US-China Fight Puts Taiwan's Economy In A Firing Line

(MENAFN– Asia Times) TOKYO – The best one can say about the freefall in Taiwanese exports in January is that it could have been worse.

The 19.3% drop from a year ago was less severe than the 24% economists feared. It’s also less than December’s 23.2% plunge. Yet Taiwan President Tsai Ing-wen’s economy has a US$40 trillion problem on its hands.

The reference here is to the combined annual gross domestic product (GDP) of the US and China. And at the moment, the half of this challenge that really stands out is China.

Fewer and fewer of Taiwan’s integrated circuit chips are going to the mainland and Hong Kong. By some measures, the shortfalls are the biggest since January 2009.

In part, Taiwan’s data signals that global demand for electronics continues to crater. The biggest problem, though, is Taiwan’s increasingly precarious place amid US-China trade tensions. Orders from China and Hong Kong plunged 45.9%.

It’s not just Taiwan. Japan and South Korea are also learning how expensive it is to stand with the US as an ally amidst China’s economic rise.

As Henry Kissinger, the one-time US secretary of state, once quipped:“It may be dangerous to be America’s enemy, but to be America’s friend is fatal.” Surely, it’s proving all too true these days from a GDP standpoint.

In Tokyo, Prime Minister Fumio Kishida’s approval rating is in the mid-20s as his economic reform hopes go sideways. While that’s on him and his ruling Liberal Democratic Party, Japan, too, is suffering extreme feedback effects from US-China dynamics.

In recent weeks, Kishida’s government reportedly joined forces with US President Joe Biden and the netherlands to restrict exports of some advanced chipmaking technology to Xi’s economy.

The pact, which aims to stymie China’s efforts to increase market share in the chips space, would result in blowback for companies including ASML Holding, Nikon Corp, Tokyo Electron and other tech giants.

US President Joe Biden wants more advanced semiconductors produced in America as part of his push to compete with China. Image: Twitter

It’s a win for Biden, as he presumably prepares to run for reelection in 2024. Though predecessor Donald Trump claimed to be tough on China, Biden has pursued a quieter, more surgical, approach that’s causing real challenges for Xi’s economy.

Yet the unintended consequences are adding up for Japan, South Korea and Taiwan as North Asian democracies close ranks vis-a-vis China. These pressures are likely to grow more intense as the 2024 US election cycle heats up, and China finds itself front and center.

Republicans now controlling the House of Representatives, meanwhile, are working up investigations into the origins of the Covid-19 pandemic and spy balloons flying over the US mainland, regulation of Chinese tech platforms like bytedance’s tiktok and other topics sure to rankle officials in Beijing.

For Taiwan, the fallout from increased tensions could be especially bleak considering the economy shrank 0.86% in the last three months of 2022. That was the worst quarterly showing since the 2008-2009 global financial crisis.

Worse still, Taiwan’s Ministry of Economic Affairs sees little reason for optimism that export demand will bounce back.“The downside risks to the global economy are still high, which may affect the performance of export orders,” the ministry said.

Huang Yu-ling, head of the ministry’s statistics department, reports that 70% of over 2,000 companies surveyed so far detect little uptick in demand since China ended Covid-19 controls.

Hence the ministry’s efforts to telegraph that exports this month will be between 6.9% and 10.8% lower than in February 2022.

This makes Taiwan something of a global weathervane. News that its open and sizable economy is sputtering augers poorly for growth everywhere. Local giants like taiwan semiconductor manufacturing co. (TSMC) are major suppliers to Apple, Qualcomm and other global tech names.

Taiwan is“especially exposed to the vagaries of the global electronics sector given its key role in global tech supply chains,” notes economist Frederic Neumann at HSBC.

TSMC is the world’s leading chip maker. Image: Facebook

South Korea, too, at a moment when President yoon suk-yeol ‘s approval rate is treading water just nine months into his five-year term. Much of the deterioration in support relates to an underperforming economy.

Sales shortfalls at chip giants samsung electronics , SK hynix and others buttress Kissinger’s point that being a top US ally can prove very costly as your biggest customer stands ready to pump fresh demand into your economy.

Semiconductors are by far the biggest source of income for Korea’s economy. Xi’s 1.4-billion-person nation is both the world’s largest semiconductor market and Korea’s biggest trade partner.

Misgivings abound in Seoul since August 2022 when Washington limited US$7,500 tax credits for electric vehicles to those assembled inside North America. It generated new headwinds for hyundai motor co. and Kia Corp, which make EVs in Korea and export them overseas.

In his February 8 State of the Union speech, Biden announced an even sharper pivot toward restoring America’s role as a manufacturing power. Yet his cornerstone argument-“build more and build it here” – signaled Biden is doubling down on a“buy America” industrial policy that put allies in Seoul, Taipei and Tokyo in a tight spot.

The pretext seems to be that fellow democracies in North Asia follow Biden’s lead. Might South Korea, for example, run afoul of US priorities if it maintains a policy of investing in advanced technologies in China?

Since taking power in May, Yoon has tried to straddle US-China tensions, a policy his government calls“strategic equilibrium.” As conglomerates that generate the lion’s share of Korean GDP risk losing market share, Yoon’s balancing act between East and West becomes more precarious.

At the very least, Korea’s family-owned conglomerates, known as chaebols, can expect Biden’s White House to be lobbying for investments in the US that might otherwise go to China.

A big precedent was set in May when hyundai motor pledged to invest $10 billion in Biden’s economy by 2025. Odds are, the US will be angling for similar commitments from Korea Inc.

All this has Korea’s most powerful CEOs struggling to figure out where the geopolitical landmines are. The chips and science act and the Inflation Act that Biden signed last year are keeping compliance officials in Seoul, Taipei and Tokyo on edge.

South Korea’s Samsung is caught in the middle of the US-China tech war. Image: AFP

A big worry: balancing plans for building advanced semiconductor factories over the next decade without crossing Washington’s red lines.

Questions abound about what Bidenomics means for Samsung’s huge production facility in Xi’an and SK hynix’s in Wuxi. And, of course, what might happen if Korean circuitry unwittingly ends up in Chinese weapons, lasers, air-defense systems and surveillance tools?

One answer is to negotiate a middle ground with Biden’s trade team. For all their geopolitical loyalties and security concerns, it’s high time Asia carved out a way to coexist as the two biggest economies brawl. It’s not like, after all, the us-china decoupling theory is playing out at warp speed.

Last year, trade between the two biggest economies increased markedly despite tensions. US imports from China rose $32 million to $537 billion in 2022, while the US shipped a record $154 billion in exports to China.

Yet Taiwan, Japan and South Korea also should be riding the tailwinds generated by China’s reopening ­– and, for now, stronger than expected US growth – to reinvigorate economic reforms.

Goal one: diversifying growth engines away from exports. Twenty-five years of all three economies pledging to recalibrate economic models haven’t gone particularly well.

Here, North Asia might want to follow Biden’s lead. The CHIPS Act alone is pumping $300 billion into research and development to increase productivity and new innovation. Trump completely neglected efforts to build economic muscle at home.

Biden needs to go much further and think more ambitiously. Had Trump acted more innovatively – and Biden added a zero to his tech investment package – US inflation might not be at 40-year highs. And the Federal Reserve might not be carrying out the most aggressive rate hike cycle since the mid-1990s.

Scott Kennedy, senior adviser at the Center for Strategic and International Studies, finds great significance in US Secretary of State Antony Blinken and Secretary of Commerce Gina Raimondo“repeatedly” saying the administration will“emphasize investing in the US’ own capabilities, aligning with allies, and competing vigorously with China, but that it will also remain open to constructive communication and cooperation where possible.”

It’s grand, Kennedy says, that Biden is reaffirming his approach“with China where it can advance American interests and benefit the world.” But, he adds,“managing our differences and cooperating both require greater communication.”

Here, Blinken’s decision to scrap a long-planned Beijing visit over Chinese balloons was a costly own-goal for the US economy, many analysts say.

Unleashed pent-up Chinese demand could drive the global economy in 2023. Image: Screengrab / NDTV

China, too, needs to tend to its own reputational losses. As economist Diana Choyleva at Enodo Economics notes,“Beijing’s abandonment of its harsh Covid policy is sure to unleash some pent-up consumer spending. But the authorities’ precipitous and inept opening of the economy has further tarnished their reputation for economic management and brought uncertainty about the future.”

Choyleva adds that“the loss of confidence is likely to prove a more intractable problem, which won’t be solved by simply lifting Covid restrictions.”

Still, Taiwan is Exhibit A for any discussion of how maintaining alliances with the US amid China tensions has its costs. Rising ones, too, if Biden and Xi can’t soon find ways to mend fences.

Follow William Pesek on Twitter @williampesek