Taiwan Moves Pose Hurdle for Foreign Defense Firms, AmCham Says

An honor guard during a flag raising ceremony at Chiang Kai Shek Memorial Hall in Taipei, Taiwan, on Wednesday, Dec. 27, 2023. Next month Taiwan holds presidential and legislature elections that will help shape US-China relations for years to come. Photographer: An Rong Xu/Bloomberg Photo by An Rong Xu /Bloomberg

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(Bloomberg) — Changes that Taiwan made to rules for defense cooperation with foreign companies might discourage them from working with the archipelago, an American business group says — a view that comes just as China’s military shows off some key advances.

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A policy that was tweaked last year “presents several challenges that risk undermining Taiwan’s attractiveness as a defense market,” the American Chamber of Commerce in Taiwan said in a paper on Tuesday. It added this could slow procurement and undercut the incentive for foreign firms to invest in Taiwan.

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AmCham said “the rules are unclear about what kind of investments or technology-sharing companies are expected to provide in return for defense contracts,” calling on Taipei to safeguard commercial viability to encourage long-term spending on its defense industrial base.

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The paper provides a glimpse of some of the difficulties Taipei faces as it tries to field a military that can deter China’s much more powerful forces. Taiwan is keen to work with the US on weapons production, hoping to ensure a more stable flow of advanced arms to the archipelago.

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Last year, Taiwan changed its Industrial Cooperation Policy, dropping a requirement that foreign defense firms invest 40% of a contract value into the domestic economy in favor of a discretionary, case-by-case model. Both versions of the policy are intended to ensure that overseas companies invest in areas the Taiwan government deems important while also providing for some tech transfers.

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Officials in Taipei have watched as the US focused on arming Ukraine in its fight against Russia in recent years. That may change somewhat under President Donald Trump, who reportedly plans to ramp up weapons sales to Taiwan to a level exceeding the pace set during his first term.

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Beijing has escalated military pressure on Taiwan since President Lai Ching-te came to office last year, holding an unprecedented number of military exercises around the democracy of 23 million. Beijing says Taiwan is its territory and has threatened to use force to take control of the self-governing archipelago. Some experts have said those drills show China is capable of blockading Taiwan, shutting it off from key shipments of energy for an extended period.

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China’s military appears to be getting more formidable in other ways. Over the weekend, one of its carriers operated deeper into the Pacific Ocean than ever before.

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Also, last month Pakistan said the use of its Chinese J-10C fighters helped shoot down Indian fighters during a confrontation — challenging the notion that China-made weapons are inferior to Western arms. India has downplayed Pakistan’s claims about the effectiveness of weaponry deployed from China and other countries, saying that its military was able to conduct precision airstrikes deep in Pakistani territory. 

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AmCham also said in its report that Lai’s pledge to raise defense spending to more than 3% of gross domestic product was “pragmatic” given cross-strait tensions. While campaigning for president the second time, Trump suggested the archipelago should devote 10% of GDP to its armed forces — comments that align with his push for NATO members in Europe to bear more of the costs of collective defense.

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The chamber also called for clarifying regulations covering Chinese components used in the defense industry. It suggested classifying parts depending on where they were made and whether they contained Chinese subcomponents or raw materials.

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The recommendations come as Taiwan continues to seek a trade deal with the US, which has threatened a 32% tariff on its goods.

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