The Taiwan Banker

Since the election of President Tsai Ing-wen in 2016, China has steadily ratcheted up pressure on Taiwan. Economic warfare has been integral to Beijing’s campaign to punish Taipei for refusing to accept the discredited governance model of “one country, two systems” used in Hong Kong and Macau. While the sanctions have hurt certain industries, notably tourism and agriculture, the pain has been temporary. Taiwan has been able to find new markets for its goods and services. Uncompetitive firms, such as hotels that catered to Chinese tour groups, have exited the market without fanfare. Taiwan will continue to exhibit economic resilience in the face of China’s belligerent response to U.S. Speaker of the House Nancy Pelosi’s visit, though some short-term pain cannot be avoided. It was predictable that China would unveil selective sanctions on food products from Taiwan and conveniently cite SARS-CoV-2 contamination as the reason. China’s ruling Communist Party has a knack for finding the coronavirus in places others do not. At present, the agriculture sector has been hit the hardest. Before Pelosi visited Taiwan, China banned imports of 100 Taiwanese food brands. That turned out to just be Beijing’s opening salvo. It has since banned thousands of Taiwanese food exports. Though Taiwan consumes most of the agriculture sector’s output domestically, China is its largest food export market. Data compiled by the Taiwanese government show that Taiwan’s horse mackerel and largehead hairtail exports to China in 2021 were worth US$3 million, citrus US$10 million and various baked goods more than US$50 million. As a share of Taiwan’s total exports to China, food accounts for just 0.4%, according to Goldman Sachs. With that in mind, China’s sanctions will have a negligible impact on Taiwan’s overall GDP growth, but could have political ramifications for the Tsai Ing-wen administration. After all, the November local elections are just around the corner. Fishermen are already suffering from a ban by China implemented on Taiwan’s grouper exports in June. "Fishermen here indeed are worried that they don't know where to sell groupers," Zheng Rui-Long, the owner of a fish processing factory in Pingtung, told Reuters in August. For now, Taiwan is relying on subsidies to counter China’s sanctions on its agriculture sector. To boost domestic purchases of agricultural products, it began on August 8 offering an NT$200 (US$6.67) agrotourism voucher for any purchases of more than NT$600 (US$20) from platforms such as the Farmers’ Association. The Council of Agriculture plans to distribute 300,000 vouchers. Further, Taiwan is moving to diversify its food export markets. The Ministry of Economic Affairs (MOEA) said on August 11 that it would allocate NT$200 million (US$6.67 million) to support roughly 2,000 Taiwanese firms affected by China’s sanctions. The funding will be used to promote processed foods in 13 countries. Less problematic for Taiwan is China’s ban on natural sand exports to the island democracy. Taiwan can produce nearly 99% of the sand it needs domestically, according to the Bureau of Mines. Given Taiwan’s improved dredging of rivers, streams, and reservoirs, it has reduced its reliance on sand imports. The trade ties that bind China could hurt Taiwan’s economy badly if it banned the island democracy’s electronics exports. Electronics components account for the largest share of Taiwan’s US$113 billion in exports to China.However, because China is reliant on those products for its own economic well-being, it is highly unlikely to take such a step. Leading Taiwanese semiconductor firms, such as Hsinchu-based chip designer MediaTek, generate most of their revenue from Chinese customers. Despite the Chinese Communist Party’s best efforts, which include nearly US$100 billion in state funding, China still imports 84% of its computer chips. For its part, Taiwan accounts for 64% of global semiconductor manufacturing revenue, according to the Taipei-based research firm TrendForce. Given the slow pace at which China’s semiconductor industry is developing, it will take decades before domestic firms can replace their Taiwanese counterparts – if ever. That Chinese leader Xi Jinping’s anti-corruption campaign is now targeting chipmakers does not augur well for the industry’s development either. Looking ahead, China’s reliance on Taiwanese electronics firms will continue to act as a ballast in the precarious cross-Strait relationship. For instance, Taiwan’s Foxconn, the world’s largest contract electronics manufacturer, has been a major investor in China since the late 1980s. Foxconn makes most of the world’s iPhones at its China factories. Taiwan Semiconductor Manufacturing Company (TSMC) is also a large investor in China, with fabs in both Shanghai and Nanjing. Due to geopolitical considerations, TSMC will probably not expand its China investments. Foxconn seems less cautious in that respect, though the Taiwanese government may nix its US$800 million investment in China’s embattled Tsinghua Unigroup. Where Taiwan needs to stay vigilant is in how manages global firms’ perceptions of risk in its business environment. Since the pandemic broke out in early 2020, Taiwan has imposed some of the world’s strictest measures to contain the spread of the coronavirus. While those measures have been largely successful, they have come at a significant cost: They have severed Taiwan’s normal ties with the world. Many friends of Taiwan – with the exception of high-level dignitaries – have not visited the country in 2 ½ years or longer. Facing unprecedented military pressure from China and taking into consideration Taiwan’s high vaccination rate and ability to manage SARS-CoV-2 in the community, it is questionable whether travel restrictions still serve a constructive purpose. Taiwan has to consider the key role normal travel, unencumbered by quarantine, serves in boosting its national interests. At the same time, the Taiwanese government should take prudent action to assess where risk to normal business operations has risen, such as in air and sea shipping routes that could be affected by nearby Chinese military activity. It should begin devising workarounds for possible supply chain bottlenecks with relevant stakeholders. Ultimately, China’s formal sanctions on Taiwanese industry will be less harmful than its ability to sow doubt in the minds of the international community about the security of Taiwan’s business environment. How global investors perceive the situation will depend largely on whether Taiwan can mitigate risk and take control of the narrative.