The government has adopted a “five plus two” policy for developing innovative sectors — the “Asian Silicon Valley” project, biomedicine, “green” energy technology, “smart” machinery and defense, plus new agriculture and a circular economy.
The government also has its “new southbound policy” to encourage trade and other interactions with Southeast Asia.
These policies were formulated before US President Donald Trump won election last year, but now the government should think about how to take advantage of Trump’s policies, producing a win-win situation for Taiwan and the US.
Trump calls for putting “America first,” principally because the US faces two major economic problems that have caused its real per-capita gross national income to lag behind other countries, dropping to No. 10 in the world last year.
The first problem is that foreign direct investment in the US is much lower than US investment abroad, which has led to rising unemployment.
The second problem is that the total value of US exports is much lower than that of imports, hence the US has a serious trade deficit.
The US has trade deficits in all manufacturing categories, except for aerospace, plastics and medical equipment. In 2015, the overall US commodity trade deficit reached US$7.99 billion, of which China accounted for the largest share at about 40 percent.
In his State of the Union address to the US Congress on Feb. 28, Trump announced a number of responses to these problems:
First, to cut taxes to attract businesses back to the US and encourage foreign business investment, thus creating more jobs and cutting imports.
Second, to invest US$1 trillion in infrastructure, which would make the US more competitive and increase exports.
Third, to cut the US’ trade deficit by promoting equality and mutual benefits in foreign trade and negotiating with those countries that have big trade surpluses.
Japan has responded quickly to these policies.
While visiting the US last month, Japanese Prime Minister Shinzo Abe proposed a “US-Japan Growth and Employment Initiative,” offering to invest in US infrastructure projects, such as high-speed rail, explore global infrastructure demand and cooperate on research and development (R&D) in areas like robotics, artificial intelligence, networks and aerospace.
Abe said that this plan could generate 700,000 jobs for the US and create new markets worth about US$450 billion over the next 10 years.
Taiwan has close trade ties with the US and Japan, and the US’ R&D and innovation capabilities are the best in the world. Taiwan should grasp the opportunities offered by these new policies to cooperate more closely with the US and make Taiwanese manufacturing more competitive. This goal could be approached in four ways:
First, the government should provide economic and trade information to help Taiwanese businesses participate in US infrastructure projects, invest in the US and set up factories there.
The government should provide Taiwanese businesses interested in the US with information on trade, investment, environmental protection, legal matters and public sentiment. Given Trump’s new policies, other countries are sure to head to the US to invest and establish manufacturing supply chains.
The government should act quickly by helping Taiwanese businesses play their strengths and make early entries into US domestic manufacturing, R&D and marketing, enabling them to effectively cooperate with leading US manufacturers and stimulate Taiwan’s industrial transformation and upgrade.
Taiwan and the US have signed the Agreement on Government Procurement, according to which nations give each other access to their government procurement markets, subject to negotiations. The US General Services Administration offers more than 11 million products and services for government procurement. The government should help Taiwanese businesses participate in the huge infrastructure opportunities that are emerging under the Trump administration.
Second, the government should encourage Taiwanese businesses to invest in the US’ main industries.
US’ airplane and other aerospace manufacturers, biotechnology and pharmaceuticals industries are the world’s biggest in terms of total output, while the same is true of its financial and insurance sectors. Its oil refining and natural gas industries rank No. 3 in the world.
US information and telecommunications corporations are world leaders, including semiconductor makers like Intel, AMD, Qualcomm, nVidia and Micron, as well as systems and services providers such as IBM, Apple, Google, Facebook and Amazon. The US venture capital sector’s total market capital is US$4.3 trillion — the biggest in the world — and venture-backed revenue accounts for 21 percent of US GDP.
Some venture capital companies can fix the ground rules of global markets in their respective sectors. The US has many industries in which Taiwanese businesses could invest and which would make good partners for cooperation.
Third, Taiwanese businesses should strive to form strategic alliances with their US counterparts, or to acquire them or engage in cross-sector cooperation.
Of the world’s 500 biggest enterprises, 128 have their headquarters in the US. These world-famous companies are breaking into new sectors through strategic alliances, acquisitions and cross-sector cooperation.
Take for example the formation of mobile platforms and business alliances in the field of healthcare. Intel, IBM and Philips have launched the Continua Health Alliance with the participation of more than 200 information and telecom companies, medical equipment and pharmaceuticals manufacturers, hospitals, academic research institutions and non-governmental organizations.
Qualcomm has branched out from its core integrated circuit design business to establish the Qualcomm Life Ecosystem, which has been joined by more than 100 medical equipment manufacturers, medical service providers, pharmaceuticals manufacturers, app developers, mobile device manufacturers and system service providers.
IBM has established Watson Health to build a cloud health platform. It has acquired medical technology companies and is cooperating with medical treatment centers to offer cancer solutions and help physicians with diagnosis and treatment.
A second example is big corporations’ acquisitions of artificial intelligence teams. Google, for example, has acquired DeepMind Technologies to develop artificial intelligence products.
Taiwanese companies should emulate these well-known corporations, cooperate and interact with them, join their business groups and strategic alliances, participate in acquisitions and engage in cross-sector cooperation. These active approaches would allow them to quickly obtain technologies in newly emerging fields and move into new markets.
Fourth, Taiwan should engage in cooperative R&D or industry-academic cooperation with US universities and research institutions.
The US’ 1980 Patent and Trademark Law Amendments Act, known as the Bayh–Dole Act, allows researchers to license inventions produced via government-funded research to outside entities or set up their own companies. This measure has created many small and medium-sized enterprises (SMEs) that put research results to practical use.
There are more than 4,000 universities and colleges in the US, and most of the top 100 universities have excellent research achievements and highly talented people. Taiwan’s academic research institutions, associations and businesses should cooperate with US universities and research institutions and invest in their peripheral enterprises.
The government should review its “five plus two” and “new southbound” policies, taking into consideration factors like Trump’s new policies, the R&D vigor of advanced US science and technology, US entrepreneurs’ efficient cross-sector integration and the fact that the US has the world’s biggest home market.
The government could consider four ideas:
First, the “five plus two” industrial policy should spur the development of Taiwan’s semiconductor and information security industries.
A McKinsey Global Institute report predicts that the Internet of Things will have an annual worldwide economic impact of at least US$2.7 trillion by the year 2025. Artificial intelligence technology will create “smart” objects that will eventually be essential for all kinds of business.
Taiwan’s manufacturing supply chain for semiconductors is an important asset that few nations possess. Taiwan’s midstream and downstream semiconductor fabrication and semiconductor assembly and testing sectors rank No. 1 in the world for total output value.
Taiwan’s upstream IC design sector is second only to the US, but it only accounts for 18 percent of the world’s total output value — far behind the US’ 63 percent. This might be because of the big gap between the IC design sector’s technology of Taiwan and that of the US.
Leveraging Taiwan’s advantages in IC design and semiconductors to integrate software and hardware by embedding artificial intelligence applications in IC chips could be a great opportunity for Taiwan.
Given this huge business opportunity and considering Taiwan’s national strategic concerns, the “five plus two” policy should be adjusted to put more stress on investing in the US. This would make Taiwan’s semiconductor manufacturing and information security sectors even more competitive.
Second, the “five plus two” industrial policy should be used to help improve Taiwan’s links with US industry and academic research institutions.
The “Asia Silicon Valley” plan focuses on “connecting with Asia, linking up with Silicon Valley and innovating Taiwan,” but the US has several biotechnology clusters, such as in Boston, San Francisco and San Diego, California. There are also research units near all the big US universities that would be good partners for investment and cooperation.
Taiwan’s SMEs have limited resources, so they might need help from the Industrial Technology Research Institute, the Institute for Information Industry, businesses and industry associations to join emerging-sector ecosystems and strategic alliances formed by US companies. The government should establish footholds in the US and use its connections to cultivate Taiwan’s interests in the US.
Third, besides the “new southbound policy,” it is even more important to get into the US market.
The US has the world’s biggest domestic market with total consumption accounting for more than 70 percent of its GDP. It is essential for Taiwan to build ties with the US.
Fourth, the nation should attract Taiwanese businesses operating overseas to return.
The government should encourage Taiwanese businesses operating overseas to return and it should work with local businesses to develop intelligent-living industries to raise standards of healthcare, transportation, work and living, and protect the environment through sustainable development.
This might enable Taiwan to offer solutions to problems arising from urbanization around the world and contribute to mitigating climate change and environmental degradation.
Jang Show-ling is a professor of economics at National Taiwan University.
Translated by Julian Clegg
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