The Economist recently characterized the undervaluation of the New Taiwan dollar and the island’s excessively high current account surplus as “Formosan flu,” sparking debate both domestically and abroad. Hsien-Ming Lien, President of the Chung-Hua Institution for Economic Research (CIER), noted that the shifting narratives—ranging from “the most dangerous place on Earth” to “Dutch disease,” and now to “Formosan flu”—reflect a renewed global focus on Taiwan amidst the AI boom. However, President Lien argues that many of these inferences overlook the local industrial structure and policy context, necessitating a more comprehensive interpretation.
From “Most Dangerous Place” to “Formosan Flu”: AI Boom Refocuses Global Attention on Taiwan
President Lien argued that, regarding the exchange rate debate, the Big Mac Index cited by The Economist is not applicable to Taiwan. Public utility prices in Taiwan—including water, electricity, gas, and transportation—have long been heavily subsidized. Given that water, electricity, and gas are significant components of food production costs, food prices would inevitably rise if these prices were to return to market levels. Therefore, judging whether the New Taiwan dollar is undervalued solely on the basis of the price of a Big Mac is unreasonable.
Regarding the current account surplus, Taiwan’s surplus-to-GDP ratio has climbed from a historical range of 5%–10% to approximately 16% in recent years, driven by AI-driven exports. The Economist posited that excess savings are being forced into U.S. bonds, potentially creating a systemic financial risk. President Lien pointed out that the elevated figures partly reflect early profits made by Taiwanese businesses in China that could not be repatriated, rather than stemming entirely from local excess savings. Furthermore, the risk that this massive surplus would be transformed into bond holdings by life insurers only amplified after foreign media labeled it the “Formosan flu.”
As for why the New Taiwan dollar has not appreciated significantly over the long term, does this stem from pressure from export industries? President Lien admitted that “to some extent, yes,” but noted it also aligns with industrial reality. Between 2008 and 2018, gross margins in the electronics industry were low, making competitiveness highly vulnerable to exchange rate fluctuations. There were even instances in which business leaders publicly criticized the New Taiwan dollar for appreciating too rapidly relative to the Korean Won and demanded that the Central Bank take responsibility—a reflection of the industry’s acute sensitivity to exchange rates.
The Central Bank’s core consideration in exchange rate operations is employment. Since 2000, Taiwanese businesses have invested heavily in China, with cumulative investment exceeding US$550 billion and a resident population exceeding one million. This has resulted in insufficient domestic investment and weak domestic demand. However, Taiwan’s unemployment rate has largely remained below 4% over the past 20 years, a scenario similar to Japan’s ability to maintain low unemployment despite long-term economic stagnation. In this structural context, the Central Bank primarily references competitors’ exchange rate movements—such as the Korean Won, Renminbi (RMB), and Japanese Yen—to ensure full employment, rather than determining the New Taiwan dollar’s trajectory solely on the basis of the balance of payments.
Widening Divergence Between AI and Traditional Industries: A Policy Dilemma Amidst Industrial Polarization
The widening divergence in Taiwan’s industrial landscape over the past few years has placed fiscal and economic policymakers in an increasingly difficult position when it comes to trade-offs. On one hand, the AI supply chain is growing at a breakneck pace due to robust demand from American technology firms. The trade surplus with the U.S. is estimated to exceed US$120 billion this year, with roughly 95% stemming from the AI sector. Conversely, traditional industries remain sluggish, heavily impacted by price-cutting competition from China and U.S. tariffs.
Under these contrasting conditions, policy decisions face a dilemma. The New Taiwan dollar should appreciate based on the balance of payments and export momentum. However, traditional industries anticipate a weaker currency to maintain competitiveness. Likewise, booming industries tend to favor interest rate hikes, while those in recession hope for rate cuts. This structural divergence complicates the Central Bank’s and the government’s efforts to balance monetary and macroeconomic policies, which is a key reason external observers find it challenging to understand Taiwan’s economy when relying on individual indicators.
Author: CIER Editorial Team
Date: November 19, 2025