An hour west of Taipei is Hsinchu, the Silicon Valley of Taiwan. Here, in a sprawling science park, is a concentration of some 400 tech companies. They include giants like Taiwan Semiconductor Manufacturing Co, the world’s largest producer of computer chips, and AU Optronics Corp, Taiwan’s largest maker of liquid crystal display (LCD) panels.  
The pulse at the once-bustling Hsinchu Science Park has slowed dramatically in the last few months. In January, an estimated 80% of employees at plants there were forced to take unpaid leave, amounting to one or two days a week. That’s because the world is no longer voraciously buying the stuff that Taiwan churns out, such as LCD panels (of which it has over half the global market) and semiconductors (of which Taiwan makes 70% of the world’s made-to-order chips).
Taiwan is the fourth Asian economy after Singapore, Japan and Hong Kong to sink into recession. However, being one of Asia’s most export-dependent nations, it is particularly badly hit. In January, its exports plunged a record 41.7% y-o-y, coming after they had already shrunk by almost a fifth in 4Q2008. The quarter also saw real GDP collapse 8.4% y-o-y.
Those dismal numbers prompted the government to cut its GDP growth forecast for 2009 to -2.97%. It also cautioned that Taiwan would see five quarters of economic contraction — the longest in its history. Economists at banks and brokerages are far more pessimistic. The median forecast is for a 4.8% fall this year, with CLSA warning that the economy could shrink as much as 11%. This would make the recession not just Taiwan’s longest but its most severe ever.

Go out and shop
It’s not just that external demand has shrivelled up. Taiwan’s domestic demand — already anaemic before the global downturn — has fallen off a cliff, tumbling 7.7% in 4Q2008. The ranks of the jobless have swollen to 5% as at December, the highest level in more than five years.
To cushion the fallout, the government rolled out a four-year stimulus package totalling NT$500 billion last November. This included the usual tools like tax cuts and infrastructure spending. It also included shopping vouchers. A week before Chinese New Year, the government began dishing out NT$85.7 billion in shopping vouchers — or NT$3,600 per person. So far, nearly half has been cashed and the government hopes the shopping voucher plan will add 0.7 percentage points to GDP this year.
But this move just gives people money to buy what they would already buy anyway (many people used the vouchers for everyday stuff like groceries or train fares). Clearly, more needs to be done and the government in early February responded with another stimulus package amounting to a hefty NT$715 billion. Still, economist P K Basu of Daiwa Institute of Research reckons this is not enough. For 2009, the total stimulus amounts to a “modest” 3.3% of GDP, which he says, in a Feb 20 report, does not give the economy “enough of a counter-cyclical boost”.
Trade pact with China
Taiwan’s economic winter has galvanised the administration of president Ma Ying-jeou towards inking a free trade pact with Taiwan’s largest trading partner — China. Called the Comprehensive Economic Cooperation Agreement (Ceca), the pact has also gained urgency because of the implementation in 2010 of the competing “Asean plus one” free trade arrangement with China.
Under the latter, China will remove tariffs on items subject to rates of up to 10% in its trade with Asean countries. Taiwanese goods will continue to incur tariffs, putting them at a disadvantage. This will get worse once the pact widens to Asean plus three (China, Japan and South Korea) and, ultimately, Asean plus six (which will bring in Australia, New Zealand and India).
Two weeks ago, Taiwan’s petrochemical, plastic and textile industry captains appealed to the government to negotiate a zero-tariff agreement with China. “Otherwise, our economy will enter the morgue from the ICU,” said Hung Fu-yuan, president of the Taiwan Plastic Products Association.
Not surprisingly, Ceca has caused an uproar among those opposed to forging closer ties with China. As Taiwan becomes addicted to Beijing’s handouts, it would eventually lose its economic autonomy and, in the end, its sovereignty, warns Kenneth Lin, professor of economics at the National Taiwan University.
But Taiwan stands between a rock and a hard place. A survey by the National Chengchi University finds that 26% to 35% of Taiwanese and foreign businesses would reduce their investments in Taiwan if the country is marginalised as a result of the upcoming East Asian economic integration process. And, in contrast, if an economic integration agreement were signed with China, 29% to 42% of the businesses polled would increase their investments.
As Beijing’s economic might grows, Taiwan has little choice. In the second week of February, AU Optronics and fellow LCD panel maker Chi Mei Optoelectronics began recalling large numbers of workers back to their factories. The reason? Both companies had snagged NT$73 billion in orders from China’s nine major TV assemblers, including Konka and Hisense. The orders are in response to Beijing’s efforts to get rural households to spend via government-funded discounts on big ticket items. The future of Taiwan’s Silicon Valley and the nation’s exposed economy pivots more than ever on its ties with the mighty mainland. China knows it and, increasingly, the Taiwanese may have to accept it.

Sunita Sue Leng is a former associate editor at The Edge Singapore.