Taiwan is bracing for enormous challenges this year to sustain strong economic growth amid potentially escalating tit-for-tat tariffs and uncertain prospects for the local artificial intelligence (AI) sector after China’s DeepSeek debuted its first chatbot, stirring turmoil in the industry. With a massive trade surplus with the US, Taiwan also faces high risks of sweeping heavy tariffs from Washington.
Foreign investors yesterday offloaded NT$74.39 billion (US$2.26 billion) of local stocks, one of the heaviest sell-offs in history. The TAIEX, a bellwether of Taiwan’s economy and highly sensitive to external environment changes, fell 3.53 percent to close at 22,694.71, with AI-related stocks bearing the brunt of the slump, the deepest in about a decade. Taiwan Semiconductor Manufacturing Co, which makes up 39 percent of the TAIEX, fell 5.73 percent to close at NT$1,070 in Taipei on concern that DeepSeek’s budget-friendly chatbot would challenge AI giants Nvidia Corp and OpenAI. Hon Hai Precision Industry Co and Quanta Computer Inc shares tumbled 8.06 percent and 9.83 percent respectively, as they are among major assemblers of AI servers based on Nvidia chips.
The shares of another Nvidia supplier, Wiwynn Corp, dropped 9.82 percent, as it was hit by escalating AI competition and heavy US tariffs. Mexico is a major server manufacturing hub of Wiwynn, shipping about 70 percent of its AI servers for North American customers from the country. A 25 percent tariff markup would increase manufacturing costs and squeeze profit margins. Wiwynn shares that pain with 300 other Taiwanese manufacturers with operations in Mexico.
To help companies cope with tariff hikes, the Ministry of Economic Affairs yesterday announced it had set up a special task force to provide consultancy services about investment incentives in the US and to support production relocation and diversification efforts. The latter would be of little help, as changing manufacturing sites would take time and cautious evaluation, and corporate executives have a better understanding of the situation than government agencies.
Over the past few years, Taiwanese manufacturers have shifted manufacturing to Southeastern Asian countries or Mexico in response to intensifying geopolitical conflicts and US-China technology competition, aiming to enhance supply chain resilience. However, it is becoming more difficult to circumvent heavy US tariffs through another supply chain shift, as Vietnam and other Southeastern Asian countries are likely to also be trade targets of the US. Taiwan is at risk, as it is one of the 10 countries with the largest trade surplus with the US, topping US$42.2 billion in the first eight months of last year.
US President Donald Trump has threatened to impose a 100 percent tariff on Taiwan’s chips, but the impact should be manageable for chipmakers supplying advanced 3-nanometer and 5-nanometer chips, which are crucial for US companies seeking to beat Chinese rivals in AI and smartphones. However, Trump’s “softer on China, harder on others” approach would pose a challenge for local chipmakers offering less advanced chips. They are to face pricing competition from Chinese peers, given that Chinese goods face a mere 10 percent import levy.
To avoid punitive US tariffs, Taiwan needs to trim its massive trade surplus with the US. Appreciating the local currency is considered the most obvious approach, as other countries have done, but, a strong New Taiwan dollar would deal a blow to Taiwan’s already struggling traditional sector. Machine toolmakers, petrochemical suppliers and other companies in the traditional sector struggled to eke out a profit due to sagging demand on a weak world economy last year. Trump’s new trade vision is to have a deeper effect on Taiwan and requires wisdom from the government and industries to navigate the tariff storm.
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