Visitors look a screen at the Taiwan stall during the inaugural day of the 3-day Smart Asia 2018 ... [+]
Economists often say there are no winners in a trade war, but that’s not entirely accurate. A recent report by the United Nations Conference on Trade and Development (UNCTAD) says that Taiwan is gaining the most “trade diversion effects” with a windfall of $4.2 billion, which is higher than any other market.
Taiwan gained the most business in office machinery and communication equipment, the U.N. trade and investment agency says. Office machinery including tech hardware made up just over $2.8 billion of the total.
The island that became a manufacturing powerhouse decades ago is absorbing an extra hefty share of diverted capital because of its mature tech industry, with ample local talent, and historic business ties to China, including a shared supply chain, analysts say. A number of Taiwanese firms were already shifting operations back to Taiwan from China before the trade dispute erupted.
“Taiwan is in a prime position to benefit from the trade diversionary effects of the U.S.-China trade war,” says Edward Gardner, economist with European forecasting firm FocusEconomics. “This is partly because of its geographical proximity to, and close trade links with, mainland China.”
Taiwan edges out the rest of the world
UNCTAD says the trade dispute has caused $35 billion in losses of Chinese exports to the U.S. market, and 63% of that total was diverted to other countries and territories. The rest was either lost outright or absorbed by American producers, UNCTAD says. It put Mexico in second place after Taiwan, with trade diversion there worth $3.5 billion, and the European Union in third place with a diversion sum of $2.7 billion.
These shifts signal that multinationals are looking for a “diversification” of risks away from China, says Song Seng Wun, an economist in the private banking unit of CIMB in Singapore.
The U.S.-China trade war broke out in March 2018 when U.S. President Donald Trump signed a memorandum ordering the first round of tariffs on Chinese imports. Tariffs on Chinese goods now total $550 billion, and China has hit back with duties on U.S. goods worth $185 billion.
Skilled tech workforce, mature supply chain
Taiwan is benefiting largely because so much of its economy relies on tech hardware, such as semiconductors and new gear for 5G wireless protocol, Song says. About 60% of the 10 million people that Taiwanese companies employ in China work in information and communication technology, per this report.
“For Taiwan companies that perhaps have facilities in China, it does make sense to say ‘let’s bring them back home,’ so made-in-China is made-in-Taiwan,” Song says.
Supply chain overlaps between Taiwan and China make it particularly easy for Taiwanese electronic component manufacturers to come back onshore, Gardner says. On top of that, he says, Taiwan government initiatives such as preferential financing and permission to hire low-cost foreign workers “further entice manufacturers to base operations in Taiwan.” Taiwan’s own tech talent is already drawing a who’s-who of multinationals to expand their tech R&D.
Taiwan Semiconductor Manufacturing Co., the world’s biggest contract chipmaker, could pick up a lot of this diversion, the CIMB economist believes. The manufacturer’s second-quarter revenue of NT$241 billion ($7.9 billion) was up 10.2% over the first quarter and 3.3% over the April-June period of 2018.
How long can Taiwan keep absorbing spillover from China?
Taiwanese investors in China had already been re-onshoring operations before the trade dispute broke out, auguring a continuation even if the dispute cools down. They had grappled in China for the past decade with rising labor costs, intellectual property violations and problems with workplace productivity.
As of October 29, 142 Taiwanese investors had repatriated NT$610 billion from China back to Taiwan, government-supported Central News Agency reports. That figure has been climbing throughout the trade dispute.
More on Forbes: Why Taiwanese Firms Are Scaling Back Their China Operations
Investors from other places, Japan and South Korea for example, have opened factories in China over the decades to capitalize on lower labor costs, a skilled workforce and a giant domestic market. But Korean and Japanese electronics firms had already built a “relatively diversified overseas supply chain”, Ma says, meaning they can lean on their non-Chinese factories for more help during the trade dispute.
“Taiwanese electronics firms have been highly relying on China as the primary production base in the past decades,” she says. “In face of rising U.S. tariffs on China-made products, the immediate response of Taiwanese electronics firms is to move their production back home, which is considered more efficient and cost effective than looking for new alternative overseas production bases.”
