As a strategic part of the first island chain in the Asia Pacific region, Taiwan, officially known as the Republic of China (ROC), is a crucial player in regional and global trade and investment, especially in high-tech industries. According to data released by the International Monetary Fund (IMF), Taiwan ranks as having the 21st highest Gross Domestic Product (GDP) per capita based on Purchasing Power Parity (PPP).1 To know more about how to do business in Taiwan, there are four things to keep in mind.
Major industries in Taiwan
Although Taiwan is a small island with a limited population, it has played an important role in the global supply chain due to its manufacturing prowess, especially in high-tech industries. Since the 1990’s, Taiwan has evolved from an agrarian economy to one driven by technology and knowledge intensive industries. With the advanced technology R&D facilities, the value-added and innovation chain, such as semiconductors and LCDs, has largely thrived in Taiwan.2 The World Economic Forum (WEF) ranked Taiwan thirteenth globally in terms of growth competitiveness, and fourth on the innovation capability, underscoring the strength of Taiwan’s innovative R&D.3 To support the production and exports of larger firms, small and medium-sized enterprises (SME) continue to be the engine room of Taiwan’s economy, accounting for 97.7 percent of all enterprises in Taiwan.4
International Trade and FDI
Taiwan’s economy heavily depends on international trade, which accounted for 62.7 percent of GDP from 2015 to 2017.5 Main exports include electrical equipment, machinery, computers, plastics, medical apparatus, mineral fuels and vehicles; while imports include electrical equipment, mineral fuels, machinery and computers.6 Taiwan’s main trading partners in 2018 were China, ASEAN, United States, Japan, and European Union.7 In addition to having bilateral relations with these trading partners, Taiwan is a member in several international trade organizations, including Asia-Pacific Economic Cooperation (APEC) and the World Trade Organization (WTO).
To strengthen its geopolitical position in the Indo-Pacific region, Taiwan also emphasizes itself as a regional trade and logistics center, offering tariff and investment incentives around free trade zones (FTZs). Moreover, the government provides several incentives to encourage foreign direct investments. Deregulation has reduced the negative list to less than 1 percent of manufacturing categories and less than 5 percent of service sectors. It also removed most foreign ownership limits.8 Foreign investors enjoy sound legal protection in Taiwan, having the same treatment as domestic Taiwanese businesses.
Relationship with China
Although Taiwan has proactively engaged in international trade, its export-oriented economy remains vulnerable to fluctuations in the global economy because of its sophisticated relationship with China. Taiwan and China have been ruled separately since the Chinese civil war in 1949, but China still claims Taiwan as part of its sovereign territory awaiting unification, by force if necessary. Under China’s One China Principle, which China’s chairman Xi Jinping confirmed in January 2019 as one country two systems, Taiwan is finding it difficult to join more international organizations in economic and political fields. Faced with the uncertainty from the mainland, the Taiwanese government has tried to diversify the risk from depending on China. It has promoted the New Southbound Policy, enhancing cooperation and exchanges between Taiwan and 18 countries in Southeast Asia, South Asia and Australia.
However, the similar language, culture, and history have made Taiwanese businesses the first and major to exploit China’s potential as a manufacturing hub. About 40 percent of Taiwan’s total exports are to China and some key industry sectors like technology have a lot of their production lines in China. Moreover, there are 23 formal agreements with China so far, including a 2010 Economic Cooperation Framework Agreement (ECFA). The close ties between the two sides serves to enhance Taiwan’s investment attractiveness to multinational companies which view Taiwan as a steppingstone into China’s market.
Considerations for U.S. Businesses
For the past 30 years, the U.S. and Taiwan have had a strong economic relationship through significant trade and investment. Taiwan is the third-largest Asian investor in the U.S. long-term securities.9 Moreover, Taiwan has greater economic freedom with limited government spending and good business freedom than the U.S. and China.10 For U.S. businesses who are interested in investing in Asia, as a steppingstone towards China and Southeast Asia, Taiwan is a safe and place to develop. The strong intellectual property (IP) protection in Taiwan provides a secure environment for tech companies to invest while China has had the problems of trade secrets and IP threats. In addition, Taiwan’s average tariff rate of 6 percent is low compared to international standards, which makes Taiwan a good trading partner.11 It is still important to take into consideration the weak labor freedom, judicial effectiveness, and financial freedom in Taiwan while investing in the island.12
Conclusion
Standing in the strategic position in the Indo-Pacific region with high-tech industries, doing business in Taiwan can benefit from the government’s favorable policy for foreign direct investment and the high-skill talents in Taiwan. Compared to China’s market, Taiwan has a more transparent rule of law, offering clearer protections for business from the threats of trade secrets or technological espionage. However, the vulnerable international status of Taiwan in the global market affected by China should also be taken into consideration as a risk to invest in Taiwan.
About the Author
Jennifer Hsu, is an FAO Global Business & Policy Associate.
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