It has pushed back the epidemic and is once again welcoming companies that had decamped in China
THREE YEARS ago, a leading scholar said that the Taiwanese economy was “on the brink of death.” The wording was extreme but the sentiment was widely shared. Taiwan faces a litany of seemingly intractable problems. Many of his best companies had settled in China; wages were stagnant; growth was weaker and weaker and the population was aging rapidly. Its glory days as an Asian tiger – celebrated for its rapid development – seemed firmly in the past.
Yet in 2020, Taiwan took a step backwards: it is, once again, one of the fastest growing economies in the world. Admittedly, its GDP is only expected to increase by around 2% this year. But it’s in a rare endeavor, with less than a dozen savings expected to grow at all, thanks to the coronavirus. For the first time in decades, Taiwan’s economy is expected to grow faster than China’s. The question is whether Taiwan’s surprising strength marks a new beginning or is it just a brief deviation from the continued descent.
Two factors related to the pandemic are contributing to Taiwan’s relative success this year. First, it was the only country to contain covid-19 without sweeping school, office and store closures. His government, alert to new illnesses in China, began screening visitors to Wuhan at the end of 2019, as soon as there were reports of a mysterious pneumonia outbreak. Thanks to the fine-grained contact tracing and almost universal mask wearing, life went on more or less as usual. Since July, revenues for retailers and restaurants have increased from a year earlier.
Second, Taiwanese manufacturers are well positioned to meet global demand as it is. From tiny semiconductors to giant computer servers, electronics represent a third of Taiwanese exports. With so many people suddenly forced to work from home, sales of products such as tablet computers and headphones have been strong. So while world trade will decline by around 10% this year, Taiwan’s exports are up almost 5%.
These two sources of outperformance will likely disappear with the ebb of the pandemic. However, Taiwan has also benefited from tensions between China and America. Taiwanese companies that had previously invested in China have moved some of their activities home to avoid US tariffs. Those who keep coming back include Giant, a bicycle maker, Long Chen, a paper company, and Compal, a computer maker. Investments in factories and other fixed assets in Taiwan hit a record high last year at NT $ 4.3 billion ($ 150 billion), and are on course for a new record this year (see graph) .
The noise echoing in the Hwa Ya Technology Park in Taoyuan, a large city in the north of the island, is proof of the construction boom. Quanta Computer, one of the world’s largest electronics manufacturers, is ramping up domestic production of sophisticated servers it once made in China. And workers are tearing down blue plastic scaffolding covering an even larger server factory under construction for NT $ 15 billion ($ 525 million). “It will be ready quickly,” said a helmeted worker happily.
Some in Taiwan fear that this momentum, catalyzed by Donald Trump’s trade policy, will die out when Joe Biden enters the White House. While Mr Biden has pledged to take a hard line on China, he may be willing to cut tariffs. But Gordon Sun of the Taiwan Economic Research Institute believes Taiwanese companies will continue to diversify away from China. “They can’t afford to be caught in another trade war, even if the possibility is small,” he says.
The return to Taiwan, if prolonged, would respond in part to one of the concerns hanging over its future: the relentless migration of good companies and good jobs to China. Some 400,000 Taiwanese, or about 2% of its population, now live in the Taiwan Strait. Taiwanese companies speak with apprehension of the emergence of a “red supply chain” in China that will soon challenge Foxconn, a Taiwanese contract manufacturer that makes most of Apple’s iPhones. Competition from China has also contributed to sluggish wage growth in Taiwan. Adjusted for inflation, wages have remained stable since 2000, averaging just under $ 20,000 per year.
Yet the surge in investment in Taiwan has clear limits. President Tsai Ing-wen often refers to the country’s “five shortages”, short for its limited supply of land, water, electricity, workers and talent. Not much can be done except on a small island that is committed to phasing out nuclear power and has one of the lowest birth rates in the world. Taiwan’s population has officially started to decline this year, and the government predicts that it will drop from 24 million today to 16 million in 2070.
Added to these chronic woes are the harsh realities of Taiwan’s dependence on China. Almost 40% of Taiwanese exports go to China and Hong Kong. “Taiwan cannot just get rid of the Chinese economy and seek other engines of growth,” says Chen Chien-liang, an economist who served under Ms. Tsai’s predecessor, who tried to get closer to China.
The saving grace for Taiwan is that China needs Taiwanese products as much as Taiwanese companies need the Chinese market. Chinese companies are still a long way from living up to the magic of TSMC, the Taiwanese company that produces the world’s most advanced semiconductors. China has done nothing worse for the Taiwanese economy this year than limiting the flow of tourists from the mainland (ironically, this may have helped isolate Taiwan from covid-19). America could actually do more damage if it enacts new rules that prevent tsmc from working with Chinese customers like Huawei, a telecommunications giant.
For Liang Kuo-yuan of the Yuanta-Polaris Research Institute, the economic prescription for Taiwan is simple, but difficult to achieve. The island must make itself indispensable in industries such as medical devices and batteries, he says, as it has done in semiconductors. These high-value niches will help protect Taiwan from Chinese pressure, and also adapt to Taiwan’s limited resources and declining population.
Just one year of impressive growth does not bring Taiwan any closer to this goal. Liang, for his part, is worried that China is surpassing Taiwan in its long-term economic planning. But an outstanding performance during this most difficult year at least gave confidence to many Taiwan after years of gloom. Opposite the Hwa Ya Technology Park in Taoyuan, Chris Liang runs a small restaurant. Among his tech company clients, the change in sentiment has been almost palpable, he says. “Our control of the epidemic has changed people’s attitudes towards the economy. People are more optimistic. “