Sat, Feb 11, 2006 page8

• China's economic analysis is flawed

  • By Hwan C. Lin 林環牆
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  The spokesperson for the Taiwan Affairs Office of China's State Council, Li Weiyi (李維一), made a couple of comments regarding President Chen Shui-bian's (陳水扁) "active management, effective opening" policy at a press conference on Jan. 24.

  First, he said that Taiwan enjoyed a trade surplus of US$58 billion with China last year and an accumulated trade surplus of US$330 billion. He went on to say that this amounts to more than the total of Taiwan's current foreign exchange reserves, and that if it had not been for this huge trade surplus with China, Taiwan would have experienced a trade deficit.

  Second, he said that this huge trade surplus has directly stimulated the Taiwanese economy, eliminated a great deal of unemployment and led to increased incomes for many people.

  At first glance, Li's comments seem to make sense, but they do not stand up to strict and logical economic analysis.

  Simply put, as long as a trade deficit is maintained at a sustainable level it will not have an adverse effect on the economy of the country experiencing the deficit. And if the deficit is the result of active domestic investment activity, it will instead be beneficial to the country's economic growth in the long term.

  In the same way, a trade surplus by itself will not necessarily be beneficial to the economy of a country. Furthermore, if the surplus is the result of slow domestic investment activity, leading to excessive savings rates and capital outflows, it will instead hurt the country's economic growth in the long term.

  In the 1990s, for example, the Japanese economy stagnated even though Japan enjoyed a long period of healthy trade surpluses, while the overall production power of the US economy saw vigorous growth despite a long period of trade deficits. This shows that there is no absolute causal relationship between a trade surplus -- or deficit -- and overall economic performance.

  Li is half right: deduct Taiwan's US$58 billion trade surplus with China -- according to official Chinese figures -- and Taiwan will have experienced a deficit in its trade with partners other than China. His logic is, however, flawed.

  Li has fallen into a mercantilist trap, mistakenly believing that a trade surplus must be beneficial to the party experiencing the surplus. He is thus using biased figures to reach his conclusion when he says that Taiwan's enormous trade surplus with China has stimulated Taiwan's economy, eliminated much of its unemployment and led to increased incomes for many people.

  The fact is that systematic attempts to achieve long term international trade surpluses in order to stimulate economic growth is an anachronistic mercantilist attempt at a "beggar-thy-neighbor" policy -- an international trade policy of competitive devaluations and increased protective barriers that one country institutes to gain at the expense of its trading partners.

  Experience shows that this can easily lead to international trade disputes. Both surpluses and deficits must be kept within reasonable levels to prevent the overall economy from becoming seriously unbalanced, leading to structural economic problems.

  The fact is that Taiwan's trade surplus with China is mainly a reflection of changes in the global industrial supply chain. There is no question that the Taiwan-China-US supply chain meets manufacturer demands for cost effectiveness, but if we consider the overall economic interests of the people of Taiwan, we must ask if Taiwan has already invested too much in China in order to develop this supply chain. This is a policy issue to which the Taiwanese government must give serious consideration.

  Hwan C. Lin is a research fellow at the Taiwan Public Policy Council, a US think tank, and associate professor of economics at the University of North Carolina at Charlotte.

  Translated by Perry Svensson
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