As of January 2022, the Republic of China is internationally recognized by only 14 states, yet this country is a key player in the technology sector, specifically in semiconductors. How did this country become a technological powerhouse?
In 2019, the Republic of China, popularly known as Taiwan lost two allies in Oceania: the Solomon Islands and Kiribati. Likewise, in December 2021, Nicaragua announced that it severed bilateral ties with the Republic of China and reestablished them with Beijing.
As of January 2022, the Republic of China is officially recognized by only 14 states worldwide, the vast majority in the Americas.
However, a fact also praised and known about this territory has been the technology and it was widely praised for its effective management of the SARS-CoV-2 pandemic, due to its quick action. In 2020, Taiwan's economy grew by more than 3%, making it one of the few economies that will not experience a recession due to the SARS-CoV-2 pandemic.
According to the 2021 Index of Economic Freedom, the Republic of China (ROC) ranks as the sixth freest economy in the world. Its GDP per capita in 2020 was almost 25,000 euros, ranking 34th out of 196 of the world's richest nations in terms of GDP per capita. The island has also become a technological leader.
Taipei has one of the most research-intensive economies in the world. It is estimated to invest around 3% of its output in R&D. In this article we will focus on a little analyzed aspect that is fundamental to understanding the current struggle between the US and the People's Republic of China: the keys to their technological development.
Recent history dates back to the end of the 19th century. The signing of the Treaty of Shimonoseki put an end to the first Sino-Japanese war in 1895. Through this treaty, the Qing dynasty ceded the island, along with the Penghu Islands, to the Empire of Japan.
The Japanese colonial government would initiate the "Agriculture for Taiwan" policy to revamp the Taiwanese economy. In 1898, the "Taiwan Land Registration Regulations" and "Taiwan Land Research Regulations" were enacted. It should be mentioned that, in 1902, the "Regulations for the Promotion of the Taiwan Sugar Industry" was promulgated, where several Japanese companies established modern techniques in this industry. Thanks to this modernization, sugar productivity, quality and marketing improved. Within a few years, sugar became the most important export.
In addition to these measures, Tokyo focused on the expansion and reconstruction of infrastructure, the construction of communication networks and the promotion of public health. Between 1898-1907, a railroad was built running north-south across the island and the reconstruction and dredging of the ports of Keelung and Kaohsiung.
Image 1: Taichu railway station in Taichung in 1917. Retrieved from: https://www.politika.io/en/notice/colonial-historiography-in-taiwan-and-korea-under-japanese-rule-1890s1940s-part-i
In turn, after equipping Taiwan's elementary, junior high and high schools, Japan established the Taipei Imperial University in 1928. This educational development is the key to Taiwan's subsequent economic and technological progress.
During this first era of Japanese rule, economic growth was close to 3% during 1905-40. Whereas, that of mainland China hovered around 0.33% between 1914-31.
From 1937 onwards, industrialization in Taiwan will change beyond agricultural processing. With the Sino-Japanese war and the Pacific war, Taiwan would be chosen as the supply base for Japan. With this, industries related to: munitions, iron and steel, chemicals, textiles, metallurgy and machinery would become the main economic engine of the island of Formosa.
However, with the end of World War II and the damage caused by the bombing of the US forces, the economy of this island suffered and for the first time the population experienced severe food control and supply shortages.
The defeat of the Kuomintang (KMT) in the Chinese civil war (1927-1949) would cause Chiang Kai-shek and his supporters to flee to Taiwan and establish the Republic of China, under a bloody dictatorship until the 1970s. More than one million people moved to this island and, during the period 1945-1950, prices multiplied up to ten thousand.
The Taiwanese government promoted the Agrarian Reform (1949-1953), centered on three phases: the reduction of 37.5% of the value of the harvest as land rent from 1949; the sale of public farmland from 1951 and the "land to the farmer" program, implemented in 1953. It should also be added that, since 1951, the United States provided military and economic aid to Taiwan, relieving inflationary tension.
This policy would have an immediate success, by 1952, it recovered the level of production of the pre-war period, but, there was also a considerable increase in agricultural production and improvement in land productivity.
During this decade, the KMT focused its economic strategy on import substitution. However, this attempt failed because domestic producers were not able to produce the imported products as cheaply as could be obtained from foreign sources. In particular, subsidies to the substitution industries in Taiwan came from U.S. economic aid.
This failure led the Taiwanese government to change strategy and concentrate on industries that could export and earn foreign exchange to pay for imports from the island.
Starting from 1958, Taipei focused on liberalizing trade restrictions, encouraging exports, stimulating private savings and the efficient allocation of capital funds. In addition, the world's first export processing zone was established in the municipality of Kaohsiung. This liberalization accelerated from the 1960s onwards, with Washington's announcement of the reduction of its economic aid to the island.
All these measures and government subsidies will further boost economic growth and large investments in R&D, being the germ of the microchip industry. In addition, large companies, such as IBM, would begin to source chips and electronic components from Taiwan.
The 1970s were a key decade for the island's economic growth. In 1973, the first energy crisis occurred. In Taiwan, commodity prices soared. Consequently, in 1974, Taiwanese Prime Minister Chiang Ching-Kuo promoted the Ten Major Construction Projects program.
Thanks to this program, the foundations of basic infrastructure and the development of the heavy chemical industry will be laid. At the same time, the Taiwanese government lifted many trade restrictions, tariffs were reduced, a unit exchange rate was established and the permits required to send money abroad were abolished.
Despite the 1973 crisis, between 1963-1980, Taiwan's economy grew at a rate of 10% for 18 consecutive years. This growth led to Taipei becoming one of the "four Asian tigers".
Figure 1: GDP per capita growth in 4 Southeast Asian countries from 1960-2015. Retrieved from: https://mympcapital.blogspot.com/2019/11/tale-of-four-economies-south-korea.html
In the 1980s, Taiwan would undergo major changes, where relations with the People's Republic of China would develop rapidly, while the economy would become increasingly open. In 1981, the government of the Republic of China announced the creation of the Hsinchu Science Industrial Park. Three years later, the Taiwanese government pushed ahead with plans to deregulate the economy, privatize state-owned enterprises and reduce tariffs.
Huge trade surpluses led to a rapid accumulation of foreign currency assets and a sharp appreciation of the new Taiwan dollar against the US dollar, reducing Taiwan's competitiveness and wages rise sharply. This leads to many labor-intensive SMEs relocating to Southeast Asia or mainland China. As a result, the island's economy would no longer be based on these types of industries, forcing some industries to upgrade their technical standards.
Image 2: Hsinchu Industrial Park. Retrieved from: https://www.most.gov.tw/folksonomy/list?menu_id=a365d856-3247-4937-8c76-0488f488d6ee&l=en
At the same time, the Hsinchu Industrial Park would attract a highly skilled population to return to the island. This professional segment used their technological know-how to develop the electronics and information industries, changing the economic structure of the island and building the current "silicon shield" that endures to this day.
In 1987, it would mark the beginning of civilian contacts between Taiwan and mainland China. Beijing announced that Taiwan residents could visit their relatives in mainland China, increasing private exchanges between the two sides.
Acer was founded in 1976. This company was a pioneer in the creation of a training center. In its beginnings, this company focused on the trade of microprocessors and the promotion of its applications. This multinational would have an immediate success, in 1979 it opened its first subsidiary in the USA and in 1986, it was the first technology company to sell a computer with 32-bit power, surprising IBM itself.
TSMC (Taiwan Semiconductor Manufacturing Company) was founded in 1987. Previously, chip designers manufactured their products in-house. However, TSMC would reshape the semiconductor industry, dividing the market between "fabless" design companies with no in-house manufacturing capabilities, pure foundries that only fabricated, and integrated device manufacturers that did both.
In 1989, a small company called Pegasus, today better known as Asus, was born. This company focused on the manufacture of motherboards for both PCs and laptops, making a niche for itself among the best manufacturers worldwide, capturing 40% of the market in its beginnings. As of January 2021, Asus was the fifth largest PC vendor in the world by units sales.
From the very beginning, Taipei never protected these nascent technology companies with subsidies or state aid. This move is one of the reasons for the success of these companies and would cement the technology sector on this island.
As of 1996, the Taiwanese business sector had invested $6 billion in the People's Republic of China. These investments would appeal to cross-strait trade. This trade reduced Taiwan's dependence on the U.S. market.
Due to poor export growth and slowing private investment after the stock market collapse in 1990, the Taiwanese government would design the Six-Year Plan (1991-1997). This strategy focused on economic revitalization in the transportation, telecommunications, power generation and pollution control sectors. It is worth mentioning that the "Statute for the Modernization of Industries", enacted in 1991, focused on encouraging private investment in research and development and in the high-tech sectors of the economy.
In 1992, ERSO transferred DRAM and SRAM manufacturing technologies to UMC and TSMC, which will establish their own production lines. By 1995, the gap between Taiwan and the international leaders in the integrated circuit industry had narrowed to almost 1 year. This innovation spurred a flurry of investment in the industry, and by the end of 1995, 14 companies had announced plans to join the ranks of semiconductor manufacturers.
At the same time, Taiwan-based companies such as HTC gained worldwide fame in the 1990s and early 2000s, doing contract work for brands such as Apple, Dell and Toshiba. Indirectly, this production spurred the Taiwanese to innovate on their own. It is worth mentioning that HTC has developed competitive smartphones.
Taiwan's economy would be one of the least impacted during the 1997 Asian financial crisis, thanks to a good adoption during the financial liberalization process. Initially, commodity prices were stabilized, trade was liberalized and restrictions on interest rates were lifted.
During the 2000s, Taipei faced increased international competition marked by the rise of the BRICs and other emerging countries. This led to the acceleration of the transformation and modernization of its industries.
Thus, the government unveiled a new vision to pursue knowledge-based, sustainable and fair economic development, which involved full investment in human resources, R&D innovation. Alongside this, the semiconductor, image visualization, biotechnology and digital content industries.
This strategy would be key to Taiwan's success in dealing with the bursting of the dot-com bubble, the 9/11 terrorist attacks, the SARS epidemic in 2003 and the 2008 financial crisis. Taipei achieved an average economic growth rate of 3.4% between 2000 and 2009.
Since 2008, the Taiwanese government has focused on public investment, industrial restructuring and global linkages to strengthen the economy. The 12 i-Taiwan projects program is worth mentioning. This project focuses on promoting the development of high-tech industrial clusters, industrial innovation corridors and expanding R&D investment.
Alongside this, the promotion of 6 emerging industries: biotechnology, green energy, healthcare, smart industrial cloud computing, smart electric vehicles and patent invention and trading. This is accompanied by a loosening of economic and financial regulation and, aligning Taiwan's economic and trade systems with the world.
Tsai Ing-wen's arrival as Taiwan's president, during her first term in office in 2016-2020; Tsai focused on energizing the economy and creating jobs. Accordingly, Tsai has pushed for pension reform, a labor law and accelerated the abandonment of nuclear power.
Following the 2020 election, Tsai Ing-wen has led a successful response to the SARS-CoV-2 pandemic. To this end, she adopted early measures and clear communication and the use of technology from day one. This effective response has earned Taiwan the will and sympathy of the whole world by sending supplies of face masks and medical expertise. The Mayor of Prague, Zdenek Hrib, appreciated the provision of information on SARS-CoV-2 management.
In 2020, Taiwan's economy grew by 3.36% and in 2021, it is estimated at a possible 6.09%. To cope with the scenario, President Tsai in a speech in May 2020, pointed out six strategic industries, develop Taiwan's national defense, develop renewable energy technologies and forge ties internationally.
Although fewer and fewer states formally recognised Taiwan, encouraging diplomatic and economic ties with Beijing, the Republic of China has been able to cope with adversity. During the 1960s-1990s, Taipei has become an economic powerhouse and good policies have transformed the island into a technological leader.
Taipei has been praised for its swift action and limited economic impact, especially in its key role in the semiconductor industry, the SARS-CoV-2 pandemic. However, Taiwan faces the growing shadow of the great Asian giant and greater ambiguity from the US and another technological power such as South Korea could be key in the medium to long term.
Recommended bibliography:
Hsieh, D., 2019. Taiwan is the Next Hub for Tech Innovation. Entrepreneur. Available at: https://www.entrepreneur.com/article/341247
Tenreiro, D., 2021. TSMC: The World’s Most Important Company | National Review. Nationalreview.com. Available at: https://www.nationalreview.com/2021/04/tsmc-the-worlds-most-important-company/
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