To prevent China from dominating the world through unfair trading practices, the administration of US President Donald Trump on July 6 last year implemented 25 percent tariffs on US$34 billion of Chinese exports. China almost immediately imposed retaliatory tariffs on a similar value of US goods.
To date, the US has imposed 25 percent tariffs on US$250 billion of Chinese products, while threatening an additional US$325 billion, which could be canceled depending on what happens at negotiations. China has placed tariffs on US$110 billion of US goods and is threatening countermeasures. Both sides have felt economic losses.
The trade dispute traps Taiwan between the world’s two largest economies and nobody knows how long it might last. Nevertheless, the trade issue is affecting the nation. The Ministry of Economic Affairs recently indicated that exports last month declined 3.3 percent from a year earlier to US$25.83 billion, the sixth consecutive month of decline. For the first four months of this year, exports fell 4 percent from the same months a year earlier.
With exports a backbone of Taiwan’s economy, this year’s GDP growth forecast has been cut. The nation is at a crossroads. It is high time Taiwan rethought its economic development strategies.
First on the list of issues to reconsider is the relocation of Taiwanese companies back home. Since China opened to foreign investment in 1978, about 88,000 Taiwanese enterprises have invested more than US$400 billion in China, mainly in the manufacturing sector, creating about 16 million jobs. Many of the companies export to the US. The trade dispute has had a major effect on those firms. This is the right time for many of them to withdraw from China and bring good salaries and capital back to Taiwan.
In response to the supply-chain exodus from China, the government must address the problems of land, water, power and workforce shortages. In February, the government established the Action Plan for Welcoming Overseas Taiwanese Business to Return to Invest in Taiwan. In the first four months of this year, significant results were achieved. According to statistics from the Ministry of Economic Affairs, about 52 manufacturing companies have received approval from the government under the plan and pledged to invest a total of NT$279.5 billion (US$8.97 billion), which is expected to create more than 25,000 jobs. As more firms are moving production back to Taiwan, the government must fulfill its promises to overcome the five shortages.
Second, the government should help Taiwanese companies to shift production to South and Southeast Asia under the New Southbound Policy. The policy aims to reduce Taiwan’s economic dependence on China by creating investment and trade with its neighbors to the south. Notwithstanding the US-China trade dispute, many Taiwanese companies have been weighing production in countries other than China due to rising wages, other costs and political pressure exerted by Beijing.
However, shifting production from China to Southeast Asia and India would not happen overnight because most of the target nations’ lack of reliable infrastructure.
Regarding this issue, the government should properly distribute funds from the New Southbound Policy, which initially provided US$4 billion for infrastructure projects for target nations by creating a collaborative platform for exporting infrastructure construction services and turnkey projects. This effort would provide adequate supply of infrastructure and make Southeast Asia and India all potentially appealing relocation destinations for Taiwanese firms.
Third, the government should engage in bilateral and multilateral trade deals. To encourage Taiwanese companies to move back to Taiwan from China, or to relocate to South or Southeast Asia, Taipei should negotiate free-trade agreements with the US and Japan, and become a member of the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP).
China has sought to isolate Taiwan politically and marginalize its economy. For the sake of the nation’s economic welfare, it is essential for Taiwan to negotiate a free-trade agreement with the US. So far, the major obstacle for achieving this — as pointed out by US-Taiwan Business Council president Rupert Hammond-Chambers — has been Taiwan’s long-standing refusal to open its markets to pork containing the steroid ractopamine. As long as ractopamine is within safety limits, Taiwan must compromise on the issue if it is to obtain a free-trade agreement with the US.
US bipartisan support for the establishment of a free-trade deal is strong, so Taipei must seize this opportunity.
As Edwin Feulner, founder and former president of the Heritage Foundation, recently said: “We have a lot of issues with Beijing and a lot of opportunities with Taiwan.”
Taiwan is seeking to upgrade its trade relationship with Japan. However, Tokyo was disappointed at the results of a referendum passed last year that the government should maintain a ban on imports of agricultural products and food from areas in Japan after the Fukushima Dai-ichi nuclear disaster on March 11, 2011. Taiwan and China are the only two countries that have maintained such bans. Taipei must end this. If Japan has evidence to indicate that its products are safe, and other countries — including the US and those in the EU — accept that, it does not make sense for Taiwan to side with China against Japan.
In addition, Japan is now the de facto leader of the CPTPP after the US withdrew its membership from its predecessor, the Trans-Pacific Partnership, in 2016. Taiwan should join the CPTPP to boost its trade horizon and it would likely need Japan as a strategic partner to do so.
Taiwan must undertake a flexible approach to non-trade barriers to obtain CPTPP membership.
Fourth, Taipei should fully utilize the overseas funds of Taiwanese companies. The Chinese language Liberty Times (sister newspaper of the Taipei Times) recently reported that Taiwanese companies abroad have at least NT$10 trillion in combined undistributed corporate profits. A great proportion of this is in the Cayman Islands and the Virgin Islands. This is an opportunity for the government to attract investment back to Taiwan.
The nation’s corporate income tax rate was increased from 17 percent to 20 percent last year. Thus, there is no incentive for companies to remit their undistributed corporate profits back to Taiwan. However, the government could offer a 10 percent discount if the firms would transfer profits to invest in industries, rather than in real estate or stock markets.
Fifth, the nation’s economic structure should be changed. Since the establishment of science parks in 1980, the economy has focused on electronic and computer-related industries. By 2010, Taiwan was a prominent player in the global IC and PC industries. Moreover, many Taiwanese companies have moved production to China, taking advantage of lower wages and better labor supply, but becoming over-reliant on the Chinese market.
However, Taiwan’s fortunes have declined due to the US-China trade dispute, the shift from hardware to software and the cloud, and the popularity of smartphones.
To face these unprecedented economic challenges, Taiwan needs to diversify its industries and markets. It needs to decrease its reliance on the high-tech industry and the Chinese market. The government should commit a large proportion of its resources to Taiwan-based companies, which have sufficient scale and world-leading technologies.
Taiwan should also commit to promoting industries that have potential for high value-added manufacturing, agriculture and services, as the government did from 2000 to 2008 under the Democratic Progressive Party.
Taiwan has encountered adversity before, but each time has overcome it. With right government leadership and effort, the nation could turn a crisis into an opportunity and secure its prosperity.
As a quote often attributed to Charles Darwin says: “It is not the strongest of the species that survive, nor the most intelligent, but the ones that are most responsive to change.”
Lee Po-Chih is professor emeritus of economics and former vice president of National University of Kaohsiung.
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