Wednesday, February 26, 2020

Taiwan’s new place in the world

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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…

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