Taiwan’s Overreliance on Tech Sector Creates Vulnerabilities: BofA

Taiwan, a small island nation with a population of 23 million, has a significant impact on the global technology landscape and economy, according to analysts at BofA Securities. The country produces over 60% of the world’s semiconductors and 90% of advanced chips, accounting for 10% of the value added to the global semiconductor supply chain.

This dominance in semiconductor production has strengthened Taiwan’s economy, particularly as demand for these components has surged with the advancement of artificial intelligence (AI). However, the analysts also highlight that Taiwan’s heavy dependence on its technology sector introduces considerable risks.

The tech sector has been instrumental in Taiwan’s economic growth, with GDP growth rates reaching 3.4% in 2020, 6.6% in 2021, and 2.6% in 2022, primarily driven by semiconductor exports. Even in the face of global economic turbulence, Taiwan has maintained robust performance due to its technology exports. The analysts predict a solid GDP growth of 3.7% in 2024, supported by an AI-driven export recovery and improved investment momentum.

Nevertheless, this reliance on technology creates significant vulnerabilities. A large portion of Taiwan’s economic activity is tied to tech exports, which constitute over 60% of its total exports. In 2023, Taiwan sent around 35% of its exports to mainland China and Hong Kong, followed by the United States (19%), ASEAN countries (18%), and Europe (10%). This concentrated trading relationships expose Taiwan’s economy to risks from geopolitical tensions or trade disruptions.

Despite efforts to diversify its trade partnerships through initiatives like the New Southbound Policy, Taiwan remains heavily reliant on its tech sector. Progress has been made in redirecting foreign direct investments away from China, but the underlying risks associated with Taiwan’s economic framework have not been fundamentally altered.

Taiwan also faces structural challenges that exacerbate its vulnerabilities. Energy security is a critical concern, with nearly 98% of the island’s energy being imported, largely from fossil fuels. As Taiwan phases out nuclear power, the strain on its energy supply is expected to increase. The growing electricity demand, particularly from the tech sector, complicates this issue, underscoring the need for energy policy reform.

Furthermore, a shortage of skilled tech professionals poses a significant threat. The semiconductor industry has a considerable number of unfilled positions, worsened by a declining youth population and intense global competition for tech talent. Despite government initiatives to address these shortages, the talent gap remains a serious concern for the sustainability of Taiwan’s technology sector.

Large capital flows associated with the global tech cycle also impact Taiwan’s macroeconomic stability, creating challenges for the central bank in managing the economy and leading to volatility in property markets and other areas.

To address these challenges, BofA analysts recommend several strategic measures for Taiwan. Improving energy security is paramount, and exploring new energy technologies, including advanced nuclear options, could help alleviate supply constraints. Addressing talent shortages through enhanced educational programs and initiatives to attract international professionals is equally important.

Additionally, Taiwan should expedite efforts to diversify its economy by investing in high-value industries such as semiconductor design, biotechnology, renewable energy, and intelligent machinery. Expanding the services sector, particularly in areas like healthcare, could provide new growth opportunities.