Unpacking Tsai Ing-wen’s New Southbound Policy

President Tsai Ing-wen is attempting to reinvigorate and diversify Taiwan’s economy. Currently, trade with China constitutes over 20 percent of Taiwan’s total trade. The over $100 billion in cross-Strait trade is nearly double that of Taiwan’s second largest trading partner, the United States, leaving the island nation heavily reliant on the Chinese economy. Cross-Strait economic integration began under President Lee Teng-hui in the 1990s and accelerated under Chen Shui-bian, who implemented a policy of “active opening and effective management” in 2001. Tsai’s predecessor, Ma Ying-jeou, also promoted economic cooperation with the mainland, which proved unpopular in his second term and helped propel Tsai’s Democratic People’s Party (DPP) to power in landslide presidential and Legislative Yuan races in early 2016.

Tsai’s push for new regional partners, called the “New Southbound Policy,” is similar but more strategic than the policies of Lee and Chen. Like its forerunners, Tsai’s policy seeks to lessen the mainland’s dominance of Taiwan’s trade, but it is more comprehensive and emphasizes building an extensive network of cultural and interpersonal relationships throughout the region.

The economic challenges facing Taiwan are not entirely unique. States that rely heavily on trade as a source of economic activity and growth are often susceptible to fluctuations in the global market. This is especially true for Taiwan, which according to World Trade Organization, had a 63 percent trade to Gross Domestic Product ratio from 2013 to 2015. Furthermore, Taiwan’s trade with China is compounded by a contentious political environment. Unlike other small nations that are dependent on large trade partners, Taiwan must also contend with its disputed sovereignty, leaving it uniquely vulnerable to coercion from China.

Taiwan’s broader economic conditions have compounded this disproportionate reliance on China. At present, Taiwan’s economy is expected to have grown a paltry 1.5 percent in 2016, a mild improvement from the 2015 growth rate of 0.72. Projections from Taiwan’s Statistical Bureau for 2017 place its year-on-year growth rate at 1.92 percent. Stagnating wage rates and falling exports further contribute to the island’s economic struggles.

The answer to Taiwan’s economic struggles may hinge on exploring economic opportunities elsewhere in the region. ASEAN and South Asian nations encompass 32 percent of the world’s population and have a combined GDP of $5.1 trillion. Global Insight estimates that the annual economic growth rate for ASEAN and South Asian countries will be between 4.9 and 7.4 percent from 2017 and 2021. The developed economies of Australia and New Zealand offer safe, highly regulated investment environments.

To help reduce Taiwan’s dependence on China and more tightly integrate the nation into the Asia-Pacific region, Tsai has embarked on an ambitious strategy to diversify Taiwan’s economic interests into 18 target countries in Southeast Asia, South Asia, Australia, and New Zealand. The New Southbound Policy is aimed at furthering the Tsai administration’s domestic and foreign policy goals through developing cultural and economic relationships with ASEAN, South Asian, and South Pacific countries. This article explores how Tsai’s strategy compares with similar policy approaches from previous administrations, discusses how the policy will be implemented, and identifies the considerable challenges to success.

Logistics

Following Tsai’s inauguration in May 2016, her administration established the Southbound Policy Office to set guidelines for the policy. The office was headed by Director James Huang, until his recent appointment as chairman of the Taiwan External Trade Development Council. On September 5, 2016, the Southbound Policy Office, working in conjunction with the National Security Council, finalized the New Southbound Policy Promotion Plan, detailing strategic approaches to the policy. The promotion plan will be implemented by the Executive Yuan under John Deng, former Minister of Economic Affairs from 2014 to 2016.

Taipei has budgeted NT$4.2 billion (US$131 million) in 2017 for the policy initiative, spread across 16 ministries. The remaining ministries are required to establish key performance indicators, which will be used by the National Development Council for performance evaluation. To further boost funding, the National Development Council has announced plans to collaborate with local governments and establish partnerships with Taiwan-based corporations and NGOs.

Aside from its ambitious and expansive scope, the Tsai administration has yet to announce how  it will coordinate inter-departmental relationships. A lack of clarity in command structure could create bureaucratic delay and tensions, which may prove detrimental to the policy’s implementation and overall effectiveness.

Previous Southbound Policies

Tsai Ing-wen’s New Southbound Policy is not the first policy designed to lessen Taiwan’s reliance on China and diversify trade and investments into other economies. It follows three ambitious but ultimately unsuccessful forerunners under the Lee Teng-hui (1988-2000) and Chen Shui-bian (2000-2008) administrations.

Lee’s first Southward Policy (1994–1996) focused on expanding commercial ties in Southeast Asia. The policy was initially effective in spurring Taiwanese investment into ASEAN member states. According to statistics from the Ministry of Economic Affairs, investment outflows grew from $1.17 billion in 1993 to $4.98 billion in 1994. Concurrently, investment into China decreased from $3.168 billion to $962 million. While Taiwanese businesses thrived in some ASEAN markets under Lee, countries in Southeast Asia lacked significant supporting industrial and production base capabilities, which ultimately drew Taiwanese businesses to opportunities in the rapidly developing Chinese economy.

The second wave of Lee’s Southward Policy (1997–1999) was also unsuccessful. Despite using measures to cap individual investment, his efforts to push Taiwanese investment into ASEAN countries were undermined by the Asian Financial Crisis, which weakened Taiwan’s overall investment activity and dropped Taiwan’s investment in ASEAN countries from $4.85 billion in 1997 to $1.42 billion in 1998.

Following Taiwan’s admission into the World Trade Organization in 2002, then DPP President Chen Shui-bian launched the “Go South” strategy to expand Taiwan’s economic influence in the region. His approach centered on strengthening the investment support system for Taiwanese businesses in Southeast Asia by establishing investment environment assessment mechanisms, facilitating niche industry investment, and providing training for Taiwanese employees returning from overseas.

However, the draw of China’s market and its expanding regional influence in Southeast Asia weakened the “Go South” strategy. Furthermore, Chen himself advocated for Taiwanese businesses to consider the rich financial incentives offered by China to explore opportunities in the mainland. After steady investment growth throughout the mid-2000s, Taiwanese investment into ASEAN countries plummeted from $12.49 billion in 2008 to $2.09 billion in 2009. Although Taiwanese investment activity was weakened as a result of the 2008-2009 global financial crisis, Taiwanese investment into China dropped less sharply than investment into ASEAN countries.