Taiwan's Choice under Impact of ECFA and AI
China Times Editorial, June 5, 2024
Two major events that are impactful on Taiwan’s economy occurred recently: First, mainland China canceled 134 preferential tariff items on the early harvest list of the cross-strait Economic Cooperation Framework Agreement (ECFA), impacting Taiwan's traditional manufacturing industries and leading to falling stock prices of related companies. The other event is NVIDIA CEO Jensen Huang’s Taiwan visit that set off a wave of artificial intelligence (AI) and the "love Taiwan" trend. Taiwan stocks rose 362.54 points, or 1.71 percent the same day as Huang’s speech at the National Taiwan University on June 2. And financial media personality Hsieh Ching-ho said that "Taiwan will be fine without ECFA ".
These two major events symbolize that Taiwan's economy is entering a historical turning point. At this critical moment, both the people and the government of Taiwan must look at the issues beyond the face value but also have an overall view to make correct judgments and choices.
Economic Links and Pillars of Peace
Taiwanese business people have largely invested in mainland China since it began economic reform and market opening in the 1990s. After the mainland joined the World Trade Organization (WTO) in 2001, it integrated into the world trade system quickly. Taiwanese businesspeople used the mainland as a base of production to create a triangular trade model of high-quality and low-cost goods exported to Western consumer markets. The triangle trade model not only allows Taiwan to ride on the train of the mainland’s economic rise to create a wave of prosperity; it also provides Taiwan's technology industry with ample room for development, and as a result, the high-tech industry has risen.
The semiconductor industry, led by the Taiwan Semiconductor Manufacturing Company (TSMC), as well as server, network, and infrastructure manufacturers, and software developers such as Quanta, Foxconn, Asus, and Wistron, have all become the world's leading enterprises. The mainland heavily relies on Taiwan's high-tech products, especially Taiwan’s chips. Taiwan's trade surplus with mainland China has reached new highs. In 2018, the United States launched a trade war with China, which escalated into a technology war in 2020. The mainland was forced to hoard large amounts of chips. Taiwan's exports to the mainland therefore increased even more, and the trade surplus became even larger.
It is fair to say that over the past four decades, the two sides of the Taiwan Strait have coexisted and prospered economically. Taiwan has provided funds and technology to help the rise of mainland China’s manufacturing industry. In exchange, Taiwanese enterprises have thrived, and Taiwanese business people have profited. This has driven the growth of Taiwan's high-tech industry and economic prosperity. Close economic ties have become an important pillar of stability in cross-strait relations and peace in the Taiwan Strait. However, the trajectory of cross-strait economic relations was reversed in 2023. The trade volume of cross-strait import and export, as well as the amount of investment by Taiwanese businesspeople in mainland China, have both declined. Total investment in the mainland has only been US$2.9 billion, a decrease of about 40 percent compared with that in 2022. In the meantime, Taiwan’s investment in the United States has grown significantly, reaching $9.69 billion. The United States has become Taiwan's primary investment target.
The substantial increase of Taiwan's investment in the United States is mainly due to TSMC's plan to establish a factory in Phoenix of up to $40 billion, and at the same time to drive other semiconductor supply chain manufacturers to invest in the United States. It is the result of cooperating with the United States' "China+1" strategy, which is of great help to the supply of chips in the United States, but it may not be in the best interests of Taiwan's economy. In addition, the extreme right wing of the United States advocates blowing up TSMC if necessary to prevent China from gaining a chip advantage. This has caused Taiwanese society to have doubts about TSMC's investment in the United States.
Mainland China and the United States are equally important
The political and economic relations between the two sides of the Taiwan Strait have deteriorated simultaneously with the escalation of the U.S.-China confrontation since 2020, and mainland China’s pressuring Taiwan by banning the import of some agricultural products and withdrawing some preferential tariff items from the ECFA early harvest list. However, the Democratic Progressive Party (DPP) administration attaches more importance to “sovereignty” and “dignity” and refusing to compromise, the mainland has gradually intensified its economic sanctions against Taiwan. In the future, ECFA may exist in name only, and Taiwan will no longer be able to enjoy tariff preferences, which is very detrimental to industries such as machine tools and petrochemicals.
NVIDIA, a major AI chip manufacturer, driven by the rapid development of generative AI technology and applications in the United States has become the hegemony of AI. Its market value is expected to exceed $3 trillion, surpassing Apple to become the second largest in the world in terms of market value. The chips designed by NVIDIA are mainly produced by TSMC, which is the most important partner of NVIDIA, and its CEO Jensen Huang was born in Taiwan. Huang’s father is from Zhejiang Province, China, and his mother is from Tainan. He shows a strong Taiwanese identity. His career achievements, love for Taiwan, and his relationship with TSMC Partnership are the most topical and widely discussed in Taiwan.
His speech at National Taiwan University attracted more than 3,000 people in audience. In the context of deteriorating cross-strait relations and mainland China's expansion of economic retaliation against Taiwan, Huang's speech aroused strong political effects. Some people cheered that it would not matter without ECFA, while others believed that his initiative is a kind of "Taiwan technological independence" that coincides with President William Lai’s needs and creates instability across the Taiwan Strait.
Both views are rather biased. The former denies the value and importance of Taiwan's traditional manufacturing industry, which is detrimental to the balance of development of Taiwan's industry and economy. The latter ignores Nvidia’s emphasis on the mainland Chinese market and even forgets that Jensen Huang was at the year-end banquet of his factory on the mainland, dancing in a Chinese DongBei cotton-padded jacket. What we should pay more attention to is the Dutch disease in which the semiconductor industry excels while other industries decline. Unbalanced industrial development will lead to uneven distribution of national income, and the already serious income gap problem will become even more serious.
The AI wave demonstrates the resilience of Taiwan's economy and the strength of its manufacturing industry to keep pace with the times. However, the services industry and small and medium-sized manufacturing industries that provide the most employment opportunities are also very important. In other words, the United States and mainland China are both very important to Taiwan's economy and neither can be neglected.
From: https://www.chinatimes.com/opinion/20240605004537-262101