The post-World War II, post-Cold War system of globalized free trade led by the US looks increasingly insecure, a system that Taiwan is deeply reliant on.
Taiwan is a mid-sized maritime trading power that punches well above its weight economically. In the second quarter, trade in goods and services was 118.5 percent of nominal GDP.
The entire neighborhood is trade-dependent. Bloomberg estimates half of all world trade goes through the Taiwan Strait.
Photo: Reuters
Though it runs trade deficits with some countries — notably South Korea and Japan — Taiwan overall runs big trade surpluses, including with the US, China and Hong Kong. The European Union and the ASEAN nations are also high on the list of trading partners, but Taiwan trades with nearly everyone worldwide, at times not entirely legally and from time-to-time Taiwanese get caught breaking sanctions on places like North Korea and Russia.
The trade surplus this year is estimated at a massive 15 percent of GDP. Ideally, there should be a trade balance rather than a surplus and the economy more driven by higher wages and a stronger currency boosting domestic demand by increasing people’s buying power, but East Asian governments are obsessed with boosting the fortunes of exporting companies first and foremost.
This is coming to haunt East Asian countries as it is a significant contributor to demographic collapse, with Japan having suffered from it for years. According to the CIA World Factbook the lowest birthrate in the world is in Taiwan, surpassing even South Korea, which came in second to last out of 227 countries and territories. China is probably even worse, but no one trusts their reported numbers and the CIA did not bother including them on the list.
Photo: Reuters
SUPPLY CHAINS IN THE SPOTLIGHT
Worldwide there are threats to Taiwanese trade. One crucial issue that few gave the slightest bit of thought to five years ago is now recognized as a big threat to Taiwan’s extreme dependency on supply chains.
Even prior to the pandemic, the “just-in-time” supply chain model pioneered by the Japanese was showing some signs of strain, but during the pandemic it became painfully obvious. Lockdowns at factories and ports — especially in China — led to damaging shortages around the world.
Photo: EPA-EFE
Then the challenges kept coming. In 2021 the container ship Ever Given, run by Taiwan’s Evergreen Line, ran aground in the Suez Canal, grinding all shipping through that key chokepoint to a halt for six days.
In February 2022 Russia invaded Ukraine, partially cutting off Ukrainian exports while sanctions cut off Russian trade with much of the world. While Ukrainian successes in hobbling the Russian Black Sea fleet and various agreements have partially restored Ukrainian exports, for a time energy, grain, fertilizer and various chemical and mineral prices sharply spiked.
Then drought hit the Panama Canal starting in November, 2022 cutting the number of ships able to traverse one of the world’s other key chokepoints. Only now — two years later — is shipping returning to normal. The drought was brought on by the El Nino weather system, but a changing climate could make this a more regular occurrence.
It gets worse. Following the brutal Hamas attack on Israel followed up with the brutal Israeli invasion of Gaza, Houthi rebels in Yemen began firing at ships passing through the Bab el-Mandeb Strait into the Red Sea, which hosts the Suez Canel at the other end. The Houthis claim that this was to put pressure on Israel to end their invasion.
TAIWAN’S FRAGILE SITUATION
All of this underscores the fragility of Taiwan’s extreme reliance on trade. It starts with inputs — Taiwan is a big importer of energy, food and raw materials. Without these, it would not be able to export much of anything, let alone keep the lights on.
While exports of relatively simple products like plastics, rubber and agriculture require relatively few imported inputs, most of Taiwan’s exports are enormously complex electronics and semiconductor products with extensive supply chains spanning the globe.
The semiconductor industry supply chain is extraordinarily complex, especially when suppliers of suppliers are accounted for, and can extend into the thousands or even tens of thousands. Once a Taiwan Semiconductor Manufacturing Co (TSMC, 台積電) chip exits the fab, it still needs to be tested and packaged, often by ASE Technology Holding Co (日月光投控) in Kaohsiung.
Then the chip might be shipped off to a company like Hon Hai Precision Industry Co (鴻海精密), the world’s biggest electronics manufacturer, which has a complex worldwide supply chain of its own to assemble products powered with that TSMC chip, such as Apple iPhones. Meanwhile, Taiwanese shipping giants like Evergreen, Wan Hai Lines Ltd (萬海) and Yang Ming Marine Transport Corp (陽明) are all over the globe shuttling these bits and bobs needed to assemble the final product about.
TAIWAN BUSINESSES ADAPTING
Taiwan is in a more precarious position than most people realize. Overseas wars, sanctions, climate threats, a threatening neighbor and a series of looming tariff wars are all already causing problems.
TSMC needs, for example, neon gas to operate their Dutch-made ASML Holding NV lithography machines. Though the market has stabilized, Russia and Ukraine are big neon production centers and the war and sanctions sent prices soaring.
Russia is one of the world’s biggest exporters of oil, natural gas, gold and nitrogen-based fertilizers among other products, all of which Taiwan is heavily reliant on. The war caused prices for all to spike, regardless of whether an end client purchased from Russia or not.
These markets stabilized once supply chains shifted. For example, Russian oil intended for Europe rerouted to China and India, while the Middle East, Africa and North America increased supplies to Europe.
Batteries used in electronics are reliant on cobalt, 73 percent of which comes from the Democratic Republic of the Congo, which is periodically at war. China could at any point sever any number of supply chains Taiwan relies on.
Taiwanese firms are adapting as best they can. Moving factories to locations closer to end clients such as Mexico, or to friendlier nations like Vietnam or Thailand is only of limited use. It may help avoid risks associated with China, get around tariffs, reduce labor costs and reduce shipping costs of the finished product, but it does not change the fact that the supply chain still spans the globe.
Rerouting supply chains has become a necessity, and shipping has grown more costly through increased insurance fees, longer routes or having to pay extortion fees to the Houthis rebels — but at least for now shipping is still happening.
In some cases Taiwanese firms are adapting by acting unethically or outright illegally. Taiwan was Russia’s fifth-largest customer for coal earlier this year and Formosa Plastics continues to be a big customer. Instead of importing oil directly, Taiwan imported almost 114,000 barrels a day of Russian naphtha last month, which is a petroleum product.
Firms have also been getting around sanctions on Russia by exporting through third countries. These have included things essential to Russia’s war efforts, such as machine tools and even 20 percent of Russia’s nitrocellulose imports, which is a key component of smokeless gunpowder.
Donovan’s Deep Dives is a regular column by Courtney Donovan Smith (石東文) who writes in-depth analysis on everything about Taiwan’s political scene and geopolitics. Donovan is also the central Taiwan correspondent at ICRT FM100 Radio News, co-publisher of Compass Magazine, co-founder Taiwan Report (report.tw) and former chair of the Taichung American Chamber of Commerce. Follow him on X: @donovan_smith.
That US assistance was a model for Taiwan’s spectacular development success was early recognized by policymakers and analysts. In a report to the US Congress for the fiscal year 1962, former President John F. Kennedy noted Taiwan’s “rapid economic growth,” was “producing a substantial net gain in living.” Kennedy had a stake in Taiwan’s achievements and the US’ official development assistance (ODA) in general: In September 1961, his entreaty to make the 1960s a “decade of development,” and an accompanying proposal for dedicated legislation to this end, had been formalized by congressional passage of the Foreign Assistance Act. Two
March 31 to April 6 On May 13, 1950, National Taiwan University Hospital otolaryngologist Su You-peng (蘇友鵬) was summoned to the director’s office. He thought someone had complained about him practicing the violin at night, but when he entered the room, he knew something was terribly wrong. He saw several burly men who appeared to be government secret agents, and three other resident doctors: internist Hsu Chiang (許強), dermatologist Hu Pao-chen (胡寶珍) and ophthalmologist Hu Hsin-lin (胡鑫麟). They were handcuffed, herded onto two jeeps and taken to the Secrecy Bureau (保密局) for questioning. Su was still in his doctor’s robes at
Last week the Democratic Progressive Party (DPP) said that the budget cuts voted for by the China-aligned parties in the legislature, are intended to force the DPP to hike electricity rates. The public would then blame it for the rate hike. It’s fairly clear that the first part of that is correct. Slashing the budget of state-run Taiwan Power Co (Taipower, 台電) is a move intended to cause discontent with the DPP when electricity rates go up. Taipower’s debt, NT$422.9 billion (US$12.78 billion), is one of the numerous permanent crises created by the nation’s construction-industrial state and the developmentalist mentality it
Experts say that the devastating earthquake in Myanmar on Friday was likely the strongest to hit the country in decades, with disaster modeling suggesting thousands could be dead. Automatic assessments from the US Geological Survey (USGS) said the shallow 7.7-magnitude quake northwest of the central Myanmar city of Sagaing triggered a red alert for shaking-related fatalities and economic losses. “High casualties and extensive damage are probable and the disaster is likely widespread,” it said, locating the epicentre near the central Myanmar city of Mandalay, home to more than a million people. Myanmar’s ruling junta said on Saturday morning that the number killed had
RSS