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Taiwan and China are trapped in financial co-dependency

Beijing hit the headlines in March when it banned Taiwanese pineapples on alleged pests. The action was more in line with a pattern of China's weaponry for political purposes in other parts of the world through informal actions rather than explicit trade barriers.

The ban ultimately proved unsuccessful as the 40,000 tonnes of pineapples originally intended for tables in mainland China were bought by other buyers. However, the incident was a reminder of how deep the trade and investment ties are between Taiwan and China – and how they have remained, for the most part, surprisingly isolated from increasingly strained cross-strait policies.

Cross-strait trade hit record levels last year, including indirect trade through Hong Kong and Macau. Taiwan's exports accounted for around 70 percent of the total. Much of the increase was due to strong global demand for goods made in China in response to the COVID-19 pandemic. It also helped boost the Taiwanese economy, as did successfully and swiftly tackling the pandemic that caused China's growth to surpass China for the first time since 1990 – 2.98 percent versus 2.3 percent.

While the increasing flow of trade – and Taiwanese investment of more than $ 188 billion in China since 1991 – serves Beijing's longstanding goal of integrating Taiwan's economy into its own, the situation for China is not as favorable as it may seem. The two sides of the strait are in a state of economic dependence, with China increasingly reliant on Taiwan for technology. Most of Taiwan’s exports are advanced electronics, especially state-of-the-art semiconductors that China cannot produce. . And with the US restricting the sale of semiconductors to China and the technology used to manufacture them, Beijing faces vulnerabilities that make economic ties with Taiwan even more important.

Over the years of deepening trade and investment ties, China's economic punitive measures against Taiwan have been limited. The notable exception was a sharp drop in Chinese tourism following the inauguration of Taiwan President Tsai Ing-wen in May 2016. The Strait's economic integration as a means of political reunification was highlighted last month during a visit by Chinese President Xi Jinping to Fujian Province – the part of China closest to Taiwan – underlined. Development of the strait. "

Beijing's reluctance to economically punish Taiwan is in sharp contrast to China's persistent diplomatic and military actions against the island in response to Taiwanese policies, which Beijing considers offensive. During Tsai's first four-year tenure, Beijing lured seven diplomatic allies of Taipei away. Despite the pandemic, it has prevented Taiwan from attending the World Health Assembly, the decision-making body of the World Health Organization. Since March 2019, Chinese jets have been entering Taiwan's air defense zone regularly, frequently crossing the cross-strait axis, which the People's Liberation Army Air Force had tacitly respected for 20 years. And threats of a Chinese invasion of Taiwan are frequent in the state media in China. Some observers see growing pressure in China as a sign that Beijing is no longer confident, that time is on its side, and that Chinese patience for reunification may be waning.

In that context, the pineapple ban was a shot over Taipei's arch – a warning that the cross-strait relationship is not immune to the same retaliation that countries that have angered Beijing have faced recently. For example, Australia was hit by export restrictions on beef, barley, wine and other products to China last year in response to Canberra insisting, among other things, on an international investigation to treat the COVID-19 outbreak in China. However, exports of Australian raw materials such as iron ore and liquefied natural gas, which are important for the Chinese economy, have remained largely unaffected.

The Taiwanese government has sought to reduce reliance on the Chinese economy by encouraging market diversification and encouraging Taiwanese companies to shift investment back from China. The core of the diversification strategy was the New Southbound Policy, which promotes the expansion of trade, investment, cultural and educational relationships with other Indo-Pacific countries. This policy worked before COVID-19, but trade and investment flows were disrupted during the pandemic.

Incentives for Taiwanese companies to return from China, introduced two years ago, have resulted in commitments of at least $ 38 billion to invest in factories in Taiwan – many of them high-tech. However, Taiwanese companies remain deeply anchored in the Chinese economy. Foxconn Technology Group employs more than 1 million people in China who assemble Apple iPhones and other branded electronics.

There is also a push factor for Taiwanese companies who have found China less hospitable as labor costs rise, Chinese environmental regulations tighten, and US-China trade tensions disrupt supply chains. Companies, many of which once left Taiwan for China, are now relocating their factories to Southeast and South Asia and elsewhere to produce in China for the domestic market only.

Still, China's share (including Hong Kong and Macau) of all Taiwanese exports reached nearly 44 percent in 2020, a record high. It is uncertain whether the rebound in cross-strait trade will continue in response to coronavirus demand once the global economy recovers from the pandemic.

The strong demand for electronics – and especially for semiconductors – is expected to continue over the next few years. However, this needs to be weighed against expectations of ongoing trade tensions between the US and China, which are focused on technology sales. These tensions affected several Taiwanese companies in 2020 when the US imposed a ban on the export of high-end semiconductors to Huawei and curtailed trade transactions with China's largest chip maker, Semiconductor Manufacturing International Corp., as a result of Huawei's efforts to get ahead of the Prohibition to provide chips.

China focused its anger on US restrictions, but an important question for the future is whether it will be willing to take major economic coercive measures against Taiwan if Washington continues to tighten controls on technology sales – or in response to developments in the USA. Taiwan Relations or Taiwanese Politics. China's economic dependence on Taiwan and the Chinese leadership's goal of integrating the two economies initially indicate the likelihood of further reactions in the interests of the pineapple ban. Taiwanese exports to China, which can be substituted by other suppliers, are vulnerable, and companies in these sectors should diversify their markets.

Punitive measures against Taiwan that harm China's core interests – including Beijing's aim to develop high-tech industries – are less likely, however, and imports of semiconductors and other electronic components will continue to have priority. Should Beijing choose, it could put pressure on Taiwanese companies, which have a strong presence in China, by disrupting their operations. However, this would likely only be the case if China completely abandons its strategy of promoting reunification through economic integration combined with various forms of military, diplomatic and economic pressures.

The economic interdependence between China and Taiwan is likely to persist due to their geographic and cultural proximity and the complementarity of the two economies reflected in their intertwined supply chains. Beijing may be targeting pineapples, but it's not going to piss off the apple cart.

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