Taiwan Votes 2024: Island’s firms navigate uncertain future as tariff dispute with China widens

INTERNATIONAL DESK: China is considering reimposing tariffs on more Taiwanese imports under a landmark cross-strait free trade agreement, a prospect that has taken on a political dimension as the presidential election draws near, and which analysts warn could wrought damage to the Taiwan economy in the long term.

There is also uncertainty about China’s next step, which is likely to differ based on who Taiwan elects as president on Saturday (Jan 13). The three contenders – Mr Lai Ching-te of the ruling Democratic Progressive Party (DPP), Mr Hou Yu-ih of the Kuomintang (KMT) and Dr Ko Wen-je of the Taiwan People’s Party (TPP) – represent different ways forward for cross-strait relations and trade.

“What worries (us) most is how China is going to follow this. This is only the first step. What will be its next step?” said Taiwanese economist Kristy Hsu.

On Tuesday (Jan 9), China’s Commerce Ministry revealed it was studying the suspension of tariff concessions on more Taiwanese goods covered by the Economic Cooperation Framework Agreement (ECFA).

This came a month after Beijing concluded an eight-month investigation into Taiwan’s ban on more than 2,500 types of imports from the mainland by accusing the island of violating the ECFA as well as World Trade Organization (WTO) rules.

In the aftermath, China suspended tariff cuts on 12 chemical products from Taiwan. It is now exploring similar action on agriculture, fishery, machinery, auto parts and textile imports.

Trade experts who spoke to CNA expect the move to have a limited short-term impact. Still, they are concerned the effects could become amplified in related industries and harm business confidence.

Given the timing of China’s trade investigation and findings, it is widely seen as an attempt to sway the outcome of Taiwan’s election. But experts say there are also genuine economic reasons.

“China has two objectives. Of course, one is that they want Taiwan’s people to elect a government that will be advantageous to relations between both sides. The other objective is that some of China’s industries need the Taiwan market,” said Dr Du Zhen-hua, adjunct associate professor in global business at Chinese Culture University in Taipei.

China is Taiwan’s top trading partner, with cross-strait trade totalling US$224 billion last year. The island runs a trade surplus with its much larger neighbour, which accounted for about 35 cent of Taiwan’s exports in 2023.

The roughly 2,500 Chinese imports that Taiwan bans cover a wide range of goods including agricultural produce, natural and synthetic fibres, household electronics, steel products and vehicles. The bans are intended to protect domestic industries.

China’s report on its trade investigation contains estimates of the lost value of exports linked to Taiwan’s restrictions. According to relevant business associations, for example, mainland firms have missed out on exporting US$2.5 billion worth of fresh vegetables and US$170 million worth of fruits to the island.

“Taiwan is not a huge market, but it is at least a medium to large one, around the 20th largest economy in the world, and its import restrictions have hurt the development of Chinese businesses,” said Dr Du.

He added that China “has a basis” for its claims that the island violated ECFA, which came into effect in 2010 and committed both sides to gradually reducing or eliminating tariff and non-tariff barriers, as well as WTO rules on eliminating trade restrictions.

Dr Du said over the long term, there is reason to worry about China’s move to reimpose tariffs.

In the case of the 12 chemical products, such products are highly homogenous and indistinguishable no matter where they are manufactured, he pointed out. As they are easily replaced by versions made elsewhere, an increase in tariffs would significantly hurt the competitiveness of Taiwan’s exports.

“The manufacturers in Taiwan will rapidly relocate to China or Southeast Asia. This will affect midstream and downstream industries, which will continue to move overseas too. Ultimately, it will affect the 400,000 workers employed in Taiwan’s petrochemical industry and their families,” he said.

Given the wide application of chemical products, if petrochemical firms move out of Taiwan, this would affect the island’s rubber, plastic and pharmaceutical industries, he added.

Economist Ms Hsu, who is director of the Taiwan ASEAN Studies Center at Chung-Hua Institution of Economic Research, said she was concerned about business confidence being harmed by the suspension of tariff cuts. Firms on the island could respond by moving out of Taiwan and increasing their investments in the mainland or in other countries.

“Taking back these zero-tariff benefits for certain items may not be significant in our overall exports to China, but the consequent response from industry to avoid that kind of impact will be more investment in different countries,” she said, citing the example of Taiwan’s printed circuit board makers, who flocked to Thailand in 2023.

Still, not all businesses in the potential line of fire are fazed. Textile businessman Arthur Hsu points out that China is no longer the top export destination for Taiwanese fabric, with Vietnam now leading the way.

International brands that order from textile wholesalers like him are already moving garment production out of China to places where labour is cheaper, he said.

Mr Hsu is the general manager of synthetic textiles company Hsiang Lun Industrial Corporation in Taipei. The company, which was founded by his father in 1980, sells nylon and polyester fabrics for outdoor apparel such as waterproof jackets and high-visibility vests. Its main customers are North American brands that order fabric for garments made in other countries like Cambodia, China and Vietnam.

The firm employs 15 workers at its headquarters in Taipei, and operates three mills in Nantou, Tainan and Taoyuan. Mr Hsu said that from the start, his father insisted on keeping Hsiang Lun’s supply chain in Taiwan rather than making fabric in China.

He recalled his father’s message to him: “If we move to China or someplace else, then our roots will be moved to China, and then Taiwan will be useless. And then one day … you will find there is no mill or no factory here in Taiwan, and we will have to close our company.

“So my father insists that all our products need to be made in Taiwan to keep this (supply chain) alive and healthy, that we have the ability to (make) the product for a long, long time,” said Mr Hsu. He has maintained this stance since joining the family business.

If China suspends tariff cuts on fabric imports from Taiwan, this could lead some garment manufacturers on the mainland to source cheaper materials from elsewhere. But “with or without ECFA, this was going to happen sooner or later”, said Mr Hsu.

Hsiang Lun has already had such an experience, even with ECFA in place. Mr Hsu said his firm used to supply jacket lining fabric to international brands manufacturing garments in China, shipping out two 40-foot containers of 20 denier nylon a month. But they received their last order in 2017, when the brands discovered they could buy the fabric more cheaply in China or Vietnam.

“Business is business,” said Mr Hsu. “Which one is cheaper, which one is better, which one can ship out the goods faster – we’ll use that supplier. No matter if there’s ECFA or no ECFA, if our product loses its competitiveness, we will lose the market.”

He was hence more preoccupied with improving Hsiang Lun’s product offerings and developing a more complete supply chain on the island to stay globally competitive. The company has started to build up its design and sample production capabilities so it can work with brands on those parts of production, but Mr Hsu admitted that “it’s still a long way to go”.

Pointing out the lack of any internationally recognised Taiwanese outdoor apparel brand, he also said he hoped the government could do more on that front, as it is brands that make the final decision on where fabric is purchased from and where it is sent to for garment manufacturing.

Mr Hsu has been paying close attention to this presidential race. He says of the three candidates, only the DPP’s Mr Lai and the TPP’s Dr Ko have talked about traditional industries.

Mr Lai has also spoken about strengthening Taiwan’s supply chains – though in the context of semiconductors – while Dr Ko has talked about improving the management of migrant workers, which is important for the labour-intensive textile industry, said the businessman.(CNA)