Taiwan’s Special Defense Budget Bill Passes with Drastic Cuts
Matthew Fulco
Executive Summary:
A $25 billion special defense budget passed Taiwan’s legislature, ensuring funds for U.S. arms purchases but cutting most funding for domestic defense programs, including drones, presented in the government’s original $40 billion proposal.
The cuts were instigated by Kuomintang (KMT) chairwoman Cheng Li-wun and represent a political victory for her faction of the main opposition party, which supports lower defense spending and friendlier ties between Taiwan and the People’s Republic of China (PRC).
Taiwan’s nascent drone sector is set to be heavily impacted, with the government no longer able to place large orders. Firms will have difficulty justifying investment in specialized semiconductors for drones and other research and development overheads due to a lack of clear demand.
U.S. officials have voiced concern ahead of a June visit by Cheng Li-wun that the budget undermines Taiwan’s defense capabilities. Taiwanese voters could also turn against the KMT, as a majority support strengthening national defense.
Taiwan’s Legislative Yuan passed a pared-down version of a special defense budget bill on May 8. The special budget was designed to oppose the rising military threat from the People’s Republic of China (PRC), and boost Taiwan’s indigenous production of asymmetric weapons while providing funds to procure U.S. weapons systems. The revised $25 billion version of the budget—cut from the original $40 billion—focuses exclusively on the purchase of U.S. weapons systems. It removes spending for domestic asymmetric defense systems and related cooperation with the United States (Central News Agency [CNA], May 8).
The stripped-down defense budget is a win for the opposition Kuomintang (KMT) and Taiwan People’s Party (TPP), which together control the legislature. In particular, it is a win for KMT chairwoman Cheng Li-wun (鄭麗文) and her faction, who are skeptics of high military spending and champions of a less confrontational relationship with the PRC (United Daily News [UDN], May 24). It is also a major setback for the incumbent Democratic Progressive Party (DPP) administration, who have launched multiple public appeals to garner support for the full $40 billion package (Office of the President[OOP], Taiwan, February 11). Without restoration of the funding, the country’s fledgling drone industry and related cooperation with the United States will be harmed, auguring ill for Taiwan’s long-term military readiness.
Cheng Li-wun’s Triumph
The biggest winner of the reduced special defense budget is KMT chairwoman Cheng Li-wun, who successfully imposed her PRC accommodationist vision on the legislature. By successfully convincing KMT colleagues to defund Taiwan’s domestic defense sector soon after meeting Chinese leader Xi Jinping in Beijing, where the two jointly condemned Taiwan independence, she is signaling to the PRC that she has the wherewithal to pursue rapid cross-Strait détente (Xinhua, April 10).
Transforming Taiwan into a drone production hub should be a nonpartisan national project. In practice, however, it has largely been driven by the current and preceding DPP administrations (OOP, Taiwan, August 13, 2022; January 28). By slashing billions of dollars in funding from this initiative, Cheng has shown the government of President Lai Ching-te (賴清德) that the KMT, despite not holding the presidency for more than a decade, once again has real political power.
At the same time, by simply getting the budget passed, Cheng has assuaged some of Washington’s most pressing concerns about her party’s commitment to national defense ahead of her June trip to the United States, although significant unease remains. A bipartisan group of 37 U.S. lawmakers sent a letter in February to the leadership of the Legislative Yuan expressing concern that the budget would only be partially funded (U.S. Senate/Pete Ricketts, February 12). Following the budget’s passage, the Congressional Taiwan Caucus said in a statement that it “strengthens Taiwan’s self-defense and reinforces deterrence,” but added that “we encourage the Legislative Yuan to continue working to fully fund Taiwan’s defense priorities” (U.S. House of Representatives/Ami Bera, May 16). American Institute in Taiwan Director Raymond Greene lent public support to the Lai administration’s $40 billion special defense budget in February, indicating that the U.S. government prefers the full special budget versus the curtailed budget (American Institute in Taiwan, January 26).
Cheng and the KMT seem to be calculating that President Donald Trump will be satisfied with the downsized special defense budget because it focuses on procuring U.S. arms, with no significant cuts to those purchases. “For Trump, money is money,” former KMT legislator and media pundit Jaw Shaw-kong (趙少康), a party heavyweight and its 2024 vice presidential candidate, said at a mid-May press conference held by the Taiwan Foreign Correspondents Club (Taipei Times, May 15).
Drone Industry Setback
After several years of brisk expansion, Taiwan’s drone industry has suffered its first serious setback with the sharp cuts to the special defense budget. About one third of the Lai administration’s version of the budget was allocated for domestic defense, including anchor orders for more than 200,000 domestic drones, loitering munitions, and surveillance unmanned aerial vehicles (UAVs). It also included $2 billion for joint Taiwan–U.S. drone equipment procurement and research and development. All that funding has been cut.
Taiwan needs significant domestic procurement—which the military could provide—to scale up the drone industry and develop a more complete supply chain. Even though Taiwan has world-leading semiconductor fabrication capabilities, the current domestic market is too small to justify the high R&D costs for specialized drone chips. If Taiwan wants leading firms like TSMC or UMC to produce specific chips for UAVs, the orders must be big. Chen Ping-hui (陳炳煇), co-convener of the Ministry of Economic Affairs’ Drone Expert Panel, noted “they won’t take the job unless you place an order for at least 500,000 units” (你沒有50萬顆他不會幫你做) (PTS Taiwan, May 13).
There are foreboding implications for Taiwan’s long-term defense readiness. The state-backed Research Institute for Democracy, Society, and Emerging Technology (DSET) think tank notes that even if funding is eventually restored through the annual budget cycle, Taiwan’s drone sector “would be forced into a near two-year standstill,” which could adversely affect its competitiveness in key export markets (The Diplomat, May 18). Weaker unmanned systems capabilities would hinder Taiwan’s ability to defend itself against a PRC invasion (Mirror Daily, May 22). The entire Hellscape strategy for Taiwan’s defense proposed by the U.S. Department of Defense rests on the Taiwanese military’s ability to procure drones in large numbers (Center for a New American Security, February 26).
The cuts also target other aspects of Taiwan’s military readiness. These include provisions for the indigenous development of “Strong Bow” medium-range anti-ballistic missiles (強弓中層反彈道飛彈), alongside other missile and drone defense programs. This complicates efforts to develop a “Taiwan Dome” (臺灣之盾), the island’s proposed layered air defense system. Other notable cuts have come for Intelligence, Surveillance, and Reconnaissance (ISR) capabilities, as well as peacetime munitions production, leading to questions regarding the availability of Taiwan’s munitions for everyday training needs (Executive Yuan, May 14; China Brief, May 29).
The KMT has not provided persuasive reasons for its defunding of the nascent drone industry. Legislator Ma Wen-chun (馬文君), for instance, has criticized the performance of domestic drones and how the military certifies them, without providing many specifics. When pressed on why the KMT defunded domestic defense, she responded by saying, “The true harm [to Taiwan’s military readiness] lies in wasteful expenditure of the defense budget” (浪費國防預算才是真正的傷害) (CNA, May 18).
Risks for the KMT
The KMT’s drastic slashing of the special defense budget entails several political risks. On the one hand, the cuts to the drone industry will heavily impact municipalities governed by the KMT. An analysis by the DPP caucus in the Legislative Yuan found that of Taiwan’s 267 drone manufacturers, more than 200 are based in cities or counties under KMT control (Business Today, May 22).
The KMT also risks voter backlash given widespread support for strengthening national defense. About 62 percent of voters expressed support for the special defense budget in a recent mobile phone survey conducted by a think tank affiliated with Taiwan’s Ministry of National Defense (Institute for National Defense and Security Research, May 14). On May 24, several human rights and pro-independence civil society groups organized a rally in Taipei City to protest reduced defense spending. The organizers estimate the turnout was 8,000 (Liberty Times, May 23).
Conclusion
Led by chairwoman Cheng Li-wun, the KMT and its TPP allies sharply cut Taiwan’s special defense budget. This strategy aims to defund the country’s nascent drone industry, that has been supported by DPP policies and that the KMT and TPP see as wasteful. Given opposition control of the Legislative Yuan, the Lai administration has limited options to push back before the next elections in January 2028.
Fresh from her meeting with Xi Jinping in Beijing and preparing for a U.S. visit, Cheng believes she has the wind at her back. However, both the Trump administration and Congress are wary of the cuts to domestic defense production, which Washington sees as crucial to Taiwan’s ability to deter PRC aggression (U.S. Senate/ Foreign Relations Committee, May 8; Taipei Times, May 10).
Cheng will face a skeptical U.S. audience when she visits in early June. She will have to tread carefully and be open to adjusting her party’s stance on defense spending. Otherwise, the KMT is unlikely to be seen as a reliable partner in Washington, which will have implications for the party’s prospects in the 2028 presidential election.
This article originally appeared in China Brief Notes. Check it out here!
Matthew Fulco is a journalist and geopolitical analyst. He worked in Taipei from 2014–2022 and Shanghai from 2009–2014, and is now based in the United States. He formerly served as a Taiwan Contributor for the Economist Intelligence Unit and his writing has frequently appeared in The Japan Times and AmCham Taiwan’s Taiwan Business Topics magazine.