TAIWAN

Latest Development

Taiwan economy contracted by 1.9% in the first three quarters of 2001. While exports declined by 17% in Jan-Nov, domestic demand, especially capital investment, also weakened.

Taiwan will formally become a WTO member on 1 January 2002. Taiwan has committed to lower its average tariff rate from the current 8.2% to 5.54%. The services sector will also be further liberalized.

Taiwan further relaxed the restrictions on investment in the mainland under the “active opening, effective management” policy announced in early November 2001. Restrictions on imports from the mainland will also be removed under WTO's MFN principle. However, it is expected that Taiwan will revise the relevant import management regulations to prevent sudden surge of imports from the mainland.

Current Economic Situation

 

Taiwan economy slowed down markedly in 2001 after growing by 5.9% in 2000. Dragged down by contracting demand in the export markets and weakened domestic demand, especially in capital investment, the economy declined by 2.4% and 4.2% in the second and third quarters of 2001 respectively. For the first three quarters of 2001, real GDP contracted by1.9% with gross fixed capital formation dropped by 15.9%. Private consumption growth also slowed down to 1.2% in the first nine months comparing to a 4.9% increase in 2000. In view of these, the government revised downward its GDP growth forecast for 2001 from a 0.37% decline to a contraction of 2.1%. The Council for Economic Planning and Development predicts the economy to recover and grow by 2.23% in 2002.

To stimulate economic growth, the government put together an additional spending package at NT$61.6 billion (US$1.8 billion) in mid-2001. The monetary authority also adopted a more accommodating monetary policy. After several subsequent reductions, the discount rate was lowered to 2.25% on 8 November, comparing to 4.7% in January 2001.

The weakening economy has also induced downward pressure on the general price level. The consumer price index (CPI) dropped by 1.1% in November, resulting in a lower average rate of increase at 0.15% for the first eleven months of 2001. The government projects CPI will go up by 0.7% in 2002.

Hi-tech industries are significant for the economy of Taiwan, which has become the world's second largest integrated circuit design and production centre with total output of US$2.6 billion in 2000. Besides, Taiwan ranks the world's top producer of a number of computer products. However, due to a general downturn in the information technology sector, production of a number of products including PC and scanners decreased in 2001. In the event, the output of the manufacturing sector dropped by 8.6% in the first ten months of 2001, and unemployment rose to a 15-year high at 5.3% in October 2001.

The Taiwanese government is planning to strengthen Taiwan's position as a high value-added manufacturing centre. The Economic Development Advisory Conference (EDAC) has put forward recommendations in August 2001 to strengthen industrial competitiveness, including sharply expanding official R & D spending. The output value of knowledge-based industry is expected to continue growing in the coming years.

The Hsinchu Science-based Industrial Park is taking a lead in the hi-tech industry in Taiwan. By end-2000, there were 289 companies operating in the Park with total business turnover amounting to US$28.2 billion. The Park's exports totalled US$15.3 billion (+40.8%) in 2000. Japan was the Park's major export market, accounting for 23% of the Park's total exports, followed by the US (19%), Hong Kong (13%), Singapore (8%) and the Philippines (7%).

The government has taken more active steps in liberalizing the economy in the last decade, including privatization of state-owned companies. The government successfully raised NT$382 billion through more than 50 assets sales between 1989 and 1999. But the response on privatization this year has been disappointing when the government tried to sell the largest state-owned enterprise, Chunghwa Telecom. According to the original schedule, two-thirds of the company was supposed to have been floated during 1999 and 2000, but so far the government has managed to float a small portion only, partly due to the general lackluster of telecommunications stocks.

 

Foreign Trade

 

Suffering from the weak world demand, especially in electronic products, Taiwan's exports decreased by 17.3% to US$112.6 billion in the first eleven months of 2001.

The poor performance of exports has in turn affected imports as Taiwan depends on imported components and capital equipment. The weak domestic investment sentiment has also contributed to the decline in imports. In the first eleven months of 2001, imports dropped sharply by 23.8% to US$98.7 billion.

 

Foreign Investment

 

After growing by 81.8% in 2000, the total amount of approved foreign direct investment into Taiwan declined by 29.5% in the first ten months of 2001 to US$4.3 billion. During the first ten months of 2001, major inward investments came from the US, Virgin Islands, Cayman Islands, Japan, Singapore, Netherlands and Hong Kong.

Investment projects were mainly engaged in banking and insurance sectors, electronic & electrical appliances, wholesale & retail sectors. These leading sectors accounted for 64% of the total approved inward investment in the first ten months of 2001.

In 2000, Taiwan's outward investment rose sharply by 55.3% to US$5.1 billion. However, the approved amount suffered a set back beginning in the third quarter, giving a mere 4.9% increase for the first ten months of 2001. In the first ten months of 2001, apart from Virgin Islands and Cayman Islands, the US was the leading destination for outward investment, reaching US$878 million. Other major destinations for the period include Canada, Singapore, Malaysia and Hong Kong.

Banking and insurance are the major sectors in outward investment, followed by electronic & electrical appliances. These sectors together accounted for 70% of the total approved outflow of direct investment in the first ten months of 2001.

 

WTO Accession and Import Policy

 

Taiwan gained approval to join the WTO at the WTO Ministerial Conference in November 2001 and will formally become a full member on 1 January 2001. In its bid to join WTO, Taiwan has committed to further liberalise its merchandise regime as well as opening up the services sector to foreign investments.

Taiwan's WTO accession will lead to further reduction of import tariffs. Taiwan has committed to lower its average tariff rate to 5.54% from the current 8.2%. For industrial products, the tariffs will be lowered from an average of 6.03% eventually to 4.15% by 2004. For agricultural products, tariffs will be lowered from 20.02% eventually to 12.9% by 2007.

 

 

Although the reduction in the average level of industrial tariffs is not significant, specific products, which used to have high tariff protection, will have more substantial reductions. For example, the current average tariff on automobiles is around 44% and will be reduced to 16%. Certain light consumer goods will also enjoy a more marked tariff reduction. For example, tariff rates on toys, which stood at 4.5% to 9% currently, will be reduced to zero percent.

There are various concession measures affecting different professional or services sectors. For example, foreign lawyers are allowed to practice law of his/her home jurisdiction or international law independently. Advertising services, real estate services, management consulting services and convention services etc. will also be opened up to foreign investors. The financial services sectors also enjoy various degree of liberalization. While foreign banks still need to fulfill certain requirements (a foreign bank should have a total business volume of at least US$1 billion with the banks and major enterprises of Taiwan in the previous three calendar years before setting up a branch in Taiwan), certain types of business that banks can conduct are free from any restriction, such as financial leasing and participation in the issue of short-term bills. Regarding the infrastructure sector, Taiwan has agreed to participate in the WTO Agreement on Government Procurement. Foreign companies in principle can compete on an equal footing for projects in Taiwan. However, reportedly, Hong Kong's market access may be restrained by Taiwan's possible restrictive measures over companies with significant mainland interest.

 

Cross Straits Relations with Chinese Mainland

 

In late August 2001, Taiwan's President endorsed the recommendations by the Economic Development Advisory Conference to change the policy on cross-strait economic relations. Major initiatives include:

§         Promoting the development of cross-strait economic interactions

§         Changing of   "no haste, be patient"  policy to "active opening, effective management

§         Allowing mainland investment in Taiwan

§         Lifting the ban on direct links

§         Restoring cross-strait negotiations

On 7 November, Taiwan formally announced the details of the “active opening, effective management” policy. Taiwan business can now directly invest in the mainland without going through a third place. The US$50 million cap on individual investment in the mainland will be scrapped. Only projects with investment amount greater than US$20 million will need to go through a special inspection process while the review process for projects below US$20 million will be simplified. Taiwan has also decided to allow mainland investment in Taiwan's land and real estate sectors.

Indirect imports from the mainland are restricted. As of November 2001, 43.3% of all the goods items from the mainland were still prohibited from imported into Taiwan. Another 7.9% were allowed to import with conditions, for example, only garment items which are processed in the mainland with textiles coming from Taiwan can be re-imported into Taiwan. However, these restrictions on mainland imports will be removed under the WTO's MFN principle, though it is believed that Taiwan will revise the relevant import management regulations to prevent sudden surge of imports from the mainland.

In Jan-Oct 2001, Taiwan approved indirect investment projects in the Chinese mainland amounted to US$2.3 billion (+15.6%). Investments mainly concentrated in Jiangsu, Guangdong and Fujian. In the first ten months of 2001, Jiangsu accounted for 51.8% of the total, an increase of 21.5%, while Guangdong accounted for 28% of the total, a decline of 11.6%. According to the mainland's statistics, by June of 2001, more than 48,000 Taiwan firms had invested in the mainland with contractual & actual utilized amounting to US$51.2 billion and US$27.5 billion respectively. The majority of them routed through Hong Kong. Famous Taiwanese companies with significant investment in the mainland include Uni-President Enterprises (NT$12.7 billion), Chi Mei (NT$1.5 billion) and FPG (NT$5.7 billion).

Volume of trade across the strait represents a significant part of Taiwan's external trade. In 2000, this figure surpassed US$30 billion to reach US$32.4 billion(+25.7%), accounting for 11.2% of Taiwan's overall external trade. However, starting from 2001, both exports to and imports from the mainland dropped. Exports to the mainland declined by 10.7% to US$17.4 billion while imports dropped by 7.8% to US$4.3 billion in the first nine months of 2001. Taiwan's top-10 export products to the mainland included electrical equipment and parts, machinery and parts, plastic products, steel, man-made fibers, industrial-use textiles, organic chemical products, optical and photo-taking instrument and parts, copper products and polyester. On the other hands, electrical equipment and parts, machinery products and parts, steel, mineral fuels, zinc products, toys, sporting goods, organic chemical products, cement products, bedding equipment and lighting fixtures are the major items that will be imported by Taiwan from Chinese Mainland.

 

Economic Relations with Hong Kong

 

Hong Kong serves as an important transshipment base for cross-strait trade. In 2000, indirect Mainland-Taiwan trade via Hong Kong amounted to US$11.6 billion (+17.3%). Of which, re-exports of Taiwan goods to Chinese Mainland were US$9.6 billion while re-exports of Mainland goods to Taiwan were US$2.0 billion (+21.6%). For the first nine months of 2001, the value of re-exports of Taiwan goods to China decreased by 6% to US$6.7 billion and re-exports of Mainland goods to Taiwan dropped by 15% to US$1.3 billion.

In the first ten months of 2001, Taiwan was Hong Kong's 4th largest trading partner with total trade of US$15.5 billion. Taiwan was Hong Kong's 6th largest export market with total export amounting to US$3.8 billion. Hong Kong's exports to Taiwan mainly consisted of semi-conductors, electronic parts, electrical machinery, telecommunications equipment, etc.

Reciprocally, Hong Kong is one of Taiwan's major trading partners. In Jan-Oct 2001, 21.7% (US$22.2 billion) of Taiwan's total exports were to Hong Kong. In terms of imports, Hong Kong accounted for only 1.7% (US$1.5 billion) of Taiwan's total.

In Jan-Oct 2001, Taiwan approved 59 investment projects amounting to US$38.5 million (+20.4%) in Hong Kong. Major investment sectors were trading services, finance & insurance, electronics & electrical manufacturing, wholesales & retail, etc. Accumulated till Oct-2001, there were over 640 Taiwanese investment projects with total investment of US$1.2 billion in Hong Kong.

Reciprocally, there were 93 Hong Kong-invested projects amounting to US$140 million in Taiwan in Jan-Oct 2001. Accumulated till Oct-2001, Hong Kong invested more than 2,100 projects in Taiwan amounting to US$3.7 billion. Those projects mainly involved in finance & insurance, electronic & electrical manufacturing, services sector, etc.

Hong Kong's Trade with Taiwan

 

	1999		2000		2001 ( Jan-Oct )
(US$ million)	Value	Growth	Value	Growth	Value	Growth
Total Exports	4,226	-2.7	5,103	+20.8	3,756	-12.3
Domestic Exports	654	-21.6	783	+19.7	568	-12.4
Re-exports	3,572	+1.8	4,320	+21.0	3,188	-12.3
Imports	12,875	-3.5	15,919	+23.6	11,768	-11.7
(of which re-exported)	9,225	+0.2	11,275	+22.2	8,659	-8.1
Total Trade	17,101	-3.3	21,022	+22.9	15,524	-11.8
Trade Balance	-8,650		-10,817		-8,011

Source: Anhui Statistical Yearbook and State Statistical Bureau, CEIC      

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