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Key Economic Data 
  2003 2002 2001 Ranking(2002)
Millions of US $  406,000    
GNI per capita
 US $ 18,000
Ranking is given out of 208 nations - (data from the World Bank)

Books on Taiwan

Update No: 055 - (26/08/08)

With all eyes on Beijing for the Olympic Games, any fresh non-diplomatic manoeuvring between Taiwan and China have been on hold for the month although new government of Taiwan under President Ma Ying-jeou has continued unilaterally with its “opening up policy” of engaging China economically by removing unnecessary restrictions on travel and trade. 

It hopes that eventually the increased economic engagement will lead to political engagement but critics constantly remind Mr. Ma that Beijing has a history of demanding much and giving little. So far, Taiwan has been doing most of the giving.

World malaise impacts Taiwan
But with the slowing of the global economy, playing the China card is probably the best that the Kuomintang (KMT) government can do. U.S. industrial production slowed again in July rekindling fears of a recession and abating the appetite of consumers there to spend. The turmoil in the U.S. financial markets continues to be a major factor. Price inflation in the American economy hit a 17-year high in July, rising by 5.6 percent from a year earlier. Europe may also be in trouble with the EC statistical agency reporting that in the euro zone, GDP contracted by 0.2 per cent in the second quarter—equivalent to 0.8 per cent when annualized. This was the first time since the early 1990s that GDP had fallen overall within the 15 countries that make up the euro area.

Japan is in trouble as well. Japan’s economy contracted at an annual rate of 2.4 percent in the second quarter of the year. This was the largest decline in more than seven years. Other reports suggest that the U.K. may be heading towards its first recession in 15 years. China is still far from recession, but there too there are signs that growth is slowing. Domestic demand may be of growing importance to China’s economic health but it has a long way to go before it can compensate for a downswing in the trade side of the ledger.

Taiwan’s growth falters as a result
All of this is bad news for Taiwan of course, because its economy remains driven by exports. Having bolstered economic performance in the first half year with double digit growth, there are signs that both shipments and forward orders are now slackening. Overseas shipments grew by only eight per cent last month. Anywhere else this would probably be considered a good outcome but for Taiwan—used to seeing much higher numbers—it was taken as a warning sign. Shipments to China, Hong Kong and to Europe moderated their growth while those U.S.-bound actually declined.

Imports meanwhile jumped by 12.3 percent, mainly due to surging prices of oil and other commodities. Taiwan’s trade surplus for the January-July period amounted to US$7.58 billion. This represents a decline of 31.3 per cent from last year’s level.

Inflation is affecting Taiwan as it is much of East Asia. Higher food and energy prices have pushed Taiwan’s inflation rate to a fourteen year high. Year-on-year consumer prices rose by 5.92 per cent in July. This was the highest rate of increase since September 1994. An even higher rate of increase is forecast for next month.

Inflation has taken its toll on income, on spending power, on the TAIEX and on the New Taiwan Dollar. Real wages have fallen (y-o-y) by 2.36 per cent and the unemployment level has risen to a new recent high of 4.06 per cent. As a consequence of these numbers economic growth prospects for the remainder of the year have fallen. The Directorate General of Budget, Accounting and Statistics (DGBAS) is expected to release revised forecasts shortly. Previously it forecast GDP growth at 4.78 per cent and CPI at 3.35 percent. The TD dollar is weakening and is expected to trade between values of NT$ 30.5 and NT$ 30.8 in the near term. The TAIEX, the benchmark index of Taiwan’s stock exchange has fallen by around 17 per cent since the start of the year.

Playing the China card
These are gloomy numbers indeed and not the sort that any incoming government wants to be confronted with. The answer as far as the KMT is concerned lies in fresh openings to China and, as a starter, the removal of “unnecessary restrictions” on cross-straits trade and exchanges.

So far this opening up has been most visibly manifest in direct air flights including week-end charter flights between Taiwan and the mainland of China—albeit such flights at present are still required to transit the air space of third parties, usually Hong Kong. Taiwan and China have also agreed to the exchange of tour groups with, initially, a daily cap of 3,000 mainland Chinese. This number is to be revisited early next year in the light of experience.

These “direct” flights only began on July 18 but have proven to be immensely popular. At present these air services cover five Chinese cities but will be expanded soon to cover six more. Both sides have also agreed to negotiate on air route and traffic control procedures so that the detour via Hong Kong air space—which adds both time and cost—will no longer be necessary. Negotiations on cross-straits chartered cargo services are also expected before the end of this year.

Now that the direct travel links are in place, attention is turning to the opening up of Taiwan’s capital market and investment flows between Taiwan and China. 

Taiwan’s Cabinet has agreed to remove restrictions on investments in China by its largest companies and will raise the investment ceilings for smaller firms allowing them to legally remit funds to and from the Chinese mainland (most were doing it anyway through “other” channels. Also abolished is a rule that bans foreign companies from using funds raised through the Taiwan bourse for investments into China.

From next year, Taiwanese banks will be allowed to set up branches in China. At present they are restricted to representative offices only and cannot offer full banking services.

Taiwan is also opening up local financial markets to Chinese capital and, from October this year, will allow Chinese investors to place funds in Taiwan’s stock and futures markets. Companies with Chinese shareholders will also be allowed to list on Taiwan’s main board or through depositary receipts.

Mr. Ma shares his vision
In a recent interview with the Wall Street Journal, President Ma Ying-jeou outlined the basis of his broader policy. According to Mr. Ma the general strategy toward the Chinese mainland is first, to normalize economic relations. This assumes special importance for Taiwan since, all other considerations aside, it is estimated that more than 100,000 Taiwanese firms have invested in the Chinese mainland. Taiwan’s bilateral trade with China has already passed US$120 billion; with some 40 per cent of local exports bound for either mainland China or Hong Kong.

Over the longer term the strategy extends to embrace three broader goals: firstly, to make Taiwan the innovation centre of Asia (Mr. Ma said “world” but that might be too ambitious a goal); secondly to make Taiwan a regional centre as the springboard for trade and investment in Asia; and third, to ensure that Taiwan remains the global headquarters for Taiwanese companies.

This strategy is really no more than a rehash of the plans of then Premier, Vincent Siew, in the mid Nineteen Nineties who planned to make Taiwan into a regional operations centre, especially for Greater China. (That plan was derailed by the souring of relations between China and then President Lee Teng-huei and the 1995 missile crisis.)

There is a difference of course. In the mid-nineties, China was not then a global economic power. Now the paradigm is different. The emergence of China as a global economic force—and growing political force as well—provides Taiwan with the opportunity, if handled properly, to cultivate an interdependent relationship that emphasizes (for Taiwan-headquartered companies at least), the opportunity of vertical integration with an emphasis locally on software design, research and development, innovation, design, incubation, and marketing. This strategy, according to Ma is not just focused on China but on Asia as a whole since as the value chain changes, so too do the manufacturing centres. Already some local Taiwanese companies are divesting from manufacturing in China and moving to lower cost centres in Vietnam and elsewhere in Asia.

What does it all mean?
Mr. Ma’s remarks were no doubt made for Washington’s benefit; the more so because they came while U.S. President Bush was in Beijing for the Olympic opening and the subject of Taiwan would undoubtedly come up in exchanges with the Chinese. After the false starts of the previous month, Mr. Ma was anxious to demonstrate to Washington that there would be no more maverick behaviour from the Taiwanese president such as that which characterized the presidency of his DPP predecessor, Chen Shui-bian.

Before departing for Asia, President Bush, in a White House interview on 30 July, acknowledged that relations between Taiwan and mainland China are now “in a better place.” Mr. Ma wants to make sure they stay that way. And with Taiwan still wanting to consummate a long-standing deal for modern defensive weaponry and anxious to gain more space diplomatically, it needs to have the U.S. firmly on side.

In a major policy speech delivered during his visit to Bangkok but addressed to Asia in its entirety, President Bush was at pains to emphasize the fact that America now needed a stronger engagement with Asia than ever before. He acknowledged that relations with China were “complex” and stressed the new economic might of China and especially China’s “confident middle class” and its new “purchasing power.”

In relation to Taiwan, President Bush also stressed America’s determination to maintain peace across the Taiwan Strait. “From the beginning of my Presidency, I have stated clearly that America's approach to Taiwan would be based on our longstanding "one-China" policy, our three joint communiqués, and our steadfast commitment to the security of Taiwan's democracy under the Taiwan Relations Act. I have also articulated a principle that there should be no unilateral attempts by either side to alter the status quo. As a result of this frank engagement and firm diplomacy, the tensions that once roiled the Taiwan Strait have calmed, and we are witnessing a new period of stability and peace.”

At the very least, Mr. Ma is showing an appreciation of the realpolitik of the situation that his predecessor failed to grasp.

Incidentally as far as the Olympics went, Taiwan came in at 80th place managing to garner four bronze medals.

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