Taiwan has a dynamic capitalist economy with gradually decreasing guidance of investment and foreign trade by the Republic of China (ROC) government which governs the island. In keeping with this trend, most large government-owned banks and industrial firms have been privatized. Real growth in GDP has averaged about 8% during the past three decades. Exports have grown even faster and since World War II, have provided the primary impetus for industrialization. Inflation and unemployment are low; the trade surplus is substantial; and foreign reserves are the world's fourth largest. Agriculture contributes 3% to GDP, down from 35% in 1952, and the service sector makes up 73% of the economy. Traditional labor-intensive industries are steadily being moved off-shore and replaced with more capital- and technology-intensive industries. Taiwanese investors and businesses have become major investors in mainland China, Vietnam, Thailand, Indonesia, the Philippines, and Malaysia. The tightening of labor markets has led to an influx of foreign workers, both legal and illegal. Because of its conservative financial approach and its entrepreneurial strengths, Taiwan suffered little compared with many of its neighbors from the Asian financial crisis in 1997-1999. Unlike that of neighbouring Japan or South Korea largely consists of small and medium-sized businesses with one in seven people an owner of a business.
Taiwan has transformed itself from a recipient of U.S. aid in the 1950s and early 1960s to an aid donor and major foreign investor, especially in Asia. Private Taiwanese investment in mainland China is estimated to total more than $100 billion, and Taiwan has invested a comparable amount in Southeast Asia.
Taiwan has historically benefited from the flight of many well-educated, bourgeois Chinese to settle on the island: during early Qing Dynasty, the preceding Ming dynasty supporters survived for a brief period of time in exile in Taiwan, and in 1949, as the Chinese Communist Party gained control of mainland China, two million Kuomintang (KMT) supporters fled to the island.
Taiwan, and for that matter all four of the Tigers, benefited economically from previous foreign rule or influence, whether it was British commerce in Hong Kong and Singapore, or Japanese industrialization and American land reform in Taiwan. In a sense, Taiwan benefited from Marx’s export of the dialectic through imperialism. Furthermore, each of the tigers was an artificial polity severed from larger neighbors—Communist China in the case of Taiwan and Hong Kong, Malaysia for Singapore. Likewise, South Korea was a produce to postwar division and bloody civil war. Each therefore felt acute insecurity, which was translated into political structures that restricted civil liberties and subordinated short-term social well-being for economic growth.
The Americans deserve credit for reforming landownership in Taiwan, a crucial step in modernizing the economy, as well as its direct aid, which constituted more than 30 percent of domestic investment from 1951 to 1962. Land reform, government planning, US aid and investment, and free universal education brought huge advancement in industry and agriculture, and living standards.
Once again, the transformation of Taiwan's economy cannot be understood without reference to the larger geopolitical framework. Although aid was cut back in the 1970s, it was crucial in the formative years, spurring industrialization and security and economic links were maintained. Uncertainty about the US commitment accelerated the country’s shift from subsidized import-substitution in the 1950s to export-led growth. Like Korea, Taiwan moved from cheap, labor-intensive manufactures, such as textiles and toys, into an expansion of heavy industry and infrastructure in the 1970s, and then to advanced electronics in the subsequent decade.
Foreign trade has been the engine of Taiwan's rapid growth during the past 40 years. Taiwan's economy remains export-oriented, so it depends on an open world trade regime and remains vulnerable to downturns in the world economy. The total value of trade increased more than fivefold in the 1960s, nearly 10-fold in the 1970s, and doubled again in the 1980s. The 1990s saw a more modest, slightly less than twofold, growth. Export composition changed from predominantly agricultural commodities to industrial goods (now 98%). The electronics sector is Taiwan's most important industrial export sector and is the largest recipient of U.S. investment. Taiwan, as an independent economy, became a member of the World Trade Organization (WTO) as Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (often shortened to "Chinese Taipei"-both names resulting from PRC influence on the WTO) in January 2002.
Taiwan is the world's largest supplier of contract computer chip manufacturing (foundry services) and is a leading LCD panel manufacturer, DRAM computer memory, networking equipment, and consumer electronics designer and manufacturer. Textile production, though of declining importance as Taiwan loses its competitive advantage in labor-intensive (cheap-labor) markets, is another major industrial export sector. Imports are dominated by raw materials and capital goods, which account for more than 90% of the total. Taiwan imports most of its energy needs. The United States is Taiwan's third largest trading partner, taking 15% of Taiwanese exports and supplying 10.9% of its imports. China has recently become Taiwan's largest import and export partner. In 2006, the PRC accounted for 22.5% and 11.9% of Taiwan's exports and imports respectively (excluding Hong Kong) (According to the CIA World Factbook). This figure is growing rapidly as both economies become ever more interdependent. Imports from China consist mostly of agricultural and industrial raw materials. Exports to the United States are mainly electronics and consumer goods. As Taiwanese per capita income level has risen, demand for imported, high-quality consumer goods has increased. Taiwan's 2002 trade surplus with the United States was $8.7 billion.
The lack of formal diplomatic relations between the Republic of China (Taiwan) with Taiwan's trading partners appears not to have seriously hindered Taiwan's rapidly expanding commerce. The Republic of China maintains cultural and trade offices in more than 60 countries with which it does not have official relations to represent Taiwanese interest. In addition to the WTO, Taiwan is a member of the Asian Development Bank as "Taipei, China" (a name resulting from PRC influence on the bank) and the Asia-Pacific Economic Cooperation (APEC) forum as "Chinese Taipei" (for the same reason as above). These developments reflect Taiwan's economic importance and its desire to become further integrated into the global economy. Taiwan has been negotiating with the U.S. for a Free Trade Agreement (FTA), but this has become difficult due to the expiration of presidential fast track authority.