China reliance on Taiwan will make trade retaliation costly

BEIJING: China’s military drills after US House Speaker Nancy Pelosi visited Taiwan sparked alarm around the region, although its trade retaliation barely made a dent – mostly because Beijing doesn’t want to hurt itself.

The value of trade targeted by China’s sanctions contributes a tiny amount of less than 1% to Taiwan’s gross domestic product (GDP), according to economists, taking the sting out of China’s announcements.

Beijing could ramp up actions by targeting more food products, wood or minerals. But levies on any big-ticket items that would cause real damage to Taipei – such as semiconductors – are near-unthinkable, given China’s reliance on the island for cutting-edge technology.

“The chance remains relatively low” for China to target Taiwanese tech, said Ma Tieying, an economist at DBS Group Holdings Ltd.

“If you look at Taiwan’s role in global semiconductor supply, it’s very much dominant. It would be very difficult for China to find the alternative supply if it bans the Taiwan-made semiconductors.”

Beijing still has a few tools it could deploy to pressure Taipei.

China and Hong Kong account for around 40% of Taiwan’s total exports, though Taipei has made efforts to reduce its economic dependence on China in recent years.

More restrictions would be an economic headache for Taiwan, which is already grappling with slowing global demand for electronics and high inflation, cooling its growth outlook.

The trade sanctions Beijing has already inflicted this month are expected to have a marginal impact on Taipei.

Food accounts for just 0.4% of cross-strait trade, Goldman Sachs Group Inc economists wrote in a research note last week. In all, bilateral trade between the two economies reached Us$328.3bil (RM1.47 trillion) last year.

The recent restrictions impacting citrus fruits and some fish exports might have an impact of less than 0.1% on Taiwan’s GDP, the Goldman economists said.

There’s also evidence of other tension, including Chinese customs data that show Beijing has blocked other food imports, though it’s not clear when those suspensions happened.

If China wants to mitigate the fallout of sanctions on its own economy, it could target Taiwanese wood, minerals, shoes or hats. Taiwan’s trade relies significantly more on delivering those items to China than China does on receiving them from the island, according to a DBS report.

China would also have an easier time finding alternative sources for those products, according to DBS. For instance, one-fifth of Taiwanese wood is exported to China, but these comprise only some 0.1% of China’s total wood imports. Other countries where China imports wood from include Russia, the United States and Australia.

China could also restrict more of its own exports to Taiwan, as it did with natural sand. There’s some historical precedent for doing so, as Beijing previously halted sand exports in 2007 for about a year, citing environmental concerns.