US-China battle puts Taiwan’s economy in a line of fire – Asia Times

TOKYO – The best that can be said about the free fall in Taiwan’s exports in January is that things could have been worse.

The year-on-year decline of 19.3% was less than the 24% feared by economists. It’s also less than December’s 23.2% plunge. But Taiwanese President Tsai Ing-wen’s economy has a $40 trillion problem to contend with.

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

Fewer and fewer of Taiwan’s IC chips go to the mainland and Hong Kong. By some standards, the deficits are the largest since January 2009.

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

It’s not just Taiwan. Japan and South Korea are also learning the cost of standing alongside the US as an ally amid China’s economic rise.

As Henry Kissinger, the former US Secretary of State, once quipped, “It may be dangerous to be America’s enemy, but to be America’s friend is fatal.” From a GDP standpoint, that is certainly proving all too true these days.

In Tokyo, Prime Minister Fumio Kishida’s approval rating is in his mid-20s as his hopes for economic reform range sideways. This is due to him and his ruling Liberal Democratic Party, but Japan is also suffering from extreme feedback effects from the US-China dynamic.

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

The pact, aimed at hampering China’s efforts to increase chip market share, would set back companies like ASML Holding, Nikon Corp, Tokyo Electron and other tech giants.

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

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

But the unintended consequences are piling up for Japan, South Korea and Taiwan as the North Asian democracies close ranks on China. These pressures are likely to intensify as the 2024 US election cycle heats up and China takes center stage.

Republicans, who now control the House of Representatives, meanwhile, are working on probes into the origins of the Covid-19 pandemic and spy balloons flying over the US mainland, regulating Chinese tech platforms like ByteDance’s TikTok, and other issues officials in Certainly going to anger Beijing.

For Taiwan, the fallout from rising tensions could be particularly grim, considering the economy contracted 0.86% in the last three months of 2022. That was the worst quarterly result since the 2008-2009 global financial crisis.

Worse, Taiwan’s Commerce Ministry sees little reason for optimism that export demand will recover. “Downside risks to the global economy remain 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 see a small increase in demand since China ended Covid-19 controls.

Therefore, the ministry’s efforts to wire exports this month will be between 6.9% and 10.8% lower than in February 2022.

This makes Taiwan a kind of global weathervane. News that its open and sizable economy is faltering bodes well for little growth anywhere. Local giants like Taiwan Semiconductor Manufacturing Co. (TSMC) are key suppliers to Apple, Qualcomm and other global tech companies.

Taiwan is “particularly vulnerable to the vagaries of the global electronics sector, given its key role in global technology supply chains,” notes HSBC economist Frederic Neumann.

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

South Korea, too, at a moment when President Yoon Suk-yeol’s approval rating is teetering just nine months into his five-year tenure. Much of the deterioration in support is related to an underperforming economy.

Lost sales at chip giants Samsung Electronics, SK Hynix and others bolster Kissinger’s argument that being a top US ally can prove very costly as your biggest customer stands ready to pump new demand into your economy.

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

Concerns have been rife in Seoul since August 2022, when Washington limited $7,500 EV tax credits to vehicles assembled in North America. It created new headwinds for Hyundai Motor Co. and Kia Corp, which manufacture electric vehicles in Korea and export them overseas.

In his State of the Union address on February 8, Biden announced an even sharper swing toward restoring America’s role as a manufacturing power. Yet his cornerstone — “build more and build it here” — signaled that Biden was doubling down on his “Buy America” ​​industrial policy that left allies in Seoul, Taipei and Tokyo in a tight spot.

The pretext appears to be that other democracies in North Asia are following Biden’s lead. For example, could South Korea come into conflict with US priorities if it sticks to its policy of investing in advanced technologies in China?

Since taking power in May, Yoon has sought to ease tensions between the US and China, a policy his administration calls “strategic balance.” As conglomerates, which generate the lion’s share of Korea’s GDP, risk losing market share, Yoon’s balancing act between East and West becomes increasingly precarious.

At the very least, Korea’s family-run conglomerates known as chaebols can count on Biden’s White House to champion investments in the US that might otherwise go to China.

A major precedent was set in May when Hyundai Motor pledged to invest $10 billion in Biden’s economy by 2025. It is likely that the US will seek similar commitments from Korea Inc.

All of this leaves Korea’s most powerful CEOs struggling to figure out where the geopolitical land mines are. The CHIPS and Science Act and the Inflation Act, which Biden signed into law last year, have compliance officials in Seoul, Taipei and Tokyo on their toes.

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

One major concern: Balancing plans to build advanced semiconductor fabs over the next decade without crossing Washington’s red lines.

There are many questions about what bidenomics means for Samsung’s massive manufacturing facility in Xi’an and SK hynix’s in Wuxi. And, of course, what could happen if Korean circuitry unwittingly got into Chinese weapons, lasers, air defense systems, and surveillance equipment?

One answer is to negotiate a middle ground with Biden’s trading team. For all their geopolitical allegiances and security concerns, it’s high time Asia found a way to coexist while the two largest economies brawl. It’s not like the US-China decoupling theory is playing out at warp speed, after all.

Over the past year, trade between the two largest economies has increased significantly, despite tensions. US imports from China increased by US$32 million to US$537 billion in 2022, while the US provided a record US$154 billion in exports to China.

But Taiwan, Japan and South Korea should also use the tailwinds generated by China’s reopening – and stronger-than-expected US growth for now – to revive economic reforms.

Goal one: diversification of growth drivers away from exports. 25 years in which all three economies have committed to recalibrating their economic models have not gone particularly well.

This is where North Asia may want to follow Biden’s lead. The CHIPS Act alone is pumping $300 billion into R&D to increase productivity and new innovations. Trump has 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 have been at 40-year highs. And the Federal Reserve may not be conducting its most aggressive rate hike cycle since the mid-1990s.

Scott Kennedy, senior adviser at the Center for Strategic and International Studies, said it was significant that US Secretary of State Antony Blinken and Secretary of Commerce Gina Raimondo “repeatedly” say the administration will “emphasize investing in the US’s own capabilities and engage with… allies, and compete vigorously with China, but also remain open to constructive communication and cooperation wherever possible.”

It’s great, says Kennedy, that Biden is “reaffirming his approach with China where it can advance American interests and benefit the world.” But, he adds, “to manage our differences and work together requires more communication.”

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

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

China also has to take care of its own reputational losses. As economist Diana Choyleva of Enodo Economics notes, “Beijing’s shift away from its tough Covid policies is sure to release some pent-up consumer spending. But the hasty and clumsy opening up of the economy by the authorities has further tarnished their reputation for economic management and brought uncertainty about the future.”

Choyleva adds that “the loss of confidence will likely prove to be a more persistent problem that cannot be solved by simply lifting Covid restrictions.”

Still, Taiwan is exhibit A for any discussion of how maintaining alliances with the US amid tensions in China comes at a cost. Soaring ones, too, if Biden and Xi don’t find ways to mend fences soon.

Follow William Pesek on Twitter @WilliamPesek