Taiwan-based Companies Scale Down Investments in China

The Lede: Taiwanese firms are reducing their involvement in China while increasing their investments in other regions across the globe, showing signs of a shift away from the Chinese market amid rising tensions in world trade relations.

What we know:

Taiwan’s Investment Commission issued data on Thursday, April 20 showing that investments made by Taiwanese companies in China dropped by 10.4% compared to the previous year, with the total amount invested in the first quarter of 2023 reaching $758 million.
Taiwanese firms withdrew a historic sum of profits from China last year. Listed Taiwanese companies repatriated investment income worth NT$114 billion ($3.7 billion) from China in 2022, Bloomberg reported based on local Taiwanese media and government sources.
While Taiwanese companies are reducing their engagement in China, they are rapidly increasing their investment in other parts of the world. According to data from the Investment Commission, total Taiwanese overseas investment, excluding China, jumped by 240% to $6.9 billion in the first quarter. This growth was primarily driven by Taiwan Semiconductor Manufacturing Co.'s $3.5 billion investment in a plant located in Arizona, according to Bloomberg.
Wang Huning, the chairman of the 14th National Committee of the Chinese People's Political Consultative Conference and the No. 4 official in CCP, met with Liu Chao-shiuan, the President of Taiwan's Council of the Summit for Entrepreneurs Across the Taiwan Straits, in Beijing, Chinese state-run media reported. The Chinese official urged for closer cross-Straits exchanges and business cooperation saying it’s beneficial for the Chinese economy. Wang pledged that measures will be taken to encourage Taiwanese citizens and businesses to invest in the mainland.

The background: Over the past decade, Taiwanese companies, which were once major investors in China, have been reducing their capital expenditure in the country. The initial reason behind this were higher labor costs and a tougher business environment. But the trend has later accelerated due to the push by former U.S. President Donald Trump to decouple U.S. companies from China, a policy that the Biden administration mainly continues to follow. Concerns about the economic and political risks posed by China, such as the ongoing trade tensions between the U.S. and China and the possibility of military conflict across the Taiwan Strait added further pressure.

The recent ban by China on imports of Taiwanese pineapples, which Taiwan views as an attempt to exert political pressure, has raised concerns about the economic interdependence between the two countries. The event served as a reminder of the strong trade and investment connections between Taiwan and China, which have largely remained unaffected by the increasingly tense political situation.

The economic ties between Taiwan and China have created a state of mutual dependence. China increasingly relies on Taiwan for advanced technology, particularly for complex electronics such as advanced semiconductors. Meanwhile, China lacks the ability to develop such technology and is constrained by U.S. trade restrictions.

To decrease their reliance on the Chinese economy, the Taiwanese government has been promoting market diversification and urging Taiwanese businesses to shift their investments away from China. A key component of this strategy is the New Southbound Policy, which seeks to expand trade, investment, cultural, and educational ties with other countries in the Indo-Pacific region.

Likely outcomes/Takeaway:

Taiwan is a major trading partner with China, and many Taiwanese companies have manufacturing facilities there. If Taiwanese firms continue to pull away from China, it could potentially affect the economies of both countries, leading to decreased trade, investment, and job opportunities. On the other hand, it could reduce Taiwan's dependence on China and strengthen its position in the region.
Additionally, if Taiwanese firms reduce their reliance on China, it could create opportunities for other markets to step in and provide goods and services that were previously sourced from China. This could benefit countries such as Vietnam, Indonesia, and Thailand, which have growing manufacturing sectors.

Quotables:

“Efforts will be made to ensure that Taiwan compatriots and their businesses are willing to invest on the mainland, integrate into the development of the mainland and prosper on the mainland.” – Wang Huning, the No. 4 official in CCP.
"I expect, certainly hope and expect that there will continue to be very strong ties between China and the United States when it comes to mutually beneficial trade and investment." – U.S. Treasury Secretary Janet Yellen.

Good Reads:

Taiwan’s Economy Is Breaking Away From China’s (The Heritage Foundation)

Taiwan and China Are Locked in Economic Co-Dependence (Foreign Policy)

China Crackdown on Taiwan Inc. Pressures Firms to Look Elsewhere (Bloomberg)