Taiwan’s high-technology industry is about to benefit to an even greater extent from its economic ties with China now that both are members of the World Trade Organization (WTO). As tariffs fall and trade and investment policies liberalize, Taiwan’s tech companies will have more near-term business opportunities in China than will companies in most other sectors, a McKinsey study shows.

The China-Taiwan high-tech relationship is of major interest to many multinational companies, which look to Taiwan for high-tech design, contract manufacturing, and foundry services (Exhibit 1). These multinationals stand to benefit from lower costs if their Taiwanese suppliers pass along the savings generated by increased trade with China. A number of world-class high-tech manufacturing companies are based in Taiwan—Taiwan Semiconductor Manufacturing Company (TSMC) in semiconductors, Asustek Computer in motherboards, Acer and Quanta Computer in PCs. The industry is a net exporter, with a trade surplus of NT $735 billion (US $21 billion). Over the past few years, however, many of these companies have started shifting some of their manufacturing operations to China in order to reduce production costs and stay competitive. This trend has rapidly accelerated over the past 18 months as more and more cash-strapped US customers have...