Island of trade opportunity - Taiwan - Special advertising section

Nation's Business, Dec, 1987

Island Of Trade Opportunity

When the Kuomintang government withdrew to Taiwan in late 1949 following the Communist takeover of the mainland, the island's future looked bleak at best. Inflation was rampant, unemployment was high, production was down sharply, the government had no funds, and natural resources were limited.

The Nationalist government, led by the late President Chiang Kai-shek, saw the urgent need for drastic change if his government was to survive and the island was to resist Chinese Communist forces that were threatening to overrun the island. The Nationalists, with economic and military assistance from the United States, embarked on a program of economic and political reforms that would later turn the small agrarian island into one of the fastest growing economies in the world.

In the early 1950s, the Republic of China (R.O.C.), like other developing nations, followed a policy of promoting domestic, import-substituting industries by means of protective tariffs and import quotas. The exchange rate was also kept undervalued in the hope this would keep prices stable. This policy resulted in trade deficits and a serious shortage of foreign exchange, and in the late 1950s, as the limited domestic market became saturated, economists persuaded the government to devalue the local currency and switch to a policy of promoting exports.

By 1965, U.S. aid, which had averaged $100 million (U.S.) annually since 1951, had come to an end as the economy began to take off. Just three years later the trade balance, which previously had been in favor of the United States, began to tilt in favor of the R.O.C. Since then, two-way trade between the United States and the R.C.O. has risen sharply, from $270 million in 1965 to $24.4 billion in 1986.

Today, the tiny island, one third the size of Virginia, has become the 14th largest trading nation in the world, with global trade in 1986 reaching a record-high $64 billion and current foreign-exchange reserves of more than $68 billion.

However, the R.O.C. may have become too successful. America's huge trade deficit has led to strong protectionist sentiment in the United States, with calls for import quotas and restrictions growing stronger.

The politically isolated island, which has traditionally relied on the United States, sends almost 50 percent of its exports to America, placing it in an extremely vulnerable position. With a $15.7 billion surplus in trade with the United States last year, and critics citing trade protectionism in the R.O.C., the country has become the No. 2 target, after Japan, in the war to reduce America's ballooning trade deficit.

However, simple statistics do not accurately explain the whole trade picture. First, the two countries are at different stages of industrial development. The R.O.C. enjoys a comparative advantage in producing labor-intensive goods that the United States cannot produce economically. Were these products to be kept out of the U.S. market, American producers would not benefit, and the overall U.S. trade deficit would not be changed. Other countries, such as South Korea, Singapore and mainland China, would replace the R.O.C. as suppliers, thereby only shifting the source of the deficit. And if the United States chose to limit imports from all such countries, the result would be higher priced goods for American consumers.

Furthermore, though Japanese products compete directly with those of U.S. manufacturers, R.O.C. products do not. Very few of the island's manufacturers export proprietary products to the United States. In 1986, 75 percent of Taipei's exports to America were products sold under U.S. brand names. Schwinn, the American bicycle producer, imports 1 million bicycles a year from Giant Manufacturing in the R.O.C. This accounts for 70 percent of Schwinn's sales in the United States.

Another little known point is that a significant portion of Taipei's trade surplus with Washington can be attributed to U.S. firms manufacturing in the R.O.C. It is estimated that 15 to 20 percent of the $15.7 billion surplus in 1986 can be attributed to imports to the United States by American manufacturers in the R.O.C.

Attracted by the island's low labor costs and high investment returns, a large number of foreign firms, such as General Electric, Texas Instruments, General Instrument, Atari, TRW and Mattel, have established factories there, using the R.O.C. as a base for exporting around the world. "If we had to rely on local parts, prices would be much higher in the United States," says James Klein, president of General Instrument of Taiwan. "If we weren't offshore, we couldn't compete with the Japanese worldwide."

The trade imbalance is also distorted by things that are not included in the trade figures, such as $700 million annually in military sales to the R.O.C., profits of American banks and other service-oriented industries and a sizable amount of U.S. exports that come into the island via Japanese trading companies.

Another important factor is the difference in the sizes of the markets in the two countries. The U.S. market is 10 times larger than the R.O.C. market.