Last year the economy grew by only 0.85 percent, which was mainly due to a 10.8 percent contraction in exports. Last month, exports fell by 13 percent. This is on a par with the 2008 financial crisis, when the nation’s exports declined for 14 consecutive months.
Many observers have blamed the economic malaise on cross-strait economic ties that resulted in Taiwanese companies transferring capital and technology to China.
However, the real reason is that Taiwan’s economic transformation has been conducted at a slow a pace. Taiwan cannot compete internationally, which has led to long-term capital outflows from the nation, preventing it from attracting international investment. Furthermore, there is a large amount of idle capital built up in the domestic economy.
Domestic investment is continuously setting new record lows and Taiwan is either unable to attract foreign investment and talent, or they are restricted from entering the Taiwanese market due to standards and regulations, while Taiwanese capital and talent are leaving the nation.
In the 1990s, the average rate of investment in Taiwan was 35.4 percent. Between 2000 and 2007, under the Democratic Progressive Party’s (DPP) administration, investment fell to 30.8 percent, and between 2008 and 2014, under the Chinese Nationalist Party (KMT), investment fell again, to 23.3 percent.
Between 2001 and 2007, annual foreign investment in the nation totaled about US$5.6 billion; between 2008 and 2014, the figure fell to US$4.3 billion. Of the main Asian economies that attract foreign investment, Taiwan is only able to beat Macau.
In 2011, foreign investment in Taiwan was the second-lowest of any nation in the world and in 2014 it was the fifth-lowest.
Capital flight is becoming an increasingly acute problem for Taiwan. In the 1990s, net capital outflows were a mere US$19.8 billion. During DPP rule from 2000 to 2007, this figure increased to US$105.8 billion, and between 2008 and 2014 under the KMT, capital outflows rose even further to US$256.2 billion. In 2014, net capital outflow reached a record yearly high of US$54 billion.
In a report published by Oxford Economics titled Global Talent 2021, the number of Taiwanese professionals who have chosen to relocate abroad has reached 61.1 percent of all Taiwanese moving abroad — the highest in the world.
Investment in Taiwan has nose-dived, yet Taiwan continues to maintain a relatively large capital surplus, which has not been squeezed out by Taiwanese investment in China.
Between 2005 and last year, Taiwanese investment in China jumped from US$47.3 billion to US$150 billion, although Taiwan’s surplus capital — the difference between savings and loans — rose from US$5.25 trillion in 2005 to US$9.77 trillion in November last year. Furthermore, cost of funds — interest rates — in Taiwan is extremely low, at 2.23 percent.
Investment by Taiwanese companies in China has spurred exports to that nation and pushed the upgrading of Taiwan’s manufacturing industry, while increasing foreign exchange earnings.
Between 1990 and 2014, Taiwanese exports to China totaled US$768.9 billion and created a total trade surplus of US$358.5 billion. According to a 2013 government report, the proportion of Taiwanese businesses based in China that had a positive effect on their parent companies located in Taiwan outweighed those that had a negative impact by between 15 and 65 percentage points. Benefits included expanding the parent company’s range of domestically produced products, increased quality, upgraded technology, enhanced product diversity, improved financial auditing and increased employment opportunities.
However, faced with the rise of China’s “red supply chain,” exports to China by China-based Taiwanese companies have diminished. Not only does this reduce benefits to overall production, employment, upgrade programs and transformation of the industrial sector, it also puts pressure on the nation’s economic transformation, while increasing competition between domestic businesses.
According to a government survey, only 25 percent of China-based Taiwanese companies procure resources from Taiwan, while the proportion of such companies that take their orders from Taiwan, but manufacture in China has reached about 50 percent.
Taiwan’s economic predicament is the result of globalization. Resources continue to flow one way across the Taiwan Strait in ever-increasing numbers; a phenomenon that started during former president Lee Teng-hui’s (李登輝) term.
With the opening up of China’s economy and its admission into the WTO, Taiwanese companies — similar to many companies around the world — have increasingly transferred manufacturing resources to China. Taiwan must quicken the pace of its economic reform and upgrade program, so that it can continue to provide Taiwanese companies based in China — and the domestic market — with more advanced products and services; otherwise the Taiwanese supply chain will be gobbled up by China’s “red supply chain.”
It is only by improving the investment environment and international competitiveness that Taiwan will be able to revive its economy. Increased investment by Taiwanese companies in China is the result of China’s increased global competitiveness, rather than the cause of Taiwan’s economic malaise.
The nation must reform its economic structure, push forward with upgrading its industries, open itself up to the flow of global manufacturing resources and fully participate in regional economic integration.
Otherwise, it will lose its competitive advantage within the global economy, its manufacturing resources will continue to flow abroad and it will find it difficult to attract both domestic and international manufacturing resources.
Tung Chen-yuan is a visiting academic at the University of California, Berkeley.
Translated by Edward Jones
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