Artificial intelligence (AI) is to Taiwan what oil is to the Gulf states: an extraordinary windfall that could also become an addiction. The island manufactures most of the servers and semiconductors used in AI. Taiwanese firm TSMC, which produces the most advanced chips in the world, expects its sales to rise by 30% in 2025 and recently raised its third-quarter revenue forecast above $32 billion (about €27 billion). Foxconn, another flagship Taiwanese company, announced in mid-August that its profits would jump by 27% in the second quarter thanks to strong demand for AI servers.

The global AI revolution sent the country's exports soaring, reaching a record $154 billion in the second quarter. Exports now account for two-thirds of Taiwan's gross domestic product (GDP) growth, which hit 8% in the second quarter – one of the highest rates in the world. Want to know how the global tech industry is doing? Follow Taiwan's GDP; it is one of its best indicators.

So far, so good. But a burst in the AI bubble could quickly deflate the island's growth. That is why having a diversified economy is crucial. Behind Taiwan's remarkable growth figures stand only a handful of major companies in the same sector: semiconductors. We have seen countries like Angola and Saudi Arabia rely solely on oil, unable to develop the rest of their economies, and suffering from an overvalued currency. Taiwan is exhibiting the same symptoms.

The research center at the Taiwan Institute of Economic Research issued a warning in early September about the poor health of its industry, which recorded its third consecutive month of recession in July. Its indicators showed that in nineteen out of the twenty-one manufacturing sectors in Taiwan, activity was down due to higher US tariffs and the overvalued Taiwanese dollar.

Military pressure from Beijing

Another vulnerability is Taiwan's dependence on the US. As Alicia García-Herrero, chief economist for Asia-Pacific at Natixis Bank, pointed out, "One-third of exports go to the US, compared to only 15% in 2021, making Taiwan particularly vulnerable to fluctuations in US policy." Indeed, in late August, Washington revoked the authorization previously granted to the Taiwanese giant TSMC to export US-made chip manufacturing equipment to China without a license.

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