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Taiwan’s Surprising Drop in Trade Dependence on Mainland China

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Taiwan’s Surprising Drop in Trade Dependence on Mainland China

The root cause is not Taipei’s efforts, but China’s own economic woes.

Taiwan’s Surprising Drop in Trade Dependence on Mainland China
Credit: Depositphotos

Although elected with a clear mandate to decrease Taiwan’s trade dependence on mainland China, President Tsai Ing-wen met with limited success in her attempt during the first term of her presidency. Indeed, China’s proportion of Taiwan’s overall exports reached an all-time high (43.9 percent) in 2020. 

However, even without a large-scale government intervention since then, Taiwan’s trade reliance on mainland China has significantly dropped. Surprisingly, Taiwan has China’s dwindling economy to thank, instead of government-led trade diversification efforts, such as Tsai’s flagship New Southbound Policy, or Beijing’s economic sanctions, which theoretically would have driven cross-strait trade away.

Numbers Speak

Under President Chen Shui-bian (2000-2008), Taiwan’s export reliance on mainland China and Hong Kong rose from 24.4 percent in 2000 to 39.0 percent in 2008. Under President Ma Ying-Jeou (2008-2016), Tsai’s immediate predecessor, the number rose slightly, to 40.1 percent in 2016. And, as mentioned above, the number reached a record high in 2020, when Tsai began her second term.

Since Tsai’s second inauguration, though, we have seen a sharp drop to the lowest levels in 21 years: from 43.9 percent in 2020, to 42.3 percent in 2021, 38.8 percent in 2022, and 35.2 percent in 2023. According to the latest report from Taiwan’s Ministry of Finance, Taiwan’s exports to mainland China and Hong Kong accounted for merely 32.9 percent of all Taiwan’s exports in January 2024, the third lowest percentage in a single month since August 2002.

Made with Flourish

Su Jain-rong, Taiwan’s former finance minister, said in his farewell interview with Bloomberg in 2022, “Taiwan needs to diversify its trade away from China” – not because of political concerns, but because of “the uncertainty of the market.” That gave us a clue as to what is propelling this downward shift: China’s domestic economic challenges.

In 2021, Taiwan’s exports to mainland China and Hong Kong had a year-on-year growth rate of 24.8 percent, the highest since 2010 and the second highest since 2004. That was also when the economic alarm bells went off in China. In September 2021, China’s property sector crisis spread beyond Evergrande with no signs of stopping. 

China has been enveloped in economic crisis after crisis since then: local government debt, youth unemployment, a stressed labor market, and a falling stock market. The subsequent low consumer price inflation, shrinking demands on the mainland, and deflationary risks hurt Taiwan’s exports to China. Taiwan’s exports to China thus shrunk by 1.6 percent in 2022. The figure plummeted again in 2023, this time declining by 18.1 percent year-on-year, the worst contraction since 1982. These decreases had the result of lowering Taiwan’s overall trade dependence on China. 

Lower confidence in the stability and profitability of the mainland market has also led to a sharp decline in investment from Taiwan. According to Taiwan’s Mainland Affairs Council, outbound investment to China accounted for 83.8 percent of total outbound investment in 2010. The number dived to 11.4 percent in 2023.

Electronic components, semiconductors included, have fluctuated between 40-60 percent of Taiwan’s exports to mainland China and Hong Kong. Machinery exports have accounted for 4 percent and 6 percent. As China’s dwindling economy brought down consumer demand and the world entered a stage of electronic component destocking, the new, smaller demand could not sustain the previous high export numbers. 

According to Taiwan’s Ministry of Finance, the year-on-year trend lines of electronic component exports to mainland China and Hong Kong faced 14 months of consecutive negative numbers, from November 2022 to December 2023. Taiwan’s machinery exports to mainland China and Hong Kong saw 17 consecutive months of year-on-year contractions from August 2022 to December 2023.

Given the sheer size of China’s economy and the close trade relationship between Taiwan and the mainland, if China’s economy falls, Taiwan will suffer. The drop in Taiwan’s exports to mainland China and Hong Kong correlated with a drop in Taiwan’s total exports. From September 2022 to August 2023, Taiwan’s total exports saw a streak of negative year-on-year figures. It’s no coincidence that from August 2022 to December 2023, Taiwan’s exports to mainland China and Hong Kong experienced the worst contraction in cross-strait trade. 

According to Taiwan’s Ministry of Finance, Taiwan exported $47 billion less in total in 2023 compared to the previous year. The drop in exports to mainland China accounted for 72 percent of the decrease in total exports.

Beijing’s Economic Sanctions?

Given the timing, it’s tempting to ascribe this contraction to China’s economic sanctions. On August 1, 2022 – around the same time the downward slide took hold – the General Administration of Customs (GAC) of China announced the prohibition of imports from more than 100 food, tea, agriculture, and fishery companies in Taiwan to retaliate against U.S. House Speaker Nancy Pelosi’s visit to Taiwan. 

Two days later, on August 3, the GAC halted the import of grapefruits, lemons, tangerines, chilled large-head hairtails, and frozen mackerels from Taiwan. In December 2023, just before Taiwan’s January 2024 presidential election, Beijing threatened to explore the possibility of suspending the preferential market access of Taiwan’s agriculture, fishery, machinery, textile products, and automotive parts under the Early Harvest List of the  Economic Cooperation Framework Agreement (ECFA).

The often-targeted animal and plant products only account for 0.2 percent of all Taiwanese exports to mainland China and Hong Kong. According to Kristy Hsu of the Taiwan ASEAN Studies Center, the whole list of sanctions following Pelosi’s trip only impacted less than 0.5 percent of Taiwan’s exports to mainland China and Hong Kong.

However, a complete suspension of the ECFA Early Harvest List could have been detrimental to Taiwan’s economy. According to Taiwan’s Ministry of Economic Affairs, goods included on the Early Harvest List accounted for 3.6 percent of Taiwan’s total exports in the first nine months of 2023, which was around 10.2 percent of Taiwan’s exports to mainland China and Hong Kong in the same period.

Taiwan Premier Chen Chien-jen admitted in October 2023 that China’s market is irreplaceable. He answered, “We do hope to continue our economic relations with China” when being asked in the Legislative Yuan about the potential consequences of Beijing suspending the ECFA or conducting trade barrier investigations. The investigations were put in place on December 15, 2023;  ECFA remains intact but its potential end continues to loom large. 

At its current levels, Beijing’s economic coercion has not had a major impact on Taiwan’s exports to mainland China and Hong Kong, and therefore Taiwan’s economic reliance on China. But future measures, including a suspension of the ECFA Early Harvest List, could conceivably do more damage. 

Taiwan’s Government-led Diversification?

The New Southbound Policy (NSP) is Tsai Ing-wen’s flagship trade diversification policy initiative. It aims to help diversify Taiwan’s trade away from mainland China and Hong Kong by increasing Taiwan’s trade reliance on a group of 18 countries: the 10 Association of Southeast Asian Nations (ASEAN) member states, six countries from South Asia (Bangladesh, Bhutan, India, Nepal, Pakistan, and Sri Lanka), as well as Australia and New Zealand.

Unfortunately, according to Taiwan’s Ministry of Finance, Taiwan’s percentage of exports to this set of 18 countries did not increase during Tsai’s tenure – in fact, it fell. The NSP countries accounted for 22.2 percent of Taiwan’s total exports in 2013, under Tsai’s predecessor, Ma Ying-jeou. That fell to 20.9 percent in 2023. The highest level seen under Tsai’s administration was 21.3 percent in 2017, the year after she took office.

Taiwan’s trade with the United States, however, has seen a notable increase. Taiwan’s exports to the U.S. rose from 14.7 percent of Taiwan’s total exports in 2021 to 17.6 percent in 2023. However, it is debatable how much of this is due to government policy versus the intrinsic pull of the strong, stable growth of the U.S. economy.

The first agreement of the U.S.-Taiwan Initiative on 21st-Century Trade was signed in June 2023 and went into effect a month later. The agreement contained no provisions to increase market access or to avoid double taxation. The trade diversification effect of this agreement has yet to be seen. Even absent a formal agreement, however, the recent reorganization of supply chains championed by both governments is seeing closer ties between Taiwan and the United States on certain critical products, including semiconductors.

Perhaps more importantly, though, the rising trend in Taiwan’s trade reliance on the United States coincides with a period where the U.S. economy kept performing better than expectations. As a result, the U.S. market is considerably more attractive to Taiwanese businesses than the market on the other side of the strait. 

Moving Forward

Mainland China’s economic difficulties are having a surprising side-effect: helping Taiwan to reduce its economic reliance on the China market, something government intervention by Taipei has long struggled to achieve. China’s poor economic performance is essentially jeopardizing its own national security and political goals.

The trade numbers also prove that not only Taiwan’s government but also individual businesses see the United States as a stable trade partner, if not the preferred one. The U.S. should seize the opportunity to deepen its trade relations with Taiwan and increase its economic resilience through more formal trade incentives.

Taiwanese people understand the consequences of overreliance on one single trading partner. And this issue is not unique to China, either. Forty years ago, when Taiwan still maintained its “no contact, no negotiation, no compromise” policy vis-à-vis mainland China, the United States accounted for almost 50 percent of Taiwan’s total exports. Washington had substantial leverage over Taipei’s economic and trade policy: from tobacco and alcohol to patents and copyrights. Taipei was under immense pressure and had to operate under Washington’s discretion, and it was a familiar face on Special 301 and Super 301 listings.

With that cautionary tale in mind, the Taiwanese government should continue to facilitate production diversification and transformation of the sectors vulnerable to Beijing’s economic coercion, particularly given China’s repeated warnings about suspending trade benefits under the ECFA. This should be a priority for President-elect Lai Ching-te.

The author thanks Ms. You Shih-Yi of the National Policy Foundation (Taiwan) for her guidance during the research process.