Patience a virtue for cross-strait trade policy

DPP Secretary-General Wu Nai-jen (吳乃仁) recently urged the DPP government to replace the "No haste, be patient" (戒急用忍) policy with an "investment quota" (投資配額) policy in order to mollify Taiwanese businessmen who are eager to do business with China, as well as to generate further profits to bolster Taiwan's economic growth. Such a viewpoint takes only superficial account of the issues and risks calling a halt to the upgrading of industries inTaiwan.

First, statistics relating to Taiwan's domestic investment performance, show that gross domestic investment dropped rapidly from 33.8 percent of GDP (Gross Domestic Product, 國內生產毛額) in 1980, to 17.5 percent in 1986. It began to rise again in 1987, climbing to 22.4 percent by 1998. Further examination of past rates of private domestic investment reveal that the average from 1980 to 1986 was 4.8 percent. The average from 1987 to 1998 jumped to 10.7 percent. Clearly, Taiwan's domestic investment grew after Taiwan companies began to invest in China in 1987.

Second, according to a survey of more than 3000 local companies conducted by the Ministry of Economic Affairs (MOEA, 經濟部), only a few small enterprises cut domestic investment after commencing operations in China. They did so mainly due to shortage of capital and managerial staff. For medium and large enterprises, on the other hand, the purpose of investing in China is to develop a more efficient international production team in order to enhance competitiveness in international markets. Having invested in China, rather than reduce their ratios of domestic investment, they set about the expansion of operations in Taiwan.

Third, if we examine Taiwan companies' investment in China year by year, we see that many companies investing in China from 1987 to the early 1990s were small or medium sized enterprises. Some, mostly labor-intensive industries, and purely for financial survival, closed their Taiwan production lines and transferred their operations to China where labor costs were and remain considerably cheaper. Such an approach to investment is known as "defensive external investment" (防衛型對外投資).

Wu's call for an "investment quota" policy -- requiring companies to expand their businesses in Taiwan while making investments in China -- is unrealistic in practice and will upset the division of labor among different industries in Taiwan and China. The "investment quota" policy is more appropriate to large enterprises, which focus on tapping the human resources of various countries in order to share out the work. Such a policy is not suitable for medium and small enterprises, or the so-called "sunset industries," Taiwan's traditional industries. The division of labor among different industries, moreover, is just as important as the division of labor within large companies. In fact, many of Taiwan's medium and small enterprises in China rely heavily on large Taiwanese companies for the supply of materials and equipment. The "investment quota" policy will seriously harm the division of labor across the whole economy.

Put simply, to call off the "No haste, be patient" policy would seem to be the best solution for cross-strait investment and the division of labor for Taiwan companies. Although the "investment quota" policy might solve the problems of large companies, such as those in the high-technology sector, it will upset the division of labor across different industries and may cause further problems as Taiwan upgrades its industries. The government must, therefore, propose long-term cross-strait trading policies, and not seek to implement them in such a casual manner.