Diversifying, Not Decoupling

In July 2022, on the eve of then U.S. House of Representatives speaker Nancy Pelosi’s visit to Taiwan, the Trustee Chair in Chinese Business and Economics at CSIS conducted a formal survey of Taiwanese companies’ views and activity related to the international geostrategic environment. What most stood out was the high percentage of firms that already had begun to move some of their business from Mainland China or were considering doing so. A smaller, yet surprising number also reported either already moving or considering moving some of their business from Taiwan. These levels of reported movement of operations far outstripped such activity by their American, European, and Japanese counterparts.

Since then, in part due to two summit meetings between the leaders of the United States and China and the launching of over a dozen dialogues, geostrategic tensions have modestly tempered. In that context the Trustee Chair conducted a second survey of Taiwanese firms in November 2023 to assess how companies’ views and behavior may have shifted during the intervening period. The new survey was slightly modified to take into consideration changing circumstances, and the sample size was increased.

The overarching conclusion from the latest survey is that although worries about the risks of doing business with China remain high, Taiwanese companies are engaging in a variety of diversification strategies rather than decoupling from China.

Companies’ worries about the geostrategic environment have receded somewhat, but they still favor a variety of coping strategies, including expanding involvement in regional trade arrangements, broadening commercial ties with the United States, expanding research and development (R&D) and nurturing a talented workforce to protect Taiwan’s technology advantage, and shifting some of their operations from China and Taiwan. Although the total proportion of firms considering or actually moving some of their business from China and Taiwan fell slightly, the proportion reporting they have already moved some operations rose significantly (from 25.7 percent to 34.3 percent from China, and from 13.0 percent to 17.9 percent from Taiwan). Companies report that Southeast Asia is still their number one destination, but interest in South Asia has risen dramatically. Companies are motivated to move from China for a variety of reasons, including high labor costs, fears of supply chain disruptions, changing investment policies, and worries about the possibility of war. Industries vary significantly in their interest in moving, which may be affected by the extent of their investment and the purpose of their existing operations.

Although the proportion of firms moving remains high, they are moving as part of a variety of diversification strategies, not outright abandoning China altogether. China is still seen as an important trading partner; Taiwanese businesses are still not convinced India and Southeast Asia are sufficient substitutes; and companies are only moving a portion of their operations.

These results have important implications for policymakers in Washington, Beijing, Taipei and elsewhere. In the face of similar risks faced by Taiwanese industry, the U.S. government has launched a range of initiatives to address a list of economic security concerns, including dual-use technologies, supply chain resilience, economic coercion, and human rights abuses. If Washington’s approach becomes overly focused on imposing restrictions and shifts from a goal of managing risks to decoupling, it could very well find itself out of step with Taiwan, and most likely with other like-minded partners as well.

Although Beijing has taken a variety of steps over the past two years to address the concerns of companies and investors, including from Taiwan, it has simultaneously increased military pressure against Taiwan, carried out an investigation into Taiwan’s potential violation of ECFA, and imposed a variety of tailored restrictions. At a minimum, these steps send a mixed signal to Taiwanese businesses and propel them to explore alternative opportunities. Beijing will need to adjust its policies if it wants to achieve progress on both political issues and economic ties. For Taipei, the survey results suggest that policy steps to radically expand restrictions against Mainland China would not be welcomed by local industry, which instead still sees China as an important location for production and a large market. The continued anxiety about a possible war and supply chain disruptions means Taipei still must work to reassure local industry about the island’s commercial environment and economic future. Strengthening business confidence is central to maintaining the island’s economic vibrancy and security.

Taiwanese Industry

A Potential Canary in the Mine

The views and actions of Taiwanese companies provide invaluable insights into both cross-strait relations and trends in the geoeconomic environment. Firms from Taiwan are deeply embedded in supply chains that traverse the West, the People’s Republic of China, and the Global South, operating along the most complex geostrategic fault lines in the world. Moreover, Taiwanese industry may be the “canary in the mine,” with its views and conduct providing a preview of how global industry may behave when faced with competing forces to either shift business away from China or stay put. On one hand, the growth of restrictive trade and investment policies, the rising possibility of military conflict, climate change, increasing labor costs, pandemic restrictions, and other risks have created pressures for firms to move from China to other locales. On the other hand, China’s large domestic market, its sophisticated infrastructure and manufacturing value chain, and its growing innovation ecosystem act as incentives for firms to remain there or even expand their footprint.

Multinational companies and financial institutions trying to assess their options, as well as policymakers attempting to evaluate the efficacy of their economic policies, will gain a deeper understanding of this landscape by examining the views and behavior of Taiwanese industry. Although trade and investment data and individual case studies are useful gauges, surveys provide an intermediate bridging tool, as they allow for the assessment of a large number of firms’ subjective evaluations of their circumstances, their actual behavior, and the factors shaping their future choices.

In July 2022, on the eve of then U.S. House of Representatives speaker Nancy Pelosi’s visit to Taiwan, the Trustee Chair in Chinese Business and Economics at CSIS conducted a formal survey of Taiwanese companies’ views and activity related to the international geostrategic environment. As a group, the polled companies believed that Taiwan was overdependent on China, and they were worried about a possible conflict in the Taiwan Strait, the consequences of China’s zero-Covid policies, and other risks. Many of those polled advocated for expanding Taiwan’s economic ties with the United States, becoming more involved in regional arrangements, and strengthening the island’s technological edge through greater research and development (R&D) and investments in human talent.

But what most stood out was the high percentage of firms that already had begun to move some of their business from China (25.7 percent) or were considering doing so (33.2 percent). A smaller, yet surprising number also reported already moving some of their business from Taiwan (13.0 percent) or were considering doing so (20.8 percent). At the time, roughly two-thirds of those moving from either locale were shifting some of their operations to Southeast Asia. These levels of reported movement of operations far outstripped such activity by their American, European, and Japanese counterparts.

Since then the geostrategic environment has continued to evolve. In early 2023, China ended its zero-Covid policies and reopened to international travel. Around the same time, the United States and China took a range of steps to stabilize their relationship, including leadership summits in October 2022 and November 2023 and the launch of over a dozen bilateral dialogue mechanisms. In the process, the sense of imminent conflict in the Taiwan Strait receded, as the United States and China sought to reassure the other about their motivations and to clarify their red lines. It is in this somewhat less tense geostrategic context that the Trustee Chair conducted a second survey of Taiwanese firms in November 2023 to assess how companies’ views and behavior may have shifted during the intervening period. In addition to remeasuring their assessment of risks and coping strategies, a second survey could also evaluate whether steps by China to normalize inward and outward international travel and by Beijing and Washington to stabilize ties had any effect on firms’ intentions to move business operations.

The new survey was slightly modified from the original. There were fewer questions about the Covid-19 pandemic. In their place, new questions were added to more directly understand why companies would potentially move from Mainland China and Taiwan, and if so, how much of their operations they were moving. The survey also placed greater attention on the relevance of companies’ industries to more fully capture variation in patterns of views and behavior.

As Figure 1.1 shows, the average size and overall profitability levels of companies in the latest survey sample are similar to 2022, but firms in the new survey skew substantially younger. The proportion of firms with investment in China is slightly higher (61.6 percent compared to 60.8 percent), and the companies in the new survey depend somewhat more on the Mainland for their revenue than those polled in 2022. The 2023 survey has a somewhat higher percentage of firms in agriculture and industry but still has roughly 25 percent of firms in manufacturing, which is very similar to the island’s overall average. The size of the sample was increased intentionally (to 610 firms from 525) so that it would be more feasible to analyze how firms’ sectoral identity shapes their responses.

▲ Figure 1.1: Comparison of 2022 and 2023 Survey Samples. Source: Scott Kennedy, It’s Moving Time: Taiwanese Business Responds to Growing U.S.-China Tensions (Washington, DC: CSIS, October 4, 2022); and appendix.

The biggest difference in this year’s sample is that the proportion of respondents in favor of Taiwan’s independence was much lower, 13.9 percent compared to 23.2 percent. The general population’s support for independence did drop over the same period, with 3.8 percent in favor of immediate independence and 21.5 percent in favor of maintaining the status quo for the moment but eventually moving toward independence, but was still higher than this sample. In the 2022 survey, pro-independence respondents were more likely to favor moving their operations.

In sum, the timing of this new survey — coming after a general stabilization in U.S.-China ties — and the skewing of the sample in a pro-unification direction would, all else being equal, suggest a lower proportion of companies would be moving their operations, whether from Mainland China or Taiwan. As will be explained below, the actual results indicate that a high proportion of Taiwanese companies are still moving. That said, it appears that the vast majority are engaged in one form or another of diversifying rather than fully decoupling their business from China.

The next chapter of this report presents the key findings of the survey with regard to how Taiwanese companies evaluate the various geostrategic risks they face and how best to respond, both in terms of government policies as well as their own behavior. The third chapter delves further into Taiwanese firms’ decision to move operations from the Mainland and explores why they are more prone to move than their counterparts from elsewhere. The final chapter evaluates the policy implications for the various actors with a stake in these geopolitical challenges.

The Overall Results

Evolving Risks and Responses

The overarching conclusion from the latest survey is that although worries about the risks of doing business with China have modestly receded — in part due to the thaw in U.S.-China relations and the end of zero-Covid — anxieties remain high. As a result, companies still favor a variety of coping strategies, with an even higher proportion than in 2022 having already started to move some of their business out of Mainland China and Taiwan. As in the 2022 edition, the full survey and results are included in the appendix.

1. Anxieties about China and international affairs remain high but have attenuated in a few ways, reflecting slightly less alarmist expectations about the likelihood of a U.S.-China military confrontation and a subtle shift in views regarding China’s Covid-19 policies.

The most notable change is a drop in the proportion of those expecting a U.S.-China military conflict in the next five years, falling over 10 percentage points, from 38.7 percent to 28.2 percent (see Figure 2.1). At the same time, the proportion believing Taiwan’s semiconductor industry serves as a disincentive to Beijing to attack or as an incentive to the United States to come to Taiwan’s aid both fell somewhat, to slightly under half of those polled. Those who believe China’s zero-Covid policies had a negative impact on their business did not change — 45.7 percent in 2022 and 45.5 percent in 2023 — but the proportion who said zero-Covid had either a somewhat positive or very positive effect on their business rose from 15.0 percent to 24.3 percent, perhaps reflecting a reevaluation once the tensions of the moment had passed.

▲ Figure 2.1: Worries about War and Zero-Covid. Source: Kennedy, It’s Moving Time; and appendix.

2. Taiwanese companies seek to reduce dependence on China and expand cooperation with others.

As a result of these continuing worries, the proportion of polled companies that believe Taiwan should reduce its dependence on China is still high. But the overall proportion that agree with this statement — either strongly or somewhat — fell almost 10 percentage points, from 76.3 percent to 66.9 percent (see Figure 2.2).

▲ Figure 2.2: Taiwan Should Reduce Its Dependence on China. Source: Kennedy, It’s Moving Time; and appendix.

The first approach to reducing dependence is to expand involvement in regional trade arrangements. As Figure 2.3 shows, the Economic Cooperation Framework Agreement (ECFA), which regulates cross-strait commercial relations, is still regarded as the most important regional agreement for Taiwan; however, support for this view dropped substantially, to just over 21 percent. Evaluations of other major East Asia arrangements — the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP) and the Regional and Comprehensive Economic Partnership (RCEP) — are also still among the top tier but fell as well. Rising in the assessment are new arrangements such as the Digital Economy Partnership Agreement (DEPA), Taiwan’s own New Southbound Policy, and the U.S.-led Indo-Pacific Economic Framework for Prosperity (IPEF). DEPA was launched in 2020 and as of May 2024 had four members: Chile, New Zealand, Singapore, and South Korea. Taiwan’s interest ostensibly originates from the arrangement’s focus on issues central to the island’s economy and from the fact that efforts by the World Trade Organization (WTO) to reach a new pact on digital trade have faltered. Interest in the New Southbound Policy, geared toward expanding ties with Southeast Asia, India, Australia, and New Zealand, also modestly rose. Finally, recognition of IPEF rose even though the prospects for Taiwan to formally join have been very low.

▲ Figure 2.3: Preferred Regional Arrangements. Source: Kennedy, It’s Moving Time; and appendix.

The second component is to expand commercial ties with the United States. Although the United States and Taiwan recently successfully negotiated the first part of the Initiative on 21st-Century Trade, whose components mirror those in IPEF, Figure 2.4 shows that Taiwanese firms’ primary interest is still in three other arrangements. Leading the way is a formal bilateral trade agreement, but interest in that dropped somewhat (especially when ranked among the top three), likely because prospects for such a deal have remained low. Similarly strong support exists for two arrangements that have been in operation for some time, the Technology Trade and Investment Collaborative Framework and the Trade and Investment Framework Agreement (TIFA).

Support for a bilateral double-taxation agreement with the United States still does not rank as highly as other arrangements but did rise from 7.8 percent to 14.3 percent as the top option of respondents and increased to be among the top three, from 26.1 percent to 35.4 percent of respondents. Moreover, when specifically queried about a double-taxation agreement, a full 70 percent consider it important, with almost a quarter describing it as “extremely important” (23.0 percent), “fairly important” (24.9 percent), or “important” (22.1 percent). Only 7.4 percent said the agreement is “completely unimportant.” The Biden administration, Congress, and Taipei have made progress on creating parallel double-taxation measures, but final adoption, as of September 2024, is still uncertain.

▲ Figure 2.4: Bilateral Arrangements with the United States. Source: Kennedy, It’s Moving Time; and appendix.

3. Consensus solidified over the importance of offensive technology policies to maintain the island’s technological advantage.

In the original 2022 survey, Taiwanese companies reported that the most important steps needed to protect Taiwan’s technology advantage were expanding R&D and nurturing a talented workforce. These “offensive” steps drew more support than “defensive” ones such as rigid export controls and investment restrictions.

In the new survey, these views were further strengthened. When asked how Taiwan should maintain its technological edge on China, 37.9 percent of respondents said that R&D in Taiwan should be expanded, compared to 35.4 percent in 2022 (see Figure 2.5). Jumping up to second, with 14.9 percent support, is expanding the number of university undergraduate and graduate students in science and technology (S&T). By contrast, support dropped for every kind of “defensive” policy meant to limit China’s access to technology — such as export controls on dual-use technology, inward investment restrictions, outward investment restrictions, and limits on Taiwanese working in Mainland Chinese high-tech companies — with each attracting just above 10 percent support. This sentiment is consistent with the respondents’ analysis, discussed further below, that one of the main constraints on their firms’ competitiveness is insufficient talent.

▲ Figure 2.5: How Should Taiwan Keep Its Technological Edge? Source: Kennedy, It’s Moving Time; and appendix.

4. More Taiwanese companies are following through on their plans to move some operations from Mainland China and Taiwan.

The most surprising finding from the 2022 survey was the high percentage of companies that were considering moving or were actually starting to move some of their business from both Mainland China (58.9 percent) and Taiwan (33.8 percent). Despite the tempering of U.S.-China tensions and less alarmist worries about war, companies in the latest survey still report that they are considering or already moving, from both China (57.4 percent) and Taiwan (37.6 percent), as Figure 2.6 shows. The biggest shift is from thought to action, with a jump in actual moving from China (from 25.7 percent to 34.3 percent) and Taiwan (from 13.0 percent to 17.9 percent), indicating that the original consideration of moving was more than baseless speculation.

In addition to a jump in those already moving, there was also a change in the pattern of destinations. In the original survey, over 63 percent of companies moving from China and 67.8 percent of companies moving from Taiwan were going to Southeast Asia, far more than any other location (see Figure 2.7). By contrast, by late 2023, companies reported that Southeast Asia was still their number one destination from China (50.9 percent) and Taiwan (48.9 percent), but by a smaller margin than before. For those moving from China, the second most common destination was, as in 2022, Taiwan. However, the third most common destination, and biggest change from 2022, was South and Central Asia, by which respondents most likely meant India. There was still interest in moving to Northeast Asia (South Korea and Japan), while North America, and Australia and New Zealand, still garnered low levels of interest. For those moving from Taiwan, there was a substantial jump in those moving to the Mainland, while South and Central Asia moved up to attract as much interest as Northeast Asia. And like those moving from Mainland China, there was still only limited interest in North America and in Australia and New Zealand. This suggests that large individual investments, such as Taiwan Semiconductor Manufacturing Company’s (TSMC) fab in Phoenix, Arizona, are not being followed by a wave of other Taiwanese companies. By contrast, momentum to move to India has gained substantial steam.

▲ Figure 2.6: Companies Report Moving from Mainland China and Taiwan. Source: Kennedy, It’s Moving Time; and appendix.

▲ Figure 2.7: A Shifting Pattern of Destinations. Source: Kennedy, It’s Moving Time; and appendix.

To provide greater insight, the new edition of the survey also asked companies to indicate the proportion of their operations that they are considering or actually moving from the Mainland and Taiwan. As Figure 2.8 shows, the plurality (39.4 percent) of those in Mainland China are moving 26–50 percent of their business, and just over 30 percent of companies are moving 11–25 percent. Only 7.9 percent are moving the vast majority of their business (over 75 percent) out of China. For those leaving Taiwan, the data skews somewhat lower, with the plurality (36.7 percent) moving 11–25 percent, and 31 percent moving 26–50 percent. These are not insignificant portions of their business, but very few are leaving either locale outright.

▲ Figure 2.8: Shifting, Not Leaving: Proportion of Investment Being Moved from Mainland China and Taiwan to Elsewhere. Source: Appendix.

There are also some important insights to be gained by looking at the responses of different industries (see Figure 2.9). First, industries vary substantially in the share of firms with investment in China that are considering or actually moving. In five sectors (public administration, real estate, finance and insurance, human health and social work, and manufacturing), over two-thirds of firms are moving or considering doing so. In another 10 sectors, it is 50–60 percent of firms, and in four sectors it is less than 50 percent.

A complete explanation for the variation across sectors awaits more refined statistical analysis, but there are a couple of findings that stand out at first glance. Sectors with firms that report China’s market is a relatively higher share of their overall revenue appear to move somewhat more of their operations than those less dependent on China. Additionally, in sectors where a higher proportion of firms report moving, they tend to be moving a slightly lower proportion of their business compared to sectors where a lower share of firms are moving. Put another way, in some sectors a high share of firms are moving, but they are moving less of their operations.

There is an important contrast in terms of destinations. Over half (52.8 percent) of firms in manufacturing are moving to Southeast Asia, whereas only 22.6 percent in that sector were returning to Taiwan. Other likely movers to Southeast Asia were in health and social work and hotel and food services, all services that could support the people who are in manufacturing firms. The most likely sectors to return to Taiwan were public administration, finance and insurance, and hotel and food services.

Finally, in around 40 percent of sectors, firms most commonly were moving a moderate proportion of their operations (26–50 percent). In five sectors, firms were mainly moving 11–25 percent of their operations. And in another five industries, the proportion of operations that firms reported moving was widely distributed, with no one dominant pattern.

▲ Figure 2.9: Industry Patterns of Moving from China. Source: Appendix.

In addition to these broader patterns of shifting investment decisions, there are some distinctive regional patterns that suggest Taiwanese companies are pursuing a diversity of approaches. The largest plurality of companies are not moving at all, either from the Mainland or Taiwan. Of those that are moving, three groups are significant. The first is the group of 22 companies that are moving from China and Taiwan and going only to Southeast Asia. The second group is composed of 25 firms that are moving from both China and Taiwan to at least three other destinations. The final group is made up of 30 firms reporting that they are simultaneously moving only from Mainland China to Taiwan and from Taiwan to Mainland China. The “Southeast Asia movers” are focused on shifting production to a single locale; the “diversifiers” appear to be spreading risk across a range of regions; and the “cross-strait movers” appear to be reorganizing their production within the company, with a clearer delineation of their “China for China” activities in the PRC and their other activities directed for Taiwan and the rest of the world back on the island.

The broader point is that although most companies are moving or planning to move their business, there is substantial variation in where they are moving to and how much of their operations they are moving. Understanding these patterns is aided by analyzing the reasons why companies are moving.

Why Taiwanese Companies Are Moving

It is not only surprising that such a high percentage of Taiwanese firms are moving from Mainland China and Taiwan despite the stabilization of U.S.-China relations, but that the inclination for Taiwanese firms to move is so much higher than for their counterparts from the United States, Europe, and Japan (see Figure 3.1). Whereas over 57 percent of Taiwanese companies are considering or already moving, just under a quarter of U.S. firms in China are, and only around 10 percent of European and Japanese firms report that they are moving.

There is no direct evidence to explain why Taiwanese companies have a stronger propensity to move than their American, European, and Japanese counterparts. But we can evaluate what differentiates the Taiwanese firms that choose to move from those that do not, and then more closely analyze the various reasons for moving. This may then help provide insights across different investors in China.

One way to distinguish movers and non-movers is to compare their answers to other questions in the survey. These patterns are not necessarily statistically significant, because the potential effect of other factors is not simultaneously accounted for, but such “crosstabs” are nevertheless suggestive. The first survey from 2022 found that several factors — companies’ backgrounds, the Covid-19 pandemic, firms’ evaluation of the international economic situation, the respondents’ political leanings, and their views about security — were related to how likely they were to have considered or actually begun to move some of their business from China and Taiwan.

As with the 2022 results, companies in manufacturing are more likely to have already moved than to either be just considering moving or have no plans to move (see Figure 3.2). A company’s current profitability does not appear to shape their relocation decisions. Unlike in 2022, however, older companies are now more likely to leave rather than younger firms.

▲ Figure 3.1: Comparative Rates of Movement from China. Source: American Chamber of Commerce in China, China Business Climate Survey Report, 2020–2024; European Union Chamber of Commerce in China, Business Confidence Survey 2024 (Beijing: European Union Chamber of Commerce in China, June 2024); Japan External Trade Organization, Survey on the International Operations of Japanese Firms, 2019–2023; and appendix.

Looking at economic ties, while revenue reliance on China did not seem to matter in 2022, it does in the latest survey. Companies that depend more on China for their profits are less likely to move than those that are less dependent. A total of 69.2 percent of those who did not move generated more than 25 percent of their profits from China, while only 51.7 percent of those considering moving and 36.4 percent of those who have not moved depend on China for a quarter or more of their profits.

Conversely, those who already started moving strongly believe that the island should reduce its dependence on Mainland China. In short, while exposure to China may be synonymous with higher opportunity costs, fears of overdependence still shape relocation decisions. Finally, those who believe that Southeast Asia and India are sufficient substitutes for China were, as in 2022, more likely to have already started moving.

The impact of political and security views did not change much between the two surveys. In 2023, 21.3 percent of those who moved away supported Taiwan’s independence, compared to 9.5 percent who were considering moving and 2.8 percent who were not moving at all. Moreover, companies that left were less concerned about China’s military action given Taiwan’s strength in semiconductors and were most likely to believe that the United States and others would provide military support in the event of a contingency for the same reason.

▲ Figure 3.2: Distinguishing between Movers and Non-movers from Mainland China. Source: Appendix.

When the focus turns to reasons for moving from or staying in Taiwan, because the pandemic subsided in 2022, the 2023 survey did not ask how Covid-19 cases affected business or whether respondents were satisfied with Taiwan’s Covid-19 policies. Instead, as Figure 3.3 shows, basic company characteristics and views about the semiconductor industry mattered. Companies that are older, larger, and in manufacturing showed a greater propensity for moving. Unlike in the 2022 survey, the belief that Southeast Asia and India are sufficient substitutes for both Taiwan exports and investments with Mainland China now appears positively correlated with the decision to move from Taiwan. In addition, companies that believe Beijing is less likely to take military action because of Taiwan’s strong semiconductor industry were also more inclined to move. Respondents’ views about Taiwan independence, their companies’ relative dependence on China for revenue, and the likelihood of war in the next five years did not seem to differentiate movers and non-movers.

▲ Figure 3.3: Distinguishing between Movers and Non-movers from Taiwan. Source: Appendix.

The more recent survey, from late 2023, went one step further and directly asked only those companies that are moving or considering moving to choose the top three reasons from a long list of reasons why. Although not posed to those who did not move at all, this approach lets firms themselves clearly explain their decision to move as opposed to looking for patterns between separate questions. As Figure 3.4 shows, this approach yields some similarities but also reveals some differences from the crosstabs.

▲ Figure 3.4: Why Companies Are Moving from China and Taiwan. Source: Appendix.

Four of the top five reasons concern China’s business environment, including high labor costs, the possibility of supply chain disruptions, changing investment policies, and lack of policy transparency. Although Taiwanese firms are worried about the possibility of war, that ranked fourth among the various factors affecting their decision. At the other end of the spectrum, issues that were much less important included a general desire to diversify production or reduce ties with China, the need to follow others in the same supply chain, China’s Covid-19 policies, and reputational risks.

The reasons firms gave for moving some business from Taiwan shared similarities with those moving from China but also revealed some differences. As with China, the top issue is the rising cost of labor. Other issues related to Taiwan’s business environment were also cited, such as the investment environment and the possibility of supply chain disruptions. By contrast, the fear of war vaulted to second place, cited by 37.1 percent of respondents as a reason to move from the island. At the other end of the spectrum, general reasons to diversify or follow other firms in one’s supply chain were cited much less often.

In short, Taiwanese firms seriously consider moving from either China or Taiwan when they believe it will make a tangible difference to their business and substantially reduce their risks, and not because of vague worries and fears.

Diversifying, Not Decoupling

The data reflect a high degree of anxiety among Taiwanese firms, and a substantial proportion are moving some of their operations from China and Taiwan as a result. That said, it does not appear that these adjustments add up to a plan to decouple from China by entirely rerouting their supply chains, or a complete loss of interest in the Mainland Chinese market. Instead, several signs point to these changes adding up to an effort to diversify.

When asked how important various countries and regions are as economic partners for Taiwan, although the United States was most often identified as “extremely important” in both the 2022 and 2023 surveys, China’s position rose significantly in 2023. The proportion of those identifying China as an extremely important trading partner for Taiwan rose from 28.4 percent to 35.6 percent, placing it ahead of Japan, the Association of Southeast Asian Nations (ASEAN), and Europe (see Figure 4.1).

Second, as noted earlier in Figure 2.3, Taiwanese businesses still see the ECFA deal with China as the single most important agreement for expanding their international business opportunities. And in 2023, the ECFA received almost as many mentions among the top three as the CPTPP and the RCEP.

Third, a belief that India and Southeast Asia could collectively be sufficient substitutes for trade and investment ties with China is still high, but has fallen, with those answering “strongly agree” falling from 20.8 percent to 17.4 percent and those answering “somewhat agree” dropping from 44.0 percent to 39.3 percent.

▲ Figure 4.1: Who Are Taiwan’s Important Trading Partners? Source: Kennedy, It’s Moving Time; and appendix.

Fourth, the ways in which the firms are moving also do not point to decoupling as the primary motivation. As noted above, Taiwanese companies that are moving or considering moving are only shifting a portion of their operations from China, most often somewhere between a quarter and a half, with very few moving more than that.

In addition, as previously mentioned, those moving display a range of regional patterns, each shaped by a distinctive rationale. Some firms are simultaneously moving some operations from China to Taiwan and from Taiwan to China, what the authors call “cross-strait reorganizers.” These firms appear to be relocating their business for China’s market entirely in China and their business for the rest of the world in Taiwan. Every company in this group believes that U.S.-China cooperation is in their interests. This group also appears more confident that Taiwan’s semiconductor industry would act as a “silicon shield” to deter Beijing from an attack but should there be a conflict, the United States would come to Taiwan’s defense. Those moving to multiple locations (“diversifiers”) also seem to be reshuffling their operations into a “China for China” strategy and “elsewhere for the world.” It is the “Southeast Asia movers” (those moving from China and Taiwan only to Southeast Asia) who are most concerned about the business environment on both sides of the Taiwan Strait and are adjusting accordingly, with companies in this group moving a higher proportion of their operations in China and Taiwan than others.

Finally, actual cross-strait trade and investment is still quite high. There’s been a reduction in China’s dominance as a destination for outbound investment but very little change in the direction of trade, with China still being the destination for a quarter of Taiwan’s exports (see Figure 4.2).

Together, these various pieces of evidence point to diversification but not abandonment of China as a location for production or as a market. Even with all of these changes, China is still an extremely important economic counterpart for Taiwan, substantially higher than the United States and far higher than Europe. There is little indication this reality will fundamentally change in the near future.

▲ Figure 4.2: Taiwan’s Contrasting Trade and Investment Patterns. Source: “Import & Export Trade Statistics,” Bureau of Foreign Trade, Taiwan Ministry of Economic Affairs; and “國外投資分區月資料統計” (Monthly statistics of foreign investment by region), Board of Foreign Trade and Investment Commission, Ministry of Economic Affairs.

Implications

Taiwanese industry’s anxieties about the geostrategic environment tempered slightly between mid-2022 and late 2023, yet there are still concerns about U.S.-China tensions, the possibility of war, and China’s business environment. As a result, Taiwanese companies advocate reducing dependence on China and expanding business ties with others in the region and beyond. As in 2022, Taiwanese companies are still moving some of their operations out of China and Taiwan, and they are doing so at a greater level than their counterparts from other countries. That said, they appear to be motivated by a desire to hedge their risks and diversify their regional and global production footprint, not outright decouple from China. Firms from the island still see China as a key economic partner and generally favor advancing their own capabilities instead of restricting ties as a method to handle the various security and competitive risks from across the Taiwan Strait.

These findings have important implications for policymakers in Washington, Beijing, Taipei, and elsewhere.

In the face of similar risks, the U.S. government has launched a range of initiatives to address a list of economic security concerns, including dual-use technologies, supply chain resilience, economic coercion, and human rights abuses. At the same time, U.S. industry has slowed new investment into China, while adding incremental capacity in other locales. The data from these surveys suggest that although Taiwanese firms are moving at a higher rate, they broadly recognize that interdependence with China is impossible to fully eliminate, and that while “defensive” measures are necessary, so too are “offensive” steps to advance their own competitiveness. If Washington’s approach becomes overly focused on imposing restrictions and shifts from a goal of managing risks to decoupling, it could very well find itself out of step with Taiwan, and most likely with other like-minded partners as well.

The implications for Beijing are even more challenging. Although the Mainland’s zero-Covid policies are no longer a concern, Taiwanese firms still lack sufficient confidence in China’s business environment and are nervous about geostrategic tensions. Beijing has taken a variety of steps over the past two years to address the concerns of companies and investors, including from Taiwan. As a result of cross-strait political tensions, however, Beijing has increased military pressure against Taiwan, while also carrying out an investigation into Taiwan’s potential violation of ECFA and imposing a variety of tailored restrictions. These steps at a minimum send a mixed signal to Taiwanese businesses and propel them to explore alternative opportunities. Beijing will need to adjust its policies if it wants to achieve progress on both political issues and economic ties.

For Taipei, the survey results suggest that policy steps to radically expand restrictions would not be welcomed by local industry, which instead still sees China as an important location for production and a large market. Although the New Southbound Policy has borne some fruit in encouraging diversification of investment to Southeast Asia and India, further steps are needed to make these destinations more credible as long-term options for global business operations. Finally, the continued anxiety about a possible war and supply chain disruptions means Taipei still must work to reassure local industry about the island’s commercial environment and economic future. Strengthening their confidence is central to maintaining the island’s economic vibrancy and security.

Appendix

The Survey and Summary of Results

Taiwan Global Business Climate Survey

臺灣全球商務問卷調查

Carried out by Qualtrics, November 3–16, 2023

Sample Size: 610 companies

BUSINESS OUTLOOK

INTERNATIONAL ECONOMY

CROSS-STRAIT RELATIONS AND BUSINESS

YOUR COMPANY’S STATUS

Scott Kennedy is senior adviser and Trustee Chair in Chinese Business and Economics at the Center for Strategic and International Studies (CSIS). A leading authority on Chinese economic policy and U.S.-China commercial relations, Kennedy has been traveling to China for 36 years. Ongoing areas of focus include China’s innovation drive, Chinese industrial policy, U.S.-China relations, and global economic governance.

Andrea Leonard Palazzi is a research associate with the Geoeconomic Council of Advisers at CSIS. His research focuses on U.S.-China economic competition and interdependence, sanctions, monetary and industrial policy, and currencies.