In 2018, Taiwanese merchandise exports could increase by +USD 20bn driven by stronger demand from Asia. In the longer term, the economy will rely on a three-pronged strategy based on improved infrastructure, strong innovation efforts and strategic cooperations
A +USD20bn export opportunity
Taiwanese merchandise exports are projected to rise by +USD20bn in 2018 (after +USD37bn in 2017). This continuous improvement will be mainly driven by a rise in demand from Asia (+USD16bn). Europe (USD2.6bn) and North America (USD1.6bn) would follow. The sectors that are expected to enjoy most of the gains are electronics (USD9.3bn) and chemicals (+USD2.9bn).
The economy is set to benefit from a continued growth in global demand as World’s economic (trade) growth is expected to rise above +3% (4%) for a second consecutive year in 2018. New exports orders would be supported in particular by growing consumer markets in Asia and a positive investment cycle in high income economies.
From a supply side point of view, business sentiment is broadly positive and credit conditions will likely remain supportive in the short run: the central bank is not in a hurry to raise policy rate considering the low level of inflation and the relative strength of the NTD.
Strong innovation efforts - Research and Development spending account for 3.1% GDP - and a strong specialization in the electronics sector help keep the economy competitive as the integration of new technologies in the chain of productions represents the main of engine of the ongoing global investment cycle.
Looking ahead, we see three pressing challenges.
First, rising protectionism and increasing trade tensions between its largest trade partners (US-Mainland China) pose a risk for the export-reliant economy.
Foreign trade value nearly represents 120% of Taiwan’s nominal GDP, while net exports of goods and services amount to about 13% of GDP.
Second, non-payment risk becomes significant at the border with an increase of both corporate insolvencies and payment terms in Mainland China, its main trading partner.
Last, the market is faced with tough competition from neighboring economies such as South Korea, Singapore, Japan or Mainland China’s cities that are investing heavily on innovation and specializing in the tech industries (especially in the context of the manufacturing 2025 strategy).
This stiff competition is exacerbated by the relative strength of the NTD. Against this background, stronger efforts to maintain market’s export edge will be key.
A three pillar strategy: connect, innovate and cooperate
The strategy would hinge on a three-pronged approach that we could call: Connect, Innovate and Cooperate. The economy can leverage on strong policy buffers (central government debt is only at 31% GDP).
The first pillar Connect will consist of developing competitive infrastructures that improve connectivity in the market and reduce transaction costs.
This relates to authorities’ “Forward-looking Infrastructure Program”.
Funded by a special budget of nearly USD14bn over four years, this program is set to expand major infrastructures, especially, green railway, urban and rural facilities, green energy as well as digital infrastructures. This program could boost real GDP growth by an average 0.1pp per annum.
The second pillar Innovate will rely on the “Five plus Two Industrial Innovation Plan”.
To transform and revitalize Taiwan’s industries, the Tsai administration launched the 5+2 Industrial Innovation Plan targeting seven pillar industries, including biomedical, internet of things, green energy, smart machinery, defense, high-value agriculture, and circular economy.
This is expected to improve competiveness through stronger innovation and industrial diversification. It would also act as a boost on growth through job creation, and the promotion of regional development. The plan is backed by an USD3bn+ Industrial Innovation and Transformation Fund and involves cooperation between central and local governments as well as the private sector. Experience from the past showed that the market has been particularly efficient in delivering on its industrial promises.
The third pillar Cooperate refers to strategic partnerships. This includes international cooperation initiatives such as the New Southbound Policy which aims at fostering relations (trade, investment and industrial cooperation) between Taiwan and Southeast ASEAN nations. Such a collaboration should help diversify exports partners but also generate
revenues from foreign direct investments. Strategic private partnerships abroad could also be a clear driver of growth, as corporates look for new outlets. Partnership in the tech sector (Foxconn Technology Group - Apple, e.g.) have already proved being an important driver of new revenues. New partnerships surfing on the digital wave (Foxconn with Tencent, e.g.) could be the next growth avenue.
Figure 1 Taiwan potential export gains in 2018 (USD bn)