As the last major free market economy still excluded from the General Agreement on Tariffs and Trade (GATT), the Republic of China is actively seeking to join the world organization. The United States initiated GATT in the wake of World War II as a means to restructure the international economic order and promote global trade. With a total of ninety-nine members, the organization now covers 90 percent of world trade.
The ROC government, which formally filed to join GATT on January 1, 1990, considers membership in the Geneva-based organization as essential to the smooth development of Taiwan's foreign trade, the lifeline of its economy. The application process began in December 1987, when an interagency panel was set up to plan the necessary adjustments in economic structure and seek the sup port of GATT members. By taking this step, the government hoped to ease some of the problems which have paradoxically appeared in the midst of one of the great foreign trade success stories of the last three decades.
Suffering from a limited domestic market, Taiwan has vigorously promoted international trade as the cornerstone of its economic strategy. Assisted by its trade connections with over 160 nations, the island's foreign trade in merchandise totaled US$115.6 billion in 1989, ranking it the thirteenth largest trading partner around the world, even higher than mainland China (US$111.6 billion, the fifteenth largest), which has a population of one billion, compared to 20 million in Taiwan. The island's merchandise trade is equal to 77 percent of its GNP.
If the figures for non-merchandise trade in services and other items are added, the total figure would increase by over 26 percent (see tables). And if long-term capital movements are considered as part of Taiwan's external economic relations, another 8.6 percent should be added for the US$10 billion worth of inward and outward-bound direct investment and portfolio investment in 1989. The grand total of trade and investment would thus be roughly US$156 billion, well over Taiwan's 1989 GNP of US$150 billion.
Taiwan has in recent years earned huge foreign trade surpluses, leading to intensified demands from its trading partners to open the doors of its market as widely as possible. For example, the U.S., which is Taiwan's largest trading partner, has demanded that the island abide by GATT's free trade principles as a means of redressing the chronic trade deficit that the U.S. runs with Taiwan. In response to American demands, the government adopted large-scale measures to open its market. Most of these trade concessions were subsequently extended to the island's other trading partners.
But Taiwan discovered that although it had to fulfill more and more of the obligations of a GATT member, in some cases it did not enjoy the corresponding membership rights. One instance is the ban on frozen seafood imposed by the Italian government. GATT membership would have protected Taiwan against this action. Moreover, the island has often had to yield to the unreasonable demands of its trading partners in trade disputes, and it has not been able to use the GATT dispute settlement mechanism provided to members of the organization.
Government economic policy-makers also believe that GATT membership can shield Taiwan from the growing tide of trade protectionism. For instance, it can ensure Taiwan's economic presence in Europe after the formation of the European Single Market in 1992. Membership can also permit Taiwan's voice to be heard in discussions on trade issues.
Taiwan's application for GATT membership demonstrated the government's determination to intensify its already vigorous policy of economic liberalization and internationalization. After four decades of rapid economic development, the island has emerged as an important player in the international economic arena. But its industrial development has run into a major bottleneck be cause of soaring labor costs and inflated land prices, among other factors. Taiwan has to upgrade its production from labor intensive products to higher-end items. For this purpose, the competitive stimulation and technological know-how available through the international market are indispensable.
Moreover, the government's policy of giving priority to exports has been successful to the point of creating a chronic foreign trade surplus and huge forex reserves (US$73 billion as of the end of 1989). This gigantic pool of idle funds has led to rampant money games in the domestic market, wreaking havoc on the economy. Further liberalization and internationalization of the economy are therefore necessary in order to relieve these destructive monetary pressures.
The government has slashed the effective tariff from the 14.1 percent of 1971 to today's 5.4 percent, and it has almost eliminated import restrictions on industrial products. It has also lifted controls on flows of forex and on the New Taiwan dollar exchange rate. The forex move has resulted in the rapid growth of outbound investments. Taiwan is now the second largest foreign investor in Southeast Asia (after Japan), and it has become a financial power much sought after by countries hungry for foreign in vestment. In addition, Taiwan's services market has been gradually opened to foreign businesses, and there is now greatly increased protection for intellectual property rights.
In its application for GATT membership, the government expressed its willingness to accept the obligations of a developed member country. This means that Taiwan intends to adhere to GATT's rules for liberal trade and open its market, thereby waiving the exceptional treatment (including permission for special tariff protection, import controls, and export subsidies) accorded to GATT's less developed members. This decision means that major adjustments in the government's economic policy and a shakeout of the economy are inevitable.
In the memorandum about Taiwan's foreign trade system that accompanied its application for GATT membership, the government specifically pledged to slash Taiwan's effective tariff rate (tariff revenue as a percent of imports) from the existing 5.4 percent (first quarter 1990) to 3.5 percent by 1992. This is a level comparable to the industrially developed countries. Nominal rates for 94 percent of the imported items will be bound to 30 percent or less, while that for the remaining 6 percent, including some agricultural products, will be bound to 50 percent or less.
In addition, Taiwan will have to adopt the following measures if it is to meet GATT requirements:
• Abolish the import restrictions on certain goods from given areas, such as the import ban on Japanese-made autos and the import quota on South Korean made cars, which conflict with the GATT principle of equal treatment for all member countries.
• Avoid the priority status given to U.S.-made goods in the government's purchasing projects.
• Open up the access of foreign businesses to Taiwan's securities and insurance sectors.
• Intensify the protection of copyrights and intellectual property rights.
• Extend preferential tariffs to the nineteen GATT member countries that are still not receiving this privilege.
Ready for GATT membership-even though large-scale opening of the domestic market will hurt many local industries.
The large-scale opening of the domestic market will surely aggravate the plight of many local industries, such as autos and home appliances, which have been hit hard by the recent flood of imported goods. Some kind of remedy for these industries may have to be found in the future. In addition, the government will have to accelerate the pace of opening up the services market, including insurance, securities, and value-added network services.
The biggest trouble spot, as with many GATT members, is the agricultural sector. Currently, Taiwan farmers receive various subsidies, such as guaranteed prices for rice purchases. In addition, the average nominal tariff rate for agricultural products remains at the high level of 26 percent, and import restrictions of varying intensity are being maintained for 165 agricultural products, notably processed chicken meat, fowl offal, peanuts, and rice.
Experts point out that the agricultural problem is not only an economic issue, but also has political and social dimensions. Agricultural protection is a universal phenomenon, even among the most developed GATT member countries. From 1986 to 1988, for instance, the nominal tariff for agricultural products in the developed countries doubled to 40 percent. In Taiwan, government protection is responsible for 25 percent of farmer income. The figure is 36 per cent in the U.S., 43 percent in Canada, 50 percent in the European Community-and a staggering 78 percent in Japan, according to Professor Peng Tso-kwei, director of the Graduate School of Agricultural Economics at National Chung Hsing University in Taichung.
In fact, GATT allows its member governments to extend direct income support to their farmers. Nevertheless, over a period of four years Taiwan in tends to cut the nominal tariff for agricultural products to 18 percent from the existing 26 percent. By mid 1991, the Council of Agriculture expects to complete the draft of a gradual program to cut tariffs and lift import restrictions for farm products.
Further opening of the agricultural market will aggravate the plight of Taiwan's farmers, who have been affected by a large increase in imports of agricultural products in recent years. Data for 1986 to 1989 show the decline of the farm sector: the share of agriculture in Taiwan's GNP fell from 5.54 percent to 4.95 percent, much lower than the level in most developed nations. How to help farmers cope with the upcoming difficult adjustments will be a major political and economic challenge.
The ROC government emphasizes that its application for GATT membership is intended solely to bring Taiwan's economy under the umbrella of the GATT trading system, not to achieve a particular political status. It argues that as the thirteenth largest trading partner in the world and a major successful free-market economy, its entrance into the organization can strength en the multilateral trading regime. For example, Taiwan could benefit the GATT membership by further opening its expanding domestic market to foreign businesses and by increasing its economic assistance to less developed countries. Its admission to membership is therefore a logical extension of GATT principles and practices to an important player in the global marketplace.
An extensive lobbying operation targeting the governments and the private sector in GATT member countries is being undertaken jointly by both the government and the private business sector. For the application to succeed Taiwan will have to secure the consensus of the GATT council and the support of sixty-six GATT members, which is two thirds of the total membership. Up to now, most member governments are sympathetic to Taiwan's application, but they are reluctant to express their support explicitly. Last year, GATT was on the verge of approving mainland China's application, including special treatment for developing countries, but approval was withheld in the wake of the Tienanmen massacre. Insiders point out that the decisive factor will be the attitude of the U.S. and the European Community.
Taiwan's entrance into the organization will have profound significance as an example to other developing countries of the advantages of pursuing industrial development based on the principles of free-market economics. Membership in GATT will have an impact not only on the future of Taiwan's economy, but also on the effectiveness of the organization itself in expanding global trade boosting economic growth, and raising worldwide living standards.