Is the AI Boom Quietly Reshaping Taiwan’s Strategic Position Against China?

The AI Boom has reshaped the global economy, bringing with it a wide range of consequences. While companies like Anthropic and OpenAI boast record growth, raising $30 billion and $122 billion in their latest funding rounds respectively, workers seeking entry-level positions are forced to adapt to an increasingly uncertain job market. Yet there is one place that has benefited enormously from the AI Boom: Taiwan.

The AI Boom has done wonders for the island’s economy, which is heavily reliant on semiconductor production: an industry that the rapidly expanding AI sector desperately requires. Surging demand for microchips helped Taiwan’s GDP to grow by 8.76% in 2025, more than four times the US growth rate during the same period, creating over 200,000 jobs in the process. Taiwan’s government now projects the economy to expand by a further 11.05% in 2026, which would be the highest growth rate since 1987. 

For Taiwan, however, the most important consequence of the AI boom may not be the extraordinary economic growth it brings, but the way that growth is reshaping the island’s strategic position against its cross-Strait neighbor, China.

Taiwan’s growing prosperity has allowed the government to allocate greater resources towards national defense. In May, the Legislative Yuan approved $25 billion in additional defense spending. On September 3, the government proposed a further $4.6 billion. Yet the central question is not whether increased defense spending will allow Taiwan to withstand an open military conflict. China still enjoys an overwhelming advantage in military resources and personnel. The question, instead, is whether Taiwan’s growing importance to the global tech industry changes the strategic calculations behind Beijing’s efforts to increase pressure on the island.

Taiwan’s semiconductor industry has a long history, with the production of microchips on the island dating back to the 1970s. As the industry has grown, so, too, has its importance to Taiwan’s economy and the global market. The island’s semiconductor industry now accounts for over 20% of Taiwan’s GDP and more than 60% of global foundry revenue.

The explosive rise of generative AI has boosted demand for semiconductors and advanced microchips, increasing the profits of Taiwan’s leading producers, including TSMC. The resulting economic growth has generated greater government revenue, which reached an all-time high of over NT$4 trillion in 2025, while also attracting significant foreign investment; In May, Nvidia unveiled plans to invest $150 billion in Taiwan annually.

Global dependence on Taiwan’s semiconductor industry, intensified by the AI Boom, has reinforced the so-called Silicon Shield: the idea that Beijing may be deterred from open hostility by the economic consequences of disrupting Taiwan’s semiconductor production. As China’s own advanced microchip production capabilities continue to lag behind those of Taiwan, it too, remains heavily dependent on the island’s semiconductor industry. Still, Beijing has sought to demonstrate that Taiwan’s security and political future ultimately remain within its reach. Since 2022, China has been sending military aircraft and naval vessels into areas surrounding Taiwan on an almost daily basis, conducting several large-scale military drills encircling the island. On September 6, Taiwan’s defense ministry reported another increase in China’s military activity, detecting 15 naval vessels and 21 military aircraft.

In response to mounting tensions in recent years, Taiwan’s government has pledged to keep Taiwan's military spending above 3 percent of GDP, gradually increasing the share to 5 percent by 2030. The proposed 2027 defense budget is expected to exceed NT$1 trillion for the first time. Taiwan’s decision to increase defense spending is not driven solely by domestic considerations.  The Trump administration has also pressured Taiwan to assume a greater share of the burden for its own defense, much as it has encouraged European allies to increase their military spending. At the same time, the island is facing pressure from the United States to diversify its semiconductor production. TSMC, the largest microchip manufacturer, plans to invest a total of $265 billion in its semiconductor manufacturing operations in Arizona. On September 2, Taiwan’s economy minister stated that the island's companies plan to invest an additional $20 billion in the U.S.

This creates a dilemma. On one hand, Taiwan’s increasing fiscal capacity to fund defense spending is supposed to strengthen its position against China. On the other hand, diversifying semiconductor production abroad risks reducing the island’s strategic value to countries whose economies depend most heavily on advanced microchips, particularly the United States, potentially weakening their incentive to support Taiwan in the face of mounting pressure from Beijing. 

However, whether expanding production abroad will make Taiwan’s semiconductor industry strategically irrelevant remains open for discussion. Advanced semiconductor manufacturing depends on a complex ecosystem of suppliers, infrastructure, human resources and technical know-how. For the foreseeable future, Taiwan is likely to remain at the centre of that ecosystem. The expertise and resources of Taiwanese companies will stay valuable as countries around the world are expanding domestic semiconductor production, often with the help of Taiwanese corporations. The Arizona fab and the TSMC Kumamoto complex in Japan, which is expanding to open a second fab by 2027, are only some of the examples.

Moreover, these new fabs are currently complementing rather than replacing production in Taiwan, at least for now. Due to overwhelming demand, Taiwanese fabs are operating at full capacity or beyond. Expanding abroad, therefore, does not necessarily come at the expense of demand for domestic production, but rather helps reduce the excessive strain on existing fabs.

At the same time, it remains debatable whether increased military spending can meaningfully offset the fundamental asymmetry across the Strait. China’s military budget of $281 billion dwarfs even Taiwan’s proposed $35 billion defence budget, announced in late August and the largest in the island’s history. Taipei has no realistic option to match China in terms of manpower, as the islands’ standing army is 14 times smaller than that of its mainland neighbor.

The stark difference in military capacity, coupled with mounting military pressures from China, has led Taiwan’s officials to express skepticism regarding the island’s defense capabilities in case of open hostilities. At a news conference in May, Lieutenant General Huang-Wen Chi, director of the Department of Strategic Planning, expressed the idea that Taiwan’s armed forces are “ill-suited to endure a Chinese naval blockade.”

It is unclear, however, whether a full-scale Chinese blockade of Taiwan is likely in the near future. In the latest Annual Threat Assessment in March, the U.S. Intelligence Community assessed that “Chinese leaders do not currently plan to execute an invasion of Taiwan in 2027, nor do they have a fixed timeline for achieving unification.” While the regular shows of force by Beijing clearly display its willingness to dominate Taiwan, it does not necessarily follow that Beijing is willing to escalate them into a full-scale blockade or invasion, which would cut off a vital supply of semiconductors and advanced microchips that China’s tech industry heavily depends upon. 

For now, Taiwan enjoys increased global demand for both the products of its microchip companies and their expertise. The AI Boom has not fundamentally solved the island’s strategic vulnerability created by its geographic proximity to China and the military imbalance across the Strait. However, the boom has made Taiwan and its industry more economically and strategically relevant than ever. As AI corporations continue to receive record funding from investors, this will continue to be the case. That is, if the boom doesn’t turn into a pop.