Commentary: Taiwan’s slowing growth and national security


CHINA NO LONGER RELIABLE FOR BOOSTING ECONOMIC GROWTH

A strong economy was key in supporting Taiwan’s national defence during the Cold War. Between 1951 and 1991 – when the economy was flourishing – Taiwan allocated 6 to 11 per cent of its GDP to strengthening its national defence.

Since the 2000s, Taiwan has lost speed on economic growth. Greater demand for social welfare expenditure has reduced military expenditure as a percentage of GDP from 10 per cent in 1961 to 6 per cent in 1991. Despite a higher defence budget, Taiwan’s military expenditure will account for only 2.6 per cent of its GDP in 2024.

Since the 1990s, Taiwan has relied on exporting technology intensive industrial goods to China to sustain economic growth. China’s economic liberalisation, following its political reconciliation with the United States, has made the cross-strait production network workable.

But China’s mounting political conflict with the United States, real estate crisis, household consumption stagnation and growing local government debts suggest that China is no longer reliable for Taiwan to boost its economy.

Taiwan’s growth model, based on exporting intermediate goods to China for final assembly, is changing. China and Hong Kong’s share in Taiwan’s total exports shrank to 35 per cent in 2023, from 44 per cent in 2020. Meanwhile, the combined share of exports to the United States, Europe and ASEAN countries increased by 7 per cent.

In the first three quarters of 2023, Taiwan’s investment in China declined by 17 per cent to US$2.5 billion, far less than Taiwan’s investment in the United States – US$9.6 billion – and slightly higher than the US$2.3 billion investment in Singapore. Taiwan’s investment decline in China started before 2013 due to China’s wage hikes, stricter labour and environmental standards.

The US-China geopolitical tensions since 2018 have accelerated the investment relocation. Apart from the ongoing US–China geopolitical tensions, China’s economic slowdown, the Chinese government’s clampdown on private business and its growing hostility toward foreign investors will continue to drive Taiwan’s investment away from China.



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