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The risks of Taiwan-China economic and trade ties(Taiwan News Via Thomson Dialog NewsEdge)Taiwan's domestic investment accounted for less than 20 percent of GDP. Many people think that investment activity was not really thriving because of the international recession. I will especially take the situation of other countries for comparison to see how differently the international slump affected the individual countries. We will then take a look to see how much the international economic situation affects Taiwan. The three other small Asian dragons South Korea, Hong Kong, and Singapore were affected by the international slump during the same time as Taiwan, but their domestic investment rate was higher than Taiwan's. Even in the U.S., Japan and Italy the domestic investment rate was higher than in Taiwan during the same period. This shows that the international slump is definitely not the only reason why Taiwan's domestic investment rate is low. Where does the problem lie? After the year 2000 the Economic Development Advisory Conference reached consensus to implement an "active opening, effective management" policy toward investment in China, but it failed to come up with concrete methods of adequate management. From 1993 to 1999 when President Lee Teng-hui was in power appropriate controls and norms were in place regarding commercial and trade contracts between Taiwan and China. As a result Taiwanese investment in China remained always at around 0.5 percent of GDP. But after 2000 this figure kept rising so that by 2004 it had already soared to 2.4 percent. These Mainland Affairs Council figures are still rather conservative, because they only include investments that went through the legal application and approval process, while investments that were made clandestinely are not factored in. Therefore the 2.4 percent figure is still underrated. Economists often argue that government controls are useless because companies have their own way of getting around them. But you should not ignore that supposing the government departments had no efficient management, enterprises would not feel that the government is determined (to keep tabs on China investment) and would also lose confidence in the overall domestic investment environment. Therefore, as companies are driven by a cost-reduction strategy they do, of course, need to go through all kinds of channels before they leave for China. If everyone invested in China, readiness to invest in Taiwan will naturally be affected accordingly. If Taiwanese businesspeople jostle to position themselves in China, then why should foreign entrepreneurs invest in Taiwan? There is no need for them to do so, they will follow the Taiwanese to China. This is the reason why Taiwan's investment rate could not be boosted after the new government took power in 2000, although the international ratings agencies World Economic Forum and IMD gave Taiwan's overall investment environment very high assessments (in their World Competitiveness reports). The successful strategy that our companies have taken all along is lowering costs. The problem with this strategy is its "low learning threshold." What you are able to do everyone else is able to do as well. Even the people who you hire locally will very quickly learn how to do it. Therefore when Taiwanese companies invest in China and use the local cheap manpower, they can boost profits in the short term. But as everyone rushes to emulate this approach, the whole thing becomes worthless in the end, as the strategy of cutting costs eventually turns into a vicious price cutting competition. The cheap goods that Taiwanese manufacturers produce in China and export to the world's major markets have begun to substitute products that are made in Taiwan. Another problem is the degree of "product differentiation." If our companies don't have any pressure to upgrade, the differences between our products and that of other countries will gradually become smaller. So-called "upgrading" means applying creativity and design to come up with ways to make things that others won't be able to make. The difference of products does not necessarily only come from the price. In 1990, the differentiation of products exported to the U.S. by South Korea and of products exported to the U.S. by China stood at 75.2. At the same time, the differentiation between Taiwanese and Chinese products stood at 72.5 (a differentiation of 100 means that two products are completely different), which shows that back then there was not much of a difference between Taiwan and South Korea in terms of product differentiation. However 13 years later in 2003 the degree of product differentiation between South Korean and Chinese exports to the U.S. still stood at 59.1, while Taiwan's had narrowed to just 31.2, because our companies due to their cost-reduction strategy and over-investment in China were unable to transform and upgrade, only producing goods at low costs. If products do not differ and also cannot compete on price, then they will be easily substituted. When manufacturers massively relocate the production of low-level products to China and fail to introduce new technologies to develop high-level industries, the domestic manufacturing industry will experience a severe hollowing-out phenomenon. Economists often argue that the government should not interfere with activity in the market economy. But in fact, from 1971, the concept of national economic security began to slowly take shape. So-called national economic security means the degree of autonomy in commerce and trade that a country needs for its survival and development. Energy sources, for instance, must not rely too much on imports, commerce and trade must not rely too much on a single country, and exports must not rely too much on a certain kind of product. These points all serve to maintain the autonomy of our commerce and trade. Since China suppresses Taiwan everywhere in the international community and does not grant Taiwan room for survival, we must maintain an even higher degree of autonomy in commerce and trade. If Taiwan conducts too much commerce and trade with China, then our degree of autonomy in commerce and trade will be affected, which in return will affect our room for survival and development. Because once you completely rely on China in every aspect, it does not need to threaten you militarily, but only needs to use economic sanctions and use Taiwanese businesspeople based in China as hostages to reach its goal of causing upheaval in Taiwan's society, thus affecting Taiwan's survival and development. The harm of excessive investment in China When a manufacturer moves to China he might demand, for the sake of convenient management, that other related industries or mid- and upstream makers follow the company there. As a result many manufacturers that originally did not need to go are forced to leave for China. When the plants have been moved to China, all high-level staff also needs to follow, thus causing a talent drain in Taiwan. That's the first harm. Secondly, thanks to globalization, entrepreneurs and high-tech talent can work in China to pursue higher incomes. But once the factories in Taiwan have closed down and gone out of business, the low- and mid-tech workers are forced to stay in Taiwan, since it is impossible for them to follow the factories to China. Consequently when companies look for a second spring in China, the incomes of their senior executives will rise more rapidly, while the incomes of their mid- and low-tech workers won't easily rise. As a result the gap between family incomes will become bigger. Many entrepreneurs rush to invest in China based on the corporate interest. From their personal political preferences they probably don't identify with China's united front approach or the one-China principle, but for the sake of their respective interests they will help China to exert pressure on Taiwan's government, thus forming a pro-China group. For instance when Taiwanese towel makers recently protested against the dumping of Chinese towels, the chairman of a certain textile maker helped China to put pressure on the Ministry of Economic Affairs saying he hoped that the government won't adopt import relief measures, but launch instead a less damaging anti-dumping investigation. Policy suggestions The government should clear away obstacles that hamper manufacturers' readiness to invest in Taiwan, provided that the three major pillars of sustainable development - economic development, fairness and justice, as well as environment and ecology - are not contravened. At the same time it should work out efficient countermeasures to turn around the current trend of equalizing "globalization" with "Chinalization," while also actively developing closer commercial and trade ties with Europe, the U.S. and Japan. The government should come up with concrete ways of implementing the recently proposed "proactive management, effective opening" policy to avoid making simple indicators such as caps on the investment ratio and the investment amount or restrictions on the industry category the basis for approving or rejecting China investment applications. Since manufacturers' investment in China affects to a varying degree the integrity of the existing domestic industrial structure, the high-tech talent drain, the unemployment rate and income distribution, the government departments should make long-term overall strategic planning regarding investment in China or the relocation of industries abroad and must make an overall assessment before approving such cases. Moreover, any lawmaker or any person in charge of a company that is listed on the Taiwan Stock Exchange or traded on the OTC Securities Exchange who visits China to conduct exchanges or commercial activities must truthfully report to the government upon return to Taiwan whom he/she had contact with in China as well as the content and nature of the activities that he/she conducted there. In the "Lobbying Act" the government should formulate articles that prohibit lobbying and soliciting support for an enemy country. The end Edited by Tina Li Translated by Susanne Ganz Copyright 2006 Taiwan News |