What to do when the countries around you move up the value chain? Taiwan’s new government must find out fast. Finbarr Bermingham reports.
Many of those who grew up in the west through the 1980s and 90s will be familiar with the ‘Made in Taiwan’ logo which adorned plastic toys, bicycles, textiles and a huge number of early home computing products. For a country that is between Belgium and the Netherlands in terms of size, Taiwan’s omnipotence was remarkable.
A couple of generations later, and the country remains extremely reliant on exports – but they aren’t the growth engine of the economy they once were. Taiwan is now the world’s 19th largest trading nation, ahead of India, Australia and Brazil. And while many toss it into the “Asian tigers” grouping used to depict the exporting powerhouses of East Asia, Taiwan’s exports dependence dwarfs even its local peers.
Japan, China and South Korea’s dependence on foreign trade in 2015 (calculated by adding total imports and exports, then dividing by GDP) was 32%, 41% and 80% respectively. Taiwan’s trade dependency, on the other hand, is 110%; an astonishing statistic. It means that when trade suffers, the impact resonates throughout the island nation – which is exactly what’s happening now.
2015 was the worst year for Taiwanese trade since the global financial crisis. The total value of its merchandise trade dropped 13%, with exports dropping 10% and 15% respectively. April delivered further bad news, when exports dropped for the 15th month in succession (double-digit export contraction has become the norm across Asia this year, alas).
Energy prices are a factor here: while Taiwan is an importer of energy, it also exports a substantial volume of plastic and petrochemical-based goods, the prices of which have taken a hit over the past two years. But inarguably, the greatest challenge facing Taiwan currently is a macroeconomic one, which is almost entirely out of its hands. “Mainland China and Hong Kong are now Taiwan’s largest trade partner, taking more than 38% of Taiwan’s exports. In 2015, Taiwan’s export to China and Hong Kong dropped 13% and 11%, respectively. In the first quarter of 2016, Taiwan’s exports to China and Hong Kong dropped 17% and 14%, respectively. Taiwan’s exports to China may continue to drop on a yearly basis. The plunge in Taiwan exports can be attributed to China’s economic slowdown,” Kate Chen, an analyst at the Taiwan External Trade Development Council (Taitra), tells GTR.
Another problem stems from the island’s noisy neighbour. China’s industrial development means that it now represents competition for some of Taiwan’s high-tech exports, where it previously provided a huge export market for the products.
“A lot of Chinese companies are moving up the value chain and are competing on the kinds of goods that Taiwan used to sell to China. High-end microchips, etc. Taiwanese companies are suffering as a result of this,” says Gareth Leather, Asia analyst at Capital Economics, emphasising that the problems from China are certainly grave, but that the fundamental issues with Taiwan’s trade economy are structural.
“It’s tricky because what Taiwan needs, given the rising competition from China, which is unlikely to go away, is wholesale industrial restructuring, which is not easy to do overnight: it will take a long time. Even if you have the right policies in place, it’s going to be a struggle for them,” Leather tells GTR.
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Over the eight years the Kuomintang (KMT) held power in Taiwan, relations grew closer. Political tensions eased and the pair became close trading partners (although Leather says that contrary to popular belief, the share of GDP taken by trade with China actually declined over the two terms). This thawing culminated in the signing of the Economic Co-operation Framework Agreement (ECFA) in 2010, which reduced tariffs bilaterally and which was hailed as the most significant agreement between the two countries since the acrimonious split in 1949.
The KMT was ousted in an election in January 2016, with Tsai Ing-wen of the Democratic Progressive Party (DPP) voted in as president, assuming the reins at the end of May. Tsai ran on a pro-independence ticket and spoke out against the ECFA and in favour of diversifying Taiwan’s trading partners. Fortunately for her, this correlates with the advice being given to the incoming Tsai by many respected analysts.
Win Lu, the head of financial services at KMPG Taiwan, tells GTR that the new government needs to pursue stronger relations with the Asean nations, and that the government should encourage Taiwanese manufacturers to follow their Korean and Japanese counterparts in moving their production hubs from China to the trading bloc. Again, rather fortuitously, the government has come at a time when there is another trading bloc being negotiated that is very open to including it as a member: the TPP. The American Chamber of Commerce in Taipei is lobbying hard for Taiwan to be included in the world’s biggest trade deal, with the Taiwanese government doing the same. Op-eds have appeared in the US financial press, authored by US or Taiwanese policymakers, calling for its membership in the second round of TPP entrants (other possibilities include South Korea).
Elsewhere in this supplement, you can read about the potential benefits of the TPP for Vietnam, a country significantly further back in its development than Taiwan. Indonesia has voiced an interest, but Taiwan’s market economy makes it a more realistic candidate and one which should gain the support of other members without too much hassle.
For a country that has few trade agreements in place (ECFA, along with deals with Singapore and New Zealand, are the main ones), TPP comes at a perfect time. Research from the Chung-Hua Institution of Economic Research (CIER) estimates that the TPP would increase Taiwan’s GDP by 2%, create more than 60,000 new jobs, and save around US$1.5bn in duties.
Such studies are rarely accurate, but as Taiwan looks to diversify from China, membership would be crucial. Joshua Meltzer of the Brookings Institute says: “Left out, Taiwan will be harmed by these FTAs’ trade diversion effect – whereby Taiwan’s exports lose out in FTA markets due to increased competition from imports from other FTA partners. The recent successful completion by Korea – a competitor with Taiwan across a range of products – of FTAs with the EU and the US provides a useful example of some of the costs to Taiwan of not participating in these Asian FTAs.”
For the US, onboarding Taiwan to its flagship trade agreement would go some way to strengthening its hand in the region. In April, the Taiwanese government rejected membership of the Asian Infrastructure Investment Bank (AIIB), after China – the main shareholder and controlling power – asked it to apply under the same terms as Hong Kong (China still claims ownership of Taiwan).
“Taiwan would only apply for AIIB membership if we could do it with equality and dignity. We feel very sorry about Mr Jin’s stance that Taiwan should apply for membership under China’s umbrella. It’s completely unacceptable,” said deputy finance minister Wu Tang-chieh at the time.
The incoming government is unlikely to take a more conciliatory tone, which leaves the TPP as the main multilateral option for Taiwan. While it will not act as a panacea for all of Taiwan’s trade woes, it should offer a long-term alternative market – one which is likely to prove much less belligerent and volatile than its old foe to the immediate west.