Taiwan's Economic Future Remarks by AIT Chairperson Therese Shaheen at AmCham, Taipei, Luncheon October 14, 2003

PR0354E | Date: 2003-10-14

(As prepared for delivery)

Current Economic Conditions - A Time to Reflect on the Formula for Success:

Taiwan's recent past is story of an economic miracle - a series of successful transitions over the last five decades, from import substitution to export-led growth, from labor-intensive products to more capital- and technology-intensive goods, from doing all operations in Taiwan to moving production off-shore to take advantage of an increasingly globalized economy.

American aid and advice made a contribution at the beginning of this process. More important have been good policy, sound economic fundamentals, a good educational system, an outstanding workforce, and the suppleness of Taiwan's industrial structure, which traditionally has been dominated by small- and medium-sized firms.

At every stage, Taiwan's companies have been able to find niches that maximize the island's unique mix of resources. As a result, Taiwan has emerged as a ranking international economy and an industrial powerhouse with hundreds of billions of dollars in two way trade.

While Taiwan's economic performance is recovering from its first recession caused, in part, by reduced demand for exports in key markets in 2001, this recession occurred after decades of rapid economic expansion, low unemployment, and low inflation.

Today, Taiwan has attained the stature of a global trading power and the 16th largest economy in the world

Over the past ten years, Taiwan has evolved into a net exporter of capital, much of it being FDI in China focused on the electronic and information technology industries.

In the process the industrial structure of the Taiwan economy has become strongly oriented towards the manufacture and export of electronics and information technology components.

Taiwan's former low-tech industrial base has mostly re-located to the PRC and Southeast Asia.

At the same time the structure of the economy has shifted over the past decade towards that of a lower level developed economy, so that in 2002 agriculture accounted for 2%, industry accounted for 31% and services accounted for 67% of domestic production.

In the past five years, Taiwan's trade with the PRC, primarily exports, has grown faster than its worldwide trade and its bilateral trade with the U.S.

While the U.S. retained its position as Taiwan's largest overall trade partner in 2002, it dropped to number two after the PRC as Taiwan's largest export market.

The Taiwan-PRC-U.S. trade links, also known as the U.S. IT global supply chain, has placed an important role in this evolution of Taiwan's external trade.

The PRC's evolution into the world's second largest information hardware producer is due, in part, to the steady migration of Taiwan industrial investment across the Strait.

The PRC has become one of the most important assembly bases for Taiwan's high-tech electronics industry. In the process Taiwan's foreign direct investment has become an important component of China's economic development and political stability.

Both cross-strait trade and Taiwan's bilateral trade with the U.S. have been focused on the electronics/ electrical machinery sectors over the past five years. On average, electronics and electrical machinery account for half of Taiwan's bilateral trade with the U.S. and two-thirds of cross-strait trade.

Much of the latter is shipped to U.S. markets after value-added processing and assembly in the PRC. In 2002, PRC electronics/ machinery imports accounted for 35.6 percent of U.S. imports from China.

Future Economic Directions - A Chance to Repeat Success

Drawing upon its successes of the past, Taiwan should address with confidence the future direction of its economy and implement reform of the financial system, improvement of the investment climate, and continue to implement WTO accession commitments.

Economic relations with the PRC, which have been steadily liberalized in recent years, also will be a major factor. Viewing the risks of foreign direct investment through the prism of opportunity is a useful practice, as is a realistic attitude toward China's economic potential. With these principles in mind, Taiwan investment in the PRC can be a positive sum game.

Taiwan's current economic situation reflects a nascent recovery from cyclical downturn in the midst of a more fundamental structural shift in the production of goods and services.

With the movement of Taiwan's information technology/electronics export platform across the straits to capture China's lower costs of production, Taiwan would do well to implement measures aimed at moving the economy to the next level of performance.

However, absent significant economic revitalization, Taiwan could face a 15-20 year period of serious economic challenge as the PRC economy increases in stature and weight and continues to replace Taiwan as the production site for Taiwan's high tech manufacturing.

Basing economic policy in the liberalizing spirit of the WTO - financial reform, regulatory transparency and economic liberalization - should help to attract new investment in services and manufacturing, with the associated R&D, that will replace its past economic dependence on original equipment manufacture (OEM)-based export-led growth.

The Government has recognized in Taiwan's Challenge 2008 National Development Plan that revitalizing Taiwan's economy is a top priority. This plan calls for an additional USD 16 billion, over six years to improve infrastructure, facilitate R&D, and create new jobs. Economic Development consumes almost 15 percent of the budget.

This kind of focus on the big economic picture coupled with a clear articulation of economic goals over time is a useful step towards rejuvenating the economy.

This process will help encourage the development of new economic assets. By defining how government can best assist businesses in their development, Taiwan can unshackle the energies of its entrepreneurs. Start-up enterprises are particularly willing to try new ideas. They can help attract investment and bring in new technologies, skills, and know-how that can contribute to new industries and services.

The Premier's Plan and Vincent Siew's economic advisory role are examples of Taiwan working to translate economic vision into an action plan. Their efforts have been helped along by constructive commentary from opposition politicians and insightful analysis from Taiwan's highly respected think tanks. All of these contributions taken together offer Taiwan an opportunity to chart an economic course with a long-term perspective and a focus on economic efficacy rather than short-term political expediency. This can do much to instill economic confidence.

Of course, as Taiwan pursues its economic vision, politically difficult steps should be identified and strategies devised to surmount these obstacles; funding must be identified and realistically put in place.

Effective implementation of the Premier's Challenge 2008 Plan and other economic initiatives requires the resolution of contradictions between economic visions at high political levels and impediments at the bureaucratic level.

A key element of reinvigorating the economy will be liberalizing and streamlining the financial and regulatory infrastructure. This can help entrepreneurs with ideas have access to capital and markets. Taiwan businessmen need to rediscover a position of economic strength on Taiwan, encouraging Taiwan and foreign investment in Taiwan to blossom again.

Taiwan should strive for financial sector stability by addressing systemic weaknesses, reducing government involvement, and creating a sound regulatory environment.

This involves fully recognizing existing non-performing loans, (NPLs), shutting down insolvent institutions, recapitalizing remaining viable financial firms, promoting effective work-outs of distressed assets, privatizing government shareholdings, ensuring a level playing field for foreign firms, and improving the supervisory framework.

Taiwan also needs to create fiscal sustainability through tax reform, especially broadening the tax base. Taiwan should also seek to ensure a greater role for markets in determining the New Taiwan Dollar exchange rate.

The implementation of disciplined regulatory transparency is also critical - open and transparent administrative procedures, consultations with interested parties before issuing regulations, provision of advance notice and comment periods, and publication of all regulations.

In addition to the faithful implementation of its WTO obligations, Taiwan also needs to continue to liberalize trade in goods and services as well as insure the highest level of IPR protection and enforcement.

The United States stands ready and willing to listen to Taiwan's concerns as it moves along this path and assist where possible, to help revitalize Taiwan's economy and restore Taiwanese self-confidence.