Taiwan’s Economic Miracle Under COVID-19 – Analysis

By Lantao Li*

Taiwan’s economic performance has been quite impressive in a world where the global economy was hit hard by the COVID-19 pandemic. Under such context, Taiwan’s economy has performed very eye-catchingly. According to the latest data from Taiwan’s statistics department, its economic growth rate continued to rise year-on-year in the third quarter this year, reaching 3.33%, a steady improvement over the previous two quarters. Indeed, compared to Korea’s -1.3%, Singapore’s -7%, and Hong Kong’s -3.4% during the same period, Taiwan’s growth rate is not only the highest among the four regions, but also the only region with positive growth, ranking first among the Four Asian Tigers.

According to the latest economic forecasts provided by Taiwan’s Directorate General Budget, its economic growth rate in 2020 is estimated at approximately 1.56%, being one of the few economies that enjoys positive growth in the world. ANBOUND’s researchers emphasize that Taiwan is a city-state economy that is highly dependent on external factors, while simultaneously also greatly affected by geopolitical frictions. Under such circumstances, Taiwan’s economic development is nothing short of a miracle.

What makes Taiwan’s economy so unique while the rest of the world suffers from depression and multiple adverse conditions? Based on ANBOUND’s observations, Taiwan has done well in several aspects, including COVID-19 prevention and control, leading in industries, foreign investment, and foreign trade. All these, plus Taiwan’s “luck” under the impact of international geopolitics, contributed to its impressive performance. 

First, in terms of COVID-19 prevention and control, Taiwan’s authorities have avoided the pandemic from intervening with economic activities to the greatest extent. Beginning in March this year, Taiwan has banned residents who were at the time outside the island from travelling elsewhere and imposed a two-week strict quarantine on residents returning to the island. This has enabled Taiwan to avoid entering a lockdown. Due to its timely and effective preventive and controlling measures, coupled with the small size of the island which makes it easier to be isolated from the outside, since April 13 this year Taiwan has not reported locally transmitted cases for more than 200 days. So far, only 563 confirmed cases and 7 deaths have been reported. The effectiveness of Taiwan’s pandemic prevention and control is something that is unique in the world, and it ensures that Taiwan’s local social and economic order can retain a sense of normalcy, with production and life being basically unaffected.

In terms of the contribution of the three major demands to Taiwan’s economic growth, exports are the main driving factor. Taiwan’s excellent COVID-19 prevention and control measures allow the factories of the island to maintain normal operations. This is also the time when strong external demand (from masks to chips) further drove Taiwan, which has an obvious export-oriented economy, to a V-shaped recovery. According to statistics, in the adverse external environment, the cumulative export value of Taiwan in the first eight months was US$ 217.38 billion, an increase of 1.5% over the same period last year. Taiwan’s exports in September reached US$ 50.03 billion, a record high in a single month, an increase of 9.9% over the same period last year, and it even experienced a positive increase for seven consecutive months.

Among these, Taiwan’s semiconductor industry has the greatest contributions. Due to Huawei’s shipment wave before the U.S. ban, related manufacturers’ products are sold in massive amounts abroad. According to statistics, integrated circuits alone account for more than 30% of total exports, which is significantly higher than the proportion of 28.5% in 2019, and has continuously set a new monthly high in previous years. In September, the most important source of growth in orders was still electronic products, which amounted to US$ 16.05 billion, a year-on-year increase of 29.7%. In addition, analysts said that because of professionals working from home under the pandemic, there are more orders for computers, monitors and smart phones, which puts Taiwan in a particularly advantageous position in foreign trade this year. The above-mentioned external demand has benefited related companies a lot. Among them, the operating income of the industry leader Taiwan Semiconductor Manufacturing Company (TSMC) in the third quarter increased by 22% from the same period last year to NTD 356.4 billion (approximately US$ 12.14 billion), while net profit increased by 36% to NTD 137.3 billion (US$ 4.78 billion), each hit a record high on a quarterly basis. TSMC’s net profit margin in the third quarter was as high as 38.5%, gross profit margin was 53.9%, and operating profit margin was 42.1%, which is indeed a miracle among the enterprises.

Including chip exports, the close economic and trade ties between Taiwan and the Mainland have stably supported the steady development of Taiwan’s economy. With the Mainland successfully preventing and controlling COVID-19 outbreaks, the overall stability of foreign economic and trade has formed an effective guarantee for Taiwan’s economic growth. According to statistics from the General Administration of Customs of Mainland China, despite the impact of the pandemic, cross-strait trade volume in the first three quarters of this year increased by 12.4% over the same period last year, reaching US$ 185.4 billion. This increase is mainly due to the increase in Taiwan’s exports to the Mainland, accounting for nearly 80% of the cross-strait trade volume, allowing Taiwan to enjoy a trade surplus of nearly US$ 100 billion. Taiwan-funded enterprises have reaped considerable profits from investing in the Mainland, and the linkage between the upstream and downstream industrial chains has played a strong role in the economic and trade ties between the two sides of the strait. These are of great significance to Taiwan’s overall economy. Mainland China’s economy is huge and continues to grow against the trend this year; this stabilizer effect will also be transmitted to Taiwan.

However, in recent years, the momentum of Taiwan’s investment in the Mainland has slowed down. Under the New Southward Policy, some Taiwanese companies have turned towards Southeast Asia to invest, and the proportion of Taiwanese investment in the Mainland to the total overseas investment has also dropped by more than 30% in the past two years compares with its record high 84% in 2010.

Southeast Asia, the focus of Taiwan’s New Southward Policy, has relatively good performance in terms of COVID-19 prevention and control, as well as economic achievements, whilst also being an important factor for Taiwan’s economic stability and growth. ASEAN is now Taiwan’s second largest trading partner and second largest investment destination. Although in absolute terms, the scale of Taiwan-ASEAN economic and trade is still a certain distance from the Mainland, yet in terms of growth rate, Taiwan’s trade closeness with ASEAN is more than that of the Mainland. In recent years, Southeast Asian countries like Vietnam has become increasingly attractive for Taiwan’s foreign investment. In 2018, it accounted for 6.3% of Taiwan’s total foreign investment, being one of the top 5 locations of Taiwanese companies investing outside of Mainland and other regions.

On the whole, despite the overall poor environment of the global economy under the impact of the pandemic, Taiwan still has a unique developmental space in an unfavorable environment through its own efforts, special industrial structure, technical capabilities, and support from its external environment. All these made Taiwan effectively avoid the impact of the pandemic, while gave full play to the advantages of the industry and achieve better economic performance. It is worth noting that the good performance of Taiwan’s economy and leading industries under the pandemic has provided the Taiwanese authorities economic confidence, as well as relatively solid economic support for the political and economic decision-making of its leaders.

Final analysis conclusion:

Thanks to its effective pandemic prevention work, competitive industrial structure, and reasonable distribution of foreign investment, Taiwan is able to locate a favorable external market space in an unfavorable global environment. Under the influence of certain factors, Taiwan has achieved an economic miracle under COVID-19. (Part of the information comes from the “ANBOUND 100+” high-end discussion group platform).

*Lantao Li, graduated from Beijing Normal University in 2013 with a PhD degree of Natural Resources and Harbin Institute of Technology with a bachelor degree of Transportation。 He is an assistant researcher in macroeconomics at Anbound Consulting, an independent think tank with headquarters in Beijing.