TAIPEI -- Taiwan's largest companies have spent the past two decades building factories ever deeper into China, particularly in the Yangtze River and Pearl River deltas. Besides having a major impact on global supply chains, this push has left the economy of Taiwan deeply entwined with that of its large -- and, increasingly, antagonistic -- neighbor across the strait.
Yet there are growing signs that many of Taiwan's companies may soon begin to unwind that 20-year process by withdrawing from China, due in no small part to the U.S.-China trade dispute.
Perhaps more than any other economy, Taiwan has found itself trapped in the middle of the trade war between the world's two superpowers. China and the U.S. are Taiwan's top two individual trading partners, and the Taiwanese economy is heavily reliant on global trade.
Products that are made by Taiwanese companies at plants in the mainland are effectively considered to be "Made in China" -- putting them in the crosshairs for U.S. tariffs that could rise to 25% early next year. Already, there are widespread concerns in Taiwan that the trade war is hurting Chinese demand for its exports.
At the recent G-20 summit in Buenos Aires, U.S. President Donald Trump and Chinese leader Xi Jinping apparently agreed to a 90-day cease fire that delays a Jan. 1 deadline for imposing 25% tariffs on $200 billion of Chinese goods. Despite the upbeat rhetoric, though, few are expecting China and the U.S. to reach a deal that would avert the tariffs.
This is a major concern for Taiwanese corporate bosses, who, if they weren't looking for the exit door from China before, appear to be doing so now.
"Taiwan is a small economy that is stuck between the two largest economies, and nobody knows how long this trade war will last," C.C. Wang, president of the Taiwan Association of Machinery Industry, told the Nikkei Asian Review.
Taiwanese industries are weighing their options. For some companies, the trade conflict appears to be accelerating production shifts that were already being considered due to rising wages and other costs in China. Vietnam, Malaysia, Indonesia and India are all potentially appealing relocation destinations.
But moving production from China back to Taiwan is also a possibility. Given that her party's poor performance in November's local elections was largely driven by economic concerns, President Tsai Ing-wen would like to be viewed as bringing jobs back to Taiwan. Her administration is offering tax and other incentives for companies that do just that.
One company that is already planning a return to Taiwan is Quanta Computer, the world's largest contract notebook computer and server builder. Worried about an escalation of the trade war, Quanta recently announced that it will spend 4.28 billion New Taiwan dollars ($138 million) to acquire land and a building near the company's headquarters in the northern city of Taoyuan.
"We are moving the production of some high-end products back to Taiwan to avoid the tariffs," Quanta Chairman Barry Lam told reporters recently.
"Although the manufacturing costs could be slightly higher than in China, our clients are willing to take it," he said. "That way, the impact of the trade war on Quanta will be reduced."
Such candid talk is a noticeable shift from several months ago. At the onset of the tit-for-tat tariffs announced by Washington and Beijing, companies in Taiwan generally held their cards close to their chests as they tried to gauge whether this spat would echo the U.S.-Japan trade war launched by President Ronald Reagan in the 1980s, which lasted about a decade.
The feeling that this trade spat is just beginning grew stronger in early November when the U.S. Justice Department indicted two companies -- Chinese state-owned Fujian Jinhua Integrated Circuit Co. and Taiwan's United Microelectronics Corp. -- on charges of intellectual property theft. The two companies are charged with stealing IP related to DRAM chips from the Taiwan operations of U.S.-based Micron Technologies. Three people who had worked for Micron in Taiwan were also indicted.
The U.S. Commerce Department had previously banned Fujian Jinhua from buying components, software or technology-related products from American companies -- a major blow to the company, given China's reliance on such goods.
Rupert Hammond-Chambers, president of the U.S.-Taiwan Business Council, told Nikkei that he considered China, not Trump, to have initiated the trade conflict.
"Over the past 20-plus years China has pursued a predatory set of trade practices to accomplish rapid economic development," Hammond-Chambers said. "Those practices have included the theft of intellectual property and trade secrets as well as the manufacture of finished goods at below cost."
Any deal between Washington and Beijing to resolve the current trade spat must include a certifiable mechanism for ending these practices, he said.
The fact that there is bipartisan support for confronting China on these issues despite the politically divided environment in the U.S. suggests that this may indeed be just the beginning.
With Taiwanese companies becoming more vocal about their desire to move out of China, Tsai's administration has started discussing incentives for those looking to repatriate production.
In a recent interview, Chen Mei-Ling, minister of Taiwan's National Development Council, told Nikkei that more than 40 companies across a range of sectors have expressed willingness to move some production back to Taiwan.
Giant, the world's largest bicycle maker, announced that it will bring back 300 to 400 jobs to the central Taiwanese city of Taichung, having previously sent jobs from the city over to China. The company, which has recently expanded its European footprint, is also looking for land in a nearby industrial area for a logistics center.
"We plan to move the logistics center that is currently within our Taichung plant to a nearby industrial park so that we can have more space for production," Giant spokesman Ken Li told Nikkei. "For the U.S. market, we would ship from Taiwan to avoid any tariffs."
Bicycles and bicycle parts have been subject to the U.S. tariffs on $200 billion worth of Chinese imports since late September, while tariffs were imposed on electric bikes earlier in the year.
Looking ahead to a possible escalation in levies, Giant Chairperson Bonnie Tu told reporters that "no product could still stay competitive" if it were hit by a 25% tariff.
Key iPhone assembler Pegatron is also planning to move production out of China to avoid tariffs on networking and other devices. The company -- which has been less aggressive than some of its rivals about shifting production outside of China -- said it was speeding up relocation plans due to trade tensions.
American companies with operations in Taiwan and China are also sizing up the shifting landscape.
"Many companies are still in wait-and-see mode, while others have long had a China-plus strategy, with production in China and other parts of the world," said William Foreman, president of the American Chamber of Commerce in Taipei. "They're already getting serious about shifting some of their production from China to other countries in Asia."
David Ho, president of AirPod and Fitbit assembler Inventec Appliances, said it was a good thing that Taiwanese manufacturers like Inventec had established manufacturing facilities in the 1990s in countries other than China, such as in Malaysia, Mexico and the Czech Republic. Those facilities, as well as existing facilities in Taiwan, will provide flexibility for the company to adjust its production scheme, he said.
For Taiwanese companies that export to China, the concern is a slowdown in the mainland economy. The machine tools industry, a bellwether of investment sentiment, is a prime example.
Taiwan's exports of machine tools to China -- the largest destination for such shipments -- only grew 5% by value in the first 10 months of this year, compared with 27% growth for the whole year in 2017, according to data from TAMI.
"Five percent growth is very marginal," Wang said at the 2018 Taiwan International Machine Tool Show in November. "The trade war between Beijing and Washington has significantly impacted investor confidence in China, which has consequently lowered the import demand for Taiwanese machine tools."
Machine tool exports from Taiwan to the U.S. grew 32.6% year-on-year during the first 10 months of 2018, encouraged by Trump's policy to bring manufacturing back stateside. Yet the U.S. market only accounted for 13% of Taiwan's total machine tools exports, compared with China's share of 32%, Wang said.
All that companies in the industry can do, he added, is monitor the trade tensions and try to improve their own competitiveness to survive the increasingly uncertain global market.
Taiwan's largest industrial conglomerate, Formosa Plastics Group, has also felt the pain of the trade conflict. As a supplier of petrochemical, metal and plastics materials, the company's performance is an informal gauge of demand for consumer and industrial products.
Executives from four of Formosa Plastics Groups' listed companies -- Formosa Plastics, Nan Ya Plastics, Formosa Petrochemical and Formosa Chemicals & Fibre -- have all seen revenues decline recently as the trade war hurt demand and dragged down prices of materials.
"China's economy is really weaker than expected, while the trade war and many geopolitical issues have added to the massive uncertainties," F.Y. Hong, Formosa Chemicals & Fibre vice chairman, recently told Taiwanese reporters.
A Taipei-based sales manager at a Taiwanese company that makes hardware for electronic devices said the trade war had dampened demand. "Our clients are waiting to see how things play out with the trade war."
Her company and others in Taiwan whose products are finished in China and are therefore already subject to American tariffs of 10% were scrambling to produce and ship as much to the U.S. as they could before they rise further, she added.
"A 25% tariff is quite high, especially in an industry such as ours, where margins are already razor-thin."
U.S. hard-liners back in control
If Taiwan hopes to untangle itself from China, its biggest trade partner, then it will certainly want some kind of assurances. Tsai's New Southbound Policy holds a degree of promise, but shifting supply chains from China to Southeast Asia and India won't happen overnight. Most of these countries lack the transportation infrastructure that China has.
At the same time, the China that first lured Taiwanese manufacturers no longer exists. Wages have risen, political pressure has grown, and the country has morphed from a strategic partner of the U.S. -- Taiwan's ultimate guarantor of security -- to a strategic competitor.
With this in mind, it makes sense that Morris Chang, retired chairman of Taiwan Semiconductor Manufacturing Co., a national champion of Taiwan's tech sector and a global powerhouse, pressed U.S. Vice President Mike Pence for a bilateral free trade agreement at November's APEC meeting in Papua New Guinea.
"China seeks to economically isolate Taiwan, marginalize its economy and reduce its options," Hammond-Chambers said. "Bilateral and multilateral trade deals are essential for the future welfare of economies, and Taiwan is shut out."
From Hammond-Chambers' perspective, the main obstacle to Taiwan securing a new deal with the U.S. isn't Washington-Beijing relations, but Taiwan's long-standing refusal to open its markets to American pork containing the steroid ractopamine.
Engaging other American officials -- including national security adviser John Bolton, Secretary of State Mike Pompeo and U.S. Trade Representative Robert Lighthizer -- and giving in on the pork issue will likely be necessary if Taiwan is going to upgrade its trade relationship with the U.S.
"The opportunity is right there. Can Taiwan elevate the offer to the senior levels of Mr. Trump's government and make a strategic and economic case for a deal?" he asked.
The willingness of Taiwan to consider giving in on this demand is likely to grow if another round of U.S. tariffs on Chinese goods goes into effect early next year. The likelihood of China giving the U.S. what it wants -- which includes removing trade barriers and reaching an agreement on ending cyberespionage and intellectual property theft -- within the 90-day window appears low at the moment.
The cease-fire reached in Buenos Aires may have played into Trump's desire to have cordial personal relations with Xi, but now that the theater of their meeting is over, the China hawks in his administration are reasserting themselves. Lighthizer, a hard-liner who advocates using tariffs against China, is taking over the trade negotiations from Treasury Secretary Steven Mnuchin -- a sign that the U.S. will take a tougher stance.
And just days after the summit, Trump tweeted that he would not hesitate to raise tariffs if talks fell through: "President Xi and I want this deal to happen, and it probably will. But if not remember ... I am a Tariff Man."
Perhaps most ominously, Chinese media accounts of what agreement was actually reached -- no document was signed by the two sides -- differ substantially from U.S. media reports.
For Taiwan, the "deal" in Buenos Aires may not have ended the trade war, but it is better than nothing, giving companies and the government 90 more days to adjust their strategies for what will likely be a protracted trade dispute between the world's two largest economies.
Roy C. Lee, deputy executive director of the Taiwan WTO & RTA Center at the Chung-Hua Institution for Economic Research, said near-term trade resolutions between China and the U.S. are possible, but they are likely to be "partial and conditional."
"The real challenge lies in future rounds of negotiations," Lee said. "New battlefields in the U.S.-China economic conflict, such as technology and WTO reform, are already emerging. In short, the trade war is all but certain to continue."