Taiwan has a dynamic capitalist economy with gradually decreasing government guidance of investment and foreign trade.
Exports, led by electronics, machinery, and petrochemicals have provided the primary impetus for economic development.
This heavy dependence on exports exposes the economy to fluctuations in world demand.
In 2009, Taiwan's GDP contracted 1.8%, due primarily to a 13.1% year-on-year decline in exports.
In 2010 GDP grew 10.7%, as exports returned to the level of previous years, and in 2011, grew 4.0%.
In 2012, however, growth fell to 1.3%, because of softening global demand. Taiwan's diplomatic isolation, low birth rate, and rapidly aging population are major long-term challenges.
Free trade agreements have proliferated in East Asia over the past several years, but except for the landmark Economic Cooperation Framework Agreement (ECFA) signed with China in June 2010, so far Taiwan has been excluded from this greater economic integration in part because of its diplomatic status.
Negotiations continue on such follow-on components of ECFA regarding trade in goods and services. The MA administration has said that the ECFA will serve as a stepping stone toward trade pacts with other key trade partners, which Taiwan subsequently launched with Singapore and New Zealand.
Taiwan's Total Fertility rate of just over one child per woman is among the lowest in the world, raising the prospect of future labor shortages, falling domestic demand, and declining tax revenues.
Taiwan's population is aging quickly, with the number of people over 65 accounting for 11.2% of the island's total population as of 2012.
The island runs a large trade surplus largely because of its surplus with China, and its foreign reserves are the world's fifth largest, behind China, Japan, Saudi Arabia, and Russia.
In 2006 China overtook the US to become Taiwan's second-largest source of imports after Japan. China is also the island's number one destination for foreign direct investment.
Three financial memorandums of understanding, covering banking, securities, and insurance, took effect in mid-January 2010, opening the island to greater investments from the mainland's financial firms and institutional investors, and providing new opportunities for Taiwan financial firms to operate in China.
In August 2012, Taiwan Central Bank signed a memorandum of understanding on cross-Strait currency settlement with its Chinese counterpart.
The MOU allows for the direct settlement of Chinese RMB and the New Taiwan dollar across the Strait, which could help develop Taiwan into a local RMB hub.
Closer economic links with the mainland bring greater opportunities for the Taiwan economy, but also poses new challenges as the island becomes more economically dependent on China while political differences remain unresolved.