The next groups of Europeans to come to Taiwan were the Dutch and the Spanish. In 1622, the Dutch East India Company established a military base on the Pescadores Islands (Penghu), but were forced out by the Chinese and moved to the much larger island of Taiwan in 1624, where they established a colonial capital and ruled for the next 38 years. Two years later, the Spanish also occupied northern Taiwan to counter-balance the Dutch expansion, building Keelung and Danshuei as their bases for trade and Christian missions, but were ousted by the Dutch in 1642.

The Dutch carried out an economic policy of mercantilism. Taiwan became a trading and transshipment center for goods between a number of areas, such as Japan, China, Batavia (Jakarta), Persia, and Holland. To increase the trade surplus, the Dutch induced the Chinese to migrate to Taiwan in the 1630s to grow sugarcane and rice, and thus initiated an agricultural revolution. The amount of land under cultivation was greatly increased, and sugar and rice were the principal products grown until recent years.

Taiwan was a Dutch entrepot for trading among China, Japan, Southeast Asia, and Europe. Taiwan's exports to China included rattan, deer hides, deer horns, and medical herbs. The island's imports from China included raw silk, silk textiles, porcelain, and medicine, but most products were re-exported either to Japan, Batavia, or Europe. Imports to Taiwan from Batavia included spices, amber, tin, lead, cotton, and opium, most of which were traded to China or Japan. Before the Dutch arrived, the Chinese on Taiwan had enjoyed free trade with the Japanese without taxation, trading mainly silk and deer hides in exchange for silver. Continuing the same trade, the Dutch added a new item, sugar. Taiwan turned into one of the most profitable branches of the Dutch East India Company in the Far East, accounting for 26 percent of the company's world profits in 1649.

In addition to economic development, Dutch missionaries were also active in converting Taiwan's population to Christianity. Protestant missionaries established schools where religion and the Dutch language were taught. By 1659, the Dutch had converted to Christianity more than 6,078 out of 10,109 inhabitants in their parishes.

Settlement by Han people in Taiwan dates back to the 16th century, but large-scale immigration did not begin until the 1630s, when the Dutch started developing Taiwan's agriculture. While the Dutch were colonizing Taiwan, China was experiencing civil wars, followed by the invasion of the Manchus, who eventually established the Cing dynasty in 1644. There was resistance in the south until 1661, and pirates repeatedly ravaged coastal towns. The endless wars, famines, and robberies severely threatened the peaceful life of average Chinese. Consequently, thousands of people, especially from the coastal provinces of Fuchien (Fujian) and Guangdong, migrated across the Taiwan Strait to Taiwan. About 40,000 Chinese were living in Taiwan in 1662.

Mass migration to Taiwan changed the character of the island. Recognizing the urgent need for industrious farmers, the Dutch employed the new immigrants, providing them with oxen, seeds, and implements. Because all land in these areas belonged to the Dutch East India Company, the Dutch were able to profit enormously from collecting heavy rents from the Chinese tenants. Although settlers petitioned to be allowed to buy and own the land they were tilling, so that they could pay taxes instead of rent, the Dutch rulers refused. Unemployment, mistreatment by the colonial rulers and collection of a new head tax increased tensions. In September 1652, frustrated Chinese farmers revolted against the Dutch. The rebellions were violently suppressed by the Dutch, who slaughtered about 3,000 peasants.

As Manchu troops poured into northern China, many Ming loyalists escaped to the south, where they resisted the foreign invasion for over 20 years. One of the most celebrated resistance fighters was Jheng Cheng-gong, also known as Koxinga. Son of an international trader and pirate Jheng Jhih-long and his Japanese wife, Jheng forced the Dutch out in 1662 and made Taiwan his base for counter-attacking the Manchus on the mainland until 1683.

Jheng Cheng-gong and his son built the first Confucian temple in Taiwan, set up schools, and followed Chinese laws and customs. During their rule, a steady stream of Chinese continued to arrive in Taiwan and settlements sprang up in increasing numbers along the western coast. Agriculture developed primarily in the southern part of the island. Industry consisted of refining sugar, tile manufacturing, and salt production. Trade, which had begun under the Dutch, continued with China, Japan, and Southeast Asian countries.

Jheng's son and grandson ruled Taiwan for 22 years before surrendering control of the island to the Manchus in 1683, following military defeat. Taiwan was ruled by the Manchus for 212 years until 1895.

Under Cing rule, agriculture expanded northward and southward, and increasing numbers of Chinese left the mainland to settle on the island, despite laws restricting emigration. Rice and sugar, first developed under the Dutch rule, were cultivated all over the island and exported to China, Japan, and even Australia for some time.

Four ports in Taiwan were forcibly opened to foreign trade following the Treaty of Tianjin in 1858. Tea and camphor, which had large markets in the world, became major cash crops for earning foreign exchange. Being the production area for new crops, as well as coal, northern Taiwan surpassed southern Taiwan as the island's new economic center, with Taipei superseding Tainan as the new political capital. However, conflicts between the immigrants and the aborigines intensified when the Chinese encroached on the mountainous areas to produce tea and camphor.

Taiwan's resources attracted international attention, and some countries even attempted to occupy Taiwan. Japan occupied southern Taiwan for a short period in 1874, and the French attacked northern Taiwan in 1884-85.

Foreign interest in the island made the Cing court realize Taiwan's importance as a gateway to the seven provinces along China's southeastern coast. Consequently, throughout the 1870s and 1880s, a number of progressive and ambitious Cing officials who were sent to Taiwan succeeded in strengthening defenses, exploiting coal, and constructing telegraph lines between central and southern Taiwan and Fujian Province across the Taiwan Strait. In 1885, the Cing dynasty made Taiwan its 22nd province. During the more than two centuries of Cing rule, Taiwan was fully integrated into the Chinese empire, with numerous Taiwanese attending traditional academies and passing civil service examinations.

Achievements by the Cing administration were disrupted when Taiwan was ceded to Japan in 1895 under the Treaty of Shimonoseki. When Japanese troops entered Taipei on June 6 of that year, armed resistance broke out. By the time resistance was broken in October, over 7,000 Chinese soldiers had been killed and civilian casualties numbered in the thousands.

During its 50-year rule of Taiwan, Japan developed programs designed to supply the Japanese empire with agricultural products, create demand for Japanese industrial products, and provide living space for emigrants from an increasingly overpopulated home country. The colonial government eventually introduced an industrialization program to build Taiwan as a base for its "South Forward Policy" of colonial expansion into Southeast Asia.

The period of Japanese colonization can be roughly divided into three periods. The first, from 1895 to 1918, involved establishing administrative mechanisms and suppressing armed resistance by local Chinese and indigenous peoples. One of the largest revolts, the Tapani Incident of 1915, resulted in the deaths of several thousand Taiwanese. During this period, the Japanese introduced strict police controls, carried out a thorough land survey, standardized measurements and currencies, monopolized the manufacture and sale of important products (such as salt, sugar, and pineapple), began collecting census data, and made an ethnological study of the island's indigenous peoples.

During the second period from 1918 to 1937, Japan consolidated its hold on Taiwan. Compulsory Japanese education and cultural assimilation were emphasized, while economic development was promoted to transform the island into a secure base from which Japan could launch its southward aggression.

The third period, which started in 1937 and ended in 1945, included the naturalization of Taiwan residents as Japanese. The Chinese on Taiwan were forced to deny their heritage by adopting Japanese names, wearing Japanese-style clothing, eating Japanese food, and observing Japanese religious rites. Chinese dialects and customs were discouraged and Chinese language schools closed. Heavy industry and foreign trade was strongly emphasized during this period, coinciding with the requirements of the Second World War.

Japanese development of Taiwan as a colony was extensive in areas such as railroads, agricultural research and development, public health, banking, education and literacy, cooperatives, and business.

Transportation Infrastructure: Recognizing the importance of transportation to Taiwan's economy, the colonial rulers constructed 2,857 miles of railroad lines, modernized harbors, and built 2,500 miles of highways.

Irrigation and Agriculture: Irrigation was considered the key to further developing Taiwan's agriculture, which was plagued by uneven rainfall. Concrete dams, reservoirs, and large aqueducts formed an extensive irrigation network that brought thousands of acres of poor farmland into production. Arable land for rice production increased by more than 74 percent and sugar cane, by 30 percent. The enormous increase in sugarcane production is considered to be one of the most spectacular achievements of the Japanese colonial period. From 1905-1935, the area planted in sugar cane increased 500 percent. By 1939, Taiwan was the world's seventh largest sugar producer.

Industry: The Japanese policy of an agricultural Taiwan and industrial Japan did not require significant development of Taiwan's industry. Factories built during the period were small95 percent had fewer than 30 workers. Finally, during World War II, military necessity led the Japanese to develop strategic industries in Taiwan, including aluminum, chemicals, oil refining, metals, and shipbuilding. Around 90 percent of Taiwan's foreign trade was with Japan, mostly agricultural.

Hydroelectric Power: Heavy rainfall and swift mountain streams on the island made hydroelectric power attractive to colonial administrators. In the 1930s, a large-scale project utilizing Sun Moon Lake and the Jhuoshuei River greatly increased electric power, thus boosting aluminum, chemical, and steel alloy production.

Despite Japanese successes in transforming Taiwan into a society that was economically more modern than its neighbors, alien rule came at a heavy cost. Economic development was primarily for the benefit of Japan, not Taiwan. The Taiwanese were denied self-government and democracy and kept out of high positions at all levels of society. People were taught to see themselves as Japanese instead of Chinese, and in fact, during the Second World War, tens of thousands joined the Japanese military. Liberation from colonial rule came only with the defeat of Japan in 1945 and Taiwan's return to China.

The first years after the Japanese surrender were not smooth and resulted in one of Taiwan's greatest tragedies, the February 28 Incident. The first troops sent to take over Taiwan were poorly trained and undisciplined, while the major fighting component of Nationalist troops remained on the Chinese mainland battling the communist rebellion. Most importantly, high inflation, shortages of daily necessities, unequal treatment by the Nationalist troops, unjust appropriation of personal property, and unchecked profiteering angered Taiwanese natives.

The tension finally exploded on February 28, 1947, following an incident in Taipei where an elderly woman was beaten while resisting arrest for selling untaxed cigarettes in Taipei, and a bystander was shot in the commotion. Crowds rioted across the island, seizing police stations, arms, and radio stations and killing a number of mainlanders. In the succeeding months, after the arrival of troop reinforcements from the mainland, Governor Chen Yi proceeded to arrest and execute thousands of people who had demanded government reforms. Chen Yi was discharged from his governor post, and later was tried and executed in 1950 for conspiring with the Communists to overthrow the ROC government while serving as governor of Zhejiang Province. The February 28 Incident has been a source of tension between Taiwanese and those who came from the mainland after 1945.