President Ma Ying-jeou’s (馬英九) new Cabinet will soon be up and running. Although its members might seem very pleased with themselves, it is imperative that they do not underestimate the serious challenges facing the nation. Given that the European debt crisis is likely to have only a passing impact on Taiwan, the fundamental challenge remains economic restructuring and the ability to play a meaningful role in international economic integration.
These issues require not only political will on the part of the government, but also a softer approach that makes optimal use of integration and coordination capabilities.
On Jan. 1, when Taiwan was still in the throes of election fever, the free-trade agreement (FTA) between the US and South Korea came into effect. The US removed import taxes on 82 percent of all product categories of South Korean exports to the US. South Korea’s FTA partners now account for 60 percent of the global economy
Seoul has signed nine free-trade deals, among them agreements with ASEAN, India, the EU and the US. It is also engaged in FTA talks with another seven economic entities, and talks with China and Japan are scheduled to begin later this year.
By comparison, Taiwan has signed agreements with five Central American states. The nation is currently discussing another agreement with Singapore, but the trade volume covered by these deals accounts for only 3.6 percent of Taiwan’s total foreign trade. Late last year, Taiwan and New Zealand announced that they were evaluating the feasibility of an economic cooperation agreement, but in terms of trade volume that will make up just 0.2 percent of total foreign trade.
Ma hopes that Taiwan will be able to join the Trans-Pacific Partnership (TPP) at some point in the next 10 years, but he still has not produced a plan to that end. Furthermore, given the speed at which East Asian economic integration is progressing, the question is whether Taiwan can afford to wait 10 years to join the TPP.
Taiwan’s ranking in the IMD World Competitiveness Yearbook, improved from 18th in 2007 to 6th last year. However, a more realistic measure of national competitiveness would be to look at foreign investment, international capital flows and domestic investment in Taiwan.
In the three years after Ma’s election in 2008, annual real foreign investment fell by 50.8 percent, 33.4 percent and 29.1 percent, respectively. Even with the implementation of the cross-strait Economic Cooperation Framework Agreement (ECFA), foreign investment in Taiwan only increased by 7.6 percent last year, to US$3.4 billion. According to UN data, Taiwan’s foreign direct investment (FDI) as part of global FDI fell from 0.37 percent in 2007 to 0.31 percent in 2008, 0.25 percent in 2009 and 0.2 percent in 2010. This is less than the other three Asian tiger economies, and does not even amount to half of the FDI received by Vietnam.
A look at international capital flows, including both direct investment and securities investments, shows that Taiwan’s international competitive advantage is fast disappearing. Between 2000 and 2007, under the Democratic Progressive Party (DPP) government, average annual net international investment in Taiwan was a negative US$13.23 billion. Between 2008 and 2010, under the first Ma administration, the figure was a negative US$20.08 billion. During the first three quarters of last year, net international investment in Taiwan was a negative US$46.5 billion, a larger capital outflow than in any year in the past.