While trade, investment, and technology exchanges between Taiwan and the United States have reached historic highs, bilateral cooperation in defense security and drone supply chains continues to face critical challenges, The Wire China reported on July 19, citing analysis from DSET’s policy analyst Cathy Fang.
The report highlights a significant shift in the U.S.-Taiwan economic relations over the past decade, driven by robust U.S. demand for Taiwanese high-tech products. Taiwan’s current economic growth mirrors—and even surpasses—its peak during the “Four Asian Tigers” era. Taiwan has emerged as the fourth-largest trading partner of the United States, and the U.S. has replaced China as Taiwan’s primary trading partner. A senior U.S. diplomat noted, “U.S.-Taiwan trade and investment relations have completely transformed in substance and structure.”
“Taiwan is our most important international partner in the AI sector — pretty much every piece of hardware is manufactured by a Taiwan company. Taiwan is playing a similar role in the drone sector because it has the ability to replace Chinese components at scale,” the diplomat added.
Despite these economic bonds, substantive challenges in defense cooperation remain. The U.S. government is currently delaying approval of a $14 billion arms package for Taiwan. Meanwhile, Taiwan’s Legislative Yuan stripped funding from a special defense budget that included $15 billion on drones and air defense systems.
Cathy Fang, a policy analyst in DSET’s National Security Research Program, pointed out that the U.S.-Taiwan military collaboration framework is actively evolving. The partnership is shifting from traditional arms procurement toward software-hardware integration and AI-enabled mission capabilities. For instance, Taiwan’s National Chung-Shan Institute of Science and Technology (NCSIST) has signed cooperation and development agreements with seven U.S. defense tech firms including Anduril Industries and MARTAC. Furthermore, the Taiwan Excellence Drone International Business Opportunities Alliance (TEDIBOA) has signed six cooperation agreements with U.S. industry, government and academic institutions, seeking to reduce the industry’s reliance on China-based suppliers.
Despite progress in supply chain transformation, Fang noted that core operational coordination issues between the two militaries remain unresolved. Without joint testing, shared data standards, pre-positioned stocks of weapons, and joint exercises, U.S. and Taiwanese forces are more likely to operate in parallel rather than as an integrated force in the event of a conflict with China.
“U.S. defense firms are unlikely to commit capital, personnel, tooling, or production know-how to Taiwan-based manufacturing unless Taiwan provides a stable multi-year demand signal,” Fang said. “At present, that signal remains incomplete because Taiwan’s major drone-related funding package is still being blocked by the KMT in the legislature.”
