%, and other Asian currencies gained between 1.76% and 2.97%.
Including the first two days of May, the NTD’s appreciation reached 6.49%, far outpacing other Asian currencies. Why?
On May 2, Taiwanese market observers and exporters were puzzled by the rare single-day surge until May 3, when Taiwan’s trade negotiation team confirmed that the first round of talks with the U.S. began on May 1. This revealed the cause: U.S. pressure triggered the NTD’s surge.
Facing public skepticism, Taiwanese authorities denied any link between the currency surge and U.S.-Taiwan trade talks, attributing it to local market expectations of NTD appreciation and a rush of foreign investment into Taiwan’s stock market.
However, the authorities couldn’t explain why the NTD’s appreciation far exceeded that of other Asian currencies. Japan, for instance, held two rounds of trade talks with the U.S. and Japanese stocks continued to rise, but the yen depreciated in early May.
Perhaps the Taiwan authorities have not lied, but have only revealed part of the truth. Even so, the psychology of the local exchange market’s expectation of the appreciation of the Taiwan dollar fully reflects the pessimistic expectation of the Taiwan-US trade talks. Unlike Beijing’s hardline stance toward Washington, Taipei is eager to “pay tribute”. Despite officials’ assurances of not yielding excessively to the U.S., the market’s reaction is the most honest.
Within a month, the NTD’s 6.49% rise is a trend the U.S. welcomes, as it narrows the U.S. trade deficit with Taiwan and pushes Taiwanese tech firms to set up factories in the U.S.
Currency appreciation shrinks exporters’ profits, drives industrial relocation, and directs firms to their main clients’ locations. High-margin tech firms have no choice but to establish U.S. factories to avoid tariffs and currency pressures. Low-margin traditional industries, like machinery and petrochemicals, rely on government subsidies to survive.
Of course, Taiwan’s traditional industries have another big market to choose from, namely the Chinese market. In other words, China has also benefited from the inward investment brought about by the U.S. tariff war.
Over the past four years, the trend is clear: Taiwanese tech firms serving U.S. clients have increasingly set up U.S. factories, but only larger firms—around a few hundred—have done so. Mid-sized tech firms, influenced by TSMC, may also invest in the U.S. during Trump’s current term, but their numbers won’t exceed 1,000 due to high U.S. production costs.
In comparison, there are tens of thousands of Taiwanese companies doing business in China, totaling 120,000 if we include companies that used to do business in China but withdrew due to various factors.
In recent years, due to the U.S.-China trade war, rising wages, and the COVID-19 pandemic, Taiwanese capital has noticeably withdrawn from China. Nevertheless, cross-strait trade (including Hong Kong) accounts for about 35% of Taiwan’s exports, making China the most critical market for Taiwanese businesses. Taiwanese companies that will set up factories in the U.S. are all large corporations with major customers in the U.S. and a sizable capitalization.
Thus, the NTD’s sharp appreciation severely impacts Taiwanese exporters targeting the Chinese market, particularly the electronic components sector, which accounts for over half of Taiwan’s exports to China. Mentioned in the previous article, TSMC’s overseas factories only achieve significant profits in China, and Taiwan’s semiconductor supply chain maintains robust exports to China.
It is important to note that Taiwan is one of the very few economies in the world that maintains a trade surplus with China, mainly because Beijing looks the other way and doesn’t care if bilateral trade is reciprocal. Taiwan bans 2,509 Chinese import items, far exceeding China’s restrictions on Taiwanese goods.
In other words, excessive NTD appreciation not only accelerates Taiwanese capital’s shift to the U.S. but also to China and Southeast Asian economies, making it a catastrophic event for Taiwan’s economy.
With TSMC being asked by Trump to invest an additional $100 billion in the U.S., speculation that Taipei might be overly conciliatory to Washington is a common concern of the market and the public. Taiwan’s leading business media even speculated that Trump’s target is an NTD-to-USD exchange rate of 1:13.3 (currently 1:31).
The 1:13.3 rate is derived from the implied exchange rate of The Economist’s purchasing power parity index, the “Big Mac Index”. Given the index’s limitations, this speculative rate reflects Taiwan’s perception of U.S. dominance and Trump’s “big appetite.”
Forecasts based on exaggerated exchange rate calculations mean that there is very little confidence in the government’s ability to defend Taiwan’s interests, and few believe that the current administration can resist U.S. pressure. The NTD’s 3.3% single-day surge indirectly validates these concerns.
Thus, the NTD’s surge reflects the likely outcome of Taiwan-U.S. trade talks: sacrificing economic interests is inevitable, and the scale will be unprecedented. After all, Taiwan is already considered “guilty” and now everyone is just waiting for the US to announce the “sentence”.
The NTD’s appreciation isn’t the end but the beginning. Taipei will not resist and will likely concede more to the U.S. than any other economy worldwide.