On May 2nd, the New Taiwan Dollar (NTD) surged 3.3% against the US dollar, marking its largest single-day gain in 23 years. For Taiwan, an export-driven economy where exports account for 70% of its GDP, such a rapid appreciation of its currency could severely impact its economy.
Since the proposal by a one-time US President on April 2nd to impose "reciprocal tariffs" on trading partners, excluding China, Asian currencies have generally strengthened throughout April. The currency appreciation has been particularly pronounced among US allies, with the NTD rising by 3.64%, the Japanese Yen by 4.44%, and the Korean Won by 3.6%. Other Asian currencies saw gains ranging from 1.76% to 2.97%.
Including the gains in the first two days of May, the NTD's appreciation has reached 6.49%, significantly outpacing the gains of other Asian currencies. What could be the reason behind this unusual phenomenon?
On May 2nd, Taiwanese market observers and export companies were puzzled by the extraordinary single-day surge. The reason became apparent on May 3rd when the Taiwanese trade negotiation team confirmed that the first round of negotiations with the US had begun on May 1st. This suggests that US pressure triggered the sharp rise in the NTD.
Faced with public skepticism, Taiwanese authorities denied any link between the currency surge and the US-Taiwan trade talks. They attributed the NTD's appreciation to market expectations of its rising value and a sharp increase in foreign capital inflows into the Taiwanese stock market.
However, the authorities failed to adequately explain why the NTD's appreciation far exceeded that of other Asian currencies. For instance, Japan had held two rounds of trade talks with the US, and Japanese stocks continued to rise, yet the Yen weakened in early May.
While the Taiwanese authorities' claims may not be entirely false, they likely only reveal part of the truth. Even so, the local foreign exchange market's expectations of the NTD's appreciation fully reflect a pessimistic outlook on the US-Taiwan trade negotiations. Unlike Beijing, which maintains a firm stance against Washington, Taipei appears willing to offer "tribute." Although government officials have affirmed that they will not make excessive concessions to the US, the market's reaction reveals the most candid truth.
The 6.49% surge in the NTD in just one month is welcomed by the US. This is because it reduces the trade deficit with Taiwan and pressures Taiwanese technology companies to establish factories in the US.
Currency appreciation reduces the profits of export companies, promotes the relocation of industries overseas, and encourages companies to move their operations to regions where their major clients are located. Technology companies with high profit margins have no choice but to establish factories in the US to avoid tariffs and exchange rate pressures. On the other hand, traditional industries with low profit margins, such as machinery and petrochemicals, must rely on government subsidies to survive.
Of course, Taiwan's traditional industries have another huge market to choose from: China. In other words, China is also benefiting from foreign capital inflows due to the US tariff war.
Looking at the trend over the past four years, Taiwanese technology companies dealing with US clients have steadily increased their establishment of factories in the US. However, this movement has been mainly limited to large corporations (around a few hundred). Medium-sized technology companies affected by TSMC may also consider investing in the US during the current US presidential term, but their numbers are not expected to exceed 1,000 due to high US production costs.
In contrast, the number of Taiwanese companies operating in China amounts to tens of thousands, and the total reaches 120,000 if companies that previously operated in China but withdrew due to various factors are included.
In recent years, Taiwanese capital outflow from China has noticeably increased due to factors such as the US-China trade war, rising wages, and the COVID-19 pandemic. Nevertheless, cross-strait trade, including Hong Kong, accounts for about 35% of Taiwan's total exports, making China the most crucial market for Taiwanese companies. The Taiwanese companies that will establish factories in the US are all large corporations with major clients in the US and substantial capital.
Therefore, the sharp appreciation of the NTD severely impacts Taiwanese export companies targeting the Chinese market, especially the electronics components industry, which accounts for over half of Taiwan's exports to China. As mentioned in previous articles, among TSMC's overseas factories, only those in China are significantly profitable, and Taiwan's semiconductor supply chain maintains robust exports to China.
It is worth noting that Taiwan is one of the few economies globally that maintains a trade surplus with China. This is mainly because Beijing does not significantly mind the balance of trade between the two. Taiwan bans 2,509 categories of Chinese imports, far more than the restrictions China imposes on Taiwanese goods.
In other words, an excessive appreciation of the NTD could be a disastrous event for the Taiwanese economy, accelerating not only the transfer of Taiwanese capital to the US but also to China and Southeast Asian economies.
With the US President demanding an additional $100 billion investment in the US from TSMC, the speculation that Taipei might be overly accommodating to Washington is a common concern among the market and the public. Even major Taiwanese economic media outlets are speculating that the US President's target exchange rate is 13.3 NTD per US dollar (currently around 31 NTD).
The exchange rate of 13.3 NTD per US dollar is derived from the implicit exchange rate of The Economist's Big Mac Index, a purchasing power parity index. Given the limitations of this index, this speculative exchange rate reflects Taiwan's perception of US dominance and the US President's "big appetite."
Predictions based on exaggerated exchange rate calculations imply a very low level of confidence in the Taiwanese government's ability to defend its own interests, and few believe that the current administration can resist US pressure. The 3.3% single-day surge in the NTD indirectly confirms these concerns.
Therefore, the surge in the NTD reflects the anticipated outcomes of the US-Taiwan trade negotiations. The sacrifice of economic benefits is inevitable, and its scale will be unprecedented. In the end, Taiwan is already considered "guilty," and now everyone is just waiting for the US to announce the "sentence."
The appreciation of the NTD is not the end but the beginning. Taipei will not resist and is likely to concede more to the US than any other economy in the world.
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