In May 2022, a meeting occurred between US Trade Representative Katherine Tai and Taiwanese Minister Without Portfolio John Deng. The official purpose of the meeting was to “explore concrete ways to deepen the US-Taiwan trade and investment relationship” ahead of Joe Biden’s first presidential tour of Asia. The high level of these talks shows just how important the two countries consider each other.
The reasons for this are many. Taiwan’s strained relationship with China means the country looks to the US for added security (something Biden committed to with his comments in late May). The US has a vested interest in Taiwan’s global dominance of the semiconductor sector. Indeed, in 2021, a worldwide shortage of chips highlighted Taiwan’s importance in the global trade network for electronics, and in particular just how critical the trade relationship between the US and Taiwan is when it comes to ensuring the US’s continued leadership role in technology development.
Economic ties between the US and Taiwan are already deep. Taiwan is the US’s eighth-largest trading partner, and the US is Taiwan’s second-largest trading partner (after China). Taiwanese foreign direct investment (FDI) in the US was nearly $137bn in 2020, up 13.6% from 2019, and directly supported about 21,000 jobs, according to the US Department of State. US investment in Taiwan reached $31.5bn in 2020, an 8.8% increase from 2019.
From Taiwan’s side, mutual trade priorities and shared values make US trade relations a natural extension of the country’s concerted policy effort to become less reliant on mainland China. In addition, Taiwan’s consumer market is relatively small, with a population of about 24 million people, and the export of goods and services accounts for more than half of its GDP ($345bn in 2020). This makes export markets such as the US vital to its economic well-being.
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Against this backdrop and, in the midst of a pandemic, Andrew Wylegala took up his post as president of Taiwan’s American Chamber of Commerce (AmCham) in March 2021. It followed a career in the US Foreign Service working specifically on export promotion and US-bound investment attraction. He leads a membership of about 540 multinational companies, with the largest share naturally American but a significant number being Taiwanese and European companies as well, says Wylegala. AmCham’s membership is divided up into 26 different committees and sector interests, with a heavy focus on what Wylegala refers to as commercial advocacy. “Essentially improving the business climate for those who are already in the market,” he explains.
Taiwan’s growth trajectory it positive by all metrics. It is the 57th-largest country in the world by population but has the 21st-largest economy, with a GDP of $662bn in 2021. Taiwan’s economy grew by 44% between 2010 and 2021 and is expected to grow by another 19% by 2025. On top of this, its business environment is seen as particularly welcoming for foreign investors. AmCham’s 2022 business climate survey found that 83% of members were positive about their three-year outlook and 91% indicated said they are very or somewhat confident in their revenue growth prospects over the next three years.
Taiwan has more work to do in attracting foreign investors, however, particularly in the wake of the Covid-19 pandemic. The country's 2021 FDI inflows dropped to $7.48bn, a decline of 18.24% from 2020, largely due to restrictions imposed as a result of the Covid crisis. In addition, the number of approved applications from foreign investors in Taiwan in 2020 fell to 2,711, a 20.68% drop on 2019, according to Taiwan’s Investment Commission.
In his relatively short time as president of AmCham Taiwan, Wylegala has seen a trend regarding the repatriation of Taiwanese businesses back from China as they focus on diversifying investment away from the mainland. This dynamic was enshrined in policy in 2016 by Taiwan’s Investment Commission’s Southbound Policy, which aims to enhance trade between Taiwan and 18 countries in South East Asia, South Asia and Australasia in a bid to reduce dependence on China. The policy seems to have been working.
Despite the overall drop in FDI in 2021, approved investments during the year from countries listed in Taiwan's New Southbound Policy rose by 162.32% on 2020 figures, to $1.06bn, with most of it coming from companies in Singapore, Thailand and Australia, according to Taiwan’s Investment Commission. Wylegala adds, however, that on top of targeting countries from this region, a raft of tax and other incentives provided by the Taiwanese government have played a role in attracting foreign investors.
In addition to inward investment, Wylegala believes Taiwan is on the verge of bolstering its global outbound investment, with both push and pull factors behind this movement. “Some of these may overlap with the geopolitical situation and changes in the relationship with China as the traditional manufacturing base,” he says. Some stand independent of these events and relationships, however.
Taiwan sees increased outbound investment
One key outward investment project has been Taiwan Semiconductor Manufacturing Company (TSMC) building its first chip plant in the US, a $12bn manufacturing site known as a mega-fab, in Phoenix, Arizona, which will start producing five-nanometre chips in 2024. This forms part of a major global expansion by the company, which is reportedly building a new site in Singapore too, as well as targeting other parts of Asia and Europe. “Germany's courting TSMC, Japan has landed it in Kumamoto on the island of Kyushu,” says Wylegala. He expects other Taiwanese companies to follow this strategy. “When a company such as TSMC moves, it doesn't go alone, but it brings an entire ecosystem of suppliers with it,” he adds.
TSMC’s overseas investment means Taiwanese players that perhaps have never operated outside of their domestic market will consider foreign investment. Although TSMC’s operations will remain largely concentrated in Taiwan, its outward investment to the US is significant considering the relatively small global investments it had made until now.
Wylegala sees this embracing of outward investment as an opportunity for Taiwan to diversify its economy away from semiconductors, which could be important given that industry commentators are predicting TSMC’s global monopoly of the product could be hit by a number of factors, including global supply chain diversification and rising prices.
Taiwan is also developing a global reach across other sectors through outbound FDI flows. In electronics, large Taiwanese original equipment manufacturers (OEMs) including Foxconn, Pegatron and Wistron have started to invest into India as part of the China diversification strategy. In more traditional industries, Pou Chen – an important OEM for international footwear brands – is considering further diversifying the locations of its production facilities, from Vietnam to Indonesia and other South East Asian countries.
Could Taiwan be the next Hong Kong?
With a more global outlook, Taiwan has an opportunity to become the next Hong Kong even though the island has not traditionally fulfilled the role of investment gateway to Asia, according to Wylegala. “Certainly, the Taiwanese government would like to put itself in that position, but there is probably some work to be done on the regulatory front in financial services as it is not an entirely free and welcoming market to regionalise operations,” he adds.
There are a number of constraints within Taiwanese borders that are limiting the growth of its financial sector, based around areas such as data transfer, cross-border data flows and electronic payments. Taiwan's digital infrastructure also falls well short of that in Hong Kong. In AmCham’s 2021 white paper review, the chamber identifies Taiwan’s lack of digitalisation in business and government operations as a threat to the country’s global competitiveness. This was evidenced by the disruption that the Covid-19 lockdowns caused in the country, when many businesses were ill-prepared to institute remote working or maintain smooth continuity operations.
To address this shortcoming, Taiwan’s government is in the process of establishing a Ministry of Digital Development, which, if organised correctly, AmCham has stated could help overcome tensions between digital and traditional industries and improve the regulatory framework for developing Taiwan’s digital economy. Within financial services in particular, AmCham's recommendations to government focus stringently on improved digitalisation. Otherwise, it says, emulating Hong Kong is simply not an option.
While accelerated digitalisation is needed, Taiwan has achieved a great deal in this area very quickly. “E-government and participatory democracy through digital tools, and the way that public health has been addressed, makes Taiwan a shining example for digital solutions,” says Wylegala.
Energy supply is another factor limiting Taiwan's progress, as 98% of the island’s energy is imported, resulting in a number of widespread blackouts over the past year. Wylegala says Taiwan’s energy policy may not be “completely coherent or viable” to meet the island’s immediate or long-term needs, which is a concern. “Costs have gone up, but Taiwan is still procuring all the hydrocarbons it needs," he adds. "However, a suspect grid without any interconnection beyond the island is a vulnerability.”
Going forward, the opening of Taiwan's borders after the Covid-19 crisis is critical for trade and investment. The country's government changed its strategy in 2022 to a ‘live with Covid’ approach instead of lockdowns and border closures. Taiwan’s effective health policies have meant an official count of fewer than 1,000 Covid-related fatalities since the pandemic began. With many, including Wylegala, anticipating a wave of outward investment as Taiwan makes a bid to internationalise its trade, the stage is set for the small island nation to make a global impact.