Taiwan’s AI-powered economy soars in the shadow of bubble fears and China threats

TAIPEI, Taiwan — In Taipei, real estate agent Jason Sung is betting that housing prices around a high-tech industrial park in the northern part of the Taiwanese capital will soon soar — thanks to computer chip maker Nvidia.

This is the area where Nvidia plans to build its new Taiwan headquarters as it rapidly expands on the island, poised to overtake Apple and become the largest customer of Taiwanese semiconductor maker TSMC, the largest contract manufacturer of advanced chips needed for artificial intelligence.

Nvidia CEO Jensen Huang describes Taiwan as the “center of the global IT ecosystem.” This is part of the global AI frenzy. Its economy grew 8.6% annually last year, and it hopes to maintain that momentum after recently reaching a trade deal with U.S. President Donald Trump that reduced U.S. tariffs on Taiwan from 20% to 15%.

“We were lucky,” said Wu Tsong-min, professor emeritus of economics at National Taiwan University and former board member of Taiwan’s central bank.

But Taiwan’s heavy reliance on computer chipmakers and other technology companies brings a growing risk that the AI ​​craze will turn into a bubble.

“What if the AI ​​bubble is real, and its rapid pace of growth slows, what’s next for Taiwan? That’s the question many are asking,” Wu said.

Escalating tensions with Beijing, which claims to independently govern Taiwan as a territory of mainland China, pose another ongoing threat, despite the island’s vital role in global chip and AI supply chains.

An island of around 23 million people, Taiwan relies heavily on exports. They jumped nearly 35% year-over-year in 2025, with shipments to the United States jumping 78% due to growing demand for AI.

That’s largely due to TSMC, or Taiwan Semiconductor Manufacturing Corp., and electronics giant Foxconn, which makes AI servers for Nvidia and is a major supplier to Apple.

Taiwan has experienced massive economic changes moving from labor-intensive industries such as plastics and textiles to advanced manufacturing such as semiconductor manufacturing.

The AI ​​frenzy has made TSMC one of the 10 most valuable companies in the world. Its profit jumped 46% last year to 1.7 trillion Taiwan dollars ($54 billion).

The chipmaker is investing heavily in Taiwan and new factories in Arizona, United States. It produces more than 90% of the world’s most advanced chips.

Foxconn, formerly known as Hon Hai Precision Industry Co., has doubled its value since 2023. The Apple iPhone and iPad maker now produces AI servers and racks and has partnered with OpenAI to provide AI data center equipment.

Taiwan’s heavy reliance on its tech industry means its biggest risk is that growth is “very heavily dependent on the AI ​​boom and the continued race for technology,” said Lynn Song, chief economist for Greater China at ING Bank.

There are fears that the AI ​​craze could prove to be a bubble prone to bursting similar to the Internet.com crash in 2000 that swept through markets, alarming many in Taiwan.

“I’m also very nervous about it,” said CC Wei, president of TSMC, when asked about a potential AI bubble during a January earnings call. “Because we need to invest between $52 billion and $56 billion (this year).”

“If we don’t do it carefully, it will definitely be a big disaster for TSMC,” he said. “I want to make sure my customers’ requests are real.”

In a recent report, Fitch Ratings analysts said demand for AI will remain strong, at least in the short term. Longer term, however, risks “will depend on the evolution of AI, as well as trade and investment policies and the adaptability of Taiwanese companies,” they write.

Taiwanese electronics company Asia Vital Components, a key supplier of liquid cooling systems to Nvidia, is investing heavily in research and development. Its president, Spencer Shen, said he sees no signs of AI-related demand slowing so far. The company is already designing thermal solutions for 2028 AI servers, he said.

“We don’t think it’s a bubble,” Shen told The Associated Press in an interview. “AI is being driven by companies with real products and massive cash flow, like Amazon, Microsoft, Google and Meta.”

“In fact, AI infrastructure is still scarce,” Shen added. “I expect AI to spill over into our daily lives and fundamentally change the way things work.”

Some in Taiwan believe its central role in the technology sector, notably as a maker of computer chips whose main material is silicon, helps protect the island from attacks by communist-led Beijing, whose leaders have vowed to reunify the island with the Chinese mainland, by force if necessary.

The two governments separated in 1949 during a civil war. Beijing has stepped up its pressure by conducting military exercises nearby. The late December exercises included live shells landing closer to the island than before, Taiwanese officials said.

Such geopolitical factors cloud the economic outlook, although many in Taiwan, including its former president Tsai Ing-wen, believe its importance to global chipmaking would deter China from attacking.

The risk of an invasion is unclear. Global technology companies and Chinese industries would suffer from massive disruptions in the chip supply chain, said Wu of National Taiwan University.

Still, some companies have identified contingency scenarios in recent years on how to respond in the event of military action by China, said Chen Shin-horng, vice president of the semi-official Chung-Hua Economic Research Institution.

“We need to understand the potential risk, the potential damage to Taiwan,” Chen said.

Although many of its main research and development activities take place in Taiwan, TSMC already has factories in China, Japan and the United States, and is expanding offshore production in the United States, Germany and Japan.

About 65% of Foxconn’s production is made in China, and the company has factories in other parts of the world, including India, Mexico and the United States. AVC has expanded its production capacity in Vietnam.

While some have called on Taiwan to diversify its economy away from technology in order to reduce risks, others argue that the way forward is to double down on cutting-edge technology. “This is our greatest strength,” said AVC’s Shen.

The AI ​​boom has done wonders for Taiwan’s stock market, where the benchmark Taiex index has soared nearly 250% over the past decade, making many investors rich. Economists have significantly revised upward their forecasts for Taiwan’s economic growth for 2026, based on the robustness of its AI-related exports.

But as is the case elsewhere, wealth is not distributed equally. Many people in Taiwan feel left behind.

Taiwan’s wealth gap has quadrupled over the past three decades, according to official data.

Salaries for tech workers who already earn high salaries, especially engineers and chip managers, have soared. For other traditional industries, such as plastics and machine tool makers, growth has lagged.

Economists believe this gap could widen as the AI ​​frenzy continues.

“It can be difficult to make a living,” said Jean Lin, in his 30s, manager of a takeaway outlet selling bento in a Taipei neighborhood where Foxconn’s office is located.

“Many younger generations still can’t afford to buy an apartment,” added Lin, who wants to one day start his own business. “A lot of young people still feel like they don’t have a lot of money.”

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Associated Press video journalist Johnson Lai contributed.