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Slow Demand, China Supply Chain Gains Send Taiwan into Recession

FILE - A volunteer sews blankets made from recycled plastic bottles at The Tzu Chi Foundation factory in Taipei, Taiwan. Taiwanese exports are falling, driving the island's economy into recession.

Taiwan has fallen into economic recession after two quarters of decline in the value of goods and services produced. The world’s 19th largest economy says it is losing its edge to the fast-growing manufacturing center China. Taiwan’s major export markets are also not buying as much as they once did from Taiwan.

Taiwan’s half-trillion-dollar economy has been all but synonymous with exports for decades. But according to the definition of many economists, the Asian Pacific island that pumps out plastics, machinery and consumer electronics fell into economic recession in the third quarter this year. The economy contracted by 0.3 percent from July through September compared to the previous quarter, which had shrunk 1.14 percent.

Taiwan’s budget and accounting office points to weak spots in the world economy, falling crude oil prices and the squeeze of competition from China’s maturing supply chain. Andrew Tsai, an economist with KGI Securities in Taipei, explains that once China had largely seen export contracting as a priority, but that it also wants to sell to a domestic market. Tsai said China found that relying only on low-margin export contracting could not sustain fast growth, so it has used raising industry standards as stimulus.

Investors from Taiwan used to source parts from home, make exports cheaply in China and send those products offshore for sale. But China now has a reliable supply chain and quality has risen as the Chinese learn from years of factory inspections. Analysts call China’s high-tech supply chain particularly strong and say it has eroded income for the $131 billion tech sector in Taiwan.

FILE - A man walks among cars which are ready for export at the port of Taipei, northern Taiwan, April 16, 2014.
FILE - A man walks among cars which are ready for export at the port of Taipei, northern Taiwan, April 16, 2014.

Declines in export orders every month since April foreshadowed Taiwan’s recession. Exports make up 60 percent of Taiwan’s economy and orders normally grow modestly month-to-month.

Weak consumer spending in major markets China and Europe are hurting Taiwan's exports across categories. Chinese consumers are hesitant as their own economic growth slows. Economic and trade issues have hurt spending in some European countries.

Lower crude oil prices worldwide since 2014 have hit Taiwanese petrochemical firms that pre-purchased supplies at higher rates.

Taiwan’s economy has grown every year since a 2009 recession that tracked much of the world into decline after the global financial crisis. Economists say the Western year-end holidays could raise orders for Taiwan’s PCs, smartphones and petrochemical products. The budget office forecasts 2.32 percent economic growth next year along with stronger export demand.