No news is good news: Automatic renewal of the ECFA with Mainland China is not as relevant for Taiwan’s exports

The ebb and flow in the cross-strait relationship between Taiwan and Mainland China is complex. In the good times, there were more collaborations with the Economic Cooperation Framework Agreement (ECFA) as a landmark example. As 2020 marks the automatic renewal of the ECFA after ten years in existence, it is a perfect time to analyze Taiwan’s exports and the linkages with the agreement and other trends. In this report, we examine the impact of ECFA on Taiwan’s exports and investment since 2010, followed by the relative performance of exports into Mainland China. We then provide an outlook for Taiwan’s exports given the current geopolitical and global macroeconomic environment.

The first thing to note is the ECFA – once an important tool in shaping Taiwan’s trade policy – has become less relevant. The ECFA-eligible items reached its peak of 7.2% of total exports in 2017 and fell to 6% in 2019. Still, the ECFA remains vital for some sectors. Glass and petrochemicals are the obvious cases with a high share of ECFA-eligible exports. But the lion’s share of Taiwan’s exports, i.e. ICT goods, is not covered in the ECFA but is included separately in the Information Technology Agreement (ITA) with Mainland China as one of the participants. Hence, a government-driven rainy day fund is needed for highly exposed sectors to provide buffer and encourage diversification. 

For the perspective of Mainland China’s imports, Taiwan has gained market share since 2011. But the key reason is not the ECFA but on Taiwan’s tech edges. The trend is shown in ICT and machinery having the best performance but with limited benefits from the ECFA. In 2019, 23% of ICT imports into Mainland China was sourced from Taiwan, higher than 16% in 2011. Although Mainland China is climbing the tech ladder, Taiwanese firms still form a vital part in its supply chain, contributing to 32% of value in exports among its top 500 exporters.

Going forward, deglobalization and geopolitics will bring challenges but can also lead to a sliding door moment for structural changes. The share of export orders from the US has outpaced that of Mainland China and Hong Kong. In the general trend of supply chain reshuffling, Taiwanese firms need to follow their clients, which has already happened in nearshoring and reshoring. From 2018, Taiwan has produced more goods locally than in Mainland China for exports. Lastly, Taiwan has seen an obvious increase in FDI driven by Europe in high-tech sectors.

All in all, the continuation of ECFA is good news from a geopolitical point of view but it is less relevant than before in economic terms. Exports from Taiwan to Mainland China will remain vital but the products covered by the ECFA are shrinking in relative size. More importantly, faster growth is expected in Taiwan’s exports towards the US and South East Asia. This is particularly the case given the ongoing reshuffling of Taiwan’s participation in the value chain.

Full report available for NATIXIS clients.