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U.S.-China trade tensions rise after DPP victory

Taiwan’s Democratic Progressive Party (DPP) candidate William Lai retained the presidency in the country’s recent elections, obtaining 40.05% of the national vote. Lai’s victory was received negatively by mainland China which continues to view the DPP with hostility due to the party’s pro-independence leanings.  

However, the DPP’s failure to maintain its majority in the island’s Legislative Yuan likely improved China’s opinion. No party was able to achieve a simple majority in the legislature but the pro-China learning Kuomintang (KMT) party has now overtaken the DPP as the largest party in the Assembly with 52 seats while the centrist-leaning Taiwan People’s Party (TPP) currently holds a kingmaker role with eight seats. The DPP’s failure to maintain a majority in the Yuan could help ease cross-strait ties in the long-run as a mainland-leaning legislature would make it more difficult for president-elect William Lai to pass bills or trade restrictions that could prompt a strong negative response from China.  

Sabre rattling continues 

Relations between Taiwan and China will continue to remain strained due to China’s hostile relationship with the DPP and their mistrust of William Lai. The election results do not appear to have changed the mainland’s willingness to use gray zone military tactics with more than 298 aircraft and 136 naval ships detected around Taiwan over the month of January.  

The possibility of disruptive military drills around the island also cannot be ruled out closer to in the coming months as Taiwanese officials indicate that the Chinese military could be waiting for the winter weather in the Taiwan Strait to improve before launching a large-scale exercise. Additionally, Chinese officials could also be waiting to launch military exercises closer to Lai’s inauguration in May. 

China also appears to be preparing to suspend more tariff provisions under the Economic Cooperation Framework Agreement (ECFA). The ECFA was signed in 2010 between China and a previous KMT-led government. It eliminates tariff and non-tariff barriers between the two countries for 539 Taiwanese goods and 267 mainland Chinese products including machinery parts, chemicals, and automotive components.  

A January 20 release from an official Chinese Communist Party bulletin indicated that Beijing was planning to suspend more preferential tariff provisions under the ECFA. Fishery products, machinery, automotive components, and textiles could be affected. In December, 2023, the Chinese government suspended tariff exemptions for 12 Taiwanese chemical products covered by the ECFA including butadiene, isoprene, meta-xylene, dodecyl benzene, chloroform, chloroethylene, and ethylene propylene copolymer.   

Export controls tighten  

Increasing trade controls between the U.S. and China are expected to continue affecting manufacturing operations in the region. Compliance risks for companies in the semiconductor sector are also increasing as more Chinese companies turn to intermediary firms in South Korea, India, Taiwan, and Singapore to obtain controlled U.S. chip technologies. Two employees of an unspecified electronics distributing company in South Korea were recently caught in January 2024 for smuggling around 96,000 controlled semiconductor chips worth more than $7.49 million to Chinese customers via air mail.  

The U.S. is also expected to continue widening trade restrictions on semiconductors and advanced technologies this year. A January 2024 survey by the U.S. Department of Commerce is underway to determine the extent to which companies in the U.S. are reliant on China for the procurement of mature semiconductors larger than 28-nanometers (nm). The survey could be a precursor to tariffs and other restrictions on China’s mature chip manufacturing sector. A U.S. House bill has been introduced that would restrict foreign biotech companies from gaining American genetic information.  

Outside of the U.S., the European Commission has also proposed a new set of economic security initiatives that would introduce measures to increase the effectiveness of EU export controls and regulate incoming and outbound investment risks. Japan has also recently proposed new export controls that would make it harder for Russia and China to obtain advanced materials and high-precision machine tools used to manufacture military equipment. These controls are expected to be officially introduced in the current fiscal year and could disrupt the flow of advanced machinery and telecommunication equipment from the country. 

The increasing number of controls targeting China’s semiconductor sector have impacted the country’s imports of integrated circuits (ICs) considerably, with trade data showing that IC imports into China have dropped by 15.4% from the previous year to $350.2 billion, the steepest drop since 2004. In contrast, Chinese imports of chipmaking tools and equipment rose an estimated 14% in 2023 to nearly $40 billion as semiconductor companies scrambled to increase purchases of advanced semiconductor manufacturing tools from Dutch hi-tech chipmaking equipment producer ASML before new Dutch export controls went into effect this year.  

UFLPA detains more shipments 

There was an overall quarter-over-quarter increase in the value of goods detained by the U.S. Customs and Border Protection (CBP) for inspections under the Uyghur Forced Labor Prevention Act (UFLPA) during the last half of 2023. Overall, exports from Malaysia continue to comprise the highest value of goods detained at around $1.23 billion followed by Vietnam ($600 million), and China ($300 million).  

Around 99% of detained shipments from Malaysia have comprised electronics exports while those detained from Vietnam are split between goods from the electronics, industrial, and apparel sectors.  

In terms of the country of origin, China has seen a consecutive increase from October to December in the number and value of shipments detained with up to nine different groups of products inspected ranging from apparel and footwear to agricultural products.  

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