Throwing a straw against the wind? How Taiwan responds to China’s economic statecraft

As the United States systematically ramps up its competition with China under the Biden administration, Taiwan, a fault line between the two clashing superpowers, remains one of the hotspots of tension that could rupture in the near future. In the recent G7 summit, the participating countries demonstrated unprecedented emphasis on Taiwan-China relations — the G7 countries assert in the communique, “We underscore the importance of peace and stability across the Taiwan Strait, and encourage the peaceful resolution of cross-Strait issues … and strongly oppose any unilateral attempts to change the status quo and increase tensions.” Yet, the communique is primarily security-focused — it overlooks Taiwan’s immense economic pressure imposed by China’s economic statecraft. Defined as exercises of a country’s political power through economic vehicles, economic statecraft is an art that is widely practiced by the Chinese government to influence its neighbors, and Taiwan is no exception. How could Taiwan, a country whose GDP is only around 5% of China’s, counter China’s growing influence on its economy?

Despite the evident power asymmetry, Taiwan manages to counter the political and economic pressure inflicted by China’s expanding economic statecraft. During Tsai Ing Wen’s presidency, her administration has managed to diversify the sources of foreign investment, leverage Taiwan’s comparative advantage in the global supply chain, and conduct infrastructure-building projects. As Blanchard and Ripsman argue, the result of successful economic coercion primarily depends on the target state’s level of stateness, which is comprised of three components: autonomy, capacity, and legitimacy. Building upon their work, this article investigates how Taiwan responds to China’s economic statecraft. Instead of relying on China’s goodwill, Tsai actively decreases economic dependence on China and develops Taiwan’s economic resilience.

Diversifying Economic Structure

With the growth of the Chinese economy, Taiwan’s economic structure, like other countries globally, becomes strongly dependent on China’s market. Tourism, agriculture, and manufacturing industries, therefore, are highly vulnerable to Chinese sanctions. As a result, diversifying Taiwan’s economy and upgrading its economic structure are essential to achieve sustainable economic growth and safeguard national security. As President Tsai once said, “you would not put all your eggs in one basket.”

Until 2016, tourism in Taiwan relied heavily on Chinese tourists, which granted the Chinese government substantial leverage for its economic sanction. After Beijing curtailed group tours to Taiwan, large-scale protests broke out from traveling businesses, which are strongly dependent on Chinese tourists. Due to the asymmetric trade balance, the Taiwanese government could not retaliate against the economic sanction by altering bilateral trade policies. Yet, it initiated a structural change in the traveling businesses. Since 2018, the Tourism Bureau provides travel subsidies that cover both group travelers and individuals to boost domestic tourism. For example, travelers who reside at local hotels that are close to night markets would receive vouchers for the trip. The Ministry of Transportation and Communication also waives fuel surcharges for tour buses that engage in domestic travel, which previously were significantly hit by Chinese economic sanctions.

The “New South Bound Policy” serves as Taiwan’s economic grand strategy in countering Chinese economic dominance by redirecting trade and investment to Southeast Asian countries and Western countries.  As indicated by the Bureau of Foreign Trade, in 2019, the bilateral trade between Taiwan and ASEAN countries increased substantially from 1.5% in 2018 to over 12.1% in 2019. The EU and the United States have also become crucial economic partners. By lowering the visa requirements for ASEAN countries, promoting education exchange, tourism, and special loans to Taiwan’s companies, Taiwan has successfully mitigated the losses from Chinese sanctions.

Upgrading Economic Structure

Apart from trade policies, Taiwan also announced a “5+2” innovative industries plan. Contrary to Made in China 2025, the “5+2” is more “people-centric.” Five flagship programs are stipulated in the plan: innovation industries; medical cooperation; policy forums, and youth exchanges; regional agriculture; and talent cultivation. Since the plan was implemented in 2017, Internet giants such as Google, Microsoft, Amazon, and Oath, have established research centers and expanded scopes of investment. The green energy industry is another booming industry in Taiwan. With a fully developed supply chain ranging from materials, components, wind farm designs, operations, and maintenance, companies such as MHI Vesta, Siemens Gamesa, and Orsted have cooperated with Taiwan’s companies to build offshore wind farms. The plan also promotes overseas cooperation. Through this plan, Taiwan and India have deepened economic cooperation, in which Taiwan’s educated industrial talents work in India to advance India’s semiconductor and smartphone design.

Apart from “people-centric” policies, Taiwan also upgrades its infrastructure program to increase its economic resilience in facing China’s economic statecraft. These policies aim to further transform Taiwan’s industrial base from low value-added manufacturing to high value-added sectors such as clean energy, biotechnology, and the Internet of things, by funding and building core infrastructure in the next 30 years. All three programs are essential parts of Taiwan’s economic statecraft in building an economy that relies less on the Chinese economy, and consequently, lowering Taiwan’s vulnerability to Chinese economic sanctions.

In short, China’s economic statecraft poses a threat to Taiwan’s economy. However, it is also an opportunity for Taiwan. On one side of the coin, Chinese sanctions inflict substantial damage to Taiwan’s economy. On the other side of the coin, the sanction exposes the vulnerability and fragility of Taiwan’s economy and prompts the Taiwanese government to undertake a structural change in countering such threats.


China’s rapidly stretching global economic presence, notably when partnered with economic coercion, may exacerbate strategic fear and doubt across the globe. Although large countries may enjoy the capacity and autonomy to stand up and counter Chinese influence, smaller countries are in struggles. This article focuses on Taiwan, a small country at the forefront of Chinese economic statecraft, and how Taiwan utilizes its economic statecraft to respond to the challenges. This research may carry policy implications to Asia-Pacific countries that hope to access the Chinese market but are not willing to sacrifice their economic autonomy. Specifically, Taiwan’s case indicates that China’s economic statecraft may be less effective when states respond actively and divert the pressure from within.

Image Source: Unsplash

Subscribe to us to receive our China Focus Newsletters!

The following two tabs change content below.

TszWang (Sam) Yeung

TszWang is a master's student from Hong Kong, pursuing his degree in Chinese Economic and Political Affairs at the School of Global Policy and Strategy. He graduated with first-class honors from Hong Kong University of Science and Technology with a Global China Studies major. He is interested in a wide range of topics, such as Chinese international relations in the Asia-Pacific, cross-Strait relations, China-Hong Kong issues, and contemporary Chinese history.

Start typing and press Enter to search