Commentary: Taiwan is rebalancing its economic relationship from China to the US

Commentary: Taiwan is rebalancing its economic relationship from China to the US

While welcomed by many in Taiwan, the new economic equation will be a delicate pursuit for its next president, says Roy Chun Lee.

Taiwan's President Tsai Ing-wen speaks on the phone with U.S. president-elect Donald Trump at
Taiwan's President Tsai Ing-wen speaks on the phone with US president-elect Donald Trump at her office in Taipei, Taiwan, Dec 3, 2016. (Photo: Taiwan Presidential Office/Handout via REUTERS)

TAIPEI: It has been another challenging year for Taiwan filled with both excitement and concern.

Two key factors that shaped the development of 2019 were the US-China trade war and the upcoming Taiwan presidential election.

READ: Taiwan election race widens as China's big stick diplomacy backfires

In terms of economic performance, the Chung-Hua Institution for Economic Research (CIER) forecasts Taiwan’s GDP growth to be one of the highest in the East Asian region, reaching 2.33 per cent.

While trade performance has declined throughout the year, domestic investment in the manufacturing sector has soared to a historic high, contributing to GDP growth.

HOMECOMING

This outcome can be partly attributed to the US-China trade war. The surge of investment is mainly underpinned by the homecoming of Taiwanese original equipment manufacturing (OEM) companies – that previously used China as their production base – trying to circumvent tariffs for their US clients.

According to government figures, committed investment reached US$27 billion as of December, with US$8.7 billion already realised.

READ: Commentary: America’s strategic China blunder on trade and everything else

Around 70 per cent of this investment is in the information and communication technologies (ICT) sector, followed by electronic machinery, consumer products and chemicals.

With the effect of creating job opportunities as well as new dynamics for economic activities, short-term prospects are looking positive for 2020.

SHIFT IN TRADE

(L-R) Taiwan's presidential candidates Tsai Ing-wen, James Soong Chu-yu and  Han Kuo-yu pose b
(L-R) Taiwan's presidential candidates Tsai Ing-wen, James Soong Chu-yu and Han Kuo-yu pose before first televised election husting in Taipei, Taiwan December 18, 2019. The Central Election Commission/Pool via REUTERS

The upcoming 2020 presidential election has prompted the government to accelerate major decisions on public investment, including the extension of the high-speed rail system to cities that were previously considered economically unviable.

But many critics question feasibility and worry over the lack of transparent impact assessment processes.

Another significant development is the structural change taking place in trade and investment.

READ: Commentary: Fighter jet sales to Taiwan and the complex US-China balance of power

Taiwan’s overall export growth stands at – 3.4 per cent as of October 2019, with exports to the US increasing by over 23 per cent and exports to China declining by 32 per cent.

By year’s end, the US is expected to surpass ASEAN to become Taiwan’s second largest trade partner behind China.

REBALANCING ECONOMICS WITH CHINA

Investment to China – which historically dominated Taiwan’s outbound investment – declined by over 50 per cent by November compared to the same period in 2018, and investment into ICT manufacturing dropped by over 90 per cent.

From a strategic perspective, many have an interest in this outcome as it implies a re-balancing of Taiwan’s economic relationship with China by reducing the level of dependence and integration with the Chinese economy – a long-time goal of the current government.

But re-balancing also bears economic costs: a re-configuration of the supply network impacts not only the movement of capital and manufacturing equipment but also workers and suppliers.

A worker cuts steel plates inside the China Steel Corporation factory in Kaohsiung
A worker cuts steel plates inside the China Steel Corporation factory, in Kaohsiung, southern Taiwan August 26, 2016. (Photo: REUTERS/Tyrone Siu/File Photo)

While Taiwan is the preferred location for many Taiwanese OEM firms, the relative high cost of production means that India, Vietnam, Thailand, Malaysia and other ASEAN countries are often the only feasible option.

Incomplete supply chains and a lack of qualified workers remain top concerns for many Taiwanese businesses.

A NEW EQUATION WITH WASHINGTON

The rejuvenated trade relationship with the US is also not all good news. Taiwan’s trade surplus with the United States reached US$170 billion in October 2019, suggesting that the US$200 billion trade surplus threshold will be surpassed by the end of the year without difficulty.

This is one of the thresholds that the US uses to classify states as potential currency manipulators.

READ: Commentary: How real is the threat of a US-China currency war?

Taiwan already exceeds the other threshold – as the current account surplus is more than 2 per cent of GDP – so the risk for Taiwan to be designated a currency manipulator is increasing.

Nevertheless, the Taiwan-US relationship improved significantly in 2019. The Taiwan Travel Act – that allows bilateral high-level official visits between the US and Taiwan – came into force in 2018.

Both the US House of Representatives and the Senate subsequently passed the Taiwan Allies International Protection and Enhancement Initiative Act of 2019 that instructs the US government to facilitate Taiwan’s meaningful international participation, including in its Indo-Pacific Strategy.

THE CHINA FACTOR

These developments, in addition to other initiatives, angered Beijing, causing injury to Taiwan-China relations.

Chinese President Xi Jinping and Taiwan's leader Tsai Ing-wen
File photos of Chinese President Xi Jinping and Taiwan's leader Tsai Ing-wen. (Photos: AFP/AP)

The Hong Kong protests have seriously undermined the value and credibility of the "One China, Two Systems" policy that China has espoused.

According to Taiwan’s official Mainland Affairs Council’s latest survey in October, over 89 per cent of the population is against this framework in defining the future of cross-strait relations. The China spy story that recently appeared on Australia’s 60 Minutes program added further fuel to the fire.

READ: Commentary: Prospects for China-Taiwan unification? Hear what Taiwanese themselves say

2019 has been a critical year for Taiwan in many regards.

It could be the beginning of a permanent restructuring of the Asia Pacific supply network.

It could also be the beginning of the end of the economic integration between Taiwan and China that has persisted for the past 25 years. Cross-strait relations could also begin to be redefined.

But there are still many uncertainties clouding the decisions regarding the future of Taiwan. Whoever becomes the next president in January 2020 will certainly face a challenging job.

Roy Chun Lee is the Deputy Executive Director of the Taiwan WTO and RTA Center at the Chung-Hua Institution for Economic Research (CIER). This article first appeared on East Asia Forum.

Source: CNA/el

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