Taiwan’s Economic Pivot Towards Southeast Asia: Bolstering Regional Support for Status Quo

On 20 May 2024, Mr Lai Ching-te was inaugurated as the new president of Taiwan. His presidency comes at a time when the self-governed island faces significant geopolitical turbulence, with the Taiwan Strait being the most dangerous flashpoint in US-China relations. Lai has pledged to build upon the foreign policy of his predecessor, Tsai Ing-wen, including the New Southbound Policy (NSP).

Introduced in 2016, the NSP aims to strengthen economic ties and diversify partnerships with Southeast Asia, South Asia, Australia, and New Zealand. It has further catalysed a notable shift in Taiwan’s economic relations towards reduced reliance on China and a greater focus on Southeast Asia amid the US-China trade and tech war. The NSP’s value lies not only in economics: growing ties with Southeast Asia also bolster regional support for maintaining the fragile status quo in the Strait.

China remains the largest trading partner of Taiwan, accounting for 21.2 per cent of Taiwan’s total trade, followed by ASEAN (15.0 per cent) and the US (14.9 per cent) in 2023. However, Taiwan’s trade volume with China has been on a downtrend since 2021. Taiwan-China trade decreased from US$208.4 billion (25.2 per cent of Taiwan’s total trade) in 2021 to US$205 billion (22.6 per cent) in 2022, with a further sharp decline to US$166 billion (21.2 per cent) in 2023. During the same period, Taiwan’s trade with Southeast Asia increased from US$117.5 billion in 2021 to US$134.6 billion in 2022, before dropping to US$117.3 billion in 2023 due to the overall contraction of global trade that year.

Of note, Taiwan’s export exposure to China is trending downward, with its export value to China in 2023 returning to the same level in 2018 at US$96 billion. Meanwhile, Taiwan’s exports to Southeast Asia rose from over US$50 billion in the previous years to US$70-80 billion in 2021-2023. Taiwan’s export dependence on China, including Hong Kong, is currently at the lowest in the past 22 years, falling from 40.0 per cent of its total exports in 2022 to 30.7 per cent in the first four months of 2024. In contrast, its exports to Southeast Asia increased by 25.0 per cent, accounting for 19.5 per cent of its total exports.

Trade Trending Up

Taiwan’s Trade with ASEAN, China and the US (in US$ billion)

Taiwan’s pivot from China towards Southeast Asia is more discernible in its outbound investments. Taiwan’s investment in China has been declining since 2010. In 2019, it invested US$4.17 billion in China, which was only 28 per cent of the 2010 investment level of US$14.61 billion. This hovered around US$5 billion annually between 2020 and 2022, and dropped further to US$3 billion in 2023, marking a 40 per cent decrease, the lowest level in more than 20 years. In 2022, Taiwan’s investments in Southeast Asian and South Asian countries reached US$5.2 billion, exceeding its investment in China for the first time. About 40 per cent of the new investments from Taiwan are directed towards Southeast Asia, with Singapore, Vietnam, Indonesia and Thailand among the top recipients.

Manufacturing accounts for the largest Taiwanese FDI in the region (38.2 per cent), which is increasingly shifting towards high-tech manufacturing as Taiwanese tech companies relocate to Southeast Asia due to the US’ tech war against China. Singapore, Vietnam, Thailand and Malaysia stand to benefit from this relocation. For example, Taiwanese investments in Vietnam in 2023 surged to US$2.2 billion, a four-fold increase since 2022, with major Taiwanese electronics manufacturing companies such as Foxconn, Wistron, Pegatron and Quanta setting up or expanding their production capacity in the country.

Taiwan’s Pivot Toward SE Asia

Taiwan’s Investments to ASEAN and China (in US$ billion)

The acceleration of Taiwan’s economic diversification is also evident in people-to-people exchanges. In tourism, 2022 saw a significant post-pandemic return of Southeast Asian tourists to Taiwan, accounting for 41.4 per cent of its total foreign arrivals. Taiwan has extended its visa-free entry policy for tourists from Thailand, the Philippines, and Brunei for another year to July 2024. Another area where Taiwan’s economic future is deeply intertwined with Southeast Asia is in labour. The region accounts for the majority of over 760,000 legal migrant workers in Taiwan, the largest numbers coming from Indonesia (272,855), the Philippines (149,371), and Vietnam (263,263).

Given this growing economic interdependence, the stakes are high for Southeast Asian nations in the event of any contingency over the Taiwan Strait. According to the State of Southeast Asia (SSEA) 2024 Survey report by the ISEAS – Yusof Ishak Institute, 44.2 per cent of Southeast Asian respondents are concerned that hostilities in the Taiwan Strait could severely disrupt regional supply chains. Countries like Vietnam, Singapore, Thailand, and Malaysia, which have substantial trade and investment links with Taiwan, are particularly apprehensive about such a scenario. Understandably, Indonesian, Vietnamese and Philippine respondents, whose countries send large numbers of migrant workers to Taiwan, expressed heightened concerns about the need for repatriation of their nationals in the event of a crisis.

While Southeast Asian countries may not wield significant influence over cross-strait relations, their consistent signalling against the use of force is significant. In the event that Beijing considers employing force, it can anticipate minimal support from these countries.

As the potential economic fallouts from a cross-strait contingency would reverberate far beyond Taiwan, Southeast Asian countries consistently advocate for maintaining the status quo and avoiding the use of force. The SSEA survey findings in 2023 and 2024 yielded remarkably similar results on the question, “What should your country do if conflict breaks out in the Taiwan Strait?”. In the 2024 Survey, Southeast Asians’ primary choice is to oppose the use of force through diplomatic means (45.1 per cent). Conversely, “support for China” was the least favoured option (3.0 per cent). While Southeast Asian countries may not wield significant influence over cross-strait relations, their consistent signalling against the use of force is significant. In the event that Beijing considers employing force, it can anticipate minimal support from these countries.

Taiwan’s diplomatic isolation means that it would be logical for the island to expand economic ties with Southeast Asia. This is the most effective pathway to forge partnerships and secure tacit regional alignment in opposing the use of force over the Taiwan Strait. President Lai should thus persist with the NSP and advance the momentum of Taiwan’s growing economic links with Southeast Asia.

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