The repeated exercises of the Chinese navy off Taiwan are fueling tensions between the two neighbors. In reaction to the growing hostility of China, the former Formosa revises downwards its economic relations with the Communist Republic.
These enemy brothers, however, have very intertwined economies. Taiwan was one of the first countries to invest in the special zones created in the coastal regions by Deng Xiaoping in the 1980s. Today, it is still in this touchy neighbor that Taipei invests the most. And it is also with him that the old Formosa exchanges the most.
But this historic relationship has lost momentum. The growth of Taiwanese exports to China has slowed sharply. And Taiwan’s investment in the People’s Republic has even declined. We went from 9 billion dollars in 2017 to 1.7 billion just five years later, in 2022.
From 2019, Taiwan’s investment in China is contracting
From one year to another, they decrease by half. Officially, the rising cost of labor in China is the main cause. The other explanation is the trade war unleashed by Donald Trump from July 2018. Taipei then redirected its investments and exports to escape the tariff barriers put in place by the American administration. Because electronic products made in China by Taiwanese companies are directly affected by these reprisals.
A decoupling of the two economies?
China remains Taiwan’s top destination for overseas investment. In 2022, the second world power still attracted a third of the total amount of Taiwanese investments abroad. Difficult to see a trace of decoupling. But ten years ago, China absorbed two-thirds of these Taiwanese investments. There is therefore a clear reduction in sail size over the medium term. There won’t be any rupture, for the moment, the two countries have too much to lose.
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Taiwan has redeployed to other countries in the region
Southeast Asia and India have become priority targets with about a third of Taiwanese business investment, almost the same amount as in China. Companies are adapting to the vast ongoing relocation movement driven by this trade war and then by the consequences of Chinese containment during the Covid-19 epidemic.
Foxconn for example, one of Apple’s main contractors with its giant factory based in China, is building a new factory in India; it plans to invest $800 million in it. The semiconductor industry, the flagship of the Taiwanese economy, is also diversifying its overseas investments outside the Middle Kingdom, with major projects in the United States.
Trade between the United States and Taiwan has also increased sharply
The United States is increasingly importing electronics from Taiwan; the island, which thrives on foreign trade, has therefore not suffered too much from its very relative remoteness from China. And Washington and Taipei have also reopened or started official discussions in several forums to promote their economic rapprochement. It is not really a question of lowering tariff barriers between the two countries as is customary in free trade agreements, but rather of finding convergence in standards or priority areas, such as energy transition, to accelerate integration between these liberal democracies. In light of its tense relations with China, this enhanced economic dialogue with the United States is more of a political tool than a real engine of growth.
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