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Post-election economic outlook for Taiwan

The ECCT hosted a Special Lunch on the outlook for Taiwan’s economy following the recent presidential and legislative elections. The event featured guest speaker Alicia Garcia Herrero, Chief Economist for Natixis Asia Pacific.

Taiwan’s economic performance in 2023 was dragged down by a drop in exports as well as investment. It was mostly thanks to strong consumption that Taiwan’s GDP growth managed to remain above 1% for the full year. This was helped by a rise in wages and a stable job market. According to the speaker, the main reasons for Taiwan’s sluggish exports in 2023 were high interest rates and excess inventories in semiconductors and electronic devices and components built up over the pandemic. However, now that most of these inventories have been drawn down, Taiwan can look forward to a return to export growth in 2024. Natixis expects GDP to rise by more than 3% in 2024 on the back of rising exports and investment.

From 2014 to 2023, the share of exports to the US has surged while the same ratio of exports to China fell over the same period. Now, it is also increasingly difficult to export some advanced semiconductors and equipment to China due to the US chip ban. While China remains Taiwan’s largest export destination, its share of exports has fallen from 40% on average between 2016 and 2019 to 35% in 2023 while the share of exports to Asia, the US and Europe has risen.

Taiwan’s outbound FDI has long been very concentrated in China, even more than trade, but this has fallen from 65% under the last KMT government to 34% during the Tsai administration (from 2017-2023). The speaker noted that this trend actually began towards the end of the administration of Ma Ying-jeou, who at the time was strongly pushing for increasing trade and investment ties with China. The trend continued under the Tsai administration, who introduced the New Southbound policy to encourage diversification towards Southeast Asian and other countries in the region. While Tsai’s policy could be interpreted as having some success (Taiwan’s investments and trade with regional countries rose under her administration), the fact that trade and investment expanded more with the US indicates that the reasons for the shift are more to do with economics than government policy. Moreover, the increase in orders for AI chips, equipment and components over the past year is helping to accelerate Taiwan’s investment and trade with the US.

Taiwanese investors are belatedly also increasing their investments in Europe, although the portion and accumulated absolute value is still dwarfed by investments in the US. This imbalance seems disproportionate given that Europe continues to attract large inbound investments from other countries, including the US and China.

Given that many Taiwanese investments are in green field projects, which create new jobs and economic value, they are much more beneficial to the respective economies than mergers and acquisitions.

While Taiwan’s economy has been a beneficiary of the rise in demand for high-end semiconductors and electronics, the speaker expressed the view that too much dependence on one sector puts Taiwan at risk. She also said that she does not subscribe to the “silicon shield” view, which posits that keeping all of Taiwan’s high-end semiconductor capacity at home is a source of strength. Rather, Taiwan would be better off continuing with the process of further geographic diversification of its semiconductor production and supply chain facilities. This would create truly multinational Taiwanese companies, which would not only provide the benefit of economic geographical diversification but would also strengthen Taiwan’s soft power globally.

As to how the new administration will affect the economy, the lack of a majority party in the legislature will necessitate compromise in policies. In the new environment, the speaker said she expects the DPP’s stance on China to become softer (constrained by its lack of control of the Legislative Yuan). This will possibly slow down economic diversification away from China, although it is unlikely to go so far as to usher in a second ECFA deal with China (which the KMT supports). In addition, the US’s stance on technological cooperation between Taiwan and China would be much harsher than during the Ma administration.

On the question of energy policy, the speaker said that the DPP could perhaps change its stance on nuclear power. Meanwhile, the TPP may want to influence industrial policy towards more diversification. On the question of affordable housing, this is likely to become a key issue since all three parties recognise its importance. She concluded that faster growth in 2024 will amount to tailwinds for the DPP but that any DPP efforts to expand diversification and reduce dependence on China will likely be constrained by its lack of control of the Legislative Yuan.

Please refer to this link for the presentation.