Taiwan’s Economic Momentum for Regeneration

Uncertainties abound regarding trade relations between the United States and China, as the causes of tensions range from frustration over trade imbalances to grievances about adhering to the rule of law. But equally unsettling is the fact that it is difficult to predict which side may actually emerge victorious in the end. In fact, the question may well be which country will be able to hedge its losses more rather than coming out ahead in the end. What is certain, though, is that while the world’s two largest economies remain at loggerheads, new opportunities are opening up across the Asia-Pacific region to attract foreign capital that wants to avoid the uncertainties of the U.S.-China friction. So far, the biggest gains of the trade war can be seen in Southeast Asia, but Taiwan may well benefit the most as it also makes strides politically.

China’s allure as an investment destination had already been losing some of its luster for manufacturers focused primarily on lower costs

To be sure, China’s allure as an investment destination had already been losing some of its luster for manufacturers focused primarily on lower costs, as countries including Vietnam, Indonesia, and Malaysia have increasingly became more competitive. The escalating tariff dispute that labels goods made in China as Chinese in spite of being manufactured by a non-Chinese company has only increased the pace of exodus of U.S. companies large and small from the PRC. The fact that import of Chinese goods into the United States fell by 12 percent during the first six months of this year may seemingly be good news for the U.S. economy, but it has not led to a repatriation of U.S. offshore investments back into the United States. Rather, the need for exporters to reduce the risks of their supply chain to the uncertainties of the trade war with China has only increased the allure of countries that have been spared the imposition of punitive tariffs, which has not simply been a boon for Southeast Asia, but also a positive development for the Taiwanese economy, at least in the near term.

Taiwan’s efforts to bring its own companies back to its shores over the decade have had mixed results. But it is actually the escalation of imposing punitive tariffs by Washington on Chinese goods that has increased the attractiveness of Taiwan as an operational hub, especially for Taiwanese investors. According to Taiwan’s Ministry of Economic Affairs, Taiwanese companies have pledged to invest over $19 billion, or 600 billion Taiwanese dollars by the end of September.  To date, at least 123 Taiwanese companies are planning to reinvest in Taiwan by retreating from the PRC, and collectively, they have already exceeded the goal of 500 billion Taiwanese dollars that President Tsai Ing-wen set in luring Taiwanese capital back to the ROC.

But concerns about escalating tariff barriers is not the only factor driving asset allocation into Taiwan.

But concerns about escalating tariff barriers is not the only factor driving asset allocation into Taiwan. The heated and most likely far more long-lasting rivalry over technological superiority between Washington and Beijing is also adding further to Taiwan’s economic momentum. The heated competition over 5G technology and U.S. efforts to be less dependent, if not compete directly with China, in new telecommunications and data networks is increasing the allure of Taiwan as an investment destination committed not only to free markets, but to the rule of law and privacy protection in particular. As Taiwan seeks to build on its competitive advantages in the technology sector as a major manufacturer of semiconductors, the government’s commitment to facilitating the growth of 5G will be a cornerstone of ensuring not only its longer-term growth, but also the role it plays in setting standards in global technology governance rules.

Prospects for Taiwan’s economy look better now than before the flaring up of the U.S.-China trade war, at least in the near term. But the allure of Taiwan as an investment destination is not without risk. Firstly, there is the possibility of a swift end to the tariff escalation between the United States and China, which could also lead to an abrupt end to onshoring of investments back to Taiwan. Secondly, the prospect of the White House imposing punitive tariffs against Taiwanese goods as it has done against goods made in China cannot be ruled out, especially if Taiwan succeeds in rapidly boosting its exports to the United States. The most worrisome factor, however, is the possibility of Taiwan not being able to deliver on expectations of the new investors, from securing a highly educated workforce to taking steps against energy shortages. Still, there is no doubt that the trade wars have opened a new opportunity for Taiwan to reinvigorate its economy. Coupled with greater political attention being given to Taiwan as a result of growing concerns about Hong Kong’s challenge in dealing with Chinese political pressure, the window for Taipei to carve out a greater role for itself in the rapidly evolving global economy is open, even if it may be for a limited time.

Image: tingyaoh/Pixabay

Follow Shihoko Goto, deputy director for geoeconomics and senior associate for Northeast Asia, on Twitter @GotoEastAsia.

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