Written by Min-hua Chiang.
Taiwan government revised up economic growth forecast in 2021 to 5.5% in June despite the sudden surge of covid-19 cases since mid-May. This is the fastest growth path since and second only to the post-crisis rebound in 2010 (see Figure 1). The economy is bolstered by thriving exports outlook. Growing domestic investment is another anchor of Taiwan’s economy thanks to the continuous investment repatriation. The greater government consumption is expected to offset the potential fall in private consumption following the constraints on outdoor activities. Taiwan Centres for Disease Control (CDC)’s capability to put the domestic outbreak under control in a month further gives confidence that moderate economic growth this year could be expected. With the extension of alert level 3, the number of daily cases peaked to over 500 on May 17, has slowed down to less than 100 consecutively since June 25 and less than 50 since July 4.
Figure 1. Taiwan’s Annual Economic Growth Rate by Expenditure 2010-2021
Explaining Taiwan’s Export Expansion to China
Resilient exports are the main contributor to the positive economic outlook. Total exports grew by over 30% in the first half of 2021, with electronic components filled for nearly 40% of Taiwan’s total exports (see Figure 2). The US higher tariffs against Chinese products did not affect Taiwan’s exports of indstrial inputs to China for final assembly. Instead, China and Hong Kong’s share in Taiwan’s total exports swelled from 40% in 2019 to 43% in 2021 (Jan-June) (see Figure 3).
Apart from the external solid demand for electronic goods, the shift of supply chain network explained Taiwan’s more robust exports to China. Taiwanese firms have gradually moved their production lines away from China since a few years ago. As China continues to rely on industrial inputs made by Taiwanese firms, firms in China would have to import industrial goods from Taiwan instead of procuring them from China-based Taiwanese firms. According to the Ministry of Economic Affairs (MOFA)’ survey, 45% of Taiwanese firms reported having manufacturing production in China and Hong Kong in 2019, down from 50% in 2016. At the same time, Taiwanese firms’ production shares in Taiwan and the rest of the world have increased.
Taiwan exports vast amounts of electronic components to China and Hong Kong. The share of electronic components in Taiwan’s total exports to China grew from 32% in 2011 to 51% in 2019 and further to 55% in 2020. Along with the growing exports of electronic components, the MOFA’s survey showed that Taiwanese firms’ reports of production of electronic components in China declined noticeably from 43% in 2011 to 34% in 2019. Taiwanese firms’ effort to update industries at home also contribute to Taiwan’s comparative advantage in exporting key components to China and other countries. Taiwan’s growing specialization in making semiconductor chips is evidenced by Taiwan Semiconductor Manufacturing Company (TSMC)’s expanding global market share from 35% in 2000 to over 50% today.
The development of Chinese banded ICT products could have also reinforced China’s demand for key components from Taiwan. Samsung shut down its smartphone assembling production in China after being defeated by other Chinese smartphone makers in China’s market. Samsung’s withdrawal from producing smartphones in China in 2019 indicates China would demand less industrial input from South Korea for making smartphones. The trade statistics evidence this. South Korea accounted for 19% of China’s imports of electrical machinery and equipment in 2017. This percentage declined to 15% in 2020. During the same period, Taiwan’s share increased from 21% to 25%.
Figure 2. Taiwan’s exports by main items 2017-2021 (Jan-June) (as% of Taiwan’s total exports)
Figure 3. Taiwan’s exports by main destinations 2017-2021 (Jan-June) (as% of Taiwan’s total exports)
Vulnerable local service business
Despite the robust growth in exports of industrial goods, several local service sectors have suffered from the covid outbreak. The official statistics have shown an apparent decline in revenue in both retailing sectors and food services in May. In addition, the unemployment rate rose from 3.6% in April to 4.1% in May. Nearly 70% of employment drop is in services. In comparison, the production and employment in the manufacturing industry has remained relatively steady thanks to the vigorous exports of manufacturing goods.
The temporary business closure and rise in unemployment in service sectors following the extension of soft lockdown to July is expected to hurt private consumption in the second quarter. More importantly, the different levels of impact from COVID-19 on manufacturing industries and services could result in unbalanced economic growth and potential rise in income inequality. Unlike the export-oriented manufacturing industries, most of Taiwan’s services are domestic market-oriented and low value-added. However, 60% of Taiwan’s working population relied on services for their livelihood. The wholesale and retail sector hired most of the domestic workers, accounting for 20% of Taiwan’s total employment. In comparison, the electronic manufacturing industry only took 8%. Despite the greater employment, the average wage in wholesale and retail services is 15% lower than in the electronic manufacturing industry.
To minimise the impact of covid-19 on local service business, the government raised an additional emergency budget of NT$260 billion in June, bringing the total COVID-19 economic relief budget to NT$680 billion (US$24 billion). Compared to most advanced economies, the Taiwan government’s expenditure to counterbalance covid-19 impact is negligible. The total covid-19 economic relief budget is about 3% of Taiwan’s GDP, lower than most countries in the world (Figure 4). Indeed, Taiwan can afford greater fiscal stimulus to alleviate local business’ pressure given its relatively low government debt to GDP ratio (33% in 2020). Its high savings rate (39% in March 2021) also suggests its greater capacity to invest more at home. Taiwan should take this pandemic crisis as an opportunity to increase service sectors’ productivity through digitalisation. This could also allow service businesses to be better prepared for any pandemic outbreak in the future.
Figure 4 Comparison of Covid-19 Expenditure as a Percentage of GDP
Accelerating Vaccination Programme Remains Key for Safeguarding Taiwan’s Growth
Taiwan’s successful “defensive approach” against Covid-19 has helped the island maintain domestic economic operation as usual in the past year and a half. However, the spread of covid variants to Taiwan that could transmit faster and easier have posed great challenges to Taiwan’s virus containment capability. In addition, the economy cannot remain closed forever. Therefore, the acceleration of the vaccination programme will be the most helpful method to minimise the potential impact of the prolonged pandemic crisis on the economy.
Taiwan’s current vaccination rate is one of the lowest in the world. As of July 7, 2021, only 11% of the population have been partially vaccinated (see Figure 5). This is far less than most of the advanced countries. Taiwanese people did not feel the urgency for vaccination before the spike in pandemic cases in mid-May. The hesitation suddenly turned to the rush for vaccination when people realised the necessity of job vaccines. China’s insistence on standing between Taiwan and the global vaccine supply has further complicated the vaccine shortage problems in Taiwan. Thanks to the United States and Japan’s involvement, the pressure of high vaccine demand in Taiwan was released. The United States and Japan donated a respective 2.5 million and 2.37 million vaccines to Taiwan at the time of writing. Lithuania also announced to donate 20,000 vaccines to Taiwan. With the gradual delivery of vaccines from COVAX and the development of vaccines by two Taiwanese firms, Taiwan is expected to raise its vaccination rate in the next few months gradually.
Figure 5 Share of people vaccinated against Covid-19
In the short term, the gradual increase in vaccine coverage is likely to lift consumer confidence and allow the government to enact bold measure to open the economy. The strong economic growth in the United States will further pave a way for Taiwan’s export-oriented economic optimism. However, the lingering covid-19 in many countries may limit Taiwan’s greater opening for borders any time soon.
In the longer term, the strong global demand for semiconductor chips will continue to drive Taiwan’s economy to grow. Taiwan has played an essential role in the global semiconductor supply chain. 92% of global leading-edge semiconductor production is made by Taiwanese firms. The US has sought to enhance cooperation with Taiwan for securing the supply of key components to American industries. The Taiwan-US rapprochement in semiconductor industries is expected to alter Taiwanese firms’ mapping out of supply chain network. TSMC’s investments in the United States have already increased its satellite companies’ interests to follow suit. The US policy to maintain its economic muscles and technology superiority over China will continue to be the most important factor in directing Taiwan’s economic development in the future.
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 Taiwan’s Covid-19 Spike. You can find all articles in the special issue here.