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Taiwan trade barriers continue to increase

Cross-strait tensions rose in late May as China launched a two-day military exercise around Taiwan on May 23-24 following the inauguration of William Lai Ching-te as the island’s 8th president. China appears to have launched the aerial and naval drills to express its disapproval with President Lai’s inauguration speech, which was perceived by the mainland as encouraging Taiwanese independence.  

Regional tensions escalate as William Lai takes office 

The recent drills were comparable in scope to previous major military exercises launched by Beijing in August 2022 and April 2023 and involved a notable contingent of at least 19 navy vessels and around 49 aircraft, of which 35 crossed the Taiwan Strait median line. The exercise also saw joint readiness patrols carried out by different branches of the People’s Liberation Army, which deployed assets across five zones in the Taiwan Strait and to the north, south, and east of the island. Exercises also took place around Taiwan’s outlying islands of Kinmen, Matsu, Wuqiu, and Dongyin. The drills were significantly shorter than the seven-day military exercise that was launched following the visit of former U.S. House Speaker Nancy Pelosi to Taiwan in August 2022 and there were no reports of any live ammunition or ballistic missiles fired.  

The recent drills do not appear to have caused any major disruptions to logistics operations in and around the Taiwan Strait. However, the frequency of Chinese military drills around Taiwan suggests that the mainland will likely continue utilizing armed exercises around the island as a means to dissuade the island from taking actions that are perceived as pro-independence. Companies should continue to prepare for potential disruptions through the waterway should China escalate the scale of its military drills.  

China bolsters Taiwan trade barriers 

In addition to the military exercise, China also increased pressure on Taiwan by announcing that it would be re-imposing tariffs on 134 imports from the island that had been previously covered under the Economic Cooperation Framework Agreement (ECFA).  The ECFA is a free trade agreement that was signed between China and Taiwan in June 2010 in order to reduce tariffs and commercial trade barriers. However, Beijing has recently begun revoking ECFA tariff exemptions as a means of placing economic pressure on Taiwan and the ruling Democratic People’s Party (DPP). The last major round of tariff revocations occurring in December 2023 when Beijing revoked exemptions on tariffs for 12 Taiwanese chemical products.  

The new trade restrictions will come into effect on June 15 and will end preferential tariffs on a range of Taiwanese exports to the mainland such as industrial chemicals like methyl acrylate, isopropanol, epoxy resins, and other petroleum-based products. Industrial metals like cold-rolled coils, copper wire, and brass sheets will also be affected alongside toolmaking machinery and other industrial machines such as drilling and milling tools, hydraulic engines, packaging equipment, precision cutting equipment, and die forging machines.  

The latest restrictions could begin impacting Taiwanese companies in the chemicals, machinery, and textile industries as exports from the island to China will be less competitive than alternative products produced on the mainland. Companies that derive a significant portion of their revenue from sales to mainland China and are unable to diversify to overseas markets could begin to experience financial pressure. However, sources indicate that the impact to the broader Taiwanese economy from the ECFA revocations is expected to be small.  

Biden announces new U.S. trade barriers on exports from China 

Trade tensions between the U.S. and China have also continued to rise, with President Biden announcing a new package of tariffs targeting certain exports from China on May 18. The tariff hike covers an estimated $18 billion worth of Chinese exports to the U.S. will be implemented progressively from August 1 and into 2026.  

Among the goods covered by the latest tariffs include metal parts like articles of steel and aluminum, semiconductors, and medical goods including personal protective equipment, syringes, and needles. The tariffs also highlight ongoing efforts by the U.S. government to decouple renewable supply chains from China, with tariff hikes schedules for electric vehicles (EVs), solar cells, and other related components including lithium-ion batteries, permanent magnets, and graphite.  

The new tariffs are not expected to significantly disrupt existing trade volumes between China and the U.S. as the affected products constitute only around 3.6% of the total value of Chinese exports to the U.S. in 2023. However, trade data indicates that U.S. manufacturers are still dependent on upstream suppliers in China for some goods that will be covered by the new tariff increase. For example, around 70% of all lithium-ion battery imports and 80% of permanent magnets imports in that are used in the production of electric vehicles (EVs) originated from China in 2023. The medical device industry could also be forced to seek alternative suppliers as China accounts for around a fifth of all surgical gloves and 14% of all syringes and needles imported into the U.S.  

Apart from tariff changes, the Biden administration made additional adjustments to the Inflation Reduction Act to restrict OEMs from procuring battery parts and critical minerals from China, Russia, Iran, and North Korea. However, sourcing restrictions on battery minerals such as graphite and minerals used in electrolyte salts are only expected to take effect in 2027. 

Advanced chip restrictions continue 

The U.S. continues to impose restrictions on the export of advanced semiconductors and chip making equipment to China as national security and competition concerns persist. In early May, the U.S. Department of Commerce revoked export licenses that had allowed several U.S. chip companies including Intel and Qualcomm to ship certain types of central processors and older 4G chips to Chinese companies including Huawei Technologies. The licenses appear to have been withdrawn due to domestic pressure from U.S. lawmakers as well as over continued concerns that existing chip restrictions have failed to prevent recent Chinese chip advancements like Huawei’s latest Ascend 910B chip.   

Despite increasing controls targeting advanced chips, the U.S. appears to be continuing its policy of allowing foreign companies to continue manufacturing less advanced chips in China.  

Chinese companies also remain the target of U.S. sanctions, with around 37 Chinese companies added to the Bureau of Industry and Security’s (BIS) Entity List on May 9 over national and foreign policy concerns. Inclusion on the Entity List prevents products classified under Export Administration Regulations (EAR) from being exported to the affected companies without licenses.  

Around 20 companies based in mainland China and Hong Kong have also recently been added to the U.S. Treasury Department’s sanctions list for apparent trade ties with the Russian military. The majority of the sanctioned entities are involved in the distribution of electronic components.  

Forced labor risk persists 

The expansion and enforcement of the Uyghur Forced Labor Prevention Act (UFLPA) also remains a concern for automotive manufacturers despite greater awareness of forced labor risks linked to China’s Xinjiang region. More than two dozen Chinese textile companies were also added to the UFLPA list on May 17, revealing that Chinese cotton linked to the Xinjiang region continues to remain present in the U.S. textile market. 


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