American and Taiwanese officials just held one of their first economic dialogues since President Joseph Biden was sworn into office. The urgency for the meeting was reportedly to discuss a shortage of semiconductors for the automobile industry and ways Taiwan, a global leader in chip manufacturing, can help meet demand. Just in the last year, Taiwanese companies have announced big plans to invest more in semiconductor manufacturing in the United States. In fact, Taiwan may be one of the few economies to have seen its total outward direct investments (ODI) actually increase in 2020—an impressive feat since Taiwan is no stranger to the economic impact of the COVID-19 pandemic. The amount of Taiwan’s new ODI increased 61 percent last year. This should be welcome news given direct investment can support job growth, increase productivity, and can help mitigate disruptions to supply chains.
Inward Foreign Direct Investment
Direct investment is either foreign (coming into a country) or outward (going from a country) depending on the direction it’s going. One country’s outward investments are another country’s foreign investments.
A recent report from the United Nations Conference on Trade and Development revealed that the value of new global foreign direct investment (FDI) fell by 42 percent in 2020 to a total estimate of USD $859 billion. Developed economies, especially those in North America and Europe, were hit the hardest with new FDI falling 69 percent last year. That’s because few have been safe from the economic impact of the pandemic. The negative impact makes it hard not just for economies to attract FDI but for companies to increase their outward investments as they struggle at home.
Taiwan’s economy has fared relatively well during the pandemic compared to most. Its successful pandemic management and low infection rate is admired as an example of best practices. Generally speaking, unemployment numbers have rebounded since an initial increase at the onset of the pandemic. The unemployment rate is now roughly the same as it was in 2018 and 2019 (3.7 percent). Gross domestic product (a measurement for the size of an economy) growth has been anemic in 2020 but not as volatile as some other major economies. Taiwan’s economy is expected to have zero growth in 2020 but rebound to 3.2 percent growth in 2021. Meanwhile, advanced economies are estimated to have seen their economies shrink by 4.9 percent last year.
With the pandemic having just a slight drag on Taiwan’s economy, Taiwan saw a USD $2 billion (roughly 18 percent) decrease in new FDI in 2020—bringing the total value of new FDI to USD $9.3 billion. The decrease is not as bad as it was for some of the world’s larger economies though. Many advanced economies saw double-digit decreases in their amount of new FDI including Canada (a decrease of 34 percent), Australia (46 percent), the US (49 percent), Germany (61 percent), and the United Kingdom (over 100 percent).
It’s questionable what sort of impact the decrease in new FDI will have on Taiwan’s economy, if any. A significant amount of decrease last year came from known tax havens including the Caribbean (38 percent) and the Netherlands (83 percent). But Taiwan also saw less FDI from Japan (24 percent), Germany (68 percent), and Australia (89 percent) compared to 2019. These decreases were primarily seen in manufacturing, energy, and finance/insurance.
Investment from the United States (historically the largest foreign investor in Taiwan besides the Caribbean or Netherlands) decreased roughly 28 percent. However, there were also some new major investments and partnerships announced including Google’s plans to invest more in Taiwan’s hardware manufacturing and Microsoft’s plan to make Taiwan an “Asian Digital Transformation Hub.” There was also a significant increase (338 percent) in investment from Denmark as companies (Orsted) look to invest more in Taiwan’s demand for energy diversification.
Outward Direct Investment
The world saw investment from Taiwan increase USD $6.7 billion (61 percent) last year to USD $17.7 billion. Even though Taiwan’s ODI was particularly low in 2019 (making the increase in 2020 seem bigger), ODI in 2020 wasn’t that much different from prior years. And these new investments were surely welcome as other countries struggled with high rates of unemployment, supply chain disruptions, and questions over economic resiliency.
Roughly half of Taiwan’s annual ODI last year was in manufacturing, most of which is in electronic parts and component manufacturing like semiconductor fabrication. By now, everyone should be familiar with the announcement Taiwan Semiconductor Manufacturing Company made in May to invest USD $12 billion in Phoenix, Arizona to build a top-of-the-line semiconductor fab. Last year, Taiwan investors increased their investments particularly in Hong Kong (99 percent), Indonesia (244 percent), Japan (440 percent), and the US (648 percent).
About one-third of Taiwan’s total ODI last year went into China, though this shouldn’t be surprising. China was one of the few countries last year to see its new FDI actually increase (4 percent). There are a few reasons for this which I’ll skip for now. But for the first time ever, China was the largest destination for FDI in the world (a title historically held by the United States). Depending on how well the Biden administration handles its pandemic response, this honorary title can easily switch back.
Historically speaking, China has often been a popular investment destination for Taiwan. Since the early 2000’s, the total stock of Taiwanese investment in China became greater than its investment in the rest of the world. But since 2015, the annual amount of Taiwanese investment in the rest of the world has outpaced investment into China—signaling how much more interest there is in countries like Japan, Singapore, the United States, and Vietnam, and concern there is about the deteriorating investment environment in China. Taiwanese investment into China has been on a solid downward trajectory for the last ten years now and likely to continue.
Investment Cooperation and Regulations
Towards the end of 2020, American and Taiwanese officials announced plans to work together more on investment. In a memorandum of understanding signed in November, officials noted the need to work together on issues like building safe communications infrastructure and advanced manufacturing. What’s more, the newly formed US-Taiwan Economic Prosperity Partnership Dialogue includes an effort to protect the United States and Taiwan from investments that might threaten our national security, like those in the semiconductor industry.
According to the Dialogue’s fact sheet, “both sides committed to explore ways to increase communication and collaboration between the Committee on Foreign Investment in the United States (CFIUS) and Taiwan’s Ministry of Economic Affairs (MOEA) on investment screening, through AIT and TECRO.”
Over the last few years, governments have become increasingly concerned about certain foreign investments, particularly those investments from China. While foreign investment is often encouraged, a boom in Chinese investment around 2016 worried American, Japanese, and European lawmakers into rethinking and modernizing their respective rules for screening foreign investment.
In 2018, the United States passed the Foreign Investment Risk Review Modernization Act to update the authorities of CFIUS. A year later, Japan would update its Foreign Exchange and Foreign Trade Act. And by late-2020, the European Commission’s guidance for foreign direct investment screening would go into effect, though it’s still up to European member states to implement their own national-level screening regulations.
While these regulations are a necessary tool to protect the United States and others from certain investments (and investors), they can also impose a cost on investments coming from countries that are our friends and allies. The updated regulations can also increase the number of investment transactions that are reviewed. While CFIUS has historically focused much of its resources on investments from China, in 2019, CFIUS reviewed almost twice as many investments from Japan (46 transactions) as it did China (25 transactions). CFIUS has reviewed 14 investments from Taiwan since 2005, of which eight reviews occurred in 2018 and 2019—a possible increasing trend.
The new Dialogue’s focus on investment screening can hopefully mitigate concerns that potential American and Taiwanese investors have about coming under increased review under these new regulations. And greater collaboration could potentially expedite those investments that do come under review. The Dialogue will also be good for our national security given there should be regular meetings and information sharing on “trends in investment and technology that could pose risks” and “information with respect to specific technologies and entities acquiring such technologies.” Together we can track and monitor the activities of suspicious investors.
Bilateral US-Taiwan investment is not just increasing in value but becoming increasingly important. The fact that investment from Taiwan increased in 2020, the worst economic year in a lifetime, is something to appreciate and not take for granted. We should hope to see more bilateral investment in the future. Hopefully, efforts to protect from suspicious investments won’t hinder the good ones. And so, it’ll be important for the Biden administration to continue the good work already started under the US-Taiwan Economic Prosperity Partnership Dialogue.
The main point: Bilateral US-Taiwan investment is not just increasing in value but becoming increasingly important.