Taiwan’s US$40 billion gamble: Defence buildup amid China-Japan-US tensions

On 26 November 2025, Taiwan’s Democratic Progressive Party (DPP) government, led by President Lai Ching-te, introduced a colossal US$40 billion (around NT$1.25 trillion) special budget for weapons procurement and defence modernisation over the next eight years (2026-2033). While the proposal is currently being blocked by the opposition, the special defence budget would be the largest in 30 years and on top of Taiwan’s regular annual defence budget.

The Lai government justifies escalating defence expenditures by citing China’s unprecedented military buildup, increased incursions, intensifying hybrid and grey-zone threats (including maritime harassment, disinformation, cognitive warfare and united front interference), Beijing’s stated goal of completing preparations to use force against Taiwan by 2027, and an explicit doctrine of achieving “peace through strength”. 

The American Institute in Taiwan, the de facto US embassy in Taipei, and according to Taiwan sources, US legislators, and State Department officials, welcomed Taiwan’s decision for a special defence budget. 

As expected, China accused Lai of undermining cross-strait relations. A spokesman for the Taiwan Affairs Office of the State Council warned Lai for pursuing “Taiwan independence”, pushing Taiwan into the “abyss of war and danger”, and making it an arms market. 

The special budget proposal was sent to the opposition-controlled Legislative Yuan, where it will undergo a review committee and then three readings in the full Legislative Yuan for approval, amendment or rejection. 

The opposition, consisting of the Kuomintang (KMT), which does not support formal independence for Taiwan, and the Taiwan People’s Party (TPP), criticised what they called an “astronomical” allocation as too large, too fast and fiscally risky. KMT figures argued that Taiwan is “not an ATM”, warning that such a huge budget would be unsustainable, rely heavily on new debt and divert resources away from social welfare, education and other programmes, while calling for greater emphasis on diplomacy and conflict prevention rather than simply buying more US weapons.

The special budget announcement came amid one of the most severe diplomatic rows in years between China and Japan over Taiwan. Japanese Prime Minister Sanae Takaichi’s remarks that a Chinese attack on Taiwan could constitute a “survival-threatening situation” for Japan, potentially justifying a military response under Japan’s security laws, provoked Beijing.

China summoned the Japanese ambassador, demanded a retraction of the remarks, issued an advisory urging citizens to avoid travel to Japan, suspended Japanese seafood imports and put other trade talks on hold.

Japan’s foreign ministry also summoned China’s ambassador over a Chinese consul general who called to “cut off” Japanese Prime Minister Sanae Takaichi’s neck in an online post, which was later removed, and advised its citizens to stay safe in China. 

Both sides increased military signalling, with China stepping up patrols and exercises near Japan while Tokyo scrambled jets and monitored PLA activity.

On the other hand, in “solidarity” with Japan, Taiwan’s government lifted all remaining restrictions on Japanese food imports imposed after Fukushima, and President Lai Ching-te urged Taiwanese to eat Japanese-sourced sushi and buy Japanese products, sharing images of his own sushi meal to encourage “sushi diplomacy”.

The US remains the foremost guarantor of Taiwan’s security. Its role under President Donald Trump, however, is changing. Since his election campaign, Trump has been critical of Taiwan. He accused the island of stealing the US chip industry and demanded an unrealistic increase in the defence budget to 10% of GDP.

Unlike his predecessor Joe Biden, who on four separate occasions stated that the US would intervene if China attacked Taiwan, Trump adopted a cautious and pragmatic approach.

During the current Sino-Japanese rupture, Trump played a reconciliatory role and showed no sign of tilt. In his phone call with China’s President Xi Jinping on 24 November, he listened to Xi’s perspective that Taiwan’s return to China was a leftover agenda of the post-war international order. A few hours later, Trump advised Takaichi over the phone not to provoke Beijing regarding Taiwan’s sovereignty — although the Japanese side denied that this had occurred during the conversation. The Sino-Japanese tension, which Trump was trying to dissipate, was, in fact, inadvertently benefiting Taiwan by bringing Japan closer to it.

Perhaps sensing Trump’s changing moods, Lai tried to assure him through his article in The Washington Post that Taiwan was acting on his advice to increase its defence budget and purchase more US weapons to benefit the US defence industrial complex.

A sense of urgency about defence modernisation within Lai’s government and Taiwan’s strategic community is discernible. Whether this urgency stems from the DPP’s domestic politics of an election campaign agenda to demonstrate “resolve" to China,  from concerns over President Trump’s unpredictable policies as discussed above, or from assessments that China is serious to invade Taiwan by around 2027, this has shaped the DPP’s defence strategy around three main components: increased resource allocation, weapons procurement both externally and internally, and a comprehensive all-out defence approach.

First, in addition to the proposed additional defence budget, the Lai government has planned to raise total defence spending in 2026 to around 3.3% of GDP, with an ultimate goal of 5% by 2030.

Second, Lai’s government intends to acquire large quantities of advanced air- and missile-defence systems, unmanned platforms and precision-guided munitions from the US and other partners. These, coupled with mainly indigenous capabilities such as Hsiung Feng anti-ship missiles, extended-range Sky Bow interceptors, and mass-produced loitering munitions and small unmanned aerial vehicles (UAVs), will all be integrated with artificial intelligence (AI) technologies. The ultimate objective is to build a so-called “Taiwan Dome" (T-Dome) — a multi-layered, island-wide air and missile defence network. This would, according to Taiwan’s defence experts, provide a more multi-layered, resilient and asymmetric defence potentially able to blunt the first strike and impose high costs on the Chinese forces, if they invaded. 

The third part of the strategy is to mobilise reservists and adopt an "all-out defence" approach, using civilian infrastructure and local governments as rehearsed during the 2025 Han Kuang exercise and associated "urban resilience” drills. These steps are apparently well articulated; however, their actual effectiveness remains inherently uncertain, as is the case with any plan for war. 

Compared to the past, the defence modernisation being introduced by the current Lai-led DPP government is transformative in nature. The allocation of substantial resources has provided a foundation, while shifts toward asymmetric and multi-layered capabilities, whole-of-government and whole-of-society “all-out defence" planning, and accelerated acquisition of advanced and indigenous systems are reshaping Taiwan from a platform-centric force into a more agile and resilient deterrent posture.

The current defence modernisation largely depends on Taiwan’s economy and the DPP’s rule. As the AI boom keeps Taiwan’s economy strong, defence spending faces no short-term limits. Whether Taiwan can maintain this in the long run remains a question. Second, and most importantly, the two dominant political parties, the DPP and KMT, have very different perspectives toward China. The KMT does not regard China as a main threat and instead favours cross-border communication. If the DPP government loses power in the future, changes in threat perception as well as in defence strategies are likely to occur.

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