How China’s nationalistic aggression launched Taiwan’s economic renaissance Brookings – Brookings Institution "taiwan and china conflict" – Google News

As the international trade landscape gradually shifted from globalism to economic regionalism in the 21st century, smaller trading nations have actively pursued bilateral and multilateral free trade agreements (FTAs) with their trade partners. Within the context of the Asia-Pacific’s regional development, China’s increasing economic influence has discouraged Taiwan’s trade partners from signing FTAs with Taipei. Consequently, Taiwanese manufacturing companies in traditional sectors were compelled to diversify their operations outside Taiwan. This trend led to the concentration of the remaining manufacturing enterprises in Taiwan within the ICT sector, which have benefitted from tariff-free arrangements under the World Trade Organization’s Information Technology Agreement. By the time the Chinese-led Regional Comprehensive Economic Partnership (RCEP) was signed in November 2020, approximately 75% of Taiwan’s exports to RCEP countries were ICT-centric. Taiwanese businesses adapted to mitigate the impact of China’s imposed isolation effectively.

Despite these adaptations, China’s mercantilist policies and state subsidies directed toward mass-production industries resulted in intense price competition for traditional manufacturing sectors like textiles, electrical equipment, petrochemicals, and steel around the world. This competitive pressure also led to the decline of numerous traditional manufacturing companies in Taiwan, contrasting with the rapid growth of ICT firms. A notable illustration of this shift is reflected in the evolution of Taiwan’s top corporations—in 2000, only three of the 10 largest companies were in the ICT domain and six were in traditional industries, whereas by 2024, seven of the top 10 belonged to the ICT industry, with the remaining three in financial services.

South Korea, a country that has signed FTAs with many countries around the world, provides a useful point of comparison. Much like Taiwan, South Korea is highly dependent on exports, but it has been able to maintain a balanced composition of its manufacturing exports in sectors other than ICT. However, China’s price competition made this balanced composition a curse in disguise. Since the mid-2010s, South Korea’s exports have constantly performed worse than Taiwan’s, although Taipei’s new Taiwan dollar was also stronger than the South Korean won during that time. As a result, Taiwan’s GDP per capita surpassed South Korea’s in 2022 for the first time in 18 years. Taiwan’s stock market capitalization also surpassed South Korea’s at the same time.

International isolation forced trade-dependent Taiwan to concentrate its exports on tariff-free ICT industries. In turn, this saved Taiwan from China’s distorted price competition for manufacturing exports in traditional industries. When Beijing announced the suspension of 134 items for ECFA tariff reductions in late May, for example, all of them were in traditional industries. Taiwan’s Ministry of Economic Affairs estimated that the suspension will affect only 2% of Taiwan’s total exports.

Between 1990 and 2010, Taiwan was the largest foreign investor in Chinese manufacturing, which helped China quickly integrate into the global supply chain and become the largest trading power in the world through export-oriented industrialization. Once China established itself as the global manufacturing powerhouse, the Chinese government launched a series of import substitution policies to build a more self-sufficient domestic “red supply chain.” Therefore, foreign investors no longer enjoyed the preferential treatment they used to have, and they gradually encountered fierce competition from heavily-subsidized local companies. Taiwanese companies didn’t grasp the policy change and continued investing heavily, with foreign direct investment (FDI) to China comprising a significant portion of Taiwan’s total FDI, peaking at 84% in 2010.

Competition from the red supply chain, initiated during Hu Jintao’s era in China, did not trigger significant capital outflows initially. It wasn’t until Xi Jinping’s tenure, which was marked by a prioritization of national security over economic progress, coupled with events like the suspension of Ant Group’s initial public offering, the crackdown on the Hong Kong Anti-extradition movement, and the passage of Counter-Espionage Law, that FDI to China began to dwindle. Subsequently, from 2018 to 2022, FDI to China dipped below that to ASEAN for the first time, hitting a three-decade low in 2023. Taiwan mirrored this trend as its FDI share in China plummeted from 84% in 2011 to 11% in 2023.

Responding swiftly, the Taiwanese government introduced a series of repatriation policies in July 2019, encouraging Taiwanese companies to reinvest in Taiwan, particularly in green, high-value-added industries pivotal to the global supply chain. By June 2024, these policies had attracted over $71 billion back to Taiwan, predominantly in the ICT sector.

In 2015, China introduced “Made in China 2025” to propel the red supply chain into a dominant force in global high-tech manufacturing, earmarking crucial sectors such as AI, 5G, aerospace, semiconductors, electric vehicles, and biotech. Semiconductors, vital for AI and 5G, emerged as a key focus. China heavily invested in semiconductor development to bolster the red supply chain. Yet disruptions to the global supply chain during the COVID-19 pandemic underscored Taiwan’s critical role in it, as Taiwan supplied 60 percent of global semiconductors and more than 90 percent of the advanced ones.

Xi’s ambitious plans for China’s semiconductor manufacturing and coercively annexing Taiwan raised international alarms over the geopolitical risks to the semiconductor supply chain’s resilience. In fact, President Donald Trump’s trade war with China evolved into a technological war in 2019 when the U.S. government started to restrict Chinese companies from obtaining the chips and equipment they needed to power their semiconductors and 5G networks, especially those involved in “dual use” applications that skirt the line between military and civilian technologies. President Joe Biden further extended the restrictions to AI by cutting off the supply of the most cutting-edge chips, software, and equipment for AI development. Moreover, the U.S. Congress passed the CHIPS and Science Act in July 2022 to “strengthen American manufacturing, supply chains, and national security, and invest in research and development, science and technology, and the workforce of the future to keep the United States the leader in the industries of tomorrow, including nanotechnology, clean energy, quantum computing, and artificial intelligence.”

In November 2022, Open AI launched ChatGPT, changing market perspectives on generative AI and starting the AI boom. Although major customers’ concerns about supply chain resilience necessitated Taiwan Semiconductor Manufacturing Company (TSMC) to diversify advanced chip production to the United States, Japan, and Germany, the AI boom has brought new opportunities for Taiwan’s ICT industries as a whole. Growing together with the global ICT industries from personal computers to smartphones over the last five decades, Taiwan has developed the most comprehensive supply networks in the world, ready to manufacture extensive end-user devices for the AI era.

In conclusion, Xi’s nationalistic aggression has inadvertently catalyzed Taiwan’s economic renaissance, steering the nation toward a tech-centric future marked by resilience, innovation, and strategic realignment in the international economic landscape. Unless there is a sudden paradigm shift in the AI revolution, Taiwan’s prosperity and pivotal role in the new era is just getting started.