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Published Date: 2019-12-25
It has been
another challenging year for Taiwan filled with both excitement and concern.
Two key factors shaped the development of 2019 were the US–China trade war and
the upcoming Taiwan presidential election.
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. 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. 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.
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. Taiwan’s overall export growth stands at –3.4 per cent as of
October 2019, with exports to the United States increasing by over 23 per cent
and exports to China declining by 32 per cent. By year’s end, the United States
is expected to surpass ASEAN to become Taiwan’s second largest trade partner
behind 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 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: re-configuration of the supply network impacts not
only the movement of capital and manufacturing equipment but also workers and
suppliers. 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 Taiwan businesses.
The rejuvenated
trade relationship with the United States 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
United States uses to classify states as potential currency manipulators.
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 United States 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 the US
Indo-Pacific Strategy.
These
developments, in addition to other initiatives, angered Beijing, causing injury
to Taiwan–China relations. 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.
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, Chung-Hua
Institution for Economic Research (CIER).
This article is
part of an EAF special feature series on 2019 in review and the year ahead.