Taiwan Is Also Decoupling From China

Taiwanese business, if not Taipei, seems to be following Washington away from China

Taiwan's President Tsai Ing-wen (top C) attends a ceremony to mark the island's National Day in front of the Presidential Office in Taipei, on Oct. 10, 2022. Sam Yeh/AFP via Getty Images

Commentary

America’s recent moves to decouple its economy from China seem to have found a mirror in Taiwan.

It is not that Taipei’s official policy has embraced Washington’s increasingly hostile line toward Beijing. On the contrary, Taipei seems to have held to a carefully balanced diplomatic line. Instead, it is Taiwanese business that, following its own interests, has loosened its once irrefutably close Chinese connection. Some of the moves by Taiwanese business reflect fears about Beijing’s military intentions. Mostly, the loosening reflects dispassionate assessments of profitability and risk. On that basis, the decoupling movement would seem to have legs.

The starkest evidence appears in investment flows. Taiwanese direct investment in China has plummeted from the equivalent of $9.0 billion in 2017 to under $1.7 billion last year, the most recent period for which complete data are available. That is an 81 percent drop in only five years. Nor is it that Taiwanese business has ceased investing generally. Instead, it has channeled investment efforts elsewhere. Southeast Asia and India have seen inflows that would have previously gone to China. Even the United States and Europe have gained at China’s relative expense. Whereas China in the past regularly commanded fully two-thirds of all Taiwanese overseas investments, its relative position has shrunk to only one-third of Taiwan’s total, slightly less than Singapore alone and about the same as Taiwan now invests in the United States.

Because a large part of Taiwanese exports to China consists of components for assembly in established Taiwanese operations, the investment shift has slowed the growth pace of electronics exports from Taiwan to China. Whereas in 2020, such exports grew 24 percent, 2022 saw growth of only 11 percent.

Apart from the natural caution inspired by the Chinese regime’s threatening and disconcerting military maneuvers around Taiwan, two other, more business-oriented considerations have directed this shifting investment focus. Production costs are fundamental. Chinese wages have risen relative to wages elsewhere. Aside from cultural affinities, Taiwanese business favored Chinese operations because they offered access to an inexpensive and disciplined workforce. It was much the same with American and European business.

But as China has developed, its wage scales have begun to catch up with wages elsewhere. From 2010 to 2021, the average factory wage in China rose some 247.0 percent, some 12 percent a year—far faster than wages rose in Europe or America. Wages in India and Southeast Asia also rose faster than in Europe and the United States but fell short of China’s move. At the margin, China became less relatively attractive as a destination for manufacturing operations. One Taiwanese observer noted that the relative wage question alone threatens China’s “global factory” status.

Contributing to the move by Taiwanese business are the effects of tariffs on Chinese goods coming into the United States. Imposed by former President Donald Trump in stages during 2018 and 2019, President Joe Biden, despite his penchant for undoing all that Trump did, has kept them in place. Because much Taiwanese investment in China supports goods later shipped to the United States, the tariffs made these Chinese operations a lot less attractive to Taiwanese business than they had been.

Accordingly, Taiwanese investors began the process of shifting investment flows toward economies that are not subject to the tariffs, places like India and Vietnam. Between 2019 and 2022, flows of Taiwanese technology to the United States originating from Vietnam doubled. Those product flows from India rose 72 percent. The emphasis on India will no doubt gain momentum now that Apple has plans to move 50 percent of its iPhone production to India by 2027, up from 5 percent at present.

Though the moves reflect individual business decisions rather than policy set by Taipei, Beijing has threatened to retaliate by terminating the Economic Cooperation Framework Agreement (ECFA) it has with Taiwan. Besides, that agreement now covers a mere 5 percent of all Taiwanese product flows to China. Given the recent behavior of the People’s Liberation Army, this threat would seem to lie low on the intimidation scale.

Rather than feeling threatened on the trade front, it looks as though Taiwan is well on its way to diversifying from reliance on China altogether, while China still depends heavily on flows of Taiwanese semiconductors. Indeed, China’s recent preference for military demonstrations and public considerations of military action may reflect just how much the leadership in Beijing understands the economic asymmetry in Taiwan’s favor.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.