The 1980s have been characterized by sweeping new economic challenges for the Republic of China on Taiwan. These have come about as a direct result of the island's economic success story, which began in the early 1960s as the government's outward-looking policies for industry and trade played essential roles in the rapid growth and remarkable structural transformation of the local economy.
The 1960s and 70s witnessed a swift expansion of labor-intensive manufactured exports, which contributed to efficient industrialization by permitting specialization according to comparative advantage and by stimulating technological improvement. At the same time, living standards improved, as did income distribution, through the creation of productive employment and rapid increases in real wage rates.
In the 1970s, however, two oil crises, rising trade barriers, and increasing real wage rates threatened Taiwan's ability to compete with new exporters of labor-intensive products. And in the late 1980s, Taiwan's economy finds itself grappling with a huge trade imbalance with the United States and a rapid appreciation of the New Taiwan dollar.
A U.S. product show in Taipei—"the government will assist American businessmen in conducting more extensive market promotion activities in Taiwan."
Last year Taiwan exported 38.7 percent of its total exports to the U.S., and its trade surplus amounted to US$10.4 billion (excluding US$2.88 billion monetary gold imports). Dependent on the U.S. market and without retaliatory leverage, Taiwan is a likely target of U.S. protectionist measures, although the trade surplus with the U.S. shrank 35 percent in 1988 from the previous year. In the period between the September 1985 G-5 meeting in New York and December 1988, the NT dollar appreciated 43.7 percent against the U.S. dollar. This development has had considerable impact on the island's economic performance.
In addition, due to rising public awareness from accelerated political democratization, the government can no longer ignore the rising costs of environmental pollution and the poverty of public services and welfare. It must restructure its policy to give greater priority to pollution control, consumer protection, and social welfare improvement.
Despite these difficulties, Taiwan's economy remains fundamentally sound, having grown at a 7.33 percent clip in 1988. But policymakers currently find themselves at a crossroads, with many of the current structural problems resulting from past successes.
Restructuring the economy and maintaining a high rate of economic expansion will depend to a great extent on the expansion of domestic demand, diversifying export markets, and revising mercantilist trade policies. The government can ensure a more positive economic future by further liberalizing imports and foreign exchange controls, reforming the financial system, expanding technology transfers, and assuming greater responsibility for preserving an open system of world trade.
Expansion of Domestic Demand
The success of outward-oriented industrialization has created a growing export surplus, which has expanded substantially in recent years (although the export surplus as percentage of GNP declined from 20.0 percent in 1986 to 10.4 percent in 1988). The size of Taiwan's foreign exchange holdings has become remarkable by any standards, with foreign reserves in 1988 amounting to 17 months of imports.
An export surplus represents more domestic savings than domestic investment or a positive net foreign investment, which is unusual for a newly industrializing country in need of substantial infrastructure construction. Actually, the ROC exports its savings in very large amounts to the United States to help finance the U.S. budget deficit, despite the continuing trade dispute. But policy-makers have become aware that a mercantilist trade policy, with its tight foreign exchange controls and massive buildup of foreign exchange reserves, can cause serious trade frictions.
Many factors have brought about the trade imbalance, including weak domestic demand. The Detailed Action Plan for Strengthening Economic and Trade Ties, formulated by the Council for Economic Planning and Development in March 1989, is designed to help expand domestic demand and achieve a significant reduction in the trade surplus. The government has adopted an expansionary fiscal policy by initiating major investment projects in economic and social infrastructure. Special emphasis has been placed on transportation infrastructure, environmental protection, pollution control, and medical care to improve the quality of life. The government also encourages private investment in these areas whenever possible.
Diversification of Export Markets
Taiwan has major trade imbalances with both the U.S. and Japan. The relative importance of Japan as a market and a supplier for the island has remained fairly constant in recent years. Most imports from Japan have been machinery and equipment, metal products, and chemicals. Overall, Japan has benefitted more than the U.S. from lower trade barriers, and Taiwan has consistently run a deficit in its trade with Japan, amounting to US$6.06 billion in 1988. To correct this imbalance, Taiwan must take greater advantage of the yen's appreciation and domestic-oriented Japanese growth to increase its exports to Japan.
In contrast, the huge merchandise trade surplus with the U.S. has become a thorny issue. Labor-intensive goods remain important, but telecommunications equipment, office machines and data processing equipment, electrical machinery, and metal manufactured products are the major exports. In the U.S., labor-intensive products from Taiwan have tended to compete with those manufactured by uncompetitive industries that were consequently very protectionist. The recent Detailed Action Plan seeks to diversify export products and reduce dependency on the U.S. market.
New jobs, better educated workers—"switching the focus of Industrial development from unskilled labor-intensive manufacturing to capital-intensive and high-technology areas."
Taiwan is revising its previous mercantilist trade policy. Although the island has gained a great deal from external trade, if domestic markets are not open for imports, Taiwan will be vulnerable to charges of unfair trade. Import restrictions have been relaxed considerably in recent years, as the government has made 16 wide-ranging tariff cuts since 1971. Among the newly-imported commodities, U.S. products such as wine and beer have already secured an expanding market share in Taiwan, and the island's imports of passenger cars and airplanes increased by as much as 2.8 times over 1987. Passenger car imports from the U.S. currently account for 30.4 percent of total auto imports, and import shares of household laundry equipment and freezers exceed 70 percent. Moreover, the average rate of effective duty has been brought down to 5.7 percent, a level comparable to that of industrial countries.
The Detailed Action Plan seeks to reduce the average rate of effective duty to 3.5 percent by 1992. The average nominal rate of import duty will be reduced to 7.0 percent by 1992, down from 12.6 percent in 1988. It is hoped that U.S. firms will take full advantage of new trade opportunities created by Taiwan's import liberalization and expanding domestic market. In addition to "Buy American" missions dispatched to the U.S., the government will assist American businessmen in conducting more extensive market promotion activities in Taiwan by sponsoring U.S. product shows in Taipei and providing market information. Moreover, the Export-Import Bank of the Republic of China will extend credits to U.S. companies to help them export machinery and other goods against deferred payments from purchasers.
Foreign Exchange Liberalization and Financial Reform
In July 1987, the ROC government lifted most of the controls on foreign exchange and revised related laws and regulations. Those foreign exchange controls that remain in effect and still need Central Bank approval are confined to non-trade-related inward remittances of more than US$50,000 and outward remittances of more than US$5 million by any individual or firm in a year. The government still restricts capital inflow to control short-term financial speculation. There has been substantial outflow of private capital since early 1988, and overseas mutual funds have now become widely available for public foreign investment through the trust departments of foreign exchange banks.
A local factory produces upscale, value-added shoes for a European customer—"in the pursuit of more effective domestic and international growth."
The government also introduced a new exchange rate policy in April 1989. Previously, a daily mid-rate was set according to the weighted average of the previous day's transactions. Bank traders had to buy and sell within 2.25 percent of the mid-rate. The new guidelines abolish this limit, and a group of nine banks-five regular major foreign exchange banks and four local and foreign banks chosen on a rotation basis—set the range of buying and selling rates that apply to transactions under US$30,000. For exchanges exceeding US$30,000, rates are negotiated by trading banks with customers. There is a provision for resetting the exchange rate in order to allow it to respond to the course of business during the day. This reform will allow market forces to play a greater role in determining exchange rates. The Central Bank can reduce the amount of intervention, and adjustments will be made primarily to maintain an orderly market rather than simply "lean against the wind" and slow down changes in the exchange rate.
In addition, a revised banking law to allow the establishment of new private banks and to abolish interest rate regulation was sent to the legislature in February 1989; it was passed in July. The revised law will provide equal treatment for foreign banks and permit them to accept savings deposits, extend long-term credit, and engage in some investment banking activities, which will enable considerable expansion of their scope of activities.
Direct Foreign Investment, Technology Transfer, and Intellectual Property
The ROC government is encouraging better use of foreign exchange earnings through investment abroad rather than simply the accumulation of low-yield foreign reserves. Many firms that manufacture apparel, plastic shoes, toys, and handbags have already relocated to lower-cost countries in the Asia-Pacific region, especially Thailand and Malaysia. A growing number are locating production or acquiring foreign firms in industrial countries, especially in the U.S., to avoid trade barriers and obtain new technology. Mainland China also offers investment possibilities. The ROC government does not interfere in trade and investment activities between Taiwan and mainland China if these are handled through third countries. The government understands that direct foreign investment is one of the best ways to fight against isolation in the global arena, and is an effective way to spread its prosperity abroad by enabling other developing countries to take over export markets for unskilled labor-intensive products.
Increasing emphasis on technology transfers is both an opportunity and a necessity. Abundant high-quality manpower with academic training in science and technology is Taiwan's most important resource. The present industrial policy has been striving to restructure the economy by switching the focus of industrial development from unskilled labor-intensive manufacturing to capital-intensive and high-technology areas. Approvals of technical cooperation projects and royalty payments have increased in recent years. Taiwan is also benefiting from a reverse brain drain, in which U.S.-trained scientists and engineers have returned to help improve technology and start high-tech ventures. But technology transfers in high-tech areas are risky; these must be "socialized," with the government assuming a portion of the risk by providing R&D funds and start-up capital and by encouraging collaboration among university research centers and business.
Finally, the ROC will soon revise the Copyright Law, the Patent Law, the Trademark Law, and other regulations concerning their implementation. The government will also establish a court specializing in the protection and enforcement of intellectual property rights.
The ROC is no longer a minor actor in world economics, and the government realizes it is in its best interests to reorient Taiwan's economy and assume greater responsibility for preserving an open trade system. Nevertheless, this adjustment process requires time because of the large gap between exports and imports. Policy measures that would restructure the economy and reduce the trade imbalance are sometimes unpopular and often face resistance from interest groups, since these measures are bound to ask for sacrifice from certain sectors of society. Easing protectionist restrictions will help make the much-needed adjustments less painful. In the pursuit of more effective domestic and international growth, ROC government policy must achieve even more effective integration into the interdependent world economy. —(Dr. Liang Kuo-shu is a professor of economics at National Taiwan University, Taipei.)