U.S.-China Trade War: Impact on Taiwan

Stimson Spotlight

U.S.-China Trade War: Impact on Taiwan

Editor note: This piece is based on remarks by Shih-Chung Liu, Vice Chair, Taiwan External Trade Development Council. To view the event page and video, click here.

Following the July 10 announcement by the Trump administration that Washington plans to subject an additional USD$200 billion worth of Chinese goods to a 10% tariff in September, the U.S.-China trade war appears to be well underway. This most recent tariff imposition follows a previous 25% U.S. tariff on $34 billion worth of Chinese goods, and a Chinese reciprocal retaliation valuing up to $34 billion in U.S. goods. Amid this brouhaha between the world's two largest economies, the fallout from the bilateral trade war has been speculated to negatively impact the economic well-being of adjacent stakeholders, the most concerning of which being Taiwan. Despite Taiwan's seemingly ineluctable position of being caught in the bilateral crossfire, the island state may, in fact, not be significantly affected by the U.S.-China trade war.

Inducing bilateral trade conflict was originally seen as a U.S. tactic for responding to China's unfair trade practices (e.g. forced technology transfer), reducing Washington's trade deficit with Beijing, and protecting American manufacturing jobs. This most recent round of tariffs specifically attacked “technologically significant” goods included in Beijing's “Made in China 2025” plan (e.g. robotics, information technology). It is speculated that not significantly attacking consumer goods serves as a method not to conspicuously place the burden of the tariffs on individuals. Yet the looming burden appears clear; Chinese state media has published headlines reading “Trump has ignited World War III”. Still, analysts maintain that Taiwan “stands to lose the most”. This is particularly true if China shifts some of its imports from Taiwan to those from the U.S. in order to reduce the trade deficit.

Taiwan's economy has historically relied heavily on China's collaboration, with 40% of Taiwanese exports going to the mainland. However, recent shifts in the Chinese government has hampered the trade environment with Taiwan. During the Stimson Center event, “War or Deal? The Impact of Trade on the East Asian Economies”, Shih-Chung Liu, Vice-Chairman of the Taiwan External Trade Development Council (TAITRA), stated that due to the mainland's increasing labor wages, stricter rules, and uncertain central government policy, Taiwanese companies have been presented a dilemma: either to move back to Taiwan and seek assistance from its own government, or to diversify its portfolio of trade partners in the region. Diversification is a tried-and-true strategy, as South Korea and Australia have already sought out closer economic ties with countries in South and Southeast Asia.

Taiwan, too, has already begun to lay the groundwork for portfolio diversification in the region with its “New Southbound Policy” (NSP). Vice-Chairman Liu stated that the NSP—Taiwan's regional relationship building plan with 10 ASEAN countries, 6 South Asian nations, Australia, and New Zealand—has already demonstrated that many other international markets are interested in enhancing and strengthening the depth of business relations with Taiwan. The NSP is a novel project for Taiwan, shaped after the “Go South” policies of previous administrations, but focusing on “softer” security issues rather than traditional security concerns. By way of explaining NSP's potential, Liu explained that TAITRA has already established two joint ventures with India over the past six months: one for electric vehicle development, and one for constructing a new petrochemical plant in Gujarat, Prime Minister Modi's hometown.

Establishing a broader network of trade partners and friends in the region helps Taiwan not have “all its eggs in one basket.” Central to this motivation, as Liu pointed out, is that “this trade war is more than just a trade war,” that this bilateral back-and-forth is more symptomatic of a competition for “future technology, supremacy, superiority, and domination.” By progressively decreasing its dependence on the Chinese market, Taiwan may be able to help safeguard itself against the dangers that bilateral tariffs present.

Similarly, Liu explained that Taiwan may help protect itself from harm by identifying which sectors are actually hurt by the trade war; because of the fact that 80% of Taiwanese companies operating in China produce intermediate goods, it is not certain whether these goods are being produced solely for Chinese consumption or if they are being reproduced in China and then sold by China to the American market. Liu explains that the Taiwanese guiding principle for how to manage the effect of the trade war is “don't panic, but get ready for it.”

And even if Taiwan is making strident efforts to diversify its portfolio and plan accordingly to mitigate the potential negative consequences of the U.S.-China trade war, many Taiwanese companies operating in China claim not to be suffering from the fallout. In the most recent surveys among Taiwanese companies operating in the Sichuan province of China in which businesses were asked, “Do you sense the shock [of the trade war]?” the majority response was that companies had not yet felt the impact. This is due in part to Taiwan pursuing new contracts with NSP member countries and forming new contracts and hedging strategies, but also due to fact that two of Taiwan's major exports, laptops and cellphones, have not been included in any of the tariffs so far. Another assessment in three to six months will likely render a more specific answer.

Liu summarized Taiwan's position within the trade war and how it can preserve its economic well-being by explaining that bilateral trade frictions between China and the United States may actually lead to the NSP's success and Taiwan gaining more trade partners. NSP functioned, Liu explained, as a structural reform that eliminated outdated policies, which may “show the world” that Taiwan is qualified to participate in the CPTPP, RCEP, or more bilateral FTAs. Then, even if China blocked Taiwan from signing on to these regional trade regimes or bilateral trade agreements, Taiwan would still be able to pursue trade projects with a more robust network of regional actors or engage in people-to-people exchanges, which lend to collaboration in science and technology. Liu also pointed out that the impact of the trade war could potentially lead to collaboration between Taiwan and competitors such as Japan and South Korea.

Ultimately, the U.S.-China trade war may not significantly damage Taiwan's economy, and could potentially catalyze Taipei's trade portfolio diversification. Nevertheless, Liu affirmed that China and Taiwan should look to reestablish formal communication channels, seeking a jointly-agreed upon framework for how to protect the more than 2 million Taiwanese business professionals working in China.