Caught in the Crossfire: The Threat to Taiwan of a Looming US-China Trade War

Caught in the Crossfire: The Threat to Taiwan of a Looming US-China Trade War

Caught in the Crossfire: The Threat to Taiwan of a Looming US-China Trade War

Dennis Halpin is a visiting scholar at the US-Korea Institute at SAIS (Johns Hopkins University). He previously served as an analyst in the INR Bureau at the State Department, and on the Foreign Affairs Committee of the House of Representatives as an adviser on Asian issues from 2000 to 2013.

US President Donald Trump, drawing on his penchant for clarifying major policy changes via his twitter account, shook Wall Street with his March 2 pronouncement that “trade wars are good, and easy to win.” This tweet came out a day after the president suddenly announced that the United States would impose tariffs of 25 percent on steel and 10 percent on aluminum. This news sent the Dow Jones Industrial Average plunging by over 400 points as corporate America went into panic mode. CNN reported that the Business Roundtable had “warned Trump that tariffs could backfire” with “foreign retaliation” that would “harm the US economy.” But it is not only American producers and consumers who would be caught in the crossfire of a global trade war. The economies of such staunch Asian trading partners as Taiwan, South Korea, and Japan would also take a hit.

Focus Taiwan reported on March 9 that “Taiwan will seek negotiations with the United States on tariffs to be implemented on steel and aluminum imports into the US, in a bid to protect the interests of Taiwanese exporters, according to the Ministry of Economic Affairs (MOEA).” The MOEA reported that Taiwan’s steel product exports to the US totaled US $1.3 billion in 2017, accounting for 13.16 percent of the total steel exports, while Taiwan’s aluminum product exports to the US totaled US $44 million, or 6.15 percent of the total aluminum exports. In 2017, the US was the largest buyer of Taiwan’s steel products, and the sixth-largest buyer of Taiwan’s aluminum products, the MOEA said. A subsequent report in Focus Taiwan on March 17 noted that Taipei will be sending a high-level MOEA official to Washington before the March 23rd deadline (when the tariffs on steel and aluminum imports go into effect) “to negotiate for the exemption of the country’s steel and aluminum exports from recently announced tariffs, according to an unnamed official from Taiwan’s representative office in the US.”

“China, China, China, jobs, jobs, jobs,” had been a rallying cry of Donald Trump’s 2016 presidential campaign. These slogans drew the populist support of white, working-class voters. These same voters propelled Trump to victory in such ‘Rust Belt’ states as Pennsylvania, Ohio, Michigan, and Wisconsin. Once in office and following a Mar-a-Lago summit with Chinese leader Xi Jinping, Trump’s anti-China protectionist rhetoric seemed to fade away under the tutelage of such globalist economic experts as Gary Cohn. However, earlier this year, the anti-China protectionist rhetoric suddenly re-emerged, encouraged by trade deficit hawk and Trump advisor Peter Navarro. The former university professor reportedly had a White House showdown with Gary Cohn on the trade issue where the two went mano-a-mano gladiatorial-style in front of the president, who relishes such discord. Navarro, according to MarketWatch, emerged victorious and Cohn, the head of the president’s National Economic Council, set out for a White House exit.  

The Wall Street Journal confirmed on March 14 that further moves against Beijing as a major target of President Trump’s renewed protectionist push are expected. A White House spokesperson stated that “the US is pressing China to reduce Beijing’s bilateral trade surplus by $100 billion.” While China may be Trump’s target, Taiwan would suffer extensive economic collateral damage given the interlocking nature of the cross-Strait economies, the intricate cross-border supply chains, foreign direct investment, and Taiwan’s numerous brick-and-mortar factories in the People’s Republic of China (PRC).

Catching Taiwan in the crossfire of a US-China trade war would do significant potential damage to US farmers as well. Taiwan Today reported last September on a deal signed by a delegation of Taiwan grain importers to purchase nearly $3 billion in American grain. Overall Taiwan was the seventh largest export market for US agricultural products in 2016, and the United States 10th largest trading partner. Taiwan’s IT ties to Silicon Valley are also significant. If a trade war adversely affects the discretionary income of Taiwan consumers, the economic fallout will likely be felt in America all the way from Iowa to California.

This largely unanticipated decision to impose steel and aluminum tariffs also reportedly grew out of domestic political considerations as the Trump Administration seeks to make good on its protectionist promises to its working-class base in light of the approaching mid-term election cycle in November. Specifically, the March 13 special Congressional election in the 18th Pennsylvania district, a steel-producing area, may have been a motivator to move on the tariffs. (If that was a key motive, it failed as the Democratic candidate managed to eke out a narrow victory in the very heart of Trump country).  

But whatever the motive, the costs of escalating trans-Pacific trade tensions present a major challenge to Taiwan and the economic wellbeing of its populace. In spite of President Tsai Ing-wen’s proactive New Southbound Policy, seeking a course correction with regard to ‘putting all of one’s eggs in one basket’ via economic overdependence on the mainland, China still looms large as the world’s second-largest economy across a narrow strait. China remains Taiwan’s main trade partner being the recipient of an estimated nearly 30 percent of Taiwan exports by value (40 percent including Hong Kong). The 2010 Economic Cooperation Framework Agreement between Taipei and Beijing removed tariff barriers on hundreds of goods flowing in both directions. In December 2016, Quartz reported that “about 2 million Taiwanese live in China permanently, running businesses large and small. […] These Taiwan businesses employ thousands – sometimes tens of thousands – of mainland Chinese in the tech and manufacturing sector, and rely on a mixture of Taiwanese and Chinese capital to fuel their business expansion. Foxconn, or Hon Hai, is the largest with about one million employees on the mainland. Foreign direct investment from Taiwan into China this year [in 2016] has already exceeded $10 billion.” The picture is clear.  

Foxconn microchips assembled in Chinese factories make their way into the US’ IT industry, including inside Dell computers and Apple iPhones. Any disruption of the Taiwan-China-US supply chain caused by escalating trade barriers would thus have severe economic repercussions for producers and consumers in all three economies.  

The global nature of these economic links became quite apparent when Taiwan’s Foxconn decided last year to build a massive factory in Wisconsin to make flat-screen displays. This move was hailed by the Trump Administration as demonstrating the president’s ability to fulfill his pledge to bring manufacturing jobs back to America. (The Atlantic reported on July 27 that Foxconn estimated that the new facility would create 3,000 jobs in the next four years while State of Wisconsin’s officials put the estimate higher at 13,000 new jobs). The announcement also drew the attention of the House Republican leadership as the new factory will be constructed in Racine County, in the heart of House Speaker Paul Ryan’s congressional district. Ryan, not surprisingly given the potential Foxconn jobs at stake for his constituents, has publicly said that he is “extremely worried” over the consequences of a potential trade war.  

Many of Ryan’s Congressional Republican colleagues, 107 in all, followed suit in a March 7 letter, reported by CNBC, calling on President Trump not to impose broad tariffs on steel and aluminum and to focus on “China’s unfair trade practices” instead. The Republican Party has, of course, adjusted a number of once rock-solid Reaganite positions, including regarding free trade, in order to accommodate to the era of Trumpism. President Trump did relent a bit, possibly due to this Congressional pressure, in later announcing tariff exemptions for major steel exporters Canada and Mexico due to ongoing NAFTA renegotiations.

The difficulty with targeting Beijing, as not only Members of Congress but incoming Trump top economic advisor Larry Kudlow did with his call for a ‘tough response’ to China, is that it ignores the intricate links of a globalized economy. Singling out one ‘unfair’ trade partner can have significant unintended consequences for other economic bystanders. In potentially crippling the economies of steadfast allies and responsible trading partners in Taipei, Seoul, and Tokyo, Kudlow and company risk ‘throwing out the baby with the bathwater.’

The United States, already seen to be economically retreating in Asia due to its withdrawal from Trans-Pacific Partnership (TPP) negotiations, risks losing even further ground to Beijing in the most economically vibrant region of the world. One cannot win at poker by throwing in one’s cards, cashing in one’s chips, and then abruptly walking away from the table. And Asia today, with Taiwan as a major hub, is where the high stakes poker economic game is being played. Unlike the nineteen fifties, the American economy can no longer go at it largely alone and still maintain the expected high standard of living for its people.

Beijing, sensing it is the real target of escalating American protectionism, seems ready to take the gloves off. China’s semi-official news publication, Global Times, stated in a March 14 editorial: “If the US wants to reduce its trade deficit, it has to make Americans more hard-working and conduct reforms in accordance with international market demand, instead of asking the rest of the world to change. […] Once a trade war starts, capable countries won’t bow to the US. China has tried hard to avoid a trade war, but if one breaks out, appeasement is not an option.”

Given the grave historic precedent of the Opium Wars, when Great Britain sought to solve a looming trade deficit with China by forcing the importation of opioids on a reluctant Chinese government, Beijing seems unlikely to yield to Western trade pressure. Chinese officials have also expressed confidence that their populace, which endured over a century of economic deprivation through rebellions, invasions, and civil war, can more easily “chi ku” (吃苦) –eat bitterness– than the average Trump voter, who will see the prices of all his or her favorite inexpensive Asian imports skyrocket as a result of a full-blown trade war. And there will be America’s friend Taiwan caught in the middle.

The real showdown looms in the near future. The Trump Administration’s investigation of Chinese technology transfers, economic property rights, and innovation practices under Section 301 of the Trade Act of 1974, initiated in August 2017, has already resulted in a draft report of findings reportedly circulating in the White House that is awaiting further action. The Hill reported on March 18 that Congressional Republicans are open to targeted China tariffs and that “Trump is said to be considering imposing tariffs on up to $60 billion worth of Chinese imports following an investigation under ‘Section 301’ of the trade act, which covers intellectual property.” Thomas J. Donohue, CEO of the US Chamber of Commerce, cautioned, however, that such tariffs would “wipe out” a significant chunk of the benefits of the GOP tax law.

According to a March 4 report in Hong Kong’s South China Morning Post: “The prevailing consensus is that unilateral penalties will be imposed on China, and bean counters at the US International Trade Commission are said to be tallying up the numbers on China’s annual intellectual property rights theft. There are even whispers Trump might trigger the International Emergency Economic Powers Act, an extreme unconventional enforcement tool ‘to deal with an unusual and extraordinary threat […] to the economy of the United States’ and restrict Chinese foreign inward investments in the US across a swathe of sectors.”  

As Americans face their first major trade war in almost 90 years, it might be wise for the economic policy planners to examine the history of the last great trade war: the protectionist Smoot-Hawley Tariff Act of June 1930, the second-largest tariffs in almost a century. The passage of these tariffs by an overwhelmingly Republican Congress under a Republican President (Herbert Hoover) led to almost immediate tariff retaliation by America’s main trading partners. Smoot-Hawley helped to put the ‘Great’ in the ‘Great Depression,’ swept the Republican majorities out of Congress for a generation, and contributed to the end of Herbert Hoover’s political career. A partner at J.P. Morgan at the time noted that “that Act intensified nationalism all over the world” just as fascism was on the rise. It also hurt America’s most loyal trading partners, such as Canada.

Will Taiwan be the Canada of the newest trade war?

The main point: As a looming trade war between Washington and Beijing becomes increasingly likely, Taiwan runs the risk of being inadvertently caught in the crossfire. Given the intricate cross-Strait economic links via supply chains, foreign direct investment, and Taiwanese manufacturing facilities in the PRC, the damage to Taiwan’s economy could be considerable. Given Taiwan’s status as a major importer of American agricultural and other products, and as an IT supplier, any resulting downturn in Taiwan’s economy would have repercussions from Iowa to Silicon Valley.