Does Taiwan Have Dutch Disease?

0:00 For better or worse, modern-day Taiwan is overwhelmingly known for two things.

0:04 Making the world's most advanced microprocessors and its

0:06 uneasy relationship with the People's Republic of China.

0:09 Now, so far, the former has protected it from the latter.

0:12 Taiwan produces chips that basically no other economy on Earth can.

0:16 And while we are trying to close this gap, in the meantime,

0:19 basically every institution that uses technology on the planet

0:22 has a vested interest in keeping this country safe.

0:25 If the rest of the world ever does catch up though,

0:27 usefulness may have run its course.

0:29 Now, this is obviously not an ideal situation to be in geopolitically,

0:33 but it is also potentially compromising economically as well.

0:36 On the surface, Taiwan is booming.

0:38 Demand for the hardware that goes into AI data

0:40 centers has enabled explosive growth in high-v value exports.

0:43 Last year, in 2025 alone, Taiwan's economy grew by 8.7%,

0:48 which would be an astronomically strong result even in a developing economy.

0:51 But Taiwan is not a developing economy.

0:53 It's already one of the richest on Earth.

0:55 Of course, because of the whole gray area around independent nationhood,

0:58 robust economic statistics from international agencies are not quite as easy

1:02 to find as they would be for most other countries.

1:04 But based on estimates from the IMF,

1:06 Taiwan is already the most productive economy in Asia

1:08 on a per capita basis with the exception of Singapore.

1:11 And Singapore kind of cheats these statistics.

1:14 So even that's not exactly a fair comparison.

1:16 However, the country may now be becoming a victim

1:18 of its own success in a somewhat familiar way, just with a bit of a twist.

1:22 It is now so dependent on one single high-v value

1:24 industry that the rest of the economy could be suffering.

1:27 Not only does this create a single failure

1:29 point with potential consequences beyond just purely economics,

1:32 it also distorts the local market in ways

1:34 that aren't necessarily ideal for the real people living there.

1:37 Cost of living increases, housing affordability, a two-speed economy,

1:41 and all of the problems that go

1:42 with these issues are certainly not unique to Taiwan,

1:44 but the semiconductor industry is making them a whole

1:47 lot worse and a whole lot harder to fix.

1:49 So, has Taiwan developed its own unique brand of Dutch disease?

1:53 If it does, how can it be fixed?

1:55 And if it can't, what does this mean for regular

1:58 people within Taiwan and the world that relies on them?

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2:46 So, what exactly is Dutch disease?

2:48 As you probably inferred, the name comes from a unique economic

2:51 trap that impacted the Netherlands in the 1960s.

2:54 Coined in 1977 by the economist,

2:56 the term describes the economic paradox where a natural resource boom causes

2:59 a currency appreciation that actually negatively impacts

3:02 other typically industrial sectors of the economy.

3:05 In the 1960s, the Netherlands discovered a large natural

3:08 gas field in the northeast corner of the country.

3:10 The Groning gas field.

3:11 Even today, Grooningan remains the largest reserve in Europe

3:14 and one of the largest in the world.

3:15 For a country that was still recovering from the impacts of a world war,

3:18 the discovery was met with enthusiasm.

3:20 Natural gas extraction quickly became the focus of the Dutch economy.

3:24 And as outputs and exports increased, so did the nation's wealth.

3:27 But it came with an unexpected side effect.

3:29 At its core, Dutch disease describes the economic problems that arise

3:32 when a country's currency suddenly and sharply strengthens most often,

3:36 such as, and in this particular case,

3:37 due to a resource boom, making other sectors less competitive.

3:40 As Dutch gas exports rapidly increased, so did the inflow of foreign currency.

3:44 This massive inflow caused the value of the Dutch Gilder to appreciate.

3:48 The result, every other Dutch export became more

3:51 expensive and less competitive in the global market,

3:53 and domestic businesses suddenly faced

3:55 newfound competition from cheaper foreign imports.

3:57 Meanwhile, investment in the now

3:59 lagging manufacturing and agricultural industries dwindled.

4:02 Workers lost their jobs,

4:03 and the economic diversity of the country began to deteriorate.

4:06 While economic theory generally argues that countries

4:08 should lean into their comparative advantage,

4:10 specializing in what they do best or have the most of, in this case,

4:14 hyperfocus on a single non-renewable commodity is akin

4:16 to becoming a voluntary hostage to its boom bus cycles.

4:20 And then there's the question of, well,

4:21 what to do with all this newfound wealth?

4:23 The Netherlands certainly put it to work.

4:25 Building roads, schools, and a robust social safety net.

4:28 All noble causes.

4:30 The problem is overinvesting in the public sector also meant

4:32 an underinvestment in the industrial and non-as business sectors of the economy.

4:36 By the mid1970s, the symptoms of the disease began to show.

4:40 Wage increases pressured production costs, and as gas prices cooled,

4:43 the Netherlands found themselves with a bloated public sector

4:45 and a severely depleted manufacturing base unable to pick up the slack.

4:48 Unemployment spiked,

4:49 and citizens found themselves in a two-tiered economic system.

4:52 those reaping the benefits of the gas boom and everyone else seemingly left

4:56 behind a struggle as their industry

4:57 stagnated and their cost of living increased.

4:59 While coined as a term to describe a specific situation in the Netherlands,

5:03 the Dutch are not unique in their disease.

5:05 Oil rich nations like Venezuela and many in the Middle

5:07 East continue to struggle with this exact conundrum.

5:10 So what does any of this have to do with Taiwan,

5:13 an economy quite devoid of any such natural resources?

5:16 Well, replace oil and gas exports with semiconductor exports,

5:19 and the story starts to look concerningly familiar.

5:22 Jensen Huang, the CEO of Nvidia, refers to this tiny island nation

5:26 as the center of the world's computer ecosystem.

5:28 Taiwan's globally dominant semiconductor industry has, in a sense,

5:32 created a high-tech version of the Dutch disease.

5:34 When you specialize in making a product

5:36 that the entire world relies on to function and seemingly

5:38 cannot get enough of, a remarkably similar set

5:40 of parallels to that of the Netherlands becomes apparent.

5:43 Tech giants like Google, Microsoft,

5:45 and Meta are locked in an AI arms race that may top $700

5:48 billion in data center spending this year alone with no signs of slowing down.

5:52 At the same time, with geopolitical tensions

5:54 on rise and the global order reshuffling,

5:56 militaries around the world are racing to secure the chips

5:59 they need for the production of their high-tech weaponry.

6:01 Semiconductors are the foundational building blocks of it all.

6:04 And in order to buy those chips,

6:05 you have to buy new Taiwan dollars to pay for them.

6:08 As with the Netherlands,

6:09 this creates massive appreciation pressure on the local currency.

6:13 If you're Taiwan's namesake semiconductor giant

6:15 or an engineer working there, you don't mind.

6:17 In fact, you benefit.

6:18 But if you're a small to mediumsiz Taiwanese manufacturing company,

6:21 you're not benefiting.

6:22 You're paying the price and struggling to stay competitive.

6:25 When the AI boom appreciates a currency by double digits in a single year,

6:29 it becomes a lot harder to stay competitive globally.

6:31 This is leading to the same type of decline in Taiwan's non- techch

6:34 industries that the Netherlands non- gas

6:36 sectors experienced in the late60s and 70s.

6:39 Taiwan's success in semiconductors is shifting

6:41 the country into a two-speed economy.

6:43 If you work in the Shinshu Science Park and show

6:45 up for your shift in TSMC or United Micro Electronics Uniform,

6:48 you are highly compensated and in high demand.

6:51 For reference, the average annual salary at TSMC

6:54 is 3.57 million new Taiwan dollars or approximately $116,000.

7:00 Quite the pay package in a country where the average cost of living

7:02 for a single adult is $300,000 new Taiwan or $9,500 a year.

7:08 But if like the majority of Taiwan citizens,

7:10 you don't, your reality is very different.

7:13 The median Taiwanese salary is just $546,000 new Taiwan or $17,000.

7:19 Quite poulry in comparison.

7:20 And while the tech and data industries are

7:22 technically driving headline salary increases across the board,

7:25 70% of workers in Taiwan still earn

7:27 less than the average monthly salary of $1,500.

7:31 To make matters worse, this influx of highly concentrated tech wealth has led

7:34 to increased domestic spending and consumption by those with money,

7:37 driving up the cost of goods, services,

7:39 and housing for everyone, including those without.

7:42 The semiconductor boom is making life more luxurious for its stakeholders,

7:45 but increasingly unaffordable for the average citizen.

7:47 They likely feel the impacts of this Dutch-like

7:49 disease every time they pay rent or buy groceries.

7:52 And the semis sector's lopsided contribution

7:54 to economic output has well lopsided the economy.

7:57 Taiwan is leaning so far into the AI boom that its economy

8:00 is becoming perilously balanced on a single leg of the proverbial stool.

8:04 In 2025, Taiwan's semiconductor foundaries accounted

8:07 for nearly 77% of global production,

8:09 led by TSMC with a staggering 70% market share.

8:13 TSMC grew sales by over 30% last year and expects

8:16 to keep up the pace for years to come.

8:18 While the rest of the world is

8:19 struggling to kickstart economic growth post inflation,

8:21 Taiwan is sprinting full speed ahead.

8:23 The tiny island grew GDP by 8.7% in 2025, its strongest growth in over a decade.

8:29 But while their exports have reached record levels,

8:31 it's increasingly being driven by this one single industry.

8:34 Exports to the US have more than doubled in the last year,

8:37 driven by big tech's insatiable appetite for chips.

8:40 However, even ignoring the domestic issues this creates,

8:43 this whole economic model is incredibly risky.

8:46 Semiconductors by their very nature have historically been a cyclical industry.

8:50 And while many claim this time is different,

8:52 history shows that more often than not, this time ends up being not different.

8:56 If we are in an AI bubble and it pops, well,

8:59 that would be Taiwan's equivalent of oil

9:00 prices crashing for a Middle East state.

9:03 If America's big tech companies decide that their investments

9:05 have reached the point of diminishing returns,

9:07 then so will the Taiwanese economy.

9:09 To complicate things,

9:10 AI bubbles aren't the only risk factor for Taiwan's concentrated economy.

9:14 The island nation finds itself smack dab

9:16 in the middle of several colliding forces geologically and geopolitically.

9:20 Geologically, Taiwan is a mountainous island born

9:22 on the boundary of colliding tectonic plates and weather zones.

9:25 In fact, the 100% of the island is

9:27 considered at high risk for tropical storms and earthquakes.

9:30 And it's no stranger to either.

9:31 But for an economy built on an industry

9:33 that relies on highly sensitive precision machinery,

9:36 one is far more of a risk than the other.

9:38 In 2024, Taiwan was hit by the strongest earthquake in 25 years.

9:42 The Taiwanese and global economy held its breath

9:44 as TSMC operations were temporarily put on hold.

9:47 Fortunately, the pause was short-lived, but the risk remains.

9:50 Geopolitically, Taiwan is still very much in the crosshairs of CCP.

9:54 And according to their one China principle,

9:56 they will one day be reunified with the mainland through peace or by force.

10:00 Even if nothing ever comes of this, the geopolitical

10:02 tension alone has had real economic consequences.

10:05 Outside of direct investment in the semiconductor industry,

10:08 Taiwan offers little in incentive to other foreign investors.

10:11 Foreign companies typically turn to Asia for its cheap manufacturing.

10:14 But labor costs of manufacturing in Taiwan

10:16 are higher than its peers like Vietnam, Malaysia, and India.

10:19 And those countries don't come with the risk of invasion.

10:22 That risk also impacts the government's ability to borrow.

10:24 Taiwan historically has maintained a reasonable debt to GDP ratio,

10:28 partly due to laws limiting their borrowing

10:30 and partly due to their semiconductor fueled GDP growth.

10:33 But even still, government borrowing remains a pillar

10:35 of their strategy to fuel economic growth.

10:37 Any increase in government borrowing costs makes that strategy more expensive.

10:40 And while borrowing costs remain comparatively low,

10:43 they are susceptible to sharp increases driven by perceived geopolitical risks.

10:47 In 2022, the yield on the Taiwan tenure almost

10:50 doubled in weeks after a high-profile visit from Nancy Pelosi,

10:53 the highest ranking US official to do so in over 25 years.

10:56 That visit came with a cost and interest rates on government debt

10:59 has remained elevated and persistently sensitive

11:01 to every US China Taiwan headline since.

11:04 Taiwan is walking a geopolitical and economic tightroppe between

11:07 the world's two superpowers and its two largest trading partners,

11:10 all while trying to navigate its

11:11 unique technological version of the Dutch disease.

11:14 So, how can it be fixed?

11:16 Well, according to some in Taipei,

11:18 while the situation may look like the 1960s Dutch disease, it isn't the same.

11:22 Their point is that while Taiwan's semiconductor heavy

11:24 exports may fit the bill at first glance,

11:27 the reality is that the industry is heavily reliant on supply chain imports,

11:30 meaning they have to spend a lot of the money they

11:32 bring in back out again on things like equipment and raw materials,

11:35 as opposed to pure natural resource exports,

11:37 which largely produce cash flows in only one direction.

11:41 And if you zoom out, they do have a point.

11:43 Taiwan still has a massive trade surplus for an economy of its size.

11:46 But a lot of its exports still depend on the trade of component

11:49 parts which is why its largest

11:50 import and export category is integrated circuits.

11:53 Now this is still very much an issue and technicalities don't

11:56 take away from the fact that if demand for these chips

11:58 fall or perhaps more concerningly if the supply of them

12:01 catches up elsewhere their economic miracle could quickly come undone.

12:05 So is there any way to fix this?

12:08 One strategy to reduce the symptoms of Dutch disease is to weaken

12:11 the currency in order to better support

12:12 the non-dominant export industries of the island.

12:15 And well, Taiwan is already trying that, but it's getting harder.

12:18 Taiwan is one of the world's largest holders of foreign currency reserves,

12:22 holding a record 605.5 billion in 2026,

12:26 driven by a robust trade surpluses and government

12:28 policy aimed at stabilizing the local currency.

12:31 In fact, while we have been discussing the problems

12:33 that are arising from upward pressure on the currency,

12:35 the United States is discussing the opposite.

12:38 That Taiwan is keeping it artificially undervalued and the nation has

12:41 landed itself on the Treasury's

12:43 monitoring list of potential currency manipulators.

12:45 Not an ideal place to be,

12:46 particularly in the midst of trade negotiations and tariff tantrums.

12:50 In its defense, Taiwan's central bank claims its exchange rate

12:52 policy is simply to maintain the stability of the Taiwan dollar,

12:56 not to suppress the exchange rate to maintain competitiveness for exporters.

13:00 But they have a habit of timely intervention

13:02 whenever the currency begins to appreciate too much.

13:04 In the name of stability or otherwise, the intended effect is the same.

13:08 To make matters more complicated, currency depreciation is a double-edged sword.

13:12 A weak currency makes imports more expensive,

13:14 decreasing the purchasing power of those already left

13:16 behind in the name of trying to support exporters.

13:19 But now that they've caught the eye of the Treasury,

13:21 they must walk a delicate path in order to not overdo their interventions.

13:25 A difficult task in light of increased upward

13:27 pressure from the world's insatiable demand for chips.

13:29 And while record revenues, orders, and profit margins will allow companies like

13:33 TSMC to shrug off the impacts of appreciation,

13:36 the same cannot be said for Taiwan's less glamorous manufacturers.

13:39 The industries that Taiwan has been trying to prop up

13:41 may end up even further behind along with their workers.

13:45 Next on the list of fixes is diversifying the economy.

13:48 Taiwan is attempting to do so with its 5 plus2 plan,

13:51 an initiative aimed at investing

13:52 in the left behind manufacturing and agricultural industries.

13:55 In theory, this will increase their competitiveness

13:57 while simultaneously raising wages for non-semi workers.

14:00 The problem is despite these investments,

14:02 the semiconductor space is speeding up,

14:04 not slowing down, making addressing the problem increasingly difficult.

14:08 So, if you can't manipulate the currency

14:10 or rapidly diversify the economy, what can you do?

14:14 Well, you can do what you do best, export it,

14:16 and managed to kill two birds with one stone.

14:19 Kind of.

14:20 Last month, Taiwan and the United States signed a breakthrough trade deal.

14:23 In exchange for $250 billion in new investment

14:26 to build foundaries and make chips in America,

14:28 US tariffs on Taiwan, which started at 32%,

14:31 then dropped to 20%, would now settle in at 15%.

14:34 Hard to keep track, I know, but importantly,

14:36 Taiwan's prized export semiconductors would be exempt.

14:40 Sounds like a good deal, and it is.

14:42 TSMC has already committed $165 billion

14:45 in investments to build out foundaries in Arizona.

14:47 Good for America that is eager to reshore domestic chip production.

14:51 And good for Taiwan that is eager to stabilize its currency.

14:54 This massive capital outflow helps to relieve upward pressure on the TWWD

14:57 by recycling excess USD back into the American economy rather than into TWWD.

15:02 Taiwan also gets to protect its most important products from tariffs and its

15:06 premier companies get to diversify geographically

15:08 and further embed themselves in Western nations.

15:11 But once again, Taiwan finds itself on yet another delicate path.

15:15 If Taiwan shifts too much of its high-end chip fabs off island,

15:18 it may weaken the very silicon shield that has helped to keep it safe.

15:22 Taiwan's biggest successes are responsible for some of its biggest problems.

15:26 And some of its solutions to solve those problems, well, may make more problems.

15:31 If Taiwan can't diversify its economy,

15:33 it will remain one earthquake or blockade away from economic disaster.

15:37 But on an individual level,

15:38 the average Taiwan citizens will become increasingly stuck.

15:41 Modern Taiwan has had one of the most impressive economies in the world,

15:44 given the circumstances of its place in world affairs,

15:46 and its GDP growth is the envy of many.

15:49 It is one of the wealthiest nations on Earth with a GDP per capita of 41,600.

15:54 But to a lot of its people, it doesn't feel that way.

15:57 And even to those reaping the rewards right now,

15:59 it is still an economy built on an industry that barely existed 50 years ago.

16:03 and there are certainly no guarantees it will be around in 50 years from now.

16:07 Now, beyond just the pure economics,

16:09 we have also briefly mentioned the elephant in the room

16:11 of the People's Republic of China's

16:12 increasingly aggressive stance towards the island.

16:15 Now, obviously, this is an economic risk, but far more importantly,

16:18 it is a significant strategic risk that will

16:20 inevitably involve the most powerful militaries on the planet.

16:22 And that begs the bigger question of why is China trying to do this?

16:26 As we have seen outside of this one

16:28 single industry that wouldn't survive an invasion anyway,

16:30 Taiwan doesn't exactly have much to offer the mainland and the geopolitical

16:33 costs of such an action would be almost impossible to calculate.

16:37 Now, we have actually made an entire video about China's economy.

16:40 It gives some context on this situation.

16:42 You should be able to click on that video on your screen now.

16:45 Thanks for watching, mate.

16:47 Bye.