China has been gradually overtaking Taiwan as a key supplier to the world’s electronics industry and the so-called “red supply chain” — Chinese electronic component suppliers — is posing a growing threat to Taiwanese manufacturers.
As Beijing gears up its promotions for its “Made in China 2025” program with the aim of accelerating an industrial upgrade and elevating that nation to one of the world’s biggest manufacturing service providers by 2025, long gone are the days when manufacturers pursued a division of labor across the Taiwan Strait. Now, local firms face intense competition from their Chinese peers.
The outflow of talent, capital and technology to China is already taking a toll on the nation’s economy, as indicated by the still-weak GDP growth of the past few years. The Directorate-General of Budget, Accounting and Statistics in May raised its GDP growth estimate for this year from 2.42 percent to 2.6 percent, and several research institutes have also upgraded their forecasts, but Taiwan’s economic showing has been below the global average for three years in a row and is set to lag behind its Asian Tiger peers again this year.
Based on Ministry of Economic Affairs statistics released on Friday, production in China (including Hong Kong) as a proportion of export orders was still high last year at 47.9 percent, compared with Taiwan’s 46.8 percent.
A ministry-conducted survey indicated that 50.3 percent of local manufacturers still view their domestic peers as major competitors in foreign markets, but 24 percent of those polled see Chinese manufacturers — especially those in the traditional sectors — as their main rivals, ahead of European and US firms at 9 percent, and Japanese and South Korean companies at 7.7 percent.
It has become clear that Taiwanese have been increasingly opposed to economic and trade policy that leans toward China out of concern that an overreliance on China would enhance Beijing’s leverage and undermine Taiwan’s technological upgrade and economic flexibility, as well as hamper domestic wage growth and employment opportunities.
Although opening trade to China over the past two to three decades has made money for some businesses and wealthy families, it has not done much for workers. What is even more worrisome is that this overreliance on the Chinese market means the survival and sustainable development of Taiwanese firms is in Beijing’s hands.
As several governments are threatening one another with new tariffs, and the first round of tariff penalties announced by the US and China is set to take effect on Friday, it is no doubt bad news for export-reliant economies in Asia — including Taiwan — and poses a threat to local manufacturers, who take orders in Taiwan, produce goods in China and then export them to the US and elsewhere.
Economists have warned that a full-blown trade war would have a material effect on this region and Taiwan could be hit the hardest by a substantial decline in demand from China.
The scale of the damage to local firms depends on the fallout of the potential trade war, but the negative impact could expand from auto parts to machinery items, and from petrochemical products to electronic components and semiconductors.
According to a National Security Council assessment released last month, Taiwan needs to reconsider its role in the global and regional supply chains.
The government certainly must continue to monitor the trade conflict and prepare contingency plans and countermeasures, but for Taiwanese firms the important thing is that they need to know who their rival really is.
They must also step up the pace of upgrades or transformations, and diversify overseas operations or even return home, in order to reduce their exposure to China and mitigate possible trade-war losses.
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