Taiwan sees opportunity in US-China trade war but don’t expect a windfall, economists warn

With economic reliance on the mainland for the island for 30 years, any gains amid the trade war are unlikely to bring long-term relief for Taiwan

PUBLISHED : Tuesday, 16 October, 2018, 10:31pm
UPDATED : Wednesday, 17 October, 2018, 3:34pm

As the trade war between China and the United States rages on, some in Taiwan see an economic opportunity – a chance for the self-ruled island to make some gains while the mainland takes a battering.

Taipei was upbeat earlier this month, announcing that at least 40 businesses based on the mainland were planning to relocate to the island, and 30 more could be looking to Southeast Asia as they try to avoid getting caught in the crossfire of the escalating trade conflict.

But economists and analysts have questioned how much Taiwan could really gain from any relocations, given the long-term operations of Taiwanese companies on the mainland.

Worse, they said, if US President Donald Trump pushes through yet another round of tariffs on US$267 billion worth of Chinese imports, the island’s economy would suffer as a large proportion of its products manufactured on the mainland are shipped to the US.

Emile Chang, who heads the Taiwan economics ministry’s investment bureau, stopped short of naming the mainland-based Taiwanese firms that have expressed interest in relocating, saying the government needed to keep them from being harassed by Beijing.

But he did say they included textile, rubber, electronic components, and auto parts manufacturers, among others.

Local media outlets have speculated that Quanta Computer could shift some of its large production base on the mainland back to Taiwan, while Delta Electronics, which supplies power components to Apple, could be pressured by its clients to accelerate plans to move its production outside China – possibly to the Philippines.

Deep links

The island’s economy has ironically been deeply linked to the mainland since Chen Shui-bian took office in 2000 as Taiwan’s first president from the independence-leaning Democratic Progressive party.

If the government wants mainland-based businesses to return to Taiwan, it must address the problems of land, water, power, workforce and talent shortages
Lin Po-feng, chairman of the Taipei-based Chinese National Association of Industry and Commerce

His eight-year term ended in 2008 with him being jailed for corruption, but not before his policies increased the percentage of mainland-bound exports from 24 per cent to 41 per cent in terms of total trade value. Since then, that percentage has remained largely unchanged.

According to the Taiwan Stock Exchange, as of June this year close to 1,200 listed Taiwanese companies – including Quanta Computer, Delta Electronics and lead iPhone supplier Foxconn – had invested up to NT$2.72 trillion (US$87 billion) in the mainland since economic ties were forged in the 1990s.

But figures released by the mainland show more than 48,000 Taiwanese firms investing up to US$120 billion on the mainland in the past 30 years.

According to Taiwan’s stock exchange, the mainland data is likely to include a large number of small and individual enterprises which do not require approval from Taiwanese authorities due to the much smaller size of their investments.

Beijing considers Taiwan a wayward province that must be brought back to the Chinese fold, by force if necessary. It suspended official talks with Taiwan when current president, Tsai Ing-wen, refused to accept the “one China” principle when she took office in 2016.

China insists cross-strait talks will not resume until she does so.

Tsai has repeatedly attempted to persuade mainland-based Taiwanese firms to shift their investments back home or to 18 countries in Southeast Asia, South Asia and Australasia, which she has targeted as investment bases in her “new southbound” policy to diversify the island’s markets and reduce economic reliance on the Chinese mainland.

But her efforts have had little effect, with Taiwan’s mainland-bound investments continuing to outweigh those for Southeast Asia.

Taiwan’s exports accounted for 65 per cent of its GDP last year, with the mainland its biggest market by far. The island exported US$130.2 billion worth of goods to the mainland last year, up 16 per cent from 2016, compared to the US$67.3 billion and 13.4 per cent with the 18 countries targeted in the southbound policy. 

Taiwan’s economists have warned that the island’s heavy reliance on the mainland has made it highly vulnerable in the event of any conflict with Beijing.

“With 41 per cent of its total exports going to China, Taiwan would be left with no bargaining chip if a serious dispute with China ensues,” said former Chinese vice-premier Wu Rong-i.

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In the first seven months of this year, Taiwan approved US$622.2 million worth of investment in Vietnam – one of the southbound policy’s favourable investment destinations – but government statistics show that is still far behind the US$5.2 billion flowing across the Taiwan Strait to the mainland.

“Honestly speaking, many Taiwanese businessmen have spent years or decades developing their businesses and forming a supply chain on the mainland, and as long as they are able to continue making profits, many would choose to stay put due to the concern that they may need to restart everything if they pull out from China,” said Sean Wang, senior executive of a Taiwanese electronics company based in Shenzhen, China.

But since Trump slapped tariffs on US$200 billion worth of Chinese products in September – on top of an initial US$50 billion earlier this year – a number of Taiwanese enterprises, especially in the textile, information technology, bicycle, and machinery industries, have considered moving back to the island or relocating in the new southbound policy-targeted countries, according to trade officials and business executives.

“We are concerned that the supply chain created by us in China may be upset if American buyers stop buying our products and switch their purchases elsewhere,” said Michael Chen, deputy director of a Taiwanese optoelectronic supplier based in the mainland port city of Xiamen, across the strait from Taiwan.

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The second round of tariffs, which target a wide range of products from food to industrial chemicals, started at 10 per cent and are due to rise to 25 per cent by January. On Tuesday, Trump repeated his threat to impose tariffs on an additional US$267 billion of Chinese imports, a move that would hurt at least half of the Taiwanese operations on the mainland.

Another Shanghai-based business executive said the trade war may be the trigger for a shift, but not the only factor.

“Rising labour and land costs – which are three times more than those in Southeast Asia – plus low-end technologies used for production have sharply reduced the competitiveness of mainland-based Taiwanese firms, with 40 per cent reporting business losses,” he said.

The advisory committee of Taiwan’s policy-making Mainland Affairs Council said earlier this month the Tsai government should seize the opportunity to convince local investors to relocate either to Taiwan or shift to the new southbound policy-targeted countries, to help reduce the island’s economic reliance on the mainland.

Five more issues to tackle

Taiwanese businesspeople, however, said the government needed to tackle five issues before convincing them to pull out from the mainland.

“If the government wants mainland-based businesses to return to Taiwan, it must address the problems of land, water, power, workforce and talent shortages, but so far we haven’t seen anything concrete other than just a bunch of proposals,” said Lin Po-feng, chairman of the Taipei-based Chinese National Association of Industry and Commerce.

Deputy economic affairs minister Kung Ming-hsin said authorities had freed up 344 plots of idle land with a total area of 214.5 hectares, mostly in southern and central Taiwan, which could serve as plant locations for returning Taiwanese firms.

But Kung conceded it was unlikely the government could satisfy all the requirements of returning businesses.

“Instead of moving low-tech and labour-intensive production lines back to Taiwan, which require enormous plant sites and a huge labour force, the government hopes these firms can upgrade their industrial structures for smart operations,” he told reporters earlier this month.

After meeting a group of mainland-based businesspeople recently, Yao Jen-to, chairman of Taiwan’s semi-official Straits Exchange Foundation, said they were keen to know if the government could resolve a taxation problem before deciding whether to move back to the island.

The problem is that before Taiwan opened up trade links with the mainland in the 1990s, many Taiwanese investors had wired millions of US dollars in investment funds there by way of third countries like the Virgin Islands.

They did not have government approval and, in accordance with current taxation law, would be slapped with a huge fine if caught.

“The finance ministry has yet to come up with any decision,” Yao said, adding his foundation would be open to the creation of a single window to deal specifically with this issue.

Taoyuan welcomes newcomers

So far, of all Taiwan’s local governments, Taoyuan is one of the most prepared cities for the relocation of mainland-based enterprises.

“The city government has instituted a regulation which provides incentives and preferential treatment, including reduction of land and housing tax by 50 per cent, for those investing in Taoyuan,” the city’s mayor, Cheng Wen-tsan, said.

He added that investors need only go through the city government’s single window system to complete all the paperwork in registering their business operations.

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The city, which is home to nearly half of Taiwan’s migrant workforce, is also one of the friendliest, according to Cheng.

He said his government planned to set up a centre to help newcomers settle in and also to recruit talent from among new migrants already in Taiwan, as well as from their original home bases, from the mainland and elsewhere in Southeast Asia.

Too many factors

Analysts said the trade war had provided the island with a good chance to cut back its economic reliance on the mainland, but it was still too early to say whether Taiwan could achieve its goal.

“There are still many factors, including whether Trump will impose the third round of tariffs against Beijing, whether incentives offered by the government are attractive enough and whether Asean countries are willing to expand their ties with Taiwan,” said Wang Kung-yi, a professor at the Chinese Culture University in Taipei.

In an article published on the Brookings Institution website on Friday, senior fellow Richard Bush said China would have a lot to lose from all-out competition with America, but US allies and partners in the region might also be at risk – both from the trade war and the broader rivalry.

“A US decision to increase tariffs on [Chinese] goods would hurt ... Taiwan companies [with products finished on the mainland] and perhaps wipe out the narrow profit margins on which they operate,” said Bush, former chairman of the American Institute in Taiwan, which represents US interests on the island. “Given its dependence on the China market, Taiwan might become a victim of ‘friendly fire’ in a US-China trade war.”