To many observers, both in Taiwan and elsewhere, Taiwan is a multi-faceted success story. Thirty years after democratization, Taiwan has shown that a Chinese democracy can govern effectively, and a high-income economy can continue to grow even as the world suffers from a severe pandemic.
Taiwan has managed the spread of COVID-19 far better than most: It suffered only seven deaths among its 23.5 million people in 2020. Except for a few short weeks of lockdown in March last year, life in Taiwan has been normal. Schools, offices, and restaurants have been open as usual, although with temperature screening, hand sanitizing, and social distancing. Live concerts by Yo-Yo Ma and performances of “Phantom of the Opera” have attracted thousands of people into indoor arenas. Taiwan’s ability to fight COVID-19 illustrates its excellent public health infrastructure and health policy expertise, supported by extensive data and digital technology. Taiwanese people have also demonstrated a high level of trust toward both their government and their fellow citizens, applying lessons learned fighting the SARS pandemic in 2003 to prevent the spread of this latest virus.
With COVID-19 effectively contained and economic activity uninterrupted, Taiwan’s economy grew over 3% last year — higher than its neighbors Japan, Singapore, and Hong Kong, which all declined 5% or more. Despite a weak global economy, Taiwan enjoyed record exports thanks to surging global demand for its technology components and products because of the need to work and study from home. Taiwan is home to the world’s leading semiconductor industry, feeding an insatiable market for the most advanced chips for automobiles, 5G, and smart devices. When other export-oriented countries suffered from the decoupling of U.S.-China relations, Taiwan’s economy actually benefited, with Taiwan’s technology companies emerging as global leaders in digitization. Taiwan’s GDP growth forecast for 2021 is the highest in seven years.
In short, Taiwan has become a poster child for economic resilience and good public health. But what has been a success story so far may be only a fine line away from calamity because of Taiwan’s overreliance on China and its relatively weak connections with the rest of the world.
Concentration on the technology sector and the Chinese market poses risks
China is, of course, a natural trade and investment partner for Taiwan, given its common language and culture, its proximity, and the attraction of its lower wages and large market. Nonetheless, dependence poses risks for all of China’s trade partners, as the U.S. trade war with China has shown and as China uses economic dependence for political leverage. It is therefore wise for Taiwan to diversify its commercial relationships.
Taiwan has episodically tried to do so, first under former Present Lee Teng-hui’s “Go South” policy in 1993 and now under current President Tsai Ing-wen’s “New Southbound Policy” since 2016. Both policies tried to steer Taiwanese trade and investment away from China and back to Taiwan or to Southeast Asia. Due to rising costs in China and the U.S.-China trade war, Taiwanese investments in China have indeed declined. However, trade with China keeps growing, reaching the highest point in the 40 years since economic relations across the Taiwan Strait resumed. China and Hong Kong combined now represent 34% of Taiwan’s overall trade, compared with 13% with the United States and 11% with Japan. Despite policy incentives, the Association of Southeast Asian Nations’ (ASEAN) share of Taiwan’s total trade volume has actually dropped from 16% in 2017 to 14% today.
Taiwan’s continued dependence on China is partly due to the fact that China was the only major economy to rebound from the pandemic and expand in 2020. It is projected to grow 8% this year, according to the World Bank. Although they may resist, young Taiwanese looking for work may find China to be one of their best options, and Taiwanese exporters will likely remain tied to China.
Just as the destinations of Taiwan’s exports are geographically concentrated, so too are the sectors from which they come. Most of Taiwan’s impressive export growth is from the information and communication technology sector, with little from textiles, agriculture, small and medium businesses, or traditional manufacturing, all of which remain important parts of the Taiwanese economy. Workers in Taiwanese…