Tue, Oct 14, 2003 - Page 8 News List

Taiwan should keep its distance from China

By Liu Shih-xiang 盧世祥

China has gradually become a target of public criticism in the international economic and trade communities since the summer.

Mexican President Vicente Fox accused Chinese officials of using despicable methods to attract businesses and Italy's Minister of Economy and Finance Giulio Tremonti claimed it would be suicidal for Europe to open up its trade to China. Washington also blames its loss of jobs in the manufacturing industries on China's insufficient liberalization and the obviously undervalued yuan. The George W. Bush administration could eventually adopt a harder stance on this issue.

These criticisms are not unfounded. In the eyes of many developing countries, China has robbed them of their markets in the West due to its relatively cheap and abundant labor force.

EU and US officials recently complained that the opening of China's markets after the country's WTO entry has fallen far short of what was promised. The White House and the US Department of Commerce even announced that they would form a special team to investigate China's unfair trade practices and take the necessary measures to correct them.

The manipulation of the yuan's exchange rate has been China's most criticized measure. Beijing has pegged the yuan to the US dollar, although it has enjoyed a current-account surplus since 1994. Its trade surplus with the US exceeded US$100 billion last year.

People seem to have different opinions about exactly how much the yuan has been undervalued. The US National Association of Manufacturers estimates the yuan to be 10 percent to 40 percent undervalued. But the figure could even be as high as 50 percent to 60 percent, according to the famous "Big Mac index" of The Economist magazine.

People have different opinions on how to solve the problem.

When US Secretary of the Treasury John Snow visited Beijing last month, he suggested that the Chinese authorities build an exchange-rate system on the basis of free trade, an open market, free flow of capital and market orientation. In the same month, however, Nobel-winning economist Robert Mundell stressed during his visit to Taipei that drastic appreciation of the yuan would be catastrophic for China's economy. He also called for the establishment of an "Asian currency area."

Nicholas Lardy, a leading expert on China's economy, believes that Beijing can gradually revalue the yuan in two steps: First, it can appreciate the yuan by 10 percent to 20 percent and expand its range of fluctuation. It can also change its policy by pegging the yuan to the US dollar, the euro and the Japanese yen -- not just the US dollar. It can adopt a free-floating exchange rate and allow capital to flow freely after its financial system has been strengthened.

Due to a fear of losing face, Beijing is unwilling to give up the fixed exchange rate or allow the yuan's value to increase under international pressure.

China will encounter greater pressure from the international community. The US is most likely to take action as next year's presidential election draws near. China's resistance may trigger a backlash in the form of trade protectionism.

For Taiwan, the dispute over the yuan's value has highlighted the true face of China's economy behind its glamorous appearance. By putting 60 percent of its foreign investments in China, Taiwan may also suffer as the international community takes countermeasures against China. In the face of such an economically risky neighbor, Taiwan cannot remain unprepared for possible economic threats.

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