Import bans and stricter labeling requirements for Taiwanese goods imported to mainland China have raised concerns over delays for companies engaging in import-export and those sourcing components from the Taiwan region. We discuss practical steps that companies can take in handling China-Taiwan trade in light of recent tensions and how to mitigate against future risks.

Speaker of the US House of Representatives Nancy Pelosi’s visit to Taiwan from August 2 to 3 set off a series of events that may lead to disruption of trade between the two regions.  

In addition to military drills across the Taiwan Strait, the customs administration of mainland China banned the import of foods from Taiwan, including various agricultural products and processed foods.  

More recently, China’s customs have indicated that longstanding labeling requirements for products imported from Taiwan will be implemented more strictly, which has the potential to stymie imports of crucial manufacturing components if not addressed quickly.  

We look at some of the practical issues in handling supply chains and trade between the two regions and steps foreign companies can take to mitigate the potential impact of recent developments.  

The Taiwan Strait is one of the busiest shipping lanes in the world, accounting for almost half of the world’s container ships and 88 percent of larger container ships, according to Bloomberg . It is the primary route for ships carrying goods from Asian factory hubs (mainland China, Japan, South Korea, and more) to the west and for ships carrying most of the energy Japan needs from the Persian Gulf.  

The military exercises conducted around the Taiwan island in the weeks after Nancy Pelosi’s visit have led to fears of increasing supply chain instability and delays, as ships were forced to move along longer and more precarious routes. It has been reported that some gas carriers to north Asia rerouted or slowed down during the military drills, while shipments to Taiwan and Japan were also affected.

On August 10, China announced the end of military drills surrounding the island. Shipping and air freight has since reportedly resumed and are using the normally scheduled routes. New military drills are also to take place in areas outside of the Taiwan Strait and are therefore unlikely to have as big of an impact on shopping routes as the prior ones.  

It thus appears that there will not be a lasting impact on shipping in the Taiwan Strait beyond the existing supply chain bottlenecks. However, it is still possible that more military exercises will take place in the strait. Businesses whose materials and products mainly ship through the Taiwan Strait are therefore advised to formulate contingency plans to hedge against the risk of further disruption. This may include preparing for increased shipping rates and delays, drawing up alternative routes, identifying alternative suppliers, and stocking up on inventory where possible.  

On August 1, Chinese media reported that the China General Administration of Customs had banned the import of food from 107 Taiwanese companies. Many agricultural products have been affected by the ban, including aquatic products, such as live fish, fresh refrigerated fish, frozen fish, dried fish, prepared fish, and canned fish, as well as honey and tea leaves.  

Of the companies affected, 35 are producers of baked goods, including popular bakeries Vigor Kobo and Kuo Yuan Ye. Other impacted industries include producers of dried and processed foods, such as instant noodle manufacturer Wei Lih Food, condiments and canned food producer Wei Chuan Foods Corporation, and soy and dry goods manufacturer Taisun Enterprise.   

On August 3, following Pelosi’s visit to the island, China further banned the import of citrus fruits, chilled largehead hairtail (a type of fish), and frozen Japanese horse mackerel, according to a notice posted on the China Customs website . The suspension of imports of these products was said to be due to complaints from consumers that pests had been found in Taiwanese citrus fruits and the detection of COVID-19 on the packaging of frozen fish.  

On the same day, China’s Ministry of Commerce (MOFCOM) also prohibited the export of natural sand to Taiwan. Natural sand is an important component of building materials such as concrete and glass, and Taiwan limits the extraction of it from its own resources to protect the environment and prevent over-exploitation.  

The impact of the current trade sanctions will be limited to the Taiwanese companies and industries directly involved in the ban, as well as Taiwanese construction companies. It is therefore unlikely to have a spillover effect on other regions and industries.  

Moreover, the import bans are unlikely to make a significant dent in overall trade between the two regions. In 2021, trade between mainland China and Taiwan reached RMB 2.12 trillion (US$312.4 billion), of which RMB 506.3 billion (US$74.6 billion) were exports and RMB 1.6 trillion (US$235.8 billion) were imports. Over half of the exports were mechanical and electronic products, and only a small proportion were agricultural products and foods. According to analysts cited by Bloomberg , the overall trade impacted by the bans amount to around 1 percent of Taiwan’s local GDP.  

Despite the relatively small scope of impacted goods, mainland China still has significant leverage over the island’s economy. Mainland China is Taiwan’s biggest export market, accounting for 42 percent of exports in 2021. This has therefore raised the question of whether the central government will target some of the major export industries, but for reasons discussed below, many analysts believe this to be unlikely.  

The jewel in the crown of Taiwan’s local economy is the semiconductor manufacturing industry. Taiwanese companies currently account for over 60 percent of the global contract manufacturing market share and is forecast to hit 66 percent this year, according to market intelligence firm TrendForce. Taiwan’s leading semiconductor manufacturing company, TSMC, alone accounts for most of this share, holding 53 percent of the global market. Major contractors include Apple, Qualcomm, NVIDIA, and AMD.  

Demand for semiconductors will continue to expand for years and perhaps decades to come as digitalization accelerates across the world. This means that, short of disruption from competing industry players, Taiwan’s semiconductor foundries will continue to see strong revenue growth for the foreseeable future. The stability of the island and wider region will therefore be essential for the global economy and development.  

Companies in mainland China are also hugely reliant on Taiwan’s semiconductor manufacturing capabilities. The Chinese mainland accounts for 60 percent of the global demand for semiconductors as the rapidly developing digital and high-tech industries increase the use of microchips. Although mainland China is increasing its domestic chip manufacturing capacity, it is still heavily reliant on imports of advanced chips from places such as South Korea, Taiwan, and Japan.  

For this reason, it is unlikely that the central government will impose bans on manufacturing products or equipment, as such a move would have significant ramifications for development in mainland China. Further bans are therefore likely to be focused on consumer and agricultural products, and potentially materials such as wood and minerals.  

What we may see instead is a further push in mainland China to divest from Taiwan’s electronics manufacturing and improve its own manufacturing capabilities and technology in order to reduce Chinese companies’ reliance on imports. This would give China more leverage over the island and mitigate the impact of any retaliatory sanctions from the US.   

China is already seeking to become more self-sufficient in its semiconductor industry in order to reduce the reliance on imports. The main driver of this push has not been directly related to Taiwan, but rather a means of mitigating the impact of possible sanctions and trade tensions with the US. The ultimate effect will also be to become less reliant on Taiwanese-made chips and technology.   

The efforts have begun to pay off, as evidenced by falling imports of semiconductors in the first quarter of 2022. The road to full self-sufficiency is long, however, and China remains reliant upon imports, especially for advanced chips.  

Foreign companies operating in China and supplying components from Taiwan may therefore wish to reduce reliance on imports for mechanical equipment and semiconductors and look at sourcing from suppliers based in mainland China wherever possible. Such a switch will not be possible for components that are not currently available or are of a lower standard in mainland China. However, in the longer term, it can provide more stability and increase resilience against future possible sanctions, especially as the capabilities of manufacturers in mainland China improve over the coming years.   

In recent weeks, several media outlets have reported that China’s customs will strictly implement labeling requirements for products imported from Taiwan. Goods labeled as being from “Taiwan”, “Republic of China”, or “Made in Taiwan” will now no longer be permitted to enter mainland China. This means companies that source components from Taiwan may find their imports confiscated or otherwise blocked at the ports of entry.  

A report from Nikkei states that Apple has already requested all their suppliers from Taiwan to relabel goods with the source region of “Taiwan, China” or other similar phrases that conform with the One China Principle.  

According to sources cited by Bloomberg , these labeling requirements were first introduced in 2015 but have not been strictly implemented until now. However, China appears to have published such labeling requirements as much as a decade earlier.  

A document titled Notice on Issues Involving the Naming of Taiwan released in 2005 by the Ministry of Foreign Affairs (Ling Ba Han [2005] No. 598), which was also used by the China Council for the Promotion of International Trade (CCPIT), describes the permitted terms for Taiwan thus:  

The label must include a comma (,) between the words “Taiwan” or “Taipei” and “China”, and may not use a Chinese back-sloping comma (、), dash (-), or slash (/).  

The following terms are not permitted:  

The CCPIT states that the above regulations should be followed for general certificates of origin, commercial invoices, certificates, declarations, and other foreign-related documents.  

These requirements are in direct contradiction to Taiwan’s current requirements for the labeling of export goods. Taiwan customs require labeling on the export goods themselves, or on the inner or outer packaging, to say that the goods were “Made in the Republic of China”, “Made in the Republic of China, Taiwan”, or “Made in Taiwan”. Goods that are found to have labeling that does not comply with these regulations will be reported to Taiwan’s International Trade Bureau for investigation, which will cause delays at export.

For its part, Taiwan’s Ministry of Economic Affairs has stated that it will assist companies in handling the exports and intends to change the standards as a first response to the situation, indicating it will not resist the stricter labeling requirements in mainland China.

Companies engaged in the production and export of supplies from Taiwan are advised to check and amend the labeling of their products bound for mainland China. It is also advisable to communicate the requirements with Taiwan customs to ensure no delays during export.  

Companies that source goods from Taiwan are also advised to communicate with any suppliers shipping goods from Taiwan to mainland China to ensure compliance with the above labeling requirements and prevent any possible delays at customs.  

China Briefing is written and produced by Dezan Shira & Associates. The practice assists foreign investors into China and has done so since 1992 through offices in Beijing, Tianjin, Dalian, Qingdao, Shanghai, Hangzhou, Ningbo, Suzhou, Guangzhou, Dongguan, Zhongshan, Shenzhen, and Hong Kong. Please contact the firm for assistance in China at china@dezshira.com.

Dezan Shira & Associates has offices in Vietnam, Indonesia, Singapore, United States, Germany, Italy, India, and Russia, in addition to our trade research facilities along the Belt & Road Initiative. We also have partner firms assisting foreign investors in The Philippines, Malaysia, Thailand, Bangladesh.

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