Explainer: China-Taiwan trade, and everything you need to know

Explainer: China-Taiwan trade, and everything you need to know

Small figurines with computers are seen in front of Chinese and Taiwanese flags in this illustration. (Reuters photo)
Small figurines with computers are seen in front of Chinese and Taiwanese flags in this illustration. (Reuters photo)

US House of Representatives Speaker Nancy Pelosi has visited Taiwan in defiance of strong opposition from mainland China, and it is shaping up to have far-reaching implications for trade.

Tensions across the Taiwan Strait have heated up since the pro-independence Tsai Ing-wen was elected president in 2016. Beijing regards the island as a breakaway province that must be reunified with the mainland - by force, if necessary.

Yet, economic figures between the two economies illustrate how important trade remains across the strait. Mainland China is Taiwan's biggest trade partner, while Taiwan is one of the few economies that have a trade surplus with mainland China.

The mainland overtook Hong Kong as Taiwan's top export economy in 2004, and it has held that position for 18 and a half years. Meanwhile, the mainland has been the largest supplier of goods to Taiwan since 2014.

What does mainland China buy from Taiwan?

In 2021, the mainland accounted for 28.21% of Taiwan's total exports, by value.

Machinery, instruments, plastic, rubbers and chemical products have been the major commodities exported by Taiwan in the past five years.

Integrated circuits, also known as chips, accounted for 62% of the island's exports to the mainland last year, with the value reaching US$155 billion, according to China Customs figures. And in the first half of this year, the mainland imported US$79 billion worth of chips from Taiwan.

Meanwhile, tropical and citrus fruits, along with types of fresh and frozen fish, which Beijing has targeted with trade suspensions, accounted for only 0.2% of Taiwan's export total in 2020 - a year before the mainland began imposing trade sanctions on such products.

And overall, the island's exports to China have fluctuated upward over the last decade. Under Tsai's rule from 2016 to 2021, exports to the mainland increased by 70.76%.

What does Taiwan import from mainland China?

Taiwan's largest importer has also been mainland China since 2014. A total of 21.62 % of Taiwan's imports in 2021, by value, came from the mainland.

However, the island ranked only 11th among buyers from the world's biggest exporter in 2021, in terms of import value.

Integrated circuits account for most of Taiwan's imports from the mainland, and the island bought more than US$20 billion worth of chips last year. These comprised 28.58% of its total imports from the mainland.

From 2017 to 2021, the value of the island's imports from the mainland increased by 64.82%.

What are major investments between the two economies?

Unlike trade, since investments from both sides peaked in the early 2010s, they have shown a fluctuating downward trend, with significant declines in recent years.

The annual value of Taiwan's investments in mainland China reached US$5.86 billion in 2021, down by about 60% from 2010, data from Taiwan's investment commission shows.

Meanwhile, the mainland's investment on the island comprised just US$116.24 million in 2021, down 66.73% compared with the investment peak in 2013.

By investment amount, the top industries in which mainland China invested in Taiwan were electronic components manufacturing, which includes chip production; wholesale and retail trade; and banking.

And the industries that Taiwanese invest in on the mainland are very similar - electronics parts manufacturing; wholesale and retail trade; finance; and insurance - according to China's Ministry of Commerce.

The mainland's infrastructure investment push has also included Taiwan for several years. In 2005, the central government released a long-term plan for the development of a national transport network that included building a roadway or a railway to Taiwan within three decades. And the highway plan was again highlighted by the mainland government this year.

How have economic relations changed between mainland China and Taiwan?

The extent of cross-strait trade and investment has largely been tied to which political party has been in power on the island - the now-ruling Democratic Progressive Party or its opposition, the Kuomintang.

During the Kuomintang's rule from 2008-16, Taiwan signed 23 agreements with mainland China, and 21 remain in force, including some related to investment, labour, finance and shipping. Bilateral investments between the two economies also reached a new high during that span.

But trade links with the mainland also set off a firestorm across the island, with large-scale student protests that had long-lasting implications.

Since the pro-independence Democratic Progressive Party came to power in 2016, "the institutionalised consultation mechanism" has remained suspended, according to China's Ministry of Commerce.

Moreover, mainland sanctions have served to curb cross-strait trade in the past two years.

During Pelosi's visit to the island, the mainland imposed additional blocks on citrus fruit, some cold-chain fish, and processed food imports, and it also stopped exporting natural sand - a component in chip production - to the island.

Why are chips crucial to cross-strait relations?

A large portion of trade and investment between mainland China and Taiwan is focused on the chip industry.

In 2021, Taiwan's integrated-circuits-related trade surplus with the mainland reached US$133.84 billion.

The mainland holds a larger share of the packaging process for integrated circuits, but Taiwan has a more obvious advantage in chip manufacturing.

And when it comes to designing integrated circuits - the most advanced part of the chip-manufacturing process - Taiwan ranked second in the world last year, while mainland China was third, according to IC Insights, a market research firm for the industry.

Meanwhile, mainland China has been the largest consumer of integrated circuits since 2005, and the economy's trade deficit in this area has increased for three straight years, up to 2021.

This sector has also become one of the battlegrounds in the US-China trade war, with former US president Donald Trump imposing sanctions on leading companies in the mainland's chip industry.

President Joe Biden, on the other hand, has invited Japan, South Korea and Taiwan to create the so-called Chip 4 Alliance to compete with the mainland in the field.

Despite the challenge, global chip sales from mainland Chinese companies are on the rise, largely due to Beijing's "whole-of-nation effort" to advance the mainland's chip sector and meet the US challenge.

But the mainland's integrated-circuits production will still account for only about 10% of the global market by 2026, according to IC Insights.

Tsai has ambitions to decouple from mainland China, but how?

Tsai's administration seeks to reduce the island's trade dependency on China by making agreements with other countries, especially the United States.

In June, the island's officials launched a new joint trade initiative with Washington - the US-Taiwan Initiative on 21st-Century Trade.

This initiative came after Taiwan was excluded from the Indo-Pacific Economic Framework, an economic initiative launched by the United States in May as a counterweight to mainland China.

However, the initiative did not mention the establishment of any bilateral trade agreements or free-trade agreements, which the US Congress has not authorised.

The US is Taiwan's second-largest trade partner, while the island is the US' ninth-largest partner, as of last year.

Currently, Taiwan has economic cooperation agreements with nine countries, including the developed economies of Singapore and New Zealand under the World Trade Organization's framework, since neither country recognises Taiwan as a sovereign state.

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