The COVID-19 Factor and Impact of US-China Trade War on Taiwan

The COVID-19 Factor and Impact of US-China Trade War on Taiwan

The COVID-19 Factor and Impact of US-China Trade War on Taiwan

The outbreak of the novel coronavirus (COVID-19) is wreaking havoc on the global economy, bringing even greater uncertainty to a world order already in flux. As a result, Taiwan’s economy is experiencing a slowdown, with a lower than expected gross domestic product (GDP) growth in the first quarter of 2020. To be sure, the Taiwanese economy seems to have been spared from the worst effects of COVID-19, yet the intensifying trade war between the United States and China will likely compound the complexity for the Taiwanese economy going forward. For instance, the US-China trade war has raised the issue of Taiwan’s trade reliance on the Chinese market in the face of US tariffs while encouraging businesses from Taiwan to reinvest in the island. The COVID-19 pandemic has also highlighted global dependence on the supply chain for many critical products—such as in the pharmaceutical industry—that are mostly sourced from China with Taiwanese input. However, it has also helped to increase demand for other exports from Taiwan. Overall, both the COVID-19 pandemic and the ongoing trade war are likely to have significant implications for the island.

How Did We Get Here?

Since the 2016 American presidential election, President Donald Trump has focused on making “better” trade deals in order to benefit the US economy and increase American manufacturing jobs. Doing away with “unfair” trade deals and not allowing other countries to “take advantage” of the United States have been his administration’s most important policy positions. Starting in 2017, Trump began talks with China over trade. When the two governments failed to reach an agreement, the United States slapped tariffs on China throughout 2018, with an average tariff increase of 8.2 percent. These actions eventually led to large-scale US tariffs on many goods from China, such as plastic tableware, handbags, luggage, and clothing. Meanwhile, China retaliated against the United States with tariffs on US agricultural goods, including soy beans, crude oil, and 5,078 other product categories.

After nearly three years, the US-China trade war has yet to be resolved, and many other countries, especially Taiwan, have been caught in the crossfire. Taiwan has been placed in a difficult position as a key trade partner of both China and the United States. What has happened to Taiwan’s economic and trade relations with the two countries since the onset of the trade war, and how has the COVID-19 outbreak affected Taiwan’s position between China and the United States?

Taiwan’s Economic Links with China

China has a huge role when it comes to Taiwan’s economy, accounting for approximately 30 percent of Taiwan’s total trade, making China Taiwan’s largest trading partner. This amounted to USD $150.5 billion dollars in bilateral trade in 2018. Many Taiwanese businesses have established production operations in China. For instance, Taiwanese technology companies such as Taiwan Semiconductor Manufacturing Co. (TSMC, 台灣積體電路製造股份有限公司) are heavily reliant on the Chinese supply chain. During a recent slowdown in the Taiwanese economy, turning to China seemed like an excellent solution to some Taiwanese, as shown in Han Kuo-yu’s (韓國瑜) 2019 election victory as mayor of Taiwan’s second largest city, Kaohsiung. Han’s campaign focused on selling more Taiwanese fish, vegetables, and other goods to the Chinese market as a way to revitalize the city’s economy, which has been stagnant since 2017. Taiwan’s GDP is expected to reach 2.5 percent growth in 2019, down 0.3 percent from 2018, while its wages have remained stagnant. These problems, combined with significant links between the Chinese and Taiwanese economies, further reinforce Taiwan’s need to diversify economic links with foreign trade partners and to not rely on Chinese investment to help improve the sluggish economy.

Taiwan has implemented multiple policies in order to combat this economic stagnation and reliance on China. To this end, the Tsai administration has launched the New Southbound Policy (NSP, 新南向政策) and the InvesTaiwan office (投資台灣事務所). Both of these initiatives have had moderate success, but have not yet yielded their desired results. The NSP has brought more international attention to Taiwan and has helped to build stronger relations with some Southeast Asian countries, including the Philippines and New Zealand. Since the announcement of the NSP in 2016, Taiwan’s trade with the 18 targeted countries has increased by 22 percent. Despite this progress, Taiwan has yet to create strong and sustained economic growth, as shown by its reduced GDP growth rate. InvesTaiwan, on the other hand, is starting to see some success, with many businesses moving production back to Taiwan, a phenomenon also spurred by rising US-China trade tensions and the supply chain disruption in China caused by the coronavirus.

Costs and Benefits of the US-China Trade War

The US-China trade war could have significant economic consequences for Taiwan. In many cases, the main costs from the trade war are not from direct US tariffs on Chinese goods, but rather from decreasing US demand for Chinese goods, which often use Taiwanese components such as semiconductors. One of the most significant risks to Taiwan is the disruption of the supply chain in China, which could dampen global demand for Taiwanese electronics. This disruption is the result of an array of factors, including the coronavirus pandemic, US tariffs, and the Trump administration’s increasing policy focus on limiting imports of Chinese products from companies such as Huawei, which uses components from Taiwanese firms such as TSCM.

While the trade war has had negative impacts on Taiwan, there are also many upsides for Taiwan’s economic outlook. As a result of shifting trade patterns, Taiwan has sent an additional USD $4.2 billion in Taiwanese exports to the United States in 2019 compared to the previous year. Of that amount, USD $2.8 billion comes from office machinery and communication equipment from Taiwan, according to a UN report. This is compared to a USD $10 billion drop in exports of office machinery and communication equipment from China. These immediate gains are crucial to support Taiwan’s long-term goal of increasing its economic footprint in the global economy.

The trade war is also one of several factors behind the relocation of Taiwanese firms back to Taiwan. US tariffs are increasing the costs of exporting goods from China to the United States and lowering US demand for Chinese goods. As a result, Taiwanese firms are considering moving production from China back to Taiwan or to ASEAN countries. Taiwan has the most to gain from the production relocation resulting from the trade war. Not only could Taiwan grow economically, but more Taiwanese businesses investing back into the island over the long-term would help to relieve Chinese leverage and influence over the Taiwanese economy. However, Taiwan will need to ensure that the relocation costs are low and that the large-scale influx of businesses does not drive up labor and land costs, which could discourage further companies from returning. Taiwanese businesses that require high-skilled labor may find Taiwan the most suitable destination for relocation, whereas those seeking low-skilled labor could turn to Southeast Asian countries such as Vietnam.

The COVID-19 Factor

The outbreak of the novel coronavirus in Wuhan, China, which has since spread around the world, has complicated the transfer of production from China to Taiwan and other ASEAN countries. Taiwanese firms at first struggled to deal with the pandemic and its ramifications in China, as the halt in production in China led to a shortage of raw materials, which are usually imported from China. While Chinese factories are restarting production, the significant supply chain disruption during the outbreak has exposed the level of Taiwan’s economic dependence on China and its supply chain. The coronavirus pandemic is making a more compelling case for Taiwanese firms to move production back to Taiwan or to shift manufacturing to ASEAN countries.

The economic outcome of the COVID-19 outbreak is yet to be fully determined, as Taiwan’s GDP growth reportedly slowed to 1.54 percent in the first quarter of 2020, down from 3.31 percent in the previous quarter in 2019. Many European countries have closed their borders and shut down economically, while the United States is suffering a pronounced economic recession. These factors are threatening imports from Asian exporters, including China and Taiwan, as global demand falls during the economic downturn. While the Phase 1 of the US-China trade deal took effect in February, it may be difficult for both countries to implement the deal in light of the outbreak. The COVID-19 crisis creates additional uncertainty for Taiwan on top of the trade war, while also creating an opportunity to accelerate the tide of Taiwanese businesses reshoring to the island. The US-China trade war and the COVID-19 pandemic have created a unique situation for Taiwan. In order to navigate it successfully, Taipei will need to mitigate the potential adverse effects arising from a global economic slowdown and capitalize on Taiwanese firms returning to the island.

The main point: While both the US–China trade war and COVID-19 have had adverse effects on Taiwan immediately, Taipei has the potential to come out of these two unique circumstances in a much stronger position than it was in previously if both are handled properly.