Written by Tse-Kang Leng.
Image credit: 總統接見「國際半導體產業協會（ＳＥＭＩ）及臺灣半導體產業協會（ＴＳＩＡ）董監事及國內外半導體企業」by 總統府/Flickr, license CC BY 2.0
Taiwan is now facing increasing pressure to adjust its cross-strait economic policies. In her second inaugural address on May 20 of this year, Taiwanese President Tsai Ing-wen re-emphasised the importance of Taiwan’s strength in the semiconductor and ICT industries, and she also urged the country to secure a central role in global supply chains. In order to cope with current global uncertainties, more substantial state intervention to consolidate economic security will become the new normal. Smaller countries like Taiwan may also take this opportunity to decrease its economic dependence on China and re-link economic and military security with the United States.
The Taiwanese government has perceived the recent Coronavirus pandemic as an opportunity to consolidate its position in the global and regional economic division of labour. The National Development Council stresses the goals of promoting the export of service-oriented industries, consolidating the autonomy of key technologies, and enhancing digital transformation. To diversify investment and reduce risk, the Ministry of Economic Affairs has launched six new policies: promoting innovation projects, assisting returning investments of Taiwanese firms, transferring industries to New Southbound countries, expanding cooperation with US industries, exploring the markets of EU countries, and facilitating global logistics supports. In 2019, Taiwanese exports to the US grew 17.1 % compared to the previous year. The MOEA is going to establish a Taiwan-US Business Centre to enhance further integration of bilateral trade and investment.
Taiwanese companies had taken proactive action to reduce risks even before the Coronavirus outbreak. Statistical data shows a sharp decline of 50.9% in Taiwanese Chinese investment in 2019 compared to 2018. However, the dependence rate on Taiwanese investment in China is still on the rise, from 37.3% in 2018 to 37.9% in 2019. The reason for such a rise is due to the shrinking of Taiwan’s total outbound investment value by 51.6% from 2018 to 2019. Under the new policies of the Taiwanese government to encourage domestic investment, Taiwanese firms have redirected their investments to the domestic market. However, such new investment plans certainly do not mean the large-scale relocation of existing projects in mainland China. There is clearly a gap between contracted and implemented investment values. If the new round of domestic investment is concentrated on real estate development of industrial parks, it should not be explained as the relocation of supply chains from China to Taiwan. Moreover, if these new projects in Taiwan are still labour-intensive and with low technological levels, they will not help to promote long-delayed plans to control key upstream positions in the supply chain.
Considering the increasing uncertainties of the external situation, moving some manufacturing capacities out of China is a natural decision to reduce cost and alleviate risks. Since the cost of operations in China is no longer low — like it had been in the past decade — ASEAN countries, especially Vietnam, have become the favourite new locations for manufacturing facilities. If moving out is the result of relocating entire manufacturing networks, the hollowing out effects will be obvious. Otherwise, relocating partial facilities is a reflection of the policies relating to labour division in multinational firms. Moreover, factories closing in China during the COVID-19 crisis does not mean the moving of the supply chain or the abandoning of the Chinese market. For instance, the recent decision of Taiwan’s Pou Chen Group to close its factory in Wuhan is due to upstream brand-holders’ shrinking in the market — firms such as Adidas and Nike. Furthermore, foreign companies are not in a rush to move their manufacturing capacities out of China. In a survey conducted by the American Chamber of Commerce in China, half of the respondents (over 350 American companies) indicate a substantial improvement in China’s investment environment. This represents an increase of 12% compared to the rate in 2018 and is twice as much as that in 2016 (24%). Also, 83% of respondents are not considering relocating their manufacturing capacities or sourcing outside of China. This is a 3% increase, instead of a decrease, compared to 2018.
The recent US-China trade war, especially the sanctions targeting the Chinese high-tech firm Huawei, has put Taiwanese semiconductor giant Taiwan Semiconductor Manufacturing Co Ltd (TSMC) in a precarious situation. TSMC has maintained a close connection with Huawei. HiSilicon, a semiconductor design unit wholly owned by Huawei and Apple represent 37 per cent of TSMC’s total sales in 2019. HiSilicon outsources its chip fabrication to pure-play foundries like TSMC, which saw sales jump 45 per cent to US$10.3 billion. This rise was bolstered in part by its business with HiSilicon in the first quarter of 2020.
On May 15, 2020, the US Bureau of Industry and Service (BIS) announced restrictions on Huawei’s ability to use US technology and software to design and manufacture its semiconductors abroad. Simultaneously, TSMC made public its intentions to build and operate an advanced semiconductor fabrication plant in Arizona. It is expected to create over 1,600 high-tech professional jobs directly, and thousands of indirect jobs in the semiconductor ecosystem. Construction is planned to start in 2021 with production targeted to begin in 2024. The Trump administration has been pushing TSMC hard to adjust its policy of fence-sitting. In addition to alleviating the political pressure, TSMC’s move is to cope with pressures from competitors Intel and Samsung in exploring niches on American soil. Establishing advanced facilities in the US with higher costs reflects TSMC’s calculation to balance political correctness and economic efficiency. However, it is premature to postulate that TSMC’s Arizona project represents a total shift of its business connects out of China. TSMC is adopting a policy of “act and see” to make flexible adjustments under the pressure of a US-China confrontation.
The COVID-19 crisis and the US-China trade war push the state as well as the business community to adopt new policies for accommodating to the post-globalisation world. The good old days of relying heavily on China as the sole centre of manufacturing and assembly may be gone. Currently, China is struggling to expand its domestic consumption and is promoting the service industry as the key sector and locomotive of development. China’s position in the global supply chain is in transition, but it is not experiencing a demise. Political pressure and national security concerns will intensify uncertainties in the post-globalisation era. Such uncertainties will lead to a new round of state-business interaction. The Chinese government continues to provide preferential treatment to attract Taiwanese investments in China, including allowing Taiwanese to participate in China’s infrastructure projects. Further attention is warranted to see whether Taiwanese investment will shift to China’s domestic market and service sectors after the COVID-19 crisis. For major Taiwanese players like TSMC, restrictive policies from the US will constrain their options to strike a balance between political risks and economic profits. However, considering the long-term perspective, large firms are keeping their bargaining chips and are preparing for a possible reversal, back on the track for a positive global division of labour. It is too early to assert a total “de-coupling” of the US-China economic relationship at this current stage.
Tse-Kang Leng is Director of Institute of Political Science at Academia Sinica (IPSAS) and Professor of Political Science at National Chengchi University, Taiwan. His research interests focus on political economy of globalization, local governance and business development in China, and culture and creative industries.
This article is part of a special issue on the impact of Covid-19 on Taiwan’s economy.