March 4, 2024

Chess pieces are seen in front of displayed China and Taiwan's flags

Illustration: Dado Ruvic (Reuters)

Intermediate goods are inputs used to produce a final product. Think textiles to make a coat, metals to make a car, and computer chips to make an iPhone.

And as a research report published last week shows, tracing the flow of intermediate goods can also lead to insights about changing trade relationships between countries and the degree to which they are dependent on each other.

One surprising revelation from the report, published by the Asia-based, global trade focused nonprofit Hinrich Foundation, is that China is becoming dependent on Taiwan for intermediate goods.

China is the world’s largest importer and exporter of intermediate goods, and Taiwan makes up the largest share of China’s intermediate good imports. And Taiwan’s share is growing: In 2022, it accounted for 14% of China’s intermediate good imports, up from 12.2% in 2018.

“Despite escalating geopolitical tensions, China is increasingly reliant on Taiwan for its inputs… partly driven by higher demand for advanced semiconductor products during the pandemic,” wrote Thang Nguyen-Quoc, the report’s author and lead economist at Oxford Economics.

Over the same period, China has reduced its imports of intermediate goods from South Korea and Japan. Both those countries saw their share fall the most among China’s top 15 sources of intermediate goods imports. South Korea now accounts for 10% of China’s intermediate goods purchases from abroad, down from 12.7% in 2018.

At the same time as China reduces its reliance on its East Asian neighbours for intermediate goods, it is leaning more on Vietnam and Indonesia for the inputs. Both those countries saw their share of China’s intermediate good imports rise by over 1% between 2018 and 2022. In part, this is driven by Chinese businesses expanding production to Southeast Asia.

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