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Taiwan Takes Business Back: Examining the Shifting Landscape and What it Means for International Trade

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Taiwan Takes Business Back: Examining the Shifting Landscape and What it Means for International Trade

In an exclusive Q&A with Dr. Richard Thurston – former Senior Vice President at Taiwan Semiconductor Manufacturing Company, Ltd, and “Of Counsel” with Duane Morris, LLP in New York, we take a closer look at the current international trade climate as Taiwan’s efforts to re-shore impact current trade relations while exposing a significant need for bilateral trade agreements and the need to improve opportunities in workforce development. Dr. Thurston walks us through what to expect in the near future as Taiwan takes businesses back from China.

What major advantages are gained by Taiwan reshoring? What risks are associated with this move?

Dr. Thurston: There are several main drivers behind Taiwan’s reshoring of Taiwan businesses from China. First, U.S. geopolitical issues, such as Taiwan companies avoiding US tariffs on China-originated products. Taiwan companies are facing a lot of pressure there.

Second, the protection of the supply chain, not just the supply chain for Taiwan’s consumer product companies, but that of other companies such as Apple, Google, and the whole range of high-tech companies. Thirdly, avoidance of both U.S. criticism, and, more importantly, of potential. U.S. penalties, fines, exclusion orders, etc., relating to possible export control violations. Finally, the Huawei issue. Overall, the challenges are much broader than trade secret protection, driven by U.S. desire to keep actual products incorporating certain advanced technologies from getting into the hands of China’s People’s Liberation Army.

Those factors, along with growing demands for international diversification, are complimented by Taiwan’s corporate concerns over ongoing health, safety, and welfare of their staff and managers working in China. One other motivation of Taiwan’s Government is to bring back to Taiwan experienced talent that had left over the last decade (which had created a great hollowing out of Taiwan’s technological and other capabilities).

On that last point, do you see a reverse effect happening in the workforce going back to Taiwan and aiming efforts on workforce development for the tech industry, or are you anticipating a completely different landscape overall?

Dr. Thurston: Previously, a much different environment existed, where there were two key drivers behind the movement to China that started when President Ma Ying-jeou took over the political reigns. One of the key factors he had in mind was to access the sizable but elusive China market. The Taiwan market of 24 million people is not large enough by itself, to sustain market growth driven by technological innovation. Second, access to talented human capital. A serious Taiwan problem exists because the STEM  (science, technology, engineering, and math) talent pool has continued to dry up in Taiwan. This has been a huge issue faced by TSMC and other technology-driven companies. So, President Ma wanted to access a culturally comparable talent pool as well as to lower costs for land and raw material supply. Finally, the KMT wanted to use Taiwan’s trade and investment in China to neutralize China’s threat against Taiwan independence.

How can Taiwan continue dominating the IP (intellectual property) sector by reshoring? And does this have any impact on its current practice?

Dr. Thurston: Taiwan has had a lot of difficulties in the IP area, and part of it is related to what I just talked about, the significant decline in the STEM talent pool. If you look for other issues, a major one is that Taiwan (because of its political position arising from China’s position against them) is not a member of WIPO (World Intellectual Property Organization), and is not a participant in the Patent Cooperation Treaty (PCT) and therefore, there are significant barriers against becoming a predominant IP source.

But more importantly, with the exception of a few companies like TSMC, most Taiwan companies continue to operate in the mindset of OEM and ODM companies. That mindset focuses on a slim profit margin. Therefore, they do not truly incorporate intellectual property into their overall strategy because it is expensive to promote and protect IP.

This is very relevant for many companies, especially in some of the new sectors, such as biomedicine, aerospace, clean energy, Big Data and AI labs. For example, Taiwan companies are still reluctant to establish a robust trade secret program. Although the Taiwan government has done a lot for enacting trade secret laws and litigation in its courts, many companies take inadequate measures to protect this most important IP asset and thereby, diluting its IP leadership. While there has been improvement, it has been slow because IP is still not viewed as a key to profitability. The government has been trying to improve that attitude in its companies through its intellectual property laws, so we will see. For now, I think the lack of sufficient and sustainable STEM talent, which affects directly leading-edge creativity and innovation, is a core challenge.

Taiwan is extremely important to the U.S., both commercially, with respect to its supply chain, and defensively, with respect to maintain open and safe sea and air links. What is further of concern is that the U.S. still does not have a bilateral trade agreement with Taiwan. This limits the ability of the free flow of information, business, and protections to Taiwan businesses and U.S. businesses operating in and with Taiwan.

During 2019, Taiwan’s efforts to attract its businesses back to Taiwan, and the short-term assistance it is providing to respective land acquisition and operational subsidies, has generated 160 new projects. Companies have most definitely returned from China to Taiwan. But, the question remains: is that sustainable? That issue will hurt Taiwan along with the declining birth rate out there. The innovation advantage that Taiwan has had in the past may well be limited in the years ahead unless Taiwan shores up its bilateral trade and investment relations with the U.S.

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Richard L. Thurston, Ph.D. is Of Counsel at international law firm Duane Morris where he practices in the area of intellectual property law from its New York and Taipei offices. Prior to joining Duane Morris, Dr. Thurston was Senior Vice President and General Counsel of Taiwan Semiconductor Manufacturing Company, Ltd., where he was also Chief Proprietary Information Officer (Trade Secrets) and Corporate Compliance Officer.

reshoring

CAN WE MEASURE WHETHER “RESHORING” IS REAL?

Ribbon Cuttings and Political Ads

Announcements about plant openings and closings make good political fodder. Politicians from both parties are guilty of extracting trends from single events, leaving context behind: “Jobs are coming home!” “Traitorous companies are leaving the United States!”

A popular claim over the years is that Washington policies have succeeded in either shaming or incentivizing American companies to bring manufacturing “back” to the United States, even if manufacturing overseas had been additive to domestic production. How can we know whether such “re-shoring” is actually occurring, and to what degree?

A Reshoring Index

Kearney recently released the seventh edition of their annual Reshoring Index, which attempts to do just that. The U.S. Reshoring Index tracks total manufactured goods imports from 14 traditional offshoring partner countries including China, Taiwan, Malaysia, India, Vietnam, Thailand, Indonesia, Singapore, Philippines, Bangladesh, Pakistan, Hong Kong, Sri Lanka and Cambodia, as a percentage of U.S. domestic gross output of manufactured goods.

After rising almost steadily over the last decade, imports from those 14 countries contracted 7.2 percent in 2019 while U.S. manufacturing output remained steady. The decline is due almost entirely to fewer imported goods from China in reaction to the U.S.-China trade war, which also suppressed U.S. manufacturing exports. Notwithstanding the shock of the trade war, China’s share of the U.S. import market declined for the sixth year in a row.

According to Kearney, the U.S. market imported 12.1 cents worth of offshore production from these Asia-based “low cost countries” (LCCs) for every $1 of domestic manufacturing gross output, down from 13.1 cents in 2018. On the basis of the index, the United States experienced a net reshoring in 2019, as producers chose to source more goods domestically.

imports from LCCs

Diversification Away from China

The Kearney report also began tracking the so-called “rebalancing” of American company-centered supply chains to understand whether U.S. manufacturing imports are diverting from China toward other Asian LCCs. Overall, the LCCs exported $31 billion more in manufactured goods to the United States in 2019 than in 2018, with Vietnam garnering almost half of the shifting imports. Troublingly, a portion of U.S. imports from Vietnam represent China-origin goods diverted through Vietnam to dodge U.S. tariffs.

Nearshoring: Buying More from Mexico

Not only are imports shifting away from China toward the rest of Asia, Kearney finds another trend: increased sourcing of goods from Mexico, characterized as “nearshoring”. Mexico has some advantages over LCCs in Asia and a longer relationship with many U.S. manufacturers through NAFTA.

Over the last seven years that Kearney calculated its near-to-far trade ratio, there were approximately 37 cents worth of manufacturing imports from Mexico for every dollar of U.S. manufacturing imports from Asia LCCs. Last year, however, that ratio increased to 42 cents as U.S. imports of manufactured goods from Mexico shot up 11 percent between 2017 and 2018 and another 4 percent in 2019 as tariffs on goods from China escalated.

Asia LCCs v Mexico

But Not Necessarily for Economic Reasons

As economist Caroline Freund explains, reshoring does not necessarily reduce risk: “A better strategy to reduce the risk of potential supply-chain disruption would be for firms to reduce dependence on any individual supplier.” While it’s not clear the reduction in sourcing from China will benefit domestic suppliers, it does seem apparent that what’s motivating the shift in imports is diversification away from China.

As Freund says, firms will reshore if it is more profitable and less risky to move production close to the market. They will also reshore if compelled to do so through trade and other national policies such as “Buy America” requirements. The big question is whether supply chains restructured on that basis will make economic sense.

We’ll be watching the Kearney Reshoring Index to understand whether continued tension in the U.S.-China trade relationship and post-pandemic policies keep moving the reshoring needle.

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Andrea Durkin is the Editor-in-Chief of TradeVistas and Founder of Sparkplug, LLC. Ms. Durkin previously served as a U.S. Government trade negotiator and has proudly taught international trade policy and negotiations for the last fifteen years as an Adjunct Professor at Georgetown University’s Master of Science in Foreign Service program.

This article originally appeared on TradeVistas.org. Republished with permission.