1H2017 Review: Taiwan

Taiwan’s gross domestic product is headed for its fastest clip since 2014, according to an economic think tank. GDP will probably exceed 2%, according to a forecast released in April by the Taiwan Institute of Economic Research (TIER).

Darson Chiu, deputy director of macroeconomic forecasting at TIER, said the figure is not necessarily “a very optimistic outlook”, he said, as it would be the third year in a row Taiwan’s GDP growth has remained below the global average of about 3%.

Exports in the trade-driven economy have been spurred by a global economic recovery, but the growth is superficial due to “very low base effects”, said Chiu, pointing to 17 months of consecutive decline in exports that began with 2014’s tumbling crude oil prices. He attributed recent increases in Taiwan’s export value to oil’s recovery.

Taiwan’s economy faces two “major structural issues”, Chiu said. The first is a supply value chain mainly geared toward the production of intermediate goods such as semiconductors and mechanical parts. The second is a lack of participation in international trade deals.

Chinese production is well-integrated with Taiwan’s supply value chains. As a result, China has learned to produce many intermediate goods cheaply on its own. “And that has been hurting Taiwan’s export potential” since the 2008–2009 financial crisis, Chiu said, noting that major economies like the US and China are in the process of bringing manufacturing back home as they develop next-generation industries.

President Tsai Ing-wen’s administration is aware of this global economic shift and is trying to ensure Taiwan remains a viable high-tech manufacturing hub, particularly in industries related to the Internet of Things (IoT). The Asia Silicon Valley Development Plan and related DIGI+ program are Tsai’s ambitious initiatives to foster a culture friendly to innovative digital entrepreneurship and develop a “complete IoT supply chain”.

Core objectives of the Asian Silicon Valley plan are to expand the country’s market share in in IoT from 3.8 percent (2015) to 5 percent in 2025, and to grow 100 successful companies in the process. However, Taiwan is suffering from a brain drain. In a May interview with Bloomberg, Premier Lin Chuan announced the island nation would welcome foreign talent to achieve the government’s economic goals.

If Taiwan does succeed in transforming its supply value chain and becomes a global hub for innovation, it will still need to find export markets. This leads to the second structural challenge Chiu identified: a lack of participation in free trade agreements and trade cooperation agreements, for example, with China, where Taiwanese exports face higher tariffs than those from South Korea.

With the TPP in flux and Taiwan potentially missing out on an FTA with the US after President Donald Trump affirmed his support for the ‘One China Policy’ in February, Chiu said “it’s very critical” that Taiwan not rock the boat with Beijing, which considers Taiwan a rogue province.

“Taiwan and China’s economies are closely intertwined, and there is a concern that China has leverage that it will seek to use to punish or compel Taiwan to change its behavior”, said Jonathan Sullivan, director of the China Policy Institute at the University of Nottingham.

Tsai’s refusal to accept Beijing’s interpretation of ‘One China’ has drawn the ire of the Xi Jinping administration since she was sworn into office over a year ago, and the two sides do not maintain official contacts as they did under Tsai’s predecessor, Kuomintang (KMT) politician Ma Ying-jeou. As cross strait relations have deteriorated, the Mainland has intensified its push to diplomatically and economically isolate the self-governing island.

In June, Panama, one of Taiwan’s few remaining official allies, established formal diplomatic relations with Beijing. By doing so, it was obliged to honor the ‘One China Policy’ and sever ties with Taiwan. Early this month, Nigeria shut down Taiwan’s trade office in the capital, Abuja.

On the domestic political front, Tsai and her Democratic People’s Party (DPP) have resumed a “truth and reconciliation” policy concerning the human rights abuses committed by the KMT party, which ruled Taiwan from the late 1940s to late 1980s.

The plan also attempts to achieve justice for Taiwan’s indigenous people who were mistreated following the KMT’s arrival. In June, Taiwan granted all of the island’s indigenous languages official status, and in May the country set a precedent for liberal democracy in Asia by legalizing same-sex marriage.

Tsai and the DPP have seen slipping approval ratings since her election over a year ago (as low as 39 percent in April), but she may have strong support for maintaining the “status quo” in cross strait relations. According to a June Mainland Affairs Council poll, more than 70% of the public neither relate with Beijing’s precondition that both Taiwan and the Mainland belong to the same China, nor its “practices of belittling Taiwan as a local government”.

Jonas Kelsch is a master’s degree candidate at the University of Hong Kong’s Journalism and Media Studies Centre.