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Taiwan's Role in the U.S.-China Trade War

Dec 21, 2018 | By CENS

With the U.S.-China trade war tensions still at a standstill and no likely resolution in sight in the near future, companies based in the mainland have or are already making the exodus in search of less troublesome economic climates. Taiwanese companies are no exception; some are making plans to return to Taiwan, while others have opted to head to Southeast Asia or for other parts of the world.

For example, the world's No. 1 industrial PC maker Advantech will move to add final assembly lines in the U.S. and open more sales offices across the U.S. Bicycle maker Giant has plans to expand production in Eastern Europe to decrease reliance on Chinese production. Gigabyte, on the other hand, is one of the companies that will be moving part of its production back to Taiwan.

While companies leaving China for cheaper labor costs in Southeast Asia is a trend ongoing for several years, thanks to China's booming economic growth and increasing labor cost, experts pointed out that the trade tensions between China and the U.S. have only accelerated the inevitable. The Chinese economy is in the throes of its own growing pains, only with the trade tensions with U.S. added into the mix have made the situation more volatile.

By appearances, Taiwan stands to benefit from the exodus, however, to what extent? Experts have weighed in on whether the current climate would be a boom or bust for the island.

The Current Situation
At the time of writing, the two economic powerhouses have reached a shaky consensus to hold off raising tariffs for 90 days that would allow the possibility of talks to commence. The absence of U.S. President Donald Trump's threats to raise tariffs and China's effort to offer an olive-branch of sorts through suspending additional punitive tariffs on US autos imposed from 15% to 40% starting January 1, has made global stock markets, businesses and industry watchers tentatively optimistic.

Despite U.S. President Donald Trump's original objective behind imposing the tariffs against China as means to place American interests first, the uncertainty surrounding the entire affair has bled into the global economy.

Experts have warned that prolonged trade tensions could “severely” undermine global merger activity next year, as quoted by one of the world's biggest law firms, Baker McKenzie. The law firm's newest report warned an escalation of trade tensions could lead to a decrease of 0.8 percentage points from global gross domestic product by 2020. Worldwide GDP growth is expected to be 3.1% this year.

Stock markets have been on a rollercoaster of sorts, as stocks plunged or rose along with the trade war. For example, Bloomberg reports that the volatile financial situation for China this year has cost its equity investors $2 trillion.

Where is Taiwan's Role in All of This?
Taiwan-made products have always been synonymous to “high-quality,” despite against the Chinese powerhouse competition. Though, there is no doubt that Taiwan's economy is strongly tied to China's growth; if China falters, so does Taiwan. The Taiwan Stock Exchange reports approximately 1,200 listed Taiwanese companies had invested up to NT$2.72 trillion (US$87 billion) since economic ties were forged in the 1990s, as of June this year. These companies include Quanta Computer, Delta Electronics and lead iPhone supplier Foxconn. On the other hand, China's figures show in the past 30 years, more than 48,000 Taiwanese firms have invested US$120 billion in the mainland, to which the Taiwan Stock Exchange has noted that China's data likely includes a significant number of SMEs that do not require approval from Taiwanese authorities to do business in China due to the smaller amount of investment.

Should Taiwanese companies move their businesses back to Taiwan from the mainland, in theory, it would serve as a boon to the island's economy. However, in the latest development, the U.S.' arrest of Huawei Chief Financial Officer Meng Wanzhou serves to be a warning for the Chinese technology supply chain, which is closely and intricately entwined with Taiwanese companies, for example, Huawei is a huge procurer of Taiwan-made electronic parts, with clients including Foxconn.

The U.S. had released a list of 15 Chinese companies that are deemed a threat to American intelligence security earlier this year. Coupled with the latest arrest of Meng, experts warn that Taiwanese suppliers must anticipate the possible consequences of doing business with Chinese companies under the current climate. Taiwanese suppliers working with four Chinese companies specifically are vulnerable should the U.S. target their businesses: ZTE Corporation, Huawei, Lenovo and BOE Technology. Though, having been entwined with Chinese companies for decades, whether Taiwanese suppliers involved could weather the U.S. crackdown on “threatening companies” remains to be seen.

Impact on Taiwan's Industries
Taiwan is highly reliant on exports; the island's outbound value was approximately NT$360 billion in 2017, with 41% going to China and 12% going to the U.S. A local industry report offered by the Industrial Technology Research Institute pointed out that under the two waves of tariffs imposed by the U.S. on Chinese exports of electronic equipment and parts, the potential impact on Taiwan's exports were limited.

However, Taiwan's Ministry of Economic Affairs warned that should trade tensions continue to escalate in the future, affected industries could include telecommunication equipment, middle-low end bicycles and parts, machine tool parts, petrochemical and plastic raw materials. Should the U.S.' restrictions on Chinese goods extend to telecommunication end products like computers, servers, smartphones and televisions, or even retaliate with means aside from tariffs, such as prolonging investment authorization, it would likely deeply affect the global production chain, stem the two powerhouses' economic growth and only then, would impact Taiwan's production industry.

Other industries like the automotive industry are also vulnerable, with foreign industry watchers pointing a possible hike to auto prices should the trade war drag on, despite China lowering auto tariffs. With Taiwan's standing as a prime auto parts maker, the industry could take a hit as costs to do business in the industry rise, hurting auto prices and cooling consumer demand. Aside from trade tensions contributing to the situation, China's domestic demand for automobiles appear to be slowing down as well: according to the Chinese Association of Automobile Manufacturers, auto sales fell 14 percent in November over the same month in 2017.

Also, with tariffs slapped on raw ingredients like aluminum and steel, Taiwan's hardware and hand tools industries could be affected as well. Taiwan Hand Tool Manufacturers' Association (THTMA) Chairman Yu H.C. told local media that Taiwan's hand tool companies were tentative regarding how much orders would be transferred to the island under the current trade tensions. He added, however, that there were Mexican companies inquiring prices in hopes of entering the American market. Taiwanese companies hoping to diversify their market share should consider heading and developing other markets to lessen the trade tensions' impact on their businesses.

Taiwan's hand tools could have a slight advantage under the current tariff restrictions: as the U.S. has imposed 10% of tariffs on to Chinese hand tools, the price gap between Taiwanese and Chinese products, originally at 20%, have been reduced to only 10%, making international buyers less likely to haggle Taiwan's prices. Yu warned that in other markets, Taiwanese hand tool products are unlikely to enjoy such benefits, as Chinese companies will be sniffing out potential markets to enter to avoid getting caught in the crossfire. This has been noted by local companies during the Taiwan Hardware Show. While it is still too early to tell, should Chinese production quality rise, they would definitely add pressure to Taiwanese
interests in markets outside of the U.S.

Machine tools, for example, is a prime example how the trade tensions have produced a negative impact. In October this year, China's Ministry of Commerce opened an anti-dumping investigation into Japanese and Taiwanese exporters of vertical-machine centers, prompted by complaints by a group of Chinese companies. The Chinese government's crackdown has been viewed as means to stamp down competition, possibly due to the trade war's growing effects on China's economy.

Orders for machine tools, or precision machinery in general, have been falling, with Hiwin Technologies Chairman Cho Yung-tsai suggesting that the industry outlook will steadily look better in the latter half of 2019. Before that, Cho said the market will be on the passive side, causing inventory to decline, prompting company transformation and likely leading to assembly lines being moved to Southeast Asia, elements that would still take five to six months to occur. Industry members have said due to the escalating tensions, several machine tool suppliers have already let out no-pay holidays for their factory workers. Other factories for small-sized molds and parts also reported unfulfilled orders, Cho said, adding that many of these products are exported to China, where they assembly the parts in the final product before exporting it to other parts to the world.

If Companies Are Wary, What Can Taiwan Still Do?
Despite Taiwanese companies expressing desire to move away from the turbulent trade tensions and getting caught in the crossfire, it has not been a tidal wave of companies returning to Taiwan.

Many factors contribute to these companies' wariness towards moving house. Taiwanese business representatives in China have told the media that they are looking to see the Taiwanese government to address issues in land, water, power, workforce and talent shortages. Other factors include unfavorable taxes as well.

In response, reports say that the Taiwanese government has freed up 344 plots of idle land as plant locations, amounting to a total area of 2145 hectares, mostly located in southern and central Taiwan. However, without resolving other issues in providing abundant water and power -- both existing problems for domestic companies -- freeing up land will not likely prompt Taiwanese companies to return in flocks, Deputy Economic Affairs Minister Kung Ming-hsin had said.

He hoped these companies, rather than continuing to rely on labor intensive production and low-tech operations, the companies could choose to upgrade to smart industrial operations instead, and lower the reliance on maintaining a large workforce and keep up with global trends.

Not all is doom and gloom for Taiwanese companies on both sides of the strait, however. Unlike China, Taiwan does not have a huge domestic market to fully buoy industries, though industry reports indicate that domestic and foreign-based Taiwanese production companies should consider going into smart operations to meet global demands. Incentives could include the government offering subsidies and making law amendments to make the overall environment favorable for doing business.

Naming protectionism as a probable road for global markets, the industry report advises the government to encourage companies to not only consider Southeast Asia, but also other emerging markets to avoid clustering and heavy reliance in a particular region, as they have done in China in the past. Companies should also consider transferring more value into their product development and added value to the production ecosystem, as opposed to the “quantity-above-all” mindset in the past.

One of the major advantages that the Taiwanese government can leverage is the willingness between the private and public sectors to draw up industry-academic research collaborations. The industry report says such unions could become the foundation to cultivate quality and new tech-savvy talents -- a long mourned aspect that companies have complained about graduates lacking necessary work-related abilities. By intensifying the academic-industry cooperation, newly graduated talents could easily make the transition from school to the workforce.Additionally, law revisions for investing in Taiwan, as well as in newly emerging digital and innovative economies to attract foreign talents and investment should be prioritized.

While the trade tensions between China and U.S. have not been fully resolved and are vulnerable to escalation during the current ceasefire, stock markets will be waiting with bated breath, but businesses will do business as usual. Moving away from China to seek countries to produce with better profit margins will continue, as it is inevitable under the current economic situation.


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