TAIPEITaiwan's economy is facing its most difficult period since the 1974-1975 oil
shock. Should it turn to an apparently booming China for sustenance? Or is the
mainland more challenge than solution?
The problem is real. Exports fell 22
percent and imports 29 percent in May in the wake of the collapse of electronics
demand and prices. An economy that was only lightly touched by the Asian crisis
might now be lucky to see growth in gross domestic product for 2001 above the
first quarter's 1 percent. Meanwhile China's exports are still rising and China
still says its GDP growth will be 8 percent.
For many in the business community here,
the answer lies in putting economic needs above political ones. That means
abolishing restrictions on investment in the mainland, liberalizing entry of
mainland capital and people and, above all, modifying Taiwan's stance on the One
China principle to open the way to direct air and sea links.
Some foreign commentators have rushed to
proclaim that once China and Taiwan join the World Trade Organization a One
China economy will become inevitable and irreversible.
In reality the Taiwan-mainland economic
relationship is complex and not as one-sided as the integrationists suggest.
Lack of direct links may add costs and deter some investment and tourism but,
given the ease of transit via Hong Kong and elsewhere, it is only a marginal
factor for Taiwanese.
Taiwanese investment on the mainland has
likewise only been marginally affected by official policy toward China. Taiwan
capital has, with or without approval, moved to the mainland primarily to take
advantage of lower labor and land costs, secondarily to try to profit from the
domestic market. A third factor has been the need of parts suppliers to follow
multinationals who themselves are investing heavily in China.
These processes are not new, though they
have speeded up in the past 18 months due to the China-WTO lure and the need of
fast-growing Taiwanese electronics firms to expand production capacity. In the
short run they are leading to claims of the "hollowing out" of Taiwanese
The reality is that manufacturing's role
in the Taiwan economy has been declining steadily for more than a decade but its
trade balance has remained robust. The availability of cheap manufacturing
facilities nearby has helped Taiwan companies' profitability while spurring
moves into high-value-added products at home.
Taiwan does have some reasonable worries
that the pace of mainland investment by foreign and Taiwanese companies is
outstripping its own move upmarket through innovation and its capture of
high-value manufacturing from Japan and the United States.
A slowdown in innovation would hurt
Taiwan's comparative advantage - adaptability. Unemployment among the unskilled
in older industrial areas had become structural, growing even while the local
economy was buoyant. Taiwan is being hurt by mainland incentives. Its
competitive position in software engineering may be being eroded by the
clustering of mainland and Taiwanese talent around Shanghai.
Investment in the mainland as an export
platform has been profitable for most Taiwanese companies but it has proved much
more difficult to make money by targeting the domestic market.
Meanwhile the enthusiasm of
multinationals for China could result in gluts of semiconductors and electronic
gadgetry similar to automobile, beer and household appliance excesses of the
last investment cycle. This would be awkward, because Taiwan has become ever
more specialized in electronics, but temporary.
Taiwan's role is and should remain as a
niche global player like Switzerland, not subsumed in some vague Greater China.
Taiwan's mainland obsession is distracting from its own strengths and delaying
reform of banking, property ownership and the service sector, would attract
foreign investment - including from the mainland - and set off domestically
Direct mainland links would give an
immediate boost to Taiwan, but in the longer run China is neither savior nor
threat. It is a major trading and investment partner, just like the United
States and Japan.