Strong protectionism features prominently in US President Donald Trump’s “America First” and “Make America Great Again” themes.
At the last G-20 Summit, he indicated that he believes global trade to be a zero-sum game and that the current world trade order is very unfair to the US. He seems strongly against free trade and intends to reverse the long-term US trade deficit through trade protectionism, contrasting with the supportive free trade positions of the other 19 members of the G-20. Prior to the G-20 Summit, Trump also declared his intention to impose higher tariffs or quotas on imported steel, triggering tension between the US and its allies, including the EU, Canada, Japan, and South Korea. This could, potentially, further evolve into a global trade war.
As an export-oriented country, Taiwan maintains a close trade relationship with the US. However, the US’s future trade policies are full of uncertainty given Trump's protectionist, anti-globalisation, and anti-free trade stances, and his inclination to play against the rules.
How should the Taiwan government brace for changes and mitigate the potential impact of American protectionism? As part of the global supply chain, faced with rapid change, intense industry competition, as well as the accelerating consolidation and solidification of the regional economy, how should the Taiwan government seek opportunities?
Electronics overreliance, sluggish upgrade
Trade-oriented export policies have been at the core of Taiwan’s industrial development since the 1960s. Boosted by the trend of globalisation, Taiwan has built up its presence in the global industry supply chain through the international division of labor and vertical integration between upstream and downstream.
However, Taiwan’s industry structure is over-reliant on the electronics sector, with its focus on downstream component Original Design Manufacturer/Original Equipment Manufacturer (OEM/ODM) business, which has left exports extremely vulnerable to the cyclical swings of the global economy.
In addition, Chinese competitors are replacing Taiwanese vendors due to the rapid development of localised manufacturing in recent years.
Although the Taiwanese government enacted the Statute for Industrial Innovation following the 2008 financial crisis, to encourage industry to restructure and upgrade, the pace of transformation and adjustment remains unsatisfactory.
Figure 1: Breakdown of Taiwan’s principal export destinations
Figure 2: Breakdown of Taiwan’s major exports
Source: The Ministry of Finance; Yuanta Investment Consulting
Source: The Ministry of Finance; Yuanta Investment Consulting
Hamstrung by China
The trade patterns led by developed countries are facing disruption from the rise of emerging markets, while the WTO Framework, underpinned by multilateral agreements, has made limited progress, especially after the Doha Round of negotiations hit a setback.
Regional integration and bilateral free trade have become mainstream trends, with the robust development of free trade agreements and economic cooperation agreements.
The well-established North American Free Trade Agreement, European Union, Association of Southeast Asian Nations – with the Asean Economic Community officially set up on Jan 1, 2016 – and Mercosur have been joined more recently by the Trans-Pacific Partnership, Transatlantic Trade and Investment Partnership, Regional Comprehensive Economic Partnership, and the One Belt One Road initiative advocated by China.
Due to unsettled cross-strait relations, China has suppressed Taiwan on the international stage in a myriad of ways, prohibiting Taiwan from signing any bilateral free trade agreements with major countries, not to mention participating in any regional integration organisations.
As vendors in competing countries receive trade benefits in export markets, such as tariff reductions, and thus enjoy competitive advantages, Taiwan faces tougher challenges to increase exports and economic growth.
New direction, offsetting stimulation
Despite the setbacks in its bid to join regional economic cooperation organisations, Taiwan’s government, instead of remaining passive, has been actively seeking to break current constraints and adjust its international relations strategy, so as to expand Taiwan’s economic scale and diversity while fostering better trade relations with other countries.
In August 2016, it passed guidelines on a new “Southbound” policy. In September, it officially announced the “New Southbound Policy Action Plan” to enhance cooperation with a dozen or so countries, including members of Asean, South Asian countries, New Zealand, and Australia, in four major areas – namely economic collaboration, talent exchange, resource sharing, and regional links. This initiative will not only create opportunities to expand exports as Taiwanese vendors look to secure bigger markets, but also support the government’s endeavors to rebuild external economic links by breaking the old pattern of over-reliance on a single market.
Trump has been opposed to free trade since his inauguration and plans to support domestic industrial development by imposing more tariffs or raising various punitive ones.
As a safeguard against such protectionism, other countries have stepped up economic collaboration and expansionary fiscal policies to boost domestic demand and economic growth. Exemplifying this trend, the European Parliament in February passed the EU-Canada Comprehensive Economic and Trade Agreement, while Japan and the EU reached consensus on a Japan-EU Economic Partnership Agreement in early July. To stimulate domestic demand, the Japanese government also allocated additional budgets in December 2016 and July this year to increase pension allowances and expand infrastructure.
The Korean government, seeking to create more job opportunities, also declared it would increase its budget by KRW11.2 trillion (around US$10 billion) in June after newly elected President Moon Jae-in assumed office.
Even in Germany, which has been advocating cost-saving measures, Chancellor Angela Merkel proposed larger tax cuts and government spending to target full employment in her election programme, with a cut of over €15 billion to the country’s yearly tax intake.
The aforementioned measures are some of the policy tools available to effectively address the threat of trade protectionism by boosting domestic demand and promoting continued economic growth.
New Taiwan economy
Faced with greater external uncertainty, the ruling party in Taiwan has put forward a number of measures to boost its economy and promote economic transformation. The Forward-Looking Infrastructure Development Program bill, which passed the third reading on July 5, is a government investment project that comprises two four-year stages, with a budget limit for each stage of roughly NT$420 billion (US$14.00 billion).
The programme aims to fund five major areas of infrastructure: Green Energy and Digital (to facilitate the transformation of industry); Urban-Rural and Water Environment (to enhance living conditions); and Railway (to construct green transportation systems).
Such government funding should drive NT$1.78 trillion (US$59.33 billion) in additional investments by government-run and private enterprises over the next eight years (2017-24) and is expected to raise real GDP by NT$975.9 billion on a cumulative basis while creating 40-50,000 job opportunities.
The government is also launching a “five plus two” innovative industries programme to promote the transformation of Taiwanese industry from the traditional OEM/ODM services model to a new solution-oriented business model with higher added value. The programme aims to ignite innovation, create job opportunities, and balance regional development on the island.
The five innovative industries targeted cover the Internet of Things, biomedicine, green energy technology, smart machinery, and national defense, plus the two of new agriculture and the circular economy.
These sectors will represent the vanguard of industrial development going forward and are expected to help restructure Taiwan's economy and differentiate its industries.
Taiwan will remain under the cloud of Trump’s trade protectionism for at least the next four years. Furthermore, the likelihood of the country joining organisations for regional economic cooperation seems low. However, if Taiwan can step up efforts to restructure industry and move up the value chain, and the government can continue to improve infrastructure and create a more attractive investment environment, we believe Taiwan will be able to avert a crisis and seize the moment to break through strong headwinds amid fierce global competition.