In recent weeks, the weakening of the US dollar has boosted the New Taiwan dollar. With the NT dollar going through the NT$33.0 barrier against the US dollar, the currency reached a 14-month high and has enjoyed an appreciation of almost 6 percent over the course of this year.
Market analysts and dealers expect the US dollar to continue its downward path. Therefore, attempts to intervene in the currency market by raising the limit on bond issuance to finance dollar buying would have little impact on the underlying trend of a strengthening currency.
Citing fears that the NT dollar has become overvalued against the US dollar, Taiwanese exporters have begun to complain about the effect of the rising value of the NT dollar. They are worrying aloud that their profits will deteriorate over the remainder of the calendar year. The implication of this observation is that there should be some intervention in the market by the government to avoid further rise in its value. However, worries over the total impact of the appreciation of the NT dollar on the economy are exaggerated. While a stronger NT dollar may adversely affect some exports, this impact can be mitigated through diversification. And with the Japanese yen strengthening against the dollar at the same time, this will keep the playing field somewhat level.
It is also beneficial for the economy when importers that pay for goods with dollars pay lower prices. This will make some inputs cheaper and could boost industrial output while also offsetting some of the effects of the rising NT dollar. Meanwhile, continued economic recovery and restructuring of the corporate and financial sector can provide companies with improved revenue flows. Of course, a sharp increase in the value of the NT dollar could increase foreign exchange risks that then lead to a sudden decline. But the current volatility is certainly within the bounds of reason and the state of economic fundamentals suggests that there is no heavy downside threat.
So the net impact is uncertain. In all events, there is no way to know the proper market rate of exchange. And no sensible economist should encourage governments to embark upon such a highly speculative and quixotic adventure. In all events, there seems to be little reason to believe that the central bank can or should do anything about the NT dollar's value. Over the past year, a weakening NT dollar and yen led many observers to insist that the potential for inflation justified an aggressive intervention in foreign currency markets to bolster the NT dollar.
Of course, Taipei has a formidable arsenal of foreign reserves to do whatever it wishes. But it should consider the bizarre behavior of the Bank of Japan and the Japanese government concerning the yen. Both have spent most of the post-war era fulminating over market valuations of the yen and fighting a Procrustean battle to move it toward some specified value. More than a year ago, the primary concern about the yen was its ability to rise in value against most world currencies. In one of its characteristic miscalculations, the IMF inferred that a relentless rise in the yen against the dollar and euro would be destabilizing. History has proved otherwise, but IMF officials and policymakers seem to have a short memory span when it comes to their mistakes.
Taipei has other tools at its disposal if it wishes to improve the capacity of Taiwan's economy to grow. These include reducing the public-sector deficit by cutting government spending and fulfilling its promises to privatize publicly held assets. Then attention should be turned to reducing the overall tax burden.
Tax reductions should be implemented immediately even though deficits will increase initially. However, higher growth from new private-sector spending will occur within a few quarters so that total tax revenues will also to begin to rise.
The best economic results from reducing the tax burden come from cutting marginal tax rates. As business and households gain control over a larger proportion of their resources, overall domestic spending will rise.
From a microeconomic point of view, a rising NT dollar may not be so bad since it could force out inefficient firms operating on small margins. This would reduce some of the remaining excess capacity in the domestic manufacturing sector. From a macroeconomic point of view, removing overcapacity and closing nonviable companies will then brighten conditions. Meanwhile, a stronger NT dollar will reduce the local currency burden of repaying US dollar denominated debts or purchases, including oil products.
On the matter of foreign currency, Taiwan should avoid the mistakes made by Japanese policymakers who always try to delay inevitable economic adjustments. Doing so, only make matters worse and will ensure that the NT dollar is less stable and will shadow the yen's erratic course.
Christopher Lingle is a professor of economics at Universidad Francisco Marroquin in Guatemala and global strategist for eConoLytics.com.
Taiwan faces complex challenges like other Asia-Pacific nations, including demographic decline, income inequality and climate change. In fact, its challenges might be even more pressing. The nation struggles with rising income inequality, declining birthrates and soaring housing costs while simultaneously navigating intensifying global competition among major powers. To remain competitive in the global talent market, Taiwan has been working to create a more welcoming environment and legal framework for foreign professionals. One of the most significant steps in this direction was the enactment of the Act for the Recruitment and Employment of Foreign Professionals (外國專業人才延攬及僱用法) in 2018. Subsequent amendments in
After nine days of holidays for the Lunar New Year, government agencies and companies are to reopen for operations today, including the Legislative Yuan. Many civic groups are expected to submit their recall petitions this week, aimed at removing many Chinese Nationalist Party (KMT) lawmakers from their seats. Since December last year, the KMT and Taiwan People’s Party (TPP) passed three controversial bills to paralyze the Constitutional Court, alter budgetary allocations and make recalling elected officials more difficult by raising the threshold. The amendments aroused public concern and discontent, sparking calls to recall KMT legislators. After KMT and TPP legislators again
US President Donald Trump on Saturday signed orders to impose tariffs on Canada, Mexico and China effective from today. Trump decided to slap 25 percent tariffs on goods from Mexico and Canada as well as 10 percent on those coming from China, but would only impose a 10 percent tariff on Canadian energy products, including oil and electricity. Canada and Mexico on Sunday quickly responded with retaliatory tariffs against the US, while countermeasures from China are expected soon. Nevertheless, Trump announced yesterday to delay tariffs on Mexico and Canada for a month and said he would hold further talks with
Taiwan’s undersea cables connecting it to the world were allegedly severed several times by a Chinese ship registered under a flag of convenience. As the vessel sailed, it used several different automatic identification systems (AIS) to create fake routes. That type of “shadow fleet” and “gray zone” tactics could create a security crisis in Taiwan and warrants response measures. The concept of a shadow fleet originates from the research of Elisabeth Braw, senior fellow at the Washington-based Atlantic Council. The phenomenon was initiated by authoritarian countries such as Iran, North Korea and Russia, which have been hit by international economic