Taiwan’s exports have been falling for several months in a row. This, coupled with the destabilizing effect of events around the globe, has had many research institutes in Taiwan adjusting their forecasts for this year’s economic growth downward, with many expressing doubts that the nation will achieve an expansion of 3 percent.
To come up with a solution to this issue, Premier Mao Chi-kuo (毛治國) convened a special meeting at which he called on the Cabinet’s financial experts to come up with proposals to stimulate exports. It was at this point that industry and business groups called on the central bank to depreciate the currency in an effort to boost exports. Central bank Governor Perng Fai-nan (彭淮南) responded by saying that a currency’s exchange rate should be decided by the market, and that depreciating the New Taiwan dollar would only make imports more expensive.
If we are to address the problem of shrinking exports, it is important to first ascertain whether it stems from a short-term global slowdown in economic growth, falling oil prices and the Greek crisis, or from long-term structural changes to the nation’s exports.
According to WTO figures, Taiwanese goods and services exports have been falling for more than 20 years. These figures suggest a problem in long-term export trends, and that long-term structural changes have already started to emerge.
To be fair, the government has actually introduced many proposals aimed at improving exports, but the results have been far from ideal. Whether this has been due to a misguided direction or because of an inability to execute changes is worth investigating.
First of all, exchange rates can be a double-edged sword. Coming to the rescue of exports by depreciating the currency should be a short-term measure only, and would not get to the root of the problem. The question of whether or not to lower the exchange rate depends to a large extent on the international trade situation. If the yen is falling, should we allow the NT dollar to depreciate even more in order to be competitive? This would depend on what is happening with the won because as much as 60 percent of exports between Japan and South Korea are similar, and only 40 percent are complementary, while the similarity between Taiwanese and Japanese exports is slightly higher than 50 percent while complementarity is higher than it is between Japan and South Korea. Therefore, a depreciation of the yen would be far more damaging to the South Korean economy than it would be to Taiwan’s.
South Korea is Taiwan’s main trade competitor in terms of exports to the China market, with an overlap of between 70 and 80 percent of products. Should the won fall, the NT dollar should follow suit in order to lessen the impact on the nation’s exports. If, however, the NT dollar fell too much compared with the won, this would have grievous complications for the Taiwan’s imports and domestic consumer demand.
Second, the South Korean government, concerned over the fall in exports for six months, has drawn up plans to amass private sector funds over the next three years and invest US$88 billion into new product and technology development to drive economic growth. It also plans to allocate US$14.2 billion to give to small and medium enterprises for export capital, as well as to invest more than US$4 billion in the tourism, construction and creative industries to stimulate the domestic market.
Given that investing to drive exports would produce the expected results, which industries in Taiwan should be invested in to increase the competitiveness of our own exports, and reduce the impact of the “red supply line” in China? In addition to speeding up the current structural improvements to industry, we also need technical personnel and a supporting government policy.
The government has previously touted the “golden decade” policy as the foundation for the overall national development strategy. This has encompassed the “six major emerging industries” of biotech, green energy, quality agriculture, tourism, medical care, and culture and creativity in addition to the “four emerging smart industries” — cloud computing, intelligent electric vehicles, green buildings and invention patents — all of which is a development in the right direction. The Cabinet has recently also proposed the Productivity 4.0 initiative, which aims to supplement the nation’s technological advantages to speed up industrial innovation and improve the domestic supply chain.
About NT$3 trillion is held in private savings accounts in Taiwan, meaning that potentially there is a plentiful supply of private capital. Unfortunately, there is a lack of channels through which this can be invested. If the government can provide the correct guidance in channeling this money to invest in the aforementioned industries, this would be a way to improve domestic demand and export channels, thereby killing two birds with one stone.
Lee Wo-chiang is a professor in the Department of Banking and Finance at Tamkang University.
Translated by Paul Cooper
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