Executive Brief

Defense

The US Army Special Operations Command (USASOC) for the first time used a scenario simulating defense of Taiwan against a Chinese invasion in its annual capabilities exercise (CAPEX) in April. According to US military public information, the exercise involved landings behind enemy lines, seizures of air landing strip, tunnel destruction, capture evasions, Switchblade kamikaze drone operations, and information warfare.

• Lt. Gen. Jonathan Braga stated at the exercise outset, “The PRC, in accordance with our national defense strategy, is our pacing challenge out there.” A statement from USASOC emphasized, “Ultimately, what we are trying to do is prevent World War III. That’s our job.”
• A Chinese military expert commented that this exercise indicates the US wants to duplicate what it is doing in Ukraine. Chinese and Taiwan media reported that US special operations forces are already in Taiwan, assisting the Taiwan military’s special operations training. The Pentagon and Taiwan Defense Ministry refused to comment on the reports.

On 1 May a delegation of 25 US defense industry companies led by retired Lt. General Steven Rudder, former US Pacific Marine Commander, arrived in Taiwan. The delegation included representatives from major defense contractor companies, including Lockheed Martin (F-16s); Raytheon (radar and missiles); and AeroVironment (Switchblade kamikaze drones). During their four-day stay, the delegation attended the Taiwan-US Defense Industry Forum and visited some Taiwan defense research institutions and companies.

• According to Taiwan media, the US delegation and Taiwan’s government and defense companies discussed possibilities of 1) improving Taiwan’s own defense industrial capabilities; 2) producing select American weapons in Taiwan; and 3) inviting Taiwan into the US defense industry supply chain. During the forum, Taiwan asked the US for help in developing Taiwan’s own next generation fighters in engines, avionics, and environmental controls. The most likely areas of initial cooperation could be in military unmanned aerial vehicles and ammunition. Concrete results could be delivered as early as 2025.
• China’s Ministry of National Defense spokesman said China was “extremely concerned” about US-Taiwan defense industry collaboration and warned that Taipei’s practice of “bringing wolves into your home is repugnant and will only bring a deep disaster” to Taiwan. China’s Foreign Ministry said the visit was “further proof that the US is turning Taiwan into a powder keg, which only spells trouble [for Taiwan.] We once again urge the US to abide by the One China principle and the three China-US Joint Communiqués, stop arms sales and military contact with Taiwan.” During the US delegation visit, the Chinese military increased its incursions into Taiwan’s air defense identification zone.

Economy

On 9 May the Taiwan government released its foreign trade data for the first four months of 2023. Exports dropped 17.7% YoY, the largest in 14 years since the global financial crisis in 2008 — this continued the decline over the last eight months. Taiwan exports to major trading partners like China (including Hong Kong) dropped 28.5%; US, -15%; ASEAN, -14.1%. Only exports to Japan increased, 1.2%.

Cross-Strait trade tensions are increasing. China has banned at least 97 Taiwan products, while Taiwan banned imports of 2,460 mainland products. Eleven major Taiwan exports to China had a significant drop over the last four months: plastic and rubber products dropped 40%; textiles -28%. In the first quarter of 2023, Taiwan’s trade surplus with the mainland dropped 35%. In April, China announced investigations into imports of 2,455 Taiwan products that now enjoy almost tariff-free status.

• The investigation carries a strong political message, is planned for nine months, and can be extended to 12 January 2024, the day before Taiwan’s presidential election.
• After the DPP came to power in 2016, China has particularly targeted agricultural products to influence Taiwan farmers, who are a major power base for the DPP. In 2018, 23% of Taiwan agricultural products went to China; in 2022, only 12% were exported to China. Similarly, 85% of Taiwan fruit exports went to China five years ago; but by 2022 had dropped to less than 2%.

Taiwan economists observe that Taiwan has not benefitted from US trade disputes with China, and instead many US import demands shifted from China to the EU, Mexico, Canada, and ASEAN. Taiwan exports to the US declined 14.4% in January, -13.7% in February, -20.7% in March, and -10.3% in April.

A key reason for Taiwan’s export challenge is its exclusion from regional trade blocks like the Regional Comprehensive Economic Partnership (RCEP), a free-trade arrangement among 15 Asia- Pacific countries that started in January 2022. In the RCEP, 92% of traded goods are tariff-free.