New investments from US, Taiwan bring optimism to Palau in 2026

By James C. Pearce

Palau had the world’s fifth-smallest economy in 2025, with a GDP of $333 million. This is a record low for the archipelago of 18,000 people.

The end-of-year figures showed that Pacific countries accounted for seven of the 10 poorest economies worldwide. Tuvalu had the smallest, followed by Nauru, the Marshall Islands, Kiribati, Micronesia, and Tonga, according to the Asian Development Bank and the International Monetary Fund.

It is perfectly normal for small island nations and archipelagos in the Pacific and Caribbean to be at the lower end of global GDP rankings. A volatile mix of geography, history and external assistance affected the size of its national economy.

Palau experienced a particularly adverse year due to its overreliance on tourism.

The new year brings optimism as the U.S. and Taiwan are both set to make significant investments. However, these are politically delicate. First, Taiwan has increased investment and business cooperation and has proposed the construction of a large-scale luxury golf course.

Second, President Surangel Whipps Jr. accepted Washington’s proposal to relocate unwanted aliens to the Pacific island nation in exchange for supplemental aid and a new hospital.

Under the newly signed memorandum of understanding, Palau will receive $7.5 million in U.S. funding to defray the costs of hosting up to 75 third-country nationals, particularly for public services and infrastructure associated with resettlement. It was agreed despite opposition from congressional leaders and the Council of Chiefs.

After a bad 2025, it is hoped these investments and increased cooperation can get the economy moving, even if it puts Palau in the center of controversy.

Tourism, chiefly scuba diving along its world-class reefs, supplies about four-fifths of Palau’s economic output and half of its foreign exchange. This has proven to be its Achilles' heel, as it has been unable to diversify its economy.

The Covid-triggered collapse showed Palau’s economic fragility. Its GDP sank 12 percent in 2021 before rebounding toward an IMF-reported 6.5 percent growth in 2024 and an Asia Development Bank projected 8 percent in 2025. Most of that growth was due to tourism.

Palau is heavily reliant on tourists from Asia. Arrivals began to recover after 2022 and continued through 2025.

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Palau hotels and restaurants were at full capacity during the peak of tourism between 2015 and 2017. However, the following year saw a sharp decline in numbers after the Chinese government blacklisted the Pacific island nation as a tourist destination in late 2017, following its refusal to sever ties with Taiwan and recognize China as a diplomatic ally.

Outside of tourism, government employment accounts for approximately 30 percent of all jobs in the country, a figure roughly in line with other Pacific countries in the bottom 10.

Government jobs tend to pay higher salaries, which is another problem Palau faces. While Palau has one of the Pacific’s highest per-capita incomes ($16,000-17,000 USD), income inequality is particularly acute here.

Construction tied to infrastructure aid, subsistence farming and near-shore fishing round out its economic activity, whilst limited tuna-licence fees and tiny exports leave a chronic trade gap.

Palau has a large marine sanctuary that protects 80 percent of its waters (around 500,000 sq km) from commercial fishing, mining and drilling. The remaining 20 percent is a domestic fishing zone. That limits its potential income and has also put pressure on reef fish with limited tuna supplies.

U.S. grants under the Compact of Free Association remain a critical economic lifeline.

Palau also has a dependence and cushioning for climate-related shock funds. In order to stem its economic decline, Palau has had to expand into other areas.

It is strengthening maritime security with other nations, such as the Philippines. As the westernmost nation in the Pacific, there are fears that the South China Sea could creep right up to its borders and see Palau caught in the crosshairs of a future conflict.

The U.S. is also expanding its military presence in Palau, albeit slowly.

As for the U.S. deportees, the president’s office claimed they can fill gaps in the domestic labor pools and certain occupations. “Palau would have to agree on a case-by-case basis as to individuals who will be arriving in Palau under the arrangement,” the president’s office said. "Each person will be screened through Palau’s national working group, and the government will continue open communication with the OEK, traditional leaders, and the public as implementation proceeds,” it added.

A new hospital will also be built and the deportees-resettlement deal nets more U.S. packages for Palau, including an additional $6 million—on top of the previously granted $20 million—for pension system reform and $2 million for new law enforcement initiatives. The U.S. will also fund a $500,000 initiative to build Palau’s investment screening capacity, vet foreign investments and block those that threaten U.S. military sites and Palau’s sovereignty.

Then, of course, comes Taiwan, whose assistance has been hands-on for decades. Agricultural experts working alongside local communities, medical teams in small clinics, funding for local entrepreneurs and scholarships for students to study in Taiwan are among the ways to not only enhance security cooperation but also economic growth.

China is not to be outdone. Several Chinese businesses have leased land and developed properties near U.S. military sites, ranging from undeveloped land to hotels overlooking the harbor and Palau's main airport. Beijing has promised millions of tourists, provided Palau switches its allegiance from Taiwan.

But when it comes to tourism, Palau is digging its heels, both on ecotourism and supporting Taiwan.

The Palauan government tapped a Taiwanese company to enhance Palau’s brand as a premier marine ecotourism destination. It is also banking on the worsening climate to boost ecotourism next year.

The government of Palau did not respond to requests for comment on this piece.

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