Government and governance | East Asia

12 April 2021

Taiwan’s control of COVID-19 and robust investment policies have helped its economy grow, but many potential challenges remain for its government, Huynh Tam Sang writes.

Taiwan has been in the spotlight recently due to its economic performance. For the first time in 30 years, Taiwan’s economic growth outpaced China’s, with its economy expanding by nearly three per cent in a tumultuous 2020.

The People’s Republic of China, on the other hand, achieved 2.3 per cent economic growth. Not only did Taiwan grow faster than China, but it also became Asia’s top performing economy, outstripping the other three Asian tiger economies – Singapore, South Korea, and Hong Kong.

Taiwan’s economic expansion has largely been driven by soaring overseas demand for emerging technologies. Amid the pandemic, Taiwan’s technology exports – particularly of semiconductors – met strong global demand for consumer electronics. Economists at research firm TS Lombard noted that China could soon “become more reliant on Taiwan for semiconductors as it cuts out [American] suppliers.”

Taiwan’s successful approach to COVID-19 helped to preserve the island’s domestic political and economic stability and played a key role in boosting its economic growth. In January 2021, Taiwan ranked third among 98 countries evaluated for their COVID-19 management, according to a performance index published by the Lowy Institute.

Taiwan’s management of COVID-19 contributed much to the prestige of its investment environment – evaluated by United States-based Business Environment Risk Intelligence, Taiwan ranked the third-best investment destination in 2020 globally, and first in Asia.

Government policy was crucial to this – for one, when the pandemic broke out, President Tsai Ing-Wen encouraged overseas Taiwanese companies to move their manufacturing bases back home.

More on this: How the digital age changed Taiwan

The government also strengthened three major investment programs to incentivise Taiwanese firms choosing to return home, and vowed to give its approval to companies that pledged to improve conditions for workers and create more jobs in Taiwan.

With so much uncertainty abroad, Taiwanese manufacturers began moving production lines back to Taiwan with enthusiasm. This re-shoring process, taken up by 783 companies, has seen lucrative results, growing Taiwan’s economy by $42 billion.

Importantly, more than two thirds of that total has come from Taiwanese firms previously operating in China. The return of these companies is creating more jobs for local citizens and reducing dependence on China for economic growth.

On top of this, due to the success of COVID-19 prevention at home, Taiwan’s domestic demand was not severely impacted. According to data from January 2021, spending by Taiwanese people domestically is estimated to have grown a little more than four per cent, nearly offsetting the drop in Taiwanese spending overseas of roughly 93 per cent, which occurred because of pandemic border controls.

Taiwanese people are also now more likely to buy the high-tech products Taiwan produces. A surge in local demand for this boosted Taiwan’s growth momentum and enabled Taiwan to maintain its relatively high growth rate.

But is it all sustainable?

The post-COVID-19 world may not remain so conducive to Taiwan’s economic prosperity. For one, China seems likely to continue to rise as an economic giant, and further economic integration between China and other East Asian countries, including Taiwan, will be unavoidable. This may slow down the local economy if Taiwan becomes too dependent on China.

More on this: Taiwan navigates COVID-19

Though Taiwan has tried to lessen its dependence on China, the Chinese market is hugely beneficial for Taiwanese firms. In the post-pandemic world, Taiwan will look to continue to maintain its links with the world’s second-biggest economy, but it should be wary of depending on China too much.

Also, a new roadmap for China’s economic recovery may have nuanced implications for Taiwanese factories currently contemplating their return to Taiwan.

China’s 14th Five-Year Plan carved out a road map for domestic recovery, emphasising the need to boost economic growth and ramping up technological innovation, and included Chinese economic incentives for overseas companies to invest in China.

This may be worth consideration for Taiwanese firms, and if many go to China, much of the benefit of their return will be lost.

Even if these companies stay, the flow of investment into Taiwan may soon reach a saturation point. Although re-shoring of overseas economic activity has helped Taiwan, if too much of its gains end up in the stock market and real estate, prices may soar to the detriment of the economy.

Given low interest rates this is a real possibility. Were it to occur, it wouldn’t necessarily provide the boost in investment in the sectors where Taiwan really needs it. Moreover, large rush orders for semi-conductors will likely fall off due to the advent of COVID-19 vaccines, posing yet another problem for the economy going forward.

While watchers of the region may say that Taiwan has become a rising star in a gloomy global economy, its economic rise is unlikely to outpace China for long. Still, should the government continue to embrace its New Southbound Policy and forge closer ties with like-minded countries, like the United States, Canada, Japan, Australia, and India, then its bright economic 2020 could become its new normal.

As recent events show, support from these countries is crucial to protecting Taiwan’s prosperity, and a web of democratic powers would potentially generate a network of trusted economic partners for Taiwan. Along with staying wary of risks at home, it should also look abroad for economic prosperity in the post-pandemic world.

With The New Normal: In Focus section, Policy Forum is rebooting our coronavirus pandemic coverage to address the changing situation. We hope you find the discussion valuable, and invite you to join in the conversation.

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