Trump's China Trade Threat Looms Large Over Taiwan Economy

  • Taiwan among most vulnerable to Sino-U.S. trade dispute
  • Around 40% of Taiwanese shipments are bound for China

Call it collateral damage. 

If Donald Trump delivers on threats to put punishing tariffs on Chinese goods, plenty of pain would be felt in Taiwan, a de facto U.S. ally that Beijing considers a breakaway province.

The island would be among the most vulnerable to economic spillover from any U.S.-China trade war. More than 40 percent of the export powerhouse’s shipments go to China, as it plays a vital role in supplying widgets for the mainland’s manufacturing machine.

Former Taiwan trade representative San Gee is among those who say they’re nervous.

"The possible effects could be quite significant," San, an economist and academic at National Central University, said in an interview. "Everything is uncertain. Everything is dynamic and it puts us in an uneasy position."

If Trump trade barriers cut U.S. imports by 10 percent, or $240 billion, Taiwan would take a bigger hit than China relative to the size of their economies, according to Goldman Sachs Group Inc. Such a scenario would shave at least 0.4 percent off Taiwan’s nominal gross domestic product, Goldman said, noting that the estimate doesn’t include other factors such as possible trade retaliation.

Electronics Exposure

Exports account for about two-thirds of Taiwan’s economy, and machinery and electronics make up the bulk of those exports. Taiwan now makes more than 90 percent of the world’s motherboards and notebook computers, according to a Brookings Institution report. So tariffs on Chinese electronics would be especially painful for Taiwan because a large portion are either made by Taiwanese-owned companies or are partly made in Taiwan itself.

"Because most of the value of those items is contributed by Taiwanese, other Asian and U.S. companies, a tariff based on their value coming out of China would hurt Taiwan and others disproportionately," said Shelley Rigger, a politics professor at Davidson College and author of the book "Why Taiwan Matters: Small Island, Global Powerhouse."

To be sure, China and the U.S. remain a long way from a trade war. Trump has yet to explain since he took office what action he might take on trade. He calmed nerves this month when he stepped away from a threat to upend U.S. policy on Taiwan, promising in a telephone call with Chinese President Xi Jinping to respect the "One China" policy that has been the basis of U.S. ties with the mainland since the 1970s.

Read more: Trump Drops Taiwan Gambit, a Relief for China’s Xi And Asia

China’s Commerce Minister Gao Hucheng said at a briefing Tuesday that history shows that the U.S. and China can resolve their differences. He noted that the economic interests of the two countries are intertwined.

While investors and companies remain uncertain about what direction U.S. trade policy will take, they’re working with the assumption that the two sides will reach a resolution, according to David Mann, chief Asia economist at Standard Chartered Plc in Singapore.

"People are assuming it will work out and it won’t go down the worst possible path," he said in a Bloomberg Television interview.

Read more: Trump Seen Having Support If He Dubs China Yuan Manipulator

It’s also the case that Taiwan’s economy has shown surprising strength as China’s growth slows, expanding 2.88 percent in the fourth quarter for the best gain in nearly two years. Taiwan’s currency is Asia’s top performer over the past 12 months, while the benchmark stock index, the Taiex index, is up 17 percent, also one of the best gains across the region.

Still, policy makers in Taipei are scrambling to diversify their exports into regions such as Southeast Asia by opening new trade offices and boosting tourism. The concern is that such a push might be too late to avoid serious economic damage.

"Everything is changing so fast I’m afraid that the dispute between China and the U.S. will have already set in," San said. "There won’t be too much time for us to divert our trade from China to other countries in the region."

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