Thu, Jan 16, 2014 page8

• Redrawing the global trade map

  • By Eric Chiou 邱奕宏
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  If the global economy is a wide ocean full of opportunities and risks, Taiwan seems to be a small boat, pushed about by tumultuous waves and conflicting currents and sailing without a clear destination. Despite President Ma Ying-jeou’s (馬英九) vigorous New Year’s Day address that outlined a three-pronged strategy to stimulate economic growth, a survey issued last week by the American Chamber of Commerce unveiled that a growing number of foreign companies in Taiwan feel pessimistic about their business prospects this year and are anxious about the economic slowdown and political unrest. More importantly, they also cited government bureaucracy as the No. 1 factor that affects their operations.

  Apparently, there seems to be a mismatch between government rhetoric and the expectations of foreign companies. While the nation was ranked 12th among 148 economies in terms of competitiveness in a survey by the World Economic Forum last year, it seems that this praiseworthy record does not automatically translate into economic momentum.

  With all the cold fronts and temperature plunges lately, most people are feeling the chill of an economic winter and see no sign of spring.

  Over the past decades, the economy has benefited tremendously from integrating itself into global supply chains. As a small economy with a heavy dependence on international trade, it is necessary to be vigilant, adaptive and flexible to global trends and to be prepared to find niche markets in the face of fierce competition.

  During the Cold War period from the 1950s to the early 1990s, Taiwan aligned itself with Western countries and morphed into a laissez-faire capitalist market system. It became a labor-intensive production base early on and gradually transformed into a supplier of more advanced goods.

  In the early 1990s, accompanying the end of the Cold War and China’s re-entry into the world economy with its enormous labor force, cross-strait trade and investment began to flourish. The advent of cross-strait links is best viewed as an extension of existing regional production networks. The fundamental logic of global production chains — which are dominated by Western transnational corporations — did not change. They still targeted Western countries as their primary consumer markets.

  In other words, Taiwan’s role in the Western-defined global supply chains has been upgraded, but has remained unchanged — it still earns marginal profits by adopting and adapting mostly dated technologies and serving as a silent, nameless, but competent and diligent manufacturer that satisfies consumers in the US and western Europe.

  Since most Taiwanese firms have been seamlessly integrated and inserted into the Western-led global supply chains as original equipment manufacturing or original design manufacturing suppliers and the distribution of profits has been predetermined by the brand-holders, it is not surprising that Taiwanese firms could only strive to keep costs down or expand production capacity to survive.

  The downside of these approaches is that they either lead to cut-throat competition among local firms or run the risk of creating over-capacity as demand declines.

  In the past decade, the most significant upheaval to the global economy was the rise of China.

  After it surpassed Japan to become the second-largest economy in 2011, it became the country with the third-largest foreign direct investment outflow in 2012 — behind the US and Japan — and topped the world in terms of trade in goods last year. It seems indisputable that with China’s economic ascendance, the current operation of the world economy and the practices of global production networks, which have been defined and dominated by the West for more than a century, will be overhauled.

  Because of its proximity to China and the opportunities it presents, Taiwanese firms have chased any feasible opportunities to extend their business footprints in that market. This fervent profit-seeking enthusiasm has penetrated the public sector and resulted in more economic ties with China. Nevertheless, while more officials, business leaders and media outlets are eager to bet the economic future on the ostensibly invincible growth of the Chinese economy, few really comprehend the risks and challenges.

  According to a Chinese economist’s analysis, there are at least six prospects for China’s economy that deserve attention. These include: slower economic growth; rising inflation; improved income distribution with increased labor wages; a restructuring of economic structure; an upgrade to industry chains and increasing economic volatility.

  The so-called “China miracle,” with its impressive double-digit economic growth over the past decades, has come to an end. As China gradually transforms itself from world’s factory into the world’s market, its economic growth is likely to become more moderate and stable than before.

  What do these trends show? First, Taiwan’s existing production model — a reliance on the export of intermediate goods to China for final assembly — may no longer be sustainable because Chinese firms are catching up with technological advances. As a result, the cross-strait industrial linkages will probably become irrelevant to China soon.

  Second, the “double dependence” Taiwanese firms have on Western orders and on China’s cheap and abundant labor force could pose a severe challenge in the near future. Since China’s demographic dividends may end as early as 2015 and Western transnational firms are likely to engage with Chinese firms to better serve that market, the managerial strengths and better coordination that Taiwanese firms used to have may soon be overshadowed as global supply chain is rearranged and bypasses Taiwan.

  The risks are clear and imminent: Taiwanese firms will lose out if the existing profit model changes. If they believe that they will be able to cater to the Chinese market because of cultural and language similarities and technology and marketing advantages, they may be terribly wrong. The brutal reality is that the pace of catch-up Chinese firms have managed has been faster than many expected. With the technology gap between the two sides of the Taiwan Strait diminished, Taiwanese firms will face more direct competition from Chinese firms, not less.

  It is time for the nation’s leaders to seriously ponder a long-term and sustainable economic strategy by repositioning Taiwan on the economic map. The map controlled by Western firms that has dictated Taiwan’s identity needs to be tossed out.

  However, the nation should not take the easy way out and define itself as part of the Chinese market, since that would most likely leave it as another economic periphery.

  Why not to learn from other small but beautiful and competitive states such as the Netherlands and Switzerland? Those countries have global visions, robust corporations and high-quality human capital.

  Most importantly, geographical constraints, language differences and cultural barriers have never stopped them from extending their business outreach. It is time for Taiwan to learn from the vigorous spirit of these states and to redefine itself on the global map, which will definitely help it to create the global strategy it desperately needs.

  Eric Chiou is a deputy head for FTA and regional integration at the Taiwan Institute of Economic Research’s Economic Development Strategic Planning Center.
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