Taiwan And International Trade

Taiwan And International Trade Taiwan, an island, is separated from the mainland of South China by the 100-mile-wide Taiwan Strait in the Pacific Ocean and is the seat of the Republic of China government (ROC). The capital of Taiwan is Taipei and other major cities include Kaohsiung, Tainan, Taichong, and Chilung. The languages spoken are the Mandarin, Fujianese (Amoy), and Hakka dialects. Religions on the island include Confucianism, Taoism, Buddhism, and Christianity. THE ECONOMY OF TAIWAN The 1990s have been a time of change and achievement for Taiwan. Politically, Taiwan has undergone a dramatic transition from an authoritarian government to a true democracy and on the economic front, Taiwan has continued to prosper.

For the past 20 years, Taiwan has had one of the fastest growing and most dynamic economies in the world. With over $80 billion US in foreign capital reserves, an average growth rate of 7.8 percent between 1986 and 1996, and a per capita gross domestic product (GDP) of $15,000, Taiwan has become a powerhouse in the global economy.1 Its remarkable success comes after five decades of hard work and sound economic management that have transformed Taiwan from an underdeveloped agricultural island to a leading producer of high-technology goods. Helping to spur this extraordinary growth during the last two decades were supportive U.S. policies that began with the 1979 Taiwan Relations Act (TRA). It maintained Taiwans preferential trade status when formal diplomatic relations were severed in favor of the Peoples Republic of China (PRC).

In 1979, Taiwans economy was rapidly expanding and was beginning to fully integrate into the new global economy. It exported $5.6 billion to the United States and had $7 billion in foreign exchange reserves.2 Taiwan produced a variety of products, specializing in textiles, consumer goods, and petrochemicals. U.S. corporations were beginning to invest heavily in Taiwan when the U.S. government severed the official diplomatic relations it had maintained with the Republic of China for three decades. This abrupt loss of recognition created consternation among foreign investors and Taiwans trading partners.

International contracts, which had once been secure through treaties and formal diplomatic ties, suddenly came into question. The Taiwan Relations Act, however, calmed the fears of investors by creating a framework that allowed trade and finance to continue unhindered. The TRA sent the clear message that the U.S. intended to maintain a close relationship with Taiwan and encouraged business ties with the island. Specifically, the act mandated that all treaties and agreements remain in effect, ensuring that contracts could still be enforced. In addition, it authorized funding for Taiwan from the Overseas Private Investment Corporation (OPIC), which provides insurance, loans and guarantees to businesses investing abroad.

Thanks in large measure to OPICs continued programs, trade and investment tripled over the next decade between the U.S. and the ROC, helping to maintain Taiwans economic boom. In the 1980s, Taiwans economy shifted dramatically toward sophisticated, capital and technology-intensive products for export and toward developing the service sector. A generation ago, farming accounted for 30 percent of GDP and basic manufacturing represented half of the economy. Today, farming comprises only 3.3 percent of GDP while services are almost two-thirds of GDP.3 Taiwan now boasts one of the fastest growing high-tech sectors in the world and has been called “Silicon East” by Forbes Magazine.

Today, Taiwan is the fourth-largest maker of computer chips, producing 69 percent of the worlds scanners and over half of the worlds computer monitors.4 Through the 1990s, Taiwans economic growth rate ranked ninth in the world according to the World Bank, and for the last decade, Taiwan posted an average growth rate of 6.2 percent each year compared with the average growth rate worldwide of just 2.4 percent.5 During that period, the U.S. achieved growth of 3.1 percent per year, while Japan grew by only 1.2 percent, as it experienced its worst recession since World War II.6 Inflation, too, has largely been tamed; World Bank statistics show that Taiwans average annual inflation rate in the first nine years of the last decade stood at just 3.2 percent, and this figure has declined since.7 Throughout the Asian Economic Crisis, which began in late 1997, Taiwans economy showed great resilience. Nothing, it seemed, could derail Taiwans powerful economy. When the Asian economic crisis was at its worst, Taiwan posted annual GDP growth of 4.83 percent, while most of its Asian neighbors plunged into recession.8 Western press reports painted a glowing picture of the islands economic strength. The Economist noted that “one of Asias so-called Tigers . .

. has fared better than the rest. While Korea and Southeast Asia are struggling, Taiwan has so far escaped with a small currency devaluation and a relatively modest decline in share prices. Economic growth remains strong.”9 In searching for an explanation for Taiwans success, the magazine noted a couple of factors, including a light foreign burden and better banking regulation. “A third probable cause of Taiwans success is more controversial: by having a more flexible economy than some other Asian countries, Taiwan may have been better positioned to withstand the storms,”10 the article said. In addition, the article emphasized that Taiwan makes it easy for entrepreneurs to start new businesses while also making it easy for old businesses to die.

“This creative destruction spurs incumbents to stay trim and helps spread new skills quickly,”11 the magazine said, boosting productivity in all sectors of the economy. “Its history of allowing troubled businesses to die and new ones to spring up should make it easier for Taiwan to adjust to turbulent times.”12 Similarly, an article in Forbes, writer Andrew Tanzer says that Taiwan’s system has helped it survive the crisis. “Knowing it stood almost alone,” he writes, “it developed habits of self-reliance, financing growth with domestic savings and welcoming foreign capital on friendly terms. It has been careful not to run deficits in its international accounts because it knows it cannot count on help from international bodies.”13 Tanzer also points out that “the island’s relatively small, private entrepreneurial firms are nimble when it comes to changing with the market.”14 He acknowledges that Taiwan is likely to feel increasing pressure from its neighbors, but concludes that “with its current account surplus and strong financial condition, Taiwan can afford to stimulate its domestic economy to take up any slack in exports.”15 Finally, Tanzer gives credit to Taiwan’s open and democratic system, declaring that “the verdict is in: Free, entrepreneurial capitalism beats the half-capitalist, half-socialist model by a country mile.”16 Taiwan has subsequently transformed itself from a recipient of U.S. aid in the 1950s and early 1960s to an aid donor and major foreign investor.

The ROC’s development is now a model for other emerging markets around the world and Taiwan will undoubtedly remain one of the fastest growing economies in the world. TAIWANS INTERNATIONAL TRADE With a 258 billion dollar economy, Taiwan is the worlds 13th largest economy and its 12th largest trading power.17 In 1998, Taiwans international trade totaled more than 216 billion dollars and import from all sources were worth approximately 105 billion dollars.18 Taiwan has a multi-billion dollar annual trading relationship with the United States, Japan, Germany, Korea, France, and a number of other countries. Taiwan has tried to establish its own “international space” in a complex relationship with Mainland China. The decades long dispute over the status of Taiwan in relation to the PRC has impaired international recognition and participation in international organizations for Taiwan. Without taking provocative steps, however, Taiwan has tried to establish an increased presence in international organizations, such as the Asia Pacific Economic Council (APEC) and the World Health Organization (WHO).

Through most of this decade, one of Taiwans most important objectives in this regard has been to secure membership in the World Trade Organization (WTO). Taiwans Trade Profile Like most countries in the region, Taiwan trades a great deal with the worlds major trading partnersthe United States, Japan, Europe and mainland China by route of Hong Kong. It is worth noting that Taiwans trade with the world is geographically and nationally diversified. Taiwans total trading reaches the one billion-dollar threshold with 15 countries, including a number, such as Canada, Switzerland, and Brazil, that lie well outside of the Asian region. See Tables 1, 2, and 3, respectively, for “Taiwans Top Trading Partners,” “Taiwans 10 Major Export Markets,” and “Taiwans 10 Major Import Sources” for the years 1997 and 1998.

Similarly, Taiwans imports from the world are diversified. As would be expected from an island with limited natural resources, Taiwan imports a considerable amount of agricultural products and petroleum along with a wide range of industrial products, including chemicals, steel products, electrical machinery, household appliances, wood, and paper products. Although it is also a major exporter of the same, Taiwan imports a substantial volume of textile products. See Table 4 for “Taiwans Major Imports” for the years 1997 and 1998. As Taiwan liberalizes trade in connection to WTO accession, a substantial portion of the growth is likely to be in these same sectors. [It should be noted that Taiwan has succeeded in having a WTO working party formed to consider its application to the WTO and has completed bilateral negotiations with all members of the working group.

Shortly, the working group could close its work and send the package for Taiwans membership to the larger WTO General Council for a final vote on its membership.] Taiwan is also a substantial exporter of a number of industrial products. Although Taiwan does export some agricultural products, given its small land area and limited endowment of natural resources, its comparative advantage lies in the production of manufactured products. Since most countries already grant Taiwan “Most Favored Nation” (MFN) tariff treatment voluntarily, WTO accession is thus less likely to have immediate impact on Taiwans export volume or composition. Over time, however, the dynamic benefits of an increased selection of products and composition will likely spur overall growth and movement of resources within Taiwans economy. These changes may have a long-term impact on Taiwans exports. See Table 5 for “Taiwans Major Exports” for the years 1997 and 1998. Taiwans Trade Regime Like a number of its Asian neighbors, Taiwans economy was protected in many sectors in the 1950s and 1960s. As part of a trade liberalization effort encouraged by Taiwans major trading partners, notably the United States in accordance with WTO accession, many of these trade barriers have been reduced or dismantled in recent years.

However, substantial barriers remain in a number of sectors. In an effort to attract more international trade, Taiwan has substantially reduced the applied level of tariffs over the years. Taiwans average nominal tariff rate of 8.2 percent is similar to that of other developed countries and it is scheduled to be lowered to five percent in WTO accession talks.19 For comparison, the average U.S. tariff rate is just over five percent.20 These tariff concessions will ultimately impact 3,470 industrial products and 1,021 agricultural products.21 Beyond that, however, the average tariff hides the fact that in a number of sectors, tariffs remain important barriers to trade. As is the case in many countries, tariff spikes are quite high in a number of sectors; automobiles and agriculture provide two notable examples.

Many countries have employed various trade barriers to protect the automotive sector. In the case of Taiwan, most of this protection has come in the form of tariffs. Currently, tariffs on passenger vehicles range slightly over 60 percent bringing the average tariff on automobiles to almost 44 percent.22 At this level, tariffs have a strong impact on trade and a substantial restraint on imports. There are similar high tariffs on imports of auto parts; auto part tariffs reach over 20 percent and average over 17 percent.23 Most of these tariffs, however, will be reduced substantially upon WTO accession. The average tariffs on automobiles will fall to 16 percent and auto parts tariffs to just over 10 percent.24 At these levels, tariffs will still impact trade, but imports of both can be expected to rise substantially. In the agricultural sector, tariffs as well as non-tariff measures (NTMs) are also quite significant. Tariffs on many meat products exceed 50 percent and tariffs on various types of fruits and vegetables are also prohibitive.25 Taiwans textile and apparel market is also potentially a promising export opportunity for many developing countries around the world although Taiwan itself imports a significant volume of textiles and apparel.

Most of the formal protection in this sector is provided by tariffs, which average almost 12 percent. Upon completing accession to the WTO, the average tariff on textiles will be lowered by about 20 percentto under 10 percent.26 At this level, tariffs will still restrain imports, but substantial trade opportunities will be created and tariffs on specific products will decline even more dramatically, creating various niche opportunities. In the industrial sector, tariffs are already fairly low. For …