Can Taiwan disconnect economy from, China, its biggest trading partner?

Business Standard

5 days ago

By Meaghan Tobin, Amy Chang Chien and Xinyun Wu
China has long been Taiwan's most important trading partner, the main buyer of its exports and the place where many of its companies make their products. China is also Taiwan's greatest threat and claims that the island democracy is part of its territory.
Now, Taiwan's ruling political party says it wants to do more to dismantle the commercial ties that for decades have propelled Taiwan's economic growth.
President Lai Ching-te is calling for companies that make semiconductors — Taiwan's main industry — to stop buying from and selling to China. Mr. Lai has said Taiwanese firms, which make the majority of the world's advanced computer chips, should instead embrace a supply chain that involves only companies from democratic countries.
Taiwan's ruling party wants to be seen in Washington as a reliable friend of the United States, 'even if that means paying a short-term economic cost,' said Kharis Templeman, a research fellow at the Hoover Institution, a think tank at Stanford University.
But Taiwan could pay a high cost for shifting its economy away from China.
For decades, almost all foreign investment by Taiwanese companies went to China. Taiwan's biggest companies, including the Taiwan Semiconductor Manufacturing Company, or TSMC, and the electronics giant Foxconn, grew on the strength of manufacturing investments in China and sales to Chinese companies.
Foxconn, which makes devices for Apple and Nvidia, produces a significant share of the world's consumer electronics at its factories in central China, where it has benefited from years of government-backed infrastructure investment. The company's founder, Terry Gou, ran for president in Taiwan in 2024.
Taiwan's richest person, Barry Lam, built his fortune making laptops in China with his company, Quanta Computer. The Taiwanese food and beverage conglomerate Want Want depends on China for the majority of its sales. Its founder, Tsai Eng-meng, is a vocal supporter of China's claims on Taiwan and runs pro-Beijing television stations and YouTube channels.
The close ties between the two economies have been seen in Taiwan as a deterrent against China's aggression, and a way for China to exert its influence over the island. The coupling cuts both ways.
Over the last decade, some Taiwanese firms have begun to reconsider their dependence on China. In 2014, when Taiwan's leaders proposed closer economic ties to China, thousands of Taiwanese people protested over fears of becoming too dependent on Beijing. The plan was ultimately shelved.
The trade tensions and Covid-19 pandemic made Taiwanese businesses pull back further. Last year, just over 7 percent of Taiwan's new foreign investment went to China, down from over 80 percent in 2010.
Still, analysts say completely decoupling the two economies would be difficult. China remains the largest buyer of Taiwan's exports, especially semiconductors.
At the same time, Taiwan depends on political and military support from the United States to help resist pressure from Beijing. Mr. Trump has demanded that Taiwan drastically raise its own military spending and accused Taiwan of stealing the lead in semiconductor manufacturing from the United States. Officials in Taiwan have committed to a slight increase in military spending, and TSMC said it would more than double its investments in the United States to $165 billion.
The sale of tech equipment to China is likely to be a continuing source of friction, and negotiation, for Taiwan in its dealings with the Trump administration.
Last year, a chip made by TSMC ended up in a Huawei device despite U.S. export controls, angering officials in Washington. Taiwan's addition of Huawei and SMIC to its restricted trade list is a step toward cutting off the business that has continued to flow to China.
Despite the pressures pushing Taiwan further away, there are compelling forces drawing companies to China.
Howard Yuan, 36, is a manager at Superb International in Shanghai, a garment manufacturer his family founded in Taiwan and expanded to China in the 1980s. He said it would be hard to replace China's suppliers.
And Ruby Chen, 32, said China was an easier place to start a business than Taiwan. For the past three years, she has run a wellness company focused on traditional Chinese medicine in Shandong, China.