What Does Taiwan’s Presidential Election Outcome Tell Us About Its Economic Prospects? – Taiwan Insight
Written by Min-Hua Chiang.
Image credit: 01.01 總統發表「2024新年談話」by 總統府/ Flickr: CC BY 2.0 DEED.
William Lai (Lai Ching-te) of the Democratic Progressive Party (DPP) secured his election as Taiwan’s 16th president on January 13, 2024. As the DPP extends its rule for another four years, the administration is likely to maintain President Tsai Ing-wen’s economic policies, notably diversifying the economy away from China. Navigating Taiwan’s export-oriented economy through the evolving US-China relationship will pose the most significant challenge for the new administration.
President Tsai Ing-Wen’s New Southbound Policy (NSP), announced in 2016, signified a shift in the country’s foreign policy from focusing on cross-Strait economic ties during Ma Ying-Jeou’s presidency (2008-2016) to relations with a larger “Asia economic group” in the South. China’s growing confrontations with the democracies around the world also gave Taiwan opportunities to deepen its informal commercial links with Europe and the United States. Although Taiwan’s institutionalised economic engagements with other countries are still restrained so far, the figures have shown a clear alteration in Taiwan’s external economic ties.
According to Taiwan’s Investment Commission, Taiwan’s investment in China dropped from nearly US$13 billion in 2012 to US$ 5 billion in 2022 and US$3 billion in 2023. China’s share in Taiwan’s worldwide outward investment also shrank sharply from 84% in 2010 to 34% in 2022 and 11% in 2023. In contrast, the United States, Europe, and Southeast Asian countries have emerged as Taiwan’s top investment destinations. In 2023, these three regions collectively represented a significant portion of Taiwan’s global outward investment, with the United States accounting for 36%, Europe for 20%, and Southeast Asia for 19%.
The decline in investment in China, which began over a decade ago, did not immediately sever cross-Strait trade relations. The industrial upgrading in China has fueled an increased demand from local Chinese companies for key components manufactured in Taiwan. However, the U.S. export control measures in recent years have choked off Taiwan’s exports of advanced semiconductor chips to China. As a consequence, China and Hong Kong’s shares in Taiwan’s total exports declined from nearly 44% in 2020 to 35% in 2023, according to Taiwan’s Ministry of Finance. In particular, China and Hong Kong’s share in Taiwan’s export of electrical machinery, which includes semiconductor chips, diminished from 37% in 2015 to 19% in 2023. The impact of the U.S. ban on TSMC to export advanced chips to China’s Huawei and SMIC in 2020 and greater restrictions in the following years is clear.
However, it is important to note that Tsai’s economic policies do not predominantly drive the distancing of cross-Strait economic relations. The move to relocate investments from Taiwan commenced with China’s diminishing comparative advantage in offering cheap labour. In recent years, the US-China tensions over a variety of geopolitical and economic issues have further accelerated Taiwan’s investment shift away from the mainland. Although Taiwan’s economic policy is not the main driving force, the NSP and encouragement of returning Taiwanese investment from overseas to the island could have smoothed Taiwanese investment moving away from China. Lai will continue to reap benefits by promoting Taiwan’s economic diversification if the relations between the United States and China remain tense.
The cross-Strait economic ties could drift further away if China exerts its restrictions on economic exchanges with Taiwan. Previously, China banned certain agricultural products imported from Taiwan due to sanitary and phytosanitary concerns. Taiwan’s overall exports of agricultural products continued to surge, but China’s share has significantly declined from 23% in 2018 to 12% in 2022. The United States and Japan are now the two leading destinations for Taiwan’s agricultural exports. The number of Chinese visitors to Taiwan also dropped after Tsai Ing-Wen took office in 2016. In the first 11 months of 2023, visitors from China only accounted for less than 2% of total visitor arrivals in Taiwan, according to Taiwan’s Tourism Administration. Taiwan’s tourism industry remained resilient thanks to the rise of visitors from Southeast Asian countries, Japan and South Korea.
One month before the election, China announced its potential suspension of preferential tariffs under the early harvest program of the Economic Cooperation Framework Agreement (ECFA). The impact on Taiwan’s overall economy could be restrained given the small portion of those export items that enjoyed China’s lower tariffs. Nevertheless, the impact on the targeted sectors could be huge. For example, China accounted for nearly one-third of Taiwan’s exports of plastics and rubbers in 2023 and 27% for mineral and chemical products, according to Taiwan’s official trade statistics. When Taiwan is still struggling to secure bilateral and multilateral free trade agreements (FTAs) with other countries, China’s suspension of ECFA will be likely to hurt certain industries that have long relied on the Chinese market.
Taiwan’s limited FTAs also imply that Lai might have difficulty expanding overseas markets for industries that he vowed to develop, such as Artificial Intelligence, the defense industry, security monitoring, the telecommunication industry, and the financial industry. Over the past few decades, Taiwan’s inclusion in the International Technology Agreement (ITA) under the World Trade Organization (WTO) has facilitated its trade in semiconductors, computers, telecommunication products, and so on with other countries, thus fostering the development of its high technology industries. Taiwan’s strong and extensive economic engagement with foreign countries is deemed critical for the island to strengthen the development of other industries in the future.
Nonetheless, China’s political intervention in institutionalised economic integration will make Taiwan less likely to join the Regional Comprehensive Economic Partnership (RCEP) and Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) anytime soon. Moreover, Taiwan’s growing geopolitical significance in recent years did not transform into economic substance. For example, Taiwan is not involved in the US-launched Indo-Pacific Economic Framework for Prosperity, an alliance to counterbalance China’s great economic influence. The current U.S. policy that emphasises improving the regulatory environment rather than greater trade and investment liberalisation between countries is not likely to address Taiwan’s immediate needs for greater global market expansion and diversification. The United States-Taiwan Initiative on 21st Century Trade demonstrated America’s regulatory-oriented trade policy.
In addition, the closer US-Taiwan institutionalised economic relations have not drawn other countries to follow suit and initiate their economic engagement with Taiwan. In the face of unclear export prospects, Taiwan will need a strong domestic demand to ensure satisfactory economic growth. Lai’s policy which aims to lift the minimum wage, reduce the tax burden of households, and increase subsidies for the elderly, unemployed youth, and child raising, suggests that a large extra government spending is expected. Nevertheless, even with greater government expenditure, Taiwan’s small economic size might restrain the contribution from the domestic demand to economic development. Taiwan’s economic slowdown in 2023 is an example of the impact of plummeting exports despite the rise of domestic demand.
Lai vowed to make a Taiwan economy where the sun never sets. Whether Lai’s economic blueprint will further grow Taiwan’s economy is uncertain. The official figures reckoned a downward economic trend to 1.4% in 2023, from 2.6% in 2022 and 6.6% in 2021. To sustain at least a 3.5% annual economic growth rate, as Lai hoped, Taiwan will still mostly rely on the exports of its semiconductor chips.
Being an export-oriented economy at the centre of world politics, Taiwan’s economic prospects will largely depend on whether the new administration’s policy is compatible with the new global economic setting and political landscape. At present, the economic policy that Lai proposed remains mostly the same as Tsai’s. However, the external geopolitical environment has dramatically changed. For example, the New Cold War between the United States and China, which emerged in the third year of Tsai’s presidency, has quickly transformed into hot wars in Ukraine and the Middle East in the last two years. Despite the clear geopolitical confrontation between the United States and China, the Biden administration claimed that it does not seek economic de-coupling with China. Taiwan will need to keep its foreign policy and corresponding economic measures flexible in the face of the complex political and economic relations in the world. Apart from the evolving international relations, Lai’s economic policy might also need to be adjusted if there are any changes in American politics after the U.S. presidential election in November 2024.
Min-Hua Chiang is a non-resident senior fellow at Taiwan Research Hub, University of Nottingham and an adjunct fellow at the East-West Center in Washington D.C.
This article was published as part of a special issue on ‘What does the 2024 Taiwan election tell us?’.
