Taiwanese manufacturers may have reacted fast to the supply-chain disruptions triggered by Japan’s earthquake and tsunami last month, but the disasters have revealed a structural problem and trade imbalance between Taiwan and Japan, indicating there is more work to be done by both local companies and the government.
Given the close relationship between Taiwan and Japan, people are concerned about the quake’s impact on Taiwan’s economy. Last week, the Council for Economic Planning and Development released an estimate of the impact, saying the disaster in Japan could cut Taiwan’s GDP growth by between 0.11 percentage points and 0.2 percentage points this year, lower than its earlier forecast of 0.5 percentage points.
The council’s new estimate, however, did not factor in an extended period of power rationing in Japan. In the medium to long-term, there could still be uncertainties for Taiwanese companies that depend heavily on their upstream Japanese suppliers in the fields of optoelectronics, semiconductors, electronic parts and components, as well as special chemicals and precision machinery.
Japan is Taiwan’s second-biggest trading partner and third-largest export market. Based on government data, bilateral trade between Taiwan and Japan totaled US$69.9 billion last year, second only to the US$145.4 billion between Taiwan and China.
In exports alone, Taiwan shipped US$18 billion in goods to Japan last year, following US$114.7 billion in exports to China and US$31.5 billion to the US. However, Taiwan’s biggest trade deficit was with Japan, reaching US$33.9 billion last year.
The trade deficit with Japan has grown continually — from US$600 million in 1974 to US$4.85 billion in 1987, more than US$10 billion in 1992, US$22 billion in 2000 and US$33.9 billion last year. This ballooning deficit indicates an unbalanced industrial division of labor between the two countries.
Under the current trade partnership, Taiwan has primarily exported low value-added agricultural and aquatic products to Japan, while importing high value-added key electronics components and machinery.
The result is an ever-expanding trade deficit and an excessive reliance on Japanese suppliers. Moreover, because the relationship between Taiwanese firms and their Japanese suppliers is so close, many local manufacturers have become vulnerable to any sudden shock, just like the one we saw on March 11.
It is not possible for Taiwan to solve the trade deficit or the problem of technology dependence on Japan overnight. However, Taiwan’s government and companies should start rethinking their position in the global supply chain and consider restructuring trade cooperation with Japan at a time when Japan is also working to rebuild its production strategy around a larger and more diversified market.
There is no doubt that Taiwan needs to secure know-how to produce key components at home. Taipei can do so by inviting Japanese companies to invest or cooperate with local firms in Taiwan. Done properly, Taiwan can upgrade local manufacturing and develop high value-added industries, while Japan can enjoy not only relatively cheap labor, but also lower investment risks, because Taiwan has better protection of intellectual property rights than China and is a more cooperative business partner than South Korea. The problem is that because regional rivals are probably thinking the same thing, Taiwan must act fast to secure Japanese investment.
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