Can Taiwan Withstand China's Economic Might?

Chinese bullying is drying up sources of trade.

On May 20, in its third successful transition of presidential power between parties and best sign yet of a mature and stable democracy, Taiwan inaugurated its new president, Tsai Ing-wen. To the consternation of Taiwan’s electorate—and under the radar of much of the rest of the world—President Tsai’s inauguration speech has triggered a significant escalation of Beijing’s non-kinetic “three warfares” campaign against the island. Beijing’s clear goal in using intense economic, legal and psychological pressures—the three warfares—is to bring it to heel.

Over the last week, I met with a variety of government officials, business leaders, politicians, academics and journalists in Taiwan to discuss a situation that is far more serious than is being reported in the western press. In a three-part series for the National Interest, I will look at the economics, politics and policy implications of the escalating cross-strait crisis.

The economic situation is important not just because Taiwan’s weak economy makes it highly vulnerable to pressure from its major trading partner. Slow GDP growth and attendant zero wage growth are also prime movers behind the landslide victory of a new president offering Taiwan’s citizenry the hope of a national Taiwanese identify, a continued de facto independence from China and a decoupling of Taiwan’s economic fortunes with that of the mainland.

Taiwan in the Crosshairs of Globalization

Current GDP growth in Taiwan is in the range of 0.5 percent to 1 percent, and this growth rate is likely to fall over the next year into a flat to recessionary pattern. While the unemployment remains low at around 4 percent (albeit a bit high by Taiwan’s historical pattern), income growth has flat-lined over many years now with little prospect for improvement.

Taiwan’s economic woes do not reflect a short-run cyclical phenomenon amenable to the kind of Keynesian stimuli recommended in the standard macroeconomic textbooks. Rather, this is a long-term structural problem associated with the offshoring of Taiwan’s production and the broader forces of globalization. In Taiwan’s case, however, its economic malaise is also being severely exacerbated by the economic warfare Beijing is now waging.

On the globalization front, Asia has witnessed three waves of offshoring. In the initial wave from the 1960s through roughly 1990, both Europe and the United States (as well as Japan in the later part of this period) began to offshore their factories in search of cheaper labor, lax environmental regulations and potential new markets. As part of the “Four Tigers” that also included Hong Kong, Singapore and South Korea, Taiwan benefited directly from such foreign direct investment and transfer of technology; and during this First Wave period of offshoring, it experienced rapid income growth as well as robust GDP growth rates. These were indeed Taiwan’s golden decades.

The Second Wave of offshoring began in the 1990s and accelerated in the 2000s as much of Taiwan’s new capital investment moved to foreign shores, principally China. While Taiwan’s business interests captured great riches from this Second Wave, thus began the steady erosion of Taiwan’s manufacturing and jobs base and the concomitant fall in the Taiwan’s GDP and downward pressure on wages and income growth.

A key strategic mistake made during this period, particularly during the 2008–16 term of President Ma Ying-jeou, was to ignore diversification and effectively hitch Taiwan’s economy to the Chinese wagon. Today, 40 percent of Taiwan’s exports go to China while its critical tourism sector depends heavily on mainland traffic. This is problematic for two reasons.

First, China’s economy has downshifted significantly over the past several years from its thirty-year reign of double-digit GDP growth, and this slower growth appears to be the “new normal.” Taiwan’s export trade is suffering accordingly, and the long-term outlook is not reassuring.

Second, Taiwan’s heavy reliance on China trade has made it exceedingly vulnerable to precisely the kind of economic warfare now being waged by Beijing’s hard liners. The abiding fact here is that since President Tsai Ing-wen was inaugurated on May 20, China has not just cut many of its diplomatic lines of communication—including the “hot line” between Beijing and Taipei. It has also cut trade in selected sectors such as tourism, fishing and farming. Here, it should be noted—and it was by many of the government officials I talked to—that Beijing’s economic quotas and embargoes are highly sophisticated in their targeting and designed to apply maximum political pressure to the ruling party.

In her acknowledgement of Taiwan’s Chinese trade dependence, President Tsai announced in her inaugural address a “New Southbound Policy in order to elevate the scope and diversity of our external economy, and to bid farewell to our past overreliance on a single market.” Tsai’s obvious goal is to expand trade with countries to the south like Indonesia and Vietnam.