BONNIE TU IS laughing. She just discovered the crisp red “Make America Great Again” hat that a colleague left on her desk as a joke. The chairwoman of Giant, the world’s biggest bike manufacturer, is no fan of Donald Trump. His tariffs have messed with her supply chains and driven up costs. “It’s a tax on biking, the healthiest activity in the world,” bemoans the feisty 70-year-old, an avid cyclist herself. In response, Giant has scaled back production in China and ramped up in Taiwan. “We had no choice,” she says.
Giant is not alone. Scores of Taiwanese companies have come back recently, including Compal, a computer manufacturer; Delta Electronics, a power-component supplier; and Long Chen, a paper company. In 2018 the government launched the “Invest Taiwan” office, promising low-cost loans for companies’ relocation expenses. It has already accepted applications from over 150 firms.
All this might make it sound like Taiwan has benefited from the trade war. Singapore and South Korea have also gained market share in America at China’s expense. But it would be a mistake to conclude that the trade war is good for the tigers. Overall, it hurts. It is disrupting three things on which they intimately depend: an open global trading system, their Asia-based production networks and their biggest market, China. Goldman Sachs analysts looked at how 13 economies in Asia were faring relative to their potential last year; the Asian tigers occupied four of the five bottom slots.
That trade friction should unsettle them is only natural. Exports, after all, have been at the heart of their post-war success. South Korea began with tinplate, plywood and textiles. Its exporters benefited from cheap credit, exemptions from import duties and a devaluation of the won in 1964 (ironically, urged on it by America). From February 1965 until his assassination in 1979, President Park Chung-hee attended nearly every monthly meeting of the country’s export-promotion committee, sampling products and rallying businessmen over lunch. He cried when South Korea’s exports exceeded $100m in 1964, declaring a national holiday known as “export day” (later renamed “trade day”).
Taiwan also started with cheap credit and tax breaks for exporters. Entrepreneurs soon emerged. Ms Tu remembers her uncle, King Liu, founder of Giant, remarking with astonishment in 1972 that “Americans are bringing cash here to buy bikes”. He soon found that local Taiwanese suppliers were not reliable: rubber tyres had a habit of falling off rims. So Mr Liu travelled around the island to persuade other manufacturers that they would all fare better if they adhered to the same dimensions.
Singapore and Hong Kong are often seen as entrepots. But they, too, were once exemplars of labour-intensive manufacturing. For a time, in the 1970s, Hong Kong was the world’s biggest toy producer. When Singapore became independent in 1965, it pitched itself as a base of production. Rivalry with Hong Kong was there from the outset: one of Singapore’s first big catches was GE, which chose to set up a clock-radio factory in the city-state, worried that the violence of China’s Cultural Revolution might spill over to Hong Kong.
Even as the tigers have grown far wealthier, exports have remained part of their DNA. Their companies became more sophisticated over time, prodded by their governments (which were themselves often prodded by ambitious industrialists). In South Korea, after a decade of success in light industry, officials promoted heavier industries, such as shipbuilding and chemicals. Taiwan created science parks for advanced industries from optoelectronics to semiconductors. Singapore established a National Computer Board in 1981 to train high-tech workers.
Much of the world has lost ground to China over the past 20 years. Yet the tigers’ share of global merchandise exports has been steady at 10% (see chart). Japan, their erstwhile mentor, has seen its share fall to less than 4%, half what it was in 2000.
Like other wealthy economies, they have shifted much of their basic manufacturing to China. Most emblematic is Foxconn, a Taiwanese electronics company known now as the main assembler of iPhones. It opened its first plant in China in 1988; 30 years later it employs roughly 1m people there. But as they offloaded low-end work to China, the tigers moved upstream. South Korea is the world’s biggest maker of memory chips. Taiwan has the biggest capacity for fabricating semiconductors. As a result, they each account for more than 12% of China’s final demand for electronic and computer products, twice as much as any other trade partner. They are, put simply, making things that China cannot.
They have also ridden on China’s coat-tails. As firms have clustered together in China, Asia as a whole has become a more powerful manufacturing region. Asia’s share of the global trade in parts and components rose from 19% to 30% between 2000 and 2016. Mainland China is home to four of the world’s seven busiest container ports; the others are in Singapore, Busan and Hong Kong.
Both Singapore and Hong Kong have strengthened their roles as the management hubs of “Factory Asia”. More than 4,000 companies have chosen Singapore as a regional headquarters, often to oversee South-East Asia. Hong Kong has fewer, with roughly 1,500 headquarters, but it has been far more successful than Singapore at luring Chinese companies to its stock exchange. Its stockmarket is worth more than $4trn; Singapore’s is closer to $700bn.
All these connections, however enriching, create vulnerabilities. America’s trade war is intended to inflict pain on China. But the tigers are, in many ways, more exposed to the damage because they are smaller and more open. In China, exports are worth about 20% of GDP. In South Korea it is more like 45%; in Taiwan, 65%; and in Singapore and Hong Kong, closer to 200%.
In tearing supply chains asunder, Mr Trump’s tactics pose a particular danger to the tigers’ cosmopolitan model of manufacturing. They remain highly dependent on inputs from other countries. They also serve an ecumenical range of clients, including some whom the Americans distrust. Taiwanese foundries produce chips for top American firms but also for Huawei, the Chinese telecoms giant that Americans accuse of spying. “We are everyone’s foundry. We exclude no one,” says an official at TSMC.
Faced with all the uncertainty, the tigers have a couple of options. One is to diversify their customers and their products. Taiwan has long pushed its companies to explore emerging markets other than China. South Korea’s government is keen to promote a wider range of products. On the most recent “trade day”, President Moon Jae-in of South Korea applauded new industries such as electrical vehicles and robots.
Another response is to try to patch up the global trading order. Before 2000 the tigers were party to just five regional trade agreements; they have since joined 49 more. Singapore was an originator of both the Trans-Pacific Partnership (a trade deal that once aimed to join America, Japan and ten other Pacific-Rim countries) and its supposed rival, the Regional Comprehensive Economic Partnership, which includes China. It is also among the countries working to broker a compromise between China and America that will keep the World Trade Organisation functioning.
But the tigers have little ability to dodge a full Sino-American clash. Hong Kong is most at risk. Its distinctiveness is recognised in American law, which treats it as a separate customs territory from the rest of China. That means it is a non-combatant in the trade war. But some companies appear to be exploiting this, routing goods through Hong Kong middlemen to lower the tariffs they face. America might yet tighten its scrutiny of goods from the city.
Problems in Asia can also be home-grown. A political dispute between South Korea and Japan, rooted in Japan’s occupation of South Korea in the first half of the 20th century, has morphed into a 21st-century trade squall. Japan has restricted sales to South Korea of materials vital for making semiconductor chips. The global division of labour is so finely sliced that it is difficult for South Korean chipmakers to find close substitutes.
The upshot of all the turmoil is that it is getting harder for companies to know where to operate and with whom to trade. At Giant Ms Tu’s conclusion is that companies need to stick to what they can control. “We have to focus on efficiency and automation,” she says. That quest for efficiency is shared across the tigers. Automation is one way to achieve it. But there are others. ■