August 21, 2019

Taiwan’s Gamble in the Trade War- the New Southbound Policy and its consequences to the status quo

By Jake Wright.

Taiwan is in a period of uncertainty. Although its ruling party (the DPP) advocates for independence, refusing to abide by the 1992 Consensus and are pushing for a fully sovereign state of Taiwan, unlike its political rivals (the KMT) who mutually ‘agree to disagree’ with the PRC on who is the legitimate government of China.

Despite this bold platform, Taiwan’s circle of diplomatic allies recognizing its statehood has shrunk to just 17 states and economic growth is stagnating. For three years, Taiwan played defensively on the international stage to keep the remaining support close with enticing investments. The clearest example of buying allies’ favour was a $150 million loan approved to Haiti, although it has yet to be ratified by Haitian Parliament. Still, the head of staff for President Moise, Wilson Laleau, foreshadowed to Haiti exploring potential partnerships with the PRC.

Indeed, this was not enough for four: Burkina Faso, Dominican Republic, El Salvador, Panama and São Tomé and Príncipe who have flipped recognition to the PRC over the past three years. Taiwan’s response is pragmatic: pivoting towards an informal economic offensive on emerging markets. This is achieved by offering investment to South-South East Asian countries for developing their capabilities for exports, to serve as a counterpoint to China’s disruptive posturing in the region. This is the New Southbound Policy.

This Policy will financially incentivise domestic champions of key industries to divert its supply chains away from mainland China and set up operations in the South to benefit from cheaper labour and expand Taiwanese soft power. It shall1) promote economic collaborations and developing destination markets; 2) develop and share talents and resources; 3) relocate manufacturing to destination countries to provide them with a Taiwanese model of production; and 4) expand cooperation between Taiwan and the destination countries.

Countries hostile to China’s projection, such as Vietnam and India, are expected to benefit the most from these relocations. Despite the Center for Strategic and International Studies publishing a reporton the Policy, arguing its impact is on small-to-medium enterprises, the ongoing trade war has broadened its application. Several corporations in the IT sector have already started relocating elements of their supply line to the South, having the Taiwan government sponsoring these migrations will encourage more. The intended effect of this is to decouple Taiwan’s reliance with the mainland and place it as a global competitor against the PRC.

Night market – Taiwan. Image by Robert Pastryk from Pixabay

Much has been written on the impact the Policy could have for Taiwan’s slowing economic growth and its position in the region with a tariff-stricken China. Don Shapiroposits this will reawaken Taiwan’s ‘soft power’ with a much wider scope than before. This is framed as a respite to Taiwan’s ‘over-reliance’ on the PRC, reducing its insecurity due to external political ‘shocks’. The Communist Party of China has conducted targeted suspensions of foreign enterprises at times of political antagonism; as in the case of Lotte.

Regardless, very little has been said on the New Southbound Policy’s effect on the cross-Strait relationship. This decoupling strategy may finally make a peaceful resolution, or at least transforming to constructive de-escalation, a practical impossibility. Without this common basis of economic self-interest held by the other party, provocations are more likely to be interpreted as unilateral and destructive in nature. Moreover, this movement will permanently change the narrative for future rapprochement discussions: once the supply chain is relocated, Taiwanese enterprises become both economic and political competition in southern markets.

In 2009, Taiwanese economist Liang Chi-yuan commented in the Sunday Timesthat Chinese investment in Taiwan would deter them from attacking, and for good reason. When both parties are invested in each other and share common goals, there is far less room for miscalculating intentions: attacking the other means crippling your own economic output. This was understood by the KMT (nationalist opposition) and comprehensively expanded under the Ma Ying-jeou administration.

The KMT adhered stringently to the 1992 consensus and focused on cooperating on practical issues. After a bitter rivalry for which side is the legitimate representative of China, Ma Ying-jeou broke new ground by participating in a summit with Xi Jinping. The result was to widen and deepen the interdependence between Taiwan and the PRC, providing additional incentives to reduce hostilities and cooperate. Lifting the ban on direct flights exponentially increased leisure and business travel between the two states. The Economic Cooperation Framework Agreement helped alleviate the economic downturn and allowed more Taiwanese corporations to export their supply chain to the PRC for cheaper production costs. The consequence of this was a significant reduction in cross-strait tensions – no provocations, stronger  security and stable interactions. This positive diplomatic effort brought about the most peaceful era of cross-strait relations in over sixty years.

Almost all of this progress has been lost: the Tourism Bureaureports Chinese tourists visiting Taiwan has fallen from 4.18 million in 2015 to 2.69 million in 2018; the lowest intra-strait movements since 2010. On 31stJuly, the PRC halted issuing individual travel permits to Taiwan, limiting travel to tourist groups only. Moreover, military escalations will intensify as Taiwan received approval for a $2.2 billion arms sale from the US and China responded with a military beach drill.

Although the link between economics and security is often derided as an anachronism, the cross-Strait mutual investment in each other’s market has a tangible benefit to deterring the outbreak of conflict. This author is not justifying the PRC’s approach to Taiwan, but is speaking from a position of political practicality. The DPP should opt for the re-engagement of high-level talks with the PRC without preconditions of recognition, and continue the positive progress made by the Ma Ying-jeou administration. Moreover, it should establish an official exchange office in the PRC to facilitate non-economic, cooperative activities. Clearly, the DPP does not want to spark a conflict with its New Southbound Policy, but the unintended consequences of losing economic linkages to the PRC could be catastrophic.

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About the author: Jake Wright, is an East Asian geopolitics and conflict researcher.

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