Taiwan’s
remarkable economic performance in 2020 is something to celebrate given most
countries globally plunged into recession because of the Covid-19 pandemic.
Taiwan’s GDP increased by 3.11% in 2020 compared to the global average of
negative 4.5%. It is the first time in three decades that Taiwan has achieved a
growth rate greater than China’s.
But political
debate broke out over one key element that enabled this achievement. Taiwan’s
GDP growth in 2020 was mainly underpinned by an increased trade surplus and
domestic investment. Exports increased by a record-breaking 4.9% in 2020, with
China (Hong Kong included) receiving close to 44% of Taiwan’s exports, a 12%
increase from 2019. This makes China Taiwan’s single most important trading
partner and a key source of trade surplus.
Many in Taiwan
argue that trade dependence on China indicates that the current Democratic
Progressive Party (DPP) government’s approach — keeping China at arms length
while pursuing a closer alliance with the United States — is just political
rhetoric. Taiwan, after all, needs China for economic prosperity.
There are calls to
address this high export concentration issue based on economic security
concerns. One key risk is that this structure may increase China’s ability to
coerce Taiwan for political benefit. China’s decisions in January and April
2021 to block Taiwan’s pork and pineapple imports based on arbitrary quarantine
reasons are recent examples that support this argument.
The key question
is whether trade concentration represents low resilience levels,
over-dependence, and other economic security risks that Taiwan faces, or to the
contrary, is an indication of China’s “supplier dependency” on Taiwan.
The top five
export product categories from Taiwan to China measured in export value are
electrical machinery and equipment and parts; machinery, mechanical appliances,
and computers; optical and other precision instruments and accessories;
plastics and articles; and organic chemicals. Together, they accounted for
86.3% of Taiwan’s exports to China in 2020.
Cross-strait trade
is predominately electrical machinery trade — it accounts for 64% of total
exports. Semiconductors are the most important product item under the
electrical machinery category, accounting for 78% of electrical machinery
exports. As such, the 27% increase in semiconductor exports to China in 2020
was the main factor underpinning the overall increase in exports.
Chinese demand for
semiconductors surged in 2020 because of the growing demand for electronic
consumer products due to the worldwide proliferation of working from home and
home-schooling. The stockpiling strategy of Chinese tech firms, including
Huawei and SMIC, in light of potential U.S. export controls contributed to the
surge of demand as well.
As far as the
danger of economic coercion is concerned, the risk for Taiwan is at this stage
limited. Taking semiconductor trade as an example, China’s current domestic
capacity can only supply somewhere between 15 to 20% of semiconductor demand.
Semiconductors from Taiwan and South Korea are the main sources of supply
underpinning China’s position as the global manufacturing powerhouse for
semiconductor-enabled electronic products.
This “reverse”
dependency structure means that if Beijing were to weaponize semiconductor
trade to coerce Taiwan, it could potentially harm China’s own economic growth
much more than Taiwan’s. The “reverse” dependency structure is one of China’s
primary strategic concerns and was a key driver of China’s semiconductor import
substitution policy created more than 20 years ago.
Taiwan’s current
trade structure suggests that the threat of economic coercion is small. As a
major hub in global supply chains, the future orientation of Taiwan’s trade
relationship with China depends more on other external factors, like the
direction of U.S. policy towards China and supply chain reform.
As reflected in
its Interim National Security Strategic Guidance, the Biden administration has
formally initiated “strategic competition” with China. On the supply chain
restructuring front, the continuing trade war suggests the pressure for
U.S.-based suppliers in China to relocate will remain.
The draft “Strategic
Competition Act of 2021” passed by the U.S. Senate’s Foreign Relations
Committee in April (which was integrated as part of the U.S. Innovation and
Competition Act in June 2021) intends to further accelerate the process by
requesting that U.S. overseas missions facilitate U.S. companies embedded in
global supply chains to relocate outside of China. The Critical Supply Chain
Review ordered by U.S. President Joe Biden aims to reduce dependency on China
and foreign-supplied critical products, in particular semiconductors, by way of
re-establishing U.S.-based production capacity.
For Taiwan, there
are several key implications of this situation.
First, pressure to
diversify supply chains will likely increase for those companies that are
currently located in China with majority U.S. clients. In the long run, both
investment and investment-led trade between Taiwan and China will likely
decline. Taiwan may be able to leverage this situation to secure its position
in the new supply chain.
Second, as all
major economies are pursuing similar “import substitution” policies on
semiconductors, Taiwan’s semiconductor-led exports to China and elsewhere will
likely decline as well. Foundries such as the Taiwan Semiconductor
Manufacturing Company can mitigate these challenges by diversifying production
facilities globally, but the impact on Taiwan’s trade surplus and GDP growth
will be significant.
Instead of
worrying about trade concentration, Taiwan should concentrate on defining
strategies for and finding solutions to these structural changes that are
unfolding rapidly.
Roy C Lee is
Deputy Executive Director at the Taiwan WTO and RTA Center, Chung-Hua
Institution for Economic Research.
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