Post by Trade Coach on Oct 10, 2021 13:00:10 GMT 1
Taiwan and China Are Locked in an Uneasy Embrace. What It Means for Trade and Investment
It’s not just Chinese fighter jets that roar across the 100-mile strait separating China from Taiwan. Enormous flows of trade, investment and critical technology also link the two countries. These could either put a brake on Beijing’s “reunification” ambitions, or provide an alternative weapon to fulfill them.
Trade and investment relations are not just for wonks in this corner of the world. For some years after both countries entered the World Trade Organization in the early 2000s, Taiwan’s technology and capital seemed matched in heaven with China’s low labor costs and production discipline. Manufacturers like Foxconn Technology (ticker: 2354. Taiwan) created millions of jobs on the Mainland to supply Apple and other global electronics powers. Taiwan Semiconductor Manufacturing (TSM) provided the micro-brains for burgeoining Chinese telecoms providers like Huawei and Xiaomi (1810. Hong Kong).
China’s Communist leaders hoped economic symbiosis would bring Taiwan peacefully into their embrace, says David Sacks, a research fellow at the Council on Foreign Relations. “Beijing was hoping to make the economies so intertwined the two countries would be all-but one,” he says.
Taiwanese voters shattered those hopes in 2014 with explosive protests against a proposed free trade agreement in services with the Mainland. That “Sunflower Movement” led to the election of president Tsai Ing-wen two years later. She has altered course sharply away from reunification.
Tsai pushed for economic disengagement through a “southbound policy” for investment in Southeast Asia, and an “Asian Silicon Valley” within Taiwan. That hasn’t worked too well either. Taiwan’s trade with China hit a record last year. Exports to the Mainland comprise more than 15% of gross domestic product, says Matt Gertken, geopolitical strategist at BCA Research.
“Disengagement has been very much at the margins,” says Rory Green, chief China economist at TS Lombard. “The status quo is still massive investment in China.”
That exposure gives China an economic weapon that it may deploy before Taiwan’s next presidential election in May 2024, Gertken thinks. Tsai is barred from seeking a third term. Beijing would love to defeat any successor from her Democratic Progressive Party. “The easiest way for the whole game to change is for Beijing to cause a recession in Taiwan that would cause the DPP to fall from power,” he says.
It’s a weapon with substantial potential for recoil, though. China’s advancement in a range of high-tech industries, a keystone of its competitive strategy with the U.S., depends heavily on semiconductors and other inputs from Taiwan, and will do for the foreseeable future. “In the best case, China can become a reliable producer of low-end semiconductors over the next three to five years,” Green says.
Xi Jinping & Co.’s use of economic muscle against other neighbors has largely backfired. China has restricted purchases or tourism from Japan, South Korea and Australia in recent years for perceived political offenses. The result: minimal policy gains and notably more hostile populations. “Intervening in Taiwan’s next election could be quite tricky,” Green concludes.
One X factor in this situation is a U.S.-Taiwan free trade agreement, which Tsai and a bipartisan coalition in the Congress have been pushing for. But Taiwanese may nix that themselves this December, over pork of all things. They vote on a referendum to overrule Tsai’s green light on importing American meat with the additive ractopamine, a surprise sticking point for a decade or more. (Trade talks move on their own unhurried schedule.)
The Biden administration, still feeling its way in China policy, also seems lukewarm on free trade with Taipei. “This is not a priority for USTR,” Sacks says, referring to the U.S. Trade Representative.
The economic entanglement of China and Taiwan probably decreases the chances of armed invasion in the near term. Stability-loving Beijing would rather impose its will economically than resort to amphibious occupation.
But it adds one more layer of complexity to the risk nexus around Taiwan’s outstanding companies and the global supply chains they support. Investors take note.
Source: www.barrons.com/articles/china-taiwan-news-trade-investment-51633805437?tesla=y
It’s not just Chinese fighter jets that roar across the 100-mile strait separating China from Taiwan. Enormous flows of trade, investment and critical technology also link the two countries. These could either put a brake on Beijing’s “reunification” ambitions, or provide an alternative weapon to fulfill them.
Trade and investment relations are not just for wonks in this corner of the world. For some years after both countries entered the World Trade Organization in the early 2000s, Taiwan’s technology and capital seemed matched in heaven with China’s low labor costs and production discipline. Manufacturers like Foxconn Technology (ticker: 2354. Taiwan) created millions of jobs on the Mainland to supply Apple and other global electronics powers. Taiwan Semiconductor Manufacturing (TSM) provided the micro-brains for burgeoining Chinese telecoms providers like Huawei and Xiaomi (1810. Hong Kong).
China’s Communist leaders hoped economic symbiosis would bring Taiwan peacefully into their embrace, says David Sacks, a research fellow at the Council on Foreign Relations. “Beijing was hoping to make the economies so intertwined the two countries would be all-but one,” he says.
Taiwanese voters shattered those hopes in 2014 with explosive protests against a proposed free trade agreement in services with the Mainland. That “Sunflower Movement” led to the election of president Tsai Ing-wen two years later. She has altered course sharply away from reunification.
Tsai pushed for economic disengagement through a “southbound policy” for investment in Southeast Asia, and an “Asian Silicon Valley” within Taiwan. That hasn’t worked too well either. Taiwan’s trade with China hit a record last year. Exports to the Mainland comprise more than 15% of gross domestic product, says Matt Gertken, geopolitical strategist at BCA Research.
“Disengagement has been very much at the margins,” says Rory Green, chief China economist at TS Lombard. “The status quo is still massive investment in China.”
That exposure gives China an economic weapon that it may deploy before Taiwan’s next presidential election in May 2024, Gertken thinks. Tsai is barred from seeking a third term. Beijing would love to defeat any successor from her Democratic Progressive Party. “The easiest way for the whole game to change is for Beijing to cause a recession in Taiwan that would cause the DPP to fall from power,” he says.
It’s a weapon with substantial potential for recoil, though. China’s advancement in a range of high-tech industries, a keystone of its competitive strategy with the U.S., depends heavily on semiconductors and other inputs from Taiwan, and will do for the foreseeable future. “In the best case, China can become a reliable producer of low-end semiconductors over the next three to five years,” Green says.
Xi Jinping & Co.’s use of economic muscle against other neighbors has largely backfired. China has restricted purchases or tourism from Japan, South Korea and Australia in recent years for perceived political offenses. The result: minimal policy gains and notably more hostile populations. “Intervening in Taiwan’s next election could be quite tricky,” Green concludes.
One X factor in this situation is a U.S.-Taiwan free trade agreement, which Tsai and a bipartisan coalition in the Congress have been pushing for. But Taiwanese may nix that themselves this December, over pork of all things. They vote on a referendum to overrule Tsai’s green light on importing American meat with the additive ractopamine, a surprise sticking point for a decade or more. (Trade talks move on their own unhurried schedule.)
The Biden administration, still feeling its way in China policy, also seems lukewarm on free trade with Taipei. “This is not a priority for USTR,” Sacks says, referring to the U.S. Trade Representative.
The economic entanglement of China and Taiwan probably decreases the chances of armed invasion in the near term. Stability-loving Beijing would rather impose its will economically than resort to amphibious occupation.
But it adds one more layer of complexity to the risk nexus around Taiwan’s outstanding companies and the global supply chains they support. Investors take note.
Source: www.barrons.com/articles/china-taiwan-news-trade-investment-51633805437?tesla=y
