Mainland becomes a major force driving forward Taiwan's Economy: analysis

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Last updated at: (Beijing Time) Tuesday, March 02, 2004

Mainland becomes a major force driving forward Taiwan's Economy: analysis

Cross-Straits economic and trade relations, after two decades' development, have increasingly become an inseparable part of Taiwan's economy.

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In recent years the Taiwan economy has witnessed continuous sluggishness and has even been in a predicament of negative growth seldom seen since WWII. There is opinion from the island saying that this is a result of over-close trade ties across the Taiwan Straits caused by the mainland's "magnetism effect". The fact, however, is just the opposite. Cross-Straits economic and trade relations, after two decades' development, have increasingly become an inseparable part of Taiwan's economy. Especially since 2002, economic and trade contacts between the two sides have further become a deciding factor for the island's economic growth. In that year the Taiwan economy emerged from the previous year's negative growth to a low growth of 3.54 percent. Viewed from the demand structure supporting economic growth, the overall economic demand of Taiwan is "cold inside and warm outside", while the upturn of external demand mainly relies on the accelerated development of cross-Straits trade ties, the market of the mainland has become a major source bolstering up Taiwan's economic growth. In 2003 this upward trend continued in the Taiwan economy. Therefore, obstruction of the normal development of cross-Straits economic and trade ties actually means hindering Taiwan's economic growth.

Taiwan's economic growth mainly comes from rising external demand

Public consumption and fixed investment are the main components of Taiwan's internal demand, with the former taking the lion's share of over 60 percent in the island's current demand structure. But since 2001, the local stock market has witnessed continuous oscillation and sluggishness and the job situation has tended to become increasingly severe, resulting in the shrinkage in public wealth and income and influence on consumption capability. Plus the unclear economic prospects and the public's inadequate confidence in and their low wishes for consumption, the annual growth of public consumption only remained at a low level of 1.04 percent and 1.91 percent in 2001 and 2002 respectively. Since 2003, efforts have been made to boost public consumption but failed due to the adverse effect of the storm of SARS, the economy still grew by 1.14 percent in the first quarter, but it saw an unprecedented negative growth in the second quarter.

Fixed investment is another important component of the island's internal demand, as well as a major engine for economic growth. But since the beginning of the 21st century, the problem regarding the island's deteriorating investment environment has become more prominent. Besides the factor of global economic doldrums, there are two reasons for this, on the one hand, the island's turbulent political situation and the continued tension of cross-Straits relations have seriously dampened the public's confidence in investment; on the other hand, the authorities' vacillating financial and economic policies and low administration efficiency have blinded investors to the direction and prospect of economic development. As a result, private investment dropped sharply, which decreased as much as 29.2 percent in 2001 from the previous year, and only picked up 1.56 percent in 2002 and 1.3 percent in the first quarter of 2003. As for public investment, except for a slight increase in public-run undertakings in 2001, both government investment and investment in public-run undertakings saw a negative growth in the ensuing two years.

Due to the noticeable decline in various internal demands, the contribution of the island's internal demand to economic growth sank by a big margin since the beginning of the new century. According to comprehensive statistics from the accounting department of the local "Executive Yuan", in 2001 the island's economic growth rate was minus 2.18 percent, of which internal demand declined 5.18 percent in total, contributing minus 4.93 percentage points to economic growth. In 2002 the local economic growth rate rose again to 3.54 percent, whereas internal demand grew only 1.31 percent, contributing 1.21 percentage points to economic growth, with the proportion of which standing at 34.12 percent. Obviously, internal demand has ceased to be a major force driving Taiwan's economy forward.

With respect to external demand, the island's foreign trade gradually regained growth from the sharp recession in 2001 alongside the progressive recovery of the global economy since 2002 and particularly the accelerated development of cross-Straits trade ties. Customs statistics showed that in 2002 Taiwan's total foreign trade value reached US$243.23 billion, including US$130.64 billion worth of exports, or 6.3 percent up over the previous year, and US$112.5 billion worth of imports, or a 5.0 percent increase, the total surplus value being US$18.05 billion. Calculated according to public income, Taiwan's commodity and labor export increased 9.67 percent in 2002, while import grew 6.15 percent. Taking the two figures together, the external net demand contributed 2.33 percentage points to economic growth, the proportion of which stood at 65.82 percent. In 2003 Taiwan's export continued the upward trend, which increased 7.3 percent in the first half of the year and restored the two-digit growth of 13 percent in August.

It's evident that Taiwan's economy has turned from economic recession to low growth since 2002, viewed from the aspect of demand, it comes mainly from external demand and is propped up especially by export growth.

The upturn of external demand is bolstered mainly by mainland market

America has long been the biggest export market of Taiwan, which plays an important role in the island's economic development. But this situation took a dramatic turn in 2002-the mainland for the first time replaced America to become the largest export market for Taiwan, the importance of the mainland to Taiwan's economic development has increased with each passing day.

As mentioned above, since 2002 Taiwan's overall foreign trade has gradually resumed its growth and proceeded to become a main factor supporting economic growth. But it is noteworthy that the trade growth chiefly came from the dramatic increase in cross-Straits trade. During the year Taiwan's export to its major trade partners-the United States, Japan and EU--all declined by 3.2 percent, 6.0 percent and 7.9 percent respectively. By contrast, cross-Straits trade witnessed a rapid growth. According to statistics from the local trade administration, in 2002 Taiwan's total trade value with the mainland came to US$41.01 billion, up 36.9 percent over the previous year, of which Taiwan's export to the mainland stood at US$33.06 billion, up 37.4 percent, and its import from the mainland at US$7.95 billion, up 34.7 percent. Accelerated cross-Straits trade development is significant to Taiwan's overall trade and proceeds to play a decisive role in the island's economic growth. On the one hand, the proportion of cross-Straits trade to Taiwan's total foreign trade value kept rising to 16.9 percent, and the proportion of Taiwan's export to the mainland in the island's total export value rose to 25.3 percent, while the figure for the American market in the same period dropped to 20.5 percent. The mainland for the first time replaced America to become Taiwan's largest export market. On the other hand, Taiwan's trade surplus with the mainland for the first time exceeded US$20 billion, i.e., reaching US$25.11 billion, while during the same period the island's overall foreign trade surplus came to only US$18.05 billion. In other words, if cross-Straits trade were deducted, the island's foreign trade would have a trade deficit of US$7.06 billion in 2002 and the contribution of external demand to Taiwan's economic growth would have been a negative number. In 2003 cross-Straits trade continued to show a trend of fast growth. During the first eight months Taiwan's export to the mainland increased by 1.12 fold, while its export to other countries and regions only grew 0.1 percent.

There are many reasons for the extraordinarily fast growth of cross-Straits trade in 2002. Firstly, in the slow recovery of the global economy, almost only the mainland economy distinguished itself with an 8 percent high-speed growth. Especially that the mainland actively fulfilled its WTO commitments such as lowering tariffs, meanwhile, the influx of foreign investment in the mainland has produced the effect on promoting trade, the mainland's total foreign trade value in the whole year of 2002 surpassed US$620 billion. Exports by the world's major trade countries and regions to the mainland mostly assumed an upward trend, and Taiwan was no exception. Secondly, the two sides of the Straits joined WTO respectively at the end of 2001 and in early 2002, bringing new improvement in the environment for cross-Straits trade development. As new members of the WTO, both sides promised to further open internal markets, reduce tariffs and remove non-tariff barriers. Meanwhile, Taiwan authorities were also forced to gradually relax the previous restrictive cross-Straits trade, consequently, cross-Straits trade relations gradually developed in a "two-way and direct" manner. These changes have laid a good foundation for the expansion of cross-Straits trade volume. Thirdly, Taiwan's accelerated investment in the mainland has further boosted the growth of trade ties. Since 2002, attracted by the mainland's good economic trends and prompted by the needs of their industrial restructuring, Taiwan businessmen have continuously quickened the pace of investing in the mainland. According to statistics from the island's investment auditing department, in 2002 Taiwan businessmen invested US$3.859 billion in the mainland (excluding US$2.864 billion registered later), up 38.60 percent over the previous year. During the first nine months of 2003, Taiwan businessmen invested US$3.26 billion in the mainland, a 21.46 percent year-on-year increase.

In a word, the Taiwan economy's overall demand in recent years was "cold inside and warm outside", mainly depending on the resumption of rapid export growth to support low-speed growth of the economy as a whole. During the interval, the importance of the fact (about the dramatic growth of Taiwan's export to the mainland and the status of the mainland as the biggest export market for Taiwan) to the island's economy is self-evident.

Hindering cross-Straits ties means hindering Taiwan's economy

Cross-Straits trade ties have become a major force driving the island's economy forward, it is, however, regrettable that Chen Shui-bian has been denying the actually existed "One China" consensus since taking office, he even dished out the theory "Each side is a country" and thus caused tension between the two sides. Regarding their trade policy toward the mainland, Taiwan authorities, under the strong pressure, announced in late 2001 adjustment of their "no haste, be patient" policy into "active openness and effective management", they also adopted some concrete measures to ease restriction on cross-Straits trade ties. When the matter viewed as a whole, however, the local authorities are still hindering and procrastinating the normal economic and trade contacts across the Straits, as a result, the development of cross-Strait relations to-date still cannot shake off the "indirect, one-way and non-governmental" lopsided pattern.

Since cross-Straits trade ties have become an extremely important component of Taiwan's economy, hindering the ties is, in fact, hindering the island's economic growth. Therefore, if Taiwan authorities really want to shake off their years-long economic recession and take the interests of local people into consideration, they should strategically abandon the way of thinking featuring imposition of "restrictions" on cross-Straits trade ties, and instead, take practical actions to promote normalization of cross-Strait economic and trade ties as quickly as possible.

The author is Deng Lijuan, a professor with Taiwan Research Center of Xiamen University; an abridged translation of the article by People's Daily Online

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