Making the Grade on Essential Openings

China watchers continue parsing messages and choreography from the CCP’s 20th Party Congress, but a sense that Mr. Xi is advancing his timeframe to pull Taiwan into the fold pervades. If so, Taiwan must strengthen itself by accelerating its own timeframe for a trio of strategic openings.

Changing and opening is always tough, and even more so within a conservative island culture such as Taiwan’s, exacerbated by decades of international marginalization. The reluctance to open is further heightened given that 30 years of the status quo has brought it Asia’s highest per capita wealth… and democracy. Not a hand one easily tosses aside.

But the calculus of security and prosperity has shifted dramatically. To survive and thrive, Taiwan must make the grade in its opening to (1) travel and talent, (2) re-aligned trade and investment, and (3) capital. A report card on three “required courses” in which Taiwan is enrolled follows.

Border Opening: A reduced to B for late submission

No one likes queuing in line. But the wait at Taoyuan Airport’s immigration counters after I deboarded my flight from San Francisco on October 13 – the Big Bang for Taiwan’s quarantine-less opening – was a sight for red eyes. Apart from the pack of rapid tests dealt to each arriving passenger and ubiquitous face masks, I was transported back to pre-COVID days. To one side, a line of arriving migrant workers. Beyond Immigration, a string of chauffeurs holding up company logos, and beyond them, a Ministry of Education welcome desk for international students.

The crowds of travelers and the absence of lingering pandemic check-in stations dazzled. While visa normalization is incomplete, we must recognize the courage of Taiwan’s authorities to stick to their guns. They confront stubbornly high infection numbers, more fatalities of vulnerable individuals than anyone would want, and angst about the inevitable next subvariant. Elections, moreover, are only a month away. But this opening was a critical one. Let’s hope continued travel facilitates the talent circulation that Taiwan’s demographics and SME succession demand.

Trade Deals and New Business Promotion: A-/B+

Taiwan’s government must zealously secure trade deals and push industry diversification and transformation. The need to diversify Taiwan’s commerce from China, expand its international space, and find growth engines beyond microelectronics is incontestable. This year’s economic headwinds and even harsher winds blowing cross-Strait add urgency. Since August, the investment risk premium has spiked.

The Tsai Administration must accept even uncomfortable reforms or market openings, unilaterally or as part of new negotiations. These openings should start with the four economic channels begun or restarted with the United States since June 2021, to convert framework talks into the pathbreaking Free Trade Agreement (FTA) that has eluded it for 20+ years. Double tax avoidance negotiations should be initiated, too.

It appears that Taiwan’s leaders are belatedly prioritizing economic diplomacy on par with defense. In Washington, U.S. and Taiwan officials met under the TTIC supply chain framework and delved further into semiconductor discussions, even as Congress’ security-centered Taiwan Policy Act captured headlines. Taiwan’s lead trade negotiator speaks of “early harvests” to steer the 21st Century Trade Initiative toward an FTA. Multilaterally, APEC work and quiet discussions on CPTPP accession continue.

Simultaneously, another large delegation of businesses hit Washington, D.C., to conduct the first “Taiwan Expo” and later visited Detroit and elsewhere, prospecting for trade and investment in sectors, including the EV supply chain and smart applications. That delegation followed Boston area outreach by Deputy Economic Minister C.C. Chen, who stumped for Taiwan-bound investment in biotech. Mega-FDI projects in Arizona and Texas continued, un-derailed by cost inflation, cross-cultural challenges, and talent bottlenecks. Extra credit!

Embrace of Foreign Capital: Incomplete/Warning

After promising signs of welcoming foreign capital, including private equity, in the late 2000s and early 2010s via a few notable transactions, we witness a cooling toward this type of capital and blockage of investment exits, without which there can be no fresh investment entrants. Some institutional investors allege politicized application of established rules, even as the external environment adds to investor risk premiums. In one case, a clear shareholder democracy vote for an exit transaction was subverted by minority investors. It was of no practical help that the Commercial Court found against those parties, since the decision came only a day before the deal execution deadline.

The nexus between foreign capital and the scale of investment needed to transform and enhance the competitiveness of the economy seems underappreciated. The embrace of PE and other forms of foreign capital would encourage transformative inbound investments in biotech, energy, and other advanced technologies. The role of foreign capital in the consolidation and scaling of the financial sector is getting short shrift. Without a regional bank of scale, Taiwan’s FDI champions are disadvantaged.

None of these openings represent “easy As.” But it is essential coursework, and the grading curve has steepened. Taiwan’s leadership must forge ahead abroad while avoiding missteps at home that alienate importers and foreign investors.