The Biden Administration and Taiwan’s Post-Covid Economic Prospect

Written by Min-hua Chiang.

Image credit: Taipei 101 by Luka Zou/Flickr, license CC BY-NC-ND 2.0

With 2.98% of growth rate in 2020, Taiwan’s economy has outperformed many countries in the world. The moderate economic expansion was attributed to the surging external demand for information and communications technology (ICT) goods and the growing investment repatriation. The domestic consumption remained resilient thanks to the growth in domestic tourism and economic stimulus measures. After all, Taiwan’s success in containing the COVID-19 underpinned the whole economy well amid the ongoing global pandemic crisis.

The strong external demand from the US and Europe remains key to Taiwan’s economy. Taiwan’s strong reliance on these two markets is shown on its orders for exports of final consumption goods. In 2020, the US and Europe accounted for a respective 38% and 35% of Taiwan’s total export orders for ICT goods compared to only 8% of China and Hong Kong’s orders for the same products.

After curbing the virus outbreak, China’s industrial resumption facilitated the cross-strait production network for producing final consumption goods, destined mainly for the US and European markets. In 2020, 91% of Taiwan’s orders for exports of ICT goods were produced overseas. China remains an important overseas production site for Taiwanese firms. This explained Taiwan’s growing exports to China in 2020, mostly the final assembly’s electronic components. Another reason for the rapid growth of exports to China was the US-China trade war. China’s Huawei had to order more chips from Taiwan Semiconductor Manufacturing Company (TSMC) in advance before the US ban of supplying chips to China took effect.

The US-China relations are going to reset after Biden took office. There are several implications for Taiwan’s economy. First, unlike President Trump, President Biden does not support the economic decoupling with China. The new administration also disagreed with containing China by restraining China’s exports to the US. As such, Taiwanese firms’ investment repatriation, spurred by the US restrictions on Chinese exports, may decelerate.

Taiwanese firms may continue to relocate factories to other developing countries due to the geopolitical uncertainty and cost consideration. However, the relocation of manufacturing production away from China does not mean a weakening manufacturing ties across the strait. The enactment of China-ASEAN free trade area and Regional Comprehensive Economic Partnership (RECP) would facilitate Taiwanese firms’ construction of a production network between China and ASEAN countries. The greater regional economic integration, coupled with Taiwan’s New Southbound Policy, are expected to expand cross-strait production network through ASEAN’s greater involvement.

Second, the Biden administration plans to continue Trump’s policy to encourage the supply chain moving back to the US. Apple’s two largest production partners, Foxconn, TSMC and other Taiwanese semiconductor firms echoed Trump’s policy to invest in the US manufacturing industry. As a result, Taiwan’s investment in the US in 2020 increased significantly. The US is now the second largest investment destination, accounting for 24% of Taiwan’s total outward investment, after China’s 33% in 2020. In the same year, Taiwan’s investment in electronic parts and components manufacturing in the US is two times larger than that in China.

Taiwan’s manufacturing investment in the US aims to supply the local demand in the country. This indicates that Taiwan’s potential declining exports to America as the manufacturing goods can be produced locally. On the contrary, Taiwan’s imports from the US are likely to rise. With Taiwan’s relaxation of import restriction for the US pork from January 2021, Taiwan’s import of US agricultural goods is expected to increase. Taiwan also increased its imports of crude oil from the US since 2018. Moreover, it has prepared to increase its imports of natural gas from the US. Taiwan’s potential declining exports to and growing imports of agricultural and petrochemical goods from the US may cut its trade surplus with the country in the future.

Third, unlike Trump’s bilateral approach, the Biden administration vowed to contain China through working with the US allies. Nevertheless, the effectiveness of Biden’s multilateral approach to counterbalance China’s power rise is uncertain. Unlike a few decades ago, many US traditional allies today are economically relying on China and do not intend to choose between China and the US.

In addition, China has already taken the lead in developing a multilateral network over the past few years. China is an important member of the RCEP. It also expressed its interest to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). In comparison, the US is not involved in any regional free trade agreement (FTA) yet. It will take time for the new administration to rebuild the US-centred multilateral economic network.

Taiwan has enjoyed the preferential tariff rates for ICT goods under international technology agreement of the World Trade Organization (WTO). Due to its exclusion from other regional economic agreements, Taiwan is increasingly dependent on exporting ICT related goods for its economic survival. There is a need for Taiwan to join the RCEP and CPTPP to diversify its exports in goods and services. However, Taiwan is less likely to be part of RCEP due to China’s political pressure on RCEP countries. The economic agreements with New Zealand in 2013 and Singapore in 2014 did not pave the way for Taiwan towards RCEP. Hoping that the Biden administration will bring Taiwan into CPTPP is also unrealistic.

Although President Biden mentioned his support to Taiwan, the support will be likely to be low-key. Indeed, Biden’s “low-key” in interacting with Taiwan is evidenced by how he handled President Tsai Ing-wen’s congratulations in a less noticed way through diplomats on both sides. This is different from President Trump’s direct pick-up of President Tsai’s phone calls after his election in 2016. Bringing Taiwan into CPTPP or other regional economic agreement is certainly not “low-key” that President Biden is likely to behave.

A possible scenario is that China joins the CPTPP first, and Taiwan joins it later. This is how both Taiwan and China joined the WTO two decades ago. However, this scenario will take Taiwan a long time to go through. It is still unclear whether Japan welcomes China’s involvement in this cross-regional mega trade deal. Even all CPTPP members agree with China’s participation, due to China’s less developed economy, it will take time for the country to meet the high standard requirement set in CPTPP. Taiwan’s economic advancement and further modernization cannot wait.

To overcome the political barriers, Taiwan has already started establishing bilateral economic agreements with certain countries through “building blocks” and “bottom-up approach.” To move forward, Taiwan may consider forming economic agreements with countries who do not side with China. Taiwan may also choose certain sectors that both Taiwan and its partners have comparative advantages. For examples, Taiwan can consider signing agreements with India to facilitate the exports of Taiwan manufactured goods to India and imports of India’s services. The bilateral agreements with selected partners shall also allow Taiwanese business to explore overseas markets for enhancing its low value-added service industry. This is also preparing Taiwan to better equipped for signing any potential high standard FTA in the future.

China’s economic strength and extensive economic linkage with many countries in the world suggest that the US unilateral harsh policy towards the country would tremble the global economy. Biden’s relatively “soft approach” towards China may ease the tension between the two powers politically and economically. Another way to ease China’s relations is to slow down the Taiwan-US rapprochement, accelerated during the Trump administration. Biden administration’s emphasis on multilateral approach means that Taiwan’s bilateral engagement will be a less important issue. The reduced tension in US-China relations may encourage greater cross-strait economic integration. It may, however, provide a potential leakage of US technology to China, through Taiwan.

Given the development of 5G, ICT goods and electric cars in prospect, Taiwan’s manufacturing-oriented economy is likely to maintain decent growth in the short term. In the long run, the geopolitical uncertainty and the US-China competition in high technology remain the most important variables in Taiwan’s economic outlook.

Taiwan will have to continue to maintain its manufacturing strength, encourage innovation, and attract talents and investors. Taiwan will also have to strengthen its financial services better to serve the highly developed manufacturing industry’s financial demand. The policy will also need to encourage the synergy between the highly profitable semiconductor industry and other industries so that Taiwan’s economic development will be more balanced. The domestic legal environment must ensure that all domestic and foreign business can compete fairly. A strong and competitive economy will be the best weapon to protect Taiwan’s sovereignty and to secure its national interests in the future better.

Min-Hua Chiang is a research fellow at the East Asian Institute, National University of Singapore.

This article was published as part of a special issue on Post-Covid Economy.