Taiwan has been a dynamic capitalist economy for more than five decades, with foreign trade being the engine of its miraculous growth. In so doing, Taiwan has successfully transformed itself from an underdeveloped, agricultural nation to an economic power that is a leading global supplier of high-tech products.
Having said this, no one could argue that Taiwan has been losing momentum as an industrial powerhouse because of ever-increasing outbound investment, which has eroded its attraction as a destination for foreign direct investment. As a consequence, more than 50 percent of the nation’s total export value has been supplied by overseas manufacturing sites for some time now. Last year alone, China and Hong Kong accounted for about 40 percent of Taiwan’s total exports, while 84 percent of Taiwan’s outbound investment went to China.
An IMF study published in July 2012 concluded that should Chinese investment be reduced by 1 percent, Taiwan’s economic growth would be reduced by 0.9 percent — the highest among China’s trading partners. In other words, the negative impact on Taiwan’s economy in the event of an economic downturn in China would be instant and direct due to its heavy reliance on the Chinese market.
Furthermore, because the signing of the Economic Cooperation Framework Agreement (ECFA) in June 2010 ushered in closer economic integration between the two nations, Taiwan has become increasingly dependent on China’s economy, thereby giving Beijing greater leverage in pushing its political agenda.
Given all this, what are the ways and means by which Taiwan can move forward economically?
Having served as minister of finance and ambassador to the WTO, I believe that the following points can help put Taiwan back on the right track and ensure its long-term development.
First, the government urgently needs to change its policy focus from “Made by Taiwan” to “Made in Taiwan.” While recognizing that the private sector always has the option to find the most cost-effective sites for manufacturing, the government has to be aware of the vital need to attract both domestic and foreign investments. The US has been outstanding in this regard, as it is the largest foreign investor in Taiwan, particularly, in the finance, insurance, manufacturing and wholesale trade sectors.
However, as mentioned, Taiwan has been losing its momentum as an industrial powerhouse because of ever-increasing outbound investment, resulting in more than half of the nation’s export value coming from manufacturing sites abroad.
In US President Barack Obama’s State of the Union address in January, he said: “Let’s do more to help the entrepreneurs and small-business owners who create most new jobs in America... We need to work together ... to protect our workers, protect our environment, and open new markets to new goods stamped ‘Made in the USA.’ China and Europe aren’t standing on the sidelines. Neither should we.”
Unfortunately, Taiwan seems to be the only country in the world standing on the sidelines without paying attention to the home game. I fully support Obama’s message that the government has to come up with an effective policy to effectively provide the private sector with the environment to create new jobs, thus ensuring the driving force of economic development by virtue of continued capital formation.
Second, the underlying rationale for the most important principle of non-discrimination in the General Agreement on Tariffs and Trade (GATT)/WTO system can be traced back to the “law of comparative advantage,” which was developed by the British economist David Ricardo in 1817. Without going into too much detail, Ricardo said that, with a minimum degree of intervention from governments in international trade, market forces would generate a mutually profitable division of economic resources, which in turn enhances the real national product of trading countries.
As a keen academic researcher and longtime government worker, I have always held the view that Ricardo’s law of comparative advantage not only serves as the architecture for the GATT/WTO multilateral trading system, but also represents the best development policy that Taiwan might undertake. Looking back at the prosperity the nation has enjoyed as a result of the predictable environment provided by the GATT/WTO trading mechanism, coupled with Taiwan’s international competitiveness over the past six decades, I am convinced that the nation’s economic strength lies in its ability to further integrate itself into the global economy.
In this regard, membership in the WTO since January 2002 has provided Taiwan with superior opportunities to update its trade regimes with the latest development in this multilateral trading system, which always projects the most suitable trade regimes of those advanced members. Any new topics discussed by the WTO need to be incorporated into the policymaking process in Taiwan.
In other words, if the nation is ready for the opening up of its markets by virtue of the much-needed structural reforms in its domestic industries, especially in the agricultural sector, Taiwan could ensure the supporting foundation for its competitiveness in international trade without much concern for not joining the race for negotiating free-trade agreements (FTA).
Third, the government no longer has the luxury of not conducting a proper “think through” about the priority of its trade policy, especially the further development of the ECFA. While not objecting to the view that closer economic links with China could bring greater opportunities for the economy, I would like to emphasize that such a development would also pose new challenges as Taipei becomes more economically dependent on Beijing, particularly in light of the fact that political differences between the two sides of the Taiwan Strait remain unresolved.
In this regard, the signing of the ECFA has been seriously questioned as to whether it is a political poison pill for Taiwan, even if it could also serve as a kind of economic vitamin.
I simply cannot help but recall the following comment from Jayant Menon, a lead economist at the Asian Development Bank.
“Beijing has begun using the honey of economic enticements to catch the fly,” he said.
What an awful comparison.
Although China has already become, and will continue to be, a very important trading partner from Taiwan’s perspective, the nation should not regard China as the one and only market, and should be wary of hinging its economy too closely to all the possible ups and downs in China.
Concerning the political concern over the ECFA: In the course of negotiations, the government stressed that the political differences between two sides of the Taiwan Strait could be separated from the establishment of closer economic ties. In addition, President Ma Ying-jeou (馬英九) proudly touted his so-called “diplomatic truce” as a means of defusing tensions between two nations. However, as time goes by, more Taiwanese have come to the conclusion that the diplomatic truce seems to be a unilateral rather than a bilateral one.
On many occasions, Ma reiterated that “our foremost guiding principle in addressing cross-strait issues is to safeguard our national sovereignty.”
Nevertheless, there are growing concerns among Taiwanese over the ECFA since it came into force, due to the prevailing perception that the political differences have not been set aside by China.
Given that the ECFA is a free-trade agreement by its nature, and an FTA is subject to the functioning of Article 24 of the GATT, I therefore would revisit the policy reason that effectively triggered the creation of the GATT — the policy reason related to the lofty notion shared by US political leaders during World War II that “nations which are economic enemies are not likely to remain political friends for long.”
Having traced back the very foundation that brought this multilateral trading system into being and having found that the ECFA is the only case in the GATT/WTO whereby one party totally denies the status of the other as a sovereign country, I therefore wonder, given China’s outright hostility toward Taiwan on the issue of sovereignty, would the two nations be likely to remain economic friends for long?
A white paper issued by the American Chamber of Commerce in Taipei (AmCham) in June last year was titled “Taiwan at a Crossroads.” Despite such a shocking message, I was greatly appreciative that AmCham was pressing the button of urgency to awaken the nation.
After taking a hard look through a different lens at the huge cloud which is lingering over Taiwan, I would have no hesitation in stressing that Taiwan could be considered as standing at a crossroads, any decision made now will create a ripple effect, economically or even politically.
As spelled out by Joe Studwell, a distinguished economic commentator: “History reminds us that, however fleetingly, the development destiny of a nation is in its government’s hands.”
As the AmCham paper said: “The exercise must start from a sense of urgency. Action is needed now, or Taiwan will find its day has passed.”
Yen Ching-Chang is a former minister of finance and ambassador to the WTO.
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