*Looks Back and Looks Ahead of Taiwan and Chinas Economic Linkage

March 25 2013Wuu-Long LIN ( ) wuulong@yahoo.com

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Education and ExperienceStanford Univ. Ph.D.National Taiwan U., National Sun Yat-sen U., Beijing U., Harvard U., Rice U., Kansas State U, U. of the West (present Adjunct Professor).Former Chief of Enterprise Management Research, United Nations (24-year). Visiting Mainland China about 20 times and about 40 countries to promote economic development.Publication of 27articles/reports on China-Taiwan economies with about 1800 pages.

Seven Themes1/7 Some unique features of Taiwan economy.2/7 Some unique features of Mainland China economy.3/7 Past economic relation: Can history teach us a lesson?4/7 Present economic cooperation: Are we better-off now?5/7 Future economic integration: Will next generation be affected?6/7 Political economy/Uncertainty.7/7 Recommendations

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1/7 Some Unique Features of Taiwan Economy (1)During 1970s-1980s, the fastest growth in the world, average of real GDP annual growth 9.24 %. GDP per capita increased from US $ 231 in 1952 to $ 20,920 in 2012 (estimate). The best development performance in the world: high growth, stable price, low unemployment rate, fairness of income equality. But it is deteriorating now, caught in the so called high-income trap (high-tech side effect and big corporation evil. Paul Krugman).

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Some Unique Features of Taiwan Economy (2)*GDP per capita in PPP (Purchasing Power Parity with 1.93) in 2011 was $39,976, being ranked as 28 th in the world (surpassed United Kingdom, France, Japan since 2010).* The best successful model of the recipient of the United States foreign aid with $ 1.5 billion in economic aid during 1951-1965, being accounted for 40 % of domestic investment and imports, and 6% of GDP. (additional Military aid $ 2.5 billion).

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Some Unique Features of Taiwan Economy (3)By learning from the U.S. experience, Taiwan was the first one to create/innovate two external development models which have been adopted by many countries: Export Process Zone in NanZi/KaoHsiung and Industrial Park in HsinChu.Very successful development in IT industries. The following products (including offshore production) accounted for more than 80 % of worlds share: Mask ROM, Notebook, Cable CPE, Tablet Personal Computers, Motherboards.*

Some Unique Features of Taiwan Economy (4)Cross road for further development: 1. Risk of hollowing out industries due to too heavy dependence on China economy. 2. Difficulties of globalization (sustainable & comprehensive). 3. Slow innovation for further development.

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2/7 Some unique features of Mainland China economy (1)*Very high growth rates (9-10 % yearly) for 3 decades since open door policy 1978/9, breaking the worlds historical record on GDP growth. It also means growing marketing potentials, predicting to consume 2/3 of worlds luxury products such as watch, perfume by 2015. * Note: Provincial GDP reports have been questioned overestimate. The so-called Premier LI Kequiangs GDP computation is based on 3 indicators of electricity, railroad transportation and bank loans. Its GDP estimate was 3.4 percentage points lower than government report of GDP 7.4 % in the 3rd quarter of 2012. (Wall Street Journal).*

Some unique features of Mainland China economy (2)FDI inflow to China with $59 billion in the 1st half of 2012 surpassed U.S. as top FDI destination.China official estimate of total export and import in 2012 ($ 3.86 trillion) was second to U.S.($ 3.88 trillion).Total GDP is No.1 in Asia, and No.2 in the world. Will surpass U.S. as No. 1 in 2016 (by OECD), and by 2030 (by U.S. National Intelligence Council). Surpassed European Union in 2012. GDP per capita ranks 122th lowest in the world in 2011 ( US $8,400 in PPP 1.57, being only 17.4 % of the United States). To be No 1 during 2050-2103, predicted by Stanford Prof. Morris. (Say No by Harvard Prof. Nye).

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Some unique features of Mainland China economy (3)Income per capita in PPP will reach $ 15,000 by 2018 (Expecting to become democracy based on international experience). World No. 1: China reserves of foreign exchange (98.2%) and gold (1.8 %): $ 3,213 billion in 2011 (8.2 times of Taiwan with $ 391 billion, world no. 6.) (See cia.gov FactBook). Note: It is irony that U.S. borrowed money from China, $1.2 trillion (owning 26 % of U.S. foreign debt), but U.S. is building up military in Asia, a kind of containing China. China earns trade surplus from U.S., but buys fighter aircrafts from Russia.But Chinas gold reserve is only 13 % of U.S. in 2010.

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Some unique features of Mainland China economy (4)The U.S. assets in China are more than Chinas assets in the U.S. The net debit of China to the U.S. was estimated with at least $750 billion in 2011. The assets include: bonds, stocks, foreign direct investment (FDI), air planes leasing, banking, etc. Dividend earnings by China government for owning U.S. bonds are lower than commercial earnings by U.S. private investment in China. Who is smarter?*

Some unique features of Mainland China economy (5)* The 18th National Congress of the Communist Party of China in Nov. 2012 set a goal of doubling total GDP from RenMinBi(RMB) 40 trillion in 2010 to RMB 80 trillion in 2020, implying an annual growth rate of 7.2 %. It is reachable based on experience of Japan in 1970s, and Taiwan and South Korea in 1980s. Strategy: Evolution not Revolution.*

Some unique features of Mainland China economy (6)The 2020 goal is to succeed (phrase used in the past construct) as a well-to-do/comfortable society. ()().Disposal income per capita will reach US $ 6,000 in 2020 (based on current exchange rate and inflation adjustment), being a middle income class in the world.Can low-and-middle income class double their income share ? Not easily/likely.*

Some unique features of Mainland China economy (7)(1) Chinas household Gini index increased rapidly from 0.41 in 2000 to 0.61 in 2010 (0.4 as a warning sign in international standard) , being one of the highest income inequality in the world. Beijing GDP per capita with more than $10,000 reached the same level of some developed countries. However about 183 million (13 % of China total population) are under one dollar a day.(2) The highest 10% household income group owns 57% of income (40.6% in the U.S.).(3) The 400 richest persons own 10.45% of GDP in 2010 (10% in the U.S. in 2011)

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Some unique features of Mainland China economy (8)(4) Caught in so called low & middle income trap (low labor productivity/wage, increasing social welfare). (5) 3-in-1 approach. (a) Government: Reduce increase in public spending/tax. Transparency. (b) Enterprises: Privatization. Divert subsidy fund from public enterprises (PEs) to small and medium enterprises (SMEs), thus benefiting the working class. Increase PEs payment to Government from present 5-10 % to 25-30 %, revenue increase RMB 340-450 billion. Increase 1 % interest rate in saving deposit will increase people earning RMB 400 billion. (c) People: reduce tax on SMEs and low & medium income group. Social welfare. Government support on SMEs operation and marketing efficiency.

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Some unique features of Mainland China economy (9)(6) Bottom-up is important in reducing income inequality. While rich people spend limited amount of money on consumption, poor people have few money to spend. Good strategy : high growth for low income group, middle growth for middle income group, low growth for high income group. China should play a larger role/duty in globalization (sustainable & comprehensive). Among others, (a) RMB exchange rate be changed from present government management to free market floating.

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Some unique features of Mainland China economy (10)Note: The U.S. did not put China as government manipulation on exchange rate (Nov. 2012), but emphasizing the need for further appreciation. 6.22231.0 in 11/2011. 201062012119.3%12.6 %. Note: As a low-middle income per capita, precautions must be made on currency appreciation to avert severe side effects such as price inflation, hurting export.

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Some unique features of Mainland China economy (11)(b) Play WTO rules. No government subsidy to PEs so as to have a fair competition in doing international business.In many cases, Chinas tricky/tactical way of indirect/implicit government subsidy to PEs is to get loans from public owned banks with low interest and become bad loans later. (Not against WTO rules ?).Enterprises loans as a ratio of GDP was 107% in 2011(90% as a danger point based on OECD).

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3/7. Past Economic RelationNo contact: 1950s, 1960s, early 1970s under the martial law. Exception: Chinese herb, smuggle.Martial law repealed on 7/15/1987(by then President Chiang Ching-kuo). Taiwan official term Economic Relation was used after repealing the period of mobilization for the suppression of communist rebellion on 5/1/1991(by then President LEE Teng-hui).Taiwan policy coincided with China Open Door policy in 1978/9 (attracting foreign investment, particular Hong Kong and Taiwan business in 1980s & early 1990s). *

Semi-official Trade(1) Taiwan official term indirect trade, mainly through Hong Kong. (Causing unlawfully to bypass Hong Kong, cheated shipping route diary).(2) unilateral economic transaction, not bilateral agreement duly signed by both governments.(Causing unclear statistics). (3) Taiwan export to Mainland China was OK, import to Taiwan was mostly restricted, thus increasing trade surplus.*

*Major Development of Cross-Strait Economic Relation (1)Taiwan trade surplus from Mainland China as a ratio of Taiwan total trade surplus was nil in 1970s, a peak 281% in 2008, 177% in 2011 (a much higher ratio if including Hong Kong, 294 % in 2011). That is, Taiwan was trade deficit if without trade with Mainland China.Taiwan exports to Mainland China and Hog Kong as a ratio of Taiwan total export increased from 3.8% in 1980-1993 average to about 40 % in last 10 years; being more than 10 times increase between two periods.Mainland China exports to Taiwan as a ratio of Mainland China total export, increased from 1.1 % in 1980-1993 average to 2.3% in 2010; being 2.1 times increase.

*Major Development of Cross-Strait Economic Relation (2)Taiwans FDI as a ratio of Mainland Chinas actual FDI utilization increased from nil in 1970s to peak 11.3 % in 1993, only second to Hong Kong, 62.8 %. A total of both areas was 74.1 %, being a great contribution to Chinas economic growth in that period.High dependence on Mainland China. increased from nil in 1970s to 10% in 1991 and 384% in 2010 (ECFA signed in 2010).The so-called sun set industries in Taiwan revived in Mainland China. My earlier study challenged fear of hollowing out of industry in Taiwan. End result was upgrading in industry and technology in that time.

*No Haste, Be Patient (1)Sept. 14 1996 by then President LEE Teng-huiTaiwans policy restrictions imposed onMainland China. (We agree in principle, butdisagree in practice).1. Ceiling of FDI US $50 million per project.2. Limitation of high-tech FDI. 3. Limitation of long-term FDI in infrastructure such as power plants, railroads, airports.

*No Haste, Be Patient (2)Its objective is to prevent hollow-out of Taiwans capital and high-tech to China.This policy has been modified/relaxed periodically since its implementation in1996 in accordance with mutual respect and without hostility.Note: U.S. and many countries have imposed restrictions on foreign trade & investment for national security, particular to unfriendly countries, including China.

*4/7 Present Cross-straits Economic Cooperation Framework Agreement (ECFA, Not Arrangement as preferred by China ) Effective 9/12/2010. 1. Similar to Free Trade Agreement (FTA) on export tariffs privilege. Not the same as equilateral basis of WTO principle (China officials have recently complained its unfairness to China)2. Under a WTO special article, Taiwan joined it as an economic region (not as country). It should be agreed by China, explicitly recognizing one China policy.3. Aug. 9 2012 will not have an international arbitration by World Bank, WTO

ECFA vs. FTAECFA includes both trade and investment; FTA includes mainly trade.ECFA; expecting to encounter more difficulties in the course of implementation. FTA; enjoying sweeter with more implementation*

Cross-Strait Economic Cooperation Committee (ECC)(1/5/2011). Not Government to Government . Taiwan : Straits Exchange Foundation.. Mainland China : Association for Relations Across the Taiwan Straits.., . . . , (World Bank, WTO) *

*Advantages of ECFA (1)Strengthening Taiwans competitiveness & avoid Taiwans further marginalization when Association of SouthEast Asian Nations (ASEAN) 10 plus 3 signed an FTA with China in 2010. Taiwan with about 40% of exports to Mainland China & Hong Kong will pay 5-10 % tariffs above ASEAN without ECFA.Prospect of FTA with other countries such as Singapore (3.6% of Taiwan foreign trade, expecting completion of negotiation by June 2013 ), (0.2%), . (Not good outcome by now)Expecting to start negotiation by March 2013 (Trade and Investment Framework Agreement, TIFA). A long way to go based on U.S. and S. Korea 6-year negotiation starting 2007, further delay by US Congress approval and international politics. Effective 3/15/2012.

*Advantages of ECFA (2)Before ECFA, Jan-May 2009, Taiwan economic bottleneck, GDP growth -10.78 % , exports growth -34.84%, 50-year worst in Taiwan. Immediate After ECFA, in 2010, higher GDP growth,10.7%,24-year high (-1.8 % in 2009). Lower unemployment rate 5.2 % (5.9% in 2009). (But, in 2012, GDP growth 1.25 % (estimate), implying ECFA not a panacea). : US $122.6 million in 2011, estimating $ 330 million in 2012. No tariffs started Jan. 2013.

Advantages of ECFA (3)Benefit to Taiwan: textiles, plastics, steel, petrochemicals, petroleum, machinery etc.Expanding Taiwan economies of scale for further development. With 23.2 mil. population (rank 49th in the world), domestic demand is not sufficient for higher growth, thus the need for external market. China with 1.343 billion population ( 4.3 times of U.S., 314.16 million in Aug. 2011) is the great attraction for consumer market.

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Advantages of ECFA (4)Facilitating Taiwan businessmen in China to return-back Taiwan on investment, reached NT$ 51.8 billion in 2012, more than the target NT$ 50.0 billion. 2013 target NT$ 100.0 billion.Note 1. Many Taiwan businessmen in China have encountered difficulties in running business due to rapid increase in wage and tax (even higher than Taiwan for some sectors), unexpected changes of government policies, high competition by local businesses, thus facing bankruptcy. Thus, they have diverted investment to Vietnam, Cambodia (labor intensive enterprises), and to Taiwan (capital intensive enterprises).

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Advantages of ECFA (5)Note 2: Many inland provinces are successfully attracting their migrant workers in coastal areas to return back home. This factor and booming business in Guangdong province, for instance, will cause labor shortage more than previous years 0.4 million after 2013 Spring Festival. Thus, companies will have to increase workers wage, and government will have to consider further raising the minimum wage.Note 3: More than 40 thousands Taiwan businessmen in China closed business and were jobless. Many dared not to return back Taiwan partly due to their bad debt in Taiwan.

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Advantages of ECFA (6)FDI from China to Taiwan was US$ 0.328 billion in 2012, more than the target US$ 0.2 billion, 6.5 times increase from 2011. But being a very amount in a comparison with FDI from Taiwan to China (see PPT 37).Expecting More FDI (from other countries) in Taiwan with better protection on intellectual property. Production in Taiwan, marketing in Mainland. FDI in Taiwan was US$ 10 bil. in 2012 (But not so promising by now).

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Advantages of ECFA (7), 50. 100,. (Mainland China business men complained their government policies in favor of Taiwan business men). Service sector in GDP is 68% in Taiwan and 43 % in China. Taiwan has more competitive advantages in service sector (not really in every industry sector) than China, particularly in banking and finance. Taiwan can explore banking opportunities in China.

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*Against on ECFA (1)Opposition parties, (Democratic Progressive Party, DDP) against it for its fear of trap on Taiwans merge into one China. Sacrificing political autonomy.Former President LEE Teng-hui criticized ECFA in that it will fall into Chinas plot of hijacking Taiwan economically to force political unification. No direct talk with China until it has democratized.

*Reasons Against ECFA (2)Ultimate goal of Mainland Chinas united front () is unification without consideration of price. Against One China under (1992 Consensus, a terminology created Dr. SU Chi in 2000, a kind of strengthening mutual confidence). Simply based on one-way correspondence and its reply. No legal biding; Not a memorandum nor a treaty.Increasing Hollowing-out risks of Taiwan industry, particularly capital & high-tech (core-periphery theory). (1) During 2011 & 2012, high unemployment 4.3%, low domestic investment/GNP 19.9%, low GDP growth 2.6%. (2) Compared with 1.8%, 22.5%, 8.7% during 1971-1992).

Reasons Against ECFA (3)Too heavy economic dependence on China. Good or bad ?(1) 2010 110(the 1st year ECFA),8551More than 10 times of 1996, peak year in 1990s during Economic Relation period.(2) Taiwans approved FDI in China as a ratio of FDI in other countries was 134 % in Jan.-Oct. 2011.

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Reasons Against ECFA (4)(3) Taiwans foreign trade balance as a ratio of from other countries was 177 % in 2011.(4) About 75 % of Taiwan economic growth is presently from China. (China strategy to Taiwan: Economically buying Taiwan is easier than military defeating Taiwan). Investment/GNP ratio: less than 20 % during 2002-2009 in Taiwan (diverting to Mainland China); (lower than 25 %- 30 % in South Korea). Decreasing annual average : 28.0% (1990s), 21.5% (2000-07), 20.2% (2008-11), 17.1% in 2009 ( historical lowest).

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Reasons Against ECFA (5)Although Taiwans international competitiveness increased from no.18 in 2007 to no. 6 in 2011, its annual decrease of FDI inflow was 51%, 33% and 29% during 2008-10. With ECFA effective since 2011, it increased only 8%.Taiwans share of global FDI decreased annually from 0.37% in 2007 to 0.31%, 0.25% and 0.20% in 2010, being the lowest of 4-Asian Tigers, and less than one half of Vietnam. FDI in Taiwan was US $10.0 billion in 2012 (realized US $9.721 by November end). 2013 target US $ 10.5 billion.

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*Reasons Against ECFA (6)Annual net average of Taiwans global capital flow (FDI & stocks) was negative: US $-13.2 bil. during 2000-2007 and $-20.1 bil. during 2008-2010. 2011 was the worst in recent years, -46.5 bil. in the 1st 3-quarters.Disadvantages to small and medium enterprises, unemployment in some sectors. Difficulty in job relocation, especially senior workers and farmers in remote areas.

Reasons Against ECFA (7)* Competing our venders for living. . NT $ 5 million. (news report).Negative impacts on some sectors: electronics, agriculture, timber, transport equipment, etc. Small vs. Big. Small and medium enterprises in Taiwan are about 98 % of total. Big state owned enterprises in Mainland China are more than 50 % of total, politically influenced by Chinese Communist Party. Permit only big enterprises for overseas business.

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5/7 Future Economic IntegrationPolitical economy ?Will history be repeated ?Will our next generation be affected? Think over by yourself for the answer. *

*The Cross-Strait Common Market Foundation (). (1) Established by Vincent C. Siew in 2000 (before his position as Vice President). Inspiration from early European Union (50-year formation), focusing on commodity trade, tariff reduction, common market, single currency Euro, reduction/elimination of importance of state boundaries. Step by step approach.Eventual goals: Win-Win, Sharing of sovereignty, Economic and political integration, A Greater China (not the same as Chinas official statement on one China).

*The Cross-Strait Common Market Foundation (). (2)1st stage: Promote normalization of economic and trade relations. Cooperation mechanisms. (similar to present ECFA).2nd stage: Develop a system of economic conditions for both sides to follow. Economic integration.3rd stage: Develop comprehensive economic tasks. Common currency. Political integration. Each country sovereignty.

*6/7 Political Economy/UncertaintySleeping in the Same Bed but hiding with Different Dreams :Chinas strategy: Politics first consideration and economy second consideration. Any economic arrangement is to pave the way for unification; can not wait indefinitely. Taiwans strategy: Economy first consideration and politics second consideration. Unification must consider Taiwans stability; majority of people not ready yet for unification.

*Will China Honor ECFA Forever?Present negotiation was a kind of Chinese Nationalist Party (Kuomintang) vs. Chinese Communist Party. How long will be honey moon?Do not rule out comeback of Democratic Progressive Party to be Taiwan president in future. If so, what might happen on ECFA?China boycotted World Games opening session in Kaohsiung, Taiwan on 7/16 2009 was a first warning sign. ,, . Dec. 2010.An authoritarian regime. . , 25 members (7 ). Good or Bad?

, Optimism ?Two historical failures of during 1922-1949: 1924-1927 and 1936-1948. tried to cope with dogged which ultimately seized control of China in 1949. The United States served as a mediator.Now, Mainland China with an increasing influence on world affairs will not give in sovereignty.*

*Overseas China Experts Failed to Predict Major Chinas Incidents1. Cultural revolution, 1966-1976.2. DENG Xiaopings 3-purge and 3-back.3. Tiananmen Squares massacre on students democracy movement, June 4 1989.4. Missile attack on Kaohsiung harbors off shore, during then President LEE Teng-hui campaign for presidential re-election,1996. What will be next trigger? When is the next ? Why Mainland China added 100/yearly short- and medium-range missiles against Taiwan in recent few years? About total 1400 by 2011. Why not shift to face ?

*Challenge Tasks/Questions ? Short run vs. Long run (1)Taiwan economy. In long run, Taiwan economy will heavily depend on China. Good or bad? In short run, many people will face difficulty in job relocation.Taiwan sovereignty. In long run, Taiwan will lose its sovereignty. How soon? To what extent? In short run, it will cause internal political and social instability.

*Challenge Tasks/Questions ? Short run vs. Long run (2)Which is better-off ? Better economy vs. sovereignty.Per capita income in Taiwan as a ratio of Japan: reached about 2/3 before World War II, about 1/3 in 1980s, (and 1.05 in 2010, 1.10 in 2012, PPP 1.93 in Taiwan and 0.77 in Japan). Taiwan people have had their own sovereignty now.What might be the outcome if Taiwan is unified with Mainland China? Hong Kong experience (better economy but less sovereignty) ?

7/7 Recommendations (1)Government of Taiwan has taken severalremedy measures. I would add-in andemphasize some particular plans.Buy out disadvantage groups such as senior/remote areas of farmers & workers on some small and medium businesses, though such measures as pension, tax incentive.*

Recommendations (2)(2) Implement monitoring information system with data bank, a check list and warning signals on preventing hollow-out of Taiwans capital and high-tech to safe guard Taiwan economys security.(3) Formulate alternative contingency plans in the case of Mainland Chinas economic recession, its hostile to Taiwan economy. Noting that most overseas enterprises as approved by China government are communist party public enterprises (political oriented if needed).

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Recommendations (3)(4) Promote merge and cooperation among small and medium enterprises to increase economy of scale both in production & marketing such as holding company and strategic alliance, thus increasing international competitiveness(5) Build a harmony society. Majority should not dictate minority, and minority should present constructive counter proposals. Implementation of ECFA is a good test of Taiwan democracy.

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ReferencesWuu-Long LIN ( ), Cross-Strait Economic Relations and its Development of Economic Cooperation Framework, Taiwan Economic Forum (Council for Economic Planning and Development, Executive Yuan, Rep. of China, Taiwan) Vol.7 No.11, Nov. 2009, pp. 40-61.Wuu-Long LIN ( ), Pros, cons of a cross-strait ECFA, Taipei Times (Taiwan), Dec. 27, 2009. 6 pages.Reporter Interview . . http://www.youtube.com/watch?v=tnf-N0btIS8&feature=related http://www.chinesedailyusa.com/person/Interview-c10076.aspxWuu-Long Lin ( ), A Query on the Existence of Hollowing Out of Taiwan Industries, (translated title from Chinese), Industry of Free China, Vol. 80, No.1 (Taipei, Taiwan, Oct. 1993), Pp 1-4.

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Thank You

*The United States PositionWelcome present rapprochement between Taiwan and Mainland China. A potential Trade and Investment Framework Agreement (TIFA) between US and Taiwan has no direct link with the Taiwan-Mainland China ECFA.While TIFA between US and Taiwan is not off table now, it is very difficult to achieve at present, at least several years.

Impacts on Overseas Chinese & Foreigners Doing Business in Mainland ChinaTaiwan has tariff and other advantages than overseas Chinese & foreigners to do competitive business in Mainland China.Taiwan will attract more FDI. Wage is cheaper in Mainland China, but labor quality & protection of intellectual property rights are better in Taiwan. Similar case to (but different reasons) more FDI in Mexico after 1994 North American FTA of US, Canada & Mexico.

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