Taiwan Looks Southward

Southeast Asian residents hold water splashing festival in New Taipei City. Photo: CNA

The government is seeking to strengthen trade, investment, tourism, education, and cultural relations with South and Southeast Asia.

Southeast Asia may be close to Taiwan geographically, but Taiwanese traditionally tended to see its people as little more than a source of cheap labor. Even in academia, says Edwin Yang, an instructor in the College of International Studies at National Taiwan Normal University, Southeast Asia until recently was not considered a serious field of study. “The majority of scholars still have the mentality of the Middle Kingdom – that Southeast Asia is home to Nanyang, the southern barbarians.”

The New Southbound Policy developed by the government of President Tsai Ing-wen aims to radically change this mindset. With a motto of yirenweiben or “people orientation” and a 2017 budget of NT$4.1 billion (about US$134 million), the government is encouraging multiple social and business linkages with Southeast Asia and the Indian subcontinent that embody new principles of equality and reciprocity.

The scope of the linkages is broad, ranging from tourism, the most notable success story so far, to easing hardships experienced by local migrant workers, to supporting Taiwanese manufacturers in the region by pushing for bilateral investment agreements. The aim is to present Taiwan as a friendly and equal partner willing to assist with these nations’ development.

The policy, which went into effect last November, covers 18 nations including 10 in Southeast Asia and six in South Asia, plus Australia and New Zealand. The priority nations for the early stages are Indonesia, India, Vietnam, Malaysia, the Philippines, and Thailand.

“It is a multipurpose policy to broaden and deepen our engagement with these partner countries – with their governments, their businesses, and their people,” says Minister Without Portfolio John Deng, who heads the Office of Trade Negotiations which is overseeing the program. “Taiwan has strong soft power and we’re willing to share our experiences in building up soft power with our partner countries.”

The Tsai administration is looking to this strategy to help Taiwan overcome a number of economic challenges. Because of pressure from China on other nations, for example, Taiwan has had difficulty entering into free trade agreements and other pacts with its trading partners. The New Southbound Policy allows diplomatically isolated Taiwan to increase its economic engagement through informal, lower-profile networks.

Another prospective benefit is that attracting Southeast and South Asians to work and study in Taiwan could help resolve talent and university-student shortages created by Taiwan’s aging society. Further, diversifying trade eases Taiwan’s over-reliance on China, and projects being discussed – such as exporting electronic toll collection systems and hospitals to the region – help to shift Taiwan’s exports of goods and services away from an overconcentration on electronic products.

Overall, the more cosmopolitan approach to business enables Taiwan to improve as a global business location. As Alan Hau Yang, executive director for Southeast Asia Studies at National Chengchi University puts it, the New Southbound Policy is not merely an economic policy, it is a “grand national strategy.”

Even without the China factor, engaging with the region makes economic sense. The 10 Association of Southeast Asian (ASEAN) nations, which are home to 630 million people and a diversity of languages and cultures, are generally experiencing much faster growth than the rest of the world. Their rising middle classes are hungry for education, technology, and ever-better living conditions. While the International Monetary Fund forecasts global growth for this year at 3.5%, the Asian Development Bank projects that Vietnam will experience growth of 6.5%, the Philippines 6.4%, and Indonesia 5.1%.

And in contrast to aging Taiwan and China, Southeast Asian nations tend to have relatively young populations, making their future economic prospects even rosier. A similar trend can be seen in India. The ADB puts its economic growth for this year at 7.4%, which would make it the world’s fastest-growing economy. Half of its estimated 1.3 billion people are aged under 25, according to a Standard Chartered Bank report.

Officials and economists alike are concerned about the economic dependency on China that grew under the previous Ma Ying-jeou administration. Almost 40% of the island’s exports go to the mainland or Hong Kong, a figure the Tsai administration is anxious to lower.

Diversifying trade

In fact, the trend toward diversification has already begun. While Taiwanese generally prefer doing business in China, where Mandarin is spoken and the cultures are similar, China’s growth is slowing and labor costs are rising as the economy shifts from an export-driven to a consumption-driven orientation.

Many China-based Taiwanese manufacturers, especially makers of low-end products such as shoes and furniture, are expanding operations in Southeast Asia, attracted by the cheap labor. A prominent example is Taichung-based Pou Chen, one of the world’s largest manufacturers of shoes for brands such as Nike and Adidas. It built up a production base in southern China starting in the 1980s, but is now increasing output from factories in Indonesia and Vietnam.

According to the Taiwan Institute of Economic Research (TIER), citing Investment Commission statistics, China remains the nation’s number-one destination for exports and investment, with at least US$165 billion in accumulated investment. (The actual figure could well be higher, since companies often invest through subsidiaries in Hong Kong or tax-free havens such as the Virgin Islands.)

The ASEAN nations collectively form Taiwan’s second largest export market and investment destination, with accumulated investment of US$91 billion. Next to China, Vietnam has received the most Taiwanese investment, some US$31 billion. Taiwan was once ranked number one among global investors in Vietnam; in 2016 it was the sixth-biggest investing country. Taiwanese investment comes to US$17 billion in Indonesia, US$15 billion in Thailand, and US$12 billion in Malaysia.

Around 2011, Taiwan began to invest more in ASEAN nations than in China, reversing a trend of over two decades. TIER notes that the seven largest ASEAN economies saw Taiwanese investment increase by 43% from January through September 2016, while investment in China over the same period shrank 12%. Taiwanese investment is also starting to pour into India, Standard Chartered reports. Accumulated investment there from 2000 to 2016 stood at US$177 million, ranking Taiwan as India’s 40th largest investor, but nearly half of this amount flooded in after March 2015.

This trend is likely to intensify if the current uneasiness continues in cross-Strait relations. “Southeast Asia has the potential in the next five years to catch up to China,” says Standard Chartered economist Tony Phoo. “They can’t match the size of China, but they can be as competitive.”

Roy Chun Lee, deputy executive director of the Taiwan WTO and RTA Center at the Chung-hua Institution for Economic Research (CIER), notes that the New Southbound Policy is facilitating what is a natural economic trend. Overseas Taiwanese businesspeople (Taishang in Chinese) have been present in Southeast Asian countries such as Vietnam for decades, forming extensive networks with local overseas Chinese. And former President Lee Teng-hui had his own “Go South” policy in the 1990s, as did President Chen Shui-bian in the 2000s (which is why the current program is called the New Southbound Policy. But those earlier efforts had only limited success because the China market was such a strong draw.

One difference in the new plan is that South Asian nations are included for the first time. But the biggest change, experts said, is that previous policies had the narrow focus of looking southward simply for cheap land and labor, which made it less welcome in the target countries.

This time Taiwan is seeking to build relationships on a more equal and reciprocal basis. Kristy Hsu, director of the Taiwan ASEAN Studies Center at CIER, says that as the New Southbound Policy was being set up, a number of ASEAN countries expressed interest in seeing more people-to-people exchanges, particularly in education and training for their youth. And for the first time, Taiwanese businessmen are showing an interest in certain Southeast and South Asian countries as important consumer markets in their own right, notes Tan Ching-yu, director of TIER’s Emerging Markets Development Study Center.

Although political factors are likely to keep Taiwan out of the China-backed Regional Comprehensive Partnership (RCEP) trade pact, which includes ASEAN as well as India, Australia, and New Zealand, Taiwan is reportedly close to signing bilateral investment agreements (BIAs) with some of these nations, including Vietnam and Thailand. Other countries that have been named as potential partners for BIAs include Myanmar and Brunei.

Minister Without Portfolio Deng says such investment agreements will help ensure that Taiwanese companies are treated fairly by Asian governments, with their property and personal safety adequately protected. Concerns in that regard stem from anti-Chinese riots across Vietnam in 2014 in response to China deploying an oil rig in a disputed part of the South China Sea.” Rioters also attacked Taiwanese companies by mistake.

However, CIERs Hsu is more pessimistic about Taiwan’s prospects for BIAs, saying that little progress has been made so far, for technical rather than political reasons. Negotiations need time and manpower, and Asian trade officials are currently preoccupied with other agreements such as RCEP, she notes.

One of the elements of the New Southbound Policy is to set up “Taiwan Desks” in the targeted countries, separate from the “trade offices” that serve as de facto Taiwanese embassies. They will serve as centers for research on local business conditions, assist Taishang in forming business clusters, and identify and promote trade opportunities. Taiwan Desks are already operational in Vietnam, Indonesia, Thailand, and the Philippines.

Tourism and education

In terms of people-to-people exchanges, the biggest gains have been in tourism. From January to November last year, 195,419 visitors from the 18 countries came to Taiwan, a 23% increase over the same period the year before, and helping to offset a significant slump in mainland tourists. Cambodian tourists, at 85%, showed the biggest increase, albeit from a low baseline. The number of tourists from Thailand increased by 52%, from Brunei by 51%, and India 38%. NCCU’s Alan Hau Yang says the government hopes to attract more than 2.2 million tourists a year from Southeast Asia by 2019.

Eased visa requirements are facilitating this growth. Brunei and Thailand gained visa-waiver status last year, joining Malaysia and Singapore. In mid-April the Ministry of Foreign Affairs announced that the Philippines would receive visa-free treatment on a trial basis for a year, and that visa application procedures would be streamlined for Cambodia, India, Indonesia, Laos, Myanmar, and Vietnam, including the opening of online applications. The electronic processing eliminates the need for applicants to travel to their nation’s capital to apply at a Taiwanese de facto embassy. In addition, citizens of Sri Lanka and Bhutan have been allowed to apply for tourist visas for the first time.

In other moves to promote tourism, the Executive Yuan is encouraging local governments to host travel fairs in the region, while the Tourism Bureau is encouraging local restaurants to comply with Islamic dietary laws and obtain Halal certification. Recently the Central News Agency reported that the number of Halal-certified restaurants had broken the 100-mark, and tourism officials are pushing to increase the number further to 200. Phoo says these developments could make Taiwan an attractive tourist destination for the affluent global Muslim market.

For the promotion of Taiwan as an educational hub for the region, the government has allocated a budget of NT$1 billion. In 2015 around 40% of Taiwan’s foreign students came from ASEAN nations, and Deng says plans call for doubling the number of students from Southeast Asia within a few years by offering more scholarships. Deng says the government is also encouraging Taishang to establish scholarships in the local communities where their businesses are operating, partially to improve their corporate image. According to Hsu of CIER, many Southeast Asian students are eager to learn from Taiwan’s development experience in such fields as management, entrepreneurship, high-tech industries, and agriculture.

Scholarships will also be established for Taiwanese to study in Southeast Asia. In addition, the government is encouraging Taiwan universities to set up academic programs in the targeted countries, and Southeast Asian languages will start to be taught in Taiwan’s elementary schools from the next school year.

However, some observers worry that universities now rushing to obtain grants to set up Southeast Asian study centers may simply be looking for ways to overcome their current shortage of resources, without having a deep-seated commitment to the projects. And Alan Hau Yang points with concern to cram schools even advertising courses in Southeast Asian languages with slogans such as “Learn to speak Bahasa Indonesian and earn NT$1 million a year.” He fears that later disillusionment will erode support for the New Southbound Policy.

As the government hopes the New Southbound Policy will promotes a two-way flow of professionals, it is seeking to streamline regulations with regard to visas, residency, health insurance and tax incentives for qualified personnel from the target countries. It is also establishing a database to help match professionals from the 18 countries with prospective employers among local companies, and last year the Cabinet-level Overseas Community Affairs Council held two job fairs on behalf of Taiwanese enterprises with operations in Southeast Asia.

The policy also involves helping first-generation immigrants from Southeast Asia to use their linguistic and cultural backgrounds to make a larger economic contribution, such as obtaining foreign-language teaching certification or working in tourism. Another aspect of the policy is to improve the welfare of the over 600,000 migrant workers in Taiwan as part of the effort to build better relations with their home countries. Last October, the Legislative Yuan amended the Employment Services Act to lift the requirement that migrant workers must leave the country after working in Taiwan for three years before being rehired. The change had the effect of eliminating stiff brokerage fees. Most recently, the Ministry of Labor ruled that Taiwanese employers must grant paid vacations and other forms of leave to migrant workers after one year of service.

SUPPORTING THE SOUTHBOUND POLICY — A group of young Taiwanese business people during a trip to several Southeast Asian countries. Photo: CNA

Business cooperation

The New Southbound Policy may also help support the government’s programs to cultivate the “Five Plus Two” innovative industries and to undertake investment in “forward-looking infrastructure.” One of the five industries is green energy. Taiwan is a key producer of solar panels and also aspires to build up expertise in offshore wind farms that could one day be made available to other markets around the region.

One area where noticeable progress has already been made is agriculture. Last December, the Council of Agriculture launched the Taiwan International Agriculture Development Co. to promote farming products and technology. John Deng says that productivity-enhancing techniques and equipment developed in Taiwan for small-scale farms have been well-received in Southeast Asia, where there is great market potential. But as small businesses face financial challenges in entering the regional market, the government is providing bank guarantees totaling NT$50 billion. Indonesia has been particularly interested in agricultural cooperation with Taiwan, including projects involving aquaculture and organic farming.

As the promotion of healthcare and sharing of disaster-prevention techniques are also key parts of the New Southbound Policy, says CIER’s Lee, the Ministry of Health and Welfare (MOHW) has been heavily involved in the program. The Ministry just completed a pilot immunization program in Myanmar, which had the aim of both engaging in a humanitarian effort and promoting business opportunities for Taiwanese vaccination producers. The government hopes to cooperate with all 18 targeted countries on bilateral pharmaceutical certification and the training of public-health workers. Deng adds that Taiwan is in talks with several of these countries to establish joint research programs to combat contagious diseases such as dengue fever.

According to Lee, one obstacle the New Southbound Policy faces is that mid-level government officials do not always fully understand or appreciate the policy’s objectives. In the case of the Myanmar vaccination program, for instance, he says MOHW personnel find it hard to combine the idea of offering humanitarian assistance with the pursuit of business opportunities. As another example, Kristy Hsu cites the need by small and medium enterprises for more information about the host country’s policies and regulations before they can take advantage of opportunities in such important markets as ASEAN and India.

But Taiwanese officials are frequently unable to provide enough detailed information or analysis. This problem was encountered last year by smaller medical equipment companies that were interested in setting up shop in Indonesia following its “big bang” liberalization that allowed majority foreign ownership in that industry for the first time. However, the medical instrument companies found entering the market to be complicated and government help insufficient, says Hsu.

Experts say it is hard to quantify the likely economic benefits of the New Southbound Policy using traditional economic measures, such as forecasting the prospective boost to GDP growth, since the overarching aim of the program is to improve Taiwan’s relations in the region over the long-term.

A primary long-term goal is to create more institutional cooperation with the 18 countries, Deng says. Key areas of cooperation may be environmental protection, mutual recognition of educational diplomas, joint scientific research projects, agreements between hospitals to train doctors, and sister-city arrangements between local governments. Personnel may change, he notes, but such institutional agreements can provide long-run continuity.

China is naturally watching the New Southbound Policy closely to see if it crosses any lines in terms of promoting an independent Taiwan. “That’s why the government has positioned the New Southbound Policy so carefully, defining it as a development policy or industrial policy, instead of a political or diplomatic policy,” says Hsu. So far, she says, some individual Chinese academics and low-level officials have criticized the policy, but Chinese leaders have not made any official statements about it.

Experts say China is most worried about Vietnam, where Taiwan’s economic relations are the warmest. As a sign of Beijing’s concern, China and Vietnam in January signed a joint communiqué in which Vietnam promised to resolutely oppose Taiwan independence and refrain from developing any official ties with Taiwan. China is also wary about Taiwan’s relations with India and Indonesia due to their large sizes and resulting clout. If Indonesia leads in Taiwan cooperation, its ASEAN counterparts might follow. The Indonesian Council on World Affairs and its private Habibie Center were Taiwan’s two main collaborators in the first “track two dialogue” forums between ASEAN and Taiwan last November. How China will react to these emerging informal networks remains to be seen.