For Asia Times www.atimes.com
Taiwanese elected Ma Ying-jeou of the Beijing-friendly Kuomintang (KMT) for another four-year presidential term. Cross-Strait business ties will be further strengthened, and Beijing is certain to make all sorts of mouthwatering economic concessions to lure the island into political talks. But the Taiwanese cannot take for granted that China’s economy will stay on an upward trajectory for much longer. If China slows, the island, having grown dependent, might be dealt a harder blow than others in the region.
China is Taiwan’s largest trade partner by far. Taiwanese investment in China, direct and via a third place, totaled US$2.6 billion in 2010, and following the January 2011 implementation of the cross-Strait Economic Cooperation Framework Agreement’s (ECFA) “early harvest list”, which is comprised of goods qualifying for tariff concessions, the island’s exports to the mainland are expected to have hit the record high of US$120 billion in 2011. It was predicted that ECFA would increase Taiwan’s 2020 GDP by about 5.3 percent from the current trend line, and that as continuous global downturn has lowered the demand for the island’s electronics in Europe and the United States, Chinese consumers would eventually make up for it because the tariffs of more than 90 percent of the items on the early harvest list will be reduced to zero. Hence, until fairly recently, Taiwan was still expected to achieve growth in exports of more than 5 percent in 2012.
But toward the end of last year, figures turned less rosy. Across the Taiwan Strait, where 28 percent of Taiwan’s exports were shipped to in 2010, possibly to add another 5 to 10 percent if “ghost exports” via Hong Kong to the mainland were to be included, frightening signs have been emerging that the booming economy is rapidly unravelling. As demand in China and abroad for what Chinese factories churn out slackens, manufacturing activity is shrinking, and growth of money supply and exports slowing. Property prices are declining and so are China’s foreign exchange reserves.
The Chinese slowdown already left its toll on Taiwanese exporters. In the last two months of 2011, with -2.4 percent in November and -3.0 percent in December, shipments to the mainland accounted for negative growth year-on-year, and as November’s orders from China increased by just 0.14 percent year-on-year, also export orders for Taiwanese goods from China are rapidly decreasing to the point of near-zero growth.
According to popular local views, Taiwan’s economic health hinges on China, and developments on the mainland will make or break the island’s economy. However, the pictures experts interviewed by Asia Times Online painted were not necessarily as alarming.
Prof. Ronald A. Edwards, a China expert, holds that if mainland China’s economy began to stagnate, the impact on Taiwan’s economy would not be very significant. This is because, according to him, Taiwanese companies active in China are insulated somewhat from fluctuations in Chinese consumer demand.
“Although Taiwan has become one of mainland China’s top Foreign Direct Investment (FDI) countries, the investment is strongly centered in regions with high concentrations of final product assembly lines and free trade zones (FTZs), most notably in Jiangsu and Guangdong”, Edwards said.
This shows that while mainland China has become Taiwan’s leading export destination, these exports are largely intermediate goods that are exported from Taiwan to Taiwanese-owned firms in mainland China where final assembly takes place.
“The goods are then exported to North America and Europe”, Edwards said.
He nonetheless acknowledged the possibility of feedback effects where a drop in China’s imports affects the US and Japan, which in turn would be felt in Taiwan.
“However, based on some back of the envelop calculations, I would expect these indirect effects to be small as well.”
Other observers have been suggesting that it would actually be the Taiwanese tourism industry suffering the most by problems in China. Last year about 1.79 million mainland Chinese travelled to the island, with the industry estimating an influx of 2 million this year. Voices warning a significant drop would hit Taiwan’s economy relatively hard seem convincing as in 2010, spending by Chinese tourists despite limitations on their numbers – back then 3,000 per day – already accounted for 0.72 percent of Taiwan’s GDP, and since 2008, it was US$3.1 billion they left on the island. Edwards, however, predicted that even if mainland China’s economy began to lose steam considerably, Taiwan’s tourism industry would not be overly affected.
“If the mainland economy goes sour, there will still be a small share of people there that are willing and able to visit Taiwan. With a population of 1.3 billion, that still amounts to be a huge number [if neither Beijing nor Taipei would artificially limit the number of trips].”
In terms of comparison with Taiwan’s rivals in trade, South Korea and Japan, Edwards argued that Taiwan wouldn’t lose more than them because of a Chinese slowdown but instead even less.
“Relative to Japan and South Korea, Taiwan suffered little from the 1997 Asian Financial Crisis. One main reason is that a large share of Taiwan’s economy is made up of small and medium sized businesses, unlike Japan and South Korea. Since smaller firms can more quickly adjust, this feature might additionally cushion Taiwan’s economy from shocks to demand for Taiwanese exports.”
Hu Sheng-Cheng, an economist at Taipei’s renowned research institute Academia Sinica, too, started by pointing out that the taishang, as Taiwanese businesspeople active in China are commonly called, and especially the ICT manufacturers among them, mainly use the mainland as production base and then export the goods to other countries.
“They don’t obviously suffer from shrinking mainland Chinese domestic demand but instead from the slow European and US markets. Neither are the taishang that target the mainland’s food sector, such as Want Want or Masterkong, much affected by the economic slowdown there”, Hu said.
“But being dealt a harder blow is a growing number of Taiwanese companies that produce cars such as Yulon, as well as makers of other sophisticated goods meant for the mainland Chinese market.”
Hu disagreed with the notion that Taiwan is less vulnerable than Korea and Japan to a Chinese slowdown. He pointed out that according to Chinese custom data, Korea exported 20 percent more to China than Taiwan did in 2010, and that also Japanese exports to China topped Taiwan’s by 50 percent that year.
Hu subsequently brought into account that Korea’s FDI in China roughly equals that of Taiwan, and that Japan’s is 2.2 times higher than the Taiwanese.
“But Korea’s GDP is double that of Taiwan while Japan’s is 5.5 times bigger than Taiwan’s. The importance of the Chinese market is therefore significantly lower to the Koreans and the Japanese than to us. That means their sensitivity to a Chinese slowdown is also lower.”