Taiwan's exports to the US have been declining in recent years. Exports to the US as a proportion of total national exports have slipped from 25.6 percent in 1998 to 18 percent last year and China has now taken over the position as Taiwan's biggest export market, which was long held by the US. Product exports to the China region (China and Hong Kong) last year made up 34.5 percent of the nation's total exports. Doesn't this imply a lessening of the importance of US markets to Taiwan? Has China already become the lifeblood of Taiwan's economic development?
We can answer these questions by approaching them from the point of view of one simple phenomenon. A sluggish US information-technology (IT) market was one of the main reasons behind the decline in Taiwan's economy in 2001. Because the IT industry makes up a very large part of the economy, it was the first and most heavily affected. But in 2001, another market important to Taiwan -- China -- still saw rapid economic growth and Taiwan's US-bound exports were already in a state of decline. Given this situation, why didn't China's econo-mic growth cause Taiwan's economy to start moving? Instead, it declined, affected by the US economy.
Which of the two, the US or China, holds more sway over Tai-wan's economy? A look at the data will tell us. In 2001, Taiwan's US exports declined by 14 percent, but at the same time, China-bound exports also saw a decline of almost 10 percent. One possible reason is that sluggish American IT consumer markets created a decline in Taiwan's exports to both China and the US.
Looking at Taiwan's exports to China, we find that the bulk are integrated circuits and other key spare parts and components. After further processing, these products are re-exported to major consumer markets around the world, including the US. The American IT consumer market thus affects Taiwanese exports both to the US and to China. When US markets decline, Taiwan's exports to both these markets will also decline. Since the low cost of Chinese labor has caused IT product prices to drop, the scale of the US IT market has actually expanded.
As a result, a possible increase in both Taiwanese direct and indirect exports should make the total value of Taiwan's exports to the US a lot higher than in the past.
This means that not only have US markets not become less important to Taiwan, but their importance is increasing. So far, US markets, not Chinese, have to a greater extent been the ultimate factor affecting Taiwan's econo-mic development. For Taiwan, the China market is more of a producers' market.
As a result of the division of labor across the Taiwan Strait, mainly Taiwanese businesspeople in China import key spare parts and components from Taiwan. Much of this is actually intra-company trade. These Taiwanese businesspeople have a very strong tendency to import from Taiwan. As long as Taiwan manages to maintain a technological advantage, it will be difficult to change this kind of trade.
If production conditions in China were to deteriorate, manu-facturers could still move to another location and continue this trade. For Taiwanese manufac-turers, therefore, the size of this kind of trade is mainly influenced by technological factors, in addition to end-market needs. As long as they maintain a certain degree of technological leadership, this kind of export will not diminish. Rather than saying that Taiwanese manufacturers rely on the China market, therefore, it would be more accurate to say that they rely on their own technical skills.
The significance of the US market to Taiwan, however, is different. The amount of American consumption of IT products directly affects Taiwan's exports. Given the importance of US consumer markets, a revival of the Taiwan-ese economy is largely determined by US consumer needs for IT products. Judging from the current US economic revival, the increase in capital expenditures by far exceeds that of consumer spending. Consumer spending is clearly increasing more slowly and the consumer confidence index is oscillating, which means that US consumer markets are still only in the first stages of a revival.
We shouldn't be overly concerned about the slow revival of US consumer markets. The strong revival of the US' manufacturing industry and the sharp increase in capital expenditures show that the US finds itself in a mainly manufacturing-led revival. Given the low exchange rate, the results of the increased manufacturing activity will be exported overseas, and a clear increase in US exports is therefore forecast for this year.
The increases in production and exports will lead to rising incomes and increased employ-ment, and thus lead to an increase in the most important consumer spending. Finally, strong economic growth will lead to a stronger US dollar and future strong import growth is therefore predicted. Extrapolating from this, economic development in nations relying on US markets will be even better in the future than this year. This, of course, is dependent on two other variables -- a strengthening Chinese yuan and the US budget deficit.
Taiwan should be the main beneficiary of a positive cycle of stable US consumer-market revival and predicted increases in American imports. Given the forecast expansion of US consumer mar-kets, IT manufacturers in many countries for which the US is a main market will expand their production capacity, which will lead to increased competition.
For Taiwanese manufacturers, therefore, the most important thing is still to take advantage of the increased capital created by the economic revival to upgrade research and development and technological skills.
Chao Wen-heng is an associate researcher with the Taiwan Institute of Economic Research.
Translated by Perry Svensson
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