Pacific Money

The Real Trade Challenge for Taiwan and Tsai Ing-wen

Taiwan’s biggest economic issue isn’t dependence on China.

The Real Trade Challenge for Taiwan and Tsai Ing-wen
Credit: Taiwan’s Kaohsiung Harbor image via

Taiwan’s trade figures with China should not make comfortable reading for any Taiwanese legislator or policymaker. True, between 2008 and 2015, China’s imports from Taiwan increased by almost 40 percent, vindication, presumably, in Kuomintang (KMT) eyes of Ma Ying-jeou’s cross-straits policy. But that growth pales into near insignificance against the 300 percent plus growth under the previous administration of Chen Shui-bian, supposedly characterized by a confrontational relationship with China.

The instinctive response is that China’s import growth has slowed down considerably since the global financial crash of 2008, so the two periods cannot be compared — which is also true. But despite the slowdown, and for all the highly publicized agreements under the Economic Cooperation Framework Agreement (ECFA), the inconvenient truth is that the growth of China’s imports from the rest of the world outpaced those from Taiwan between 2008 and 2015. The contrast with China’s imports from Korea, a traditional yardstick for Taiwan, is a good example: these grew 55 percent to Taiwan’s 40 percent. But Democratic Progressive Party (DPP) or other legislators should pause before rushing to criticize the ECFA as a failure, for this outperformance was simply the continuation of a trend that started from 2000, if not earlier.

In their obsession with China, Taiwan’s policymakers and business people alike are missing the real problem that these statistics point to and that Taiwan must address. That problem is not Taiwan’s dependence on a single country for trade but its over-reliance on a single business sector and the business model pursued by that sector. Over 60 percent of Taiwan’s exports to China are classified as “electronic equipment,” principally components and sub-components for assembly into finished products and subsequent export from China. This business has benefited the Chinese economy hugely and is one reason why, for all the rhetoric, the Chinese government will be careful not to impose restrictions on trade with Taiwan – it needs Taiwan at least as much as Taiwan needs it, even though it will never admit it. But it is a business in which margins are cut to the bone, profits are dependent on volume, and competition from Chinese companies is growing rapidly, as HTC’s well publicized difficulties testify. This is not new, and for some time now Taiwanese companies have been urged to develop their own brands so as to derive more value added from their products. But the rise of companies such as Huawei and Xiaomi suggests this alone may be too little and too late.

The answer to Taiwan’s difficulties therefore lies not only or not even in reducing trade dependence with China but in Taiwan reducing its dependence on the IT and electronics sector. Korea again provides a comparison: despite the huge success of Samsung and to a lesser extent companies like LG, electronic equipment comprised under 50 percent of its exports to China last year.

In circumstances such as these, the traditional approach of policymakers (around the world, not just in Taiwan) is to try to identify “new” industries and pour money into them in an attempt to generate momentum. Taiwan has already tried this in bio-technology with at best very mixed results. Experience elsewhere has rarely been more successful. Instead of seeking to play the role of entrepreneur or trying to pick winners, policymakers would be better advised to look at the barriers and impediments to trade diversification and new industry start-ups, often imposed by themselves.

In this area the World Bank’s latest Doing Business report also makes uncomfortable reading for Taiwanese officials. True, in the overall assessment Taiwan is ranked a respectable 11th worldwide (although that places it below both Korea and Hong Kong). But for a country that depends on trade for its prosperity, its 65th place for ease of cross-border trade can only be an embarrassment. This places Taiwan not only behind neighbors such as Korea and Japan but even countries such as Belarus, Macedonia, or Albania. And it is not only importers who are affected. By raising the costs of trade, exporters are less competitive and potential exporters are discouraged.

So by all means, look to diversify away from China. But if the government really wants to help the economy it should start by reducing the panoply of current regulations that deter trade and raise costs for business.

Michael Reilly is a Visiting Fellow in the Institute of European and American Studies at Academia Sinica under the Taiwan Fellowship program. From 2005-2009 he was Director of the British office in Taiwan.