The economic relations between China and Taiwan: A paradox of interdependence in the shadow of political conflict

Foundations and starting point of a unique network of relationships

The economic relations between the People's Republic of China and Taiwan represent one of the most remarkable paradoxes of the modern global economy. Despite ongoing political tensions and fundamental disagreements over Taiwan's status, both sides of the Taiwan Strait have developed a complex web of economic interdependencies that entails both strategic dependencies and significant risks. These relations are characterized by the dichotomy between political antagonism and economic pragmatism that has defined the bilateral relationship for decades.

Taiwan, officially the Republic of China, and the People's Republic of China do not maintain de facto diplomatic relations, yet the People's Republic is Taiwan's most important trading partner. This apparent contradiction reflects the realities of a globalized economy, where economic logic often transcends political differences. Bilateral trade reached a record high of US$205 billion in 2022, underscoring the immense economic significance of this relationship. At the same time, this figure highlights the complexity of the situation: while China considers Taiwan a renegade province and seeks reunification, the two economies are deeply intertwined.

The geopolitical dimension adds further urgency to these economic relations. An armed conflict in the Taiwan Strait is considered a major risk to the global economy, underscoring the global significance of bilateral relations. Taiwan's central role in global technology supply chains, particularly in semiconductor manufacturing, makes these relations a factor of global strategic importance. Taiwan's Taiwan Semiconductor Manufacturing Company (TSMC) produces approximately 90 percent of the world's advanced logic chips, illustrating to both China and the rest of the world just how vulnerable modern economies are to disruptions in this region.

From enmity to economic cooperation: A paradigm shift

The historical development of Sino-Taiwanese economic relations is inextricably linked to the political history of both sides. Following the defeat of the Kuomintang in the Chinese Civil War in 1949 and its retreat to Taiwan, a state of military confrontation and economic isolation prevailed for decades. It was only in the late 1980s that this situation began to fundamentally change.

In 1987, Taiwanese citizens were permitted to travel to the People's Republic of China for the first time since 1949. This seemingly small relaxation of restrictions marked the beginning of a gradual opening that would have far-reaching economic consequences. The lifting of martial law in Taiwan in 1991 and the associated unilateral end to the state of war with the People's Republic of China paved the way for further détente. These political changes created the conditions for the first direct talks between the two sides in Singapore in 1993, although these talks were discontinued in 1995.

The real turning point, however, came in the early 1990s with the gradual opening to indirect trade. Taiwanese businesspeople made spectacular use of indirect trade, forging economic ties that Beijing sought to exploit. Between 1991 and 2022, Taiwanese companies invested US$203 billion in the Chinese economy, making them among the most significant investors. These investments played a crucial role in the transformation of the Chinese economy, as Taiwan, a pioneer in capitalism, transferred capital and know-how to the People's Republic, a process facilitated by shared culture and language.

The intensification of trade relations was remarkable: Bilateral trade volume increased from US$18 billion in 2002 to US$205 billion in 2022. This development demonstrates how economic interests can overcome political barriers, even when fundamental political differences persist. The turning point came in 2008 with the election of Ma Ying-jeou as Taiwanese president, who pursued a pro-China agenda and resumed talks that had been suspended in 1995.

The anatomy of economic interdependence: structures and mechanisms

Today's economic relations between China and Taiwan are characterized by several distinctive structural features that highlight their complexity and strategic importance. The most important institutional framework was the Economic Cooperation Framework Agreement (ECFA), signed in 2010, which provided for the reduction of tariffs and trade barriers between the two sides.

The ECFA liberalized the movement of people and goods and included provisions to protect investments. After a transition period, 539 Taiwanese products could be exported duty-free to the mainland, representing approximately 16 percent of exports to the People's Republic of China at the time and affecting trade flows worth nearly US$14 billion. Taiwan's chemical, automotive, and mechanical engineering industries particularly benefited from the new regulations. Conversely, the regulations also affected 267 goods exported from the People's Republic of China to Taiwan, with a value of almost US$3 billion.

The structural asymmetry of trade relations is clearly illustrated by recent figures: In 2024, almost 40 percent of all Taiwanese exports still went to mainland China or Hong Kong, although this share is declining and fell to 31.7 percent in 2024 – the lowest level in 23 years. These figures highlight both the continued importance of the Chinese market for Taiwan and the increasing efforts toward diversification.

The sectoral structure of trade relations reveals a clear division of labor: Taiwan primarily exports high-quality electronic components and semiconductors to China, while importing raw materials such as rare earth elements and lower-grade, mass-produced electronic components from there. Electronics, including semiconductor chips, account for the largest share of Taiwan's total exports to China. This division of labor underscores the mutual dependence: Taiwan relies on Chinese raw materials, while China cannot do without Taiwanese high technology.

The current situation: Between record trading and growing tensions

The current situation in Sino-Taiwanese economic relations is characterized by a paradoxical situation: On the one hand, trade volumes have reached new record highs, while on the other hand, political tensions and strategic efforts to minimize risk are increasing. In 2024, Taiwan recorded its second-best foreign trade figures in history, with total exports reaching US$475 billion.

Despite ongoing political tensions, China and Hong Kong remained the leading destination for Taiwanese exports in 2024, although their combined share fell to 31.7 percent. At the same time, exports to the US surged 46.1 percent to a record $111.4 billion, making the US Taiwan's second-largest export partner, surpassing the ASEAN countries. This development reflects Taiwan's deliberate market diversification strategy, known as the "New Southbound Policy.".

Investment flows also show significant changes: Taiwan's approved investments abroad (excluding China) amounted to approximately US$44.9 billion in 2024, an increase of 91 percent compared to 2023. At the same time, Taiwanese investments in China plummeted to a record low of US$3 billion in 2023, signaling a clear shift in the investment strategy of Taiwanese companies.

The technological dimension of the relationship remains particularly sensitive. China is fundamentally dependent on Taiwan's semiconductor industry, while Taiwan simultaneously seeks to leverage its strategic position in this sector. For example, since the end of 2024, TSMC has only permitted the export of certain high-performance chips to China with prior approval, illustrating the increasing politicization of economic relations.

Case Study 1: The ECFA Agreement as a Reflection of Bilateral Relations

The 2010 Economic Cooperation Framework Agreement (ECFA) serves as a paradigmatic example of the complexity and contradictions of Sino-Taiwanese economic relations. The agreement was both a high point of economic rapprochement and a catalyst for political controversies that continue to have repercussions today.

The negotiations and signing of the ECFA took place during a period of relative political détente under Taiwanese President Ma Ying-jeou, who pursued a policy of rapprochement with China. The agreement, signed in Chongqing on June 29, 2010, included, among other things, the gradual reduction or elimination of tariffs on certain export goods and committed both sides to mutually opening up certain market sectors, such as banking, insurance, and healthcare.

The economic impact of the ECFA was certainly measurable: Taiwan was able to significantly increase its exports in certain sectors, particularly in the chemical, automotive, and mechanical engineering industries. Trade liberalization led to a further intensification of the already close economic ties. However, it also created new dependencies, which were viewed with increasing skepticism in Taiwan.

However, the political consequences of the ECFA were controversial and long-lasting. The opposition, particularly the Democratic Progressive Party (DPP), feared excessive economic and political dependence on China, as well as negative repercussions for the domestic economy. These concerns materialized in 2014 with the Sunflower Movement protests against a proposed follow-up agreement on services, which was subsequently not signed and contributed to Ma Ying-jeou's defeat two years later.

The latest development marks the end of an era: China announced in 2024 that it would end preferential tariffs on 134 products under the ECFA, effective June 15. This move came in response to President Lai Ching-te's inaugural address, in which he emphasized the equality of Taiwan and China. Although the affected products represent only about 2 percent of total exports, this decision signals a new phase in relations, in which economic instruments are increasingly used to achieve political objectives.

Case Study 2: Foxconn and the Reorientation of Taiwanese Companies

The development of the Taiwanese electronics giant Foxconn (Hon Hai Precision Industry) exemplifies the strategic challenges and adaptation processes of Taiwanese companies in the context of changing Sino-Taiwanese relations. As the world's largest contract manufacturer of electronic products and the most important iPhone producer for Apple, Foxconn embodies the ambivalences of the economic interdependence between both sides of the Taiwan Strait.

Foxconn has built a massive presence in China over decades, employing hundreds of thousands of people in its factories there. The company played a pivotal role in China's transformation into a global manufacturing powerhouse for electronics products. At the same time, the company's recent strategic realignment underscores the changing geopolitical and economic landscape.

On the one hand, Foxconn is further expanding its activities in China: In 2024, the company announced investments of 1 billion yuan (US$137.5 million) for the construction of a new corporate headquarters in Zhengzhou, which is already home to the world's largest iPhone factory. Additionally, Foxconn invested 600 million yuan in a new battery factory for electric vehicles in the same city, highlighting the company's diversification strategy beyond iPhone production.

On the other hand, Foxconn is pursuing a pronounced diversification strategy: The company plans to establish an iPhone manufacturing facility in southern India with investments of between $700 million and $1 billion. In 2025, Taiwan approved Foxconn's investment plans in India and the US, totaling over $2.2 billion. This geographic diversification reflects both efforts to minimize risk and adaptation to changing global supply chain strategies.

Particularly noteworthy is Foxconn's planned $800 million investment in the Chinese chipmaker Tsinghua Unigroup. This investment demonstrates the continued willingness of Taiwanese companies to invest in Chinese technology firms, despite political tensions, when profitable business opportunities arise. At the same time, it highlights the complex trade-offs between economic opportunities and geopolitical risks that Taiwanese companies face.

Industry focus areas: B2B, digitalization (from AI to XR), mechanical engineering, logistics, renewable energies and industry

More information here:

• Expert Business Hub
• China Blog / Insights

A thematic hub offering insights and expertise:

• Knowledge platform covering global and regional economies, innovation and industry-specific trends
• A collection of analyses, insights, and background information from our key areas of focus
• A place for expertise and information on current developments in business and technology
• A hub for companies seeking information on markets, digitalization, and industry innovations

Structural challenges and systemic risks

Sino-Taiwanese economic relations face a number of structural challenges that jeopardize both their stability and their future viability. These challenges stem from the unique situation in which intensive economic ties coexist with fundamental political differences.

Asymmetric dependency represents one of the central challenges. While China is Taiwan's largest trading partner, Taiwan accounts for only a small share of China's foreign trade. This asymmetry gives China considerable influence, which is increasingly being used for political purposes. The partial suspension of ECFA benefits in 2024 is just one example of this instrumentalization of economic relations.

This technological dependence poses particular risks for both sides. China is fundamentally dependent on Taiwan's semiconductor industry, especially on state-of-the-art chips, which Taiwan supplies to approximately 90 percent of global production. At the same time, Taiwan needs Chinese raw materials and intermediate products for its export industry. This mutual technological dependence creates both incentives for stability and potential for blackmail.

Another structural problem lies in the increasing politicization of economic relations. While previously primarily economic considerations determined bilateral trade and investment flows, these are increasingly overshadowed by geopolitical considerations. This leads to uncertainty for companies and can impair the efficiency of economic cooperation in the long term.

Demographic trends in both societies present additional challenges. Taiwan is facing a rapidly aging population, leading to a shortage of skilled workers and economic adjustment problems. China, on the other hand, is in a phase of economic transition with challenges such as a weakening housing market, high youth unemployment, and declining foreign investment.

The external dimension of the challenges is exacerbated by increasing geopolitical tensions between the US and China. Taiwanese companies are increasingly forced to choose sides, complicating their traditional strategy of acting as economic bridges. US export restrictions on semiconductor technology to China are putting pressure on Taiwanese companies, forcing them to make costly adjustments to their business models.

Strategic realignment and future prospects

The future of Sino-Taiwanese economic relations will be significantly shaped by the strategic realignments of both sides. Taiwan is pursuing a dual strategy of selective decoupling and diversification, while China oscillates between economic incentives and political pressure.

Taiwan's "New Southbound Policy," pursued since 2016, aims to reduce its economic dependence on China by strengthening ties with 18 countries in South and Southeast Asia and Oceania. The success of this policy is measurable: in 2022, for the first time, Taiwan's total investment in the policy's target countries exceeded its investment in China. Exports to ASEAN countries reached a record high of US$87.8 billion in 2024, underscoring the effectiveness of the diversification strategy.

The technological dimension of future relations will be crucial. Taiwan is investing heavily in research and development and attracted a record $805 million in foreign R&D investment in 2024. German companies such as Infineon, Zeiss, and SAP, as well as US companies like Nvidia, AMD, and Amazon Web Services, have established R&D centers in Taiwan. This development strengthens Taiwan's position as a technology hub while simultaneously reducing its dependence on individual markets.

China's strategy remains two-pronged: On the one hand, Beijing continues to rely on economic incentives and integration projects; on the other hand, it is increasing political and military pressure. China still prefers a "peaceful reunification" and is investing in a two-pronged strategy that combines economic incentives with coercive elements. Examples of the economic side include plans to "deepen innovation and development cooperation across the Taiwan Strait" and new government offices for working with Taiwan.

The medium-term forecasts for the years 2025 to 2027 are subject to considerable uncertainty. On the one hand, economic fundamentals remain strong: Taiwan expects GDP growth of between 1.6 and 3.6 percent for 2025, with the wide range reflecting uncertainty about the trade policy of the new US administration. On the other hand, geopolitical tensions are escalating: Taiwan's government views 2027 as a critical year in the event of a potential Chinese attack, which could fundamentally affect economic relations.

The long-term outlook depends crucially on both sides' ability to decouple economic cooperation from political conflicts. While the economic incentives for continued cooperation remain strong, increasing geopolitical tensions could overshadow this logic. A key factor will be the development of alternative trade and investment relationships that allow both sides to pursue their economic objectives without excessive interdependence.

Synthesis and evaluation of economic interdependence

The economic relations between China and Taiwan represent a unique phenomenon in international economics: the combination of intense economic interdependence with fundamental political antagonism. This constellation has demonstrated remarkable stability for over three decades, but faces increasing structural challenges.

The historical development from complete economic separation in the 1980s to a bilateral trade volume exceeding US$200 billion illustrates the power of economic logic to overcome political barriers. Taiwanese investments totaling US$203 billion between 1991 and 2022 have not only contributed to the transformation of the Chinese economy but have also created complex dependency structures that pose strategic dilemmas for both sides.

The current phase is characterized by a turning point: While the absolute scale of economic relations remains impressive, clear trends toward diversification and risk mitigation are emerging. Taiwan's successful implementation of the "New Southbound Policy" and the reduction of China's share of exports to its lowest level in 23 years signal a strategic realignment that transcends short-term political fluctuations.

The systematic analysis of the ECFA and Foxconn case studies reveals the complexity of the adaptation processes: While institutional frameworks like the ECFA are subject to political fluctuations and can be instrumentalized, companies demonstrate remarkable flexibility in adapting to changing conditions. Foxconn's simultaneous expansion and diversification illustrates how economic actors respond pragmatically to geopolitical uncertainties.

The structural challenges – asymmetric dependencies, technological vulnerabilities, and increasing politicization – are real and are expected to worsen. Nevertheless, several factors support continued, albeit altered, economic cooperation: technological complementarity, the high costs of complete decoupling, and the existence of shared economic interests despite political differences.

The future of Sino-Taiwanese economic relations will be shaped less by a binary logic of rapprochement or separation than by a gradual process of rebalancing. While the relative importance of bilateral relations is likely to decrease, they will remain significant in absolute terms. The challenge for both sides is to manage this rebalancing in a way that maintains economic efficiency without creating or exacerbating critical dependencies.

Ultimately, Sino-Taiwanese economic relations illustrate both the limitations and the possibilities of economic diplomacy in an increasingly politicized world. They demonstrate that intensive economic integration does not automatically resolve political conflicts, but can certainly create incentives for stability and make escalation more costly. The challenge lies in understanding and utilizing these dynamics without harboring naive expectations about the autonomous power of economic relations.

☑️ Our business language is English or German

☑️ NEW: Correspondence in your native language!

 

I and my team are happy to be available to you as your personal advisor.

You can contact me by filling out the contact form here wolfenstein@xpert.digital:or simply call me at +49 7348 4088 965. My email address is

I'm looking forward to our joint project.

 

 

☑️ SME support in strategy, consulting, planning and implementation

☑️ Creation or realignment of the digital strategy and digitization

☑️ Expansion and optimization of international sales processes

☑️ Global & Digital B2B trading platforms

☑️ Pioneer Business Development / Marketing / PR / Trade Fairs

AI search changes everything: How this SaaS solution will revolutionize your B2B ranking forever.

The digital landscape for B2B companies is undergoing rapid change. Driven by artificial intelligence, the rules of online visibility are being rewritten. For companies, it has always been a challenge not only to be visible in the digital mass, but also to be relevant to the right decision-makers. Traditional SEO strategies and managing local presence (geo-marketing) are complex, time-consuming, and often a battle against constantly changing algorithms and intense competition.

But what if there were a solution that not only simplified this process but also made it smarter, more predictive, and far more effective? This is where the combination of specialized B2B support with a powerful SaaS (Software as a Service) platform comes into play, specifically designed for the demands of SEO and GEO in the age of AI search.

This new generation of tools no longer relies solely on manual keyword analysis and backlink strategies. Instead, it leverages artificial intelligence to more accurately understand search intent, automatically optimize local ranking factors, and conduct real-time competitive analysis. The result is a proactive, data-driven strategy that gives B2B companies a decisive advantage: they are not only found, but perceived as the leading authority in their niche and location.

Here's the symbiosis of B2B support and AI-powered SaaS technology that transforms SEO and GEO marketing, and how your company can benefit from it to grow sustainably in the digital space.

More information here:

​

• B2B Support & Blog for SEO, GEO and AIS – Artificial Intelligence Search
• Forget expensive SEO tools – this alternative dominates with unbeatable B2B features