The U.S.

-China Trade War and Options for Taiwan

October 2019

Chien-Heui Wu

The 2018 U.S. National Security Strategy noted that “economic security is national
security.”1 The report stated that the White House would “no longer turn a blind
eye to violations, cheating or economic aggression.”2 In order to address these
concerns, the Trump administration adopted a number of concrete measures
aiming to weaken the link between economic and security ties that have bound
U.S.-China relations tightly until now.
Economic interdependence between the two countries and the challenge posed
by China’s rise as a major power has shifted relations between Washington and
Beijing.3 A similar economics-security nexus can be found between Taiwan and
China. While economic interdependence between Taiwan and China deepens,
the security threat posed by China has persisted. Taiwan thus shares the same
challenge the United States is facing: how to maintain economic relations with a
security adversary.

Chien-Huei Wu is an associate research professor at the Institute of European and American Studies in
Taiwan and the 2019 Taiwan Scholar for the Asia Program at the Wilson Center.
The U.S.-China Trade War and Options for Taiwan

U.S.-China Relations: Interdependence the country. Moving beyond the realm of

or Overdependence domestic law, despite the fact that the Trump
administration pays little regard to the WTO,
the securitization of the U.S.-China economic
Political Mobilization to Confront China
relations may shield the United States from
In upholding economic interests in the name WTO scrutiny under the Article XXI national
of national security, the Trump administration security exception.10
has mobilized political and popular support
for its tough stance against China. The The Effectiveness of Policy Instruments
National Security Strategy states that “China The Trump administration has used numerous
and Russia challenge American power, legal rules including Section 232 of the Trade
influence, and interests, attempting to erode Expansion Act of 1962 and Section 301 of the
American security and property.”4 Faced with Trade Act of 1974 to manage trade relations
competition from China as well as Russia, not just with China, but with other countries
Washington has to “rethink the policies of that are actually security partners. In June
the past two decades-policies based on the 2019, for instance, Japan surpassed China
assumption that engagement with rivals and as the largest holder of U.S. Treasuries.11 At
their inclusion in the international institutions the same time, Mexico succeeded China as
and global commerce would turn them into the biggest U.S. trading partner (export and
benign actors and trustworthy partners.”5 import combined).12 In the first half of 2019,
This signifies the end of a more conciliatory the top five trading partners of the United
U.S. stance, at least under the Trump States were: Mexico (15 percent), Canada
administration and solidifies the Beijing (14.9 percent), China (13.2 percent), Japan
government as the “China threat.”6 (5.3 percent), and Germany (4.2 percent).
There has also been a growing distinction Taiwan was the 10th largest accounting
between “us” and “them,” according to for 2.0 percent. As such, trade relations
Washington. In the context of U.S.-China between the United States and China have
relations, the dichotomies include: market not been as closely linked as in years past.
economy vs. nonmarket economy; capitalism The problem, though, is deficits, according
vs. state capitalism; and democracy vs. to the Trump administration. The U.S. trade
authoritarianism. China has been defined deficit with China rose to 419.2 billion dollars
as a non-democratic other,7 reflecting the as exports to China fell.
idea of a “clash of civilization” advanced by
Samuel Huntington.8 The head of the State Options for Taiwan
Department’s Policy Planning, Kiron Skinner,
and former national security adviser John Taiwan is both a security and economic
Bolton have been reported to define U.S.- partner but a trade rival for the United States.
China relations in Huntington’s terms and Some of Taiwan’s key industries have been
attracted some critiques.9 directly impacted by the ongoing U.S.-China
trade war, namely: textile and shoe-making;
As foreign adversaries pose a threat to personal computers and electronics; and
the security and economy of the United integrated circuits. Their responses to trade
States, President Trump has invoked the tensions have largely been determined by
International Emergency Economic Powers market access and labor cost.
Act and National Emergencies Act to defend

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The U.S.-China Trade War and Options for Taiwan

The textile and shoe-making sectors were view of the low gross profit margin. These
originally key driving forces of Taiwan’s enterprises that relocated to China are faced
economic miracle and migrated to China with two options: return to Taiwan or migrate
for cheaper labor costs when China started to Southeast Asia just as shoe-making and
its economic reforms. Key players in these textile sectors did. The Tsai administration
two sectors include: Pou Chen group, Feng provides investment incentive, including tax
Tai group, Eclat Textile Co., and Makalot breaks and low-interest-rate loans to attract
Industrial Co. They remain part of supply their return, but labor cost and to some degree
chain of United States as well as European the insufficiency of the labor force make
shoe and textile groups, including Nike, them hesitant. Migrating to the Southeast
Adidas, New Balance, Under Armour, Gap, has the risk of the underdevelopment of
and H & M. As China gradually tightens its industrial clusters in relevant downstream
environmental regulation and raises the labor and upstream supply chains. So far, a
standards, these shoe-making and textile number of PC and electronic enterprises,
enterprises have relocated to Southeast Asia except Foxconn, have expressed their intent
and Mexico to keep production costs low. to return to Taiwan and try to automatize
Such moves coincide with the Tsai Ing-wen their production processes to resolve the
government’s “New South Bound policy” as labor insufficiency constraint. Foxconn is an
well as the Comprehensive and Progressive interesting case as it is the largest contract
Agreement on Trans-Pacific Partnership. Still, manufacturer, closed integrated in the Apple
such companies made their decisions before supply chains. It has expressed its intent to
the U.S-China trade friction flared up. invest in Wisconsin shortly after Trump was
sworn into office but made little progress.
Personal computers and electronics
Its former chairman ran for the primary of
succeeded shoes and textiles to become
the KMT and is thinking about running for
the drivers of Taiwan’s economic engine
presidential election as an independent
in 1990s. They suffered from stiff Chinese
candidate. Foxconn’s decision-making has
competition once China entered into these
been swayed by both on economic and
fields. The key players in this sector are:
political calculations.
ACER, ASUS, Quanta, Pegatron, Invesco,
Compal and Foxconn with ACER and ASUS The integrated circuits industry is now the
having their own brand products and the key to Taiwan’s economic vitality. Taiwan
rest relying on contract manufacturing. The Semiconductor Manufacturing Company
clients for contracting manufacturing include (TSMC) is the biggest, but others are active
Dell, Hewlett-Packard, Toshiba, Fujitsu, and in IC design, packaging, testing, and system
Apple. The United States is a key export assembly, such as Media Tek and ASE
destination. Following the steps of the Technology. TSMC is a global supplier with
shoe-making and textile industries and in its major competitor being the South Korean
line of Taiwan’s liberalization policies, these giant Samsung, which faces the same
companies relocated their main production challenge from the U.S.-China trade war. In
bases abroad, mainly to China. Given that this context, the question TSMC faced was
the U.S. market is the main destination for whether it should or could continue to supply
the end products of these industries, the Huawei in view of U.S. export control against
imposition of punitive tariffs heavily impacts Huawei, which depends both on business
PC and electronic producers in particular in calculation of potential lost revenue and on

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The U.S.-China Trade War and Options for Taiwan

legal assessment of possible breaching of But as the U.S.-China trade war continues,
U.S. export control regulation. In the end, Taiwanese enterprises investing in China
TSMC decided to continue to supply Huawei are faced with a dilemma: either swallow
as it believes it satisfies the de minimis the punitive tariffs or relocate. Investment
threshold. incentives are an instrument for Tsai
administration to attract these Taiwanese
The case of Media Tek is different, as Media
enterprises to return to Taiwan.
Tek relies heavily on the Chinese market and
has been considering accepting investment Taiwan has already maintained an
from China, and lobbying for this aim, to help it investment review mechanism for both
penetrate and expand in the Chinese market. outbound and inbound policies. In terms of
Media Tek competes with QualComm, which outbound investments, Taiwan exercises
is prevented from supplying to Huawei. its control through a list of activities eligible
Therefore, Media Tek aims to take advantage for investing in China. Such mechanism has
of this export control and expand its market already been put into force since the era
share in China. Regardless, the outreach of Lee Teng-hui as Taiwanese enterprises
of U.S. export control regulation through were and still are eager to invest in China.
exterritorial effects, in particular the de The maintenance of such a list is to prevent
minimis threshold, may bite Media Tek. the hollowing-out of Taiwan’s economy. The
inbound investment review mechanism is
Taiwan’s policy options rather recent and has been lightly exercised.
It is in the Tsai administration that Taiwan
Compared to the United States, Taiwan’s has become increasingly cautious about
options to regulate the economics-security Chinese investments. The legal basis for
nexus are rather limited and premature. receiving inbound investment from China is
One key economic objective of the Tsai the Measures Governing Investment Permit
administration is to diversify Taiwan’s to the People of Mainland Area and the
economy from China to Southeast Asian inbound investment review is conducted by
countries. As such, the New South Bound Investment Commission under the Ministry
Policy is of pivotal importance. The New of Economic Affairs.
South Bound Policy has two arms: trade and
investment. The ultimate strategic goal of Finally, as the trade war intensifies, Taiwan’s
the trade arm is to join the Comprehensive worries about the Chinese technologic
and Progressive Agreement for Trans- threat deepen. The Tsai administration
Pacific Partnership. Therefore, targeting adopted a two-fold approach to address this
the Southeast Asian and Australia for free concern. On the one hand, in April 2019,
trade agreement talks is a stepping stone the Executive Yuan adopted the Regulation
to this end. The investment arm of the New Governing the Prohibition and Limitation of
South Bound Policy is to modernize Taiwan’s Products Threatening Taiwan’s Information
Investment Promotion and Guarantee and Communication Security. This regulation
Agreements with new-generation bilateral is believed to be inspired by U.S. policies and
investment agreements which provide more to target Chinese products, such as Huawei.
substantial investment protection rules On the other hand, the Tsai administration
and are equipped with dispute settlement is consulting with relevant stakeholders
mechanisms, notably, investor-state dispute to explore the possible of legislating rules
settlement. protecting sensitive technologies. A draft bill

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The U.S.-China Trade War and Options for Taiwan

had been proposed under the presidency of Chen Shui-bian in 2008 but was set aside by the
Ma administration. The Tsai administration aims to revive this bill but is faced with tremendous
resistance from the industries.
U.S.-China and Taiwan-China relations share a similar economics-security nexus.
Economically, they are closely integrated and interdependent upon each other. In terms of
security, China presents a challenge to the U.S. hegemony and constitutes an existential
threat to Taiwan. The key concern is to prevent the hollowing out of Taiwan’s economy and
to diversify Taiwan’s economy from China with a view to avoid over-dependence. As far as
corporate interests are concerned, access to the U.S. market and keeping labor costs low
are the key factors driving decisions about investing in China or relocating to Southeast Asian
countries. For more advanced or sophisticated sectors, the existence of industrial clusters,
namely, downstream and upstream producers, also have a critical role.

Endnotes

1 National Security Strategy of the United States of America (NSS), December 2017, 17.
2 NSS, p. 17.
3 In 2012, as a new leader of Chinese Communist Party (CCP), President Xi Jinping outlined his
Chinese Dream. Xi declared that “[t]he great revival of the Chinese nation has demonstrated
unprecedented bright prospects”. The transcript of Xi’s speech is available at https://www.bbc.
com/news/world-asia-china-20338586 (last accessed 21 August 2019). See further, Zheng
Wang, ‘The Chinese Dream: Concept and Context’ (2014) 19 Journal of Chinese Political
Science 1, 1-13.
4 NSS, p. 2.
5 NSS, p. 2.
6 On the “China threat” debates, see,
7 Jarrod Hayes, Constructing National Security: U.S. Relations with India and China (Cambridge
University Press 2013) 99-158.
8 Samuel P. Huntington, ‘The Clash of Civilizations?’ (1993) 72 Foreign Affairs 22, 22-49.
9 Paul Musgrave, “The Slip That Revealed the Real Trump Doctrine” Foreign Policy, 2 May 2019;
Paul Musgrave, “John Bolton is warning of a “Clash of Civilizations” with China. Here are the
five things you need to know” Washington Post, 18 July 2019.
10 For example, in the Section 232 steel and aluminum investigation, the US contends that “the
tariffs imposed pursuant to Section 232 are issues of national security not susceptible to review
or capable of resolution by WTO dispute settlement, and that the consultations provision in the
Agreement on Safeguards is not applicable”. WT/DS547/7 6 July 2018.
11 https://ticdata.treasury.gov/Publish/mfh.txt.
12 https://www.census.gov/foreign-trade/statistics/highlights/top/top1906yr.html.

5 Chien-Huei Wu