Taiwan’s economic growth in 2019 will be a trade war winner as it is set to outpace regional peers Hong Kong, Singapore, and Korea throwing shade on the idea that closer ties with China are a guarantee of prosperity.
With more tariffs being placed on goods from China, and the unpredictability of the White House’s direction on China trade policy, Taiwan has come into the spotlight as an alternative manufacturing hub. The IMF forecasts Taiwan’s GDP growth to hit 2.5% in 2019. In comparison, manufacturing rival Korea, which signed a much-celebrated free trade pact with China in 2014, is expected to grow at 1.8%, while financial and logistics hubs Hong Kong and Singapore are forecasted to grow at 2% and 1.5% for the year respectively.
The leaders of these three nations have bet big on orienting their economies around China with the hopes of growth. When Korea initially signed its Free Trade Agreement with China, Taiwan estimated that its regional economic rival-slash-peer having preferential access to China’s economy would shave 0.5% from Taiwan’s GDP with further reductions down the road.
Taiwan’s growth comes in contrast to Beijing’s warnings to the Democratic Progressive Party (DPP) administration, which has a policy of leaning towards independence for Taiwan, that pushing away from China’s orbit would hurt Taiwan’s economy. The DPP’s political rivals, the Kuomintang (KMT), have maintained that closer ties to China would result in better economic growth. When South Korea signed its FTA with China in 2014, then KMT President Ma Ying-jeou advocated that a trade deal with China be signed as quickly as possible.
Sweet Home Formosa
Contract IT manufacturer Quanta Computer (TPE:2382) is considering a total pullout from China, while Delta Electronics (TPE:2308) plans to diversify its manufacturing efforts away from China to include Taiwan and South East Asia. The world’s largest contract manufacturer, Foxconn (TPE:2354), says it will build a new factory in south Taiwan to accommodate its effort to move away from China.
Many of the OEMs and ODMs that manufacture the world’s electronic goods in China are Taiwan-based, having moved production over to China in the 1980s and 1990s to take advantage of the cheap labor pool. To incentivize repatriation, Taiwan is offering firms that chose to move operations back home preferential financing, expedited hiring of low-cost workers from Southeast Asia, and rent breaks on government-owned land.
Trade War Winner, But Following Trends
While DPP politicians in Taiwan are quick to take credit for the surging local economy, the fact of the matter is this is the result of a number of factors at play. For the past few years, China has become a less attractive destination for manufacturers. Rising wages within the country, and improving infrastructure in South East Asian countries such as Vietnam, means that the supply chain was already beginning to move away from China.
Sensing the needs to cut costs, as early as 2016 Foxconn had begun investing in factory automation, cutting tens of thousands of jobs in China. Automation could reduce labor costs substantially making China more competitive, or, conversely, aid in the repatriation of manufacturing to a higher cost market by reducing the amount of labor required.
While this trade war has pushed down the stock market, and wiped billions from investors’ earnings, it’s also a lesson that the common orthodoxy of close China ties to guarantee economic prosperity isn’t always true. That being said, the second half of 2019 has just begun and a lot could happen in the last six months of the year.
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