Vigorous exports explain Taiwan’s outstanding economic performance. Pandemic travel restrictions triggered greater global demand for information and communications technology products. With the gradual return to normal in 2021, Taiwan’s exports of other manufactured products such as metals, plastics, chemicals and textiles all grew significantly. China remained Taiwan’s largest export destination last year, but the growth of exports to the United States (30 per cent), Europe (37 per cent) and Southeast Asian countries (32 per cent) outpaced export growth to China (23 per cent).

Taiwanese firms’ large investment repartition contributed to increasing capital formation. Since 2019, the government incentivized Taiwanese firms with overseas business operations to invest at home. Total investment repartition from 2019 to 2021 was nearly US$37 billion (NT$1,038 billion) — greater than the US$15.9 billion recorded for Taiwan’s outward investment in China during the same period. The semiconductor industry has been the most important contributor to domestic capital formation.

Unlike the thriving manufacturing industry, the service sector grew slowly in 2021. Local accommodation and restaurants were greatly impacted by the imposition of movement restrictions after a domestic outbreak of COVID-19 in May. Despite the partial relaxation of restrictions since the end of July, Taiwan’s local accommodation and food businesses have not fully recovered.

Additional government spending for companies and individuals who suffered through business and jobs losses during the pandemic is another contributor to Taiwan’s economic expansion. Yet compared with most advanced countries, Taiwan’s COVID-19 economic relief budget as a percentage of GDP (4 per cent in 2021) is relatively insignificant thanks to effective COVID containment strategies. Taiwan’s central government debt as a percentage of GDP is low at 30 per cent in 2020. Taiwan has greater capacity to invest in energy and infrastructure, areas of investment that the country is in urgent need of for its growing manufacturing activities.

Yet Taiwan’s participation in regional trade deals is uncertain. Taiwan is less likely to join the Regional Comprehensive Economic Partnership given China’s heavy economic and political weight in the trade pact. Taiwan has more of a chance to be part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) thanks to its mature market economy standards. Still, most CPTPP members are small economies and have limited domestic consumption potential. The overall net benefit for Taiwan joining is far from obvious.

A US–Taiwan free trade agreement (FTA) remains far away despite the recent defeat of a Taiwanese referendum that would have blocked pork imports containing ractopamine — a barrier to bilateral trade negotiations with the United States. Domestic initiatives remain the priority for the Joe Biden administration and the United States is inclined towards promoting multilateral economic engagement. Taiwan might hope to join an Indo-Pacific economic framework, but the details and its potential benefits to regional economic growth are far from clear.

Taiwan’s strong economic performance, supported by its manufacturing prowess, showed that the impact of its isolation from regional economic agreements has been limited so far. Bilateral and multilateral FTAs might have more political than economic significance for Taiwan. Taiwan’s greater involvement in regional and global economic agreements would provide an additional layer of economic security in case China sanctions Taiwan’s economy.

Although Taiwan’s investment shift away from China in recent years might help to diversify its exports, it might take a long time to significantly reduce China’s weight in Taiwan’s external trade and accelerate diversification.

Taiwan is likely to continue its export growth momentum while demand from the United States remains strong. Yet the prolonged pandemic crisis around the world suggests that private consumption at home is unlikely to pick up anytime soon. Inflation and the expected rise of interest rates could restrain private consumption and investment. The unequal development of manufacturing and services could also deepen inequality. Skyrocketing housing prices would further worsen the income gap and divert investment from productive sectors to speculative real estate.

Unlike two decades ago when Taiwan’s main concern was the hollowing out of manufacturing, its economy today must confront challenges arising from domestic manufacturing activities potentially overheating. Economic integration with and Taiwanese investment in China has slowed. In 2019, US imports from Taiwan and Vietnam were greater than those from China, as manufacturers in the region shifted trade amid geopolitical uncertainty. The tactics used against Taiwanese firms, such as the sanctions applied to Far Eastern Group, could accelerate these trends.

Min-Hua Chiang is a research fellow at the East Asian Institute (EAI), National University of Singapore.

This article is part of an EAF special feature series on 2021 in review and the year ahead.