The worsening trade war between the United States and China will cut the GDP of Taiwan this year and next and accelerate the transfer of investments by its companies out of the mainland.
For the last 30 years, China has been the biggest single destination for overseas investment by Taiwan firms. An estimated two million Taiwan people live in Mainland China, including families of business people. A substantial part of the output of their factories there is exported to the US market.
Ma Tie-ying, senior economist of the Xing Zhan Group, said that the trade war would cut Taiwan’s GDP growth this year to 2.7 percent from a pre-trade war forecast of 2.8 percent and that growth next year would be 2.2 percent, down from a pre-trade war forecast of 2.4 percent.
“Of Taiwan products made in mainland factories or exported there, 65 percent are electronics,” Ma said. “So far, fortunately, the majority of these items have not been included on the list of goods on which the US is imposing tariffs.” Mobile telephones and personal computers, for example, have not been included. These are major products for Taiwan companies.
Liu Shih-chung, vice-chairman of the Taiwan External Trade Development Council, presented the government view of the dispute in a speech earlier this year. “This trade war is more than just a trade war. It is a sign of a competition for future technology, supremacy, superiority and domination. By progressively decreasing its dependence on the Chinese market, Taiwan may be able to help safeguard against the dangers that bilateral tariffs present,” he said.
Even before the trade war, the government of Tsai Ing-wen has been urging Taiwan companies to diversify under the “New Southbound Policy” – the 10 ASEAN countries, six South Asian nations, Australia and New Zealand. It sees the mainland as hostile and determined to take over Taiwan, by military force if other means are not successful. So, for diplomatic and security reasons as well as economic, Taiwan needs to have as many friends and partners as possible away from the mainland.
But, for companies that have invested in China for many years, this is easier said than done. Martin Wong, president of Compal Electronics, said his firm would decide before the end of the next quarter whether to start production in a plant in Vietnam that it built 10 years ago but has never used.
“We are awaiting a final list of affected products. We can withstand tariffs of up to 25 percent. The biggest problem with Vietnam is the chain of production. Some items would have to be shipped there, which would increase the cost. Relocating back to Taiwan would result in a three percent increase in costs due to higher wages,” he said.
Peng Shuang-liang, chairman of AU Optronics, noted that Taiwan firms had invested in China for more than 20 years. “To relocate everything overnight is no easy matter. We must study what our clients want and, through global production, meet their demands.”
According to the Hsinchu-based Industrial Technology Research Institute, 191 of the more than 900 publicly traded companies on the Taiwan Stock Exchange have investments in India and Southeast Asia.
Delta Electronics, a supplier of power components to Apple, Sony, HP and other global brands, said on July 31 that it would spend up to US$2.14 billion to buy Bangkok-listed associate Delta Electronics (Thailand), whose manufacturing bases in Thailand, India and Slovakia will give it protection against future trade uncertainties.
Earlier this year, Pegatron, a major assembler of iPhones, said it would set up its first factory in India, in a bid to enter that large market as well as reduce the firm’s dependence on China.
Pou Chen, the world’s top contract footwear maker, made 17 percent of its 324.6 million pairs of footwear in China last year, down from 20 percent in 2016, 25 percent in 2015 and 29 percent in 2014. In the first half of this year, it made 46 percent of its output in Vietnam, compared to 15 percent in China. Production costs in China are now higher than in Vietnam or Indonesia.
Building plants in the US is another option, despite the higher costs of production there. Last year Taiwan firms invested over US$800 million in the US, more than 250 percent greater than that in 2016, according to Taiwan’s Ministry of Economic Affairs.
If the US-China trade war intensifies, it could lead to a situation where we might have to redraw the manufacturing map of the world.
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