While continued trade tensions between the United States and China afford Taiwan an opportunity to reduce its dependence on the Chinese economy, they could ultimately prove harmful to Taipei. In her May 20, 2016 inaugural address, Taiwan’s President Tsai Ing-wen (蔡英文) affirmed her campaign pledge to enact a New Southbound Policy (NSP) that would strengthen Taipei’s centrality within the Asia-Pacific. It is more comprehensive in scope than the similarly named policies of her predecessors Chen Shui-bian (陳水扁) and Ma Ying-jeou (馬英九), which focused primarily on reducing Taiwan’s economic reliance on mainland China. As a recent report by the Center for Strategic and International Studies (CSIS) observes, the NSP “is designed to leverage Taiwan’s cultural, educational, technological, agricultural, and economic assets to deepen its regional integration.”
Still, the imperative of economic diversification endures. President Tsai further stated in her inaugural address that the NSP seeks to “elevate the scope and diversity of [Taiwan’s] external economy” and overcome its “past overreliance on a single market”—that single market, of course, belonging to China. To this end, the policy endeavors to boost Taiwan’s economic relations with 18 countries: the ten member countries of the Association of Southeast Asian Nations (ASEAN), six further countries in South Asia, and Australia and New Zealand. Where Taipei sent roughly a quarter of its exports to Beijing at the turn of the century, that proportion had reached roughly two-fifths by the time President Tsai took office. Of Taiwan’s total trade in 2018—which accounted for approximately two-thirds of its gross domestic product (GDP) that year—$150.3 billion was with China, whereas trade with NSP target countries amounted to only $116.6 billion combined.
Trade tensions between the United States and China over the past two and a half years have made it more pressing for Taiwan to deepen its network of economic partnerships. At the outset of 2018, the average US tariff on Chinese exports was 3.1 percent, while the average Chinese tariff on US exports was 8.0 percent; those figures are expected to reach, respectively, 19.3 percent and 20.9 percent by the beginning of 2020. To the extent that those increases augur a fundamental shift in US-China relations, the implications for the world economy would be significant: in addition to accounting collectively for about two- fifths of gross world product (GWP), Washington and Beijing are two linchpins of global supply chain networks.
While present trends in US-China economic relations have some potential upsides for Taiwan, the potential downsides may prove more significant.
Potential Upsides of Trade Tensions
China’s competitiveness had already been eroding prior to the onset of trade tensions between Washington and Beijing. In 2000, its hourly productivity-adjusted manufacturing labor cost was roughly four times lower than America’s; by 2017 it was only about two times lower. A growing number of companies had accordingly put into place various “ABC” (“anywhere but China”) strategies to diversify their supply chains. A recent analysis notes that the Trump administration’s tariffs “gave many businesses a final reason to look elsewhere.”
With her “Invest Taiwan” initiative, President Tsai is incentivizing Taiwan-based companies with operations in China to train their sights back home; such companies have pledged to inject $39 billion into Taipei as of this piece’s writing, and Deputy Minister of Economic Affairs Kung Ming-hsin (龔明鑫) predicts that that figure could increase by somewhere between $9.75 billion and $13 billion over the next two to three years. It is plausible to imagine, moreover, that companies based outside of Taiwan that do substantial business in China will give Taiwan a fresh look as they reconfigure their supply chains. In addition, per the NSP, Taiwan is expanding its presence in the Asia-Pacific: it secured 20 contracts in 2018 to build infrastructure in the region, up from four in 2015; it increased its trade with NSP target countries by 5.5 percent from 2017 to 2018; and it has established “Taiwan Connection” platforms in India, Indonesia, Malaysia, Myanmar, New Zealand, Sri Lanka, Thailand, and Vietnam, aimed at strengthening educational exchanges between Taiwan and the rest of the region.
Potential Downsides of Trade Tensions
One should not be too sanguine, though, about the extent to which a fundamental disruption in US-China trade relations would benefit Taiwan—for at least three reasons. First, given China’s presently dominant role in global supply chains, any effort to relocate a significant segment of production outside of the People’s Republic of China (PRC) would be challenging. Consider Taiwan’s high-tech industry. In 2018, United Microelectronics Corporation terminated its cooperation with Fujian Jinhua Integrated Circuit Company, its Chinese state-backed partner, after the United States banned Fujian from buying components from US firms. Or take Taiwan Semiconductor Manufacturing Company, the dominant player in Taiwan’s integrated circuits space: it must now be far more careful about supplying to Huawei, a core source of its revenue, lest it incur US penalties.
Taipei’s dependence on China manifests in other ways. Over 70 percent of its outbound investments presently transit through China; an estimated 100,000 Taiwan- based businesses maintain operations in China; and, as of 2016, an estimated 56 percent of Taiwan’s citizens employed overseas worked on the mainland. In brief, however much rhetorical urgency Taiwan assigns to diversifying away from Beijing, doing so to any significant degree would be a massive undertaking.
Second, the increasing costs of doing business in China do not automatically benefit Taiwan, since some firms based there are shifting capacity elsewhere rather than returning to Taiwan. Because there is no single country that can readily replace China as a manufacturing base, Taiwan will have to depend on a far wider array of partners moving forward; as the supply chains on which it relies grow fragmented, they will likewise become increasingly inefficient.
Third, Taiwan has its own competitive liabilities. Manufacturing costs there remain higher than in China, and Taipei continues to grapple with the so-called “five shortages” that compelled many of its companies to relocate to China starting in 1991, when Taiwan began permitting direct investment in the mainland: electricity, labor, land, talent, and water.
Perhaps most concerningly, it confronts a grim demographic outlook: according to the World Health Organization, Taiwan transitioned in 2018 from being an “aging society” to an “aged society,” the latter being defined as one in which individuals 65 and over constitute 14 percent or more of the population. It is forecast to be a “super-aged society” by 2026, when the aforementioned segment will have surpassed 20 percent.
Taipei is contemplating various measures to mitigate these trends. Foreign care workers, for example, are presently allowed to stay in Taiwan for a maximum of 12 years; the Legislative Yuan is considering a bill that would classify them as “skilled technicians” who are permitted to reside in Taiwan permanently.  Taipei is also working to enhance its automation capacity, with “smart machinery” serving as one of the Tsai administration’s five priority industries for development. In addition, a 2017 survey by the International Federation of Robotics found that Taiwan had the tenth highest “robot density” in the world.
The extent to which Taiwan’s many efforts will assuage anxieties about doing business there is unclear: according to a January 2019 survey by the American Chamber in Taipei, only 45.8 percent of polled members stated that they were very or somewhat confident about Taiwan’s economic outlook in 2019, down nearly ten percentage points from 2018. The longer US-China trade tensions persist, the more likely such concerns will calcify.
It is too early to render definitive judgments on the question that motivates this paper. Given the duration and complexity of contemporary economic relations between the United States and China, any recalibration thereof could take years, if not decades, to resolve itself, with global reverberations. It would be a fool’s errand to try and predict the form that an economic “new normal” between the two giants might take; candidly, it would be risky to presume with any confidence what even the coming months might entail. If Washington and Beijing reach a trade détente in the short term, for example—say, before America’s next presidential elections, in November 2020—Taipei might be able to avoid incurring the costs of long-term supply-chain restructuring, thereby rendering moot much of this paper’s speculation. Or, if the next global recession that occurs is “made in China,” Taiwan may be able to make more headway in disentangling its economy from that of the mainland and persuading prominent global companies to accept the short- to medium-run costs of leaving China.
Despite the aforementioned uncertainties, Taiwan would be remiss to indulge in schadenfreude over China’s competitive woes; given its extant economic dependence on the mainland, its economic fortunes are likely to mirror those of the latter. S&P credit analyst Raymond Hsu explained in a recent report that “[a] slowdown in China’s economic engine could affect almost all of Taiwan’s top corporates, given their trade reliance on China and the importance of global demand for the products they manufacture in and export from China.”
This paper suggests at least three core questions to keep in mind as the economic relationship between Washington and Beijing evolves. First, how quickly will Taiwan be able to diversify away from China as an export destination? Second, how quickly will Taiwan be able to boost its domestic competitiveness? Third, how competitive will Taiwan prove relative to other emerging manufacturing hotspots, such as Vietnam? Whatever the answers to these questions may be, there is little dispute that adjusting to US-China trade tensions will be as imperative as it is vexing for the dynamic island caught in the middle.
The main point: The ongoing trade conflict between the United States and the PRC has presented Taiwan with a number of valuable opportunities to disentangle its economy from that of China. However, Taiwan’s countless economic ties with China could make this process difficult or even impossible. While the long-term impacts of the US-China trade conflict for the Taiwanese economy remain unclear, it is evident that the clash will have significant consequences for the future of the island.
 This information comes from a meeting with a government official that took place during CSIS’s 2019 Taiwan-US Policy Program.