The Liberty Times Editorial: Reliance on China hampers growth

Wed, Jan 01, 2014 - Page 8

Recent good news from the US offers a degree of hope for the economy. The US had its GDP adjusted upward to a 4.1 percent annualized rate for the third quarter of last year, which was its economy’s strongest performance in two years and assuaged global concern over a reduction in quantitative easing.

As the US economy is a global economic driver, this is evidence that the latter is on the path to recovery. This, coupled with the recent announcement that Taiwan’s export orders for November hit a new high, suggests that there is cause for optimism regarding the nation’s economic outlook. So why is the GDP growth forecast for next year stuck at the conservative figure of less than 3 percent? Does the government still lack confidence in the prospects for economic growth?

The problem is that the good news of increased export orders needs to be qualified with another fact, one that has been largely ignored, which people do at their own peril: As much as 53.7 percent of the export orders are actually manufactured overseas. This is a higher figure than at any time in the past.

Export orders for November represented an annual increase of 0.8 percent, but the percentage manufactured overseas increased by 2 percent over the same period. This means that the increase in orders translates into more jobs for our largest overseas manufacturing base, China, but is of precious little benefit to Taiwan. Therefore, the increase in export orders is not good news at all. It may be great for the major shareholders of the companies involved and for capitalists, but it is toxic for the workforce.

With increased globalization, corporations in advanced countries have needed to reduce manufacturing costs to strengthen their competitive edge. To do this, they have moved their production lines overseas to developing countries. In adopting this cost-reduction business model, these corporations have made it easier for themselves to adapt, but at a cost to their own home economy. Investment-led job creation and salary increases are now a thing of the past, as is manufacturing-driven domestic economic growth, and industrial development has ground to a halt.

This is especially true given the factor price equalization (FPE) effect. FPE is an economic theory that says the economic gap between a given factor, say wages or unemployment rates, of an advanced country — Country A — and the country to which it has outsourced its manufacturing — Country B — become aligned over the long term. The result of this is that Country A is forced to accept a reduction in salary levels and higher unemployment rates. The degree to which this occurs is relative to the size of the respective economies.

Taiwan has comparatively small economies of scale and it has aligned itself with the world’s most populous country. Given this, the hollowing out of Taiwanese industry has been inevitable.

More importantly, over time Country B learns how to emulate the manufacturing processes and gradually becomes strong within this area in its own right. After it has reached a critical scale, quantitative change leads to qualitative change, and that country then starts to possess its own economies of scale and make its own technological breakthroughs. Pretty soon, it has developed its own domestic industry and ends up competing with Country A.

In other words, Country A, by outsourcing its manufacturing to a developing country to cut production costs, is essentially sowing the seeds for a future economic competitor. Given China’s unfaltering commitment to annexing Taiwan, outsourcing the manufacturing industry that was originally responsible for the nation’s economic miracle is tantamount to national suicide. Allowing the nation’s technology, talent and capital to move across the Taiwan Strait is akin to rearing a wolf: When fully grown, it will not be so tame.

China’s size gives it the inherent advantage of huge economies of scale. Industrial development will come along in leaps and bounds not just because its industry stands on the shoulders of Taiwanese businesses, but also because local companies enjoy generous government tax breaks and subsidies. The local manufacturing and high-tech industries are loathe to play second fiddle to anyone and so they are cultivating their own brands. In addition, the system is stacked in their favor, allowing them some control over technical specifications. Just as the student often supersedes the teacher, China will overtake Taiwan on the international stage. Soon it will be Taiwan playing second fiddle and only to tunes that China chooses.

In all fairness, the rapid increase in the percentage of Taiwanese goods manufactured in China did not start with President Ma Ying-jeou’s (馬英九) time in office. However, to continue following such pro-China policies now that the dangerous 50 percent threshold has been crossed is like the proverbial turkeys looking forward to Christmas. And yet, the Ma administration is even now trying to push through the cross-strait service trade pact, an agreement that will certainly do much damage to Taiwan’s economic foundations.

Even Hon Hai Group chairman Terry Gou (郭台銘) — Taiwan’s biggest industrialist in China — thinks that allowing the Bank of China to issue offshore Baodao bonds in Chinese yuan is a mistake, which is just one of the pro-China policies. Gou has suggested that the Chinese government is aware that there is a surplus of production capacity for LCD panels, but, after auditing local government finances, has chosen to issue the Baodao bonds in Taiwan. Then it takes the money it makes from selling the bonds to invest in Chinese panel makers, thereby using Taiwanese money against Taiwanese companies in China.

Gou’s criticisms perfectly sum up the fallacy of Ma’s pro-China policy. In attempting to ride on the coattails of China’s burgeoning economic growth, Ma is actually helping it to use Taiwanese capital against Taiwanese companies in China.

The IMF said last year that if China’s economic growth rate slowed by 1 percent, Taiwan’s would fall by 0.9 percent. Of all China’s trading partners, Taiwan is the most affected by changes in its economic fortunes.

Consequently, unless the nation is able to lessen its dependence on China, no matter how good the economic figures are — setting a new record for export orders for example — the economy will not benefit.

There really is only one way to stimulate the economy at the moment and that is to reduce the reliance on China.

Translated by Paul Cooper