US neglecting Taiwan’s economic security

Over the past year there has been a barrage of Western media reports focusing on prospects of a Chinese military invasion of Taiwan, with provocative headlines such as “A Chinese invasion of Taiwan would be a bloody, logistical nightmare,” “Forget the US-China trade war: Is a conflict over Taiwan the real threat?”, “Why a US-China war over Taiwan won’t be anything like the Syria strikes,” and “We can tell you how China would invade and crush Taiwan,” among others.

This fixation on war and military conflict – whether with China, Iran, Russia, Syria, North Korea or Venezuela – is understandable given the increasing militarization of US foreign policy over the past two decades. As David Oakley of the National Defense University observed, “US policymakers have turned to the military as the preferred foreign-policy tool, becoming enamored with the notion that they can shape the world through force.”

James Stavridis, a retired admiral and military chief of the North Atlantic Treaty Organization, concurs and argues that Washington has indeed avoided the “ounce of prevention” diplomatic approach and instead opted for a “pound of flesh” military approach toward the world, Oakley wrote.

However, a militarized foreign policy is not only destabilizing for the international order, it also risks pushing allies away who are worried about their economic security. This is evidenced by the European Union forging its own policy toward Iran and setting up trade mechanism to bypass US sanctions, in an attempt to keep Iran in the nuclear deal and prevent another regime-change war that would worsen the EU refugee crisis.

Similarly, this US militaristic approach may have the unintended consequence of driving Taiwan to forge closer economic ties with China.

Tariffs hit both China and Taiwan

Not only is Taiwan’s economy caught in a fallout in the electronics sector due to Trump’s tariffs on technology exports from China, Taipei is also subjected to tariffs on steel and aluminum imports to the US – for fear these products may contain China-made steel.

In response, Taipei took severe measures to restrict export of its products with any content of China-made steel to the US, and launched a self-investigation into dumping and government subsidies focused on China-made steel exported to Taiwan from 2015-2017. Nonetheless, these efforts appeared to have been in vain, and Taiwan was not included on the tariff exemption list.

Faced with a large financial burden of tariffs, on Saturday, Taiwan’s top trade negotiator John Deng said that failure to secure exemption status from the US administration would hurt Taiwanese steel and aluminum exporters.

Additionally, tariffs in the electronics sector – which account for 40% of Taiwan’s total exports – are already hurting China-based Taiwanese firms. With exports accounting for three-quarters of its entire gross domestic product, growth in Taiwan has slowed to its worst level in almost three years at 1.72% in the first quarter, down from 3.15% in the first three months of 2018.

Despite President Tsai Ing-wen’s administration implementing a New Southbound Policy (NPS) in 2017 to divert the island’s exports away from China into South and Southeast Asia, there have not been concrete results. Even with the prospect of Taiwanese firms relocating from China back to the island, ING economist Iris Pang assessed the “scale will not be large enough to move the GDP needle a lot.”

In the face of a lagging economy, squeezed between US President Donald Trump’s tariffs on China and on Taiwan and US focus on military force rather than economic diplomacy in its foreign relations, some observers question whether Washington will lose Taipei to Beijing economically.

Losing Taiwan

Some signposts are beginning to emerge, with the ruling Democratic Progressive Party suffering major losses in the November mid-term election in Taiwan. Moreover, for the first time in 20 years, the DPP’s traditional pro-independence stronghold in Kaohsiung brought in a mayor from the opposition Kuomintang (KMT) party.

Mayor Han Kuo-yu ran on a platform of spearheading a mainland-friendly policy aimed at revitalizing the city’s economy, to be followed by 14 other KMT-controlled cities and counties that view China’s vast market as an engine for growth. They hope to restore Kaohsiung to its prior glory days when it was one of the world’s top 10 shipping ports.

Kaohsiung has taken a hit economically in the past decades as it remained a heavy-industry-centered city, coupled with the dwindling of Chinese tourists and investments since the pro-independence DPP came to power in 2017. However, efforts are under way to move some Taiwanese companies from China to Kaohsiung to revitalize the city.

This is coupled with other efforts to rebrand the city as a tourist hub, with romantic boat cruises on the Love River, a metro station with a seven-minute fluorescent-light show, and a US$348 million world-class performing arts center called Weiwuying that sits on the site of a former military base established by imperial Japan during its colonial rule of Taiwan.

Nonetheless, these efforts to reinvigorate Taiwan’s economy will be in vain if the US and China ratchet up cross-Strait tensions, and in turn reduce much-needed investor confidence on the island. As Charles I-hsin Chen, executive director of the Institute for Taiwan-America Studies, argued this month in The Diplomat, US policy toward Taiwan needs to go beyond geopolitics and also address geoeconomics.

Failing that, economic imperatives would likely usher in a KMT president in 2020, who understands why Bill Clinton’s platform of “It’s the economy, stupid” won him the US presidential election in 1992.