Caught in the Crossfire: The Impact of US–China Trade Tensions on Taiwanese Direct Investment in Mainland China Published Jan. 20, 2020 By Dr. Kelan “Lilly” Lu & Mr. Kuan-Wu Chen Wild Blue Yonder / Maxwell AFB, AL -- Abstract As the world’s manufacturing center, mainland China imports large amounts of intermediate goods from its Asian neighbors, particularly Taiwan. As the key component supplier for mainland China, will Taiwan suffer from the increasing trade tensions between the United States and China? Since Taiwanese foreign direct investment (FDI)—primarily conducted by Taishang, Taiwanese business people—in mainland China is mostly export-oriented, and the United States is one of their major markets, would the potential trade war reduce Taiwan’s FDI in mainland China? How does the movement of Taishang during the trade war influence Taiwan’s economy, domestic politics, and the cross-strait relationship? Given the important strategic importance of Taishang for mainland China, have Beijing’s Taishang-preferential policies been helpful in neutralizing the negative impact of the trade war on the Taishang? Through descriptive analysis of the official Taishang data, we found that despite the trade war’s effects, there is a general increasing trend of Taishang projects in China. However, we also found that the number of Taishang in the manufacturing sector has been decreasing during the past several years and continues to decrease with the outbreak of the trade war. We also found an increasing trend for Taishang to invest in the non-manufacturing sectors in mainland China. Introduction Taiwan direct investments in China (i.e., Taishang/TDI), as one of the largest foreign direct investment in mainland China, are highly dependent on the Taiwan–mainland China–US triangular trade relationship. Several media reports suggest that the close trade relationship across the Taiwan Strait and its important role in the global supply chain make it unavoidable for Taishang to suffer losses in the ongoing trade war between Beijing and Washington, and many observers expect the Taishang will be the major losers in the US–China trade tensions.1 Not only are Taiwanese businesses in mainland China expected to suffer in the trade war, the Taiwanese economy has been greatly influenced. Some scholars expect Taiwan’s economy to lose in the long term. They argue that the trade war causes reduction in demand and the shrinking of market demands, both of which will eventually slow Taiwan’s economy. Based on the most recent analysis, a one-percent drop in the Chinese GDP will lead to 0.29 percent decrease in Taiwan’s GDP. Recent research done by a Bloomberg economist, Maeva Cousin, shows that “the worst blows from a drop in China’s exports to the U.S. would fall on Taiwan, South Korea and Malaysia—all embedded in Asia’s export supply chain.”2 Among these three Asian countries, Taiwan suffers the most as about “1.6% of Taiwan’s output is tied up in China’s exports to the U.S., with computers and electronics accounting for the largest share,” which is followed by South Korea and Malaysia whose numbers are 0.8 percent and 0.7 percent. Cousin also found that, regarding the exposure to US exports to China, Taiwan runs the sixth-highest risk of the US–China trade war.3 She also found that among all the economies in the world, Taiwan is the second-most exposed (right behind mainland China) to the Chinese exports to the United States and thus runs the second-highest risk of negative impacts of the trade war.4 Other scholars, however, argue that there is a silver lining in that an increase in China’s neighboring economies’ exports (such as Taiwan’s) offset the drop in China’s exports to the United States.5 Moreover, some scholars have argued the trade war may have a positive influence on Taiwan’s economy because it is expected to increase wages, job opportunities, housing prices, and consumer good prices and lower exchange rates in spite of an expected slight drop in the overall economic growth rate.6 Still, other studies have found that America’s added imports from China’s 10 neighboring supply-chain economies (including Taiwan) “covered less than half of the drop in America’s imports from China.”7 This indicates that the shifting of the supply chains in the world, particularly in Asia, will take time and will be costly. Another silver lining for Taiwan during this trade war is the withdrawing of Taishang from mainland China back to Taiwan and/or Southeast Asian countries such as Vietnam.7 Such movement of Taishang fits the “New Southbound Policy” promoted by the current ROC president—Tsai Ing-wen, who is a member of the pro-Taiwan-independent party (i.e., the Democratic Progress Party, DPP). The increase of capital flows into Taiwan helps to increase the GDP growth in Taiwan and has the potential to help President Tsai win re-election in the year 2020. In response to Taishangs’ return to Taiwan, the Taiwanese government has issued a series of Taishang preferential policies, which help win the votes from these Taishang in Taiwan elections. However, under the trade war and US protectionism, there has been a steady drop in Taiwan’s exports to China, which has had a negative impact on the GDP growth of Taiwan. Moreover, given the small geographic size of Taiwan and the lack of water, electricity, land, unskilled labor and skilled labor, meeting the demands of the returning Taishang is particularly challenging, especially regarding the provision of electricity. Although the Taiwanese government under the leadership of Tsai can use the Taishangs’ return as an opportunity to reduce Taiwan’s economic dependency on mainland China, the pro-independence party (i.e., the DPP) still has not put forward a comprehensive plan to replace mainland China with another market. According to Wei Shi (2019), the ROC “Chinese Economic Research Institution” are pessimistic of the economic development in Taiwan and predicted the GDP growth rate in Taiwan this year would be no more than 2 percent.8 Up to today, it has not been clear whether Taiwan’s GDP is actually increasing or decreasing given the co-existence of the dramatic drop in Taiwan’s total exports under the global economic slowdown due to the effects of the trade war and the fast increase of capital flows into Taiwan. From the geopolitical perspective, the Taishangs moving out of mainland China because of the trade war reduces the economic integration across the Strait and makes it less costly for potential cross-Strait tensions. A large number of liberal peace studies argue that the close economic ties across the Strait discourage conflicts between Beijing and Taipei due to the potential opportunity costs and Taishangs’ roles as potential agents, hostages, buffers and lobbyists for both sides.9 The withdrawal of Taishang reduces such economic ties and political ties, which makes conflicts less costly for both sides and thus more likely to break out. Given the important strategic value of Taishang, mainland China have been carrying out a series of Taishang preferential policies (such as the 21 Taishang Preferential Policies issued in early 2018) and providing subsidies to try to keep Taishang from moving out of China.9 For example, in order to keep the Taishang from leaving, some local Chinese governments have offered a substantial amount of subsidies to the Taishang.10 However, since the future of the trade war is unknowable, many Taishang have not made decisions on whether or not to move out of China despite the fact that both sides across the Strait have extended tempting preferential policies for Taishang. Under the trade war and the competition between mainland China and Taiwan over Taishang, how have Taishang reacted so far? What effect does the Taishang movement in/out of China mean for the Taiwanese government and economy? Does the type of movement matter (i.e., manufacturing vs non-manufacturing) to the Taiwanese government? How is Taiwan responding? To answer these questions, we first explore the patterns of Taishang movement in/out of China across time. Then we analyze the policy implications of such movement for Taishang, the Taiwanese government and economy and the cross-Strait relationship. Third, we investigate whether the type of movement matters to the Taiwanese government by focusing on the manufacturing and non-manufacturing industries. Last but not least, we discuss the responses from Beijing and Taipei regarding the Taishangs’ movement and how such responses impact the decisions of Taishang. Taishang Movement in/out of China over Time Historical Overview of Taishang in Mainland China The historical evolution of Taishang is closely related to the development of the cross-Strait relationship. The cross-Strait issue has been a long-term problem since 1949, when the Kuomintang (Nationalist Party, KMT) was defeated by the Chinese Communist Party (CCP) and fled to Taiwan. After that, the CCP established the People’s Republic of China (PRC) and the KMT governed Taiwan under the name of the Republic of China (ROC), with both sides claiming to be the sole legitimate government of China. In 1971, the United Nations voted to recognize the PRC, rather than the ROC, as the sole legitimate government of China. With the PRC’s market-oriented economic reforms in the end of 1970s and the democratization of the ROC in the 1980s, by the late 1980s and early 1990s the two sides had reached the point where they could agree to disagree. More specifically, both sides agree there is only “one China” and do not deny different interpretations of the “one China.” In other words, mainland China can interpret the “one China” as the PRC; Taipei can interpret the “one China” as the ROC. With the deepening of democratization in Taiwan, residents living on the island started forming a Taiwanese identity. A group of Taiwanese people began promoting Taiwanese independence from mainland China. This group formed their own political party (such as one of the two largest parties in ROC—the Democratic Progressive Party). Representatives of the DPP have been actively running in ROC presidential elections. The most recently elected ROC president, Tsai Ing-wen is a DPP member. Meanwhile, the PRC government has never given up the option of the use of force should Taiwan declare independence. Though the two sides of the Strait agreed to disagree in the early 1990s, cross-Strait relations have gone through ups and downs ever since. Taishang are a very special and unique case in international political economy. Taishang are sourced from the ROC, which has no official diplomatic ties with the PRC, and there have been military and political tensions across the Strait. Despite this, the two sides of the Taiwan Strait have had extensive economic integration for almost three decades. Taishangs’ development is not only affected by economics but also by politics. In this paper, we separate the development of Taishang in mainland China into four stages, including the exploration stage, the rapid growth stage, the stage of growth with competition and cooperation, and the stage of slow growth with comprehensive competition. First, the 1980s is the beginning of Taishang investing in mainland China. As mainland China opened its market in 1978, some Taiwanese business people invested in light industry on the mainland despite the official prohibition from the Taiwanese government. Although Taishang started investing in mainland China during that period, the amount of investment was small due to the regulatory constrictions of the ROC government. Thus, it was a period for Taishang to explore the opportunities in mainland China. Next, the investment of Taishang grew rapidly during the 1990s, which can be explained by the Push and Pull model illustrated in many existing studies.11 Generally speaking, Taiwan experienced industrial upgrading in the 1990s, which led to the increased cost of production on the island of Taiwan. Together with the deregulation of Taishang investment in mainland China, a large number of low-end labor-intensive and export-oriented manufacturing companies were pushed out of Taiwan by the island’s industrial upgrading and have relocated their investment in mainland China since then. At this stage, Taishang provided capital, technology, managing experiences and skills that were desperately needed by China’s economic takeoff. Meanwhile, the low cost of land and labor, the similar language and culture, the geographic proximity and the Taishang preferential policies (such as tax incentives) pulled many Taishang to mainland China in the 1990s in spite of some periodic political/military tensions across the Strait (such as the 1995 Missile Crisis). Taiwanese President Lee Tung-Hui stated the policy “Go Slow, Be Patient” (Jie Ji Yong Ren) to try to lessen the growth of investing in mainland China. It did not impede the continuing growth of Taishang investment in mainland China. During this time, Taishang built the supply chains in various industries in mainland China and formed many clusters of Taishang in eastern mainland China. According to these statements, we define this period as a rapid growth for Taishang. Third, during the period of “Growth with cooperation and competition,” Taishangs’ investment continued to grow, while at the same time the environment became more competitive after China joined the World Trade Organization (WTO) in 2001. As soon as mainland China participated in the WTO, it meant that the PRC had to make the market more open and treat foreign investors more fairly. Meanwhile, Chinese enterprises had grown enough to partner with Taishang. Some new Chinese enterprises were so strong that they could compete with Taishang in several industries, such as light industry and some original equipment manufacturer (OEM) industries. Taishang still enjoyed a high market share in mainland China during this time, but Taishang began to face internal and external challenges. Finally, following China’s economic rise, the original characteristics that attracted Taishang have been fading, such as low labor and land cost, relaxing government and environmental regulations, fiscal stimulus policies, and minimum wage and labor rights protections. In particular, since the 2008 global financial crisis, China has further realized the risks of being overly dependent upon labor-intensive and exported-oriented industries and has accelerated its industrial upgrading. During this process, many of the low-end traditional Taishang have already started relocating to other countries where they can continue profiting without upgrading their industries. In the face of the 2008 financial crisis, the government of mainland China formulated a policy to stimulate the consumption and industrial upgrading with four trillion RMB. China initiated the “Made in China 2025” policies under the Xi administration, which aim to transform its growth model from quantitative growth to qualitative improvement and emphasized the development of high technology. At this fourth stage, Taishang faced five major challenges. The first challenge Taishang face is that over the past three decades’ economic development and industrial upgrading, most of the Chinese domestic enterprises have grown stronger and can compete with Taishang. Second, with the agenda of building a “beautiful China” under the Xi administration, both central and local governments prioritized environmental protections by reducing pollution of the air, water, soil, etc. The stricter environmental regulations increased the cost for many low-end manufacturing companies, particularly Taishang. Coupled with the “Belt Road Initiative” and the “New Southbound Policies,” some Taishang are under pressure and incentivized to relocate to the Southeast Asian region. Third, the Chinese government no longer offers many beneficial fiscal incentives to Taishang, such as tax breaks, beneficial land policies, etc. This also increased the cost for many Taishang. The fourth challenge is mainland China’s new “Five Social Insurances and One Housing Fund” policy for improving labor benefits in China, which increased the production cost for many Taishang. Last but not the least, since 2016, when the newly elected Taiwanese president, Tsai Ing-wen, assumed office, Beijing has suspended official talks with Taiwan due to Tsai’s refusal to accept the “one China” principle. Since then, the cross-Strait relationship has been tense. This is another major challenge for Taishang. On top of the all the above major challenges faced by Taishang in the post-2009 stage, is the trade war between the United States and China triggering Taishang to withdraw from mainland China. The Pattern of Aggregate-level Taishang Movement in/out of Mainland China Before and After the Outbreak of the Trade War According to the macro-level Taishang data reported by the official outlets across the Strait,12 the monthly number of approved Taishang has maintained an upward trend in general in 2018. Figure 1 shows the number of cases of approved Taishang in mainland China reported by ROC Investment Commission in the period of 2008-2018 and across the months of 2018. Figure 1. Number of Cases of Taishang (TDI) in mainland China in the period of 2008-2018 and across the Months of 2018. Source: ROC Investment Commission. The left side of fig. 1 shows the fluctuations of annual Taishang in mainland China approved by ROC Ministry of Economic Affairs from year 2008 to 2018. The right side of Figure 1 shows the monthly fluctuations of Taishang in mainland China from January 2018 to December 2018. According to Figure 1, the number of TDI cases started decreasing in 2010 but has shown an upward trend since 2016. Within the year 2018, despite the trade war effect, the general trend of TDI cases maintained its upward trajectory in spite of some drops in April and September 2018. If Taishang were suffering the most from the trade war, how would one explain the above-mentioned increase in the approved Taishang projects in mainland China? This motivates us to investigate deeper how the trade war has influenced Taishangs’ movement in and out of mainland China. The Impact of Trade War on Taishangs’ Movement in and out of Mainland China The Impact of the Trade War on Taishang The trade war between the United States and China is thought to have started in early 2018, although there had been a series of tariff increases on certain products before that. After many rounds of trade talks between the United States and China, at present the future of the trade war is still unknown, particularly after the G20 meeting between PRC president Xi Jinping and American president Donald Trump in Japan in June 2019. Generally, existing studies have divided the trade war up to now into four rounds. The first round occurred on 6 July 2018, when the United States implemented a 25-percent tariff on 34 billion USD of Chinese goods. The second round happened on 7 August 2018, when the United States released a revised version of tariffs on a final list of 16 billion USD worth of imports from China and plan to implement a 25-percent tariff on them on 23 August. The third round started on 17 September 2018, when President Trump announced a 10-percent tariff on 200 billion USD worth of Chinese goods which would begin on 24 September 2018 and aimed to increase it to 25 percent by 1 January 2019. On 2 December, the United States and China agreed to a temporary truce and reached an agreement to refrain from increasing tariffs or imposing new tariffs for 90 days up until 1 March 2019, while the two countries negotiate toward a larger trade deal. The fourth round started on 10 May 2019, when the United States increased tariffs on 200 billion USD worth of Chinese goods from 10 percent to 25 percent, as the United States and China failed to reach a deal following the end of the first day of the eleventh round of high-level trade talks. China retaliated by announcing tariff increases on 60 billion USD worth of US goods starting 1 June 2019, in response to the tariff increases imposed by the United States on 10 May. While the first two rounds of trade war did not impact Taishang that much, the third and fourth waves greatly impacted almost all the Taishang in China that are export-oriented due to the tariff increase. Many existing studies suggest that Taishang in the manufacturing sector are suffering the most during the trade war while the service-oriented and the Chinese-domestic-market-oriented Taishang do not suffer as much. We used data from the ROC Ministry of Economic Affairs Investment Commission to generate illustrative figures in order to make comparisons. Figure 2 shows the dynamic changes of the sectoral distribution (manufacture vs. service) of Taishang in mainland China from year 1998 to 2018. Figure 2. Dynamic Changes of Taishang in mainland China from 1998 to 2018 (number of TDI projects): Manufactural Sector vs. Service Sector. Source: ROC MOEA Investment Commission, 2019. According to Figure 2, the decrease of Taishang in the manufactural sector began decreasing long before 2018 when the trade war broke out. The number of TDI projects in the manufactural sector has decreased dramatically since the year 2011, from around 1,000 cases on average per year to only about 300 cases on average per year during the past four years. In comparison, the number of TDI projects in the service sector has maintained a steady increase by opening around 300 new cases on average per year from 2007 to 2018 except for a downturn around 2015. Figure 3 shows the monthly data of the number of TDI cases and the cumulative number of manufacturing TDI cases in mainland China across months in the year 2018. Figure 3. Number of TDI in Manufacturing Sector from January to December 2018: Monthly vs. Cumulatively. Source: ROC MOEA Investment Commission, 2019. According to the left half of Figure 3, the monthly approved TDI cases data show an increase in the first wave of the trade war and a decrease in the second wave of the trade war. With the start of the third wave of the trade war, the number of TDI cases started increasing again. This does not show a clear trend of negative impact of the trade war. However, the right side figure of the Figure 3, which shows the cumulative number of approved TDI cases, shows a clear downward trend of the TDI cases starting from the first wave of the trade war. Figure 4. Number of TDI in Non-manufacturing Sector from January to December 2018: Monthly vs. Cumulatively. Source: ROC MOEA Investment Commission, 2019. According to the left half of Figure 4, the monthly new TDI cases data show a decreasing trend in general before the first wave of trade war. With the start of the second wave of the trade war, the number of TDI cases in the service sector started showing an upward trend. This indicates that trade war may not negatively impact the non-manufactural Taishang. To some extent, the trade war may have some positive impact on them, at least at a cumulative level. The Differential Impact of the Trade War on Manufacturing Taishang vs. Non-Manufacturing Taishang During the past three decades, about 70 percent of Taishang in China are in the manufacturing sector.13 Taiwan–mainland China–US trade mainly involves manufacturing productions. In the triangular trade relationship, the United States delivers purchase orders to Taiwanese firms located in Taiwan, which then request that the Taishang (i.e., Taiwan invested companies) in mainland China produce the products ordered by the US market given the lower cost of production in mainland China relative to Taiwan. As the Taishang in mainland China finish producing the products, they will export them to the United States directly from mainland China. Meanwhile, in order to produce the products to satisfy the needs of the US markets, Taishang in mainland China need to import large amounts of intermediate goods/components/parts from Taiwan. This contributes to Taiwan’s high trade surplus toward mainland China. A majority of Taishang in mainland China are mainly producing for the US market and serve as the Original Design Manufacturer (ODM) for the US manufacturing companies. Therefore, Taishang play an important role in mainland China’s exporting to the United States. Given the above-mentioned triangular trade relationship among Taiwan, mainland China and the United States, when the trade war occurred, the exporting of the final products from mainland China to the United States could decrease due to the rise of tariffs. The rising cost would lead to the increased prices for the final products sold on the US market. Due to the supply and demand equilibrium, the rising prices would lead to the decrease of demand for such products imported from China and thus reduce the number of orders delivered by the US market to the Taiwanese companies in Taiwan. This will reduce the number of orders that are forwarded to the Taishang in mainland China. As the value-added earned in the assembling factories in mainland China are usually small, a major way for them to make profits is to export large quantities with relatively lower tariffs. Now with the trade war outbreak, both increasing tariffs and decreasing exports made its very costly for the manufacturing Taishang to continue their production. Under this situation, Taishangs’ reactions can generally be divided into four types. First, given the rise in cost of producing the labor-intensive and low-end products in mainland China, many Taishang have reduced the scale of production in mainland China and/or transferred the orders of productions made by the United States from mainland China to its neighboring countries, such as Vietnam and Cambodia. Second, for the high-technology and high-end products that have been scrutinized by the United States for security reasons, these Taishang tend to move their production back to Taiwan or to locations near the major consumer markets, such as the United States. Third, for the small and medium sized Taishang who cannot afford relocating, many of them may remain in mainland China but dismiss a large percent of their employees to cut costs. Last but not least, some Taishang had to declare bankruptcy due to their loss of competitiveness, particularly under the pressure of increased tariff with the trade war. Implications of the Movement of Taishang in and out of Mainland China on Taiwan’s Domestic Politics, Taiwan’s Economy and Cross-Strait Relationship Impact on Taiwan’s Economy Each of the four types of reactions from mainland Taishang has an important impact on the economy of Taiwan. When the scale of production by mainland Taishang decreases, their demand for the imported intermediate goods/components from Taiwan decreases as well. This is expected to lead to the down-scaling of the Taiwanese firms in Taiwan and thus reduce Taiwan’s exports to mainland China. Second, for the labor-intensive and low-value-added manufacturing Taishang, particularly the ODMs, due to the dramatic decrease of the profit margins, they tend to withdraw from mainland China or to diversify their investment in countries other than China. These are usually the companies that flew into China during Taiwan’s industrial upgrading in the 1980s. They are still not welcomed back by the Taiwanese government or the people due to the pollution and/or their lack of contribution to Taiwan’s economy and current industrial upgrading. Therefore, for this type of reaction of Taishang, it does not have much impact on Taiwan’s economy. Third, for the high-technology oriented and high-end Taishang, their relocation back to Taiwan will create more job opportunities for the large pool of skilled labor, increase consumption, increase exports from Taiwan to the United States, improve Taiwan’s competitiveness in world economy and help boost Taiwan’s economy dramatically, especially for Taiwan’s current industrial upgrading.14 Impact on Taiwan’s Domestic Politics. The majority of Taishang withdrawal from mainland China initially occurred as pure business reactions to the increasing cost of investment in mainland China. Particularly, with the outbreak of the trade war, many Taishang have realized the importance of diversifying their supply chain and reducing their dependence on mainland China due to the potential political risks of the trade war with the United States. In this process, the Taiwanese government perceives that such movement fits its political agenda—the “New Southbound Policy” initiative, which is in its third year of implementation. This agenda aims to “diversify the country’s ties in a dynamic Asian region and to reduce dependence on mainland China”15 and “focuses on strengthening ties with Southeast Asia along with South Asia, Australia, and New Zealand.”16 The Taiwanese government started providing a series of Taishang preferential policies to further motivate Taishang to flow back. Particularly when the trade war broke out, the Taiwanese government actively provided tax exemptions and government subsidies to attract Taishang to flow back. Moreover, the Taiwanese government also provides administrative assistance and support to facilitate the relocating of Taishang back to Taiwan, such as accelerating the processing of firm registration, assisting with the search for land, securing the supply of water and electricity, and so forth.17 Taishangs’ relocating back to Taiwan has several important political implications for Taiwan’s domestic politics. First, some existing studies argue that the Taiwanese government is using Taishangs’ flowing back to Taiwan as political propaganda with the purpose of rallying domestic supports for the 2020 presidential campaign for the current ROC president Tsai Ing-wen.18 This group of scholars argue that the ROC government has not played an important role in attracting the return of Taishang because Taishang had already started flowing back to Taiwan before the implementation of the Taishang preferential policies. Another group of scholars argue that Tsai’s agenda to attract the withdrawal of Taishang from mainland China aims to support America’s trade war strategy. These scholars, such as Wei Shi, argue that, while a majority of countries hold negative attitudes towards Trump’s trade war strategy, the Tsai administration’s strong support indicated her political ambition of being willing to be utilized by the United States to earn political credits domestically and earn American’s support for her own political ambitions.19 For example, shortly after Xi and Trump’s meeting at G20 in Japan, United States decided to increase arms sales to Taiwan, In addition, in order to attract the returning of Taishang, the Tsai administration has issued a series of subsides. These subsidies are arguably at the cost of the taxpayers, such as the zero-interest rate for investment loans. In addition, in spite of the bubble of real estate and the environmental pollution brought by the inflows of Taishang, the Tsai administration has been gaining high evaluations in government performance reports, which is argued to be an important evidence showing that Tsai attempts to sacrifice the interests of the Taiwanese society to gain political credits.20 Moreover, the challenges posed by the returning of Taishang may have a negative impact on Tsai’s presidential campaign in the 2020 election. For example, a more recent study indicates that, with the returning of Taishang, Taiwan is under increasing pressure to provide sufficient electricity.21 Under such pressure, DPP may have to start reconsidering the use of nuclear power plants.22 If that occurred, the use of nuclear power plants directly contradicts with Tsai’s promise during the presidential campaign not to use nuclear power plants to generate electricity. Impact on Cross-Strait Relationship. The movement of Taishang during the Trade War not only influences Taishang, Taiwan’s economy, Taiwan’s domestic politics, but also it impacts the cross-Strait relationship. Taiwan’s trade dependency on China is one of the highest in the world. By 2018, 41.2 percent of Taiwan’s total exports went to mainland China and Hong Kong. Since 1991 when the ROC relaxed its restrictions on the investments of Taishang in mainland China, about 58 percent of Taiwan’s total overseas investments landed in mainland China as of the end of 2018. In spite of some recent decreases in the dollar amount of Taiwanese investment in mainland China, the total number of projects of Taiwanese investment in mainland China has been increasing. Currently there are about 70,000 Taishang conducting business in mainland China and about two million Taiwanese people (about 10 percent of the total population of Taiwan) living there. According to Taiwan’s financial supervisory authority, there are in total 1,192 listed companies on the Taiwan Stock Exchange and about 76 percent of these companies are investing in the mainland. Mainland China is the largest export market for Taiwan. Taiwan enjoyed a 77 billion USD surplus toward mainland China, which was more than double Taiwan’s overall surplus. About 96 percent of Taiwan’s exports to mainland China were intermediate inputs, such as integrated circuits, semiconductor machinery, cyclic hydrocarbons, oscilloscopes, and raw plastic sheeting. The manufacturing factories of Taishang in mainland China assemble these intermediate inputs imported from Taiwan to produce the final goods and then export them to the US market and other markets in the world. According to Ash and Kueh, “economic integration is essentially a process of unification—the means whereby coherence is imposed upon previously separate, even disparate, geographical regions.”23 Traditional commercial liberalism posits that states will not go to war if they are economically interdependent. States often use economic means, such as foreign aid, trade and FDI policies, to pursue foreign policy goals, such as pursuing reunification. Such strategy of the states is termed as the economic statecraft strategy. In practice, mainland China has utilized the economic statecraft strategy to win the hearts of the Taiwanese people and attempts to change Taiwan’s political stance by investing resources in Taiwan and “providing more preferential policies” to the people in Taiwan in the hope of promoting cross-Strait peace.24 However, Beijing’s state economic statecraft strategy had been actively resisted by the Democratic Progressive Party (DPP)25 until the year 2008 when the KMT entered office again. In response to the “economic statecraft” agenda, the KMT carried out a series of policies to push further the cross-Strait openness, including the “three links,” opening tourism, exchange students and investment from the mainland China, especially the negotiation of the Economic Cooperation Framework Agreement (ECFA).26 However, since 2016 when the current ROC president, Tsai Ing-wen assumed the office, the cross-Strait relationship has been worsening, and the economic statecraft strategy has been strongly resisted again. Quite different from the Chen Shui-bian era, the Tsai administration’s resistance to Beijing’s economic statecraft strategy was boosted by the US–China trade war, the economic downturn in mainland China and Xi’s harsher stance toward Taiwan. Moreover, the withdrawing of Taishang under the trade war further reduced the economic interdependency across the Strait and has further assisted Tsai’s resistance to Beijing’s economic statecraft strategy. With the downsizing and/or withdrawing of Taishang from mainland China, Taishangs’ pacifying role for cross-Strait peace may have been weakening. In addition, the returning of Taishang to Taiwan may strengthen the economic ties between Taiwan and the United States, which may lead to stronger political and military alliance. This could be perceived as an increased threat to the security of the mainland China, particularly under background of the trade war and the competition between United States and China over the regional dominance in the Pacific Rim. Given the strategic importance of Taishang, the increasing resistance from Taipei against Beijing and the withdrawing of Taishang from mainland China, mainland China has further strengthened its use of economic means to promote cross-Strait peace. Despite the tensions across the Strait and the challenges facing the Taishangs’ development in mainland China in the post-2009 period, mainland China re-emphasized its preferential policies toward Taishang at the beginning of 2018. One of the most important Taishang preferential policies was issued on 28 February 2018 by the Mainland Taiwan Affairs Office under the State Council, which is titled “Measures to promote cross-strait economic and cultural exchanges and cooperation.”26 This new policy has a total of 31 Policies to benefit Taishang in mainland China and has been termed “the 31 Policies,” which aims to grant the special status to Taishang and Taibao so that they could be treated equally to the mainland domestic firms and PRC citizens in mainland China. The “31 Policies” put emphasis on increasing the high-tech, service-oriented and market-oriented Taishang to move into China. However, with the outbreak of the trade war, due to the American government’s security concern over the high-tech products exported to United States from mainland China, it requires that the origin of some high-tech products or certain percentage of the parts for the high-tech products cannot be produced in China. Under such background, the impacted high-tech Taishang are under pressure to withdraw from mainland China despite Beijing’s Taishang preferential policies. However, since the trade tensions across the Strait are still dynamically changing and it is too early for some Taishang to decide whether to relocate. Also, it is very costly for Taishang to move out of mainland China given the unique and irreplaceable supply chain in China. Moreover, Taishang have the options to relocate within China, particularly given the competitive incentives provided by the Chinese local governments. More work still needs to be done to investigate whether these other factors, such as the “31 Policies”, may neutralize the negative impact of trade war on Taishang in mainland China. Summary and Conclusion During the recent trade war between the United States and China, it seems some manufacturing Taishang have chosen to exit mainland China, possibly due to the high tariffs, slow economy and the sensitivity of the high-tech industries. In addition to these economic risks, there are political risks as well across the Taiwan Strait, such as the worsening of the cross-Strait relationship since DDP defeated KMT in the 2016 Taiwanese presidential election. Such risks have been escalating since Tsai Ing-wen entered office. The trade war seems to have worsened such political tensions across the Strait. Despite these economic and political risks brought on by the trade war, a large number of Taishang are still deciding to stay and some new Taishang are continuing to move into mainland China, which has increased the total number of Taishang in mainland China in recent years. The manufacturing Taishang which have withdrawn from mainland China can be divided into three types, comprising the low-end manufacturing Taishang, the medium level of manufacturing Taishang and the high-end manufacturing Taishang. We argue that the low-end manufacturing Taishang are more motivated to relocate to other developing countries (mostly those in Southeast Asia) to avoid tariffs and to take advantage of the even lower cost of production there. This fits with ROC president Tsai Ing-wen’s “New Southbound Policy,” which aims to reduce Taiwan’s economic dependency upon mainland China and thus reduce Beijing’s ability to use economic dependency as leverage against Taiwan. This group of Taishang are less likely to move back to Taiwan due to the lack of water, electricity, land, labor, etc. However, the Southeast Asian countries do not have the comprehensive and sophisticated supply chain like that established in mainland China and therefore tend not to be capable of handling the large orders made by the American market and other markets around the world. Moreover, these same Southeast Asian countries have already been integrated into the regional supply chain with China, particularly through China’s “Belt Road Initiative.” This makes it unavoidable for Taishangs’ business operations to be connected to China in Southeast Asia. In addition, the market in Southeast Asian is much smaller than that in China. Their orders of the intermediate goods would be much smaller than those in mainland China, which makes it less profitable for the Taishang operating in the region. Due to these reasons, relocating to Southeast Asian may not necessarily reduce costs for the low-end manufacturing Taishang. For the high-end manufacturing Taishang, since they are more capable of affording the high cost of skilled labor, we argue that they are more likely to relocate to the destination markets, particularly the US market, to reduce transaction costs. Over the past three decades, Taishang in mainland China have developed a large-scale completed supply chain regarding the manufacture of products for the US market. In this supply chain, Taishang have accomplished vertical integration by including a completed list of sectors. Such large and well-established supply chains and sectoral integration make mainland China a unique and irreplaceable location as the world’s manufacturing center. In the future, under Trump’s “Made in the US” policies, even if some assembly factories were relocated to the United States, it would be very difficult and costly to move the entire established supply chain in mainland China to the United States or anywhere in the world.27 Meanwhile, given the long-established division of labor in the global market, it would be challenging to replicate a similar supply chain in the US market.28 Due to these reasons, we expect that relocating to the United States and other Western markets may not save costs for the high-end Taishang. As for the medium-level manufacturing Taishang, since they are less capable of affording the high-skilled labor in the United States and other Western countries and are more demanding than the low-end manufacturing Taishang with regard to skilled labor, they are more likely to relocated back to Taiwan. This may help improve Taiwan’s economy in the short run. In the long run, since mainland China’s supply chain has been established and the high-tech sector is being strongly supported with large-scale state spending and the recent brain drain from Taiwan to mainland China under the attraction of the “31 Policies,” we expect that mainland China in the future will replace Taiwan’s place in the global supply chain so that the US market may make orders directly to the mainland Chinese companies by bypassing the Taiwanese enterprises operating in Taiwan. In other words, the OEM model may get revised. Given the above consideration, we argue that mainland China will continue serving as an attractive hosting country of Taishang, particularly given that there are signs that the trade war may be over soon. It is important to investigate the Taishang issue, since they are important assets for the PRC in both an economic and political sense. The exit of Taishang would not only weaken the communication channel across the Strait, but also reduce the PRC’s leverage over Taiwan. The PRC government has issued the “31 Policies (Taishang Preferential Policies),” which aim to incentivize Taishang to continue investing in mainland China. Following the central government’s policies, the local governments in China are also carrying out their own versions of the “Taishang Preferential Policies” aiming to retain the Taishang in their jurisdictions and attract new Taishang to flow in. How effective are these policies? Are such local governments’ initiatives helpful for keeping Taishang from exiting? These are the questions that need to be empirically explored in future studies. Dr. Kelan “Lilly” Lu Dr. Lu is an assistant professor in the Department of Political Science at the University of South Carolina. Her research interests focus on international/comparative political economy, particularly the role played by foreign direct investment in domestic politics and international relations. She also conducts research on East Asian politics, including domestic and foreign policies of China. She is also interested in applications of dynamic panel data modeling. She has published peer-reviewed articles in International Journal of Public Opinion Research; International Studies Perspectives; Politics, Groups and Identity; and Asian Survey. She also has published multiple book chapters and book reviews. Mr. Kuan-Wu Chen Mr. Chen is a graduate student in the Department of Political Science at the University of South Carolina. His research focuses on comparative authoritarianism, comparative political theory, environmental policy, and, local governance/politics. He particularly studies the political-social transition in modern China. Kuan-Wu Chen has published peer-reviewed articles in Taiwan Democracy Quarterly (Chinese), Journal of Contemporary East Asia Studies, and Journal of Asian and African Studies. Notes 1 Roy C. Lee, “OPINION: Will the US-China Trade War Really Spur Taiwan's Companies to Leave China?,” News Lens, 10 September 2018, https://international.thenewslens.com/article/103815. 2 Ben Holland and Cedric Samk, “A $600 Billion Bill: Counting the Global Cost of the U.S.-China Trade War,” Bloomberg, 27 March 2019, https://www.bloomberg.com/graphics/2019-us-china-trade-war-economic-fallout/. 3 Ibid. 4 Ibid. 5 Yijun Huang and Liangrong Chen, “Taoyuan Airport at Midnight—An Observation of the New Winner of the US-China Trade War,” Commonwealth, 2 July 2019, https://www.cw.com.tw/article/article.action?id=5095853; and Simon Kennedy and Ryan Best, “Trump-Xi Summit at G-20 Could Save the World $1.2 Trillion,” Bloomberg, 26 June 2019, https://www.bloomberg.com/graphics/2019-g20-trade-war/. 6 Taixing Yang, “The True of the Returning of Taishang: Are There More Benefits or Harms to Taiwan under the US-China Trade War,” News Lens, 5 June 2019, https://www.thenewslens.com/amparticle/120309. 7 Simon Kennedy and Ryan Best, “Trump-Xi Summit at G-20 Could Save the World $1.2 Trillion,” Bloomberg, 26 June 2019, https://www.bloomberg.com/graphics/2019-g20-trade-war/. 8 Wei Shi, “With the Economic Downturn in Taiwan, Why DPP Still Insisted on ‘Resisting China’?,” Taihai Net, 26 July 2019, http://m.taihainet.com/news/twnews/latq/2019-07-26/2289698.html. 9 Kelan Lilly Lu, “County-Level Determinants of the Spatial Distribution of Taiwanese Direct Investment in Mainland China,” Asian Survey 55, no. 4 (2015): 766–92. Also see Shu Keng and Gunter Schubert, “Agents of Taiwan-China Unification? The Political Roles of Taiwanese Business People in the Process of Cross-Strait Integration,” Asian Survey 50, no. 2 (2010): 287–310. 10 Ibid. 11 For example, Lu, “County-Level Determinants of the Spatial Distribution.” 12 Data of Taishang Investment in Mainland China, Investment Commission of Ministry of Economic Affairs in Republic of China, 2019. 13 Ibid. 14 Li, “US-China Trade War.” 15 Prashanth Parameswaran, “Assessing Taiwan’s New Southbound Policy: A Closer Look at the Current Status and Future Prospects of One of Taiwan’s Flagship Foreign Policy Initiatives,” Diplomat, 23 April 2019, https://thediplomat.com/2019/04/assessing-taiwans-new-southbound-policy/. 16 Ibid. 17 Li, “US-China Trade War.” 18 Ibid. 19 Shi, “With the Economic Downturn in Taiwan.” 20 Xiaojing Ma, “Withdrawal of Taishang is Still a Cheap Talk,” Huaxia News, 24 April 2019, http://www.huaxia.com/thpl/tdyh/msj/2019/04/6088896.html. 21 Ibid. 22 Ibid. 23 Robert F. Ash and Y. Y. Kueh, “Economic Integration within Greater China: Trade and Investment Flows between China, Hong Kong and Taiwan,” China Quarterly 136 (1993): 711–45. 24 Shu Keng, “Limitations on China’s Economic Statecraft: China’s Favor-Granting Policies and Their Political Implications,” Issues and Studies 48, no. 3 (2009): 1–32. Also see Steve Chan, “The Politics of Economic Exchange: Carrots and Sticks in Taiwan-China-U.S. Relations,” Issues and Studies 42, no. 2 (2006): 1–22; Miles Kahler and Scott L. Kastner, “Strategic Uses of Economic Interdependence: Engagement Policies on the Korean Peninsula and across the Taiwan Strait,” Journal of Peace Research 43, no. 5 (2006): 523–41; Murray Scott Tanner, Chinese Economic Coercion against Taiwan: A Tricky Weapon to Use (Santa Monica, CA: Rand, 2007); and Keng and Schubert, “Agents of Taiwan-China Unification?.” 25 Keng, “Limitations on China’s Economic Statecraft,”; and Emmy Ruihua Lin, “Bidding for Taiwanese Heart: The Achievements and Limitations of China’s Strategy to Engage Taiwan,” in New Dynamics in Cross-Taiwan Strait Relations: How Far Can the Rapprochement Go?, ed. Richard Weixing Hu (New York: Routledge, 2011). 26 Zhongxuan Wen et al., Pioneering for Peace across the Taiwan Strait (Haixia Fengyun de Qiang yu Chi) (Taipei: Tianxia Books, 2010); John F. Copper, The China-Taiwan Economic Cooperation Framework Agreement: Politics, Not Just Economics, EAI Background Brief No. 548 (Singapore: National University of Singapore 6 August 2010), http://www.eai.nus.edu.sg/publications/files/BB548.pdf; Alan D. Romberg, “All Economics Is Political: ECFA Front and Center,” China Leadership Monitor, No. 32, 2010, http://media.hoover.org/sites/default/files/documents/CLM32AR.pdf; and Daniel Rosen and Zhi Wang, The Implications of China-Taiwan Economic Liberalization (Washington: Peterson Institute for International Economics, 2011). 27 “Taiwan-US Supply Chain Cannot Sustain without the Support of the Taishang in Mainland China,” China Times, 7 June 2017, https://www.chinatimes.com/newspapers/20170607000015-260202. 28 Ibid.