The Chinese-language Commercial Times published an editorial on July 9 titled “Why has the scale of Taiwan’s exports decreased to half of South Korea’s?” The editorial said the government’s biased tax incentives and industrial policies have caused an excessive concentration of resources in the semiconductor and flat-panel sectors. This means Taiwan is easily affected by shifts in the economic climate, and this is also why the recovery of Taiwan’s exports has fallen behind South Korea and other major trading countries.
The world ranking of Taiwan’s export volume has declined over the past eight years, from 14 in 2000 to 16 in 2006 and 18 last year. While Taiwan’s exports totaled about 88.2 percent of South Korea’s in 2000, the figure had dropped to 60.5 percent last year and 53.2 percent in the first half of this year — about half of South Korea’s. Why?
Unfortunately, in claiming that there has been an excessive concentration of tax incentives and resources in the semiconductor and panel sectors, the newspaper was generalizing based on partial data. Since the product value of these two industries is higher in South Korea than in Taiwan, how can there be a problem with concentration of resources in these two industries?
The problem is that while South Korean industries have been able to develop in their domestic market, most of Taiwan’s best performing industries — including computers and cellphones — have moved to China, leaving behind industries that were not fully deregulated as a result of the “no haste, be patient” policy, such as chip and panel makers, the petroleum cracking industry and large steel mills.
As other industries are gradually shrinking in Taiwan, it is not very strange that there appears to be a concentration of resources in the chip and panel sectors, which cannot move to China.
Why do South Korean firms enjoy balanced domestic development when Taiwan’s do not? First, South Koreans generally do not speak Chinese, so language and cultural differences provide natural obstructions.
Second, South Korean enterprises are very patriotic, while Taiwan’s small and medium enterprises thirst to go to China is the result of pro-China education and media propaganda. Statistics show that by this year, Taiwanese capital in China was more than US$400 billion. This is 10 times higher than that of South Korea.
So the problem is not that Taiwanese businesses have stopped investing, but that they are investing in China. This is proven by Taiwan’s low domestic investment ratio, which averaged less than 20 percent of GDP over the past eight years, while South Korea’s domestic investment ratio has remained at between 25 percent and 30 percent of GDP.
Taiwanese businesses invest in, manufacture in and pay taxes in China. They also export from there and this is why Taiwan’s economic growth rate is so inferior to South Korea’s. This is likely to continue unless we stop believing that our economy is dependent on China.
Taiwan’s 19-year experience of investing in China and especially the “active opening” policy after 2000 have proven the results of the core-peripheral theory. That theory says that in the interaction between a big economy and a small economy that share the same language and culture, the capital, talent and technology of the smaller economy will be gradually attracted to the bigger. As the political and economic status of the small one goes down day by day, it will eventually deteriorate into a peripheral region. The process of attraction will be faster the more convenient transportation is and the more liberal interaction is.