At his press briefing on the final day of his visit to China, U.S Secretary of State Antony Blinken sought to emphasize that the U.S. was intent on “de-risking” rather than “decoupling” from China economically. In doing this he highlighted that the two countries’ trade relationship had “reached the highest number that it’s ever hit last year — about $700 billion.” But what was notable was that even while taking care to emphasize a degree of continuity, reduced trade with China was a given. At this point, it’s even priced into the more conciliatory messages.
In this broad sentiment the most powerful economy in the world is supposedly already joined by Taiwan. Since the 2016 election of Tsai Ing-wen’s (蔡英文) Democratic Progressive Party government, Taiwan has attempted to implement the New Southbound Policy, aimed at increasing trade and investment between itself and 18 countries in Southeast Asia and South Asia, plus Australia and New Zealand, with the implied goal of reducing reliance on China. But results have been mixed — the kind of thing where what you see depends on what you want to see.
The question of whether Taiwan actually can follow Blinken’s “de-risking” line, then, is tricky. And worth thinking through.
Looking at the most obvious numbers it looks easier said than done. In 2017, the total share of Taiwanese exports moving to China (including Hong Kong) was 41% and in 2022 it was 38.8%. Although the latter figure was down 1.6% from 2021, with imports from China representing 20% of the total in 2022 (0.6% higher than in 2018), there has not been a dramatic transformation away from China. And Taiwan’s government hasn’t hidden why this is. In an echo of some of Blinken’s remarks, Deputy Minister for Economic Affairs Chern-Chyi “C.C.” Chen (陳正祺) said last year that with China existing as the world’s largest manufacturing power and the world’s largest trading country it was “not realistic” to decouple: “With those facts, I don’t see, frankly, in the near term we can completely decouple from China. That’s not realistic.”
And yet, there are those who see evidence that economic ties are being “snipped.” Taiwan’s realized investment in China fell from $9 billion ($278.06 billion New Taiwan dollars) in 2017 to just $1.7 billion (NTD $52.6 billion) in 2022. At the same time, while Taiwan’s largest export sector is electronic goods, accounting for 41.7% of total exports in 2022 and up 16.4% from the previous year, this growth is not being driven primarily by China. The growth rate of Taiwanese exports of electronic products, including semiconductors, to China, has slowed from 24% in 2020 and 2021 to 11% in 2022.
Those numbers might suggest some underlying movement away from China, even if they aren’t massively shifting the headline figures of total imports or exports yet. Growth rates of Taiwan’s exports of electronic products to Southeast Asia and India accelerated by 21% and 72%, respectively, last year. And that comes within a broader trend over the same period: “In 2022, compared with the previous year, exports to ASEAN, Japan, the U.S.A. and Europe grew by 14.8%, 15.1%, 14.3% and 6.8%, respectively, [while] exports to Mainland China & Hong Kong declined 1.6%,” according to Taiwan’s Annual External Trade Report in 2022. Even here there should be caution, though: Over the last five years those numbers have bobbed up and down. In 2018, for instance, ASEAN countries accounted for 17.4% of Taiwan’s total exports. In 2019, 16.4%. In 2020, 15.4%. In 2021, 15.7%. In 2022, 16.8%. Imports have remained steady just above 12%.
The real question, then, is whether any tentative movement away from China will be sustained or discarded, particularly as the U.S. government continues to push in that direction with its own policy. And discussions are, of course, happening around this topic.
“Based on the conversations that we have had with Taiwanese entrepreneurs, really two different [supply chain diversification] strategies [are now being employed],” said Catherine Tai, deputy director for Asia of the Center for International Private Enterprise, speaking at a Global Taiwan Institute event last week. The first is: “They really are thinking about adding new production sites outside of China.” And the second is that they are “thinking they need to incorporate risk management into the highest level decision making process.”
But why, if government policy was pushing for Taiwanese businesses to look south as long ago as 2016, wasn’t this happening already? “It’s easy to talk about risk mitigation or to talk about supply chain diversification, but when it’s in the implementation phase, it’s really a slow and painful process,” Tai noted. Taiwanese entrepreneurs are looking for four things from partners elsewhere, she said: 1. Sufficient supply of skilled labor. 2. A predictable political environment. 3. A stable supply of electricity. And 4. Places that can accommodate a whole cluster of relocation — with various companies, upstream and downstream suppliers, moving together. The fear has been that without these factors in place, production could become more expensive and it might impact productivity and competitiveness.
In other words, firms don’t want to diversify unless it suits them. They’re not going to do it as a political favor. Tai said Taiwanese government intervention and assistance is crucial in facilitating these production moves. Her co-panelist, Rupert Hammond-Chambers, the president of the U.S.-Taiwan Business Council, said other countries, such as the U.S. “can step in and offer a counterweight,” too. The U.S.-Taiwan Initiative on 21st Century Trade is a template he mentions while speaking at the same event.
Thus, watching what are effectively government incentive structures is probably the only way to predict whether Taiwanese diversification goes any further than it has already. In the last seven years it’s looked like a difficult ask.