China’s decision to suspend ECFA tariff concessions has triggered a ripple effect across Taiwan’s economy, profoundly affecting key industries and prompting strategic responses.

On May 31, 2024, China announced the second wave of tariff suspensions affecting 134 additional products, including textiles and machinery, to be implemented on June 15. This expands on the initial move in December 2023, which targeted 12 petrochemical products. These suspensions now cover 27.08% of the Early Harvest List items, affecting sectors where Taiwan holds comparative advantages, such as machinery manufacturing and high-tech components.

Economic Impacts on Taiwan’s Industries

The semiconductor industry, crucial to Taiwan’s economy, showcases resilience amidst geopolitical tensions. Taiwan Semiconductor Manufacturing Company (TSMC) continues to lead global semiconductor production, buffering Taiwan against immediate economic impacts. However, disruptions in semiconductor exports to China underscore vulnerabilities.

Taiwan’s Ministry of Economic Affairs emphasizes adherence to WTO protocols to address China’s unilateral actions, advocating for international trade norms to mitigate economic ramifications and sustain export markets amid escalating tensions. This diplomatic approach underscores Taiwan’s commitment to multilateral trade resolutions.

These tariff suspensions have profound implications across Taiwan’s economic sectors, prompting strategic adjustments and resilience-building measures.

According to an internal survey by the Chung-Hua Institution for Economic Research, Taiwan’s agricultural sector, heavily reliant on Chinese markets, faces acute challenges following the tariff suspensions. With over 341,423 jobs impacted, Taiwan’s agricultural workforce confronts declining export revenues and competitive disadvantages globally. Government intervention is critical to supporting agricultural communities and sustaining economic stability.

Similarly, the textile and manufacturing sectors, encompassing 144,872 jobs, experience heightened uncertainties amid reduced access to Chinese markets. Taiwan’s textile exports encounter intensified competition from Southeast Asian producers benefiting from regional trade agreements and lower production costs, necessitating diversification strategies.

In response to these challenges, Taiwan is strategically pivoting towards diversified export markets, including ASEAN countries and India under the New Southbound Policy. Strengthening economic ties with these regions mitigates dependency risks and enhances Taiwan’s resilience against global economic uncertainties.

Small and Medium Enterprises (SMEs), integral to Taiwan’s economic fabric, face mounting challenges amidst tariff uncertainties. With 142,553 jobs impacted in general equipment manufacturing, SMEs require targeted government support to navigate export disruptions and sustain competitive viability. Innovative financing and export facilitation measures are essential to SME resilience.

Economic and Trade Policy Implications

Analysts suggest that beyond pressuring Taiwan’s new government, China’s insistence on suspending these items is linked to its weak economic data. In May 2024, China’s manufacturing PMI fell to 49.5%, entering recession territory. The PPI also declined for 19 consecutive months. The total export value of the suspended tariff concessions grew from USD 79.8 billion in 2013 to USD 224 billion in 2023, a 2.8-fold increase. Concurrently, imports decreased from USD 120.4 billion in 2021 to USD 92.4 billion in 2023, a 23.2% cumulative decrease.

The suspension of the ECFA early harvest list has had a substantial impact on various Taiwanese industries. The internal survey also indicates that the agricultural sector is the most affected, with an estimated 341,423 people impacted. The semiconductor industry follows with 308,847 people, and the plastics industry with 144,872 people. Other affected sectors include general machinery (142,553 people), computer equipment (111,613 people), and metal molds (110,561 people).

Considering the global export ratio of the early harvest list (3.6%) and the employment in the relevant industries (2,368,532 people), the potential impact on the workforce is 85,267 people. Excluding the highly dependent ICT industry, the number of affected people is 67,870.

In terms of revenue, the computer equipment industry is hit hardest, with an estimated loss of NTD 6.44 trillion. The semiconductor industry follows with NTD 4.32 trillion, and the communication equipment industry with NTD 4.26 trillion. Other affected sectors include oil (NTD 1.55 trillion), chemicals (NTD 1.39 trillion), and steel (NTD 1.36 trillion). Considering the global export ratio of the early harvest list (3.6%) and the revenue of the involved industries (NTD 27.07 trillion), the potential revenue impact is NTD 974.6 billion. Excluding the ICT industry, the revenue impact is NTD 425.8 billion.

Broader Impact on Taiwan’s GDP, counties and Industries

The suspension of the early harvest list will lead to an estimated revenue loss of NTD 425.8 billion for Taiwanese industries, equivalent to 1.8% of GDP. New Taipei City is the most affected, with 16,211 enterprises impacted. Taichung City follows with 15,334 enterprises, and Tainan City with 7,838 enterprises. Taoyuan City and Changhua County have 7,425 and 7,350 enterprises affected, respectively.

Agriculture is the most impacted, involving 377,663 households. The metal mold industry has 13,831 enterprises affected. The plastics industry sees 11,659 enterprises impacted. Other affected sectors include aquaculture (11,076 fishing households) and general machinery (8,816 enterprises).

Challenges of the New Government’s Optimism

Facing overcapacity due to China’s expansion in specific industries and its slow economic recovery, the Taiwanese government assessed that the export value of early harvest list items to China in 2023 dropped to about USD 15 billion, close to pre-ECFA levels. In the textile industry, Taiwan’s exports to China decreased from 35% in 2010 to 17% in 2023. The machinery industry and auto parts industry also fell to 24.5% and 6.8%, respectively, with the market shifting towards Europe, the United States, India, Vietnam, and other New Southbound Policy countries.

The Ministry of Economic Affairs indicated readiness to counter economic coercion and assist in industrial upgrading and market diversification through policy tools, managing and avoiding economic risks. The tariff items suspended from the early harvest list may have tariffs ranging from 1% to 12%, averaging about 8%. For Taiwan’s SMEs, this poses significant pressure, but the primary concern is the potential impact on employment.

Taiwanese companies have been more proactive than the government in global layout to diversify risks. In 2023, Taiwan’s export ratio to China dropped to 35%, a 21-year low. Simultaneously, exports to the United States doubled, and exports to the EU and New Southbound countries increased significantly, maintaining the achievement of surpassing USD 430 billion in exports for three consecutive years.

The export ratio of early harvest list products to China decreased from 26.1% in 2016 to 16.4% in 2023. The global export ratio of these products continued to decline to 3.6%. In 2023, mainland China was the top three export destinations for 370 items on the early harvest list, followed by the United States (242 items), Vietnam (170 items), Japan (110 items), and Hong Kong (68 items). Notably, 53 items had no exports.

Immediate Measures for Relief

Currently, the export ratio of Taiwan’s early harvest list products to China and Hong Kong is close to 28.1%. There is a general consensus among industry, government, and academia that market diversification is urgent. However, SMEs and farmers cannot engage in global layout like large enterprises or the tech industry. How to assist Taiwan’s agriculture, fishery, and livestock industries, and SMEs in actively expanding into international markets is a formidable challenge for the Lai Ching-te administration.

The Taiwanese government should quickly provide financial support and relief measures to help SMEs and farmers overcome difficulties. For SMEs, the government should establish emergency relief loans, offer low-interest and unsecured funding support, and temporarily reduce corporate income tax and business tax to ease financial pressure. For farmers, direct subsidies should ensure basic income stability and agricultural insurance should be initiated for rapid compensation to reduce production risks.

To help SMEs and farmers expand sales channels, the government should actively promote the development of domestic markets and e-commerce platforms. For SMEs, the government should organize large domestic trade fairs and marketing activities, provide technical support and training for e-commerce platforms, and help them quickly explore new sales avenues. For farmers, the government should sign purchasing agreements with large supermarkets and retailers to guarantee the sale of agricultural products and establish a market information system to provide timely market demand and price information, guiding agricultural production and sales.

The Lai administration should offer short-term employment subsidies and training programs to help SMEs maintain employee employment and enhance employees’ skills for future transformation needs. For farmers, temporary wage subsidies and vocational training should be provided to ensure basic living standards and help them find new job opportunities in non-agricultural fields.

Additionally, the government should simplify administrative procedures, provide one-stop services, accelerate approval processes, and establish agricultural emergency rescue services to promptly address production emergencies and ensure stable agricultural production. Through these short-term measures, the government can effectively support the affected SMEs and farmers, helping them through this challenging period.

The Butterfly Effect: Political and Economic Implications

Currently, the Taipei Stock Exchange Index is reaching new highs, driven by AI technology advancements from NVIDIA’s Jensen Huang and TSMC’s semiconductor supply chain, significantly boosting Taiwan’s economic growth. However, the Taiwanese government faces numerous SMEs and farmers that it cannot swiftly address. The imbalance in production and sales could trigger farmers’ discontent, consumer panic over market price fluctuations, and a wave of SME unemployment. These issues might act as a butterfly effect, brewing discontent across various sectors in Taiwan and impacting future political elections. The Democratic Progressive Party (DPP) might face challenges in the 2026 local elections due to these issues.

Despite Taiwan’s robust economic performance driven by technological advancements and semiconductor exports, the suspension of ECFA tariff concessions by China has unveiled underlying vulnerabilities across various sectors, potentially triggering a broader butterfly effect.

The economic fallout from China’s tariff suspension has been unevenly distributed across Taiwan’s industries. While sectors like technology and semiconductor exports continue to thrive, others such as agriculture, textiles, and small-scale manufacturing face substantial challenges. This disparity in economic impact not only threatens sectoral stability but also exacerbates income inequalities and regional economic disparities within Taiwan.

Politically, the fallout is palpable as the Taiwanese government navigates through discontentment among affected industries and regions. The Democratic Progressive Party (DPP), historically supportive of policies promoting Taiwan’s independence and autonomy, now confronts heightened scrutiny and criticism over its handling of economic policies and international relations. The suspension of tariff concessions by China has provided fodder for opposition parties, highlighting vulnerabilities in Taiwan’s economic strategies and exacerbating public sentiment towards the government’s effectiveness in managing economic shocks.

Socially, the ripple effects extend to labor markets and consumer confidence. With job losses looming in sectors heavily reliant on China, such as electronics and manufacturing, there is a growing apprehension among the Taiwanese workforce about job security and economic stability. The agricultural sector, already grappling with declining profitability and an aging workforce, faces heightened challenges exacerbated by reduced export opportunities to China. This combination of economic pressures could lead to social unrest and political discontent, amplifying the butterfly effect of China’s policy decisions on Taiwan’s societal fabric.

Moreover, the mismatch between production and sales may trigger dissatisfaction among farmers, consumer anxiety over market price fluctuations, and a wave of unemployment among small and medium-sized enterprises. These issues could brew across various sectors in Taiwan like a butterfly effect, impacting future political elections. The Democratic Progressive Party (DPP) may face challenges in the 2026 local elections as a result.

Furthermore, the suspension of ECFA tariff concessions underscores Taiwan’s imperative to diversify its export markets and reduce dependency on China. Taiwan’s pivot towards strengthening economic ties with the United States, European Union, and Southeast Asian nations under the New Southbound Policy assumes greater urgency. This geopolitical realignment not only mitigates Taiwan’s economic vulnerabilities but also recalibrates global perceptions of Taiwan’s economic resilience and strategic importance in regional supply chains.

In response to the butterfly effect of China’s tariff actions, Taiwan’s government must adopt robust policy adjustments to bolster domestic industries, stimulate innovation, and support SMEs affected by the tariff suspensions. Initiatives such as increased investment in research and development, incentivizing green technology adoption, and enhancing digital transformation capabilities are crucial to enhancing Taiwan’s economic resilience and competitiveness in the post-ECFA era.

Conclusion: Navigating Uncertainty with Resilience

As Taiwan navigates through the butterfly effect of China’s suspension of ECFA tariff concessions, it faces a critical juncture in its economic and political trajectory. The convergence of economic vulnerabilities, political scrutiny, and social challenges necessitates proactive measures to safeguard Taiwan’s economic stability and societal cohesion.

Moreover, Taiwan should focus on enhancing domestic resilience through increased investment in innovation, sustainable development practices, and human capital. Strengthening ties with like-minded economies and expanding market access will be crucial in reducing reliance on any single market and enhancing overall economic resilience.

In conclusion, while challenges posed by China’s policy decisions are significant, they also present opportunities for Taiwan to redefine its economic strategy, strengthen its international standing, and foster inclusive growth that benefits all sectors of society. By embracing these challenges with resilience and foresight, Taiwan can navigate uncertain waters and emerge as a more robust and diversified economy in the post-ECFA era.