Written by Michael Reilly.
Image credit: Public domain.
Stock markets around the world reacted with shock to US President Donald Trump’s imposition of ‘reciprocal’ tariffs on almost every other country. In Taipei, where an initial estimate suggested that the overall impact would be to reduce Taiwan’s GDP growth in 2025 by 0.43% to 1.61%, by early April, the main stock market index had fallen almost 20% in dollar terms since the start of the year. Economists everywhere have queued up to warn of the negative consequences for the world economy, as well as to criticise the crude mercantilist logic of seeking a balance in the bilateral trade in goods in an era of global supply chains. On 22nd April, the International Monetary Fund revised its growth forecasts downwards, noting that the US economy would suffer the most.
Commentators have also ridiculed the pseudo-maths used to justify the tariff calculations, which extended even to Heard Island, a remote outcrop in the Southern Ocean inhabited only by penguins. It became evident that the policy lacked any rigorous strategic appraisal when, within days, President Trump announced the suspension of tariffs on imports of smartphones, laptops and other advanced consumer goods—presumably fearing American consumers’ reaction to the suddenly much higher prices they would have to pay.
The tariffs make no economic sense, notwithstanding the efforts of some within the US administration to claim otherwise. But what if the policy is not about economics but rather the latest salvo in what Washington sees as its battle with China for global supremacy? The warning signs have been apparent since the first Trump presidency when China was initially hit with tariffs. This time, not only was China subjected to a far higher tariff than any other country, but it was also pointedly excluded from the suspension of tariffs that was announced almost immediately after they were imposed.
The big winners from the first trade war were third countries, principally in Southeast Asia, to where many companies relocated some or all of their China-based production. This time, the trade war is extending to them in a seeming battle for supremacy. Vietnam now has the third-largest trade surplus with the USA after China and Mexico. Its ‘reward’ was to be hit with the second-highest level of tariffs after China. In contrast to China, however, it has had the carrot dangled of a big reduction in tariffs, provided it complies with US-imposed conditions, which would affect its trade with China. The Chinese government’s response was to send President Xi Jinping on a high-profile visit to Vietnam and other Southeast Asian neighbours in a signal of support, while also warning of potential retaliation against countries which negotiate deals with the USA ‘at the expense of China’s interests’.
The Trump administration has also been at pains to reassure Asian countries that the USA remains committed to their security, in sharp contrast to its very public humiliation of Ukraine’s President Zelenskyy on his visit to the White House. Following a meeting between President Trump and Japanese Prime Minister Ishiba on 7th February, the two sides restated existing positions on Taiwan, including their opposition to any attempts to unilaterally change the status quo by force or coercion. A leaked strategy document also quotes the US defence secretary, who has expressed disdain—contempt even—for European NATO allies, as saying the country should focus on China as its ‘sole pacing threat.’ The message appears clear: buy more from the USA, scale back engagement with China, and the USA will protect you. The implications of this for Taiwan become much more serious than a potential 0.43% hit to its forecast growth rate. The USA and China, including Hong Kong, are its two largest export markets, with them taking more than half of all the country’s exports. But China is also Taiwan’s largest source of imports, accounting for 20% of the total. This puts Taiwan on the front line of the trade war. Though the prospect of reducing dependence on China may be welcome to some Taiwanese politicians, the sheer scale of Taiwanese engagement in the Chinese economy means that it is not going to happen quickly. Indeed, it has been underway since the first Trump administration, with companies quietly relocating to or placing new investments in Southeast Asia. That China remains the most important bilateral market for Taiwan despite this trend is an indication of the scale of the challenge.
Logic suggests that if forced to choose, security considerations would almost certainly lead Taipei’s policymakers to side with the USA, the only country openly willing to provide security assurances. However, despite reassuring statements from US officials, America’s abandonment of Afghanistan (a decision ultimately taken under President Biden but set in motion during Trump’s first administration) and its attitude towards Ukraine have demonstrated that it can no longer be considered a reliable ally. That leaves the government in Taipei in an unenviable position, even if Taiwan’s dominance of leading-edge semiconductor production gives it more leverage than its counterpart in Kyiv.
As the US administration is quickly learning, Beijing, too, has leverage and is not afraid to use it. For example, its imposition of export controls on rare earths seems to have surprised Washington, even though Beijing has imposed similar controls in the past. In these circumstances, Trump’s tariff policy would seem to offer Xi Jinping a golden opportunity to reset relations with Taipei. If, for example, China was quietly to let it be known that it did not oppose Taiwan joining the CPTPP or was open to it joining its own regional trade pact, the Regional Comprehensive Economic Partnership (RCEP), it might make it easier for Taipei’s policymakers to avoid being forced into having to make an unenviable choice. Unfortunately, the current level of mutual distrust on both sides of the Taiwan Strait makes such a prospect most unlikely.
Ultimately, however, and notwithstanding security considerations, the choices that Taipei makes are as likely to be forced upon it by the decisions of American companies, principally the ‘Magnificent Seven’ tech companies, as by any preferences of its own. Apple, for which Taiwanese companies are major subcontractors for iPhone production and more, has a market capitalisation of US$2.9 trillion. Except for Tesla, all the ‘Magnificent Seven’ have market capitalisations of more than US$ one trillion, far more than that of Taiwan’s most successful and best-known company, TSMC, whose own market cap of US$787 billion is barely one-third that of Nvidia. Even the whole Taiwan economy, the world’s 22nd largest, with a GDP of US$814 billion, is dwarfed by the US tech behemoths. So Taiwanese suppliers to the likes of Apple have little or no influence over its corporate decisions, and how far Taiwanese companies remain engaged in China will be decided more by decisions taken in Cupertino than in Taipei or Hsinchu. So far, the signals are mixed. On the one hand, the rapid dropping of tariffs on smartphones may have shown the influence of the tech giants in Silicon Valley on the White House. On the other hand, in late April, Apple announced that by next year, all the iPhones it sells in the USA will be supplied from India, a move that will inevitably have implications for its Taiwanese suppliers.
Perhaps the only point about which we can be confident at this stage, however, is that just four months into Donald Trump’s second presidency, we should be prepared for another three years or more of uncertainty, confusion, and chaos. At least the penguins on Heard Island are unlikely to be worried.
Michael Reilly has been a Senior Fellow in the Taiwan Research Hub of the School of Politics and International Relations at the University of Nottingham since 2015. From 2005 – 2009 he was the British representative in Taiwan and from 2011 – 2014 the chief representative in China for one of the UK’s largest manufacturing companies. In 2016 and again in 2019 he was a Visiting Fellow in the Institute for European and American Studies at Academia Sinica in Taipei. He is a member of the Advisory Board of the Global Taiwan Institute and has written or co-edited many books related to Taiwan or British foreign policy. His most recent book, The Great Free Trade Myth: British Foreign Policy and East Asia since 1980, was published in 2020.
This article was published as part of a special issue on ‘Trump’s Tariffs: What does it mean for Taiwan?‘.
Taiwan Insight 