On Feb. 28, US President Donald Trump recently delivered his first speech to Congress. As always, he was very direct, but this time he followed the script and delivered his speech without improvisation, with full control over himself throughout the address. His speech, which mainly reaffirmed his policy of “America first” and buying US products, received a positive response and US stock market rose to a historic high.
On Friday last week, central bank Governor Perng Fai-nan (彭淮南) defended the New Taiwan dollar’s movements and said the bank was not manipulating the currency, so the US is unlikely to include it in its list of currency manipulators. Nonetheless, despite a bullish global market, the local bourse responded by opening high, but closing low as it struggled to reach 10,000 points.
The two incidents highlight the awkward situation Taiwan is in as a result of the competition between the US and China since Trump took power. On the one hand, China is Taiwan’s biggest overseas manufacturing base and accounts for nearly 40 percent of Taiwan’s exports. On the other hand, the US is Taiwan’s third-biggest export market and a long-term ally that has pledged to ensure Taiwan’s security.
More importantly, a major reason why Taiwan was able to transform itself economically as well as politically was the considerable help from the US during the Cold War, as the latter considered Taiwan strategically important in containing the spread of communism.
For those reasons, if there were to be a trade dispute between the US and Chinese governments, and Taiwan were to respond inappropriately, Taiwanese would have to face severe consequences. As Perng has said, when two elephants are fighting, Taiwan must be careful not to get stepped on.
There were signs that Taiwan could eventually end up in such an awkward situation and the government should have planned strategies to promote domestic change and transformation a long time ago. The mass exodus of Taiwanese manufacturing to China has undermined Taiwanese industries and created imbalances in Taiwan’s tripartite trade model.
Jobs and profits have moved to China, leaving Taiwan with the impression that it has enjoyed a massive trade surplus, when it has done nothing to help improve Taiwan’s economy. The same is true when it comes to industrial transformation and innovation, employment and wages. Even if there were no trade conflicts between the US and China, Taiwan should endeavor to change and transform this situation.
For more than a decade, we have been calling on the government and businesses to take seriously the severe consequences of allowing Taiwan to become overly dependent on trade with China. Unfortunately, businesses and past administrations were lured by the low manufacturing costs in China and were unwilling to wean themselves off the Chinese economy.
As a result, Taiwanese businesses are facing increased labor costs in China, with some being forced to move to the hinterlands or leave China altogether because of Beijing’s industrial transformation policies.
As for Taiwan’s relations with the US, when the Taiwanese economy was still growing rapidly, the nation had huge trade surpluses and became a key target of pressure from Washington.
At the time, delegations were sent to several US states to make purchases for political reasons in a bid to balance trade between the two nations. Today, China has taken over this role and the US is no longer concerned over its trade imbalance with Taiwan, but rather whether Taiwan is engaged in currency manipulation.
Although it is not clear whether the NT dollar accurately reflects its market value, opinions are divided on whether a stronger or weaker currency is better for the economy. Those who believe that boosting domestic demand is key to improving the economy say that a stronger currency is better, while those who believe external demand is more important to the economy say a weaker currency is what the nation needs.
Regardless of who is right, it is clear that following Trump’s accession to power, the NT dollar’s fluctuations will be less autonomous and market driven, and will be affected by the trade negotiations between Taiwan and the US. This poses a challenge to those in charge of the nation’s exchange-rate policy.
Another major dispute between Taiwan and the US is the issue of US beef and pork imports, which will be key to signing a bilateral trade agreement. The US Trade Representative recently released its 2017 Trade Policy Agenda and 2016 Annual Report, in which it expressed serious concern about Taiwanese agricultural policies, which it said are “not based on science.”
Issues listed in the report include Taiwan’s ban on US pork and certain beef products containing ractopamine, as well as the barriers to US beef offal products.
To secure progress in bilateral trade between the two nations, it is necessary to overcome the pork and beef import issue. However, the rise of populism in Taiwan in recent years has made it difficult for any rational discussion of the issue.
The government must toughen up and do what is necessary to safeguard the interests and health of the public, while improving trade relations with the US.
This year so far has been a difficult for Taiwan. The US and China each accounts for about half of Taiwan’s exports and are equally essential to the nation’s economy. Unfortunately, both happen to be undergoing changes that could have a significant effect on Taiwan: While China is promoting industrial transformation that could gradually force many Taiwanese companies in China out of business, the Trump administration’s “America first” policy is encouraging US manufacturers to move back home.
Overcoming this difficult situation requires good trade negotiation skills, but also, and more importantly, business innovation and industrial transformation. Taiwan must transform itself from an original equipment manufacturer that makes little profit to an original brand manufacturer of high-value products.
By improving its capabilities, Taiwan will have a chance to negotiate better deals with other nations. Furthermore, if the administration of President Tsai Ing-wen (蔡英文) can follow through on its “five plus two” industrial innovation plan and its trillion-NT-dollar economic stimulus plan — which includes building railways and infrastructure for “green” energy, water and digital development programs — instead of only talking about them, Taiwan will have a chance to transform its economic structure.
By the time that happens, Taiwan will also be able to better control its own economy, as external pressure will no longer wield so much power over it.
Translated by Tu Yu-an
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