Taiwan: Time to change gear (經濟學人)
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April 9, 2013 7:03
pm
Taiwan: Time to change gear
As growth stalls and reliance on China grows, the country
must reform to preserve its status as an Asian success
©Bloomberg
On your bike: commuters wait to cross an intersection in
Taipei’s rush hour
Taiwan is also one of Asia’s most robust democracies, with a solid two-party system and a vibrant civil society. Even the once-pervasive threat of military conflict with mainland China, which regards Taiwan as a renegade province, has greatly receded after a thaw in relations engineered by Ma Ying-jeou, president since 2008.
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Yet many Taiwanese are anything but optimistic. After decades of double-digit growth during its rise from pre-industrial poverty, the nation has been snagged in an upper middle-income trap. Growth has averaged about 4 per cent in the past five years, not bad by western standards, but not enough to keep up with faster-growing rivals. Last year, the economy mustered growth of only 1.3 per cent, among the lowest in Asia, although the government expects it to grow 3.6 per cent this year.
More worrying than headline growth is concern that Taiwanese industry could lose its competitive niche. Its technology is world-class. But its biggest companies are mainly thin-margin component or contract manufacturers, which rely on others to sell to the final consumer. “Taiwan may be structurally ‘stuck’ one level below the branded, high-margin top layer of economic activity where the richest countries exist,” says Joe Studwell in his recent book, How Asia Works.
True, Taiwan has forged new business opportunities from its improved relations with mainland China. But that comes with risks, leaving Taiwan heavily reliant on an economy that has itself started to slow and could hit even more bumpy times. Nor is it comforting for many Taiwanese to rely on a country whose self-avowed goal is to take Taiwan over, if necessary by force.
“Is China our only hope?” asks Justin Su, president of Hotai Motors, which represents Toyota and Lexus in Taiwan. “Opening up to China was a road we had to take. But still, where will Taiwan go from here? Taiwan needs to develop its own competitive advantages.”
In the 1980s and 1990s, Taiwanese manufacturers were among the first to go into China to build factories where labour was cheaper. Now, those manufacturers are getting squeezed between even cheaper competition on the mainland and smarter competition from South Korea. The latter has been far more successful than Taiwan at increasing production and creating brands capable of commanding premium prices. South Korean companies compete directly in sectors such as flat panels, computer memory and smartphones. To Taiwan’s dismay, the Koreans often beat it when it comes to branding, speed to market and R&D spending.
About half of Taiwan’s exports are electronics, but it boasts no Samsung or Sony. Instead, a local champion is Taiwan Semiconductor Manufacturing Company, a chip manufacturer that dominates its sector and has a market capitalisation of more than $60bn, but which is hardly a global brand. Perhaps its best-known company is Foxconn, which earns profit margins of under 4 per cent by assembling other companies’ products, including iPhones for Apple.
Taiwan’s problems do not end there. With a fertility rate below that of Japan or South Korea – at 1.1 child per woman, the third lowest globally – its potential workforce will start shrinking as early as 2015. Even so, many of Taiwan’s brightest are opting for better-paying jobs in Shanghai, Hong Kong or the US. Taiwan’s real wages are below their 2000 level as many local companies have expanded their Chinese operations rather than creating jobs at home.
The island is also hemmed in politically. Only 23 governments have diplomatic ties with Taiwan, mostly small nations such as the Solomon Islands and Honduras. As free-trade agreements have spread throughout Asia, Taiwan has been left out by nations fearful of offending Beijing. “Taiwan is separated from international society while other countries are aiming at globalisation,” says Mikio Higashiyama, Taiwan chairman for Mitsui & Co, a Japanese trading company. “This is a huge problem.”
Partly as a result, Taiwan’s exports have been falling as a share of global shipments since 1993. Back then, both Taiwan and South Korea accounted for about 2.3 per cent of global exports. By 2011, Taiwan’s share had dropped to 1.5 per cent, while South Korea’s had risen to 3.3 per cent.
In an interview with the Financial Times, President Ma, re-elected to a second term last year, says Taiwan cannot grow faster without a fundamental overhaul of its economic structure. Its companies must add greater innovation to their efficiency, he says. That will require painful deregulation at home and further opening up to international competition.
Mr Studwell says Taiwan probably requires nothing less than a “Thatcherite shock ... to crack all those ossified vested interests”.
President Ma may not be strong enough to administer such bold reform. His popularity has sunk to 14 per cent amid fears among many in Taiwan that deregulation and liberalisation will destroy small businesses and exacerbate inequality in a relatively egalitarian society. There are also fears that farmers, currently cushioned from outside competition, could suffer.
. . .
Many in big business, too, remain sceptical. Bowei Lee, chairman of LCY Chemical, Taiwan’s largest solvent manufacturer, speaks for many industrialists when he says reforms have stalled, and the government remains too bureaucratic.
Free trade is central to Mr Ma’s strategy. Taiwan has signed the Economic Co-operation Framework Agreement with China, which has been called the most significant deal between the two since they split after the Chinese civil war in 1949. Mr Ma is pushing to deepen that agreement, which so far applies only to a relatively limited number of products. He also hopes to conclude free-trade agreements with New Zealand and Singapore this year. The idea – or the hope – is that after its deal with mainland China, Beijing will interfere less in Taiwan’s talks with third countries.
Last month, Taipei restarted trade negotiations with the US after resolving a years-long dispute over imports of American beef. The president is also planning new free-trade zones to encourage more foreign investment in high-value industries, though he warns legislation might take a year or two to get through Taiwan’s argumentative lawmakers. “This is the only way forward,” he says. “Our trading competitors are already so far ahead of us that if we do not begin now, it will be impossible to increase our growth rate.”
If Taiwan is to push its way up the value chain, much of the heavy lifting will have to be done by the private sector. Yet thin-margin contract manufacturers find it hard to invest sufficiently in developing innovative products or marketing them directly to consumers. Those that have tried have a mixed record. Giant, now the world’s largest bicycle maker by revenue, made smart early investments in higher-end bikes and racing sponsorships. That strategy paid off. It now commands 5 per cent of global market share, but 10 per cent of revenue. Others have found it tougher-going. HTC, the smartphone maker, struggles to compete against its larger, richer competitors, such as Samsung and Apple.
President Ma argues that business, conscious of how much it is falling behind, is more prepared than before to go out and compete. “People have developed a better understanding that, if we do not implement reform, our economy will grow at a snail’s pace,” he says.
If Mr Ma’s drive to restructure the economy has had limited impact, he has had more success in improving relations with the mainland. Until fairly recently, the Taiwan Strait was considered the most dangerous flashpoint in Asia because of Beijing’s pledge – which still stands – to invade Taiwan if it ever dared to declare independence. Under Chen Shui-bian, the previous president, Taiwan came close to calling a national referendum on full independence, prompting threats of attack from Beijing.
Mr Ma has transformed matters. Shortly after he was first elected in 2008, the two sides began the first regular direct flights across the strait. Now there are hundreds of flights a week between Taiwan and dozens of Chinese cities, from Kunming in the south to Dalian in the north. Taiwanese travelling to the mainland are mostly businesspeople, happy to avoid lengthy layovers in Hong Kong. Mainlanders coming the other way are mostly tourists. More than 2m came last year and have sparked a boom in hotel construction and luxury store openings.
As well as its trade deal with the mainland, Taipei won a prized agreement from Beijing to make the island the second offshore renminbi clearing centre after Hong Kong. Many Taiwanese bankers hope renminbi bonds and investment products will liven up the island’s struggling and overcrowded banking sector and help cut transaction costs for the thousands of companies doing business in or with the mainland.
Restrictions on mainland capital investments in Taiwan are also loosening. The idea, says Kuan Chung-ming, minister of the Council for Economic Planning and Development, is to put “mainland China’s muscle” to work in Taiwan, rather than just using the mainland as a place to build factories. A day after regulators said they would lift the cap on mainland investment in the banking sector, Industrial and Commercial Bank of China announced plans to buy 20 per cent of Bank SinoPac, one of Taiwan’s largest.
. . .
Yet opening to mainland money remains politically sensitive. While Taiwan is seeking to attract Chinese money, it wants to minimise Beijing’s potential influence over its own business and political environment. Chinese investors, for example, can take only small stakes in crucial sectors such as technology because of concerns about protecting intellectual property. Deals are sometimes delayed while regulators comb investments from supposedly non-Chinese sources to ensure none of it is a front for mainland capital. Many Taiwanese are also suspicious about mainland Chinese seeking influence over the island’s media and swaying the debate in a pro-Beijing direction.
Mr Ma’s emphasis on expanding trade and investment links with China has worked to an extent. But many worry that Taiwan is putting all its eggs in one basket. William Stanton, the former de facto US ambassador to Taipei, warned that depending too much on China economically would give Beijing dangerous “leverage” over Taiwan.
For some the cost could be even greater than that. Tsai Ing-wen, the former opposition leader defeated by Mr Ma in last year’s presidential election, says: “What China wants is to move inch by inch so that we are seen to accept one China.”
Like many Taiwanese, she is sceptical of Mr Ma’s plan for jump-starting the economy. And, like many others, she regards it as potentially fatal for Taiwan’s freedom.
A social schism widens across the strait
Despite growing trade links between Beijing and Taipei, Taiwan is drifting away from the mainland politically and socially, writes Sarah Mishkin.
The expansion of trade ties under Ma Ying-jeou, Taiwanese president, has already had an impact. An estimated 200,000 China-based Taiwanese flew home to vote in the election that returned him to power last year. Most of them backed him out of concerns that a victory by the opposition Democratic Progressive party, which has historically supported Taiwanese independence, would antagonise Beijing and damage business links.
Still, polls find that more and more citizens identify themselves as “Taiwanese” rather than “Chinese”, even those whose families arrived in 1949 when the defeated nationalist army fled the mainland.
A survey done by Taiwan’s Mainland Affairs Council, which handles cross-strait ties, found that Taiwanese think Beijing is less hostile now than it was to Mr Ma’s pro-independence predecessor. However, the percentage who perceive Beijing as hostile to Taiwan’s people has risen slightly in the past decade and is now at about 46 per cent. “The two sides across the strait are indeed interacting more and more in more and more aspects but the Taiwan identity is getting stronger and stronger,” says Chang Tieh-chih, a Taiwanese journalist. “Down the road, after 10 years, no one knows what will happen.”
Even in China, says Chang Mau-kuei, a sociologist in Taipei, the image of Taiwan has improved.
Many Chinese netizens follow Taiwan’s elections closely, some of them praising the system and the candidates’ openness to answering questions and meeting voters.
“I don’t understand. It seems like democracy is something suitable for Chinese people. Why can we on the other side of the strait only sigh?” writes one blogger.
For opposing the Communist government, says Mr Chang, “Taiwanese were seen as bad guys, renegades. Now look at the gangsters – actually they are doing well.”
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