18 Sept 2018
Taiwan Businesses Fear Being Caught in China-US Trade War Crossfire
As the on-going US-China trade war looks set to go up several gears, Taiwan is keen to put contingency plans in place as the rift between two of its primary overseas markets threatens to imminently undermine its own export base.
China-US trade tensions have turned from bad to worse since March, not only affecting the two countries' economies, but also sending ripples through territories with close trading ties. Among them, Japan, South Korea, Hong Kong and Taiwan are bearing the brunt, as many of their businesses have production bases on the mainland. All of them, including Taiwan, are now preparing contingency plans.
With a small domestic market, Taiwan has adopted an export-oriented approach in its development strategy, shifting from traditional manufacturing in the early days to information-technology industries. Many Taiwan companies moved their production bases across the Strait for export processing when the mainland economy took off. Those that stayed behind are also gradually targeting the mainland as their major export market.
Figures published by the Bureau of Foreign Trade of Taiwan's Ministry of Economic Affairs reveal that the territory's exports to the mainland and Hong Kong (mostly re-exports to the mainland) have hovered around 40% of the total since 2008. The figure was 41% in 2017, underscoring the importance of the mainland market to Taiwan's industries.
The US used to be Taiwan's primary export destination. Although it no longer carries as much weight, it remains an important export destination, and export volumes have, once again, been growing over recent years. The US was Taiwan's third-largest export destination last year, accounting for 11.7% of total exports, a year-on-year increase of 10.3%.
US President Donald Trump's imposition of 25% and 10% additional tariffs on steel and aluminium imports officially kicked off the trade war earlier this year. While China is the 11th-largest source of US steel and aluminium imports, Taiwan is the eighth-largest source and will be harder hit. Unfortunately, Taiwan is not on the exemption list for additional tariffs. Through repeated negotiations with US officials, Taiwan manufacturers have been asked to clarify the 'China content' of its steel and aluminium products – that is, the use of made-in-China iron and steel, thus laying bare US intentions to block mainland steel and aluminium products from the home market.
Officials from the Taiwan government and representatives of the Taiwan Steel and Iron Industries Association have been in negotiations with the US Trade Representative (USTR) in the hope of getting tariff waivers from the US side. At the same time, steel manufacturers have also been urged to decentralise their production bases and markets to minimise the trade-war risks. Taiwan's giant China Steel Corporation, for instance, is able to steer clear of the current punitive import tariffs as it has a production plant in Vietnam. Formosa Plastics Group is also able to shelter from the trade war because its Ha Tinh Steel Plant in Vietnam already has two blast furnaces up and running.
Things got still worse for Taiwan's businesses, however, when the trade war escalated with the US imposing additional tariffs on more than US$200 billion worth of imports, and China retaliating with its own duties. Taiwan's standing is particularly hard to determine as it finds itself trapped between two major trading partners. Although some optimists believe Taiwan's businesses stand to benefit from the trade diversion as a result of tariff hikes, the more prevalent view is that the territory's close ties with supply chains on both the Chinese and US sides will greatly increase the cost of production as a result of the additional tariffs.
Taiwan's central bank pointed out in its analysis in early July that the additional tariffs imposed by the US on mainland goods in the first round mostly covered machinery, equipment and information and communications technology products. Yet Taiwan's exports of these products to the mainland are mainly for domestic consumption. A number of end products, such as mobile phones and notebook batteries, are not on the list.
China's additional tariffs on goods from the US mainly target special agricultural products. Moreover, Taiwan's involvement in the US manufacturing sector is relatively limited and the list should have little relevance to Taiwanese exporters.
However, Taiwan's central bank warned the business sector that the US side may impose further tariffs on goods from China in the next round. If the measures are extended to cover end products, the impact on Taiwan may be quite substantial.
The Ad Hoc Task Force for Responding to US-China Trade Conflicts was established by the Ministry of Economic Affairs on 17 July 2018 with a remit to devise counter measures and assist businesses in solving problems with regard to the transfer of production bases, lowering of tariff barriers, enhancement of industrial clout and prevention of illegal transshipment and dumping.
Minister of Economic Affairs Shen Jong-chin said the hardest hit industries were those with production bases on both sides of the Strait making end products sold to the US, including network communications equipment, petrochemicals, machine tools, handbags, and middle-to-low-end bicycles, parts and components. Industries with production bases in Taiwan are less affected and may even benefit from trade diversion. These include industries producing hand tools, screws and screw caps, and optical goods.
According to foreign-media reports, some major Taiwanese technology plants are preparing to withdraw their manufacturing facilities from the mainland as US-China trade tensions escalate. The Executive Yuan decided to combine the resources of the Private Investment Centre and the Department of Investment Services and Investment Commission of the Ministry of Economic Affairs to set up the Invest Taiwan office to assist Taiwan businesses in this process. Should Taiwan companies decide to extend their businesses to Southeast Asia and other overseas destinations, the government will also mobilise the resources of its overseas embassies and commissions and the Ministry of Economic Affairs to help them form business clusters abroad.
Lu Jiun-wei, Associate Research Fellow at the Taiwan Institute of Economic Research, reckons that the additional tariffs of 25% imposed by the US on mainland goods worth US$250 billion in the first two rounds will cause Taiwan's economic growth to drop by 0.17%, but maintained that the crisis would also generate opportunities. On the one hand, Taiwan businesses may increase exports to the US. On the other hand, they should take this opportunity to invest in industrial upgrades and widen the technology gap in a bid to compete more effectively with mainland businesses.
The public is most concerned about the impact of the trade war on Taiwan's technology industry, especially the semiconductor sector. Experts from Taiwan's Industrial Technology Research Institute concluded that the impact on the semiconductor sector would be quite small because most IC production bases continue to operate in Taiwan and the production capacity of their mainland plants is quite limited. Moreover, most of these facilities are producing for the mainland domestic market rather than for exports to the US and Europe. If the trade war escalates, the US may source supplies from other trading partners and Taiwan businesses should consider establishing a platform to promote the availability of their own exports.
Robert Kang, Special Correspondent, Taipei