While Taiwan has achieved significant economic prosperity, its policy has become outdated. In November 2025, Taiwan’s currency experienced a sudden appreciation following reports of American scrutiny regarding its substantial trade surplus with the US.
This short-lived appreciation not only unsettled markets but also highlighted a fundamental inconsistency within Taiwan’s economic framework. A policy that once suited the industrialising nation has remained frozen in time, even as Taiwan evolved into one of Asia’s wealthiest societies. This mismatch presents important lessons for India, which is charting its next stage of economic growth.
The currency that never followed the rules
According to conventional macroeconomic metrics, Taiwan represents an anomaly. The GDP-adjusted Big Mac Index indicates that the Taiwan dollar (TWD) is undervalued by 55 per cent relative to the US dollar. Historically, this undervaluation has bolstered Taiwan’s export performance; however, it now creates distortions that are difficult to overlook. This anomaly is further elucidated by the Balassa-Samuelson effect, which says that as nations experience economic growth, particularly through productivity gains in tradable sectors, their real exchange rates tend to appreciate. Typically, high-income economies allow their currencies to appreciate over time. Taiwan, however, defies this rule. Despite being a prosperous, technologically advanced economy, its currency has not appreciated commensurately with its economic growth.
The Real Effective Exchange Rate (REER) of Taiwan, despite the country’s per capita GDP surpassing that of Japan, has exhibited only limited appreciation over the past two decades. The REER, which accounts for inflation and the currencies of trading partners, displays an unusually stable trajectory, indicating a deliberate effort to counteract the upward pressures experienced by currencies in advanced economies.
Also read: Rupee’s story is not just its exchange rate with the US. It’s about REER—a corrective lens
Taiwan’s trade surpluses reveal deeper strain
A persistently weak currency yields predictable outcomes, notably a surge in exports and substantial external surpluses. Taiwan’s case is particularly striking. Excluding entrepôts and oil-exporting nations, Taiwan has maintained the world’s largest current-account surplus as a percentage of GDP in this century. Recently, this surplus reached 16 per cent of GDP, while its goods-trade surplus attained a record 31 per cent of GDP (annualised) in October 2025 — a level four times greater than that observed during the pandemic. In comparison, China’s surplus stands at just 3 per cent.
These figures are not solely indicative of competitiveness; they also highlight an imbalance. Taiwan’s production significantly exceeds its consumption due to its undervalued currency. This undervaluation acts as a tax on consumers by increasing import prices in an economy heavily reliant on imported food, fuel and manufactured goods. Since 1998, private consumption has decreased by 20 percentage points of GDP, representing an extraordinary shift for a high-income democracy.
Weak domestic consumption, in turn, worsens the trade surplus, compelling Taiwan to increasingly depend on external demand. The savings accrued from these surpluses must be allocated elsewhere, thereby creating the financial vulnerabilities currently central to the nation’s discourse.
Financial risks built within Taiwan’s system
Taiwan’s economic framework aligns closely with the principles of the Impossible Trinity, also known as the Mundell-Fleming trilemma. This economic theory posits that a nation cannot simultaneously sustain a fixed or tightly managed currency, free capital flows, and an independent monetary policy. Taiwan effectively prioritises the first two elements, thereby limiting its monetary autonomy. As a result, interest rates are maintained at artificially low levels, since any increase could lead to currency appreciation, which is undesirable for exporters. These low interest rates, coupled with the liquidity generated through foreign-exchange interventions, have led to two significant distortions.
The first distortion is observed in the housing market. Since 1998, Taiwan has experienced a fourfold increase in house prices, driven by cheap credit and excess liquidity. Consequently, home ownership has become increasingly unattainable for younger Taiwanese individuals.
The second pertains to the life-insurance sector, which poses a potential financial risk. To manage its substantial surpluses, Taiwan has heavily relied on its life-insurance industry. Insurers have invested nearly US$1 trillion of household savings into foreign assets, predominantly American Treasuries. However, their liabilities are denominated in Taiwan dollars, creating a significant currency mismatch. An appreciation of the TWD or depreciation of the USD could inflict huge losses overnight, potentially triggering a broader financial crisis.
These risks persist due to the reinforcing nature of the political economy. Smaller exporters, accounting for approximately 70 per cent of manufacturing employment, rely on a weak currency for their survival. Meanwhile, the central bank generates huge profits from its foreign-asset holdings, with its remittances constituting approximately 6 per cent of government revenue, compared to a typical developed-world average of 0.4 per cent. This unusual financial significance enhances its institutional influence and helps establish the current regime.
What India should take from Taiwan’s predicament
India is currently at a different stage of development; however, the fundamental decisions it faces are comparable. In a previous article regarding the rupee’s REER, I argued that the rupee’s valuation cannot be understood solely through its exchange rate with the USD. The real exchange rate, which is adjusted for inflation and trading partners, provides a more accurate assessment of competitiveness. This framework becomes crucial as India integrates more deeply into global supply chains.
Taiwan’s experience illustrates that artificially suppressing a currency can yield short-term export advantages but at the expense of long-term structural imbalances. Should India opt for a deliberately weakened rupee, it risks compromising its greatest asset: a vast and expanding domestic consumer market. Elevated import costs would directly impact households, and policies designed to prevent rupee appreciation could inflate asset markets and create financial vulnerabilities — the very challenges currently confronting Taiwan.
To its credit, India has avoided these traps. The Reserve Bank of India (RBI) permits the rupee to align with economic fundamentals, intervening primarily to mitigate volatility. Additionally, India’s regulators have exercised prudence in limiting currency mismatches within financial institutions. This strategy helps avert an over-dependence on external surpluses, preserves domestic purchasing power, and safeguards against the balance-sheet risks now prevalent in Taiwan’s insurance sector. Importantly, India’s geopolitical positioning provides it with significantly greater policy flexibility compared to the export-dependent economies of East Asia. This enables New Delhi to pursue its manufacturing objectives while maintaining strategic autonomy, rather than succumbing to external pressures.
Taiwan’s model is not a failure; rather, it represents a success beyond its original purpose. India has the opportunity to learn from this trajectory: to enhance manufacturing competitiveness without compromising consumption, to manage capital flows without distorting asset markets, and to allow the real exchange rate to evolve naturally in accordance with economic fundamentals.
As Taiwan now grapples with the challenge of unwinding an outdated currency regime, India should regard this as a cautionary signal. Currency policy can never merely be about export considerations. It is also about the kind of economy a country becomes. And in this context, Taiwan’s struggle today serves as a quiet lesson for India’s future.
Bidisha Bhattacharya is an Associate Fellow, Chintan Research Foundation. She tweets @Bidishabh. Views are personal.
(Edited by Prashant)