December 18, 2019 / 1:25 AM / a month ago

Breakingviews - Taiwan will widen U.S.-China schism in 2020

A military honour guard holds a Taiwanese national flag as he attending flag-raising ceremony at Chiang Kai-shek Memorial Hall, in Taipei, Taiwan March 16, 2018. REUTERS/Tyrone Siu - RC1F31B52FB0

HONG KONG (Reuters Breakingviews) - Keep a close eye on Taiwan in 2020. Its significance is set to grow amid shifting supply chains. Anti-Beijing sentiment also has been gaining traction in the United States. Both dynamics herald deeper ties between Taipei and Washington, bolstering the case for a controversial bilateral trade deal.

The $560 billion economy is an unlikely beneficiary from U.S.-China tension. While other Asian export powerhouses grapple with slowing demand, Taiwan recently nudged up its GDP growth forecast for 2020, to 2.7%. Rising domestic investment should help, boosted by local manufacturers moving operations back home from mainland China.

Moreover, American companies are buying more from Taiwan. In the first half of 2019, for example, U.S. tariffs diverted over $4 billion of office machinery and communications equipment orders to the island, according to a UN report. The likes of Microsoft and Alphabet’s Google are among those stepping up investments there.

Against this backdrop is growing American antagonism towards the People’s Republic, which considers self-governed Taiwan a renegade province. President Donald Trump signed a veto-proof bill effectively supporting anti-government protesters in Hong Kong. Soon after, the U.S. House of Representatives roundly passed a bill that condemns the crackdown on Chinese Muslims in Xinjiang.

Taiwan is next on the legislative agenda. The Taiwan Allies International Protection and Enhancement Initiative Act calls for the United States to reduce engagement with countries whose actions have undermined Taiwan. Under President Tsai Ing-wen, who faces an election in January, and her independence-leaning Democratic Progressive Party, eight countries have broken diplomatic relations with Taiwan in favour of Beijing. The U.S. proposal also calls for bilateral trade talks.

That will provoke Chinese President Xi Jinping and could even derail already-fragile U.S.-China negotiations. But there is a strategic rationale for a trade agreement with Taiwan.

American giants such as Apple and Qualcomm rely on Taiwanese components. Manufacturing export orders from the United States reached some $150 billion in 2018. And while companies including TSMC are leading the charge for next-generation semiconductors, China is catching up quickly. A deal may help Tsai defend the industry, and ultimately reduce her economy’s dependence on the mainland. But it also means Taiwan is destined to be a flashpoint.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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