How Will the US-China Trade Relationship Affect Taiwan After COVID-19?

In January, Donald Trump signed the “Phase One” trade agreement with the Chinese government, effectively putting a pause to the escalations in the U.S.-China trade war that had raged on for over 19 months.

In the agreement, China made a commitment to purchase about $200 billion of U.S. goods that included agricultural, aviation, auto and manufacturing products in the next two years. In exchange, the United States will reduce the tariffs it had put in place on about $120 billion of Chinese products. This, of course, was before COVID-19 was declared a global pandemic and before the United States became the most heavily affected country in the world with at least 557,000 people infected and a death toll of more than 22,000.

In spite of Trump’s harsh rhetoric toward China, going as far as to call the pandemic the “Chinese virus,” there has been no mention of rolling back the trade deal, even while countries in Europe have rejected Chinese-made equipment to fight the coronavirus. What does bear consideration is whether the agreement will dramatically affect Taiwan’s economic development, but given the current global situation, it does not appear the deal will hurt Taiwan, or at least not significantly.

When signed, the deal had the potential to boost global markets, which had been rattled by months of trade tensions. However, with global stock markets in flux due to the spread of COVID-19, we can assume whatever influence the deal might have had in this respect is long gone.

The agreement was also meant to boost Trump’s reelection prospects, as one of his main campaign promises was to deal with China’s unfavorable trade situation. The narrative of a “successful” trade deal playing out in his favor was something that he was hoping to use to improve his approval ratings heading to the 2020 elections. However, with the coronavirus crisis getting more serious, the trade situation between the world’s biggest economies has taken on a less important role.

Trump does not expect the coronavirus crisis to last forever. He has openly said that he wants to “open the country,” and when that happens, it would be safe to assume that he will once again try to use his agreement with China as a sign that he is working to restart the economy. But regardless of the effect that the agreement might have on the U.S. domestic politics, there are many reasons to believe that the agreement will not have a dramatic effect on Taiwan’s economy.

The first is that those companies that have already come back to Taiwan as a result of the trade war, and the ones that may decide to come back after what has happened with COVID-19, will not necessarily go back to China if a trade deal is eventually signed. Especially as the Chinese Communist Party (CCP) will probably see its reputation take a hit for its handling of the pandemic—a United Kingdom think tank has even called for legal action in search of compensation against the CCP.

According to data released by Taiwan’s Directorate General of Budget, Accounting and Statistics (DGBAS), Taiwan’s economy grew by 3.38 percent in the last quarter of 2019, surpassing the earlier estimate of 3.04 percent. The accelerated growth was partly due to the return of Taiwanese investors from China as a direct consequence of the trade conflict, according to DGBAS.

The forecasts for this year are much lower, at 2.37 percent, but as Taiwan hasn’t as yet implemented a total shutdown of its local economy, there are reasons to be optimistic.

In early 2019, the Taiwanese government rolled out the red carpet for companies returning from China by implementing initiatives like a three-year program that offers them benefits that range from tax credits to assistance with acquisition of land and human resources. This laid the foundation for an easy transition of their operations from China to Taiwan. In the face of the COVID-19 crisis, the Taiwanese government is currently implementing measures worth billions of dollars to “soften the impact of the virus in the economy.”

Before the crisis started, 154 returning businesses had pledged to invest NT$697.7 billion (about US$23 billion) in Taiwan, according to the Ministry of Economic Affairs. The investment that these companies have already pledged is unlikely to decrease much despite the phase one trade agreement, as many issues still linger, such as the possibility of a collapse in the negotiations, or an unknown factor that again threatens the trade relationship between the two countries (such as this pandemic for example). The uncertainty will probably deter companies from hastily moving their production lines back to China, even if some were considering this as a possible long-term plan.

Another reason to believe the Taiwanese economy will not be heavily affected by the “phase one” agreement is that nobody knows how long it will take for the agreement to be negotiated, or even if it will be successfully signed. Previous negotiations have broken down even following big announcements of progress, and at that time there was not a pandemic that originated in China getting in the way of the negotiations. Considering these factors, there are no guarantees that the talks won’t crash down as they have done in the past.

Besides, Trump has already said that he could wait until after the 2020 elections to start the second phase negotiations because if reelected, he could have more leverage over China and achieve an even better trade deal (during this time, most of the tariffs will remain in place). This also raises the question of whether or not the agreement will be completed if his reelection bid is not successful.

Another aspect to take into consideration is that, even with a signed deal, the uncertainty surrounding the trade negotiations between the world’s two biggest economies might never fade away while Trump remains in office. This is because the world has already learned that Trump is not afraid of ripping a deal apart or backing out from previously agreed commitments. Besides, at present, the competition between the United States and China goes beyond trade.

The technological race to develop the 5G network will still rage on, as U.S. telecoms battle Huawei for control of the “future of the internet.” The ideological conflicts between the U.S. democratic system and China’s authoritarianism will not go anywhere either.

Supply chains around the globe have already changed, and it is hard to believe that things will go back to business as usual. After all that has happened, it seems unreasonable to think that many companies would risk going back to China and being trapped in the crossfire once again should the conflict resume.

The Chinese economy has taken a severe hit as a result of the COVID-19 crisis, and in turn this will affect Taiwanese companies doing business in China. However, this might also increase the number of companies coming back to Taiwan plus the negative image that China will likely get for its government handling of the crisis might make international companies turn their eyes to Taiwan in search of new providers.

Should Taiwan’s strategy in handling the virus continue to ward off large scale community outbreaks and all that entails, the Taiwanese government must be ready to make the best out of this situation and use it to invest in its people, to create more jobs and lead Taiwan to a new era of economic development and prosperity.

(Cover photo via U.S. White House)