The Taiwan Banker

The first two US trade sanction lists had limited impact on Taiwanese exports, but Taiwan should pay close attention to whether future tariffs will extend to information terminals, which could broaden the impact.America’s trade war against China under the administration of President Donald Trump is heating up. The first sanctions imposed 25% tariffs on a list of products worth about US$ 34 billion, including machinery, electrical and medical equipment, and vehicles. The second list imposed 25% duties on US$ 16 billion of important products including semiconductors, electric motors, plastics, and finished goods, while the third targets US$ 200 billion in animal and plant products, minerals, chemicals, textiles, metals, automotive components, and bicycles. The rate could rise to 25% at the end of the year.China subsequently implemented countermeasures targeting US$ 34 billion of American imports, including agricultural products, automobiles, water, medical equipment, coal, and petroleum. For the US$ 16 billion tariffs, additional tariffs were place on products including chemicals, energy, plastic and its products, and medical equipment. Trump threatened that the US could eventually impose tariffs on all US$ 550 worth of US imports from China in 2017.Pitfalls and Opportunities for TaiwanThe reasons for the Trump administration’s insistence on a trade war with China are complex. The US has a trade deficit of over US$ 370 billion annually to China, and has lost at least US$ 50 billion worth of intellectual property to China. China’s advanced manufacturing will challenge America’s global leadership, and local American manufacturing jobs will continue to move overseas. The administration is also worried about the midterm elections at the end of the year. Unless China completely gives in or negotiates tactics better, the trade war will persist for the time being.Because the quantity of US imports from China far exceeds that of products going the other way, the US has a clear advantage in terms of tariffs. However, the global economy is susceptible to butterfly effects, and belligerent countries should be aware of side effects. Tariffs tend to become a zero-sum game of retaliation. In addition, over the past 20 years, more than half of the profit growth of large American corporations has come from foreign markets, so the ongoing dispute is not conducive to future growth. Barclays estimates that without an agreement to end the trade war, the two countries may lose at least 0.2-0.4%, or even up to 1.0-1.5% of GDP, as well as over 250,000 jobs.Taiwan’s industry is oriented towards exports. It exported about US$ 320 million in 2017, 41% of which went to mainland China, and 12% to the US. Looking at the last two lists of sanctioned products, the Chinese exports targeted were capital equipment and components. The effects from the two current lists on Taiwanese exports are limited (not including Taiwanese-invested production). According to the Ministry of Economic Affairs, industries to watch include: networking equipment, mid- to low-end bicycles and components, machine tool components, petrochemicals, and plastics. If the US sanctions end up extending to tariffs on information terminals such as computers, servers, mobile phones, and TVs – or even mutual non-tariff barriers, such as delays in investment review - disruption of supply chains around the world, and economic growth in the two countries, may pose significant risks to Taiwanese production.According to the most recent estimates of the Current Quarterly Model of the Industrial Economics and Knowledge Center (IEKCQM) of the Industrial Technology Research Institute, manufacturing is still growing at an 3.27% rate in 2018. Despite the uncertainty from the trade war, each subsector – metallic electromechanical, information technology, chemicals, and consumer manufacturing – is still growing. The trade war has continued to heat up, however. The global economic climate has deteriorated, indicating that uncertainty will rise in the second half of the year. Consumer and corporate investment indices must be watched carefully.Responses by Taiwanese Industry and GovernmentThe trade war could be compared to a fight between two elephants. Even if a small mouse off to the side is a friend of one side or the other, it must still be aware of its own safety. If the two giants ever get tired of fighting, the mouse becomes friends to both. It must rely on its own power so as not to become a bargaining chip between the two.Trade protectionism will be prevalent around the world for the time being. In the short term, Taiwanese manufacturers will certainly be both helped and harmed. Taiwanese businesses will be forced to flexibly relocate their production bases. Some electronics and machinery companies may see transfer benefits, but in the medium- to long-term, they must relocate outside of the US and China, proactively developing regional markets. Taiwanese businesses are more flexible and resilient than those from China, Japan, and Korea. Using this advantage to cooperate with, join, or invest in companies from Southeast Asia or elsewhere, or even to cooperate with American companies in markets outside the US and China, will help spread risks. A crisis can be an opportunity in disguise. (The author is the Director of the ITRI ​​Industrial Economics and Knowledge Center Department of International Strategic Development.)Strategic Recommendations Chinese and American monetary policies will affect global forex markets. Manufacturers must pay attention to volatility. Large manufacturers should make use of diversified hedges, and strengthen cost limits to reduce losses from exchange rate volatility.Although Taiwan lacks large domestic markets, domestic and overseas Taiwanese manufacturers make up a large demand pool for Taiwanese smart machinery applications. The government should accelerate implementation of its strategy to strengthen development of Taiwan as a global manufacturing hub, and consider incentive measures and financial regulations for smart machinery applications for factories in Taiwan and abroad.The government should also extend its New Southbound policy to incentivize collaborations with international leaders and local manufacturers entering Southeast Asia and other emerging markets. It should consider how to reduce risks from overly concentrated supply chains in the face of challenges from the return of protectionism, further building up a value-added ecosystem with business users at the core. On this occasion of global manufacturing adjustment, the government should make good use of Taiwan’s rich industrial, research, and education ecosystem, deepen its R&D advantages, cultivate its innovative talent, and optimize the laws and regulations determining the domestic investment environment (such as environmentally-friendly manufacturing and digital economy models, etc.), attracting overseas Taiwanese businesses and foreign players to invest in key domestic industries, advanced manufacturing, and digital services.