Earlier this week, president-elect Donald Trump threatened to reset the relationship between the US and China, after receiving a congratulatory and controversial phone call from Taiwan president Tsai Ing-wen.
“I fully understand the ‘one China’ policy, but I don’t know why we have to be bound by a ‘one China’ policy unless we make a deal with China having to do with other things, including trade,” he told Fox News on Dec. 11. The “One China” policy refers to Beijing’s position that Taiwan is a province of China (despite the fact that it holds democratic elections and is independently governed), and therefore other countries can have formal diplomatic relations with either China or Taiwan, but not both.
Trump’s conversation with Tsai was welcomed by Taiwan’s supporters and others who feel the US’s approach to China has been too deferential. But his statement about a “deal” implies that distancing himself from “One China” is mere theater, at Taiwan’s expense. Historically, the island faced threats of “punishment” by China when foreign governments question the Chinese Communist Party’s stance on unification. As far back as 1996, after the US issued a visa to a Taiwanese president, Beijing launched a series of missile tests in the Taiwan Strait order to demonstrate its displeasure.
Right now, China would have a number of tools at its disposal to hurt Taiwan—not just military ones, but economic ones. That’s because the island is more economically dependent on China than ever before.
From nothing to number one
Over the past fifteen years Taiwan’s economy has become deeply linked with that of its neighbor. China is Taiwan’s largest trade partner, absorbing nearly 30% of Taiwan’s exports by value. Somewhat ironically, most of this growth took place during the administration of Chen Shui-bian—the island’s first president from the Democratic Progressive Party (DPP), which broadly advocates independence from China.
Despite promoting a distinct Taiwanese national identity, Chen helped raise the value the island’s exports across the straits to $66 billion by his eight-year term’s end in 2008. In 2015, exports accounted for 53% of Taiwan’s GDP, and China is by far its leading market.
Growth in trade was more modest under the Ma Ying-jeou administration that took over from Chen, though the Kuomintang (KMT) leader nevertheless deepened the economic ties between the two countries. In 2010 Ma signed the Economic Co-operation Framework Agreement, which removed tariffs on 539 goods going from Taiwan to China and 267 goods going from China to Taiwan. He also opened the island to tourism from China, which led to a boom in visitors from across the straits—mainland Chinese nationals now account for about half of all tourists in Taiwan.
The closer links mean that Taiwan’s non-Chinese trading partners don’t even come close. The number two exporting destination, Hong Kong, is a special administrative region of China, and the US is a distant third, absorbing just 12% of Taiwan’s exports.
Tsai’s administration remains aware of the island’s dependence on China, and a key part of her platform involves directing the economy elsewhere. In an interview with the Wall Street Journal, she said she hopes to shift reliance away from tech and manufacturing and towards “innovation,” and also deepen relationships with Southeast Asia.
Taiwanese in China
About 2 million Taiwanese (link in Chinese) live in China permanently, running businesses large and small. Known as taishang, these Taiwan businesses often employ thousands—sometimes tens of thousands—of mainland Chinese in the tech and manufacturing sector, and rely on a mixture of Taiwanese and Chinese capital to fuel their business expansion. Foxconn, or Hon Hai, is the largest with about one million employees on the mainland.
Foreign direct investment from Taiwan into China this year is has already exceeded $10 billion, more than triple the amount in 1993. Foreign direct investment from China into Taiwan remains considerably smaller, amounting to over $215 million from January 2016 to October 2016, because the Taiwan government has limited what China can invest in.
These taishang are perhaps the group of Taiwanese nationals with the most at stake, should Beijing follow through with its threats. Doing business in China requires navigating through a complicated bureaucracy. It’s easy for local and provincial officials to find ways to throw obstacles in the way of Taiwanese businessmen, as a punishment for holding the wrong passport.
Taiwanese businesses are already feeling pressure owners will feel pressure to show more public deference towards Beijing. Zhang Zhijun of the Taiwan Affairs Council in Beijing said after the Tsai call with Trump that the government “absolutely will not allow them to support Taiwan independence after they return to the island with money earned from mainland.”
In 2012, for example HTC chairwoman Cher Wang voiced support for the “One China” principle, just as the company’s sales were starting to slow. This year, a seafood restaurant published a pro-“One China” advertisement in a local Taiwan newspaper, drawing similar criticism.
The tech sector
Technology in particular faces the most risk—eight of the island’s top ten revenue generators are involved in hardware manufacturing and assembly, and all of them do business across the strait.
As a worst case scenario, political backlash could mean mainland partners dissolve their contracts with Taiwanese manufacturers.
Already, component makers and designers like TSMC and MediaTek face increased competition from Chinese counterparts, many of whom are state-owned. Chinese device makers pressured by the government could cancel contracts with Taiwanese chip makers and switch to domestic rivals, like Tsinghua Unigroup or Spreadtrum.
In the past eight years, delegations from China have frequently come to Taiwan to sign contract with local electronics equipment companies, says Ross Darrell Feingold, a senior advisor at DC International Advisory, a consultancy that advises clients on political risk in markets around the globe. “That’s probably not going to be happening with any frequency at all in the coming years.”
A slowing economy
Taiwan’s increased dependency on China comes as the island is suffering economically overall. GDP growth in 2015 was a paltry 0.4%. Economic malaise was a large factor in the current president Tsai Ing-wen’s victory earlier this year, as many young voters believe the beneficiary of increased economic ties with China has been China, not Taiwan.
Tsai’s win has already prompted Beijing to suspend regular diplomatic talks with Taiwan, which could affect business ties, because she is a member of the broadly pro-independence DPP party.
China’s economic slowdown isn’t making things any better, and Trump’s possible upset of US-Taiwan relations adds an extra layer of geopolitical tension to an already precarious economic situation, Feingold says. “China is unhappy and that does create risks for people in Taiwan and companies in Taiwan,” says Feingold. “It’s not necessarily the case that they’re worse today than they were before the phone call. But it’s worth watching those risks and public perception of those risks going forward.”