President Tsai Ing-wen waves during National Day celebrations in Taipei, Taiwan, on October 10, 2016. Photo: Reuters/ Tyrone Siu
President Tsai Ing-wen waves during National Day celebrations in Taipei, Taiwan, on October 10, 2016. Photo: Reuters/ Tyrone Siu

Taiwan is claiming modest success in the first year of its revised charm offensive with countries to the south, but it will need a much bigger economic dividend to reduce its dependence on demand from China, which is heading much the same way.

President Tsai Ing-wen said at her 2016 inauguration that the New Southbound Policy would plant “deep roots” of engagement with 18 nations in south Asia, Southeast Asia, Australia and New Zealand, and some of these seeds have now germinated:

• Trade rose 11.4% to $112.8 billion in the 12 months to June 30.

• Taiwan banks’ Southeast Asian holdings, mostly for investment, increased by $3.3 billion. Investments rose in all 18 markets. 

• Tourist arrivals jumped 27.3%, helped by relaxed visa rules.

• There were 31,531 students from the 18 countries studying in Taiwan, a 9.7% increase from June 30, 2016.

Tsai seems confident the momentum will continue until Taiwan has unshackled its value chains, still firmly anchored in China, and hitched them to new markets. It is less certain how far China will allow this independent spirit to be mirrored at a diplomatic level.    

The president has consistently denied that Southbound is all about decoupling from China, and there is little doubt the policy is intended to address deeper economic woes. Tsai also said in mid-August that Taiwan would not be competing with China’s One Belt One Road initiative, which her own country has backed. 

Southbound is about “emphasizing Taiwan’s own advantages and promoting mutually beneficial development as a member of the regional community,” she told the Southeast Asian media.

But the end result will be a weakening of the client-state relationship that China has used for decades to keep its renegade province in line, and it may go beyond economic independence.

An opinion poll published on August 21 showed that 80% of people in Taiwan support the Southbound initiative, even to the extent of using “steadfast diplomacy in expanding Taiwan’s international space and safeguarding its interests”.

These are not words that will sit well with Beijing, already furious over the ruling Democratic Progressive Party’s refusal to endorse the “1992 consensus”, backed by the last few Kuomintang governments, of tacitly recognizing that there is only one China.

The DPP was swept into power in 2016 on a promise of reversing the Kuomintang’s commitment to escalated economic ties with China, which has cost Taiwan dearly since the Chinese began shifting the focus of their demand away from trade and relocated low-end industries like garments, mostly to Southeast Asia.

About 40% of Taiwan’s exports go to China and Hong Kong, but falling demand for technology goods, which account for 44% of shipments, is affecting investment. Taiwanese firms sent $9.1 billion to China in 2016, a drop of 11.7% on 2015, while the number of projects fell by 21.5%. Meanwhile, Chinese firms invested $247.6 million in Taiwan last year, an increase of about 1.5%.

Modeling by the International Monetary Fund suggests that Taiwan has the biggest exposure of any country to the Chinese  economy: a drop of one percentage point in China’s consumption and investment growth will reduce Taiwan’s GDP growth by 0.17 percentage points, rising to 0.36 points if this decline is sustained.

The IMF expects the Taiwan economy to expand by just 1.7% in 2017 and 1.9% in 2018, well down from its recent peak of 4% in 2014. China’s slowdown hasn‘t helped, but the economy was already losing ground due to an over-reliance on exports, which contribute two-thirds of GDP, and other structural imbalances.

Offshoring manufacturing to China and Southeast Asia has eroded the pool of capital available for domestic investment, and foreign ownership barriers deter incoming flows. Gross capital formation has risen since 2015 but is still growing by only 2.5% annually. Job losses are mounting, creating a groundswell of social unrest.

Cue the New Southbound Policy, which is as much about winning hearts and minds in the 18 countries as pursuing economic goals. The initial pillars of cooperation – culture, tourism, technology, healthcare and agriculture – set fairly conservative goals, though Tsai insists her government is taking a long-term perspective.

“We will share resources, talents and markets with other countries to achieve economies of scale and to allow the efficient use of resources,” she said when launching the program.

Flagship projects will include the creation of innovative industries, medical cooperation, the development of industrial supply chains, policy forum and youth exchange platforms and cultivating talent.

Electronic commerce, infrastructure and tourism are other pillars.

Southbound is actually a revamped version of Taiwan’s 1990s strategy of diverting investment from China to the booming economies of South and Southeast Asia, which was scuttled by the 1997 Asian financial crisis. Her problems are closer to home.

China will probably welcome Taiwan’s efforts to broaden its economic base, especially if this cements emerging value chains with its trade partners in Southeast Asia. It won’t be so receptive to greater engagement with China’s bitter regional rival India.

In February China complained after a Taiwanese parliamentary delegation visited India to strengthen Southbound contacts, warning Delhi to refrain from official contacts with Taiwan. The Taiwanese retorted that their nation was “totally independent”.

Two-way trade between India and Taiwan amounted to $6 billion in 2016, up from $1.2 billion in 2000. The relationship is a natural fit, as India has been chasing its own Act East policy, intended to build economic ties in East Asia, under various names since 1991.

Southeast Asian countries may feel forced to choose between Taiwan and their biggest economic ally, which would set parameters on how far they are willing to embrace the Southbound policy – though many of its goals will materialize in any case as Taiwanese investors chase the new supply lines forged by industries relocated to markets like Vietnam and Cambodia.

Taiwan has access to innovative technologies, specialized skills  and financing that the emerging Asian industrial nations will need as they chase middle income status over the next decade.

The question is whether the asking price will be too high.