By Cathy Fang
While both semiconductors and pressure from China have brought Taiwan into the international spotlight, its official diplomatic relations remain overshadowed by the chips it makes. However, these two aspects of Taiwan’s international position are not mutually exclusive, and they can complement each other – his synergy is the essence of economic diplomacy.
Economic diplomacy: Traditional tools, new perspectives
Although economic diplomacy is a cornerstone of Taiwan’s gateway to the international community, it often resembles a one-way rather than a two-way street. Even though Taiwan has provided aid and shared technology to help other countries prosper, this approach has brought relatively limited financial and diplomatic returns to Taiwan itself.
This has led to domestic criticisms of Taiwan’s outreach policies, with some viewing these efforts as merely playing a dollar-for-dollar game with China to secure more diplomatic ties. However, as Foreign Minister Lin Chia-lung (林佳龍) aptly put it, Taiwan’s diplomatic approach has evolved from “stabilized-ties (固邦)” to “prospered-ties (榮邦).” In this vein, economic diplomacy is not about handing out benefits, but about sharing them. This philosophy also aligns with the definition of economic diplomacy: economic diplomacy leverages diplomatic skills and economic tools to advance a nation’s economic, political, and strategic goals. Its dual nature involves using economic strategies to achieve foreign policy objectives, while employing diplomatic efforts to meet economic goals.
Four strands of strategic thinking
In the game of “go,” victory is about strategically encircling an area rather than capturing the king. This strategy mirrors Taiwan’s approach in areas such as the development of industrial parks, shifting the focus from standalone company investments. The broader concept is to export Taiwan’s proven “industrial-cluster model” to target nations – establishing supply chains from raw materials to finished products, and building ecosystems from service support to mechanical maintenance, akin to the successful “Taiwan Semiconductor Manufacturing Company (TSMC, 台灣積體電路製造股份有限公司)-Kumamoto” model.
Instead of promoting flagship investments by individual countries, Taiwan is now sharing its experience in creating an indispensable niche in the global chip supply chain, while expanding this model to be applicable both on the island and abroad. If more successful industrial clusters can be established and their effects become evident, it can dispel the rumor that Taiwan’s business expansion dilutes its tech importance. Instead, it will serve as proof of Taiwan’s success in embedding itself into international supply networks.
On the financial front, Foreign Minister Lin has discussed the creation of a “prosper-ties fund (榮邦基金),” which would be significant in that it would be an investment fund rather than aid, thereby shifting the dynamic between Taiwan and its beneficiaries from grantor-grantee to win-win relationships. The fund aims to include not only countries with official diplomatic ties, but also non-diplomatic allies and like-minded countries, whether geographically near or far.
Special focus is given to Central and Eastern European nations and “New Southbound” countries areas where minister Lin has dedicated significant diplomatic efforts. This fund is envisioned as filling the gap left by the less flexible National Development Fund (NDF, 國家發展基金), and the currently unfeasible Sovereign Wealth Fund (SWF, 主權基金). The NDF is constrained by legal requirements for returns and investment targets, while the SWF remains a contentious issue in Taiwan.
Additionally, with precedents like the NTD $6.56 billion (USD $200 million) “Central and Eastern Europe Investment Fund (中東歐投資基金)” and the NTD $32.8 billion (USD $1 billion) “Central and Eastern Europe Financing Fund (中東歐融資基金)” which both support Taiwan’s initiatives to strengthen regional ties, the expansion of this “prosper-ties fund” or other financial tools could be a vital political instrument. In essence, establishing the fund to bolster economic diplomacy not only provides a financial pillar for Taiwan’s foreign policy, but also offers a more adaptable approach to steering Taiwan’s industrial transformation toward a more digitalized and sustainability-focused future.
Energy concerns are pivotal in this strategic equation. Taiwan’s energy landscape is dominated by thermal power generation, which made up an impressive 83.14 percent of Taiwan’s total power generation in 2023. Specifically, coal-fired power accounted for 42.24 percent, gas-fired power for 39.57 percent, and oil-fired power for 1.34 percent, with all of these sources being primarily imported. Swelling energy demand, driven by a surge of pending high-energy-consuming semiconductor companies, has intensified this challenge.
To balance the energy supply-demand equation while promoting industrial growth, Taiwanese companies, regardless of their size, must explore international avenues that can reliably supply essential resources such as water, electricity, land, and talent. That said, this outward-looking economic diplomacy, which motivates companies to seek new opportunities abroad, skillfully balances business and energy needs, alleviating domestic energy challenges without hindering industrial growth.
When Taiwan seeks to deepen its partnerships, the irreplaceable bond Taiwan has with its primary security provider – he United States – remains paramount. Due to the Biden Administration’s focus on securing supply chains, Washington has initiated a 100-day review covering semiconductors, batteries, critical materials, and pharmaceuticals. This led to the establishment of a supply chain task force, employing a whole-of-government approach to securing key supply chains through on-shoring, near-shoring, and friend-shoring. As TSMC founder Morris Chang (張忠謀) noted, future globalization will be anchored by security as a fundamental prerequisite, emphasizing the growing consensus that technology and economic security are intertwined, and that cybersecurity is synonymous with national security.
The United States is restructuring its supply chains with technology security at the forefront. Taiwan, as a complete, reliable, and trustworthy technology-solution provider, has acknowledged Washington’s concerns about “overconcentration in Taiwan.” The Taiwanese government has demonstrated its commitment to aligning with US industrial strategies through deliberate, incremental efforts. In May, President Lai Ching-te (賴清德) identified five trusted industries (semiconductors, AI, defense, security and surveillance, and next-generation communications) during his inauguration, resonating with Morris Chang’s insights. Now, the Ministry of Foreign Affairs (MOFA, 外交部) is actively offering supply chain solutions to align with US interests. Additionally, this strategic move prioritizes Southeast Asia, a region of keen interest for the United States as it aims to diversify its supply chain away from China.
Uncertainties and challenges ahead
While this rosy outlook paints one half of the picture, uncertainties make up the other. The success of economic diplomacy hinges on the active participation of Taiwanese businessmen. To clarify, this initiative is rooted in business-to-business interactions rather than government-to-government negotiations, a reality with which MOFA has had to contend. Thus, the collaboration should not only feature directing the government’s messaging to boardrooms, but also consider how the companies’ respond through their intentions. Without the willingness of businesses to invest, this diplomatic endeavor cannot steer future policy. For this diplomatic project to succeed, greater communication between the government and Taiwanese businesses is necessary.
Furthermore, Taiwan’s MOFA should redouble its efforts to promote greater understanding as to why Taiwan’s investments could surpass those of other countries (not just China). Highlighting Taiwan’s relatively lower return expectations, the robustness and reliability of Taiwan’s IT industry, and the critical role of technology security in national security will provide compelling talking points for effective storytelling. Listening, rather than directing, forms the foundation of successful private-public collaboration. Presenting an attractive alternative, rather than warning others about “debt traps,” is key to winning the hearts and minds of nations, irrespective of diplomatic ties.
Taiwan has neither the resources to compete head-to-head with China’s Belt and Road Initiative (BRI, formerly known as “One Belt, One Road,” 一帶一路), nor the desire to pursue such a politically-charged strategy. However, by refining its diplomatic stance and harmonizing it with robust economic and trade policies, Taiwan can fortify its economic security. MOFA has outlined a plan for “integrated diplomacy (總合外交),” which encompasses value diplomacy (價值外交), alliance diplomacy (同盟外交), and economic diplomacy (經貿外交), and aligns with the island’s image as a nation committed to “democracy, peace, and prosperity.” Channeling the island’s technological strengths to prioritize economic diplomacy is a wise move. Yet, as the game of “go” teaches us, strategic foresight is more crucial than immediate victories.
The main point: Taiwan’s new flagship campaign of economic diplomacy may not be entirely novel, but it embodies a revamped philosophy, shifting from mere transactional exchanges to mutually beneficial relationships. Taiwan is deftly navigating the global arena like a player of “go,” leveraging its technological prowess to embed itself firmly within the global supply chain, rather than passively awaiting exclusion from international affairs.
