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Industrial Innovation and the Taiwan Miracle

  • Taiwan must lead in industrial innovation for a new economic miracle.

  • Short-term effects of the U.S.-China trade war have benefitted Taiwan’s economy as American importers transferred orders to Taiwan.

  • Taiwanese enterprises relocated production sites from China back to Taiwan and Southeast Asia due to the trade conflict.

  • By April 2020, this relocation was expected to bring over 33 ext{ billion} (NT$1 ext{ trillion}) in investment, positively impacting domestic investment and global trade positioning.

Taiwan in Global Value Chains

  • In the last two decades, globalization has shifted from inter-industry to intra-industry trade, resulting in trade in inputs dominating.

  • Development of global supply chains resulted in increased trade in intermediate goods, which accounted for 60 ext{ ext{%}} of total world trade volume by 2010.

  • WTO Data on Taiwan (2014):

    • Ranked in the top six exporters of intermediate goods after EU, China, US, Japan, and Korea.

    • Ranked as the 11th largest importer of intermediate goods.

  • Domestic Value Added (DVA):

    • Increased from 15.8 ext{ ext{%}} in 1995 to 24.1 ext{ ext{%}} in 2011 for exports to third countries.

    • Foreign value-added content of exports rose from 30.6 ext{ ext{%}} to 43.5 ext{ ext{%}} within the same timeframe.

  • For comparison, Korea's DVA increased from 17.1 ext{ ext{%}} to 20.5 ext{ ext{%}} and foreign value-added content from 22.3 ext{ ext{%}} to 41.6 ext{ ext{%}}.

  • Taiwan's globalization degree exceeds that of Korea despite Korea's advantages from multiple Free Trade Agreements (FTAs).

Challenges Faced by Taiwan

  • Taiwanese economists previously advocated a vertical division of labor with China to alleviate competition, but competition has intensified as Chinese industries have advanced.

  • Localization of Taiwanese firms in China leads to dependence on local sourcing for intermediate products, undermining Taiwan's envisioned vertical labor division.

  • Policy Initiatives Needed:

    • Increase Taiwan’s value-added share in GVCs through technology deepening and reduce reliance on Original Equipment Manufacturer (OEM) subcontracting.

    • Dominating production of strategic components could yield economic interdependence with GVC partners, offering political and strategic advantages.

    • Trades conflicts between the U.S. and China present a unique opportunity to reconfigure Taiwan's global supply chain role.

Taiwan's Membership in Trade Blocs

  • Participation in emerging trade blocs is critical for Taiwan's economic advancement and political standing.

  • ASEAN Economic Community (AEC):

    • Established to facilitate the free flow of goods, services and investments starting January 1, 2016.

    • Currently, it remains closed to newcomers.

  • Regional Comprehensive Economic Partnership (RCEP):

    • Consolidates ASEAN's FTA relationships but poses challenges with China opposing Taiwan's accession, affecting Taiwan's trade with Korea and Japan.

    • Taiwanese businesses have invested in RCEP member countries to mitigate negative effects of exclusion.

Benefits of FTAs for Taiwan

  • FTAs enhance productivity and competitiveness by encouraging domestic reforms.

  • CPTPP Membership Importance:

    • Could reduce Taiwan’s reliance on China (nearly 40 ext{ ext{%}} of exports) while integrating Taiwan more effectively into global trade.

    • Benefits include zero tariffs, labor standards, and investor-state dispute settlement provisions.

    • CPTPP membership is seen as a way to overcome Taiwan's marginalization.

Political Dynamics and CPTPP Accession

  • Taiwan's government must address domestic politics and regulatory standards to comply with CPTPP requirements.

  • The Tsai administration needs advocacy and statecraft support, particularly from Japan, to advance Taiwan's accession bid amid Chinese opposition.

  • Admitting Taiwan into CPTPP will economically benefit all members, enhancing Japan's export capacity and influence.

Conclusion

  • Taiwan's WTO and APEC memberships confer certain advantages, yet challenges persist mainly due to China’s influence restricting FTAs.

  • Even in light of limited FTAs, Taiwan's trade relations with the U.S. and Japan have been strengthening, highlighting its resilience in the global economic landscape.

Statistical Data Overview

  • Taiwan Value Added Components of Exports (1995 vs 2011) is visually summarised.

  • Korean Value Added Comparison also illustrated, showing shifts over the same periods.

References

  • Chow, P.C.Y. (2020). World Trade Organization (WTO) data on trade dynamics.

  • OECD-WTO Trade in Value Added statistics.

  • Asian Development Bank (2009). Survey on FTA utilization rates.

  • Discussion on trade liberalization frameworks and industry restructurings advocated by former Prime Minister Abe.