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AI Exports Push Taiwan’s Current Account Surplus Close to 20% of GDP, Increasing Pressure on New Taiwan Dollar Exchange Rate Policy

Continued expansion in global artificial intelligence infrastructure investment has driven rapid growth in Taiwan’s exports of semiconductors, servers, and information and communications technology products. The export boom has not only lifted economic growth but also pushed Taiwan’s current account surplus to a historically high level, drawing closer attention to the New Taiwan dollar exchange rate, the central bank’s foreign exchange operations, and life insurers’ hedging policies. In July 2026, the U.S. Department of the Treasury released its latest Report to Congress on Macroeconomic and Foreign Exchange Policies of Major Trading Partners of the United States. The report stated that Taiwan’s current account surplus as a share of gross domestic product (GDP) rose from 14.1% in 2024 to 19.6% in 2025, while its goods and services trade surplus with the United States nearly doubled to US$145.0 billion. As both Taiwan’s current account surplus and its trade surplus with the United States exceeded the U.S. thresholds, Taiwan remained on the foreign exchange policy Monitoring List. A current account surplus approaching one-fifth of GDP reflects Taiwan’s competitive advantage in the global AI supply chain, but it also indicates rising imbalances among export earnings, capital flows, and exchange rate policy. AI Demand Drives Rapid Expansion in the Goods Surplus The current account consists of goods, services, primary income, and secondary income, with trade in goods traditionally serving as the main source of Taiwan’s surplus. The latest revised data from Taiwan’s central bank show that the current account surplus reached US$179.77 billion in 2025, an increase of US$67.06 billion from 2024. The goods surplus rose from US$99.36 billion to US$174.95 billion, an increase of US$75.59 billion, making it the main contributor to the expansion in the current account surplus. The services balance remained in deficit, while primary income continued to record a surplus. Indicator 2024 2025 Current account balance Surplus of US$112.71 billion Surplus of US$179.77 billion Current account surplus as a share of GDP 14.1% Approximately 19.5% Goods balance, balance-of-payments basis Surplus of US$99.36 billion Surplus of US$174.95 billion Services balance Deficit of US$12.20 billion Deficit of US$13.58 billion Primary income balance Surplus of US$30.27 billion Surplus of US$25.91 billion Secondary income balance Deficit of US$4.72 billion Deficit of US$7.51 billion Note: The 2024 and 2025 balance-of-payments figures are based on the latest revisions published by Taiwan’s central bank in May 2026. Based on the data available at the time of writing, the Taiwan section of the U.S. Treasury’s July 2026 foreign exchange report placed Taiwan’s 2025 current account surplus at 19.6% of GDP, while the quantitative assessment table in the same report listed the ratio at 19.5%. The expansion in the surplus has been highly concentrated by industry. Continued growth in demand for AI, high-performance computing, and advanced process technologies has boosted exports of semiconductors, electronic components, servers, and information and communications equipment. The U.S. Treasury also noted that strong U.S. demand for Taiwanese technology products, together with advance purchases by some importers in anticipation of tariff changes, further widened Taiwan’s surplus with the United States. Taiwan’s external surplus continued to increase in 2026. In the first quarter of 2026, Taiwan recorded a current account surplus of US$62.53 billion, an increase of US$32.84 billion from the same period a year earlier, including a goods surplus of US$58.01 billion. Goldman Sachs forecasts that if the AI chip export boom continues, Taiwan’s current account surplus could exceed 20% of GDP in 2026. Domestic economic growth forecasts have also been revised upward. On July 24, the Taiwan Institute of Economic Research raised its forecast for Taiwan’s 2026 economic growth rate to 10.38%, while the Chung-Hua Institution for Economic Research projected growth of 10.35%. This indicates that AI demand has extended from exports into equipment investment, corporate earnings, stock market wealth effects, and part of private consumption. The Current Account Surplus Creates Appreciation Pressure, but Capital Flows Determine the Actual Exchange Rate When exporters receive payments in U.S. dollars and repatriate and convert the funds into New Taiwan dollars, the supply of U.S. dollars and demand for New Taiwan dollars in the market increase. Therefore, growth in goods exports and the current account surplus generally creates medium- to long-term appreciation pressure on the New Taiwan dollar. However, a current account surplus does not mean that all foreign exchange earnings will immediately be converted into New Taiwan dollars. Companies may use the funds to establish overseas production facilities, while financial institutions and households may purchase overseas equities, bonds, or other foreign-currency assets, creating financial-account outflows that offset part of the appreciation pressure. Taiwan’s financial account recorded a net increase in assets of US$154.79 billion in 2025, up from US$93.40 billion in 2024. Within this total, the net increase in direct investment assets rose from approximately US$20.92 billion to US$34.36 billion. Overseas investment by Taiwanese companies, large holdings of foreign assets by life insurers, and overseas financial asset allocation by households all help absorb the foreign exchange surplus generated by the current account. The movement of the New Taiwan dollar therefore depends on the combined effects of exporter conversions, corporate overseas investment, foreign investor flows into and out of Taiwan’s stock market, life insurers’ hedging demand, and central bank operations. Taiwan Remains on the U.S. Foreign Exchange Monitoring List The U.S. Treasury mainly uses three quantitative criteria to assess the foreign exchange policies of major trading partners: the bilateral trade surplus with the United States, the current account surplus, and persistent, one-sided intervention in the foreign exchange market. U.S. Treasury assessment criterion Threshold Taiwan’s 2025 performance Goods and services trade surplus with the United States At least US$15 billion US$145.0 billion Current account surplus as a share of GDP At least 3% Approximately 19.5% Persistent, one-sided foreign exchange intervention Net purchases in at least 8 out of 12 months, with total purchases equal to at least 2% of GDP Full-year net purchases equal to 0.8% of GDP, below the threshold Taiwan exceeded the first two thresholds, but the central bank’s full-year net foreign exchange purchases totaled US$7.7 billion in 2025, equivalent to 0.8% of GDP, below the U.S. threshold. Taiwan therefore remained on the Monitoring List but was not designated a currency manipulator. It is worth noting that the full-year figure conceals differences in operations across periods. Taiwan’s central bank purchased US$13.25 billion in foreign exchange during the first half of 2025, equivalent to approximately 3.1% of GDP during the same period, with most purchases concentrated in May when the New Taiwan dollar faced rapid appreciation pressure. Partial foreign exchange sales in other months reduced the full-year net purchase ratio to 0.8%. The U.S. Treasury also noted that the New Taiwan dollar appreciated by 4.5% against the U.S. dollar in 2025, but some private-sector models based on the current account, purchasing power parity, and the real effective exchange rate still indicated that the currency may be undervalued. As Taiwan’s surplus expands further, U.S. attention to the scale and transparency of Taiwan’s foreign exchange intervention is likely to continue. In November 2025, Taiwan’s central bank and the U.S. Treasury issued a joint statement committing to disclose foreign exchange intervention data at least quarterly, with a one-quarter lag, indicating that exchange rate policy transparency has become an important issue in bilateral discussions. New Life Insurance Hedging Rules Become a New Exchange Rate Variable The latest U.S. foreign exchange report included a separate section on Taiwan’s life insurance industry, reflecting the growing importance of insurers’ overseas assets and hedging activity in determining supply and demand for the New Taiwan dollar. As of 2025, Taiwan’s life insurance industry had approximately US$1.2 trillion in assets, equivalent to 131% of GDP. Around 60% was invested in overseas assets, representing more than US$700 billion in foreign asset exposure. Because policy liabilities are primarily denominated in New Taiwan dollars while overseas assets are mostly denominated in U.S. dollars, life insurers need to use forward foreign exchange contracts, currency swaps, and other instruments to manage exchange rate risk. When life insurers raise their hedge ratios, they generally establish positions that sell U.S. dollars and buy New Taiwan dollars, increasing demand for the local currency. A lower hedge ratio, by contrast, helps reduce appreciation pressure on the New Taiwan dollar. Beginning in late 2025, the Financial Supervisory Commission adjusted related accounting and reserve rules, allowing life insurers to amortize foreign exchange gains and losses on certain foreign bonds over the remaining life of the bonds, reducing the effect of short-term exchange rate fluctuations on current-period earnings. Taiwan’s life insurance hedge ratio had fallen to approximately 45% by February 2026, down from 60% in September 2025 and around 70% before the pandemic. Lower hedge ratios can reduce high hedging costs and decrease life insurers’ demand to purchase New Taiwan dollars in the foreign exchange market, but insurers must also bear greater exchange rate risk. If the New Taiwan dollar appreciates rapidly, the New Taiwan dollar value of overseas assets may decline, affecting insurers’ net worth and capital adequacy. The Financial Supervisory Commission has stated that the new rules are intended to improve the financial reporting of long-term assets, reduce excessive hedging costs, and strengthen the capital resilience of the life insurance industry. Insurers are required to allocate part of the hedging costs they save to reserves, gradually building a buffer to absorb future foreign exchange losses. From the perspective of the foreign exchange market, lower hedging demand may also reduce demand for the New Taiwan dollar and ease appreciation pressure. Short-Term New Taiwan Dollar Depreciation Does Not Eliminate Long-Term Policy Pressure Although the current account surplus continued to expand, the New Taiwan dollar still weakened at one point in July 2026. On July 24, the interbank closing exchange rate was NT$32.358 per U.S. dollar, representing a depreciation of NT$0.092 from the previous trading day. Taiwan’s stock market also fell by more than 1,000 points at one point during the same session. At the time, escalating conflict in the Middle East pushed Brent crude oil futures above US$100 per barrel, intensifying concerns over energy supplies and renewed inflation. The U.S. dollar and U.S. Treasury yields rose simultaneously, while the decline in Taiwanese equities and expectations of foreign capital outflows caused short-term capital flows to temporarily outweigh demand for the New Taiwan dollar generated by exporter conversions. Read More at Datatrack If high oil prices and New Taiwan dollar depreciation occur simultaneously, they will also raise the local-currency cost of imported energy. The government can delay part of the cost pass-through through CPC Corporation, Taiwan Power Company, and price stabilization mechanisms, but corporate production costs and fiscal burdens may still increase. Inflation forecasts are also approaching levels closely watched by the central bank. The Taiwan Institute of Economic Research forecasts CPI inflation of 1.98% in 2026, while the Chung-Hua Institution for Economic Research projects 2.02%. If tensions in the Middle East persist and increase energy prices and imported inflation, the central bank may face greater pressure to raise interest rates. However, Taiwan’s economy remains clearly divided across industries. Exports and investment in AI and semiconductors are growing rapidly, while traditional industries face weak demand, exchange rate pressures, and higher costs. If the central bank raises interest rates and this leads to New Taiwan dollar appreciation, or if it directly allows the exchange rate to reflect surplus-related pressures more visibly, it could help contain imported inflation but may further weaken the competitiveness of traditional exporters and increase foreign exchange and valuation pressure on life insurers’ overseas assets. AI Gains Are Turning into Exchange Rate and Financial Policy Challenges Taiwan’s current account surplus has approached 20% of GDP, reflecting the large volume of foreign exchange earnings generated by AI and semiconductor exports. The key factor for the subsequent exchange rate trend is whether these funds are repatriated and converted by exporters or redirected into overseas investments and foreign-currency assets. In addition to monitoring whether Taiwan’s current account surplus exceeds 20% of GDP in 2026, it will also be necessary to examine the actual destination of export earnings and the ability of life insurers’ capital to withstand exchange rate movements after reducing hedging. AI exports remain a major pillar of Taiwan’s economic growth, but their effects have extended to exchange rates, inflation, and financial regulation. As the external surplus grows, the central bank and the Financial Supervisory Commission will increasingly need to balance appreciation pressure on the New Taiwan dollar, imported inflation, the competitiveness of traditional industries, and foreign exchange risk in the life insurance sector.

AI Demand Drives Semiconductor Electricity Consumption to Double Over Ten Years, Prompting a Reassessment of Taiwan’s Electricity Pricing and Cost-Sharing Mechanisms

AI investment is rapidly reshaping Taiwan’s electricity demand structure. In June 2026, the Ministry of Economic Affairs released the latest National Electricity Supply and Demand Report, raising its forecast for average annual electricity demand growth from 1.7% to 2.5% for 2026–2035, the second-highest projection on record. An internal assessment by Taiwan Power Company, or Taipower, also indicates that electricity consumption by the semiconductor industry could increase from approximately 52 billion kWh in 2026 to 110 billion kWh in 2035, while its share of Taiwan’s total electricity consumption could rise from 17% to 30%. In ten years, nearly one out of every three kWh consumed in Taiwan could be used for semiconductor manufacturing. This demand is being driven simultaneously by advanced logic processes, high-bandwidth memory (HBM), advanced packaging, and AI data centers (AIDCs). As manufacturing processes become more complex, more production equipment, cleanrooms, cooling systems, and facility systems are required to operate. AIDCs also have relatively high load factors and backup power requirements, further concentrating electricity demand in specific areas. The Ministry of Economic Affairs has identified approximately 1.1–1.2 GW of AIDC electricity applications through 2035, while the power system has retained additional supply headroom capable of accommodating approximately 2–3 GW of new applications. Key Indicator Latest Data Statistical Scope Average annual growth rate of nationwide electricity demand Approximately 2.5% Ministry of Economic Affairs forecast for 2026–2035 Semiconductor industry electricity consumption Approximately 52 billion kWh in 2026 and 110 billion kWh in 2035 Taipower internal assessment Semiconductor industry’s share of nationwide electricity consumption Approximately 17% in 2026, 24% in 2030, and 30% in 2035 Taipower internal assessment AIDC electricity applications Approximately 1.1–1.2 GW through 2035 Identified and projected application capacity AIDC power supply planning headroom Approximately 2–3 GW System headroom available to accommodate subsequent applications Planned additions of gas-fired generating units Approximately 26 GW in cumulative additions from 2026 to 2035 Combined plans by Taipower and private power producers, rather than a net capacity increase Industrial Expansion Is Outpacing Power Infrastructure Development Read More at Datatrack Although Taiwan’s total electricity consumption declined slightly in 2025 from the previous year, production cuts in traditional industries and energy-saving measures masked growth in electricity demand from the semiconductor and information and communications technology industries. As incremental electricity demand becomes increasingly concentrated in wafer fabs, advanced packaging facilities, and data centers, power supply pressure will also become more differentiated across industries and regions. The greatest challenge lies in the timing gap between industrial construction and power supply development. Semiconductor plants and other electronics factories can usually complete construction or expansion within two to three years, while some companies can move even faster by converting existing facilities. The construction cycle for data centers is also generally shorter than that of large power plants. By contrast, large power plants involve land acquisition, environmental impact assessments, local engagement, and lengthy construction, with development periods frequently exceeding ten years. Transmission and substation projects may also be constrained by land acquisition, local coordination, and construction progress, causing new loads to emerge before the required power supply capacity is fully in place. To address long-term demand, the Ministry of Economic Affairs plans to add approximately 26 GW of gas-fired generating units on a cumulative basis between 2026 and 2035, covering Taichung, Hsinta, Tung Hsiao, Talin, Hsieh-ho, and several private power plants. However, additional generating capacity must still be supported by transmission lines, substations, energy storage, and backup systems. As solar power increases daytime supply capacity, pressure on the system is gradually shifting toward evening peak periods, requiring coordinated dispatch among gas-fired generation, hydropower, and energy storage. AI data centers and semiconductor plants also require stable voltage and uninterrupted power supply. Even when sufficient supply headroom exists nationwide, individual projects may still face connection delays and site-selection constraints if specific science parks or metropolitan areas lack adequate substation capacity. Electricity Rate Freezes Ease Inflation Pressure but Shift Costs onto Taipower’s Balance Sheet In March 2026, the Electricity Tariff Review Committee decided to maintain the average electricity rate at NT$3.7823 per kWh after considering energy prices, consumer inflation, and industrial competitiveness. Freezing electricity rates can slow the transmission of energy costs to consumer prices and corporate expenses, but it also makes it more difficult for fuel, grid, and incremental capacity costs to be reflected promptly in end-user prices. As of the end of May 2026, Taipower’s accumulated losses still reached NT$367.2 billion, with liabilities of approximately NT$2.78 trillion and a debt ratio of 91.6%. Taipower will still need to invest in power plants, transmission and substation facilities, and energy storage. If electricity rates continue to lag behind actual costs, the funding gap will still have to be covered through borrowing, government capital injections, or budgetary support. However, an across-the-board increase in industrial electricity rates may not address the problem precisely. During the September 2025 electricity rate review, the Ministry of Economic Affairs stated that industrial electricity rates at the time had already broadly reflected costs. As AI and semiconductor electricity demand continues to rise, the key issue is how the incremental cost of electricity should be priced and allocated. The establishment of a large wafer fab or data center may require dedicated substations, reinforced transmission infrastructure, backup capacity, and higher-cost stable power supply during nighttime hours. If these expenditures are distributed evenly across all users, the existing rate structure will struggle to reflect differences in electricity consumption time, location, and reliability requirements. Electricity Rate Reform Will Place Greater Emphasis on Large Users and System Cost Allocation Future electricity rate reform may rely more heavily on existing time-of-use pricing, contracted capacity charges, and demand response mechanisms, while further differentiating grid connection costs, peak load responsibilities, and backup obligations. Large users may also reduce peak loads and system costs by adjusting production schedules, installing energy storage systems, and participating in demand response programs. Proposed amendments to the Energy Administration Act are moving in the same direction. During its review of the bill on July 22, 2026, the Legislative Yuan’s Economics Committee discussed an initial threshold of 5 MW in contracted capacity, under which energy users above a certain scale would be required to install self-generation and energy storage equipment. The Ministry of Economic Affairs stated that more than 700 companies in Taiwan have contracted capacities of at least 5 MW, covering industries including semiconductors, petrochemicals, steel, photovoltaics, and AI data centers. However, the actual number of regulated companies will depend on the final threshold, installation ratio, exemption rules, and implementing regulations. The final threshold, installation requirements, and transition arrangements remain subject to legislative approval and implementing rules. The Ministry of Economic Affairs stated that it would consider the constraints faced by urban factories, older industrial parks, and different industrial sites, with a transition period of approximately five years as the preliminary benchmark. Self-generation and energy storage cannot fully replace Taipower’s supply, but they can help reduce peak demand, provide emergency backup, and allow large users to assume part of the responsibility for maintaining grid stability. Rising Electricity Rates Will Deepen the Divide Between Technology and Traditional Industries Semiconductor companies and most technology firms generally have stronger profitability and greater capacity to absorb higher electricity prices. Petrochemicals, textiles and fibers, steel, and retail face higher energy intensity, lower profit margins, and cyclical downturns, making cost increases more likely to directly erode earnings. Fitch Ratings stated in July 2026 that Taiwan’s energy prices had not yet fully reflected high energy costs. If electricity rates were raised by 10%, operating losses in the petrochemical and textile and fiber industries could widen further, while semiconductor companies and most technology firms would have relatively stronger capacity to absorb the increase. Electricity policy therefore needs to address both Taipower’s financial position and differences across industries. Keeping prices suppressed may weaken incentives for energy conservation and limit grid investment, while a rapid across-the-board increase could deepen the divergence in industrial profitability. A more feasible approach would be to allow prices to gradually reflect power supply costs while providing energy-efficiency financing, process improvements, and time-limited transition support to help low-margin industries reduce their energy intensity. The AI Electricity Boom Will Redefine Taiwan’s Power Policy Taiwan’s next-stage electricity challenge has expanded beyond adding generating capacity to whether industrial expansion, grid investment, and electricity pricing can be adjusted in step with one another. As semiconductor facilities and AI data centers continue to increase their electricity consumption, policy attention will focus on how the generation, transmission, substation, and backup costs created by large users’ incremental demand should be priced, and whether regional grids can be completed before new facilities begin production. Key issues to monitor include whether semiconductor electricity consumption grows in line with Taipower’s forecasts, how much of the AIDC application capacity is ultimately developed, whether gas-fired generating units and transmission and substation projects can proceed on schedule, and the final rules requiring large electricity users to install self-generation and energy storage equipment. AI is creating opportunities for exports, investment, and industrial upgrading in Taiwan, while also making stable and affordable electricity an increasingly important condition for corporate investment. The central issue in electricity rate reform will gradually shift toward who should bear the cost of incremental electricity demand and how a more transparent allocation mechanism can be established among energy security, industrial development, and the varying cost-bearing capacities of different industries.

U.S. Seeks to Extend Chip Equipment Controls to Maintenance as U.S., Japanese, and Dutch Equipment Suppliers Reassess China Exposure

U.S. restrictions on China’s semiconductor industry are expanding from advanced chips and new equipment exports to equipment maintenance, component supply, and coordination with allied countries. In April 2026, bipartisan lawmakers in the U.S. Congress introduced the Multilateral Alignment of Technology Controls on Hardware Act, or MATCH Act, seeking to narrow the differences among the export control regimes of the United States, the Netherlands, and Japan and restrict China’s access to critical wafer fabrication equipment for which it has yet to establish stable domestic production capabilities. As of July 22, 2026, the MATCH Act remains in the legislative process and has not yet become an official ban. On April 22, the House Foreign Affairs Committee advanced H.R. 8170, making it eligible for consideration by the full House of Representatives. The Senate has also introduced a corresponding version, S. 4281, which remains under committee review. Neither bill has completed a floor vote, and the final control list, effective date, and methods of allied cooperation may still be adjusted. MATCH Act Calls for Further Alignment of U.S., Japanese, and Dutch Control Standards Existing semiconductor equipment controls are implemented separately by each country. The United States has restricted the export to China of certain equipment used in advanced logic, DRAM, and NAND production and has imposed stricter export licensing requirements on specific Chinese companies and wafer fabs. The Netherlands prohibits ASML from exporting extreme ultraviolet, or EUV, systems to China, while certain more advanced immersion deep ultraviolet, or DUV, systems also require licenses. Since July 2023, Japan has placed 23 categories of advanced semiconductor manufacturing equipment, including lithography, etching, deposition, cleaning, and inspection equipment, under export licensing controls. Japan’s rules formally apply to all export destinations and are not directed solely at China, but its equipment list and licensing regime remain an important foundation for U.S. efforts to align allied controls. The latest forecast released by the Semiconductor Equipment Association of Japan, or SEAJ, in July 2026 shows that sales of Japanese-made semiconductor manufacturing equipment are expected to increase by 26% to JPY 6.55 trillion in fiscal year 2026 and rise by another 13% to JPY 7.40 trillion in fiscal year 2027. Advanced logic chips required for AI servers, as well as HBM and DRAM capacity expansion, remain the main forces supporting demand for Japanese equipment. The three countries do not apply identical equipment lists, end-user definitions, or maintenance restrictions, and U.S. equipment suppliers generally face stricter constraints. Chinese companies may therefore still purchase equipment from foreign suppliers subject to more lenient restrictions or place equipment at mature-node facilities that are not directly controlled. The MATCH Act requires the United States to prioritize negotiations with equipment-supplying countries such as the Netherlands and Japan and encourage allies to adopt rules with equivalent practical effects. If the bill becomes law and negotiations fail, the U.S. government would be required to use the Export Administration Regulations, critical components subject to U.S. jurisdiction, or other measures to expand restrictions on relevant foreign-made equipment, end uses, and maintenance activities. The original version of the bill proposed broader restrictions on immersion DUV and cryogenic etching equipment, prompting opposition from equipment suppliers. A subsequent revised version removed the China-wide ban on cryogenic etching equipment but retained the direction of controls on immersion DUV systems, specific Chinese wafer fabs, and their affiliated entities. Control area Existing system Direction of the MATCH Act Equipment exports The United States, the Netherlands, and Japan separately implement equipment lists and licensing systems Require allies to impose similar restrictions on critical bottleneck equipment Controlled entities Determined according to equipment performance, process use, entity lists, or specific facilities Include wafer fabs, owners, and affiliated entities Maintenance services U.S. persons and certain U.S. technologies are already restricted Add licensing requirements for the maintenance, upgrading, and technical support of controlled equipment Lack of allied cooperation Mainly addressed through diplomatic coordination and existing export rules May expand the application of U.S. rules to foreign equipment Control Focus Expands From New Equipment to the Operation of Installed Tools Semiconductor equipment requires long-term support from original manufacturers. After installation, lithography, etching, and deposition equipment still requires regular calibration, consumable replacement, software updates, component repairs, and technical services from engineers. Even if equipment has already entered China, the inability to obtain continued maintenance from original suppliers could affect long-term operating efficiency, yield, and capacity utilization. Maintenance restrictions may therefore have a more persistent impact than simply prohibiting exports of new equipment. Chinese wafer fabs may increase inventories of spare parts in advance or seek third-party maintenance services, but high-end equipment involves precision components, proprietary software, and process parameters that third-party providers may struggle to fully replace. If the MATCH Act is formally implemented, export controls would extend from the equipment delivery stage to the entire operating life cycle. Company-level controls could also reduce room for internal equipment transfers. In the past, when restrictions focused on specific facilities, companies could still purchase equipment through mature-node fabs that were not listed and then adjust its use internally within the group. The new framework would examine wafer fabs, owners, and affiliated entities together, potentially exposing companies such as Semiconductor Manufacturing International Corporation (SMIC), ChangXin Memory Technologies (CXMT), Yangtze Memory Technologies (YMTC), Hua Hong Group, and Huawei to broader equipment and service restrictions. China Accounts for About 20% of ASML Revenue, Making DUV and Service Businesses the Main Risks ASML has the clearest exposure to the new round of policy risks. China accounted for approximately 33% of ASML’s total revenue in 2025. In the second quarter of 2026, the company continued to estimate that China would contribute about 20% of its full-year net sales, with incremental demand mainly coming from China’s domestic logic chip business. ASML reported revenue of EUR 9.326 billion and net income of EUR 2.918 billion in the second quarter of 2026. Revenue from its Installed Base Management business, which is related to equipment maintenance and field upgrades, reached EUR 2.762 billion. This shows that policy risks could affect not only new system sales but also maintenance, upgrades, and component revenue. Immersion DUV is currently the most closely watched equipment category. China has long been unable to obtain EUV systems but can still purchase certain DUV systems for mature-node production and for some advanced logic, DRAM, and NAND processes. If restrictions are expanded to all immersion DUV systems, the range of equipment available to Chinese wafer fabs would narrow further, while ASML’s new system and service revenue would also come under pressure. However, China’s revenue share cannot be directly equated with potential losses. The final impact will still depend on equipment models, customer lists, Dutch government licensing policies, and whether installed systems can continue to receive service. ASML is also benefiting from global AI investment and has raised its 2026 revenue forecast to between EUR 43 billion and EUR 45 billion. Advanced logic and memory capacity expansion in Taiwan, South Korea, and the United States could provide a degree of offset to weaker business in China. Tokyo Electron Has Greater China Exposure as Risks Shift Toward Specific Customers and Service Revenue Tokyo Electron, or TEL, holds important positions in etching, thin-film deposition, coating and developing, and thermal processing equipment. China accounted for 34.1% of TEL’s revenue in the fiscal year ended March 2026, higher than ASML’s estimate that China will contribute about 20% of its 2026 revenue, indicating that TEL is more sensitive to changes in semiconductor equipment investment in China. The original version of the bill proposed a comprehensive ban on exports of cryogenic etching equipment to China, and Tokyo Electron was viewed as one of the main companies at risk because it offers relevant product lines. After the revised version removed this broad ban, the risk shifted toward specific customers such as Semiconductor Manufacturing International Corporation, ChangXin Memory Technologies, and Yangtze Memory Technologies, as well as maintenance and technical support at controlled facilities. Tokyo Electron’s service revenue is also significant. In the fiscal year ended March 2026, revenue from its Field Solutions business reached JPY 626 billion, an increase of 16.3% from the previous year, including components, maintenance, and equipment modifications. If maintenance activities require case-by-case licenses, the impact would gradually extend from new equipment orders to revenue from the installed base. Nikon is also a supplier of immersion DUV equipment. Although its market scale is smaller than ASML’s, Nikon products could also be included if the final rules are determined according to equipment performance. U.S. Equipment Suppliers May Narrow the Competitive Gap, but the China Market Will Continue to Contract U.S. equipment suppliers such as Applied Materials, Lam Research, and KLA have long been subject to U.S. export rules, and their equipment sales and technical support to certain advanced Chinese wafer fabs are already restricted. These companies have long argued that Dutch and Japanese suppliers face more lenient restrictions, allowing Chinese customers to shift purchases toward non-U.S. suppliers. If allied rules are raised to similar levels, the relative competitive disadvantage of U.S. equipment suppliers in China may narrow. However, an expansion of the list of critical facilities and additional maintenance licensing requirements would still reduce their equipment and service revenue. The main benefit for U.S. equipment suppliers would be more consistent competitive conditions rather than renewed growth in China-related business. The Dutch government has expressed concerns about the United States expanding extraterritorial jurisdiction. Although the Netherlands supports restrictions on sensitive semiconductor technologies, it prefers that export licensing decisions be made independently by the Dutch government and the European Union. Whether Japan is willing to adopt the same Chinese entity lists, equipment standards, and maintenance restrictions as the United States will also affect the actual effectiveness of the legislation. Chinese Wafer Fabs Will First Face Slower Expansion and Higher Maintenance Costs The short-term pressure on Chinese wafer fabs will be concentrated on equipment access, production line expansion, and the maintenance of installed equipment. Logic chip, DRAM, and NAND production requires lithography, etching, deposition, cleaning, and inspection equipment to operate together. Restrictions on a single equipment category may not immediately halt existing production lines, but they could lengthen expansion schedules, increase the difficulty of equipment allocation, and limit process upgrades. Maintenance and component restrictions would increase operating risks for installed equipment. Chinese companies may accelerate the adoption of domestically produced equipment, but equipment substitution must still undergo reliability, yield, and mass-production validation and cannot be completed simply by delivering a machine. The more likely short-term outcomes are slower capacity expansion, higher production costs, and increased inventories of components and spare parts at wafer fabs. Over the longer term, external restrictions will encourage China to increase investment in domestic lithography, etching, deposition, and inspection equipment. However, the degree of localization varies significantly across equipment categories. Even if some domestic equipment has entered production lines, the overall process still requires multiple types of equipment, materials, and software to operate together, meaning localization will not be completed simultaneously across the entire production chain. U.S.-Japan-Netherlands Coordination Will Determine the Actual Strength of the Controls The first issue to monitor is whether the MATCH Act can pass the House and Senate and whether the final text retains core provisions covering immersion DUV systems, affiliated entities, and maintenance licensing. If the bill fails to pass as standalone legislation, some provisions could still be incorporated into the National Defense Authorization Act or other major legislative packages. The second key issue is whether the United States, the Netherlands, and Japan can establish common standards. If allies independently introduce rules with equivalent effects, the United States could reduce controversy over the direct expansion of extraterritorial jurisdiction. If negotiations fail, the United States may use U.S.-origin technology, components, and export administration rules to increase compliance pressure on foreign equipment suppliers. The impact of the new round of equipment controls would gradually expand from whether new systems can be shipped to whether installed equipment can be maintained, upgraded, and kept in operation. ASML and Tokyo Electron would continue to benefit from global AI capital expenditure, but their China orders, service revenue, and regulatory costs would face reassessment. For Chinese wafer fabs, the pressure would also expand from shortages of advanced-process equipment to mature-node capacity expansion and the maintenance of installed production capacity.

USMCA Enters Annual Review, U.S.-Mexico Trade Rules Face Renegotiation, and Nearshoring Investment Turns More Cautious

The institutional environment for North American nearshoring is changing. On July 1, 2026, the United States, Mexico, and Canada completed the first joint review of the United States-Mexico-Canada Agreement (USMCA), six years after it entered into force. Because the United States did not agree to extend the agreement directly for another 16 years under the existing provisions, the three countries will next enter annual joint reviews, while the United States and Mexico will continue addressing disputes involving automobiles, steel and aluminum, and economic security through bilateral negotiations. The USMCA remains in effect, and Mexican goods that meet the rules of origin can continue to receive preferential tariff treatment under the agreement. What has truly changed is the predictability of long-term policy for businesses. U.S. imports of goods from Mexico have remained at elevated levels in recent years, reflecting the deep integration of U.S.-Mexico manufacturing and cross-border supply chains. In the past, multinational companies could assume that North American trade rules would remain stable for an extended period and use that assumption to build factories in Mexico, organize supplier networks, and plan production capacity. Now, automotive rules of origin, the use of Asian components, and restrictions on strategic products could all be renegotiated through the annual review process and U.S. negotiating demands, making companies more cautious about new factories and major capacity expansions. Read More at Datatrack The USMCA Has Not Immediately Terminated, but Investment Faces the Risk of Annual Reviews The USMCA officially entered into force on July 1, 2020, replacing the North American Free Trade Agreement (NAFTA). Under Article 34.7 of the agreement, the three countries conduct their first joint review six years after the agreement takes effect. If all three countries agree to an extension, the agreement’s term can be extended for another 16 years. If they fail to reach a consensus, joint reviews must be conducted annually during the remaining term. Under the agreement’s original timeline, the USMCA will remain in effect until July 1, 2036. Before then, the three countries can still extend the agreement’s term for another 16 years through written confirmation by their heads of government. Annual joint reviews do not mean that companies must requalify for the agreement every year, and existing tariff preferences and rules of origin will not immediately become invalid because of the outcome of the first review. The problem is that the construction and payback periods for automobile, battery, electronics assembly, and component plants often extend over many years. When future rules-of-origin thresholds, tariff treatment, and restrictions on non-North American components remain uncertain, companies may apply a higher risk discount to investment projects and respond by expanding capacity in stages, reducing the initial scale of projects, or retaining backup production capacity in the United States. Time USMCA Development Impact on Businesses July 1, 2026 The United States did not agree to a direct 16-year extension Existing rules remain in place, but the agreement enters annual joint reviews From July 21, 2026 onward (ongoing) The United States and Mexico launch the third round of bilateral negotiations in parallel with the USMCA trilateral joint review process The talks focus on automobiles, steel and aluminum, economic security, and rules of origin, and the outcome may affect subsequent trilateral negotiations From 2027 until the agreement’s term expires Annual joint reviews will be conducted until an extension consensus is reached Long-term investment decisions must incorporate potential changes in rules and tariff scenarios July 1, 2036 If no extension is agreed, the agreement’s term expires The three countries can still agree to a 16-year extension before this date The United States Proposes Raising “U.S. Content,” Making Automobiles and Strategic Manufacturing Core Issues The third round of U.S.-Mexico bilateral negotiations began in Mexico City on July 21 and is proceeding in parallel with the USMCA trilateral joint review process. The bilateral negotiations mainly address specific trade disputes between the United States and Mexico. The current round covers steel and aluminum and their derivative products, automobiles, economic security, labor, agriculture, and electronic payment services. The first two rounds discussed automobiles, rules of origin for specific industrial products, steel and aluminum, economic security, agriculture, labor, the environment, and regulatory compatibility. The two sides are attempting to narrow their main differences, but changes involving USMCA provisions or common trilateral rules must still be further negotiated and agreed upon by the United States, Mexico, and Canada. The USMCA currently requires at least 75% of the regional value of passenger vehicles and light trucks to originate in North America. It also includes rules covering core components, steel and aluminum sourcing, and labor value content. This framework primarily requires production to remain within North America, but the United States further hopes to increase the share of U.S. components in automobiles and tighten rules of origin for strategic products such as electronics and pharmaceuticals, preventing Chinese and other third-country components from obtaining USMCA benefits after being assembled in Mexico. The United States may also use tariffs, quotas, or stricter source-verification rules to regulate steel, aluminum, and certain industrial products. If these requirements are implemented, companies will need to increase their use of North American suppliers, adjust the division of production capacity between the United States and Mexico, and establish more comprehensive certificates of origin and supplier-tracking systems. The automotive industry is a major pillar of Mexico’s manufacturing sector and export supply chain to the United States, while Mexico’s vehicle production also reflects the country’s mature vehicle and component manufacturing base. Automotive components, electronics, servers, and metal-processing industries that import large volumes of parts from Asia, assemble them in Mexico, and then export them to the United States will face relatively greater adjustment pressure. Negotiating Area Main U.S. Demand Potential Adjustment for Businesses Automobiles and components Increase the share of U.S. components and manufacturing Companies may need to reconfigure sourcing and production capacity between the United States and Mexico Steel and aluminum Prevent third-country products from being transshipped or used to circumvent tariffs Raw material costs and source-tracing requirements may increase Electronics and pharmaceuticals Tighten rules of origin for strategic products The compliance threshold for assembling Asian components in Mexico may rise Economic security Reduce the ability of non-member countries to benefit from the agreement Reviews of investment backgrounds and supplier origins may expand Labor and the environment Strengthen enforcement and compliance requirements Production and administrative costs may increase Initial FDI Reached a Record First-Quarter Level, but Foreign Investment Still Consists Mainly of Reinvested Earnings Preliminary statistics from Mexico’s Ministry of Economy show that foreign direct investment reached US$23.591 billion in the first quarter of 2026. Compared with the initially reported figure for the first quarter of 2025, this represented a year-on-year increase of 10.4% and marked a record high among initial first-quarter releases. However, because the figure for the same period in 2025 was subsequently revised upward, foreign direct investment in the first quarter of 2026 declined by 3.36% when calculated against the current revised figure. Overall foreign investment performance therefore still needs to be assessed through the sources and structure of investment before determining whether new investment momentum has improved. From the perspective of investment structure, reinvested earnings reached US$22.222 billion in the first quarter of 2026, while new investment totaled US$1.705 billion and intercompany accounts recorded a net outflow of approximately US$336 million. New investment accounted for only about 7.2% of total FDI and declined by 26.6% from the revised figure for the same period in 2025, while reinvested earnings increased by 14.35%. Existing foreign companies are continuing to retain earnings in Mexico, but new capital investment remains relatively cautious. Trade uncertainty is also beginning to affect Mexico’s economic outlook. The medium-term trend in Mexico’s real GDP indicates that the economy continues to expand, although growth momentum has become more moderate than in the previous period. A mid-July market survey lowered the median forecast for Mexico’s 2026 economic growth from 1.5% in the April survey to 1.1%, while the 2027 forecast was reduced from 1.9% to 1.8%. Mexican exports remain resilient, but industrial production is weak, and uncertainty over trade rules is making companies more inclined to postpone long-term capital expenditure. Automobiles and other export-oriented industries are particularly exposed to this effect. Nearshoring Shifts from Rapid Expansion to More Precise Calculations Mexico still benefits from its proximity to the United States, relatively low labor costs, well-developed manufacturing clusters, and mature cross-border logistics. The U.S.-Mexico supply chain also cannot be fully replaced in the short term. However, completing product assembly in Mexico does not necessarily mean that a product qualifies for USMCA treatment. Companies must still satisfy regional value-content requirements, tariff-shift rules, and origin-documentation requirements. If the United States further raises U.S.-content thresholds, a model that relies solely on Asian components and assembly in Mexico will become more difficult to sustain. Nearshoring investment is therefore shifting from the previous phase of rapid factory construction to a second phase that places greater emphasis on compliance and the allocation of production capacity. Companies need to compare the costs of production capacity in Mexico, the United States, and Asia, while evaluating the feasibility of increasing North American sourcing, moving key production processes to the United States, or retaining capacity across multiple locations. Investment will not stop entirely, but decision-making periods will lengthen, and capital expenditure may be divided into phases to preserve flexibility. For Taiwanese companies that already have operations in Mexico, the immediate priority is to reassess the rules-of-origin eligibility of their products, the share of Asian components, and supporting documentation, while modeling costs under different tariff and rules-of-origin scenarios. Companies preparing to establish factories in Mexico must also incorporate U.S. production capacity, customer locations, and supply-chain backup arrangements into their assessments, rather than relying only on wages and geographic proximity when making investment decisions. The USMCA annual review has not yet undermined Mexico’s position as a North American manufacturing base, but it has raised the decision threshold for major new investments. The key issues going forward will be whether the United States formally advances U.S. value-content requirements for automobiles, whether strategic products are subject to stricter sourcing rules, and whether foreign investment in Mexico can gradually shift from reinvestment by existing companies toward a larger number of newly established factories. The core of future nearshoring competition will increasingly center on compliance with rules of origin, the share of North American suppliers, and the ability to allocate production capacity between the United States and Mexico.

France’s Public Debt Interest Payments Approach €80 Billion as European Bond Markets Reprice the Fiscal Gap Between France and Germany

France’s public debt and interest payments continue to rise. With fiscal reform becoming more difficult ahead of the 2027 presidential election, investors have begun reassessing the risk compensation required to hold French government bonds. At the same time, Germany’s expansion of defense and infrastructure spending is increasing the supply of European government bonds and pushing up the regional yield benchmark. As of July 17, 2026, the yields on 10-year German and French government bonds stood at approximately 3.12% and 3.93%, respectively, resulting in a France-Germany spread of about 81 basis points. This shows that German government bonds remain the benchmark asset in the euro area, while the fiscal and political risk premium demanded by investors for holding French debt remains elevated. Debt and Interest Payments Rise in Tandem, Increasing the Risk of a French Debt Snowball Data from the French National Institute of Statistics and Economic Studies show that France’s public debt reached €3.5361 trillion in the first quarter of 2026, an increase of €75.6 billion from the previous quarter. The debt-to-GDP ratio rose from 115.7% at the end of 2025 to 117.5%. During the same quarter, real GDP contracted by 0.1% quarter over quarter, household consumption declined by 0.2%, and gross fixed capital formation fell by 0.6%, indicating that domestic demand and investment momentum remained weak. The OECD forecasts that the French economy will grow by only 0.7% in 2026 and 0.8% in 2027, leaving economic expansion insufficient to meaningfully dilute the debt burden. Fiscal indicator Latest figure or 2026 baseline Medium-term scenario Fiscal implication Public debt €3.5361 trillion in the first quarter of 2026, equivalent to 117.5% of GDP Could exceed 130% of GDP by 2030 without adjustment The debt ratio continues to rise, while weak growth makes the burden difficult to dilute Fiscal deficit The OECD forecasts approximately 5.0% of GDP in 2026, although the government has warned that the target will be increasingly difficult to achieve Could approach 7% by 2030 without adjustment The deficit remains well above the EU’s 3% ceiling, indicating limited progress in fiscal consolidation General government interest expenditure Approximately €77.4 billion to €78.0 billion in 2026 Could rise to €124.0 billion by 2030 Rising interest payments are increasingly crowding out other public expenditure Central government budget interest payments €64.8 billion in 2026 Expected to rise to €74.2 billion in 2027 The central government’s discretionary budget space is becoming increasingly constrained The report estimates that France will need to implement approximately €126.0 billion in cumulative fiscal adjustments by 2032 to stabilize the debt-to-GDP ratio during the next presidential term. If action is postponed until after the 2027 election, the required scale of adjustment could increase further. The rapid increase in interest expenditure mainly reflects the gradual maturity of government bonds issued during the low-interest-rate period. When the French government refinances maturing debt with new borrowing, it must do so at the currently higher market interest rates, causing the average cost of debt to rise over time. The €77.4 billion to €78.0 billion shown in the table refers to the general government fiscal measure, while the €64.8 billion figure refers to interest payments within the central government budget. The two figures cover different scopes, but both show that interest costs are reducing the fiscal space available for education, healthcare, defense, and industrial investment. France is currently facing weak growth, a large fiscal deficit, and rising refinancing costs at the same time, increasing the risk of a debt snowball. The main obstacle to fiscal adjustment remains political. France lacks a stable parliamentary majority, and measures such as reducing social expenditure, reforming the pension system, or increasing taxes could all trigger political resistance. As the 2027 presidential election approaches, continued delays to reform would require larger future adjustments and could further weaken investor confidence. Germany Is Also Expanding Fiscal Policy, but Markets Price It Differently From France Germany has also entered a period of fiscal expansion and increased government borrowing. Under the German government’s draft federal budget for 2027, total expenditure will reach €555.4 billion, while net borrowing under the core federal budget will amount to €118.7 billion. Including the Special Fund for Infrastructure and Climate Neutrality and the special fund for defense, related borrowing will total approximately €203.6 billion. The increase in government bond supply will put downward pressure on bond prices and raise the yield on German government bonds, which serve as the euro area’s benchmark. Based on data from the end of 2025, Germany’s public debt stood at 63.5% of GDP, while France’s was close to 116%, leaving a gap of more than 50 percentage points. Germany’s latest spending expansion focuses on defense, infrastructure, climate action, and innovation investment. Markets believe that some of this expenditure could improve long-term growth conditions and therefore continue to assign Germany a lower risk premium. Government bond yields in France and Germany are therefore being driven by different forces. German government bonds mainly reflect additional supply, inflation, and the broader interest-rate environment. France, in addition to facing the same European benchmark rates, must pay further compensation for its high debt, persistent fiscal deficits, and political uncertainty. This also explains why the France-Germany spread has not narrowed significantly despite Germany’s increase in borrowing. Energy Inflation Raises Europe’s Interest-Rate Benchmark, Leaving France Under Dual Pressure Developments in the Middle East and rising energy prices have prompted markets to raise their expectations for European inflation and further ECB rate hikes. Although euro-area inflation fell from 3.2% in the previous month to 2.8% in June 2026, it remained above the ECB’s 2% target. The ECB raised the deposit facility rate to 2.25% in June and forecasts that average inflation could reach 3.0% for the full year of 2026. If energy costs remain elevated, policy rates and long-term government bond yields will be less likely to decline rapidly. Read More at Datatrack For France, each increase in the European benchmark interest rate will gradually be reflected in the cost of newly issued government bonds and the refinancing of maturing debt. France therefore faces two layers of pressure. The first is the increase in Europe’s overall interest-rate benchmark, represented by rising German government bond yields. The second is the additional spread demanded by markets to compensate for France’s fiscal and political risks. Germany’s increased bond supply, energy inflation, and France’s own fiscal concerns are jointly driving the current repricing of European bond markets. The 2027 Budget Will Determine Whether the France-Germany Spread Can Stabilize The France-Germany spread of approximately 81 basis points does not yet indicate that France faces an immediate financing crisis. However, it shows that markets no longer assign French government bonds a risk valuation close to that of German government bonds, while the fiscal and political risk compensation demanded by investors remains elevated. Market attention has also shifted toward when the French government will be able to stop the debt-to-GDP ratio from rising. The next major test will be France’s 2027 budget, which the government is expected to present in the autumn of 2026. The government must balance rising defense and social expenditure, rapidly increasing interest costs, and the absence of a parliamentary majority. If the budget lacks credible and executable expenditure-control measures, higher government bond yields will continue to raise interest payments through refinancing and further constrain the fiscal choices available to future governments. If the government can present a concrete and executable multi-year adjustment plan, it would help reduce fiscal and political risk premiums and create conditions for the France-Germany spread to narrow.