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Has Taiwan’s China gamble gone wrong?

by

Barron's Asia

Location, location, location: Taiwanese President Ma Ying-jeou took that old real estate adage a bit too literally when he assumed power in 2008, moving his economy as close to China as possible. That strategy is backfiring spectacularly ahead of an election Saturday expected to toss his party to the curb.

Ma’s government signed more than 20 sizable deals with China and saw cross-strait trade rise 50 percent. Trouble is, Taiwan grew just 1 percent in 2015 to China’s 7 percent, while wages stagnated, the wealth gap widened and corporate profits dwindled. That performance serves as a telling bookmark for Ma’s tenure. While his Kuomintang, or KMT party, argues that its stewardship of the economy warrants re-election, voters are turning to Tsai Ing-wen and her Democratic Progressive Party, or DPP.

The global economy was in chaos when Ma took office in Taipei. Within four months, the collapse of Lehman Brothers and crashing Western markets made China’s boom seem like low-hanging fruit. Beijing, which sees Taiwan as a runaway province, put out an economic welcome mat Ma couldn’t resist.

Yet Ma made three mistakes. First, when he lowered trade defenses Taiwan went from competing with mainland companies to squaring off against the Communist Party’s state-supported national champions. Second, he forgot Taiwan is a democracy of checks, balances and 23 million people who don’t necessarily relish being a mere subsidiary of a nation aiming a couple of thousand warheads their way. Third, he neglected to devise a Plan B.

Ma’s China-only policy is more dangerous than ever as the dragon across the water loses its economic fire. Had he diversified growth engines, even modestly, Taiwan might not be in the straits it is today. In a Jan. 2 debate with KMT standard bearer Eric Chu, front-runner Tsai put it simply: Voters want a leader who listens to them.

Hence the Taiwan paradox. As China rises, Taiwanese would seem to be sitting on a winning lottery ticket. It’s complicated, though. Ma is the heir to the political dynasty Chiang Kai-shek built after fleeing to Taiwan in 1949, and it’s a delicate balancing act. Many Taiwanese take pride in their Chinese heritage and applaud when Chinese win Olympic medals, Academy Awards and Nobel Prizes. But giving up the hard-won freedoms and rights Beijing withholds from its citizens is another story.

Ma miscalculated hugely in 2014 when he tried to rush into law a services trade deal with China largely in the dark of night. The resulting “Sunflower Movement” protests forced Ma to shelve the pact and lower his China-detente ambitions. His move in November to meet with President Xi Jinping, the heir to the Mao Zedong Communists Chiang fled 66 years earlier, also fell flat with voters. Young Taiwanese looked on uneasily as Beijing quashed Hong Kong’s youth in 2014. To many, the meeting smacked of Beijing warning Taiwanese against moving toward independence, which Tsai’s DPP has long advocated.

So where from here? Should Tsai be elected Taiwan’s first female leader, she won’t enjoy much of a honeymoon. Average Taiwanese aren’t benefiting nearly as much from Chinese growth as Ma claims. She’ll have to act fast to diversify the economy, encourage more innovation and venture elsewhere for free trade deals. With per capita income around $40,000, Taiwan has become an expensive property in a neighborhood dominated by lower-cost China. The choice is simple: move up market into higher-value-added industries or see living standards adjust downward in China’s direction.

To avoid the latter, Tsai might consider the plight of another leader trying to pull off a similar transformation: South Korea’s Park Geun-hye, who’s endeavoring to build a more “creative economy.” While economic comparisons of this kind are perilous, South Korea, too, finds itself trying to find a place between high-tech Japan and developing China. Yet reinventing an economy that long thrived on Asia’s export-growth model is easier said than done.

Services are a Taiwanese strength, providing about 60 percent of jobs and 70 percent of annual output. At its core are small to midsize companies in large cities like Taipei, Kaohsiung and Taichung as well as in rural areas. Tsai could support their growth and competitiveness with tax incentives and government support for new investments and training. That also means increasing safety nets to encourage greater risk taking. Supporting the small to midsize sector would enable Tsai to open up to China in carefully calibrated ways without hollowing out industry. So would pursuing big trade deals away from China, including the U.S.-led Trans-Pacific Partnership. And when Taiwan does negotiate with China, it must do so as an equal, not an anxious subordinate.

Such fears inform Tsai’s skepticism about cross-border technology deals. Might Taiwan be courting a stealth takeover of its prized semiconductor industry? The drama surrounding China’s state-controlled Tsinghua Holdings investing $2 billion in the industry is emblematic of the Taiwan paradox. In today’s political environment, the benefits of such an important infusion must be balanced with the long-term risks.

Thing is, Taiwan can reinvent itself. It just needs to find a cohesive way to harness its enviable human capital and financial resources to move up the value spectrum. Taiwan’s inability to compete with China on price is more than outweighed by its potential to beat the mainland to the punch on the next big thing in technology, energy or engineering. Taiwan, remember, has much more to teach China about creating a thriving economic system than vice versa.

William Pesek, executive editor of Barron’s Asia, is based in Tokyo and writes on Asian economics, markets and politics. www.barronsasia.com

  • Taiwanese2

    Taiwanese applaud when Taiwanese win Olympic medals, Academy Awards and Nobel Prizes, why would they applaud when it’s the Chinese winning them? It’s not like we start applauding when the Singaporeans start winning medals.

    • Buck

      Don`t nitpick a trivial, subjective sentence.
      Though, anecdotally, I would actually agree with the author over you.

    • Buck

      Don`t nitpick a trivial, subjective sentence.
      Though, anecdotally, I would actually agree with the author over you.

  • Buck

    Great article and interesting read. Looking forward to a new article given
    Taiwan’s recent election results. Do you consider tourism to be a potential
    economic boast which Taiwan can greatly benefit from? Taiwan`s more traditional
    Chinese cultural and relatively low cost destination make it an ideal location
    for Japanese and other tourist.

  • Alfonso

    Good article ,

    Too bad that the economy is shifting to a service economy , because is more of an import based country, so if they just focus on service the international debt could be very bad .

    Also Taiwan Industrialism is very peculiar because their main companies make high end components but nobody knows because is not for end consumers , so they need to start re branding the Made in Taiwan , I shopped a few goods Made in Taiwan and quality is extremely good.

    Taiwan must re brand their Tourism for China ,their strong is the food same language so adding more tax free shopping like the lotte in South Korea , it would make a killer mix get more share , Taiwan is great for Western tourist I just love Gaoxiong but that is something you discover once you are there like the avocado shakemilk .