Taiwan is caught in an economic trap

On Saturday, Tsai Ying-wen scored a thumping victory in Taiwan’s presidential election — but will find it much harder to translate that success into economic progress over the next four years.

Taiwanese companies are trapped in the middle of the Sino-US economic war, which has spread from trade to science, technology and currency and is likely to become a 20th Century-style Cold War. Donald Trump and his successor, whether Republican or Democrat, will continue the process of decoupling the two economies that began during his term.

Taiwan is one of the largest foreign investors in China — it has an estimated $180 billion in the country, 10 times the amount it has invested in the US. A large number of Taiwanese-owned firms in China export to the US, and have been hit by the tariffs imposed by Trump.

The trade war has reduced demand in many countries. Last year Taiwan’s exports, which account for nearly 75 per cent of GDP, were hit by a sharp fall in demand for electronic components, such as computer chips, amid weaker device sales and slower global economic growth.

The official Directorate General of Budget, Accounting and Statistics expects Taiwan’s GDP growth in 2019 to have been 2.64 per cent and forecasts 2.72 per cent in 2020.

President Tsai’s position in the trade war is crystal clear. On Sunday, the day after her victory, she met Brent Christensen, director of the American Institute in Taiwan, the US’s de facto embassy. “Taiwan looks forward to bolstering the integration of the Taiwan-US industry chain and continuing to deepen the trade relations,” she told him.

In 2019, her government launched a three-year action plan to lure hi-tech companies to repatriate production from the mainland to Taiwan. As of December 27 last year, the Ministry of Economic Affairs said, it had approved 165 such investment applications worth TWD$712.1 billion (£18.3 billion), creating 58,918 jobs. The Ministry helps returnees secure land, water, electricity, labour and financing, and offers tax breaks.

The most spectacular is Quanta Computer, the world’s largest original-design manufacturer of notebook computers. Its production facility in Shanghai was, in 2005, mainland China’s second-largest exporting firm, employing more than 30,000 workers. From the end of 2018, it has moved production of its computer servers out of China to Taiwan.

It has spent TWD$950 million and TWD$4.28 billion respectively on two sites in Taoyuan, one a factory making notebook computers and the other an artificial intelligence laboratory.

But divorce is not so easy. In 2019, mainland China and Hong Kong accounted for over 40 per cent of Taiwan’s exports. The US accounted for only 15 per cent. About one million Taiwanese people live and work in mainland China. In many sectors, they can earn salaries several times higher than at home.

According to the Nikkei Asian Review, as many as 3,000 chip engineers, including top-level talent from Taiwan’s world-leading companies, have been lured to mainland competitors by generous salaries and benefit packages. “The goal is to bring Taiwanese talent to the mainland and hollow out Taiwan,” said Meng Chih-cheng of National Cheng Kung University in Taiwan.

In January 2018, Beijing unilaterally granted quasi-citizenship to Taiwanese people living, studying, or working in China and gave some subsidies and bank loans to Taiwan enterprises.

Taiwanese firms that have invested in or sell to China are embarrassed by the virulent anti-China rhetoric in political campaigns at home and do their best to stay out of the argument. They must retain good relations with both governments; it is not an easy matter.

Eager to punish Tsai’s government, Beijing has sharply reduced the number of mainland tourists allowed to visit Taiwan. Last July, Beijing banned its citizens from going there as individual travellers because of “the current relations between the two sides of the Taiwan Straits”. It has also reduced the number of group tours.

On January 6, Taiwan’s Tourism Bureau announced 11.84 million international tourists in 2019, up seven per cent over 2018, with increases from Japan, South Korea and Southeast Asian countries offsetting the drop in mainland visitors. To achieve this, however, it had to subsidise charter flights from several countries. Mainland Chinese spend more per capita than other visitors. After Tsai’s victory on Saturday, we can expect more such punishment from Beijing.

Washington has its demands, too. Last year it repeatedly asked Tsai’s government to restrain the Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest contract chipmaker, from selling chips to Huawei, the Chinese telecoms group. US officials told Taiwan diplomats in Washington that the chips made by TSMC were going straight into Chinese missiles pointing at Taiwan.

In the third quarter of 2019, China accounted for about 20 per cent of TSMC’s revenue, with about half of that going to Huawei, according to industry estimates.

In military and diplomatic terms, this new Cold War between Beijing and Washington has benefitted Taiwan. But how is Tsai to ensure the economic interests of thousands of Taiwanese companies during the storms ahead? That will be a bigger challenge than winning the election.