Taiwan's tea industry started from Ch'ing period. Trade merchants brought in tea plants from Chinese mainland, and produced tea for sale abroad. For more than one hundred years, tea had been mainly for export during the Ch'ing period and Japanese colonial period. In the post-war period, Taiwan experienced rapid economic growth, and tea import increased as income rose. The volume of tea import finally passed export in the 1980s. The development process reflected the changing role of Taiwan in international trade. In this paper, we illustrate the historical process within an framework based on the new institutional economics. We argue that transaction costs affect production decision, therefore market conditions can influence the development of an industry, Once the organization of industry is formed, cannot change easily. Even as the condition of market changes eventually, the pattern of the industry organization prevail, therefore demonstrate the characteristic of "path dependence". With the illustration of the development of Taiwan's tea industry, we explain that in the early period the production of Taiwan's tea industry was for export so that the main course was to reduce transaction costs for the foreign markets. The effort to reduce transaction costs resulted in specialization of certain kinds of tea production. After the war, when local market became the primary driving force for Taiwan's tea industry, tea production specialized in a different fashion. However, when the domestic demand became diversified, the production could not fulfill all kinds of tea demand therefore left the opportunity for tea import.