Given global trade liberalization and competition and the spread of production technologies, such things as wages, land rent, capital interests and profits will necessarily move toward global equilibrium.
From a factor price equalization (FPE) perspective, China's economy has been rapidly integrating with the international economic system since the 1990s while also causing an increase in international competition.
There is much foreign direct investment flowing toward China, resulting in much of the spread of global production technologies going to China -- a low-wage developing country with an abundance of labor. This in turn has meant that China is catching up technologically with Taiwan and other newly developed economies. Against this backdrop, FPE theory gains practical use by explaining the falling average wage level for global labor and the creation of unemployment. The far-reaching integration of trade investments in Taiwan and China can of course not avoid the impact of this equalization.
Taiwan must have a complete and visionary set of economic policies to lessen the impact of this trend. The following describes what these policies should focus on.
First, Taiwan must accumulate the ability to innovate so that it can climb the technological ladder to give its industry a comparative advantage and distance itself from China and other low-wage economies, while also increasing the overlap with high-wage economies such as the US. If Taiwan were able to do so, the impact of the phenomenon described by FPE theory would be gradually lessened. At the same time, industries with a comparative advantage would close in on the advanced nations, for example by equalizing the production factor price in Taiwan and the US, which would have the effect of raising wage levels in Taiwan.
Second, Taiwan must make an effort to raise the quality of its work force so that it can close in on the high-quality workers in industries with comparative advantages in advanced nations. The proportion of such high-quality workers should not only be large in terms of production factors internationally, but it must also be an absolute majority in Taiwan's population structure. If this could be achieved, the downward impact of low wages in developing countries would be restricted to a minority and would not affect the formation of a high-wage employment environment.
Third, Taiwan must provide effective protection of intellectual property rights while at the same time applying technological management and government subsidies to stimulate "vertical innovation." This is needed to maintain a balance between the inflow of advanced technologies and the outflow of low technologies and increase the technological distance to low-wage developing countries. Although "horizontal innovation" facilitates the spread of technology locally in Taiwan, it may also lead to a "me too" phenomenon with other countries being able to produce the same products as Taiwan. That would create a vicious circle of price competition which would mean deteriorating trade conditions for Taiwan, which would be bad for income growth.
Taiwan has the potential to become an FPE winner. If Finland, Sweden, Switzerland and other small, high-wage countries can, why shouldn't Taiwan be able to do it, too?
Hwan C. Lin is a research fellow at the Taiwan Public Policy Council, a US think tank, and an associate professor of economics at the University of North Carolina at Charlotte.
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