The U.S.-China trade war and the pandemic have had a profound impact on cross-border supply chains. In the past few years of U.S.-China tensions, China has been accused of engaging in unfair competition by abusing its national power, from trade and technology to COVID-19 responses. Amid such accusations, some countries have been stepping back from cooperating with China due to national security concerns. As the lockdowns have further disrupted value chains and highlighted the vulnerability of global supply chains, enhancing supply chain resilience has now become a national imperative for the U.S., Japan, and other countries, with an emphasis on strengthening their production capabilities in the semiconductor and medical care industries.
After entering the WTO in 2001, China has developed a rapidly growing trade surplus. Its exports to the U.S. increased apace and hit the $500 billion mark in 2017. As the trade imbalance widened, a rising trade deficit drew the U.S. government’s attention and eventually led the Trump administration’s decision to prioritize this matter. While there were high hopes that WTO accession terms would lead to market liberalization in China, the People’s Republic has violated trade rules by continuing to subsidize state-owned enterprises, infringing on intellectual property rights, forcing technology transfers, and manipulating its currency. All these unfair trading practices have dramatically reconfigured value chains and negatively impacted worldwide economic activities.
According to the World Bank’s 2019 Global Value Chain (GVC) Development Report, GVCs were traditionally centered on three hubs—the U.S., Japan, and Germany in the Americas, Asia, and Europe, respectively. Connections were established based on adjacency. However, China’s entry into the WTO has reshaped this order by restructuring the lineup of supply centers. By 2017, China had replaced Japan as the regional supply hub in the GVC networks. Its connections also extend to the Americas and Europe. China has become an important producer and trading center across GVC networks.
Globalization has spread the division of work in the GVC networks to a global scale. Crossborder investments have narrowed the technological gaps between countries and taken on an added importance of the differentiation in production costs. Therefore, vertical collaboration apportions value chain activities to different countries based on their location advantage. Taiwan has been heavily involved in the complex technological ecosystem between Japan and the U.S., and has benefitted from the two countries’ research and design (R&D) capacities and key technologies. Embedded in this ecosystem, Taiwan emerged as a leading manufacturer in the semiconductor industry with policy support.
Years of gradually rising wages have eroded China’s once-overwhelming cost advantage, which accelerated changes within the regional supply chain. The U.S.-China trade war has furthered these shifts. Companies from Taiwan, Japan, South Korea, ASEAN, Europe, and the U.S. are all reshaping the cross-border supply chains in the region. High-end manufacturing is reshoring to Taiwan, Japan, Europe, and the U.S., while labor-intensive sectors have been relocating to ASEAN and South Asia, where seemingly inexhaustible pools of relatively low-wage workers are available. On the cusp of its economic transformation, Taiwan is faced with challenges such as slow recovery of the global economy, reindustrialization of developed countries, and the emergence of China’s red supply chain. Past success in production and manufacturing is unlikely to be achieved again, given that the current economic model has encountered development bottlenecks. New growth catalysts are required to revive industrial development and boost economic growth.
In 2016, Taiwan launched a new model for economic development that focuses on strengthening industrial advantages of critical industries. After the COVID-19 outbreak in 2020, Taiwan has begun to adjust its economic structure, with a view to diversifying supply chain risks to avoid large-scale production suspension and disruption. Such efforts include boosting industrial upgrades and transformation, encouraging Taiwanese businesses to reshore, spearheading the development of cutting-edge industries, and developing high-end R&D and managerial talent. Taiwan has been closely following the Biden administration’s policy in technology and trade with China, stepping up cooperation with developed countries in R&D and technology, and relocating production to nations
targeted by the New Southbound Policy.3 Adjusting industrial structure and deepening collaboration with the U.S., Japan, Europe, as well as the targeted countries of the New Southbound Policy will help Taiwan secure its vital role amid the reshuffling of international supply chains.