In 2012 and 2013, Taiwan’s GDP growth was lower than average world growth rates. Is this turning into a regular phenomenon? There is a sign that Taiwan’s economy might be able to turn the tables on the distinct disadvantage, so we probably do not need to worry about that, at least in the short term.
The US housing and job markets have been recovering recently owing to several rounds of quantitative easing measures. Although those measures are tapering off, they help restore demand to an expansion mode. As the US market is the world’s largest destination for end products, supply value chains in the Asia-Pacific region have started to be revived.
Since the 1980s, Taiwan has played a key role in regional supply value chains; more than 75 percent of the nation’s present exports are categorized as intermediate goods. Therefore, the revitalization of supply chains in the region will certainly help increase Taiwan’s exports this year.
The nation’s reliance on exports stood at 70 percent for the past decade and has been increasing recently. That means strong growth in exports can be considered a big push for Taiwan’s economic growth.
The most recent forecasts for world economic growth this year, conducted by global agencies such as the World Bank, IMF, Organisation for Economic Cooperation and Development (OECD) and Global Insight Institute, average about 3 percent. By comparison, the Taiwan Institute of Economic Research predicts Taiwan’s GDP this year will grow by 3.23 percent. It means there is a chance that the nation may outpace the world economy by a slim margin when the actual numbers are out.
A potential challenge could be addressed in the foreseeable future; however, the long-term issues hindering the nation’s growth capacity still remain.
First, Taiwan’s status in regional supply value chains has been challenged by the downstream economies and the challenge coming mostly from mainland China.
Second, the nation has been continuously losing overseas market share due to insufficient free-trade agreement (FTA) coverage.
Due to the labor cost hike, Taiwan has been outsourcing its downstream manufacturing and packaging processes, mostly to mainland China since the early 1990s, and some to Southeast Asia even earlier. Outsourcing is necessary to better allocate human and other resources among countries that are in economic and trade relations. Both sides of the Taiwan Strait had benefited from the business model, until the global financial crisis triggered troubles in European markets.
Nevertheless, the economic and trade relationship between China and Taiwan has been changing from a cooperative to a more competitive mode. Because the demand of China’s biggest exports destination — Europe — has been shrinking ever since the outburst of European sovereign debt crisis, China has adopted a policy of import substitution or supply chains localization.
Instead of purchasing intermediate goods from Taiwan, China has been buying some less costly parts and components from local and other suppliers, or making them on their own. The purpose of the Chinese policy would be to reduce production costs and it has seriously hurt Taiwan’s exports.
Besides China and Taiwan, East Asian countries including Japan, South Korea, Malaysia, Singapore and Thailand are all involved in the regional supply value chains. However, the Chinese policy seems to cause more harm to Taiwan’s economy than others.
The reasons behind are that economies such as Japan and South Korea have had sufficient technological advantage to stand firm on their positions, and other economies — especially Southeast Asian countries — do not depend on the Chinese market as much as Taiwanese firms do.
Why can Taiwanese suppliers not hold their positions in supply chains and overcome downstream challenges?
If the intermediate goods designed and produced by Taiwanese firms are irreplaceable and critical, China’s import substitution acts will pose no threat at all. South Korea’s research and development (R&D) expenditures over GDP ratio is around 4.36 percent, which is the highest ratio among all OECD countries. Japan’s R&D over GDP ratio stands at 3.35 percent. By comparison, Taiwan’s R&D over GDP is about 3.06 percent. Being less dedicated to R&D has made the nation more vulnerable to challenges.
Therefore, the first structural reform that Taiwan needs to secure its long-term growth would be to pursue technological improvement through R&D. As more than 90 percent of Taiwanese companies are small and medium-sized, they probably lack funds to conduct their own R&D. This is where the government must jump in to guide them and lend a helping hand. Japanese and South Korean government policies to enhance corporate capacity-building would be good resources for the Taiwanese government to examine.
The reason why the nation’s economy has been relying on China and losing market shares at the same time results from Taiwan’s insufficient FTA coverage. Many have stressed how crucial it is for Taiwan to join the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP) to effectively enhance the nation’s FTA participation.
The Ma Ying-jeou (馬英九) administration has also issued a special order directing all ministries and government agencies to join forces and pursue both FTA processes simultaneously.
It is understandable why the administration is in such a rush. The FTA coverage ratios of China, Japan, and South Korea stand at 29.79 percent, 18.93 percent and 36.81 percent respectively, whereas Taiwan’s coverage is just 9.69 percent. Since the nation lags far behind the leading group, the government has been striving to pick up the pace and try to catch up. However, a FTA strategy is needed; otherwise, the joint efforts will be futile.
The second step the nation must take to sustain its economic growth in the long run is to prioritize the multilateral FTAs that provide Taiwanese companies the most benefits and cause fewer impacts. Therefore, it is suggested to target the RCEP before the TPP.
First, RCEP members include Taiwan’s No. 1 and No. 2 export destinations: China and Southeast Asia. The TPP, on the other hand, focuses on the US market. Although the US is the world’s largest end-products market, Taiwan is basically a supplier of intermediate goods.
Second, the average tariffs of RCEP are 7.7 percent and overall tariffs of the TPP are around 4.4 percent. That means the TPP requires more market opening and less protection, which could cause more harm to Taiwan’s defenseless industries.
In other words, Taiwan needs more time to prepare itself for the TPP.
Joining the RCEP first and enhancing industrial resilience while applying for TPP membership would be a more feasible approach for Taiwan to address its long-standing constraints for growth.
Darson Chiu is the deputy director of the Macroeconomic Forecasting Center at the Taiwan Institute of Economic Research.
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