General view of the Taipei 101 during sunset on January 7, 2016 in Taipei, Taiwan.  (Alexander Koerner/Getty Images)

As the economic impact of COVID-19 is felt across the world, countries including the U.S., U.K., Canada, Japan, South Korea, Singapore, Vietnam, India, Australia, and New Zealand are exploring ways to move supply chains out of China and acquire greater resilience against Xi Jinping's hardening authoritarianism.

In a new policy memo, "Boosting Taiwan’s Economic Status is Good Strategy, Economics, and Domestic Policy," Hudson Senior Fellow John Lee examines how Taiwan is poised to become the "Silicon Valley" of East Asia and a strategic partner for countries looking to reduce their commercial dependence on China. For the U.S. and allies, a stronger economic relationship with Taiwan will curtail China's ability to capture global supply and value chains in the future, as outlined in Beijing's Made in China 2025 initiative.

See highlights from Dr. Lee's new policy memo below, and be sure to join us this Monday as Dr. Aparna Pande interviews Indian Ambassador to the U.S. Taranjit Singh Sandhu.

Taiwan: A Tech Hub Alternative to China

Major takeaways from Hudson Senior Fellow John Lee's new policy memo, "Boosting Taiwan’s Economic Status is Good Strategy, Economics, and Domestic Policy."

1. Taiwan as an alternative “East Asian Silicon Valley” that bypasses China-based supply chains:

In 2016, Taiwan announced a $350 million plan to create an “Asian Silicon Valley” to position the country as a high-tech hub and link to other high-tech clusters in advanced economies. For the U.S., it potentially provides an alternative ecosystem or high-tech cluster in Northeast Asia to tap into that is not under the direction of the Chinese Communist Party. For certain technologies and products destined for the U.S. market, it might even offer a partial solution by enabling the United States to bypass China-based supply chains altogether.

2. Beijing has hollowed out Taiwan’s technological ecosystem:

In previous decades, Taipei did little to stop firms in high-tech and high-value sectors from relocating to the mainland, believing the mass relocation of world-class Taiwanese firms to China would have few negative economic or political consequences. This resulted in the “hollowing out” of Taiwan’s technological ecosystem and Taiwanese economic relevance abroad. By 2015, with the shrinking of these advanced and innovative sectors, just 0.06 percent of private sector R&D in Taiwan was from foreign sources, a radical departure from the 80’s and 90’s, when Taiwan was a major recipient of technology and know-how from U.S. and European firms.

3. A weakened Taiwanese economy supports China’s Made in China 2025:

If Taiwan cannot reverse the movement of Taiwanese capital and innovation to China,  many of those innovations and skills will be permanently absorbed by the Chinese political economy and spread throughout it. There will be negative strategic ramifications for the United States and allies, given that Beijing’s industrial and technological plans, such as Made in China 2025, are boosted by inputs from Taiwanese firms. Furthermore, a decline in Taiwan’s economic relevance will make it easier for China to narrow the international economic and diplomatic space within which Taiwan can exist.

4. Closer US-Taiwan tech ties will draw critical resources away from China’s supply chains:

With respect to high-tech supply chains where much future value will reside, China is heavily dependent on external sources in areas such as robotics, aeronautics, semiconductors, closed-circuit chips, and cloud services. The U.S. should welcome investment from Taiwanese firms in these sectors rather than having them invest in China-based operations.

5. President Tsai is pursuing a “southbound policy” to circumvent Beijing’s efforts to isolate Taiwan:

The influence China has over other countries when it comes to their economic and political relations with Taiwan makes it difficult for Taipei to conclude Free Trade Agreements (FTA) with other economies. President Tsai’s “southbound policy” is designed to loosen the country’s economic dependency on China by deepening trade and investment ties with eighteen countries in Southeast Asia, South Asia, Oceania, and the South Pacific. The key economies are those in ASEAN countries, Australia, New Zealand, and India.

6. Taiwan’s inclusion in the CPTPP trade agreement would strengthen the region and increase Taipei's autonomy:

Including Taiwan in the Comprehensive and Progressive Trans-Pacific Partnership would reduce dependency on the Chinese market and supply chains. Japan, the driving force behind the partnership, has already indicated it would support Taiwan’s membership, as Taiwan is essential to both regional and global production and value chains. Membership for Taiwan is a way for the 11 member countries to achieve these objectives and share the burden of incurring China’s anger.

7. Current circumstances present a new opportunity for U.S.-Taiwan FTA discussions:

Taiwan’s political, strategic, and economic environment have completely changed in the last few years, and the Tsai government is far more likely to make the compromises necessary to arrive at a mutually beneficial FTA between Taiwan and the U.S. Similarly, the U.S. Congress is far more likely to look sympathetically upon an FTA with Taiwan than it was several years ago, given Taiwan’s heightened importance to U.S. interests.

Quotes have been edited for length and clarity

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