Taiwan's economy 'facing a turning point' amid election

Taiwan's economy, once hailed as a miracle, is not as dynamic as it used to be. Growth in the gross domestic product (GDP), which was an impressive 6.6% in 2021, fell to 2.6% in 2022 and then 1.4% in 2023.

No wonder, then, that future prosperity is on the minds of many on the self-governing island as the January 13 election nears. There is indeed debate over defense spending — but the military threat from China, which regards Taiwan as part of its territory, only has some voters concerned, as two academics argued last week in the Australian Financial Review.

"Just under half of voters, according to some polls, are worried about a possible war within the next five years," wrote Chung-min Tsai and Yves Tiberghien in an opinion piece.

Both men are researchers at the Taipei School of Economics and Political Science.

The Taiwanese have grown accustomed to the security threat, the authors said.

By contrast, "anxieties about economic prospects and incomes, increases in rents, energy insecurity and inequality dominate the political drift away from the government."

Taiwan sees downturn in industrial production

Asian tech-producing giants like South Korea and Taiwan are feeling the crunch of a dip in global demand. South Korea's industry is on shaky ground, and Taiwan saw production fall for the 19th straight month this December according to Reuters news agency, which cited purchasing managers' indexes.

Taiwan's economic momentum is slowing mainly due to sluggish exports and meager Chinese demand for upstream Taiwanese products. And while investment in Taiwan has also declined, Min-Hua Chiang believes a resurgence in private consumption following the COVID pandemic has provided a ray of hope. The Taiwanese researcher works for various US think tanks, including the Heritage Foundation and the East-West Center.

On top of economic problems come structural ones, with Taiwan facing challenges common among industrialized societies. One of the biggest is the rising cost of caring for an aging society.

Aging population means more social, less defense spending

While Taiwan's 2.7% inflation rate is relatively low compared to other industrialized countries, workers' real wages are depreciating. And now the island republic is paying the price for relying primarily on low wages and salaries to keep its export economy competitive.

For years, the government has been trying to sooth public frustration by increasing social benefits. By 2022, the government dedicated 27% of its overall spending to social security — three times as much as in 1994, wrote Min-Hua Chiang in an analysis published last week in the trade journal East Asia Forum.

Taiwan's rapidly aging population is also disproportionately affecting its national defense. According to UN estimates, the percentage of those over 65 will increase from 15% in 2019 to 35% by 2050.

As its population has grown older and social welfare spending has risen, Taiwan — which is under constant threat from Beijing — has spent proportionally less on defense. These days it spends around 2.6% of GDP on its military; in previous decades, that share was closer to 10%. By comparison, members of the trans-Atlantic military alliance NATO have set the target of spending 2% of GDP on defense.

Taiwan held back by US-China tensions, Beijing's faltering economy

Taiwan's economy has flourished since the 1990s thanks to the export of technology-intensive industrial goods to China. China's reforms and the easing of tensions with the United States gave a huge boost to economic cooperation between Taiwan and Beijing.

But after 30 years, that successful model appears to be running out of steam. Beijing's trade conflict with the US, which started under former President Donald Trump, has only intensified under his successor Joe Biden. And beyond the consequences of Beijing's tough COVID measures, China's ongoing real estate crisis, its debt-ridden municipalities and provinces and sluggish private consumption have all contributed to a slowing of economic growth.

While Taiwan's exports to China and Hong Kong dropped from 44% in 2020 to 35% in 2023, its exports to the US, Europe and ASEAN states grew by 7%. At the same time, Taiwanese investments in China dropped by 17% between January and October 2023, down to $2.5 billion (€2.29 billion) —whereas, Taiwanese companies invested $9.6 billion in the US and $2.3 billion in Singapore during that same period.

Taiwan, a chipmaking champion

No other firm is as dominant in Taiwan as the world's largest chip manufacturer, the semiconductor behemoth TSMC. The company accounts for more than a quarter — currently 27% — of the total market capitalization of all companies listed on the Taiwan Stock Exchange.

Taiwan's reliance on semiconductor manufacturing is immense. Chips now make up 42% of the country's overall exports, growing nearly 10% over the past decade. TSMC is now looking to significantly ramp up chip production in the US and Europe with plants in Phoenix, Arizona, and Dresden, Germany, for example.

TSMC has already put up $40 billion to build a new production facility in Phoenix. Just how much it will spend on its 70% share of a planned facility in Dresden remains to be seen. The plant — operated with partners Bosch, Infineon and NXP — is scheduled to begin semiconductor production in 2027.

But economist Alexander Sandkamp of Germany's Kiel Institute for the World Economy said none of that means TSMC is turning its back on China.

"The way Taiwanese companies like TSMC see it, it makes sense to diversify production. One also shouldn't forget that TSMC still has production facilities in China. Should there be a decoupling of China and the West — even without a military escalation — the company could still supply both sides with chips," the researcher told DW.

'New model' needed to 'power economic growth'

"Taiwan is facing a turning point in its economic development," emphasized Min-Hua Chiang.

The researcher explained that Taiwan's economy initially saw 30 years of strong growth fueled by the export of consumer goods to the US. Then, when China opened up, it saw another 30 years of growth fueled by the export of product parts to China for final assembly.

Now, she said, it's time for Taiwan, "to come up with a new model to power economic growth for the next 30 years."

This article was originally written in German.