The director of the American Institute in Taiwan, Douglas Paal, made an imprudent comment on Sept. 18 to the American Chamber of Commerce. "If Taiwan continues to view the mainland through the prism of economic threat, it is in danger of isolating itself and getting cut out of tomorrow's deals," he said.
Not long afterwards, an article appeared in the Taipei Times by Tu Jenn-hwa (
Tu concludes from Taiwan's trade surplus that, "We can easily see the benefits of our investment in China." His logic runs as follows: From 1991 to last year, Taiwan's investment in China totaled US$29.6 billion. And during the same 11-year period Taiwan accumulated a US$162.8 billion trade surplus with China, according to the Mainland Affairs Council. On that basis, each dollar invested in China "has generated more than US$5 of revenue and profits continue to grow."
His computation -- US$162.8 divided by US$29.6, which equals 5.5 -- is simple, but his logic is flawed.
International trade balances as measured by exports of goods and services minus imports of goods and services, whether in surplus or deficit, are not evidence, nor even implications, of economic gains or losses.
Bilateral trade balances, such as those between Taiwan and China, basically reflect the two trading partners' patterns of supply and demand, subject to government regulations on trade, investment, and so on. On a global basis, a country's multilateral trade balance simply mirrors the extent of the imbalance between its national savings and its domestic investment.
The US, for instance, has run a trade deficit for more than 20 years. This indicates that US national savings are insufficient to fund its domestic investment, and so it must borrow from overseas. Japan's global trade, in contrast, has long been in surplus, meaning that its national savings exceed its domestic investment, so it lends to the rest of the world. To the US, the 1990s was a golden decade for productivity growth. To Japan, the 1990s was a lost decade.
The balance of trade, either bilateral or multilateral, largely measures a nation's capital inflow or outflow according to balance of payment accounting. Taiwan has increasingly run a trade surplus annually with China since the early 1990s. This simply tells us that Taiwan's saved funds are increasingly flowing to China.
From 1991 to last year, as noted earlier, Taiwan's cumulative trade surplus with China was US$162.8 billion. This surplus in effect reflects Taiwan's cumulative capital outflows to China during the period, ignoring minor adjustment factors such as official settlement balances and statistical discrepancies. It is by and large consistent with unofficial estimates that Taiwan's China-bound capital flows have accumulated to more than US$100 billion.
The accumulated total of US$29.6 billion that Tu reported in his article is obviously far removed from reality. Official statistics on Taiwan's investment in China have been notoriously imprecise.
Taiwan has indeed over-invested in China. Taiwan's annual China-bound capital flow has risen to at least 3 percent, indeed it has probably exceeded 4 percent, of its GDP. These estimates largely match Taiwan academics' figures cited in a recent Taipei Times editorial ("Taiwan must protect its eco-nomy," Sept. 29, page 8).
Japan and the US invested in China a mere 0.4 percent and 0.5 percent respectively of their GDP, based on last year's official statistics on foreign direct investment (FDI). Taiwan is playing catch-up in the world's technological races and is supposed to devote more resources to research and development. Yet Taiwan's domestic R&D still barely exceeds 2 percent of its GDP, in stark contrast to the world's technologically advanced countries. For instance, both Japan and the US invest little in China in relation to the size of their economies, but each invests up to 3 percent of its GDP in R&D.
It is ironic that Paal said that Taiwan is in danger of isolating itself from China. In fact, no nation appears to be doing more than Taiwan to exploit business opportunities in China. Taiwan ships more than 25 percent of its exports to China. China has replaced the US as Taiwan's largest export market.
The 1990s witnessed a rapid process of economic integration between Taiwan and China. This trend has even accelerated in recent years, despite the two countries' lingering political and military tensions. Worrisome to many pro-Taiwan politicians is the Taiwanese economy's excessive reliance on the China market, which has transformed into a trump card that Beijing can use to influence Taipei's China policy.
Even purely on the economic front, the extent to which Taiwan is being increasingly integrated into China is also worrisome. China's nominal GDP is about US$1 trillion, more than three times as much as Taiwan's US$300 billion or so. An expanding Chinese market certainly presents an opportunity for Taiwan to reap gains from cross-strait trade and investment, directed by the law of comparative advantage. But integration has gone too far too fast. The benefits of integration have not translated into sustained growth in per capita GDP. In reality, the entire 1990s was a stagnant decade, because Taiwan's per capita GDP did not grow at all.
"China fever" has borne no economic fruit for Taiwan over the past decade. Rather, it represents a false signal that directed a massive amount of resources into the development of vertical integration with a developing Chinese economy. This diverted resources away from the development of vertical integration with the innovative developed world, investment in basic and applied research and the building of a modern infrastructure conducive to sustained growth in living standards.
True, it is not easy to determine the optimal level of Taiwan's economic integration with China. But evidently, from the perspective of the national interest, the status quo dictates that the marginal benefit of further integration, assuming there is such a thing, is too small to warrant its marginal cost.
Hwan C. Lin is an associate professor of the department of economics of the University of North Carolina at Charlotte.
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