Misleading reporting by pro-China media has created a myth that is close to becoming a matter of faith in Taiwan: A strong New Taiwan dollar will benefit the nation.
Recent headlines have warned that bearish stock and foreign exchange markets could push the NT dollar down to NT$31 against the US dollar, that successive depreciation of the NT is a return to past attempts to save exports through devaluation and of the double-edged nature of devaluation all hint at the notion that currency appreciation is good and depreciation is bad.
As a result of this view, recent exchange rate adjustments — Asian countries trying to devalue their currencies as the US dollar appreciates — has had the following results: Compared with the rates in early April, the closing prices on July 20 showed that the Chinese yuan has depreciated 7.95 percent, the South Korean won 7.3 percent and the Japanese yen 5.78 percent, while the NT dollar has depreciated 5.4 percent.
That means that in the past three months, the NT dollar has appreciated 2.5 percent against the yuan and 1.9 percent against the won.
Compared with the average exchange rate in 2016, the NT dollar has appreciated 5 percent, the yuan has depreciated 2.3 percent, the won has appreciated 2.03 percent and the yen has depreciated 3.3 percent. It is debatable that over the past year or so, the NT dollar has been a super-strong Asian currency.
So far the strong NT dollar has not affected the nation’s economy, as total profits of listed companies reached NT$2.19 trillion (US$71.54 billion) last year and NT$535.6 billion in the first quarter of this year, representing 21.69 percent growth compared with the same period last year.
In the first five months of this year, exports also grew by 11.2 percent, because the appreciation of the NT dollar against the won and the yuan is within the range of tolerance for Taiwanese businesses, which can maintain their competitiveness through technological upgrades.
However, the impact of the exchange rate on a nation’s economy lies not in the short term, but in the medium to long term.
As an example: From 1980 to July 19, the NT dollar appreciated 14.9 percent and the yen 50.2 percent, while the won depreciated 86.5 percent and the yuan by 342.6 percent.
Taiwan and Japan are the only two nations in Asia whose currencies have appreciated against the US dollar over the past 30 years.
It is obvious that the claim that Taiwan is returning to the past use of currency devaluation to save exports is not true. The truth is that the strong NT dollar over the past 30 years has caused Taiwan’s economy to perform much worse than those of South Korea and China.
A medium-term observation — two to four years — shows that since the 2008 financial crisis, the average exchange rate of the won against the US dollar dropped from 929 won in 2007 to 1,106 won in May 2013, a depreciation of 19 percent, while the NT dollar appreciated from NT$32.8 to NT$29.8, or 10.2 percent, and 30 percent against the won.
The outcome is that the flat-panel industry, one of Taiwan’s trillion-dollar industries, has lost out to price competition from South Korean manufacturers, and the nation’s four major panel makers suffered a loss of NT$242.7 billion from 2011 to 2012.
Using the opportunity presented by the won’s depreciation, South Korea greatly expanded the gap against Taiwan’s economy.
US President Donald Trump on July 19 said that the yuan “has been dropping like a rock” and that this puts the US at a disadvantage, depriving it of its competitive advantage.
Trump is one of a very small number of national leaders who directly interfere with interest and exchange rates, but his criticism is not unfounded. Apart from the NT dollar and the yen, most nations have seen their currencies depreciate against the US dollar over the past 30 years, with the yuan depreciating the most, followed by the won, thus depriving the US of many job opportunities and economic growth.
Most Taiwanese academics and media outlets tend to favor a strong NT dollar, because it makes traveling abroad less expensive and facilitates investment in China. However, the reality shows that a strong NT dollar has not promoted strong and rapid development.
Although the recent appreciation has not appeared to have an impact yet on Taiwanese firms, the trend toward investing in China seems to grow stronger on the back of the NT dollar’s 7 percent appreciation against the yuan over the past year. In the long run, this will have clear effects on domestic investment and growth.
The myth of the benefits of a strong NT dollar must come to an end. If even the US president has noticed the problem, should Taiwan continue to make the same mistake?
Huang Tien-lin is a national policy adviser, former advisory member of the National Security Council and former managing director and chairman of First Commercial Bank.
Translated by Chang Ho-ming
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