Taiwan Shows How to Carefully Snip Chinese Economic Ties

After keeping its society and economy running throughout the coronavirus pandemic, squashing the outbreak, and donating millions of face masks to many countries, Taiwan has earned a lot of positive press internationally. But there is another vital area in which the world could also learn from Taiwan’s experience.

The coronavirus pandemic has highlighted the enormous danger of being over-reliant on China. The logistical vulnerabilities of concentrating manufacturing supply chains in a single country like China plus its antagonistic and unreliable behavior are pushing countries including Japan, the United States, and Australia to reduce or debate their dependence on China.

Japan is providing $2.2 billion in stimulus funds to help Japanese companies move their manufacturing plants out of China. U.S. lawmakers are weighing proposals, including a $25 billion fund, to help American firms move their operations and suppliers from China. Australia is facing a debate over whether it’s too dependent on China in light of recent economic threats and tariffs due to Australia’s global demand for an inquiry into the coronavirus pandemic.

But Taiwan’s situation goes far beyond either of these three. China is the top destination for its exports and outbound investment—and also its main strategic opponent. China claims Taiwan as its own territory and frequently threatens invasion, even as it works to subvert Taiwan’s democracy, push Taiwan out of international forums and bodies, and delegitimize the state.

Adding to this paradoxical relationship is the fact that since the 1980s, over 100,000 Taiwanese firms have moved to China to set up manufacturing facilities, attracted by cheap labor and the massive domestic Chinese market. This significantly reduced local manufacturing while tying up a lot of Taiwanese investment and expertise in China.

In 2019, the U.S.-China trade war, the renewed hostility from Beijing toward the leadership of Taiwanese President Tsai Ing-wen, and Taiwanese analysts’ correct predictions that the situation would worsen caused Taiwan to initiate a reshoring initiative to lure its companies to move their manufacturing back home from China. Before that, the island nation had initiated an ambitious plan called the New Southbound Policy (NSP) in 2016 to diversify its economy and reduce reliance on China, its main trading partner. In doing so, Taiwan has been well ahead of the global curve.

After the U.S. imposition of tariffs on Chinese-made products starting in 2018, Taiwanese firms started mulling moving production to other countries, such as Vietnam. In response, the Tsai government launched a three-year reshoring plan to attract Taiwanese companies to move back to Taiwan. The plan offers incentives covering land supply, labor, and power, as well as tax breaks and bank loan subsidies. It is especially targeted at innovative industrial sectors such as tech, smart machinery, biomedicine, and green energy. As a result, while makers of lower-margin items are going to Southeast Asia, more high-end manufacturing is moving back to Taiwan, where there is an abundance of engineering and computer talent.

In about a year and a half, the reshoring initiative has already seen Taiwanese companies pledge 1 trillion New Taiwan dollars (about $33 billion) in reinvesting in Taiwan. Of that amount, NT$200 billion had already been invested in 2019, with another NT$325.3 billion set to be invested this year. This domestic investment by returning firms contributed to Taiwan’s GDP increasing by 2.73 percent in 2019, the most in a rough year among the Four Asian Tigers (Taiwan, Hong Kong, Singapore, and South Korea). Just as importantly, the initiative will also create tens of thousands of new skilled jobs—a useful bulwark against the pandemic’s unexpected employment impact.

Even before the reshoring plan, Tsai launched the NSP in 2016 to reduce Taiwan’s economic reliance on China, boosting trade and investment between Taiwan and 18 countries in Southeast Asia and South Asia, as well as Australia and New Zealand.

Taiwan had launched previous attempts in the late 1990s and mid-2000s to increase trade and investment with regional neighbors, but the NSP is significantly broader in both the scope of countries and goals. After four years, the NSP has seen notable gains in trade, investment, and tourism.

Taiwan’s trade with NSP countries grew from $95.8 billion in 2016 to over $111 billion in 2019. Outbound investment to NSP countries grew by 16 percent year on year in 2019 to $2.79 billion. Meanwhile, outbound investment in China fell dramatically year on year in 2019 by 51 percent to $4.17 billion, which also marked the fourth consecutive annual decline in investment to China.

China, including Hong Kong, still accounted for roughly 40 percent of Taiwan’s exports in 2019, twice that of the NSP countries, which collectively made up almost 20 percent. Mainland China was Taiwan’s top export destination, with Hong Kong in third place (the United States was second with 14 percent), though NSP countries accounted for seven of Taiwan’s top 15 export destinations in 2019. This suggests that there is a lot of room for Taiwan to increase its trade and investment with the NSP countries.

Despite China’s increased belligerence toward Taiwan during Tsai’s presidency, trade between the two has remained strong over the past four years. However, the coronavirus pandemic has impacted the NSP, especially in reducing trade with Southeast Asia, where several countries have undergone long lockdowns. Adjustments may need to be made, though the NSP will still be important during Tsai’s second presidential term, which runs until 2024 after she won reelection in January.

In particular, NSP public health and pharmaceutical collaborative efforts with Southeast Asian countries will be even more vital. “Successful flagship projects such as medical supply chain cooperation will be strengthened, while critical ones such as educational exchange will obviously continue,” said Jeremy Huai-Che Chiang, a research associate at the Taiwan-Asia Exchange Foundation, a Taiwanese think tank.

Tourism is another area where Taiwan has broken its dependency on China, whose tourists were once a major factor due to their sheer numbers. This was particularly necessary, as Beijing often wields tourism as a weapon, banning group tours—the main way Chinese tourists travel—to countries outside of its favor, like Taiwan.

Taiwan saw only 2.7 million Chinese tourists in 2019, down from a high of over 4 million in 2015, but its overall visitor numbers still rose annually from 2015 to 2019. In fact, 2019 saw a record high of 11.84 million visitors, a 7 percent increase from 2018.

Taiwan more than made up for the fall in Chinese tourists by attracting more visitors from Japan, South Korea, and NSP countries, especially from Southeast Asia. In 2019, almost 2.2 million Japanese travelers visited Taiwan, up from 1.6 million in 2015. Here again, the NSP has provided a boost, as visitors from NSP countries rose by 2.7 million in 2019, an increase of 6.6 percent from 2018.

But this tourism decoupling was actually driven by China in 2016, when, in a bid to punish Tsai for not agreeing that Taiwan is part of China, it started restricting the number of Chinese tour groups that could visit Taiwan. Then in 2019, in a further fit of pique, Beijing decided to ban most Chinese from visiting Taiwan as individual tourists.

Of course, it’s difficult to pull yourself away from the gravitational field of a nation of China’s size. Due to China’s significant trade and influence with Southeast Asian countries, there is a limit to the depth of relationships and cooperation Taiwan can foster in that region.

“This is the main challenge for Taiwan’s ambitions, which creates political obstacles for government endeavors and business operations alike. This does not mean things are impossible, but it does mean innovative policy approaches are often needed,” Chiang said.

This includes U.S.-Taiwan cooperation in such programs as the Global Cooperation and Training Framework (GCTF), which helps Taiwanese experts share their expertise with other countries in areas including public health, disaster relief, and good governance.“The NSP is a focal point for U.S.-Taiwan cooperation, but of course it is only one part of bilateral cooperation. It would be more of the U.S. and Taiwan working on new and existent programs like the GCTF program to increase Taiwan’s engagement with the wider region, including most of the NSP-targeted countries,” Chiang said.

Meanwhile, not all Taiwanese companies are on board. Some Taiwanese tycoons with operations in China have recently cited problems such as labor shortages, low domestic demand, and administrative issues in the region that prevent them from relocating, according to local media.

There are political costs, too. In 2018, the populist candidate Han Kuo-yu of the opposition Kuomintang caused a huge shock when he won the mayoralty of Kaohsiung, a major port city in the ruling Democratic Progressive Party’s southern heartland. (A U.S. equivalent would be a Republican winning the San Francisco mayoralty.) He ran on a very China-friendly platform, which included a pledge to attract Chinese tourists in large numbers. Disgruntled Kaohsiung business owners who were dependent on Chinese tourists helped vote in Han, who would later run and lose against Tsai in January for the presidency. Han stepped down as Kaohsiung mayor after losing a recall referendum on June 6.

Taiwan’s efforts can act as a useful model for countries such as Australia looking to reduce their own dependence on China. There is a growing debate on this issue in Canberra, especially in light of boycott threats from the Chinese ambassador, a recent ban on some Australian beef, and tariffs imposed on Australian barley imports. “I think there was already a mood among business leaders (now much augmented by COVID-19) that over-exposure to the China market is not prudent from a risk management perspective, and so individual business leaders are taking action on their own initiative to diversify their product markets,” said James Giesecke, the director of the Centre of Policy Studies at Victoria University.

“It is unlikely that Australia will implement explicit tariffs or taxes to tilt trade away from China. However, this will not rule out a significant tilt of the energies of politicians and business leaders away from marketing efforts in China and towards efforts in other countries,” added Giesecke, referring to the “India Economic Strategy to 2035,” which proposed a long-term strategy for expanding trade with India, put out by Australia’s Department of Foreign Affairs and Trade.

Decoupling from China will not be easy, but it is becoming an increasingly important issue for many countries. Taiwan is showing that strong political leadership that understands the urgent need to diversify from China and has the will to do so—backed up by planning and programs, as well as cooperation from the business community—is essential. Taiwan’s foresight in this area, just as with the coronavirus pandemic, may prove a useful example.