For Asia Sentinel.

Efforts to reduce dependence on Beijing flag despite rising tensions

By: Jens Kastner

Although Taiwan’s President Tsai Ing-wen is widely being credited for reducing the island’s economic reliance on its increasingly hostile neighbor China, recent official data shows that exactly the opposite is happening.

China’s share of Taiwanese exports inched up to 43.9 percent in 2020 from 40.1 percent in 2019, even as a number of key Taiwanese tech manufacturers, including Innolux, Accton Technology and Quanta Computer have moved production capacity to Taiwan from China in an effort to escape the downside of the US-China trade war. The rise in China’s share at the expense of Japan (6.8 percent, from 7.1 percent), EU (7.6 percent, from 8.4 percent) and ASEAN (15.4 percent, from 16.4 percent) is no small feat, given that Taiwan’s job market and fiscal position rely heavily on outbound shipments of merchandise goods. 

Similarly, whereas Taiwan’s approved inbound foreign direct investment dropped by a steep 20.2 percent year on year in January-November, inbound investment from China rose strongly, by 31.5 percent in the same period. The January-November outbound investment data also indicates a tightening of China’s economic grip on the island, with China-bound far outpacing non-China-bound at 50.4 percent compared to 27.4 percent. 

This trend is accompanied with drastically increased military pressure: the Chinese air force in recent months has daily breached Taiwan’s air defense identification zone. Beijing has also strengthened the legal groundwork for giving legal legitimacy to launch a war, amending its National Defense Law on January 1, widening the scope for using force. 

Taiwan’s government-funded Institute for National Defense and Security Research (INDSR) on its website on January 12 posted its assessment saying that the adding of the phrase „development interests’ in the range of reasons for starting a war is to be seen in the context of the Taiwan Strait, South China Sea, and Diaoyutai (Senkaku) Islands issues, as well as non-traditional threats, overseas interests, and security in space and on the internet. 

The increased export reliance “is partly a story of China’s economic recovery – especially its impressive export growth from over the past year, much of which has been sustained by heightened global electronics demand tied to remote working arrangements,” said Nick Marro, the Economics Intelligence Unit’s (EIU) Hong Kong-based lead analyst for global trade issues, in an interview with Asia Sentinel. 

“Those supply chains are linked very closely with Taiwan, which supplies many of the advanced intermediate componentry that finds its way into finished goods, such as phones, tablets, laptops and TVs, and so of course, higher demand for Chinese goods would naturally translate into higher Chinese demand for Taiwanese inputs,” he added.

Marro went on to predict these dynamics to persist this year as the pandemic continues to rage, and remote arrangements remain a fixture of our daily lives. 

“The big question now, of course, is how comfortable policymakers are with these trends, as heightened cross-Strait tension has reinforced the urgency of economic diversification,” Marro said. 

Under the impression that the U.S.-China trade war must make Taiwan diversify its trade policy away from China, President Tsai in January 2019 launched a three-year program to encourage Taiwanese businesses with operations abroad to repatriate manufacturing and investment. Prior to the Trump administration, she had already been strengthening Taiwan’s ties with South and Southeast Asia to diversify its economy and reduce reliance on China, including by creating the New Southbound Policy in September 2016. 

Tsai in her May 2020 inaugural address emphasized her goal of forging closer international ties in the six strategic sectors biotech and medical technology, national defense and strategic industries, and renewable energy technologies to “transform Taiwan into a critical force in the global economy.”

Meanwhile, China implemented several rounds of regulatory easing for the China-based operations of Taiwanese businesses and the hundreds of thousands of individual Taiwanese citizens who reside in China for work, study, and family obligations. 

“Greater reliance on China risks future political repercussions for Taiwan, particularly at a time when cross-Strait tensions are so elevated,” said the EIU’s Marro.