"An Update on U.S.-Taiwan Economic Relations" Douglas H. Paal, Director, American Institute in Taiwan American Chamber of Commerce Monthly Luncheon September 18, 2002 Taipei, Taiwan

PR0249E | Date: 2002-09-18

It is an honor to be invited here today to address what, in my experience, is among the most active and effective Amchams in Asia.

As many of you know, I have been involved in one way or another with Taiwan for over thirty years. My experience with this vibrant island has taught me that change is the only thing here that you can count on. I have therefore returned to live in Taipei with a sense of humility, and I will need the counsel of people like yourselves -- businessmen and -women who confront daily the ever-changing economic dynamics of Taiwan. The AmCham leadership has already made clear that I can rely on you for the same outstanding level of support you gave to my predecessors, and for this I am grateful. I appreciate the opportunity to actively draw from your insights and straightforward suggestions concerning the conduct of America's economic relationship with Taiwan.

A friend once told me that good fortune means having other people envy you for your problems. That is exactly the attitude I have about Taiwan as it faces economic change. This island's biggest challenge is how to best choose among the many opportunities before it. People here have an unquenchable entrepreneurial spirit, they are technology friendly, and tens of thousands of them have successfully run businesses in the world's great emerging market -- the mainland. Taiwan is blessed with advantageous geography, an outward-looking population, and a shared language and culture with Greater China. People here are industrious and extremely well educated.

As I said... Taiwan has a problem. It must decide how best to deploy its strengths to seize tomorrow's opportunities.

Anyone who knows me knows I am a friend of Taiwan. And I am from a country that is also a friend of Taiwan. So it seems appropriate to me today to act truly as a friend and share the candor and good-spirited advice that only friends can give to other friends.

Let me add that Taiwan's continued success as a democracy and innovative economic powerhouse is in America's interest. Taiwan remains a significant trade partner and contributor to our own economy. The health of Taiwan's economy is also a key component of Asian security and stability.

Take a look around Asia and you will see that something of broad proportions is sweeping the countries of this region. The aftermath of the Asian Financial Crisis in places like Korea and Thailand, and the chronic stagnation affecting Japan, have forced everyone in the region to reevaluate traditional approaches to economic decision-making. Protectionism and crony capitalism are giving way to reform and transparency. Here, in this competitive corner of the world, countries like South Korea and Singapore have embraced rapid liberalization of their telecom and financial sectors. Hong Kong and Malaysia have forced IPR pirates from their shores. The PRC, propelled by its WTO entry, is taking impressive steps to liberalize its economy and now, for example, attracts a host of international companies to bid on infrastructure projects.

Taiwan, now working to open its own markets and create a transparent regulatory regime after its WTO entry, must keep pace with these developments or lose its competitive edge. If the island is to make the most of tomorrow's globalized world, it will have to carve out a special niche for itself among its increasingly competitive Asian neighbors.

And Taiwan is in a strong position to ride this wave of change into the future. The island has many resources and tools at its disposal to turn its economic challenges into the seeds of prosperity. Every day, the number crunchers tell us why there is so much potential for continued success and future promise. For example, Taiwan remains the eighth largest U.S. trading partner, the 16th largest economy in the world, and the 3rd largest holder of foreign exchange reserves. It has a positive balance of payments and low exposure to external debt. Taiwan's vibrant and noisy democracy and equally vibrant and noisy media are ensuring a competition of ideas in the political sphere. This, in turn, is helping point the way to the adoption of economic policies that will ultimately unshackle entrepreneurial energy and strengthen all business sectors, from energy to hi-tech to financial services.

The future is guaranteed to be different from the past. To harness new opportunities, Taiwan must once again forge ahead into unfamiliar territory -- just as it did in the mid-1980s. At that time, the island transformed its economy from a focus on traditional labor-intensive industries like shoes and clothing to one whose growth is now led by cutting-edge hi-tech manufacturing, in many cases at levels of quality and efficiency unmatched in the world. The secret of Taiwan's economic transition was the island's ability to draw on its flexible, well-educated workforce and engage a new industrial model whose existence was not dreamed of twenty years before. Again today, Taiwan must harness the talents of its people and propel them forward, in part by adopting new economic policies and approaches that keep the island one step ahead of change.

I believe there are three strategies Taiwan should follow to make the most of its resources in order to meet the economic challenges of the future:

First, Taiwan should build on its WTO accession. This is not a question of "compliance," but of effecting a paradigm shift. WTO free trade principles embody an attitude that says, "protectionism stands in the way of economic development, free markets are the most powerful tools to increase welfare." By doing so, Taiwan should unshackle business. It must become a place where entrepreneurs talk about why you can do something, not why it is prohibited, or how to get around the rules.

Second, Taiwan should protect intellectual property rights. The bottom line here is this: there is no knowledge-based economy that enjoys bright prospects yet fails to offer adequate protection of the work done by those who do the thinking.

Finally, Taiwan should understand that its economic competitors are growing stronger everyday by taking advantage of business opportunities in the PRC. If Taiwan continues to view the mainland through the prism of economic threat, it is in danger of isolating itself and getting cut out of tomorrow's deals.

WTO

Taiwan has already taken a giant step towards embracing a bright economic future --it has acceded to the WTO.

Throughout the long years of negotiation toward Taiwan's accession to the WTO, the U.S. stood firm in its support for membership. And, except for a few bumps in the road, as expected from any new WTO member, Taiwan has done a good job of adhering to its commitments. We realize that this exercise was not without political and economic costs but the contribution to Taiwan's security and economy were incalculable.

The policy adjustments required of new WTO members are often painful. But Taiwan has already demonstrated its ability to muster the political will necessary to face down an important economic challenge: it has taken significant steps to tackle the high rate of non-performing loans. With great foresight, the LY has passed a series of helpful financial laws over the last year. Banks can now merge. And they can reach out to other financial enterprises like securities and insurance firms to form financial holding companies, a potential source of profitability to a banking sector that has struggled to make money. The new Securitization Law may well increase liquidity in the financial system and become yet another tool for getting NPLs off bank balance sheets. The Ministry of Finance, in a series of regulatory actions, has this year prodded banks to start the process of resolving their NPL problems.

It is no surprise to me that these positive steps have given confidence to the international business community. It has certainly attracted the interest of many of America's foremost financial institutions. Foreign financial firms recognize that the Ministry of Finance is serious and they know that significant business opportunities now exist to play a part in needed financial restructuring.

Taiwan's bold approach to financial reform can also be applied to formulating new policies inspired by the WTO principles of free trade and unfettered business activity. As I said, WTO accession is more than "compliance," it is a shift in attitude. Taiwan should seize every opportunity to incorporate the "WTO outlook" throughout its regulatory regime, its economic planning, and its approach to outstanding bilateral trade concerns involving the United States.

Taiwan may, if it chooses, merely do the minimum to fulfill its WTO commitments. But that's not what the opportunities afforded by WTO are all about. I believe Taiwan's best course is to go the extra mile, to pull down the barriers to trade that can otherwise straitjacket an economy. Just as the Ministry of Finance has seemingly been given the green light to comprehensively address banking sector problems, other agencies should be given the mandate to create institutions that can implement a transparent and independent regulatory structure. The regulators should be guided by a sense of mission to facilitate a truly unbiased free market.

A more liberalized approach to the activities of foreign investors would go far in encouraging more American companies to invest here and bring with them their best talents and latest products and services to Taiwan. Let free markets dictate what products are sold and who will be the winners and losers. Those societies that are the most open are also the most competitive and productive.

There are elements in Taiwan's WTO accession agreement and on the bilateral agenda that need urgent attention. They are key to positioning Taiwan's economy and securing its democracy. Taiwan must fulfill its commitments to liberalize its economy and completely privatize State Owned Enterprises, as outlined in its accession agreement. Companies such as Chung Hwa Telecom, Tai Sugar, Taiwan Tobacco and Liquor Corp., as well as government-directed banks, can best contribute to the economy if they are in private hands.

There needs to be, as promised, a transparent and fair regulatory regime implemented by independent regulators. The Directorate General of Telecommunications should be fully independent and have sufficient resources to effectively enforce telecommunications policies. Adoption of legislation to create a unified Financial Supervisory Board may be the best way to ensure an independent body regulates the banking system.

But it is not enough to merely pass laws and create new institutions. The decisions on implementation and the operation of these new independent bodies should be informed by the spirit of the WTO. They should be based on principles of fairness, transparency, and free markets. Companies should not need to ask agencies for permission to introduce new and innovative financial, insurance and other products into the marketplace. And these agencies should not stand in the way as the needs of a more diverse, flexible and efficient business model demand the free flow of human capital into Taiwan's service industry.

In this spirit, special attention should be paid to ensuring that terms and conditions for major infrastructure and energy projects are formulated in a way to open the door to foreign participation. Likewise, validation procedures for pharmaceutical products should encourage the import of those drugs needed to enhance and protect the health of Taiwan's residents.

While agriculture is always a contentious area, the supermarket and traditional market is often where we all see the first benefits of WTO accession. The Council of Agriculture recently announced that fruit prices were down 10 percent in the first half of 2002, quote unquote blaming WTO tariff reductions. We believe the COA is on the wrong track. Supermarkets are now stocking not only Taiwan rice, but also previously banned American, Australian, and Thai rice at prices affordable to the average consumer. Lower prices, greater choice, I call this a very positive result of WTO accession.

Agriculture is usually one of the most protected and therefore one of the most difficult sectors for any country to open to foreign competition. Taiwan is no exception. After some initial, very serious problems with implementation of Tariff Rate Quotas as well as major delays in opening the rice market, Taiwan is now largely compliant with the terms of the accession agreement. There are exceptions in certain areas like sanitary/phytosanitary measures as well as allocation of rice import quotas to the private sector, but we have confidence that the Taiwan authorities will work hard to overcome these problems.

IPR

There is no gentle way to say what I have to say about IPR: continued failure to broadly enforce intellectual property rights will pull the economy down with it. Period.

It is surprising to see that after so many years of discussion, the IPR issue is still with us. Taiwan has at times in the past faced this situation squarely and done much to resolve it. But the convenient optical disc technologies that became widespread in the 90's -- CD's, DVD's, and so on -- have brought back IPR issues with a vengeance.

Let us be clear -- IPR is now our most important bilateral trade agenda item. The weak IPR regime in Taiwan is causing hundreds of million dollars damage annually to our recorded music, software and motion picture industries. Many other sectors with investments here also encounter problems enforcing their rights against counterfeit producers and other entities that illegally purloin their trade dress and trade secrets. Taiwan must step up to the plate and confront this issue head on.

The IPR problem is much more than a bilateral issue. Left unchecked, it will certainly hobble Taiwan's future economic development. Hi-tech industries that will create tomorrow's jobs in Taiwan -- semiconductors, flat screens, nanotech, and biotech, to name a few -- all require comprehensive IPR protection.

Here again the solution lies in the WTO commitments. Taiwan should enact effective legislation, enforce its laws fully, and investigate and prosecute the pirates. Law enforcement should seize duplication equipment that is used illegally and drive the criminals from the marketplace. The Optical Media Law that was passed last year was a good first step. But look around the neighborhood: Hong Kong and Malaysia passed similar laws and quickly used them to expel the pirates. Taiwan should do no less.

Revisions of the copyright laws to bring them into compliance with TRIPS are now under discussion and are a part of current trade talks with the United States. Copyright infringement should be a public crime -- a violation that law enforcement can prosecute directly, without initial action by victims or IPR rights groups. This would enable and embolden prosecutors and judges to more seriously address IPR cases.

Market Growth

Taiwan's entrepreneurs have keenly recognized the opportunity posed by the spectacular growth of the mainland's economy. They are actively shifting traditional and lower-end hi-tech manufacturing across the Strait to take advantage of lower labor costs and other opportunities. This is a natural progression for a place like Taiwan that has become part of the First World.

The pressures of the marketplace are forcing international companies to plan for a Greater China and spread out their functions most efficiently according to the particular talents of the mainland, Hong Kong, and Taiwan. This is a new reality that Taiwan, with its maturing economy, must accept and address. Large corporations think of markets much greater than 23 million. To ignore this fact of life or adopt policies to try to counter it will inevitably lead to self-marginalization.

Taiwan businesspeople are uniquely poised to draw on the mainland's talents and resources to bolster the fortunes of the people on Taiwan. American corporations like Dell and HP need Taiwan's OEM manufacturers -- their talented managers and R&D people in Taiwan as well as their skilled assembly workers on the mainland. This is a win-win-win situation for Taiwan, the mainland, and the US.

Taiwan economic policy should be framed in the positive. Playing defense against the mainland's rapidly emerging capitalist economy may well lessen the appeal of Taiwan as an investment destination. The challenge ahead is to create the most attractive environment possible to lure foreign investment. This is important for Taiwan's "international space." An attractive investment environment is also key for this vital democracy to retain the support and interest of the international business community, whose contributions to Taiwan's economy can help continue to raise the standard of living for its people.

There are enormous possibilities ahead for Taiwan. WTO principles, IPR protection, and an embrace of globalization are essential for realizing them.

Thank you.