Fri, Jul 01, 2016 - Page 8 News List

Lifeboats for Taiwan’s economy

By Darson Chiu 邱達生

Britons on Thursday last week voted to leave the EU. It was shocking, because the EU is a great example of regional economic integration. The economy of the UK and that of Singapore are driven by financial services. Unlike New York, which is supported by the largest economy in the world, London and Singapore have to leverage their outreach through regional economic integration.

Singapore’s participation in such integration in terms of free-trade agreement (FTA) coverage is the highest in Asia, whereas London has been enjoying access to the EU’s single market to secure its status as the No. 1 global financial center. It seems that London might lose that status soon.

Regional economic integration would certainly boost the overall economic welfare of a region. In economic theory, when barriers are eliminated, the producers’ and consumers’ surpluses are expanded. As a result, overall economic welfare increases. As long as barriers are eliminated, resources can be more optimally allocated as stressed in Economics 101 textbooks.

Economic integration is good for a region. As for the members of a regional economic integration platform, there are winners and losers. That explains why certain people tend to reject regional economic integration. However, the losers can become winners, as regional economic integration brings in external challenges that stimulates them to conduct much needed structural reforms and build up capacity.

What Taiwanese truly care about is Taiwan’s exclusion from such integration platforms, because non-members excluded from a particular regional integration process are unlikely to become winners. For example, Taiwan’s major export destinations and import sources, such as China, ASEAN, the US, the EU and Japan, are either members of the nascent Trans-Pacific Partnership (TPP) or the Regional Comprehensive Economic Partnership (RCEP). Once the partnerships come into effect, Taiwan’s position in the region’s services and manufacturing supply and demand framework will shift, and negative effects are likely to come along with it.

According to an IMF forecast, Taiwan is expected to grow 2.06 percent each year from last year to 2020, lower than Hong Kong, Singapore and South Korea. Taiwan is in recession. In terms of year-on-year growth, two consecutive quarters of negative economic growth is recognized as a recession. Taiwan has had three consecutive quarters of negative GDP growth since the second quarter of last year.

Other Asian economies all had positive growth during the same period. According to the IMF, only two developed economies are in recession: Taiwan and Greece.

One serious structural problem hindering Taiwan’s growth potential is insufficient FTA coverage of Taiwan’s economic and trade activities. Taiwan’s FTA coverage is less than 10 percent, but South Korea and Singapore enjoy more than 80 percent FTA coverage.

As the coverage is extremely low in Taiwan, foreign and even local investors are discouraged from making investments and deficient capital formation further weakens exporters’ competitiveness. A vicious circle occurs.

Taiwan has been striving to gain membership to the TPP and the RCEP. That is the right move: Becoming a member of the two most important regional economic integration processes could certainly expand Taiwan’s coverage. Nonetheless, it is difficult for Taiwan to acquire entrance tickets to the two because of political constraints.

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