By Hwan C. Lin, reprint from Taipei Times, April 06, 2005
The early 1990s ushered in a sea change in the Taiwan Strait. The Taiwan-China relationship finally broke a four-decade-long bilateral embargo and marched into a new era of cross-strait integration. Capital, goods and people move in massive amounts from the nation to the world's largest developing economy.
This is a 15-year long experiment of economic integration between two long-term military rivals. Integration has generated economic gains skewed toward China, while causing a potential drag on Taiwan's long-term economic viability, an austere "aggregate risk" that is looming on the horizon.
President Chen Shui-bian (陳水扁) has not sensed the looming risk. Instead, in the recent Joint Statement issued on Feb. 24, Chen and People First Party Chairman James Soong (宋楚瑜) voiced their common stance of reinforcing cross-strait integration between Taiwan and China. Moreover, article 6 of the statement reads, "On the basis of goodwill from both sides of the Taiwan Strait, we would not exclude any possibility to establish future relations between the two sides, in any form whatsoever."
Evidently, neither the ruling nor opposition parties seem to resist some form of political integration, in the wake of 15 years of cross-strait economic integration. Neither party showed the intent to seek measures to cool down the Taiwan-China economic relationship in the Joint Statement.
More recently, China's National People's Congress rubber-stamped a bellicose "Anti-Secession" Law on March 14. This is clearly a scheme of China to utilize a domestic law to legitimize its future annexation of Taiwan. It is about time that Taiwan's government should re-examine the nation's overall relationship with China.
Since Japan renounced its sovereignty over Taiwan under the Peace Treaty of San Francisco that came into force in 1952, Taiwan has been a territorial entity under the governing authority of the Republic of China, but not subject to any existing sovereignty (see Frank Chiang, State, Sovereignty, and Taiwan (2000), and One-China Policy and Taiwan (2004), Fordham International Law Journal).
Taiwan's postwar external relationships had been closely linked to the US, Japan and Western Europe. These advanced economies served not only as markets but also as sources of technology diffusion, helping the nation advance to a newly industrialized economy that is now empowered to export technologies and capital to developing economies, like China.
History was often made, with far-reaching repercussions. The Tiananmen Square incident of 1989 strained the Sino-West relationship for years, while ironically paving a way for Taiwan to integrate economically with China at an astonishing pace. The West has been imposing an embargo on arms sales to China for fifteen years, although the EU now seems ready to lift this ban despite US opposition. The strains between China and the West, however, unintentionally rendered a preface for integration between Taiwan and China.
In tandem with the Sino-West strains, the global economic environment also acted as a catalyst. During the second half of the 1980s, the world's advanced economies were plagued by extraordinary disequilibriums in their current-account balances, which measure international trade in goods and services. The US suffered huge current-account deficits against both industrial economies such as Japan and Germany and Asia's newly industrializing economies like Taiwan, South Korea, Singapore and Hong Kong.
Against that background, surplus economies' currencies (including the New Taiwan dollar, Japanese yen and German mark) drastically appreciated against the US dollar, both as a result of the world's current-account disequilibrium and as a necessary remedy to the disequilibrium adjustment problem. Currency appreciation impaired export competitiveness. The nation's economy was therefore forced to engineer large-scale reallocation of resources, triggering a production exodus of its low-value-added labor-intensive products. China, an extremely labor-abundant economy, was an ideal low-wage production location for Taiwan's labor-intensive products.
The Democratic Progressive Party (DPP) took power in 2000 for the first time. The DPP government failed to slow down cross-strait economic integration. Rather, it hastened integration by replacing the "No Haste, Be Patient" policy, which was initiated by former president Lee Teng-hui's (李登輝) KMT government, with a policy titled "Actively West-bound, Effective Management." However, the new policy precipitated the outflow of capital and technologies to China in the relentless "China fever," without effective government management.
Today more than 80 percent of Taiwan's foreign direct investment (FDI) and over one-third of its merchandise exports are China-bound. Last year, China replaced the US as the nation's largest export market for the first time. Now China, not the US, is the largest source of Taiwan's external trade surplus.
Evidently, trade created in the Taiwan Strait has diverted Taiwan's external trade away from the US. From a static economic analysis, Taiwan may have acquired economic gains, ceteris paribus, if trade creation dominates trade diversion in the fifteen-year experiment. Some pundits even squarely said that Taiwan had gained from its economic integration with China because the nation has enjoyed a sizable trade surplus across the Taiwan Strait.
But economists agree that such static analysis is over-simplistic because it overlooks long-term dynamic elements. In the long-term, Taiwan's economic might and well-being must depend on technology-driven productivity growth.
Trade created across the Taiwan Strait mostly resulted from Taiwan's China-bound investments, which was driven by Taiwanese businesses' strategy to search for more cost-effective vertical integration, in addition to an early foothold in the emerging China market.
The politically isolated nation therefore climbed in the world's supply chain, becoming an up-stream base that supplies equipment and parts for Taiwanese businesses that have established a down-stream base that manufactures labor-intensive goods in host country China.
Such vertical integration is efficient in production because Taiwanese businesses can reap lower-wage benefits in China.
But production efficiency arising from Taiwan's China-bound investments can never be the entire matrix that measures the nation's economic well-being.
In fact, Taiwan's excessive China-bound FDI, though efficient in production, could be inefficient in allocation of the nation's economic resources. In a nutshell, an individual's overseas investments could be privately efficient but socially inefficient. After all, Taiwan's long-term economic viability rests on its forward-looking investment in nurturing innovative capabilities rather than on its China-bound investment to utilize low-wage opportunities. Investment in China can achieve gains in production efficiency by freeing up Taiwan's domestic resources, mainly land and workers, that would otherwise be used to domestically produce older goods with higher production costs.
But investment in China can also incur losses in allocation efficiency by absorbing Taiwan's domestic resources, mainly capital and non-production workers (mostly engineers and managers), that would otherwise be allocated to sustain its domestic investment in innovative new products or processes.
Investment in China therefore gives rise to both efficiency in production and inefficiency in allocation of resource from the nation's economic perspective.
As such, a laissez faire policy for Taiwan's China-bound FDI would never serve the nation's best interests because of the loss of allocation efficiency, nor would a totally prohibitive policy do this because of its adverse effects on production efficiency. Taiwanese policymakers must hold a forward-looking perspective to circumspectly weigh the marginal gain of production efficiency against the marginal loss of allocation efficiency so that the nation's China-bound investments may slow down to a level of socially optimal equilibrium.
A dynamic analysis of both market competition and the externalities of global-technology diffusion also points to a need to better manage or curb Taiwan's China-bound FDI, which has exceeded 80 percent of the nation's overall overseas investments, as noted earlier, and which is far more than the nation's annual private investment in research and development (R&D), given that for many years more than 60 percent of Taiwan's overall R&D investment had come from the government sector.
Production efficiency gains from investments in China tend to be static and short-lived when market competition increasingly intensifies. Conversely, the loss of allocation efficiency arising from resources diverted away from innovative activities is inherently dynamic and long lasting. It is certainly doubtful that Taiwanese businesses can prevent their FDI profit margins from sizable erosion under free-market competition.
The early 1990s ushered in a sea change in the Taiwan Strait. The Taiwan-China relationship finally broke a four-decade-long bilateral embargo and marched into a new era of cross-strait integration. Capital, goods and people move in massive amounts from the nation to the world's largest developing economy.
This is a 15-year long experiment of economic integration between two long-term military rivals. Integration has generated economic gains skewed toward China, while causing a potential drag on Taiwan's long-term economic viability, an austere "aggregate risk" that is looming on the horizon.
President Chen Shui-bian (陳水扁) has not sensed the looming risk. Instead, in the recent Joint Statement issued on Feb. 24, Chen and People First Party Chairman James Soong (宋楚瑜) voiced their common stance of reinforcing cross-strait integration between Taiwan and China. Moreover, article 6 of the statement reads, "On the basis of goodwill from both sides of the Taiwan Strait, we would not exclude any possibility to establish future relations between the two sides, in any form whatsoever."
Evidently, neither the ruling nor opposition parties seem to resist some form of political integration, in the wake of 15 years of cross-strait economic integration. Neither party showed the intent to seek measures to cool down the Taiwan-China economic relationship in the Joint Statement.
More recently, China's National People's Congress rubber-stamped a bellicose "Anti-Secession" Law on March 14. This is clearly a scheme of China to utilize a domestic law to legitimize its future annexation of Taiwan. It is about time that Taiwan's government should re-examine the nation's overall relationship with China.
Since Japan renounced its sovereignty over Taiwan under the Peace Treaty of San Francisco that came into force in 1952, Taiwan has been a territorial entity under the governing authority of the Republic of China, but not subject to any existing sovereignty (see Frank Chiang, State, Sovereignty, and Taiwan (2000), and One-China Policy and Taiwan (2004), Fordham International Law Journal).
Taiwan's postwar external relationships had been closely linked to the US, Japan and Western Europe. These advanced economies served not only as markets but also as sources of technology diffusion, helping the nation advance to a newly industrialized economy that is now empowered to export technologies and capital to developing economies, like China.
History was often made, with far-reaching repercussions. The Tiananmen Square incident of 1989 strained the Sino-West relationship for years, while ironically paving a way for Taiwan to integrate economically with China at an astonishing pace. The West has been imposing an embargo on arms sales to China for fifteen years, although the EU now seems ready to lift this ban despite US opposition. The strains between China and the West, however, unintentionally rendered a preface for integration between Taiwan and China.
In tandem with the Sino-West strains, the global economic environment also acted as a catalyst. During the second half of the 1980s, the world's advanced economies were plagued by extraordinary disequilibriums in their current-account balances, which measure international trade in goods and services. The US suffered huge current-account deficits against both industrial economies such as Japan and Germany and Asia's newly industrializing economies like Taiwan, South Korea, Singapore and Hong Kong.
Against that background, surplus economies' currencies (including the New Taiwan dollar, Japanese yen and German mark) drastically appreciated against the US dollar, both as a result of the world's current-account disequilibrium and as a necessary remedy to the disequilibrium adjustment problem. Currency appreciation impaired export competitiveness. The nation's economy was therefore forced to engineer large-scale reallocation of resources, triggering a production exodus of its low-value-added labor-intensive products. China, an extremely labor-abundant economy, was an ideal low-wage production location for Taiwan's labor-intensive products.
The Democratic Progressive Party (DPP) took power in 2000 for the first time. The DPP government failed to slow down cross-strait economic integration. Rather, it hastened integration by replacing the "No Haste, Be Patient" policy, which was initiated by former president Lee Teng-hui's (李登輝) KMT government, with a policy titled "Actively West-bound, Effective Management." However, the new policy precipitated the outflow of capital and technologies to China in the relentless "China fever," without effective government management.
Today more than 80 percent of Taiwan's foreign direct investment (FDI) and over one-third of its merchandise exports are China-bound. Last year, China replaced the US as the nation's largest export market for the first time. Now China, not the US, is the largest source of Taiwan's external trade surplus.
Evidently, trade created in the Taiwan Strait has diverted Taiwan's external trade away from the US. From a static economic analysis, Taiwan may have acquired economic gains, ceteris paribus, if trade creation dominates trade diversion in the fifteen-year experiment. Some pundits even squarely said that Taiwan had gained from its economic integration with China because the nation has enjoyed a sizable trade surplus across the Taiwan Strait.
But economists agree that such static analysis is over-simplistic because it overlooks long-term dynamic elements. In the long-term, Taiwan's economic might and well-being must depend on technology-driven productivity growth.
Trade created across the Taiwan Strait mostly resulted from Taiwan's China-bound investments, which was driven by Taiwanese businesses' strategy to search for more cost-effective vertical integration, in addition to an early foothold in the emerging China market.
The politically isolated nation therefore climbed in the world's supply chain, becoming an up-stream base that supplies equipment and parts for Taiwanese businesses that have established a down-stream base that manufactures labor-intensive goods in host country China.
Such vertical integration is efficient in production because Taiwanese businesses can reap lower-wage benefits in China.
But production efficiency arising from Taiwan's China-bound investments can never be the entire matrix that measures the nation's economic well-being.
In fact, Taiwan's excessive China-bound FDI, though efficient in production, could be inefficient in allocation of the nation's economic resources. In a nutshell, an individual's overseas investments could be privately efficient but socially inefficient. After all, Taiwan's long-term economic viability rests on its forward-looking investment in nurturing innovative capabilities rather than on its China-bound investment to utilize low-wage opportunities. Investment in China can achieve gains in production efficiency by freeing up Taiwan's domestic resources, mainly land and workers, that would otherwise be used to domestically produce older goods with higher production costs.
But investment in China can also incur losses in allocation efficiency by absorbing Taiwan's domestic resources, mainly capital and non-production workers (mostly engineers and managers), that would otherwise be allocated to sustain its domestic investment in innovative new products or processes.
Investment in China therefore gives rise to both efficiency in production and inefficiency in allocation of resource from the nation's economic perspective.
As such, a laissez faire policy for Taiwan's China-bound FDI would never serve the nation's best interests because of the loss of allocation efficiency, nor would a totally prohibitive policy do this because of its adverse effects on production efficiency. Taiwanese policymakers must hold a forward-looking perspective to circumspectly weigh the marginal gain of production efficiency against the marginal loss of allocation efficiency so that the nation's China-bound investments may slow down to a level of socially optimal equilibrium.
A dynamic analysis of both market competition and the externalities of global-technology diffusion also points to a need to better manage or curb Taiwan's China-bound FDI, which has exceeded 80 percent of the nation's overall overseas investments, as noted earlier, and which is far more than the nation's annual private investment in research and development (R&D), given that for many years more than 60 percent of Taiwan's overall R&D investment had come from the government sector.
Production efficiency gains from investments in China tend to be static and short-lived when market competition increasingly intensifies. Conversely, the loss of allocation efficiency arising from resources diverted away from innovative activities is inherently dynamic and long lasting. It is certainly doubtful that Taiwanese businesses can prevent their FDI profit margins from sizable erosion under free-market competition.
No comments:
Post a Comment