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.