Ever since China's ascent to the global economic stage, the principles of "production factor price equalization" and "externality" (an unintentional, nonmarket, interdependence between economic decision makers) means it has an impact on neighboring countries.
On the positive side, China has provided cheap labor and consumer products, in addition to being a destination for surplus foreign capital and even pollution from other countries. The negative aspects have been rising unemployment, the widening of the wealth gap, an increasing social welfare expenditure, increased spending on the prevention of disease, illegal immigration and security issues.
For political reasons, China has sought to exclude Taiwan from these arrangements. Taiwan is concerned that it is being marginalized in this process.
Over the past few years, many Taiwanese have begun to worry about how they are going to make a living. There are five things the nation could do to secure its future development and survival.
First, based on the idea of comparative advantage, Taiwan should develop industries which China lacks. This is relevant to developing the hi-tech industries, which include improving education, building technology parks, developing the service industry and attracting skilled workers. By developing industries according to the principle of comparative advantage, Taiwan can distinguish itself from China.
The second part is to speed up development in non-trade-related sectors to make Taiwan a better place to invest in, and strengthening its overall competitiveness. Past efforts to do this have, for the most, part centered around measures such as reduction of, or exemption from, taxes. From now on, these efforts must be taken further, and the country's desirability must be increased so foreign investment, can be used to raise the standard of living.
It is also imperative that the financial, medical and education systems are developed to conform to international standards, and the passing of legislation related to the economy needs to be sped up. Another major prerequisite for internationalization is the creation of an English speaking environment.
The third part is to improve Taiwan's links to international economic networks, in spite of China's efforts to exclude it from regional economic integration. As long as the policies outlined in suggestions one and two are implemented, Taiwan should be able to retain its competitiveness, and there should be no need to worry about being marginalized.
In the past, Taiwan has tried to implement free trade agreements, but as a result of pressure from China, many have failed to come to fruition. In the future we should try to develop international economic networks that are, for all intents and purposes, free trade agreements, without actually being named as such.
The next part concerns industries whose technology and end products are similar to those in China. These fall within the scope of the "production factor price equalization principle," and as such, these industries should be relocated outside of Taiwan. The government should offer incentives for companies to move to locations around the globe.
The fifth part is concerned with externalities produced as a result of contact with China. This is closely connected to democratization and related legislation. Here we refer to China dealing with the spread of disease, illegal migration, and pass legislation to prepare for the "small three links."
There is a great need for more research to be done into developing a strategy regarding relations with China.
Chang Jung-feng is vice-president of the Chung-Hua Institution for Economic Research. The views expressed here do not represent those of the institution.
TRANSLATED BY PAUL COOPER
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