Written by Corey Bell.

Image credit: 總統出席「玉山論壇開幕典禮」by 總統府/Flickr, license CC BY 2.0

The 2019 Yushan Forum, hosted by the Taiwan-Asia Exchange Foundation, lived up to its hype as a major forum on Asian trade and regional integration. In a major coup, this year’s programme succeeded in attracting a number of prominent speakers, including Taiwan’s President Tsai Ing-wen, who delivered the event’s opening address, her Vice President Chen Chien-jen, India’s former foreign secretary Shivshankar Menon, and Sandra Oudkirk, the U.S. State Department’s Deputy Assistant Secretary for Australia, New Zealand and the Pacific Islands. The constitution of this panel reflected its repeated references to the ‘Indo-Pacific’ – a term which Chinese officials claim to be a geographic fabrication inspired by an American strategy to ‘fence in’ China. This term was often used in this forum in discussions on a cornerstone of the policy platform of Taiwan’s current administration – the so-called New Southbound Policy, or NSP.

Devised in 2016, the NSP plans to expand Taiwan’s economic engagement with countries located in the western Pacific, Southeast Asia, the Indian Ocean and Oceania. In addition to increasing the volume of trade with these nations, it is seen as a vehicle for developing supply chains and production bases that can further the region’s integration into the global market, and develop Taiwan’s role as a global logistic centre. However, reflecting the recurring use of the term ‘Indo-Pacific,’ an important theme in the Yushan Forum was that the NSP should be used to counter China’s Belt and Road Initiative. Until recently, this has never been one of the stated aims of the policy – in fact, this is a position that has been explicitly refuted by President Tsai. Most importantly, overtly linking the NSP with efforts to curtail China’s influence in the region poses serious problems. If political and geopolitical pressures pull the NSP tighter into the vortex of escalating Sino-U.S. competition in the region, it could have a detrimental impact on the program’s capacity to realise the key goals that motivated its creation. This would be bad for Taiwan’s economy, America’s economic and strategic goals for the western Pacific, and the region as a whole.

To understand why this is the case it is useful to explore the history of Taiwan’s so-called ‘southbound’ policies.

The first southbound policy came on the back of the formation of the ASEAN Free Trade Area (AFTA), and was initiated in 1993 as part of a plan by the then-Minister of Economic Affairs, Pin-Kung Chiang, to strengthen investment in Southeast Asia. It’s formal inauguration was announced by President Li Deng-hui, who belonged to the pro-unification Kuomingtang party (KMT). In addition to its economic agenda, the motivations shaping the policy were in part political – the main one being ceasing or redirecting a raging torrent of capital flow into mainland China. Due to the program’s small scale (it targeted 7 nations), as well as the administrations limited know-how, this program’s success was ultimately limited. It nonetheless marked a paradigmatic change in Taiwan’s approach to the relationship between its geopolitical conundrums and trade, and paved the way for future developments.

The so-called ‘second wave’ southbound policy began in 1997. It was spurred on by two significant events: 1. the Asian Financial Crisis, which prompted a need for economic stimulus, and 2. President Li’s announcement of the ‘no haste be patient’ policy, which called for a reduction of Taiwan’s economy’s over-reliance on China-bound investment. This policy also faced major obstacles, due partly to political opposition within the KMT, and the view of many entrepreneurs that the ‘no haste be patient’ policy threatened to wind back the island’s freedom of trade and commerce. While this incarnation was again relatively unsuccessful, it built on the scale and scope of the first program, and increased Taiwan’s public service’s knowledge of, and experience in engaging with, Taiwan’s regional partners.

A third, vastly improved incarnation of the policy began in 2002 under the auspices of Taiwan’s anti-China, independence-leaning DPP president Chen Shui-bian. It was partly a response to China’s 2001 proposal to establish a China–ASEAN Free Trade Area, and also stemmed from Chen’s doctrine that ‘Taiwan needs to follow its own path’ – which effectively meant moving Taiwan out from the shadow of China to pursue trade opportunities in the broader global economy. Though influenced by geopolitical and domestic political considerations, the new policy sought to separate politics from trade, focusing mainly on the role of medium to small scale enterprises. This program was more comprehensive than previous incarnations, and increased Taiwan’s ‘southbound’ direct foreign investment (FDI) to more than US $10 billion (although China-directed FDI growth was similar over the same period). Nonetheless, ‘southbound’ FDI collapsed the year after Chen’s tenure expired (2008), when the program was effectively cancelled by the China-friendly administration of President Ma Ying-jeou.

From this brief history we can see that while the southbound policies of the past were inspired by geopolitical aims, economic motives were of at least equal import. However, geopolitics and domestic politics often conspired to undermine these policy’s economic aims. The emphasis on geopolitik also led to policy makers overlooking a fundamental failing – a disconnect between the state’s macro-economic strategy, and the commercial interests and skill-sets of Taiwan’s business community. Thus while state sponsored large-scale infrastructure projects ran the risk of attracting the ire of China, private Taiwanese firms continued to find China (‘westward’) investment to be a more tempting proposition, meaning that redirecting investment ‘southward’ needed to be heavily incentivised and perpetually subsidised. This made each program fiscally unsustainable, and left these policies more exposed to the vagaries of domestic politics.

Yet just prior to the inauguration of the NSP, this situation changed considerably. Formerly, Taiwanese entrepreneurs preferred investing in China because it was geographically close, culturally and linguistically proximate, and competitive in terms of costs, infrastructure etc. China’s prior level and direction of economic development also meant that there was more scope for Taiwanese and Chinese companies to play complementary roles. Yet many of these advantages have since diminished. Wages and other costs in China are now far less competitive. China’s key sectors and markets are converging with those of Taiwan, meaning that cooperation is turning into competition. And rather than facing off against non-Chinese firms with inferior Chinese cultural and linguistic know-how, China-based Taiwanese enterprises are increasingly coming up against savvy and well connected home grown entrepreneurs.

What this means is that there is now, for the first time, a stand-alone economic case for redirecting investment ‘southbound’. This is reflected by the fact that Taiwanese firms had recently begun scaling back their operations in China and shifting ‘southward’ on their own volition. And with the NSP’s macroeconomic strategy becoming better aligned with the micro-commercial needs of Taiwan’s business community, a geopolitical agenda is no longer needed to propel and sustain the program, which has allowed the latter to take on a more back seat role. It should not be surprising, in view of this, that the NSP has received considerable support from formerly sceptical (and traditionally pro-China) cliques of Taiwanese entrepreneurs. With the strong economic case for the policy obviating the need for a more divisive ideological one, the program’s fate has become more insulated from the vagaries of fiscal contractions and domestic politics.

Perhaps on account of this, the NSP has been able to be both more ambitious than its past incarnations, and – thus far at least – markedly more successful. For instance, Taiwanese investment in Vietnam for the first half of 2019 (US $783 million) was more than double the figure from a year earlier, while export growth to this country has climbed markedly (peaking at almost US$11 billion in 2018). Bilateral trade with Malaysia recorded 22 per cent growth in 2018, and double digit annual export growth was achieved in a number of markets including Australia and India. Tourist industry income from NSP countries reached 23% of all earnings in that sector in 2017, with massive growth in medical tourism from NSP sources. In addition, Taiwan has established a large number of collaborative research programs with institutes in NSP countries, including India (86 programs), Indonesia and Malaysia. Manufacturing operations by Taiwanese firms in NSP countries are being planned and expanded on an impressive scale – including the Kwang-Yang Motor Co. Ltd’s recent announcement of a multi-million dollar expansion of its plant in the Philippines.

The added bonus of this is that far from being in competition to the Belt and Road Initiative, many facets of the more comprehensive NSP may well benefit from the infrastructure and other programs advanced/funded by this scheme. Moreover, while President Tsai had formerly denied the NSP has a strong geostrategic motivation, she has acknowledged that geopolitical gains would be a natural concomitant of Taiwan’s growing economic integration and logistical role in the region. Such geopolitical benefits, moreover, are essentially aligned with those of the United States and its other regional allies.

The biggest threat to these gains could thus come if the DPP administration repeats the fundamental failures of the former three southbound policies and again creates a disconnect between the policy’s economic agenda and its geopolitical dictates. One of the biggest dangers in this regard would be reframing the NSP as a countermeasure to China’s regional economic aspirations, and the Belt and Road Initiative in particular. Nothing could be worse for the NSP than placing Southeast Asian and other regional economies into a position where they have to choose between a) participation in the NSP, along with the concomitant possibility of economic and diplomatic reprisals from Beijing, and b) China’s Belt and Road – and by extension, China’s seemingly unlimited appetite for investment and consumer power. In most cases there will likely only be one answer, and it will not be the one that the participants of the Yushan Forum are rooting for.

Corey Lee Bell is an associate editor of Taiwan Insight. He has taught modern and classical Chinese history at the University of Melbourne, Australia, and is a former recipient of the Taiwan Fellowship. He has lived in Taiwan for more than 5 years, and has written articles on Taiwan, Chinese politics and international relations in East Asia for The Australian, The Diplomat, Asia Weekly (亞洲週刊 Yazhou zhoukan), and IPP Review.

This article is part of the special issue on Taiwan’s partnerships with Asian nations.