According to the official estimates, Taiwan’s gross domestic product (GDP) growth rate in 2018 is expected to increase by 2.66 percent, decreasing from 3.08 percent in 2017. The economic slowing down has begun since Q3 2018. The slump in net exports was a factor for the decelerating economic growth while the domestic consumption remained resilient.
Apart from the softening global demand, the growing trade dispute between the United States and China could have weighed down on Taiwan’s export performance. The island has relied on exporting intermediate goods to China for final assembly. The final consumption goods are exported to the United States after manufacturing in China. In 2016, eight out of the top 10 US-bound exporting companies in China were Taiwanese firms. Among top 100 exporting companies, 36 of them were from Taiwan. Most of Taiwan’s exports to China are electronic components for assembling into information and communications technology (ICT) products.
Declining Exports to China
Taiwan’s total exports amounted to USD 336 billion in 2018 while imports reached USD 287 billion. Trade surplus hit nearly USD 49 billion, albeit a 16 percent decline compared to the previous year. China, including Hong Kong, remained as Taiwan’s largest export destination in 2018, accounting for 41 percent of Taiwan’s total exports. Taiwan’s exports to China and Hong Kong registered a decent increase (6.3 percent) in 2018, according to Taiwan’s Ministry of Finance. Nevertheless, the monthly export growth figure showed a declining trend. As shown in Figure 1, Taiwan’s exports to China and Hong Kong have dropped clearly since the latter half of the year. Its exports to 10 countries in ASEAN also fell during June and August and during November and December periods. In comparison, the exports to the US were growing.
Figure 1. Taiwan’s exports to China and Hong Kong, ASEAN-10 and the US (Nov 2017-December 2018): Year-on-year growth rate (percent)
Source: Ministry of Finance (Taiwan).
Figure 2 showed the growth rate of Taiwan’s exports to China and Hong Kong by main products. Electronic products are Taiwan’s largest export items, accounting for 47 percent of Taiwan’s exports to China and Hong Kong in 2018. The export growth rate of electronic components had a decent increase of 7.6 percent in 2018 whereas the growth rate of optical instruments had a negative growth. The other export items also had adequate growths in 2018. However, the growth rates in 2018 are falling compared to the growth rates in 2017. The drop in growth rates was particularly clear for machinery and plastics and rubbers.
Figure 2. Taiwan’s exports to China and Hong Kong by main products in 2017 and 2018: Year-on-year growth rate (percent)
Source: Ministry of Finance (Taiwan).
There are several reasons for Taiwan’s still positive growth of exports to China in 2018. First, the US trade tariff against Chinese goods that began in July did not include ICT goods that need Taiwan’s most essential export items (ICT component) for the final assembly in China. Second, the overseas orders for exports have been confirmed months before the shipments. To avoid the impact of higher tariffs on exports from China, some Taiwanese firms might have shipped their products earlier than scheduled date. Third, the currency depreciation has benefited exporters. The New Taiwan Dollar vis-à-vis the US dollar had been gradually depreciating by 5 percent from January to October 2018. Chinese yuan vis-à-vis the US dollar had also depreciated nearly 8 percent during the same period.
However, if the US extends the retaliation tariff to the ICT products, Taiwan’s economy will be seriously impacted. In response to the China-US trade war, Taiwanese firms in textile, electronics and bicycle industries have planned to relocate from China to other developing countries. Some firms have expressed interest in returning to Taiwan. Nonetheless, a complete shift of supply chain network in the ICT industry from China to other countries seems unlikely in the short term as it would affect production relations with other East Asian manufacturers. At present, it is more likely that the manufactures will pass the cost, derived from higher tariffs, to the consumers.
Acceleration of Taiwanese Business Relocation
Taiwan has diverted its outward foreign direct investment (OFDI) away from China since a few years ago following China’s wage hike and economic transformation towards a more consumption-based economy. The recent China-US trade tension has accelerated this investment relocation process.
The clear drop of Taiwan’s OFDI in China took place in 2012. Although China has remained Taiwan’s most important investment destination (38 percent of Taiwan’s total OFDI in 2018), the investment amounts had shrunk significantly from its peak (USD 14.6 billion) in 2010 to USD 8.5 billion in 2018 (Figure 3). While Taiwan’s OFDI in China has declined, its investments have increased clearly in the British Overseas Territories in the Caribbean over the past few years. As shown in Figure 3, Taiwan’s investments in the British Overseas Territories in the Caribbean have increased from USD 0.2 billion in 2012 to USD 5.9 billion. Many Taiwanese firms have taken advantage of investing in this tax haven make the best use of their financial assets.
Figure 3. Taiwan’s outward direct investment by country/region 2010-2018
Source: Investment Commission (Taiwan)
The investment in six major ASEAN countries, including Singapore, the Philippines, Thailand, Indonesia, Malaysia and Vietnam (ASEAN-6) saw a surge in 2012. However, in the subsequent years, the investments ASEAN-6 progressed slowly with Singapore and Vietnam receiving the most of Taiwan’s investment (75 percent of Taiwan’s total OFDI in ASEAN-6). Despite Tsai Ing-wen government’s promotion of its New Southbound Policy, Taiwan’s OFDI in ASEAN-6 declined to USD 1.6 billion in 2018, from USD 2.8 billion in the previous year. The Taiwan government claimed that statistics could be underestimated as some of the investments could have been made through a third country. Taiwan’s Pegatron, Apple’s second largest assembler, has decided that it would speed up efforts to relocate production to Southeast Asia from China. Another Apple supplier, Cheng Uei Precision Industry, has also followed suit. It remains to be seen whether the China-US trade tension could spur more investment in Southeast Asian countries in the following years.
Taiwan’s investment in the United States had shown clear growth from USD 0.8 billion in 2017 to nearly USD 2 billion in 2018 as a result of some Taiwanese firms’ positive response to President Trump’s “America-first manufacturing plan”. Indeed, as early as in August 2017, Taiwan’s Hon Hai Precision Industry Co, known as Foxconn Technology Group in China, announced its plan to build a USD 10 billion factory in Wisconsin, USA. A few months thereafter in November, another of Hon Hai’s investment (worth USD 50 million) in US artificial intelligence was approved by Taiwan’s investment commission.
Other Taiwanese firms in the ICT industry such as Compal Electronics, Quanta Computer, Inventec Corporation and Wistron announced that they would either increase production in other countries or relocate factories from China to other developing countries (eg. Malaysia, Vietnam, Czech Republic and Mexico) in the face of the China-US trade tension. Other than the relocation of manufacturing production, US concerns over China’s intellectual property issue will also discourage manufacturing alliance and R&D cooperation across the Taiwan Strait.
With China gradually losing its competitiveness in exports, the cross-strait division of labor in manufacturing production is likely to be waning. Some Taiwanese firms may continue to invest in China in order to meet local consumption demand. A new production alliance between Taiwanese manufacturers, Chinese producers and other overseas partners are in the formation. China will no longer be the “global factory”. The global factory could be dispersed to many locations near the important consumption markets.
Taiwan’s Opportunities in the Wake of China-US Trade War
The current China-US trade war provides a good opportunity for luring Taiwanese manufacturing investment back to the island. To facilitate the returning investment from China, the current Tsai administration is looking for solutions to the problem of “five shortages”: land, water, electricity, talent and labor. It is also looking at reducing tax and deregulating over 300 rules to facilitate domestic firms’ business operation in Taiwan. However, the effect from the tax reduction is dubious. As early as in 2009, the Taiwanese government started to deregulate domestic tax rates in order to attract overseas Taiwanese investment. After the tax reduction, there have been a significant inward investment from British Overseas Territories in Caribbean, most of which are believed to be from registered Taiwanese firms in the territory. Instead of investing in industrial sectors, some investments have flowed to the real estate and resulted in skyrocketing property prices in recent years, especially in Taipei city. The insufficient investment in the real sectors made the industrial upgrading and wages hike difficult.
Next, the China-US trade war will accelerate China’s transformation from “global factory” to “global grocery market”. China has promised to open up further its economy by cutting off the import tariff. Taiwan will have opportunities to export a variety of goods to China with lower tariff. This will help to diversify Taiwan’s export structure from ICT to other products.
Third, while Taiwan’s export-oriented firms are planning to relocate to other countries, China market-oriented firms are likely to stay to serve local demand. Taiwan will need to devise a new strategy to grasp the rapid changing market conditions in China.
Fourth, as Taiwanese firms may not be the only firms in the relocation process, the geographic proximity to China would give Taiwan a leg-up as an alternative for foreign investors. Taiwan will have to open its economy a step further to cope with the potential inflow of global FDI.
Looking into the future, with China’s economic transformation and Trump’s plan to bring back home its manufacturing sector, the global supply chain network is set to change. Taiwan’s export-oriented economy is likely to suffer from the China-US trade clash in the short term. The long term economic prospects are still uncertain, depending on whether Taiwan could respond rightly to this new global economic setting.