This Asian economy is emerging as a winner of the trade war

Taiwan’s robust technology industry makes it important to both the United States and China.
06 January 2020

Pundits did not always see Taiwan as a beneficiary of the trade dispute between the United States (U.S.) and China. Some of them even named it a potential loser. “Trade war traps Taiwan between two superpowers,” said a 2018 headline.

But now, a United Nations report identifies Taiwan as the biggest beneficiary of trade diverted from China as a result of punitive American tariffs. Taiwan racked up additional exports to the U.S. worth nearly US$4.2 billion (€3.8 billion) in the first half of 2019, driven by the office machinery and communication equipment sectors, according to the report.

An export powerhouse

In retrospect, Taiwan’s gain is not unexpected. It is a major exporter of machinery and technology, including office appliance and communication equipment — the sectors worst hit by American tariffs. Information, communication, and audio-video products make up its second largest export.

Of late, exports have been fueling Taiwan’s economic growth. Its GDP expanded 2.91 percent year on year in the third quarter of 2019 despite slowing growth in Asia, mainly thanks to increased exports to the U.S.

Taiwan’s trade to the U.S. has gained from a shift in production away from China.
Taiwan’s trade to the U.S. has gained from a shift in production away from China.

Taiwan’s mature tech industry and supply chain have made it a preferred alternative not only by American companies but also by Chinese businesses. Taiwanese tech firms, for example, are benefiting from China’s ‘de-Americanization’ campaign after the U.S. government’s crackdown on Chinese tech companies.

Major Taiwanese chipmakers such as Taiwan Semiconductor Manufacturing Co. and MediaTek have seen sales soar as Chinese companies replace American suppliers.

“We find our Taiwanese partners have secured several projects that previously belonged to U.S. companies,” said Cliff Yuan, CFO of Taiwanese chip distributor WPG Holding.

Gaining from shifting production

Taiwan’s trade to the U.S. has also gained from a shift in production away from China, particularly in the capital machinery and electronics sectors.

Many Taiwanese companies in these sectors moved manufacturing capabilities to China in the late 1980s. But as the U.S.–China trade dispute intensified, some sought to move or diversify production to dodge American tariffs. And Taiwan was an obvious choice.

To lure more companies back, the Taiwanese government has offered incentives such as relaxed land use regulations and expanded tax breaks under its InvesTaiwan program.

“The lingering uncertainties in China–U.S. relations will continue to prompt Taiwanese manufacturers to diversify their supply chains.”

More than 150 companies have applied to the government program, and investment pledges have reached about NT$1.2 trillion (€35.5 billion) since the scheme kicked off in early 2019. Flat‑panel maker Innolux Corp, for example, has received approval to invest NT$70 billion under the program.

“We will see additional annual investments of NT$300 to NT$400 billion a year over the next two to three years thanks to the return of Taiwanese companies,” said Minister without Portfolio Kung Ming-hsin.

Of course, Taiwan still faces competition from overseas. DHL Resilience360, a supply chain risk management software, revealed in a survey that 11 percent of businesses with supply chain operations in China preferred to shift production to India and Vietnam, while 27 percent were not considering moving operations.

In addition, geopolitical tensions and other factors continue to weaken global trade. Indeed, DHL’s latest Global Trade Barometer has dropped steadily over the past seven months. The global index hit 45 in November 2019, indicating that global trade growth will continue to slow down.

DHL Global Trade Barometer 2019_11_Global

Taiwan is not immune to the effects of this slowdown. While it may have benefited from rising exports to the U.S., Taiwan faces lower demand for input materials from China, potentially offsetting its gains.

According to government data, exports to Mainland China and Hong Kong dropped 6.4 percent year on year in the first 10 months of 2019, contributing to a 2.4 percent decline in total exports. The two markets account for about 40 percent of Taiwanese exports, significantly more than the U.S.’ 14 percent share.

Positive prospects

Still, economists keep a positive outlook for Taiwan. DBS Bank economist Ma Tieying expects the trend of investment repatriation and trade diversion to continue in 2020. The bank has revised its Taiwan GDP growth forecast for 2020 to 2 percent, up from 1.8 percent.

Despite reaching an agreement on an interim trade deal last December, China and the U.S. have tougher issues to resolve beyond tariffs.

“Regardless of a so-called Phase 1 trade deal between China and the U.S., the two countries’ conflicts on thorny issues like industry subsidies and cybersecurity will likely remain in place for years,” said Ma. “The lingering uncertainties in China–U.S. relations will continue to prompt Taiwanese manufacturers to diversify their supply chains.”

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