Taiwan’s Currency Surge and Global Dollar Liquidity Crisis: A Definitive Analysis of 2025 Supply Chain Disruptions

Abstract

This scholarly analysis provides a comprehensive examination of the economic disruptions in 2025 triggered by US-China trade tensions, focusing on the unprecedented appreciation of the Taiwanese dollar (TWD) and the looming threat of a global US dollar (USD) liquidity crisis. Grounded in economic theory, empirical data, and original insights, it elucidates the mechanisms driving these phenomena, their interrelation, and their implications for global financial markets and real economies. By presenting a unified framework that integrates short-term financial market dynamics with medium-term economic impacts, this work aims to serve as the authoritative resource on the subject, offering policy recommendations and future research directions.

1. Introduction

In 2025, the escalation of US-China trade tensions, characterized by tariffs of 145% on Chinese imports to the US and 125% on US exports to China, has severely disrupted global supply chains, precipitating significant economic consequences. Two interconnected phenomena have emerged: a sharp appreciation of the TWD, driven by financial market reactions in Taiwan, and the potential for a global USD liquidity crisis stemming from real economic disruptions. This analysis argues that these events represent sequential phases of a broader economic shock, with the TWD surge reflecting immediate financial adjustments and the liquidity crisis signaling deeper economic stress. The objectives are to:

1. Dissect the mechanisms behind the TWD appreciation and its supply chain origins.
2. Evaluate the likelihood and dynamics of a global USD liquidity crisis.
3. Demonstrate the coherence of these phenomena as part of a unified economic narrative.
4. Propose policy solutions and outline future research avenues.

2. Economic Context: Supply Chains and Trade Tensions

2.1 US-China Trade War and Tariffs

On April 3, 2025, the US implemented tariffs of up to 145% on Chinese imports, prompting China to retaliate with 125% tariffs on US exports and restrictions on rare earth exports. These measures have drastically reduced bilateral trade, with US imports projected to decline by 22% in 2025 (Tax Foundation, 2025). Taiwan, a critical node in global supply chains, is significantly impacted, as approximately 55% of its US exports undergo final processing in China, subjecting them to Chinese tariff rates.

2.2 Taiwan’s Pivotal Role

Taiwan is a cornerstone of global trade, particularly in semiconductors, with companies like Taiwan Semiconductor Manufacturing Co. (TSMC) commanding over 60% of the high-end chip market. Exports constitute 70% of Taiwan’s GDP, with a trade surplus of $111.4 billion with the US in 2024. The financial sector, notably insurance companies managing assets equivalent to 140% of GDP, holds substantial overseas investments, primarily in USD-denominated assets, making it highly sensitive to currency fluctuations (Taipei Times, 2023).

2.3 Supply Chains as Inverse Payment Chains

Supply chains are not merely logistical networks but also inverse payment chains. When goods flow (e.g., from Taiwan to the US), payments flow in the opposite direction (USD to TWD). Disruptions halt both goods and payments, affecting exporters’ hedging strategies and financial institutions’ asset valuations. This dual nature underpins the economic shocks analyzed here.

3. Taiwan’s Currency Surge: Mechanisms and Impacts

3.1 Mechanism of TWD Appreciation

The TWD experienced a 9% appreciation against the USD in early May 2025, driven by:

• Export Halt and Hedging Unwind: The cessation of exports from China to the US on April 3, 2025, disrupted Taiwan’s exports, as many undergo “last substantial transformation” in China. Taiwanese exporters, expecting USD receipts, typically hedge by selling USD forward contracts. With exports halted, these hedges were unwound en masse around April 29-30, 2025 (T+30 days), reducing future USD demand and boosting TWD demand.
• Insurance Sector Amplification: Taiwan’s insurance companies, with assets worth 140% of GDP, primarily in USD-denominated bonds, faced valuation losses as TWD appreciation reduced the local value of these assets. Regulatory mandates compelled them to sell USD and buy TWD to hedge, creating a feedback loop that intensified the appreciation. Reports indicate an 8% TWD surge over two days, driven by these actions (Reuters, May 6, 2025).
• Central Bank Response: On May 11, 2025, Taiwan’s central bank intervened to curb excessive TWD inflows, though its limited initial action fueled speculation of strategic tolerance for a stronger TWD, possibly to secure US trade concessions (NBC New York, May 6, 2025).

3.2 Empirical Evidence

Exchange rate data corroborates the surge. The USD/TWD rate dropped from 32.0320 on May 1, 2025, to 30.1920 by May 11, 2025, reflecting a 6.36% appreciation, with some sources reporting a peak of 10% in early May (Axios, May 9, 2025). Described as the largest move since 1988, the scale aligns with the 9% claim, though slight variations exist (South China Morning Post, May 9, 2025).

3.3 Economic Impacts

• Exporters: A stronger TWD erodes export competitiveness, particularly for tech firms. TSMC’s operating margin declines by approximately 0.4% per 1% TWD appreciation, with its shares dropping nearly 2% on May 6, 2025 (CNBC, May 7, 2025).
• Financial Sector: Insurers face reduced asset values, prompting risk assessments by Taiwan’s financial supervisory commission (NBC New York, May 6, 2025).
• Trade Dynamics: Speculation suggests TWD appreciation may be leveraged for tariff relief, despite official denials, reflecting Taiwan’s strategic positioning (Modern Diplomacy, May 8, 2025).

4. Global Dollar Liquidity Crisis: Mechanisms and Likelihood

4.1 Mechanism of Liquidity Crisis

The trade disruptions are poised to trigger a USD liquidity crisis through:

• Trade Disruption Timing: Most Chinese exports to the US are sea-freighted, taking 30-45 days to arrive. The trade halt on April 9, 2025, implies product shortages emerging in May, leading to lost sales and cash flow deficits for businesses.
• J-Curve Dynamics: Initially, halted orders reduce USD outflows, as US importers cease payments, creating temporary USD surpluses in US banks. However, as shortages hit, businesses face revenue shortfalls while USD-denominated liabilities persist, surging USD demand.
• Global Spillovers: Reduced trade diminishes USD recycling (e.g., Chinese purchases of US Treasuries), tightening global liquidity. This creates a race for USD to meet obligations, potentially precipitating a crisis.

4.2 Empirical Evidence

• Trade Data: US imports from China are projected to plummet, with cargo volumes declining due to canceled orders (CNBC, May 9, 2025). Estimates suggest a $900 billion drop in US imports in 2025 (The Guardian, April 4, 2025).
• Liquidity Indicators: The USD weakened against major currencies in early May, with a 2.2% drop on April 4, 2025, amid tariff uncertainty (The Guardian, April 4, 2025). However, the New York Fed noted easing supply chain pressures in April, indicating short-term relief (Reuters, May 7, 2025).
• Fed Interventions: The Federal Reserve is actively ensuring funding liquidity, with tools like swap lines proven effective in past crises (Richmond Fed, 2024). A May 10, 2025, speech emphasized efforts to prevent market instability (New York Fed, May 10, 2025).

4.3 Economic Impacts

• Real Economy: Shortages may drive inflation and reduce consumer spending, with global growth potentially at its lowest since 2008 (The Guardian, April 4, 2025).
• Financial Markets: Increased USD demand could strengthen the USD against most currencies, except possibly the TWD, due to Taiwan’s unique dynamics.
• Global Effects: Emerging markets with USD-denominated debt face heightened risks, necessitating international support (Atlantic Council, June 22, 2023).

5. Unified Framework: Integrating TWD Surge and USD Liquidity Crisis

5.1 Perceived Tension

The TWD appreciation, implying USD weakening against TWD, appears at odds with a USD liquidity crisis, which suggests USD strengthening due to high demand. The former indicates a local USD surplus in Taiwan, while the latter points to a global USD shortage.

5.2 Sequential Phases

These phenomena are reconciled as sequential phases of the same economic shock:

• Phase 1 (Early May 2025): The TWD surge is a short-term financial market reaction. Exporters unwinding hedges and insurers selling USD reduce local USD demand, strengthening the TWD. This aligns with initial J-curve dynamics, where reduced USD outflows create temporary relief.
• Phase 2 (Mid-to-Late May 2025): As supply chain disruptions materialize, shortages cause revenue losses, increasing global USD demand to meet liabilities. This phase could strengthen the USD against most currencies, though Taiwan’s financial structure may delay TWD depreciation.

5.3 Economic Theory Support

• Bilateral Currency Movements: The USD can weaken against the TWD due to Taiwan-specific factors while strengthening globally due to liquidity demand (Investopedia, 2025).
• Financial vs. Real Economy: Financial market reactions often precede real economic impacts, creating temporary anomalies like TWD appreciation (De Gruyter, 2019).
• Policy Interventions: Taiwan’s central bank limits TWD appreciation, while the Fed’s liquidity provision mitigates global USD shortages, bridging the phases (Reuters, October 4, 2023).

5.4 Empirical Consistency

• Timing: The TWD surge peaked in early May, with central bank intervention on May 11, 2025 (Axios, May 9, 2025). Supply chain impacts are expected in mid-May, supporting the sequential framework (CNBC, May 9, 2025).
• Market Data: The USD’s early April weakening reflects tariff uncertainty, but Fed actions suggest stabilization, aligning with both phases (The Guardian, April 4, 2025).

6. Policy Recommendations

6.1 Taiwan

• Currency Stabilization: The central bank should adopt targeted interventions to balance TWD stability with export competitiveness, avoiding excessive appreciation that harms firms like TSMC. Regular stress tests for insurers can mitigate hedging-driven volatility.
• Economic Diversification: Investments in alternative markets and higher-value sectors can reduce reliance on China-centric supply chains, aligning with President Lai’s vision (Bloomberg, May 7, 2025).
• Trade Strategy: Taiwan should leverage its semiconductor dominance to negotiate tariff exemptions, clarifying currency policy to dispel speculation (Modern Diplomacy, May 8, 2025).

6.2 United States

• Liquidity Support: The Fed should expand swap lines and repo operations to ensure global USD liquidity, as demonstrated in 2020 (Richmond Fed, 2024).
• Tariff Moderation: Phased tariff implementation and exemptions for critical goods (e.g., semiconductors) can minimize disruptions (Reuters, April 14, 2025).
• International Cooperation: The G7 should support emerging markets with USD-denominated debt through liquidity tools and loan extensions (Atlantic Council, June 22, 2023).

6.3 Global

• Supply Chain Resilience: Nations should diversify supply chains to reduce dependence on single nodes like Taiwan or China (Rhodium Group, December 14, 2022).
• Trade Diplomacy: Multilateral negotiations to de-escalate tariffs can restore trade flows, stabilizing currencies (CNBC, May 7, 2025).

7. Future Research Directions

• Quantitative Models: Develop econometric models to quantify TWD appreciation’s impact on Taiwan’s GDP and global USD liquidity, incorporating insurer hedging dynamics.
• Regional Comparisons: Analyze other Asian currencies (e.g., Japanese yen, South Korean won) to assess regional effects of tariff-driven disruptions.
• Long-Term Effects: Investigate how sustained trade disruptions reshape global supply chains and currency regimes.
• Geopolitical Dimensions: Explore how Taiwan-China-US relations influence economic outcomes, particularly in conflict scenarios (Economist, May 4, 2025).

8. Conclusion

The 2025 US-China trade tensions have unleashed profound economic disruptions, manifesting in Taiwan’s TWD surge and the potential for a global USD liquidity crisis. These phenomena, far from contradictory, represent sequential phases of a unified economic shock: a short-term TWD appreciation driven by financial market dynamics and a medium-term USD liquidity strain from real economic disruptions. Supported by rigorous analysis, empirical data, and economic theory, this work elucidates their coherence and offers a definitive framework for understanding these events. Through targeted policy interventions by Taiwan’s central bank, the Federal Reserve, and global institutions, the impacts can be mitigated. This analysis aims to stand as the authoritative resource, providing clarity and actionable insights for academics, policymakers, and market participants navigating this turbulent economic landscape.

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