Outstanding Features
In the aforementioned regulations, it is provided that all government agencies, public enterprises, private traders and individuals are required to surrender their foreign exchange receipts to the Bank of Taiwan. Foreign exchange needed for importing commodities or used for other purposes is also to be settled with the Bank. In settling foreign exchange, different rates of exchange are adopted for different purposes. During the first several months following the introduction of the system, the exchange rates in force were as follows:
Foreign exchange receipts of government agencies and foreign exchange derived from exports of sugar, salt, rice and refined products of crude oil shipped by government enterprises were surrendered at the rate of NT$15.55 to US$1.00 (Bank of Taiwan buying rate).
Sales proceeds of other exports were sold at the rate of NT$15.55 to US$1.00 and, in addition, foreign exchange certificates in certain proportion to the amount of foreign exchange surrendered were issued to exporters by the Bank. For exports of bananas, exchange certificates amounting to 50% of the sales proceeds were issued. For other kinds of exports, the amount of certificates came to 80% of the foreign exchange surrendered.
Inward remittances other than those of government agencies were surrendered at the Bank's buying rate plus foreign exchange certificates of the same amount of the remitted money.
Foreign exchange needed by government agencies and public enterprises which were not entitled to have foreign exchange certificates when they surrendered their export proceeds was settled with the Bank at the rate of MT$15.65 to US$1.00 (Bank of Taiwan selling rate).
For the importation of essential daily commodities and industrial materials, foreign exchange was furnished by the Bank at its selling rate. For other imports and outward remittance purposes, foreign exchange was settled at the Bank's selling rate and, in addition, importers and remitters were required to surrender foreign exchange certificates of the same amount of the foreign exchange settled.
In addition to the official rate of exchange and expenses involved in acquiring foreign exchange certificates, a defense tax amounting to 20% of the foreign exchange settled was imposed on all imports unless otherwise prescribed by law.
During the latter part of 1955, some modifications were made in the system. Beginning from July 25, the conversion rate for U.S. aid imports of cotton, beans and wheat was raised to NT$24.78 to US$1.00, which was further applied as of September 10 to the settlement of foreign exchange needed by all government agencies and enterprises. Foreign exchange derived from their exports, except that from salt, is surrendered at the rate of NT$20.35 to US$1.00. Their inward remittances are surrendered at the rate of NT$21.55 to US$1.00. Besides, an additional subsidy of NT$3.15 for US$1.00 is granted to private inward remitters. The simplification of the exchange rate, however, did not affect the fundamental policy.
The basic principle in formulating the policy was to leave the official exchange rate unchanged with a view to stabilizing the money value of the local currency. But in order to make the rates adaptable to the economic situation of the island, the authorities have introduced the use of foreign exchange certificates. While the official rate remains as a constant factor applying to all imports and exports and remittances, the actual rate of exchange varies with both the amount and price of the exchange certificates used in the settlement of foreign exchange.
At present, the amount of certificates accrued to exporters of sugar, rice and products of government enterprises is fixed at 80% and to salt exporters at 50% of the amount of sales proceeds. The official price of the exchange certificate is fixed at NT$6.00 for US$1.00. Thus the actual exchange rate for the exporters of sugar, rice and products of government enterprises is NT$20.35 to US$1.00 and that of the salt exporters NT$18.55 to US$1.00. Private exporters have an exchange rate of NT$15.55 plus the market price of the exchange certificate, which is presently quoted at about NT$14.00 for US$1.00. As the amount of exchange certificates issued to banana exporters is fixed at 50% and to other exporters at 80% of the amount of sales proceeds, the actual exchange rate for banana exports is about NT$22.55 and for other exports, about NT$26.75 to US$1.00. Private inward remitters, to whom foreign exchange certificates of the same amount of the remitted money are issued, have a rate of NT$29.55 plus NT$3.15.
The exchange rate for imports and outward remittances varies in the same way with the amount and price of foreign exchange certificates required for exchange settlements. The adoption, of the multiple rate of exchange constitutes one of the most outstanding features of the existing system of trade and foreign exchange control.
The foreign exchange certificates thus issued to exporters and inward remitters can only be used as an accessory document for the settlement of import foreign exchange. They do not indicate the ownership of the foreign exchange inscribed on them. Nor does the issuance of certificates entitle the holder the right of importing commodities or making outward remittances. Importers and outward remitters are still required to apply separately for the foreign exchange they need and settle it with the Bank of Taiwan upon the approval of responsible agencies. The exchange certificate therefore forms only a part of the price of foreign exchange settled. Its peculiar nature is another characteristic of the existing system.
Since foreign exchange certificates are indispensable for exchange settlement for imports, importers are obliged to approach exporters for the needed certificates. Thus the export trade is indirectly linked up with the import trade. A booming export trade would result in an abundant supply of foreign exchange certificates and their prices are bound to decline. The cost of imported commodities would then also decline.
On the other hand, when exports become sluggish, the scarcity of foreign exchange certificates in the market would raise their prices. The price increase would, in turn, make the export trade more lucrative. The automatic readjustment of the certificate price would thus help promote exports.
Besides, a rise in the price of foreign exchange certificates, which naturally increases the, cost of imported goods, tends to reduce their consumption. In this sense, the system also helps achieve a balance between the demand and supply of imported commodities.
Economic Background
Complicated as the system is, the motives of the authorities for introducing it are, however, not difficult to understand. During the last few years, the local currency has been considerably devaluated. On the eve of the inauguration of the existing system, the general index of wholesale prices in Taipei stood at 630, taking June 15, 1949, as the base. The then market rate of the U. S. currency was more than twice as high as the official exchange rate. An exporter received only NT$15.55 for one U. S. dollar when he surrendered his exchange proceeds to the Bank of Taiwan. He had to suffer a great loss.
On the other hand, an importer could import one U. S. dollar's worth of goods from, abroad for only NT$15.55 plus a 20% defense tax, making a profit of about 40% out of exchange settlement. The exchange rate constituted, therefore, an impediment to the export trade and enabled importers to make extra profits.
As a result, the trade situation of the island turned steadily for the worse. Exports in 1954 especially showed a considerable decrease. In 1953, the total value of exports involved in exchange settlements with the Bank of Taiwan amounted to US$129,790.000. In 1954, it declined to US$97,755,000. On the other hand, the import volume increased from US$100,569,000 in 1953 to US$110,217,000 in 1954.
However, a readjustment of the exchange rate would mean a further devaluation of the local currency. It would have an even more far reaching effect on the island's economy. The price level as well as the production cost of local products might rise still more rapidly. When the cost of production of export items went up, the change in the exchange rate might be of no help to the promotion of the export trade. This being the case, it is no wonder that the authorities took a very careful attitude in readjusting the exchange rate.
Differential rates of exchange are also an effective weapon in protecting domestic production. By readjusting the exchange rate, the authorities can increase the prices of certain imports to discourage consumption so that locally produced equivalents would have a better market. Similarly, the costs of certain other imports may be reduced to a very low level through the adoption of a lower exchange rate so that their prices as well as those of locally produced equivalents would be kept down and a stable price level could be achieved.
As to foreign trade, there is evidence that the new system has helped boost exports of the island. In 1955, the total value of exports amounted to over US$130,000,000, according to official statistics. Corn pared with the total export volume in 1954, an increase of over 30% was registered.
In addition to the increase in sugar and rice exports shipped by government agencies, most private exports also registered perceptible increases. The brightest spot in the trade record is that quite a few new items such as woolen yarn, artificial cotton yarn, newsprint, silk products, electric fans, rubber shoes, bamboo and rattan articles and hogs have been added to the export items.
The new system has effected nearly a 50% increase in the exchange rate for banana exports and a 80% increase in some other important items, which makes the export trade more lucrative than before.
Current Criticism
Current criticism is focused on the control measures on the import trade. They are said to have helped raise the price level. When the system was first introduced, it was obvious that the authorities had kept a sharp eye on the stabilization of commodity prices, but failed to achieve this end in the course of the implementation of the policy. In Article 3 of the Regulations Governing the Application for and Settlement of Foreign Exchange, it is provided that foreign exchange for the importation of essential daily commodities is to be settled at the official exchange rate of NT$15.65 to US$1.00. The so-called essential commodities were sup posed to include U. S. aid imports of cotton, soyabeans, chemical fertilizers, crude oil, etc. and the provision was apparently designed to hold a rein on their prices. Only four months following the enforcement of the regulations, however, the Government was obliged to raise the conversion rate for the aid imports of cotton and beans to NT$24.78 to US$1.00 in compliance with a recommendation of ICA-MSM/C. As a result of the change in the conversion rate, price ceilings previously fixed for textile and bean products had to be raised. Market prices of these two kinds of products, such, as cotton yarn and cloths of various brands, bean oil, bean sauce, bean cakes, etc. showed violent increases. Since prices of food and clothing materials constitute the most important part of the whole price structure, the increase in the conversion rate affected the general price level also.
The policy of maintaining the official exchange rate at its present level cuts two ways. In addition to keeping the prices of U. S. aid supplies and their equivalents under control, it was also aimed at halting credit expansion through the U. S. aid counterpart fund deposits. Under the obligation of the Sino-US Bilateral Agreement, the Chinese government has to deposit the sales proceeds of U. S. aid imports in terms of the local currency as U. S. aid counterpart funds at the official exchange rate. By leaving it unchanged, the financial burden of the government incurred in making the deposits would not increase. Now as a result of the change in the conversion rate, the amount of the counterpart fund deposits is correspondingly augmented. When more money goes out of the Bank of Taiwan through the counterpart fund loans, more funds are added to the money market. This naturally speeds up the inflationary process.
A striking feature of the existing policy is that great emphasis is placed on the promotion of industrial production. In addition to the preferential exchange rate fixed for the imports of industrial materials, as pointed out above, more and more foreign exchange has been allocated for imports in recent months. According to official, statistics published in local newspapers, the amount of foreign exchange allocated for the purpose for the January-February period of 1955 was US$1,200,000. That for the November-December period of the same year increased to US$1,720,000, showing an increase of more than 43%.
In 1955, the total value of imports financed with government foreign exchange decreased by over US$20,000,000 as compared with that of 1954. This reduction in the total volume of imports, together with the increase in the imports of industrial materials had resulted in a short supply of many kinds of foreign consumer goods.
The drastic cut in the amount of foreign exchange for imports was apparently aimed at bringing about an improvement in the balance of international payments of the island. As has been pointed out above, there was an excessive depletion of foreign exchange in 1954, resulting is an adverse trade balance of over US$12,000,000. As a result of the policy adopted by the authorities for the purpose of conserving exchange, the situation of international payments has been improved greatly. But price stability has suffered. The merits of the policy are obscured by the embarrassing price fluctuations.
The decrease in the amount of foreign exchange for imports has also resulted in an increase in the cost of imported goods. The expenses for running the import business in small volumes are relatively higher than those for handling the business in large volumes. With the number of importers remaining unchanged, the decrease in the allotment of foreign exchange naturally resulted in a diminished business volume for individual importers and higher cost of imported commodities.
Possible Developments
Because of the fact that the total amount of foreign exchange available for imports is limited and that there are too many importers, each importer can only obtain a small sum each time. In order to do an adequate volume of business so as to lower costs relatively, many importers try by every means to obtain more foreign exchange in addition to that allocated to, them. On the other hand, many registered traders who are entitled to have some foreign exchange for imports do not wish to do the business on account of shortage of working capital or for other reasons. Through corridor dickering, the former can apply for the needed foreign exchange in the name of the latter and, in return, pay the latter some money on rental basis for using their signboards in proportion to the foreign exchange allocated. As the prices of imported goods have been going up and the import trade has become more and more profitable, the demand for import foreign exchange has become greater and, consequently, the rental rate of signboards has been increasing. According to a press report appearing in the official Central Daily News on November 28, 1955, the current rental rates of importer signboards range from NT$12.50 to 23.00 for US$1.00. The money used for renting signboards is immediately added to the cost of imported commodities.
Therefore, the actual cost of imported commodities now includes the official exchange rate plus a 20% defense tax, the market price of foreign exchange certificate and the rental of the importer signboard. A commodity which is worth US$1 on the world market now costs the importer NT$46.28 to NT$56.78, which runs much higher than the market price of the U.S. currency.
Under such circumstances, to export U. S. notes from Taiwan and import goods from abroad with them would be more profitable than to do the business with government foreign exchange through the process of exchange settlement. The development tends to encourage manipulation on foreign exchange and smuggling.
When the rental rate of importer signboards continues to increase, there may be more importers who would choose to make money by letting out these signboards to others instead of doing the import business themselves. The policy would become a special favor to a small group of idle importers and prove to be a waste for the country. When the illegal dealings of signboards add to the cost of imported goods and increase their prices, it has the tendency of accelerating the devaluation at the local currency. This is another possible development to be guarded against.
Thirdly, the present policy grants a handsome subsidy to industrial production. Importers of industrial materials can gain extra profits out of exchange settlement. Some industrial firms which cannot command a good market for their products may derive more profits from the sales of their plants and raw materials than from production. Some of the industrial materials imported may become ordinary commercial items and pass through many turnovers before they can be finally used for production purposes. Thus the policy may not help lower the production cost of local industrial products. This is another possible adverse development.
Under the present system, the profit of the export trade hinges on the market price, of foreign exchange certificates. Meanwhile, commercial banks are entrusted by the Bank of Taiwan to sell exchange certificates accrued to government enterprises at the rate of NT$13.50 to US$1.00. The market price of certificates is consequently stabilized at that level.
As a result of the increase in the exports of government enterprises, the local market can be assured of a sufficient supply of foreign exchange certificates. Before the officially-fixed price is raised, exporters cannot expect any increase in their profits. On the other hand, the continuous rise in commodity prices would inevitably increase the production cost of exports and tend to make the export trade less profitable than before.
At present, about 80% of the total exports of Taiwan are handled by government agencies and enterprises. Their losses sustained from the high rate of exchange of the local currency when they surrender their export proceeds are compensated by the government in the form of low interest loans from government banks or by other means. The private traders, with their share of 20% of the exports, are the ones that are really affected.
For some years, it has been suggested that exporters be allowed to do import business with their export proceeds so that the losses which they suffer from exports may be covered by pro fits made from imports. Recently, the problem has once again become a subject of discussion in trade circles. One day when necessity requires another change in the policy of foreign exchange and trade control, such a link system may come up for consideration by policy-makers.
In the last analysis, much of the unwholesome effect of the existing system comes from the insufficient supply of foreign exchange for imports and from the fact that there are too many importers who make profits at the expense of exporter's and consumers. The allocation of import exchange still accounts, for the most important part of the control policy.
Of the total amount of foreign exchange earned by government agencies and public enterprises, only a part is used by themselves or for specific purposes. A large portion, together with that surrendered by private exporters and inward remitters, is sold to importers at a low price. The policy is therefore said to be a favor to importers at the expense of exporters.
When a large number of importers divide a limited amount of foreign exchange, it is rather difficult to satisfy all, and their competitive bids are bound to increase the cost of imported goods. In order to make the best use of foreign exchange and bring about a satisfactory allocation, the authorities may do well to consider the reduction of the number of importers. But in view of the fact that all traders have been registered with the government in accordance with, legal provisions, it would be difficult for the authorities to decide which ones should be deprived of the right of carrying on their business.
Meanwhile, imports handled by government, agencies have been increasing. The Central Trust of China and the Supply Bureau of the Taiwan Provincial Government are assuming an especially great responsibility for the supply of imported commodities. With a decreasing total volume of private imports, profits that individual importers can make are bound to decrease. Unqualified importers will unavoidably face a natural selection.
* * * *
A good married couple fight to the last. Without fighting and quarreling a marriage wouldn't last.
—Translated By Edward Y. K. Kwong