China Is Not the One Big Answer to Taiwan's Economic Woes
Philip Bowring International Herald Tribune
Wednesday, June 20, 2001
TAIPEI Taiwan'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?
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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.
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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.
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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.
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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.
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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.
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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 industry.
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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.
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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.
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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.
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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.
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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.
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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 driven growth.
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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.
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