Diversifying Trade: Where Taiwan Stands Today, and Where It Should Go Tomorrow

Diversifying Trade: Where Taiwan Stands Today, and Where It Should Go Tomorrow

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Diversifying Trade: Where Taiwan Stands Today, and Where It Should Go Tomorrow

Taiwan’s economy is highly dependent on international trade, with net exports driving the country’s 21st-century growth. But despite its important role in economic development, an overreliance on trade poses significant national security concerns. Taiwan’s dependence on the People’s Republic of China (PRC), the island’s top trade partner, makes it vulnerable to Chinese pressure campaigns. Some cite this concern in arguing that Taiwan should “decouple” from China, seeking to trade less with Beijing and more with countries like the United States, Japan, and Australia. This approach would also weaken China, which relies on Taiwan for intermediate goods—most prominently, semiconductors—to drive its own manufacturing sector.

But Taiwan’s trade-related problems do not end with China. Taiwanese exports are far too concentrated, with semiconductor chips and related materials comprising a disproportionate segment of total exports. Such overdependence on a single sector poses risks to Taiwan’s national and economic security, suggesting that Taipei should diversify not only its trading partners, but its exports, too.

The question, then, is how Taiwan can more effectively use trade to protect itself, safeguard its economy, and enlarge its global footprint. This article offers specific suggestions, centered on two points in particular: 1) reducing Taiwan’s reliance on China, which currently makes up 40 percent of the island’s total goods exports; and 2) diversifying Taiwan’s portfolio of goods exports, which is overly focused on machinery and electrical equipment. Although Taiwan has taken some steps in addressing these points, it should act now to achieve broader-based, sustainable diversification.

Why Trade Matters to Taiwan

With a relatively small domestic consumer base of 23 million people, Taiwan’s export-import sector has long powered its economy. The island’s trade-to-GDP ratio, an indicator of how relevant trade is to a country’s growth, was 127 percent in the fourth quarter of 2022—much larger than that of China (less than 40 percent) and the US (25 percent). Taiwan consistently ranks among the world’s top export economies.

Moreover, trade in manufactured goods is only becoming more central as a catalyst of Taiwanese growth. According to data promoted by Taiwan’s Ministry of Finance (財政部), Taiwanese exports and imports of goods have increased significantly in recent years, following a general upward trend since 2016.

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Graphic 1: Taiwanese imports and exports of goods, 2003-2022. (Data source: Taiwan Ministry of Finance)

Taiwan’s Top Trade Partners

China remains Taiwan’s top export partner, receiving nearly 40 percent of the island’s exported goods. Though the share of goods sent west across the Taiwan Strait has fallen since the outbreak of the COVID-19 pandemic, Taiwanese exports are still highly focused on the Chinese marketplace.

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Graphic 2: Top destinations for Taiwanese exports, 2003-2022. (Data source: Taiwan Ministry of Finance)

Taiwanese goods imports are significantly less concentrated, as China is not as dominant in this realm: Taiwan imports only one-fifth of its goods from across the Strait. Still, in the last two decades, Japan has declined as an importer of Taiwanese goods while the United States has stayed steady. Beijing has filled in the resultant gaps, rising from just 10 percent of Taiwanese goods imports in 2003 to 20 percent last year.

Taiwan’s Trade in Goods

Taiwan is heavily reliant on exports of machinery and electrical equipment and far less active in outward trade in other categories of goods, including base metals, plastics, and chemical products. This emphasis has only intensified in the past decade.

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Graphic: Taiwan’s top export categories, 2003-2022. (Data source: Taiwan Ministry of Finance)

Machinery and electrical equipment is also Taiwan’s most popular import class—it covered nearly half of all goods imports in 2022—though Taiwanese importers have demanded more mineral products (20 percent of import goods in 2022) since the pandemic.

Next Steps

Given this snapshot of Taiwanese trading patterns, an important question follows: how can Taiwan use trade to protect itself from a Chinese invasion, strengthen its domestic economy, and enhance its global standing?

Taiwan Should Expand Trade to Export Partners besides China

Partner diversification is key. First, Taiwan should continue to pursue trade with the United States, to which it exported 18 percent of its goods in 2022. For their part, US businesses have reduced their trade with China since 2020, and Taiwan can help fill the void. Doing so would boost its own economy, remind the United States of Taiwan’s integral role in the global economy, and offer Washington an additional reason to defend Taipei against Chinese aggression.

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Graphic: US trade with Taiwan and China, 1999-2022. (Data source: US Bureau of Economic Analysis)

On this front, the US-Taiwan Initiative on 21st-Century Trade First Agreement Implementation Act of 2023 is a meaningful start. Signed by President Joseph Biden last August, this law covers relevant trade issues like good regulatory practices, small- and medium-sized enterprises, anticorruption, and multinational cooperation. Though it generates no new market-access commitments, it demonstrates the United States’ interest in bolstering ties with Taipei.

But the 21st-Century Trade First Agreement Implementation Act is not just a sign that Congress and the Biden Administration are open to further agreements with Taiwan. It also makes such agreements more likely by outlining requirements for future negotiations and creating binding commitments for both governments to reduce trade barriers. Taiwan should take advantage of this pact by increasing its trade with the United States, particularly as both countries seek to lessen their reliance on China.

Further, Taiwan should use the 2023 US-Taiwan trade agreement as momentum for further progress on other priorities, including its application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Signed in 2018 as an effort to reduce tariffs and facilitate trade between member states, the CPTPP has 11 members, including Australia, Canada, Japan, Mexico, New Zealand, and Great Britain. Both Taiwan and China have applied for membership. Taiwan’s acceptance—in the face of Chinese opposition—would help it diversify its partner portfolio by boosting exports to Australia, Japan, and other CPTPP states.

Taiwan has begun lobbying existing member states for membership (see here, here, and here), and it should continue its efforts to convince CPTPP countries that Taiwanese involvement would bolster economic security and supply-chain resilience in the Indo-Pacific region. Naysayers will point to Chinese opposition as the chief reason that Taiwan’s application will be rejected, but precedent exists for a different result: in 2001, Taiwan lobbied to join the World Trade Organization at the same time as China and was accepted a mere 21 days after Beijing.

Taiwan should also remind existing CPTPP members of the downsides of letting China in. Beijing has ongoing territorial disputes with other members, including Japan, Malaysia, Brunei, and Vietnam; it has employed economic coercion to pressure CTPP nations like Canada, Japan, and Australia; and it is already facing sanctions from countries like Canada for alleged human rights violations. Paired with Taiwan’s general compliance with the rules-based international order, these concerns suggest that Taiwan could leverage China as a foil, strengthening its own case for joining the CPTPP.

Taiwan Should Lessen Its Dependence on Exports of Semiconductor-Related Materials

Taiwan is the world’s leading producer of microchips, exporting USD $164 billion annually, almost one quarter of the global supply. These chips are essential for the production of electronic devices and machinery, from cars and smartphones to fighter jets.

Why is Taiwan’s reliance on chip-making risky? First, the semiconductor chip race has the United States, China, and many European countries eager to establish their own technological prowess. These efforts could threaten Taiwan’s dominance in the industry, especially if the United States continues its efforts to onshore its chip development and production. Second, overreliance on the high-tech sector in general is economically unwise, for it risks benefiting the high-skilled upper class—more likely to see their wages rise as tech firms increase their profits—at the expense of the middle and lower classes.

Given these concerns, Taiwan should push for greater economic diversification. A 2023 analysis from Harvard’s Growth Lab identified industries in specific Taiwanese cities that represent opportunities for diversification. Examples include Hsinchu, Tainan, and Changhua City for photographic equipment; Taipei for chemical manufacturing; and various metro areas for sectors like apparel manufacturing, telecommunications, and textiles. The analysis also explores Taiwan’s strategic goal of positioning itself as a worldwide hub for pioneering research into biomedical and life sciences, which would allow the island to use its tech expertise to further diversify its exports.

In conclusion, Taiwan’s technological and trading prowess has given the island of 23 million people economic influence that far exceeds its size. Still, Taipei should consider diversifying its export portfolio to be less reliant on China and semiconductor materials. The 21st-Century Trade First Agreement Implementation Act is a step in the right direction, but more must be done—and concrete actions like joining the CPTPP and investing in sectors unrelated to semiconductors are two priorities that would make Taiwanese trade more resilient and sustainable.

The main point: Taiwan is a trade-driven economy whose goods are disproportionately exported to China, which routinely uses this economic dependence to exert political leverage. Taiwan should thus diversify its international commercial ties. Further, Taiwan’s export-import sector is also overly concentrated on trade in semiconductors. Though it would be foolish to make the Taiwanese economy less complex and technologically advanced, enhanced proficiencies in other industries would enhance Taiwan’s resiliency and make its economy more robust.