EU-Taiwan: Elegant Economic Diplomacy or Risky Strategic Hesitancy?

China’s military drill in the Taiwan Strait following Nancy Pelosi’s visit to Taiwan acted as an economic wake-up call for the European Union (EU). By weaponizing its geo-economic influence and blocking important trade routes, China exposed Europe´s concern regarding economic dependency in the region. Since 40 percent of EU trade passes through the Taiwan Strait, rising tensions are reaching a critical economic dimension for the Union. Suddenly, not only are the trade flows off Taiwan’s coast becoming part of the discourse in Brussels, but so are Europe’s investments in Taiwan itself. Alluding to the fact that the EU is the largest source of foreign direct investment in Taiwan, High Representative/Vice-President of the Union for Foreign Affairs and Security Policy, Josep Borrell asked the European Parliament rhetorically: “Who has been putting more eggs in the basket of the island? We, Europeans”; trying to portray the EU as a rational market player that wants to secure its investment, while refraining from taking a strong diplomatic counter-position to China.

Nevertheless, the current economic reality is significantly outshining the EU’s diplomatic one. Economic disengagement from China towards Taiwan is already in motion, although EU member-states are proceeding at different speeds. The COVID-19 pandemic and Russia’s war in Ukraine revealed how different economic dependencies can affect individual European countries. The pandemic demonstrated how painful it can be for Western economies when China’s trade hubs are crippled by hard lockdowns, while the disrupted relationship with Russia keeps reminding Europe how dangerous it is to establish an economic dependency on authoritarian states.

Taiwan – An Antidote to Dependency?

In this light, Taiwan seems like a knight in shining armor that could solve several of these problems. With its market leadership in the field of high-end semiconductors, not only can Chinese dependency be reduced but also Taiwanese know-how could be used to achieve European technological leadership in the semiconductor industry as proclaimed in the European Chip Act. For Europe, it would be a chance to obtain sensitive and interception-proof communication technologies from a democratic country instead of an increasingly authoritarian partner.  

Of course, the Taiwanese economy not only consists of the semiconductor industry, but a composition of technology and service industries, which in many areas resembles the Chinese export mix. Taiwan is already the EU’s 14th largest trade partner and will gain further ground in the coming years. Especially in financial services, Taiwan can absorb the capital and service drain from Hong Kong and become a new financial center in the Indo-Pacific region.

However, Taiwan is far from being a silver bullet. It may be able to mitigate the economic dependency on China, but it cannot replace it; the country is simply too small and lacks the huge market for European exports. Moreover, there is always the danger that increased tensions in the Taiwan Strait can lead to a complete collapse of trade, which is seemingly China´s main deterrence measure at the moment. Nevertheless, the path to supply chain resilience and reduced dependencies proclaimed by the EU can only be led by likeminded democratic states in the Indo-Pacific, and Taiwan is an essential building block of this strategy.

A Hesitant Economic Strategy

So, what will EU´s economic strategy towards Taiwan looks like? In its 2021 Open Strategic Autonomy, the EU proclaims to forge resilient and sustainable bilateral economic relations with new partners while at the same time protecting itself against coercive practices by non-EU countries. A closer economic alignment with Taiwan could serve these multi-layered purposes, addressing both security and economic issues. But it is not only the resilience of international supply chains that is in the foreground of this strategy.

Economic cooperation can be used as a channel of backdoor diplomacy to advance geopolitical interests while avoiding delicate foreign policy situations. By choosing like-minded democratic trading partners, the EU is signaling that they share Taiwan’s values without explicitly deviating from their One China Policy. At the moment, this is only happening on the basis of non-binding talks, such as the EU and Taiwan Trade and Investment Dialogue (TID) in Brussels on June 2, 2022, mainly exploring which investment sectors are beneficial for both partners.

Dispersion of China’s Economic Retaliation

However, the EU’s hesitancy contrasts with the economic and political efforts of its various members. There are many bilateral approaches from EU member-states establishing closer ties with Taiwan, deviating from the reluctant Brussels narrative. This is clearly illustrated by the example of Lithuania. When the small country opened a Taiwan Representative Office in Vilnius in 2021, China reacted with an unprecedented punishment in the form of sanctions and secondary economic coercions. However, the sanctions did not have the deterrent effect China might have wished for. Instead, it drove Lithuania even closer into cooperation with Taiwan, hosting several joint venture initiatives, agreeing on a €1-billion credit line and culminating in the opening of a Lithuanian Trade Representative Office in Taipei in September 2022. While the EU strongly condemned the sanctions and stated Lithuanian diplomatic actions did not violate the EU’s One China Policy, it remained cautious about making its own representative diplomatic overtures to Taiwan.

So instead of enforcing a common strategy towards Taiwan, Brussels prefers to leave its member-states on a long leash. This is also indicated by a press release of the European Parliament in which it urges member-countries to follow the example of Lithuania and act independently against China. The countries’ approaches on this front vary. In September, a small German Bundestag delegation visited Taiwan to deepen cooperation on issues like the COVID pandemic and climate change and, not least, to strengthen diplomatic and economic relations. Other countries such as the Czech Republic, Slovakia and Poland have already forged closer economic ties with Taiwan during the pandemic as part of mask trade and vaccine exchange.

From the EU’s perspective, these varying relations are not necessarily negative. Through the economic solo efforts and bilateral approaches of single EU members with Taiwan, China can just target single states with its diplomatic and economic coercion instead of the Union as a whole. The EU, therefore, can stay out of the line of fire and pin the responsibility on the members´ independent economic policy. Furthermore, diverging forms of economic approaches can facilitate flexible and tailor-made economic solutions, adapted to the needs of the partners. This is especially relevant in the areas of green technologies, semiconductor technology and IT security where individual cooperation with Taiwan is the most effective solution.

The fragmented economic strategies of the EU member-states can be interpreted as a precursor to an integrated economic cooperation with Taiwan and thus as a cornerstone for the proclaimed goal of resilient supply chains. However, the EU cannot just rely on the individual bilateral approaches of its member-states and remain hesitant forever. It must take the lead in key sectors such as the semiconductor industry and furthermore create a fertile framework that fosters the already established individual economic cooperations. One way to achieve this would be to respond to Taiwan’s efforts on establishing a Bilateral Investment Agreement (BIA). Either way, the strategy of differing economic strategies within the EU cannot be neither a mid- nor long-term solution. The EU must position itself as a reliable protector of its members’ foreign economic approaches and present a clearly discernible strategy to unify economic efforts towards Taiwan. If not, Taiwan might not be forever in the position where it can freely choose its trading partners.