Taiwan’s Economic Charm Offensive Hits Chinese Walls

Not many world leaders have to care about what Panama thinks. Taiwanese President Tsai Ing-wen is among the few. The Central American country’s decision in mid-June to shift its Chinese diplomatic policy away from Taipei, flipping its recognition to Beijing, has left Tsai’s polls cratering.

Tsai is now in desperate need of a foreign-policy boost, and she is banking on her New Southbound Policy (NSP). Launched last November, the policy aims to diversify Taiwan’s trade away from reliance on China by deepening labor, tourism, and trade partnerships with 18 nations in Southeast Asia, South Asia, and Australasia. But the ambitious plan faces a major obstacle – that’s the same area where Beijing and New Delhi are targeting their own economic campaigns, and the island may not be ready to play in the big leagues.

It’s natural for Taiwan, as a major supplier of intermediary goods, to shift to focusing on emerging engines of global manufacturing like Vietnam and Thailand. Indeed, recent trade numbers suggest that the shift is already underway. In May, Taiwan’s trade with Southeast Asia grew 7 percent year over year, accounting for almost a fifth of total exports. But exports to China remained stubbornly fixed at 40 percent, a proportion the government considers far too high, rendering Taipei dangerously vulnerable to political swings or economic pressure in its relationship with Beijing.

Economists acknowledge that action is necessary to rectify this imbalance and not only in light of the stalemate with Beijing. “China’s economy is slowing, and it is increasingly a competitor to Taiwan rather than a partner, especially in manufacturing,” said Roy Chun Lee, the deputy director of the Taiwan WTO Center.

But as Taiwan heads south, it must first overcome skepticism that the administration is serious about its commitments. The NSP is not called “new” for nothing – former Presidents Lee Teng-hui and Chen Shui-bian failed to see out southbound initiatives of their own in the early 1990s and 2000s, and there are doubts that this time around will be any different. “When I spoke to officials in Singapore, they said they felt the NSP was a political strategy devised by Tsai to run away from China. They see that and keep their distance,” said Jason Hsu, a congressman at large for the Kuomintang (KMT), Taiwan’s largest opposition party.

Taiwan’s overtures must also mark themselves apart from those of more powerful regional players, including China, Japan, the United States, and India.

“In some ways, the NSP is reactive rather than proactive and is going to be viewed within the regional context,” said Courtney Weatherby, a research analyst with the Stimson Center’s Southeast Asia program. “China has been continuing its outward push for investment in Southeast Asia, particularly in Cambodia and Laos, but its presence is felt throughout the region, both economically and geostrategically. India has also adopted its ‘Act East’ policy.”

Taiwan also faces the risk of having its efforts actively undermined by Beijing, particularly within states close to China’s sphere of influence such as Cambodia, Laos, and increasingly the Philippines, which has a critical relationship with Taiwan. Beijing loathes Tsai, whose public refusal to accept the 1992 Consensus on “one China” is the basis of her popular mandate.

“This is where other states come into play, and it is very likely that Taiwan will be lobbying Japan, the United States, and Australia to deepen their own engagement to create space for Taiwan, which has few of its own levers to pull within the region compared to those larger external powers,” said Brian Eyler, the Southeast Asia program director at Stimson. “With the exception of India, each country’s form of engagement in Southeast Asia is known,” he added. “China is in trade and investment – resource extraction. Japan, in addition to trade and investment, is into urban infrastructure development, energy sector master planning, broader sectorial industrial development, and other specializations. Taiwan really hasn’t found its niche yet.”

If Taiwan is to find a niche in its relationship with Southeast Asia, most experts think its greatest advantage might be its cultural reputation, in both the political and economic spheres. Taiwan already enjoys a positive reputation as a beacon of democratic liberalism in Asia, especially following the May legalization of same-sex marriage. That reputation could be leveraged to create educational exchanges and work opportunities for foreigners and establish Taiwan as a source of cutting-edge technology.

The NSP does emphasize people-to-people exchanges. Tourism has so far been the major beneficiary, with Taiwan undertaking a successful southern charm offensive that has more than offset a massive fall in mainland Chinese visitors. April statistics from the island’s Tourism Bureau showed that overall visitor numbers were up 2 percent on last year, as tourists from Japan, Hong Kong, and Southeast Asia took up the slack from a 43 percent drop in cross-strait tour groups.

But to take this initial success further Taiwan must reform its immigration policy, which is deeply out of step with the NSP. Even as the island faces a potentially crippling brain drain – some 600,000 high-skilled Taiwanese engineers and managers have left to work overseas – students from Southeast Asia graduating in Taiwan can’t enter the workforce unless they can already demonstrate two years’ work experience there. Taiwan’s Ministry of Education has announced plans to more than double international student enrollment to 58,000 by 2019, with specific support for expanded links with Southeast and South Asia. By way of comparison, South Korea accepted almost double that number last year.

Another of the government’s landmark policies, the Asia Silicon Valley (ASV) plan, is tasked with transitioning Taiwan toward a new role as a provider of services, with a particular focus on the “internet of things” (IoT). Taiwan aims to control 5 percent of the global IoT market, which firms such as McKinsey & Co. and Gartner Inc. forecast will be worth $4 trillion to $11 trillion within a decade.

The Tsai administration is attempting to link the ASV program to the southbound push, using the former to incubate new technologies and knowhow that will then be exported under the latter. But the two policies combined – essentially, the simultaneous creation and export of an industrial transformation – may be far more than Taiwan can manage. “This administration is biting off more than they can chew,” Hsu said. “ASV is a typical example. There are so many things they want to do without a focused direction…. It sounds promising, but it’s unrealistic.” And with the Taiwanese public already resisting domestic austerity, the island can’t afford to invest any more than it already is. In late June, the Taiwanese parliament, or Legislative Yuan, was surrounded by former civil servants furious at the government’s efforts to cut the interest rate payments on their pensions – reforms critical for fiscal sustainability in the face of waning economic growth and an aging population.

For Gordon Sun, the director of the Macroeconomic Forecasting Center at the Taiwan Institute of Economic Research, there is a simple solution to the government’s constrained resources: Taiwanese companies should make greater investments of their own. Two-thirds of Taiwan’s exports – worth some $200 billion annually – consist of raw materials, equipment, or machinery for transport and machine tools. Sun suggests that these industries should set up shop closer to their target markets, whether they be in Southeast Asia for petrochemicals and commodities or in Europe, the United States, and China for semifinished goods. “Taiwan has to transform itself from a hardworking manufacturer to smart investor,” he said.

Lee, from the WTO Center, largely agrees, adding that despite disruptions aimed at foreign business in the recent past, Vietnam remains an ideal destination for Taiwanese outward investment because it is negotiating a free trade agreement with the European Union and is a member, unlike Taiwan, of the Trans-Pacific Partnership, potentially giving Taiwanese goods made there access to free trade arrangements sorely lacking at home – if the deal holds together despite the U.S. withdrawal. Despite concerted efforts to do so, the NSP has yet to yield a revision of the bilateral investment agreement Taiwan signed with Vietnam in 1993.

All of which is ammunition for critics of Tsai and of her antagonism with China, which many view as representing the real block on Taiwan’s ability to foster trade in the region. “India has an up-and-down relationship with China, but that doesn’t mean they will play the Taiwan card. They don’t want to make things more complex,” Lee said, adding that since India receives just 1 percent of Taiwan’s exports, there is little incentive for New Delhi to engage. “Same with ASEAN [the Association of Southeast Asian Nations] – their relationship with China prevents them from extending the relationship with Taiwan.”

But the reality is that the content of Chinese economic policy in the region will always be outside of Taiwan’s control. What Taipei can do is decide what aspects of its own economy it would like to emphasize in its own policies. Until now, the NSP hasn’t done enough to emphasize the advantages and attractions of Taiwan’s educational system, labor market, and technology. With tensions rising in the region over North Korea, as well as talk in the US of a possible trade war with China, perhaps it is time for Tsai to emphasize Taiwan’s softer side.

Photo Credit: SAM YEH/AFP/Getty Images


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