In President Barack Obama’s last remaining weeks in office, the President’s Council of Advisors on Science and Technology (PCAST)–an advisory group comprised of the nation’s leading scientists and engineers–released a report Ensuring Long-Term U.S. Leadership in Semiconductors. The objective of the 32-page report, published on January 6, was to “assess the challenges and opportunities facing semiconductor innovation, competitiveness, and security, and [outline] recommendations for action to address them.” In particular, the advisory group warned about the dangers posed by Chinese industrial policy in this sector and underscored Taiwan’s important role in the global supply chain for semiconductors.
According to the International Trade Administration, an agency under the Department of Commerce, Taiwan is the top market for semiconductor manufacturing equipment and the sixth largest US export market for semiconductors. Indeed, Taiwan’s semiconductor production industry boasted sales of approximately $71 billion in 2015. According to the World Semiconductor Trade Statistics, the global semiconductor market in 2015 was worth $335.2 billion, which means Taiwanese companies make up more than 20 percent of the global market share.
The PCAST report highlighted Taiwan, along with the United States, South Korea, Japan, and Europe, as current leaders of the global semiconductor industry. The group warned, however, that while China still lags behind the market leaders in most subsectors within the semiconductors industry, the Chinese government’s industrial policies—primarily through subsidies and zero-sum tactics—aimed to achieve global leadership through non-market means by 2030. Examples of China’s zero-sum tactics include regulations requiring customers to “buy only” from Chinese semiconductor suppliers, forced transfer of technology, theft of intellectual property, and collusion.
As noted by the PCAST report, semiconductors are not only essential for modern technologies such as computers, cellular telephones, solar panels, medical diagnostics, and self-driving cars, but they are also critical to defense systems, including the F-35 Joint Strike Fighter and the Humvee. The Congressionally-mandated US-China Security and Economic Review Commission pointed out in its 2016 Report to Congress that “[s]ince 2014, China-headquartered firms have proposed or finalized more than 30 mergers and acquisition deals in the semiconductor industry, totaling nearly $20 billion.” Ostensibly in response to China’s mercantilist industrial policy, PCAST called on the US government to enforce trade and investments rules by coordinating responses “with other countries to increase effectiveness and reduce the risk of retaliation.” The report highlighted Taiwan’s countermeasures, such as prohibiting and restricting “Chinese acquisition of Taiwanese semiconductor technology by not approving any mainland Chinese acquisitions of, or investments into, any domestic semiconductor firms. The Taiwanese government has also launched a public-private partnership with industry to co-invest in R&D.”
Another key, Taiwan-related recommendation of the report is for the United States to work with allies to strengthen global export controls and inward investment security. Specifically, the report recommended that:
The United States should work with like-minded partners to develop principles (insofar as possible) for acceptable and unacceptable market behavior, and to help build their administrative capacity to effectively implement appropriate controls and pursue needed investigations, since many countries are currently far less capable than the United States in this regard. Led by the Department of Treasury and Commerce, and by the Intelligence Community, this effort should provide global partners with technical assistance, training, and diplomatic support to identify risks and vulnerabilities and to remediate them.
The function of PCAST is to make policy recommendations in areas of science, technology, and innovation to the President, and to specific working groups, such as the PCAST Ensuring Long-term U.S. Leadership in Semiconductors Working Group that prepared this report, whose 19 members include leading American academic and business leaders. Recent reports endorsed by PCAST include: Science and Technology to Ensure the Safety of the Nation’s Drinking Water, Technology and the Future of Cities, and Accelerating U.S. Advanced Manufacturing, to name only a few.
Among other data points, the ITA report indicated that are a variety of export opportunities for US companies, which include “semiconductors (especially sensors and communications ICs) used in the Internet of Things (IoT),” which the report assesses will be a major demand driver over the next 10 years. These trends tracks with the current government’s Asia Silicon Valley Development Initiative—which centers on the IoT. Furthermore, under the Global Cooperation and Training Framework, which was signed between the United States and Taiwan in June 2015, the two sides have held two rounds of the Digital Economy Forum, which explored ways in which the United States and Taiwan can collaborate on high-tech entrepreneurship and education. As next steps, Washington and Taipei should deepen cooperation through this channel by addressing the pressing challenges highlighted by the PCAST report in the semiconductor supply chain, and coordinate and implement policies consistent with the recommendations of the PCAST report.
The main point: The PCAST report represents a positive recognition of Taiwan’s important role in the global supply chain for semiconductors. Washington and Taipei should deepen cooperation in this sector under GCTF by coordinating policies consistent with the recommendations of the PCAST report.
Economic Priorities for Taiwan’s Nascent “New Southbound Policy” Office
David An is a Senior Research Fellow at Global Taiwan Institute. He was previously a political military officer at the US State Department.
The “New Southbound Policy” (新南向政策) is a signature policy of Taiwan’s current Tsai Ing-wen administration, setting the direction to deepen Taiwan’s linkages among industries and societies with countries in Southeast Asia. What began as a DPP presidential campaign platform in 2015 is now a top government priority. Two months ago in November 2016, President Tsai declared that the New Southbound Policy had “entered a new operational phase,” with a New Southbound Policy office that will start work on June 15, 2017.
For President Tsai to add former Taiwanese Foreign Minister James Huang (黃志芳; 2006 to 2008) as the head of the New Southbound Policy task force and office is promising and shows that this policy office will have teeth. What does it mean for this New Southbound Policy to enter a new operational phase? In particular, what should the New Southbound Policy Office focus on as its top economic priorities, and what can it learn from others’ experiences in advocating for businesses overseas?
Considering Taiwan’s track record, the most promising direction for Taiwan’s businesses is to set up manufacturing operations in the region. In support of Taiwan’s businesses, two of Taiwan’s stated economic goals in the New Southbound Policy include making concrete progress on investment projects and expanding bilateral and multilateral partnerships. These will occur in a context of political, cultural, and educational events and activities throughout the region, with a focus on ASEAN countries. To achieve these goals, Taiwan will especially look to second generation immigrants of Taiwan descent in the region as the best connectors in this effort.
The Pou Chen Corporation (寶成工業股份有限公司) is an archetype of Taiwan’s southward economic pivot. It is Taiwan’s largest manufacturer of athletic shoes for brands such as Nike, Puma, Adidas, and though it had expanded production in China in the 1980s, in recent years it has been increasing its output from factories in Vietnam and Indonesia. Countless other Taiwanese companies have the same story to tell, especially as the investment climate in China is becoming less favorable due to rising costs, more market access limits, less qualified human resources, inconsistent enforcement of laws, and an overall less welcoming atmosphere—which is even described in official US State Department reports. Looking South is an increasingly attractive alternative for Taiwan’s businesses.
In the macroeconomic picture, there is much room for growth in trade between Taiwan and the region, and the Tsai Administration has picked the right time. Development Bank of Singapore (DBS) economist Ma Tieying mentioned that, “China’s slowdown, rebalancing and rising wages are prompting Taiwanese firms to adjust overseas strategies … ASEAN markets are attractive, thanks to strong growth, low-cost labor, and ongoing reforms and economic integration.”
Furthermore, a quick comparison between Taiwan and South Korea shows Taiwan’s economic promise in South and Southeast Asia. In 2015, Taiwan exported $2.9 billion to India, while South Korea exported $12.2 billion; Taiwan exported $3 billion to Indonesia, while South Korea exported $7.8 billion in goods to Indonesia. As a fellow “Asian Tiger,” Taiwan’s economy, focused on high-tech electronics, is comparable to South Korea. Though South Korea currently has a stronger trade presence in the region, Taiwan’s advantage is that Taiwanese businessmen and women carry over skills from more abundant experience managing expansive factories outside of Taiwan, in the PRC. There have been over a million Taiwanese businessmen and over 100,000 Taiwanese invested businesses in the PRC, compared to around 75,000 long term South Korean residents and 10,000 South Korean companies in the PRC.[1] Taiwan’s business management experience outside of Taiwan in the PRC is tenfold that of South Korea. Taiwan’s asset is not only its growing trade presence throughout the Asia region, but its valuable experience managing companies from a distance, and the numbers show there is room to grow.
In addition to Taiwan’s stated goals of overseas investments and partnerships, this renewed focus toward the South should be accompanied by greater official assistance to Taiwan’s businesses in the region. Taiwan already runs an impressive network of de facto embassies throughout the Asia region, officially known as cultural and economic resource offices. Through these offices, Taiwan’s officials can improve assistance to lobby local governments on behalf of Taiwan’s businesses, and perhaps expedite business permits and resolve legal disputes.
Taiwan can also borrow lessons from US government assistance to American businesses overseas. When the stakes for an American business are high, as in the billions of dollars for an international public tender, then it is no longer a private corporate interest but becomes a US national interest to win the international competition. At that point, the US government advocates on behalf of that company in an effort for the United States to win the business over other competitor countries. When multiple US companies are involved in the same competition, then the US government can only send its diplomats to perform “generic” advocacy, so it cannot favor one specific US company in a bid. However, when only one US company is involved, then the US can perform exclusive advocacy to put the entire US government behind that one company in that one bid.
Official advocacy is coordinated through the US Department of Commerce, which runs foreign commercial service offices at the US embassies. US State Department diplomats and officials in other departments like the Department of Defense also fully support US interests in major international business competitions. When the US government officially supports a US business, then the appropriate talking points will be included in the various meetings with relevant foreign counterparts to encourage a decision that favors US business. Taiwan could do the same, or heighten current advocacy in support of its businesses overseas through the New Southbound Policy.
From my personal experience working at the US Department of State, Japan’s 2011 multi-billion dollar F-X fighter aircraft competition comes to mind. As part of that effort, I travelled with a State Department and Department of Defense delegation to US Pacific Command in Honolulu to meet with Japanese counterparts to negotiate and advocate for US aircraft. With the encouragement of former US Assistant Secretary of Defense Chip Gregson and other senior officials, Japan ultimately selected the US’ F-35 aircraft over other European alternatives.
Will Taiwanese businesses in the Southeast Asia region manage to capitalize on existing opportunities to set up manufacturing operations? Furthermore, will this pivot south deliver the expected benefits for Taiwan’s economy; create jobs for Taiwan’s youth, shore up Taiwan’s new plans to be the center of an Asia Silicon Valley, or in any way serve as a practical alternative to the past trend of investing heavily in the People’s Republic of China? Time will tell, and for the current Tsai government’s sake it would hopefully happen before the next election in 2020.
Taiwan’s populace will be looking for the tangible results of the New Southbound Policy, and Tsai’s Administration has just a few years to deliver. As Bill Clinton famously said, elections are primarily determined by the state of the domestic economy, just before he won in the 1992 election against George H.W. Bush. Tsai’s prospects for re-election, and the economic future of Taiwan, will look much brighter if she can prove that a renewed and strengthened economic and diplomatic policy of looking south is beneficial.
Subsequent articles on Taiwan’s New Southbound Policy will address how Taiwan can work with the United States in new ways in Southeast Asia, how it can deal with China’s influence in the region, the political and economic challenges that Taiwanese manufacturing businesses will face, and recommendations on how to overcome these challenges.
The main point: There is great promise in Taiwan’s New Southbound Policy to uncover new trade opportunities, and improve Taiwan’s economy, but Tsai has just a few years to prove it.
[1] David Shambaugh, China Goes Global (Oxford, UK: Oxford University Press, 2013). Page 100.