Because the ROC NT dollar is not an internationally convertible currency, but is pegged to the U.S. dollar, U.S. greenbacks plummeted within just a few days from a local level of 1:38.05 to 1:37.01 (Aug. 23). And automatically, the ROC's designated foreign reserve banks—Bank of Taiwan, International Commercial Bank of China, Hua Nan Commercial Bank, First Commercial Bank, and Chang Hwa Commercial Bank—faced major losses. Together they hold some US$4 billions in foreign reserves-and each NT$1 appreciation in the value of the NT dollar means an immediate loss in those holdings of NT$4 billions (about US$10.6 millions).
The U.S. media reports also generated some heat among local financial experts, concerned over the consequent range of prospects. A representative sample includes:
Lu Min-jen, professor of economics, National Chengchi University—We think that if appreciation of the NT dollar is inevitable, its range should be tightly limited. The record 1978 exchange rate of US$1 for NT$36 could well be the ceiling for the current NT dollar appreciation. Meanwhile, we here should do our best to convince the Americans that this is our bottom line—that beyond that point, our economy will be badly damaged.
Pan Chih-chi, professor of international trade, Soochow University—In order to alleviate the impact on our exchange market, a fixed, 10-percent NT dollar appreciation might be permitted. As for the tempo of such appreciation, a single hop to that reasonable level is indicated, because moderate, sustained appreciation will do little for the promotion of industrial productivity or to foster local business adaptability.
Lin Chung-hsiung, professor of business administration, National Taiwan University—So far, existing exercises to raise the value of the NT dollar are imprudent. Though the NT dollar is undervalued, its appreciation should be realized as part of a large-scale, well-planned operation, not willy-nilly, under pressure. As to the impact of NT dollar appreciation, our own precautions will be the decisive factors. In negotiating with the U.S., we should take a panoramic view of exchange rates, interest rates, commodity prices, import restrictions, and tariffs. If we can focus on nothing but the exchange rate issue, we will likely be at a loss in bargaining with the Americans.
Yu Teh-pei, professor of economics, Soochow University—Under current conditions, the NT dollar should no longer appreciate cent by cent. The government should schedule a 10 percent appreciation over just two or three months. Really, an NT dollar appreciation has its own positive side, relative to the Darwinian principle of "survival of the fittest," which is appropriate for our economic development. In addition, that action will help proclaim to the Americans our sincerity in resolving U.S.-ROC trade problems.
Ku Chen-fu, chairman of the Chinese National Federation of Industries—The Central Bank's current manipulations of exchange rates for the NT dollar are not long-term measures. At present, our money supply is increasing at an annual rate of 28 percent. And thanks to the drop in oil prices, the impact of the NT dollar appreciation has been moderated. Nevertheless, the government needs to make more room for capital now, to help alleviate the pressure from accumulating foreign reserve holdings. The government should also ease the restrictions imposed on private sector holdings—profit reserves— which would enhance our industries' adaptability to confront the effects of NT dollar appreciation.
Wang Chien-hsuan, vice minister, Ministry of Economic Affairs—The ROC government has long been well aware of the exchange rate problem. Currently, the NT dollar is appreciating in exchange markets, and we should not interfere in market functions. Nevertheless, since the exchange rate issue, also, involves essential macroeconomic adjustments, we should deliberate on its negotiability. Now, if the NT dollar is undervalued, an appreciation of as much as 20 percent is highly questionable. According to the "J-curve effect," a manipulated NT dollar appreciation would ignite public anticipation of an ever stronger currency and result in the phenomenon of "quick exports and slow imports." Notably also, as a result, the ROC-US trade imbalance would continue to worsen. And our efforts of recent years to diversify our export markets will prove futile if the advantages accruing from the strong Japanese yen and Deutschmark are offset by drastic NT appreciation.
Chao Yao-tung, chairman of the cabinet-level Council for Economic Planning and Development —According to the estimates of our Council, the NT dollar is truly undervalued; it should appreciate to a level of 37:1. However, the appreciation should proceed moderately. Otherwise, our economy will be adversely affected. But the appreciation will be ineffective as a means to reduce the trade imbalance. In that connection, we ought now to give first priority to the promotion of public investment and the efficient application of our accumulated foreign exchange reserves, and, then, to the lowering of import tariffs and expansion of imports.
Wang Tso-jung, professor of economics, National Taiwan University—According to basic economic principles, a standard exchange rate is useful for balancing bilateral trade. But that is not applicable to the current ROC-US trade situation, since many ROC enterprises suffer significant weaknesses in their managerial and technological structures: drastic appreciation of the NT dollar would be a fatal blow to such enterprises. If the ROC economy were to collapse, the U.S. would glean no benefits as a result. If the Americans intended to raise this issue as a means of beating around the negotiating bush, that is really pointless. We need to put everything on the table.
Hou Chia-chu, economist—In order to peg the NT dollar at a reasonable level, we must improve our total foreign exchange system. This task includes at least two major aspects:
1. Revision of the exchange rate basis: that is, link the NT dollar to a basket of international currencies, instead of just the U.S. dollar. So far, inter national currency baskets are available in two forms—the IMF's Special Drawing Rights (SDRs) and the European Community's Currency Units (ECUs).
2. Revision of influences on the exchange rate: that is, taking into account the rankings of the U.S. and Japan as the two main trading partners of the ROC, our government could take fluctuations in the two countries' currencies as part of "a framework of reference" for policy making. In other words, we would act to both distance and, in other ways, link the NT dollar to the U.S. dollar.
Should the U.S. take the Japanese yen as its model to "cure" its enlarging trade deficit with the ROC, that would be a disaster. First, Japan's export-dependency is only a fourth as high as the ROC's relative to proportion of GNP; the drastic appreciation of the Japanese yen against the U.S. dollar is, therefore, not potentially as domestically devastating as would be the case with the NT dollar. Second, the industrial and economic structures of the ROC and Japan are markedly different. The major Japanese exporters are massive companies with built-in competitiveness; the ROC's exporters are mainly small, and very vulnerable in organization, or in financial or other aspects. Third, the ROC and Japan export different products. With its highly developed technology, Japan has been able to set world standards in hi-tech products, which dominate foreign markets.
Thus, Japanese industrialists have been able to raise the prices of their export products to offset losses resulting from the appreciation of the yen. In contrast, ROC exports, if made more costly, would easily be replaced by the products of other developing countries.
A higher value for the NT dollar is not likely to cure the U.S. trade deficit. Were the U.S. market less open to Taiwan-made products, they would simply be replaced with exports from other developing countries, rather than with the higher-cost American products.
Obviously, a sharply appreciated NT dollar would hinder ROC export activity and further depress the local investment climate. Consequently, the ROC would necessarily import less from the U.S.
According to the calculations of the Council for Economic Planning and Development, each NT$1 appreciation in the value of the NT dollar results in an 0.8 percent decline in the ROC's economic growth rate.
If the U.S. greenback were to be quoted at NT$30, as some U.S. interests reportedly demand, an estimated 90 percent of all ROC industry would be shut down. Since most ROC enterprises operate at annual average profits below ten percent, it is easily seen why the reaction here to demands for drastic NT dollar appreciation is anguished.
As one of the world's major exporting countries, the ROC devotes 51 percent of its gross national production to the export trade, with a whopping 48 per cent of the total for the U.S. Of the total $148-billion 1985 U.S. trade deficit, about US$10 billion was in the ROC's favor; that is 6.7 percent of the U.S. burden, but 94 percent of the ROC's total 1985 international trade surplus—US$10.6 billion.
Economists are quick to note that such trade surpluses do not at all necessarily indicate an exercise in "beggaring" your trading partners—only that a country's exports outreach imports. Of course, under optimum conditions, all surplus exports make money. But real profits are total export revenues minus costs. In the Republic of China's 1985 total trade with the U.S., profits in real terms are estimated at only a billion, or even less. Most of these ROC exports were low to medium-priced products; in value, they are no match for the profit generation from the highest-tech products.
The ROC has given priority recognition to this situation, exerting great effort over the past few years to upgrade, liberalize, and internationalize its economy as a fundamental antidote. Indeed, its domestic market has been opening at, probably, a more rapid tempo than economies at comparable levels elsewhere in the world.
The complications have multiplied in a contemporary world, more economically interrelated than ever before. So, for example, when the U.S.. booked its stunning, twelve-figure trade deficit (148 billions for 1985 and a projected 170 billions this year), the root causes were also international.
Since the economic meeting of the "group of five" highly industrialized nations last September, the Japanese yen has appreciated by 36 percent against the U.S. dollar. As a result, the volume of Japan's exports to the U.S. did drop for the first time in a decade (and the growth rate of Japanese domestic investment also dropped, leading to the bankruptcy of some 12,000 Japanese companies). Yet, the Japanese trade surplus with the U.S. continued to expand in the first quarter of this year to US$12.66 billions-two-fold the figure for the same period last year. This is not what the U.S. is aiming for.
The most fundamental international problem for the American economy is two-sided. First, of course, is the huge U.S. trade and current-account deficit; and second is the need for structural adjustment in those American industries that have lost long-run competitiveness. These two problems, apparently deeply interrelated, are, in essence, very different in terms of origin, time dimensions, and the policies required for solution. Nonetheless, the main surface culprit for United States balance of-payment problems has long been the overvalued dollar, though underlying that overvalue is structural maladjustment as reflected in the evolving structure of comparative advantage for other economies around the world.
U.S. trade policy, either to restrict imports or to obtain better access to foreign markets, certainly can effect changes in the composition and, perhaps, the overall levels of both imports and exports. But, since exchange rates will inevitably adjust to reflect the underlying gap rising from the state of international competitiveness, such restrictive action, in the long term, would do little to improve the future outlook.
In the ROC, the economic specialists hope that vista will be brought home to American policymakers, so that efforts to effectively address the situation can get off on a better track.