The Miracle of Taiwan

Taiwan has been getting a lot of attention lately. Small wonder, since the Taiwanese company Foxconn now builds most of our iPhones in factories on mainland China; since it is now true that a Taiwanese company manufactures almost all of the chips that go into the world’s most advanced computers, and perhaps most troublingly, since China claims Taiwan as a province, and has vowed to retake it, with claims it may be ready to do so as early as 2024.

Underscoring it all is that fact that Taiwan has been one of the world’s best performing economies — primarily because of its formidable manufacturing prowess.

Almost all the countries in Asia are excellent manufacturers and thus strong exporters, a fact that is to their considerable economic advantage. In contrast, the US is a net importer, which creates a sustained net drag on the US economy, since the private sector incurs a buildup in private debt to pay for those net imports. Taiwan, an island off the southeast coast of China, is an increasingly important part of the Asian export story.

Let’s look at the data:

First let’s look at the size of Taiwan’s economy compared to China, Japan, and certain other southeast Asian neighbors.

And all have shown good economic growth.

Now let’s look at economic performance through time. Southeast Asia, China, and Japan all had a simultaneous, massive financial crisis in the late 1990s brought about by over lending, so let’s focus on the trends after that time.

You can see here that in terms of increased per capita income, South Korea and Taiwan have performed far better than any of the others in this group, as their citizens have seen the best growth in their relative incomes.

Strong exports have been part of this story, with Taiwan’s net exports the strongest of all within this group, reaching a whopping 15% of GDP. Bear in mind that the US’s is negative 4%.

One of the key benefits of a trade surplus is that an economy can grow without relying on domestic private debt growth — because without net exports, a given country’s economic growth comes primarily from growth in business and household debt.

China, Vietnam, and South Korea have shown strong growth, but at a heavy price — very high and worrisome growth in private debt. China, whose private debt has grown from 157 percent of GDP to 213 percent just since 2012, has already started to see the consequences of that growth in the form of the recent financial catastrophes at Evergrande and Country Garden, as just two examples.

But you can clearly see that Taiwan has enjoyed its massive GDP growth without much increase in private sector debt. Let’s look again at Taiwan and South Korea, which we saw a moment ago were the two countries showing the best increases in per capita income. The big difference is, South Korea has achieved this with private debt growth from 173% to 219%, a troublingly high level, while Taiwan’s has grown only modestly from 140% to 151% because of its extraordinary net export performance.

How has Taiwan achieved this large export advantage? A big part of this comes from the fact that all of the chips that go into the world’s most advanced computers are made by a single company, the Taiwan Semiconductor Manufacturing Company — or TSMC. These are chips of 10 nanometers and smaller, since the smaller the chip, the faster and more powerful it usually is, due to the smaller distance electronic instructions have to travel.

And how has Taiwan achieved so much success in manufacturing?

Well, over the last few decades as the US has had its predilection for outsourcing manufacturing, Taiwan has been embracing manufacturing, with its government subsidizing the early development efforts of TSMC and others. Note that the US’s Intel Corporation used to dominate global chip manufacturing, and even though it is still huge, it made a couple of strategic stumbles along the way and now makes comparatively less advanced chips. In fact, it is not even mentioned as a factor in advanced chip manufacturing, though it now vows to catch up. Instead, Samsung, a South Korean company, is now the second most advanced chip manufacturer.

This creates a geopolitical supply-chain vulnerability for the US tech industry that it needs to address over time. The 2022 CHIPS act passed by Congress will help — though more help will be needed over time. And the US has plenty of advantage in certain specialty chips, most recently the California-based Nvidia’s lead in the now all-important chips for artificial intelligence.

But let’s give Taiwan kudos for its focus and the industrial policy that has given it this lead.

For more information on this topic and much more please visit us at www.tychosgroup.org