Taiwan’s Strategy to Reduce Economic Dependence on China

By Anirudh Ramakrishna Phadke


Since 1949 the Republic of China (ROC) otherwise called as Taiwan has been struggling to establish itself as a separate government entity. The People’s Republic of China (PRC) otherwise called the mainland China or simply China has vowed by making unification of Taiwan into its mainland as an agenda of national concern. Though both the countries predominantly consisting of similar ethnic groups, they have diverse cultural and political views from its Communist counterpart. Taiwan has democratically elected form of government thus, having a unique identity as an independent island nation and relations with mainland China. This unique nature also directly correlates with Taiwan’s economic component.


Right from the dawn of Cross-Strait confrontation between China and Taiwan, the latter has had discriminatory policies of trade and commerce towards its counterpart. This left serious impact not only on China and Taiwan but also on nations having trade interests in Taiwan Strait. Further free and open trade practises were hindered due to the result of regular escalating tensions between China and Taiwan. Despite (Taiwan) being an important country in East Asian economy, the past decade has been watershed for its economy due to reducing foreign direct investments because of bitter bilateral relations with Mainland China. Taiwan has least share in participating in the regional and international trade practises thereby cutting the access to other economies of the world. Despite all these shortcomings, reports have suggested that Taiwan has done exceptionally well in maintaing its economy and will continue to boom higher in upcoming years. Taiwan has shown that a Chinese democracy can be governed effectively including the economic dimension. Even as the world suffered pandemic, Taiwan grew as a high-income yielding economy for the previous year.

The Economic Cooperation Framework Agreement is a boon in Cross-Strait confrontation for Taiwan because it enabled the Chinese democracy to grab an opportunity to integrate more into the East Asian Economy and beyond. Due to the agreement Taiwan had an option to either pursue preferential trade practises with other countries or to pursue a multilateral trade strategy and focus on domestic reforms that will bring larger economic gains, diversification and avoid political risks especially with Mainland China to sail smoothly across Cross-Strait.

This paper aims to find out what are the strategies were used by Taiwan to reduce its economic dependence on China and how the same can be achieved in the forthcoming years.

An Overview of Taiwan’s Economy

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Before we dive deep into the mainframe of question, it is important to understand the model of Taiwan’s economy. This section of the paper will find out and analyse the Taiwan’s economic model. It has been reported that Taiwan runs a highly developed free market economy. Taiwan’s economy is reported to be the 8th largest in Asia and 18th largest in the world depending on purchasing power parity index, making the country to be included in the advanced economies group by the International Monetary Fund (IMF). The World Bank also classified Taiwan under high-income level economies grouping.

History of Taiwan’s Economy

Upon probing the reports, we can find references that Taiwan has been transformed into what it is today with the help of US. During the early 1950s to late 1960s, US was the major financial aid donor for Taiwan and its sole foreign investor. Here it can be noted that the US on one hand has used Taiwan as a proxy to invest heavily in Mainland China. Thus, Taiwanese investment in mainland China is estimated to excess over US$ 150 billion. Taiwan also holds major investments share in other parts of Southeast Asia.

Historically, the country carefully crafted its strategy to minimise its dependence on mainland China, starting with industrialisation by land reforms. Taiwan’s rapid democratisation and economy being open led to US investments as stated above which accounted for 30 percent of country’s GDP during the period from 1950s to 1960s. Along with US’ investments and KMT’s proper planning, the country witnessed rapid advancement in industrial and agricultural aspects including people’s living standards. The Chinese democracy’s economy saw a shift from agricultural economy to industrial based economy post 1960s. Due to this change in economic orientation, Taiwan’s GDP grew by an average of 9.27 percent each year thereafter.

The smooth sail of Taiwan under US’ care gone off the tide when America established its formal diplomatic ties with mainland China by severing ties with Taiwan. Though security relations were maintained between the two sides, commitment of financial aids and economic links were cut off. Thus, the Taiwan policymakers took a hard turn from subsidised import economy model to export led growth economy model. The country’s government took the opportunity to shed its agriculturally based economy to utilise the significant growth it could achieve by shifting towards implantation of economy run by heavy industries and infrastructure developments. The government scaled up their economic activities towards more open markets and rapidly shifting towards privatisation of public owned enterprises.


During the 1980s, Taiwan’s government started integrating advanced electronics-based industries into its economy thus, fully shedding its cheap and labour-intensive manufacturing sectors. Post 1980s, Taiwanese investments in mainland China increased which spurred Cross- Strait trade aspects thereby decreasing the Chinese democracy’s dependence on the United States. Due to the country’s financial policies, Taiwan suffered little during the fiscal crisis from 1997 to 1999 as compared to other nations.

The nutshell of the historical economic build of Taiwan indeed shows very much less interaction with mainland China. Today mainland China stands as Taiwan’s number one exports and imports partner. Somewhere down the road China overtook America to make the Chinese democracy dependent on them. So where did the dragon’s gameplay occur?

How did Taiwan become economically dependent on China

It all started during the post-1990s and rapidly during the past two decades. During this period Taiwan’s economy deepened the ties to its counterpart. Today, China is Taiwan’s largest trading partner by absorbing nearly 30 percent of the island’s exports. Ironically, the dependence on mainland China started during the administration of Chen Shui Bian who was Taiwan’s first president from Democratic Progressive Party (DPP) whose core agenda was pioneering independence from China.

Despite advocating Taiwanese national identity, under his administration the government raised the value of island’s exports which resulted in total value of $66 billion at the end of his tenure in 2008. Furthermore, in 2015 exports by Taiwan accounted for 53 percent of its GDP, whereby mainland China was the leading market of its exports. Ma Ying-jeou who took over the administration from Chen, made the economic growth even more modest although the KMT leader did not deepened the economic ties between the two sides. Under Ma’s leadership the government opened the island nation for tourism to China, which lead a rapid increase in tourists from the mainland and vice versa. Today, the mainland Chinese citizens account for half of the incoming visitors to the Chinese Taipei.

The economic ties between Taiwan and China now went over the control. The second largest trading partner of Taiwan which is Hong Kong once again comes under China thus, indirectly swallowing the second spot too. The third largest trading partner which is US does not even come closer enough to the amounts of exports and imports done between China and Taiwan including Hong Kong. Thus, deeply connected by exports and imports for revenue, Taiwan has become heavily dependent on China which developed strongly during the course of several years. So, what are the strategies developed by Taiwan to deter reliance over China? The further section of this paper will analyse all the possible strategies constructed by Taiwan to become less reliant from the mainland China.

Strategies posed by Taiwan to counter Chinese dependency


Taiwanese in China

Analysing the past few years data has shown that nearly 2 million Taiwanese people live in mainland China permanently. These people with Taiwanese links are running small and medium scale enterprises known as Taishang, who are often employing thousands of mainland Chinese citizens in their businesses. Hon Hai Precision Industry or better known as Foxconn is the largest business who employs nearly 1 million Chinese citizens on the mainland. This led to transfer of over $10 billion worth of FDIs from Taiwan to China in past decade. On the other hand, a 2016 report shows that such kinds of FDI flowing from China to Taiwan remains comparatively smaller at $215 million because of strict regulations from the latter country’s control over where China can invest.

Though China had strict economic controls like Taiwan, the latter nation’s businessmen were successful in penetrating and navigating through highly complicated bureaucracy. Does Taiwan’s method of counter investing in mainland China will prove effective? In short, yes it has proved effective for Taiwan as revenue generated are ploughed back into the country as profits but still it’s a very dangerous way of constructing countermeasures.

The Chinese democracy’s top revenue generating sources come from technological sector which are involved in hardware manufacturing and assembly. Furthermore, all the Taiwanese technological based companies do business across the strait which makes them prone to political backlash and in worst case scenario that could lead to dissolution of the companies. It has been reported that Taiwanese companies like Taiwan Semiconductor Manufacturing Company (TMSC) and MediaTek are facing increasing competition from their respective Chinese counterparts which are mostly government owned corporations.

In case of Chinese government’s pressure, companies like device makers could cancel their contracts with Taiwanese chip manufacturing industries thereby switching to domestic makers such as Spreadtrum or Tsinghua Unigroup. Taiwanese investments in China would be dangerous for the island nation since those companies are bound by legal laws of China and changing dynamics of China such as economic slowdown could also inturn affect Taiwan leading to its economic slowdown.


The Economic Cooperation Framework Agreement

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Endnotes and References

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All the views and opinions expressed in this article are those of the author. This article was originally published by the author in his book titled “Research Papers on Defence & Strategic Studies Vol. 1”. Image Credit click here.

About the Author

Anirudh Phadke is the founding editor of The Viyug. He holds a Master of Science (Strategic Studies) and a certificate in Terrorism Studies from S. Rajaratnam School of International Studies (RSIS) at Nanyang Technological University (NTU), Singapore. He currently works for an International Law Enforcement Organisation based in Singapore. He can be reached out via anirudh.r.phadke@viyug.com.

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