Cover Story: Economic Outlook -- Tackling the Issues
The new administration put in place for President Chen Shui-bian's second term has lost no time in addressing the major economic issues raised by AmCham. Premier Yu Shyi-kun, meeting a chamber delegation, pledged to resolve many of the salient items as soon as possible. The government hopes that progress in these areas will win it support in its efforts to open negotiations with the United States on a bilateral Free Trade Agreement.The new administration put in place for President Chen Shui-bian's second term has lost no time in addressing the major economic issues raised by AmCham. Premier Yu Shyi-kun, meeting a chamber delegation, pledged to resolve many of the salient items as soon as possible. The government hopes that progress in these areas will win it support in its efforts to open negotiations with the United States on a bilateral Free Trade Agreement.
The timing was a fortunate coincidence. The publication of AmCham Taipei's 2004 Taiwan White Paper in the latter part of May, during roughly the same period as the presidential inauguration, has provided an opportunity for a useful dialogue between government officials and the Chamber on elements of the economic agenda for President Chen Shui-bian's second term.
At the invitation of Premier Yu Shyi-kun, the AmCham delegation preparing to leave for the annual Washington Doorknock called at the Executive Yuan on June 11 for a nearly two-hour-long exchange of views with the premier and other high-level officials about the White Paper issues. Nothing that speedy resolution of the major issues is "directly related to our national competitiveness," the premier instructed the ministers in attendance to give those items their personal attention -- and to help resolve them based on the principles of "equity and transparency."
The premier's comments echoed what AmCham had already heard from some of the key new appointees to the government's economic team. In interviews with TOPICS -- excerpts from which appear in this section -- both Chairman of the Council for Economic Planning and Development Hu Sheng-cheng and Minister of Economic Affairs Ho Mei-yueh expressed their determination to further liberalize and internationalize the Taiwan economy. Using language that would not have been out of place in the White Paper itself, Hu said the main theme for the new cabinet will be to "embrace globalization." And referring to some long unresolved White Paper issues in such sectors as the pharmaceutical, telecommunications, and construction industries, he said: "I'm confident that these issues -- at least the more important ones -- will be resolved by the end of the year." Ho Mei-yueh said the government hopes the upcoming visit to Taiwan of Charles Freeman, an assistant U.S. Trade Representative, will be an opportunity to demonstrate Taiwan's sincerity and seriousness in tackling outstanding bilateral trade differences.
The appointments of Ho Mei-yueh and Hu Sheng-cheng have been applauded by the multinational business community because in their previous positions they had frequent and effective interchange with the foreign chambers and became highly familiar with their major issues. Ho, who spent most of her career with the Industrial Development Bureau of the Ministry of Economic Affairs, had been vice chair of CEPD for the past four years and convened many of the coordination meetings involved in White Paper follow-up. As Minister of State, Hu worked closely with the Chamber, particularly with issues relating to finance and healthcare. A Ph.D. from the University of Rochester, he has been considered one of Taiwan's foremost economists. Together with Minister of Finance Lin Chuan, who has actively pursued a program of reform and deregulation in the financial sector, the two new appointees are considered by the Chamber to constitute a strong leadership team on economic-financial concerns.
It has also been noted that as CEPD chair, Hu will continue to occupy a seat in the Cabinet, concurrently retaining his post as Minister of State (sometimes called Minister Without Portfolio). That arrangement was once standard practice, but Chen Po-chih, the first CEPD chairman after the Democratic Progressive Party (DPP) came to power in 2000, was not named to be a Minister of State, and the lack of Cabinet rank was believed to have reduced his influence. Chen's successor at the CEPD, Lin Hsin-i, was primarily occupied with his pressing concurrent duties as vice premier, leaving relatively little time for the economic planning council.
Eyes on an FTA
Although government leaders have been reiterating their commitment to further opening up of the economy to international participation, they have also made clear that there is another motivation for the push to bring closure to many of the stubborn issues perennially raised by the U.S. government and business community. In his meeting with AmCham, for instance, Premier Yu stressed that Taiwan is keen to resume Trade and Investment Framework Agreement (TIFA) negotiations with the United States and then to move beyond that to entering into discussions for a full-scale Free Trade Agreement (FTA) between the two countries. Considering Taiwan's relative isolation within the international community, the government is eager to enhance the island's political and economic security through stronger bonds with leading trading partners, and particularly with the United States.
Noting the list of still-unresolved issues, Washington has thus far been reluctant to respond to those overtures about an FTA. In a recent speech to AmCham members, William Weinstein, outgoing Economic Section Chief at the American Institute in Taiwan (which represents U.S. interests in Taiwan in the absence of an embassy) said: "We are certainly open to the possibility of considering an FTA in the future, but we believe that for the moment, the most productive course for U.S.-Taiwan economic relations is for Taiwan to follow through in addressing the existing items on the table, such as IPR, pharmaceuticals, telecommunications, and agricultural trade."
Regarding IPR, the main concern is that recent signs of progress in enforcement be buttressed by further tightening of the Copyright Law, tougher penalties for offenders, and extension of the crackdown to cover counterfeiting of pharmaceuticals and agro-chemicals. Other pharmaceutical issues include the protection of manufacturers' proprietary data and fair market access for imported products. For the telecom companies, the priorities are reasonable licensing procedures for fixed-line network services and elimination of anti-competitive advantages for the former government monopoly. The agricultural trade issue involves World Trade Organization (WTO) commitments about rice imports. Earlier in his speech, Weinstein also urged Taiwan to abide unilaterally by the terms of the Government Procurement Agreement (GPA) under the WTO, even if political obstacles currently prevent it from signing the document.
One reason for hopefulness that progress will be forthcoming on some of these longstanding questions is the conclusion of the presidential election, which frees President Chen Shui-bian from certain immediate political pressures. Since he will be ineligible to run for president again, he may wish to look to his historical legacy, emphasizing policies that could bring long-term gains for Taiwan's development. That said, the fact that crucial Legislative Yuan elections will be held in December -- plus the residual rancor from the disputed March presidential balloting -- ensures that a period of political divisiveness will continue until at least the end of the year. The DPP's "Pan-Green" Alliance is aiming to take a majority of seats in the legislature for the first time, which would enable the government to implement its policies more easily, though with half a year to go before the voting, few political experts are yet making forecasts.
Pick-up in the Economy
A more solid reason to anticipate positive government action in problem-solving is the strong improvement in Taiwan's economy after three years of anemic performance. The government is now forecasting solid economic growth for this year of 5.45%. If the NT$500-billion infrastructure bill now pending in the Legislative Yuan is enacted, says Hu Sheng-cheng, "the growth rate could go to 6%." He expresses confidence that the bill will pass, despite some opposition grumbling. "No one dares to oppose this bill because virtually every county has a stake in it," he says.
Three concerns have been somewhat tempering the degree of economic optimism -- uncertainties about global prices, U.S. interest rates, and whether China will succeed in avoiding a "hard landing" as it cools down its economy. "The most important is what happens in China," says Hu. A soft landing, which he regards as "the most likely situation," could be good for Taiwan in various ways, including reductions in the price of steel and other industrial materials. As to the other uncertainties, David S. Hong, vice president of the Taiwan Institute of Economic Research, notes that the current forecasts have already factored in the impact of volatile oil prices -- and that interest rates, even if adjusted, are unlikely to rise so much from current historic lows as to retard growth, especially in the absence of any real inflationary threat.
An improved economy that increases tax proceeds would help alleviate one of the Chen administration's main headaches -- the heavy budget deficit (US$11.9-billion worth in 2003) due to rising demand for social welfare, defense spending, and infrastructure development. "Expanding the government's fiscal-policy tools has got to be a very, very high priority for Chen Shui-bian," says Hong. The possible mechanisms include revising the tax structure and increasing tax rates, raising the legislated public-debt ceiling, selling off public land or other assets, and quickening privatization of state enterprises.
In terms of willingness to attack the issues on the multinational companies' agenda, economic improvement also gives government decision-makers more time to look at deeper-seated problems instead of merely responding to pressures for short-term economic stimulation. Economic good times also diminish the calls from domestic industry for protection against international competitors.
Already there are positive indications that the government is taking up some significant, far-reaching developmental themes. One of them is devising methods for promoting the upgrading of the service sector -- a step that AmCham has long been urging. Carrying out a directive from Premier Yu, the CEPD recently completed the drafting of a well-thought-out "Service Industry Development Guidelines and Action Plan" for the promotion of more sophisticated, higher-value services. The plan earmarks 12 priority-target subcategories, outlines 13 strategies to be adopted, and -- most impressively -- identifies 43 specific pieces of legislation that need to be revised or enacted. To help speed those proposals through the Legislative Yuan, the government plans to bundle them into a package, presenting an omnibus bill to the lawmakers for efficient consideration.
The infrastructure program [see the accompanying chart for details] cited by Hu Sheng-cheng is another example. It is being dubbed the "New Ten Big Projects," alluding to the "Ten Big Projects" carried out by the Chiang Ching-kuo government in the 1970s. That original program, which included such projects as the North-South Freeway, Chiang Kai-shek International Airport, railway electrification, and China Steel's integrated steel mill, was credited with enabling Taiwan to move on to a new level of economic development.
Similarly, the new group of projects -- a combination of "hardware" and "software" -- is being seen as paving the way for Taiwan's elevation to a knowledge-based economy. In addition, Taiwan is nearing completion of work on a high-speed rail system -- being constructed as a Build/Operate/Transfer project -- due to be operational in October next year and cutting the travel time from Taipei in the north to Kaohsiung in the south to a mere 90 minutes. The first rail cars for the system were delivered from Japan in late May.
Hu referred to the new big projects as important potential business opportunities for multinational companies. But companies in the relevant AmCham and European Chamber committees have been skeptical about such prospects in the absence of firm commitment to GPA principles. They note that unreasonable terms and conditions in public contracts and inequitable bidding procedures have discouraged many construction companies -- including some of the biggest names in the industry, firms that are active in markets all over the world -- from playing an active role in the Taiwan market. AmCham construction committee co-chair Paul Lee notes that business this year in the construction sector has been quite good -- but because of contracts from the private sector, not from government.
Cross-Strait conundrum
The portion of the White Paper that has by far attracted the most media attention has been the emphasis on the need for direct transport links between Taiwan and China. Without them, the Paper argued, Taiwan cannot realistically aspire to serving as a major hub in the regional economy and multinationals will be reluctant to station executives with Greater China responsibilities here.
Because of the political complexities and sensitivities surrounding it, however, this issue does not seem to be moving any closer to resolution. Beijing, which certainly was surprised and upset by the reelection of Chen Shui-bian, has been vociferously denouncing the president as dedicated to Taiwan's independence. The PRC has also put public pressure on a major Taiwanese investor in China, because of what it regards as his pro-independence leanings. China's recent hard-line position toward Taiwan has been interpreted as part of an effort by former president Jiang Zemin, now chief of the military commission, to use the Taiwan issue as a lever to help hold onto his power and position. In that atmosphere, the chances seem remote of bridging the communication gap between the two sides, even on an issue such as direct links that is in the economic interest of both parties.
Joseph Wu, the newly appointed chair of the Mainland Affairs Council, told TOPICS that recently China seems to have been hardening its position regarding the definition of "One China" and even the composition of the negotiating team with which it would be willing to discuss the initiation of direct transport, insisting that government officials be excluded even as advisers. "China has been setting up political barriers [to resuming talks]," he said.
In the meantime, he said, Taiwan is doing its best to maintain stability and tranquility in the Taiwan Strait. Part of that effort entails beefing up Taiwan's defense capability through weapons procurement from the United States, since if a military imbalance develops, "the stronger side may be tempted to use force." At the same time, Wu said, President Chen has been seeking since his inauguration to adopt a moderate tone and conciliatory policy toward China.
The obstacles to implementing the full direct links have not precluded some progress in facilitating cross-Strait transport, however. In April, after discovering that China had revised its shipping regulations to put them into conformity with WTO rules, Taiwan quickly granted permission for foreign-flag vessels to sail directly between Taiwan and Chinese ports -- though not to discharge cross-Strait cargo. The international shipping companies have been delighted. "Not to have to sail through a third location is a huge cost savings when you consider that charter rates for ships can run upwards of US$30,000 a day," says Craig B. Grossgart, managing director of American President Lines in Taiwan. On the human resources side, Taiwan is also liberalizing rules affecting residence of mainland Chinese spouses of multinational executives based here.
Flying straight from Taipei to Shanghai may still be an unreachable dream, but progress in other areas continues.
[Box 1] Hu Sheng-cheng: Reform Momentum is Strong
The newly appointed chairman of the Council for Economic Planning and Development, Hu Sheng-cheng, concurrently continues to hold his previous post in the Cabinet of Minister of State responsible for reviewing financial policy. Following are excerpts from a recent interview he gave to TOPICS editor-in-chief Don Shapiro.
On the overall direction for the second Chen administration:
The main theme for the new cabinet will be to embrace globalization -- to connect the Taiwan economy with the world. Essentially we are trying to open up the economy more. We want to sign FTAs (Free Trade Agreements) with other countries, and to do so we first have to remove all the obstacles and resolve the trade disputes with major trading partners.
[The timing is right] because the economy is now in a better position, and our reform effort is reaching a momentum. After our joining WTO, we encountered the IT bubble in the United States and the Taiwan economy ended up with the worst recession in 50 years. In addition, the ruling party has not had a majority in the Legislative Yuan. But despite these difficulties, the government has pushed reforms -- even though it resulted in quite a few protest rallies against the government [on such issues as regulating agricultural credit cooperatives, making teachers subject to income tax, and adjusting health-insurance co-payments].
The government has really tried to reform and to upgrade the economy, and we achieved some results. If you look at the stock market, in 2000 the proportion of foreign capital in our stock market was just 5%. At the end of last year it was almost 15%. This month it's almost 20%. The share of foreign capital in our stock market is an indication of how open we've been in our financial sector.
On specific economic priorities: The first priority is to build the infrastructure -- the "New Ten Big Projects," containing a lot of infrastructure projects needed to transform the economy from a traditional economy into a knowledge-based economy.
Also we're going to pay more attention to the service sector. It now accounts for about 70% of our GDP but the productivity is very low. Upgrading the service sector is very important to us.
In the end the most important factor in determining economic competitiveness is manpower -- human capital. We've been successful in the electronics and IT sectors because we had a lot of technical personnel in those fields. If we are to build a competitive service industry, we must build human capital in that area as well.
On further financial reform: We will try to make Taiwan a financial investment center, which entails allowing capital to be freer in moving in and moving out. We also have to liberalize the financial sector to allow greater latitude for the financial institutions -- greater freedom in bringing out new financial products. In the past, we didn't pay much attention to financial supervision or to corporate governance, and so in the end we couldn't trust our institutions, domestic or foreign. The result is that we have a lot of regulations about what financial products you can bring out.
Now we're switching the focus. In the next few years we're going to pay more attention to financial supervision and to corporate governance, and to rely on market mechanisms to supervise the institutions. Then we can allow the financial institutions greater freedom in introducing financial products. This is part of our effort to connect the economy with the world economy.
On Taiwan's competitive advantages: We have a lot of capital here. We have many entrepreneurs who are constantly launching new ventures, and so we also have a lot of venture capitalists who are willing to take a risk. That gives us a competitive advantage in establishing Taiwan as a financial investment center.
We aren't afraid of competition, as long as our economy is competitive. So what we're going to do is not to close the economy but to open it up and improve its competitiveness.
On long-standing AmCham White Paper issues relating to the construction, pharmaceutical, and telecommunications industries: I'm confident that these issues, at least the more important ones, will be resolved by the end of the year. Also the enforcement of IPR protection has increased substantially, but during the revision of the Copyright Law in the Legislative Yuan, a few articles were deleted. We've submitted a new version, which I believe will be passed, though it's difficult to control the timing. But otherwise I think most of the issues of interest to AmCham and ECCT will be resolved by the end of this year.
[Box 2] The Need for Alliances
Ho Mei-yueh, the new minister of economic affairs, was previously vice chair of the Council for Economic Planning and Development, in which post she was the government official with the most frequent contact with the foreign chambers of commerce. Below are excerpts from her talk with TOPICS' editor-in-chief Don Shapiro.
On the importance of a Taiwan-U.S. FTA: The benefit of an FTA is not just the impact on trade volume or GDP growth. The United States has such a huge economic scale -- Taiwan's GDP is only 3% that of the United States -- that signing an FTA with Taiwan could not possibly have much contribution to the U.S. GDP. But the United States should think about the fast-growing Asian market. China has a very strong ambition to lead the future development of the Asian economy. It has already started building alliances, so the influence of the United States in Asia is decreasing.
How to put the U.S. finger into Greater China? Signing an FTA between the United States and China wouldn't be easy because there are so many economic differentials. That will take time. But with Taiwan it is easier -- and Taiwan needs the U.S.'s help. If we depend too much on the China market -- and exports to China, including Hong Kong, now is about one-third of our total exportation -- we will lose our bargaining power. An FTA would help Taiwan's exports to the United States and within NAFTA, and it would help U.S. companies to develop the Asian market. For both sides, it could create some counterbalance to China.
On the biggest obstacle for Taiwan's economic development: Technology is not a problem. Capital is not a problem. But we don't have enough human resources. For many years we had huge numbers of people coming back from the United States or other foreign countries. Our students used to go abroad to finish their graduate degrees, and after they got a couple of years of work experience, they'd came back. But now the number of outbound students has declined. They take their Master's course and Ph.D. course in Taiwan.
The government is very aware of this trend. So we are providing scholarships to post-doc Taiwan students to enable them to have a couple of years' experience in foreign universities. When they came back, they will [understand international developments] and have a network of connections with foreign academics. We are also trying to build up programs to attract foreign students to Taiwan, providing them with scholarships. Also, part of our economic development plan is to upgrade Taiwan's universities. We hope that in five years we can have 15 university departments that are No. 1 in their field in Asia -- each one developing expertise in a specific field and then helping to inject that capability into industry. And we hope that in 10 years, one of our universities will rank in the top 100 in the world to help attract the best students and professors and creating a good environment to support the human resources needed for the economy.
On her major goals as minister: I have asked my colleagues to focus especially on three important things. The first is to develop new markets to give us more diversification. That will require some new approaches. For example, India is a good potential market, but it's much easier for Singapore to understand that market than for us. So we should cooperate with Singapore to approach that market. We also need to help our SMEs to get on the procurement list of first-tier global companies, and also to extend our supply chain to our external markets, for example by arranging for co-op warehouses in foreign markets to help deliver products produced in Taiwan quickly to the final integrator. That's a new business model that may need some government encouragement.
The second thing is to select emerging industries and spur their development through incentive programs. New energy is a future industry, and the deep sea surrounding Taiwan may also provide resources for specialized new industries. Manufacturing-related services is another area that's important. We have an IC industry now because we incubated it 15 years ago. Now we have to incubate the industries of the future.
The last thing is to build alliances with other countries, and in that respect the United States is the most important. Although we're No. 15 in the world in trade, many countries are reluctant to deal with us -- they're afraid of China -- unless the United States first provides a model they can follow.
[Box 3] Optimizing Taiwan's Economy
Speaking to AmCham Taipei's June monthly luncheon meeting at the end of a four-year tour of duty on the island, William Weinstein, Economic Section Chief of the American Institute in Taiwan, offered his thoughts on how Taiwan can maximize its future economic success.
He took a cue from the Chinese penchant for catchy phrases based on enumeration to call his recommendations Weinstein's "Three Importants" and "Five Gotta-Do's" -- steps necessary for Taiwan to match its past economic achievements with a successful transition to the next level of development.
He explained the principles he labeled as the "Three Importants" as:
* Adhering to the spirit of WTO. He noted that economies such as Singapore, Hong Kong, the United Kingdom, the Netherlands, and New Zealand routinely go beyond the minimum required to meet their WTO commitments, thereby laying the foundation for long-term global economic relevance through free trade and robust service sector growth. For Taiwan to join them in following the "WTO Spirit," said Weinstein, means viewing trade policy reform not in terms of resolving narrowly defined trade problems, but instead as a means to maximize opportunities for commercial interaction that will maintain Taiwan's global relevance.
* Encouraging more international economic activity to take place on Taiwan itself. Taiwan and many foreign businesses now collaborate to design new products on the island and to build international supply chains to produce them, said Weinstein, and it is essential that these trends continue. But unfortunately, multinational companies have been losing interest in pursuing activity that takes place on Taiwan proper because of visa rules, lack of direct links to supply chains, and lagging infrastructure, as well as red tape, weak IPR protection, and restrictive investment rules.
Taiwan needs to avoid what many here refer to as "the threat of economic marginalization," he said, through constant surveillance to detect how existing policies drive economic activity away from the island.
* Ensuring that Taiwan's financial sector can support the island's integration into the global economy. "The work that has already been done by government and industry to reduce non-performing loans has strengthened Taiwan's banks and laid the groundwork for more rational lending in the future. There remains, however, much to be done to address structural issues dragging down banking sector profitability and to improve the consultation process with regard to crafting new financial regulations. The financial service sector here is also enormously frustrated by the inability to serve effectively Taiwan corporations' entities on the Mainland... Enabling Taiwan-invested entities in the PRC to list on Taiwan's own stock exchanges would be yet another positive step in this regard."
As to the top five things that Taiwan has "gotta do" to maintain its competitive edge, Weinstein cited these measures:
(1) Accede to the Government Procurement Agreement (GPA): Improving the quality and efficiency of government contracting in Taiwan would attract new talent to the island in areas such as construction, transportation, and energy infrastructure. There are a number of reasons that Taiwan has not yet joined the GPA, but there is no reason not to live up to the spirit of that agreement by unilaterally changing government procurement regulations to conform to GPA requirements."
(2) Liberalize Visa and Human Resources Rules: "Simple and convenient visa policies are a cornerstone of attracting business investment. The free flow of knowledge professionals allows technology to be transferred and decision-makers to get the information they need. Multinational corporations are attracted to locations where they can easily bring skilled workers across borders for meetings, training sessions, and short-term assignments. User-friendly and non-discriminatory visa rules will help Taiwan become a location of choice for the regional operations of global corporations, including those who wish to pursue 'Greater China' business strategies."
(3) Continue Financial Liberalization: More financial deregulation has occurred in the last four years than in the previous 40, Weinstein noted. These steps have included the enabling of bank mergers, formation of financial holding companies, and enactment of a Securitization Law. "But the banks need more government backing to finish cleaning up their loan portfolios, and market consolidation is still not complete. There are also technical measures that if implemented would further improve market quality and perhaps earn Taiwan a 'developed market' classification on global benchmark indices such as the Financial Times Stock Exchange Index (the FTSE) and the Morgan Stanley Capital Index (the MSCI). All of these steps would further strengthen the financial sector, attract investment, and bolster the economy."
(4) Follow Through on IPR Protection: "Taiwan's government is now beefing up IPR enforcement through efforts such as the Joint Optical Disk Enforcement task force. If it follows through on these efforts to turn the IPR situation around, the benefit to Taiwan's international investment reputation will be tremendous." The growing problem of drug piracy also needs to be addressed, data exclusivity provided for the pharmaceutical industry, and the Copyright Law be amended to bring it into compliance with WTO accession commitments. "Also helpful would be the consistent application of deterrent sentencing by the courts to IPR cases."
(5) Ensure that Regulation Does Not Choke Off Economic Development: "Taiwan's future prosperity depends in great part on products and services that do not exist today or are in their infancy." Biotech is one example, "but it will be hard for biotech to flourish here if existing pharmaceutical regulations lead investors to conclude that innovation will not be rewarded." The financial services sector must be able to market financial instruments and funds available in other developed economies. "Taiwan should regulate industry so that businesses and consumers on the island are ahead of the curve in access to innovative products and the rewards that go with them."
The "future looks bright," Weinstein concluded, if Taiwan can adopt these necessary measures to ensure its continued competitiveness. And "when in doubt, follow the advice in the AmCham White Paper," he recommended.
