Taiwan Today

Taiwan is seeking ways to solve its rapidly growing trade deficit with Japan. The deficit is expected to surge from last year's US$7.7 billion to more than US$9 billion in 1991, and quick action will be needed to keep it from getting worse. Early this year, the government decided to begin rigid enforcement of a seven-point program drawn up in late 1990. The measures include a requirement that all Japanese manufacturers and traders operating in Taiwan must export 10 to 25 percent of their annual production volume to Japan.

In mid-May, in response to pressure from the ROC government, Japan sent an unprecedentedly large trade mission to Taiwan for a one-week meeting with trade officials and industry representatives. The major purpose of the 150 member mission was to provide an opportunity for both Japanese and Taiwan industrialists to explore the possibility of increasing technology transfers from Japan to Taiwan. Authorities in both countries believe that raising Taiwan's industrial technology level is the basic way to narrow the trade deficit. As Shoichi Akazawa, the trade mission's leader, told reporters upon arriving in Taipei, "Buying isn't the main reason we've come here. Increasing purchases alone cannot solve the trade imbalance between Japan and Taiwan. We hope both sides will tackle the problem from the fundamentals."

The most fundamental problem, according to Vincent Siew, minister of Economic Affairs, is that Taiwan lags far behind Japan in industrial technology. In an interview with the press during the Japanese trade mission's visit, Siew said, "The most effective way to lower the trade deficit is for us to upgrade our technologies so that we can reduce our reliance on Japanese-made machinery, and parts and components."

A look at Taiwan's export-import activity shows clearly how the island's inadequate industrial technology is contributing to the chronic trade deficit. Persistent efforts to develop the Japanese market have not boosted sales to Japan. Last year, exports dropped by a high 8 percent to US$8.3 billion, and this occurred despite the overall increase of imports from other countries in the Japanese market. To find out what keeps Taiwan products from selling well in Japan, the Japanese trade mission sent out a survey to 7,000 Japanese companies before leaving for Taipei. Most of the 670 that responded pointed to the failure of Taiwan products to meet consumer requirements for quality and design.

Many government and business figures in Taiwan appreciate the Japanese consumer's strict demands for quality. Moreover, since disposable income is rising fast among the Japanese, they advise local manufacturers that they can only profit from meeting the requirements of that market. Says Lin Chin-ching, former deputy representative of the ROC's Association of East Asian Relations in Tokyo and now a member of the Council for Economic Planning and Development: "If manufacturers want to increase their sales in Japan, they must strengthen their research in product quality and design."

Not everyone agrees that inadequate quality and design explain why Taiwan's products stay on the shelf. After all, the island exports more than US$60 billion worth of products a year, with more than half being shipped to high-income industrialized countries, including Japan. Economics Minister Siew, in response to a question at the press interview asking him to cite trade barriers erected by Japan, pointed to what he describes as "unfair trade practices." He said, "Japan's stringent customs and quarantine inspections, its exclusive domestic distribution network, and a banking system that extends favorable bank loans to nurture domestic industries are all aimed at protecting Japanese industries."

While difficulty in expanding exports to Japan may be a factor leading to the persistent trade deficit, it is certainly not a major one. The real problem is Taiwan's heavy reliance on the Japanese economy. Nearly 90 percent of the imports from Japan, which totaled US$16 billion last year, have been machinery, and parts and components. Japan supplies Taiwan with key parts and components for finished products ranging from household appliances to automobiles, from computers to machinery.

This reliance developed for several reasons. One is that Taiwan has been following Japan's footsteps in economic development. Thus, Japan-made capital goods are better able to meet the needs of Taiwan manufacturers. And, according to an Economics Ministry official, Japanese technologies are superior to those of Western countries in areas such as industrial ceramic materials, semi conductors, automated production facilities, and parts for computerized, numerically controlled machine tools. A third reason is that Japanese parts and components are cheap, readily available, and are of high quality.

These important advantages have made it difficult for the manufacturers to diversify their import sources despite persistent government requests for them to do so. If the situation is viewed from the standpoint of comparative advantage, there is nothing wrong with manufacturers relying on Japanese equipment and semifinished products as long as they remain competitive in both quality and price. In fact, Taiwan products incorporating Japan-made parts and components have always been able to sell competitively in world markets.

The bigger issue is whether dependence on Japan is making Taiwan vulnerable politically as well as economically. Despite the worsening trade deficit, Taipei has been unable to press Tokyo to correct the imbalance. And for fear of endangering its relations with Peking, Tokyo has continued to ignore Taipei's call for the two governments to set up working-level consultations to deal with the trade imbalance. "Over the years we have been able to use economic diplomacy to successfully address bilateral issues with many countries with which we have no political links," says an ROC Foreign Affairs Ministry official. "But this is not the case with Japan. It knows quite well that Taiwan cannot alford to retaliate by cutting Japanese imports. That would only hurt our own economic interests."

The rapidly rising trade deficit with Japan is threatening to undermine Taiwan's long-standing favorable balance of trade. Given the present rate of increase, the trade deficit with Japan will come close to US$10 billion by the end of this year. This will more than cancel out the trade surplus with the U.S., which is expected to be lowered further to US$6.4 billion this year. Thus, exports to other markets - such as mainland China and Hong Kong - should exceed imports by several billions of U.S. dollars to offset the trade imbalance with Japan. If not, Taiwan may for the first time in many years register a major deficit in its overall international trade.

Problems loom in the domestic market as well. To cash in on increasing demands in the services sector, Japanese companies are shifting their investments from the manufacturing sector to service businesses such as supermarkets, department stores, restaurants, beauty parlors, and real estate agencies. The result is not only an increase in property prices, but also severe competition for many local companies. This has caused concern among many authorities in and outside the government. For example, Wei Yao chien, an opposition Democratic Progressive Party legislator, recently called government attention to the growing Japanese presence in the market, and demanded countermeasures.

In fact, the Ministry of Economic Affairs had already put into force the seven point program governing Japanese companies doing business here. They are: (1) Newly invested companies will not be issued licenses until the government has approved their plans to sell back required amounts of their production to Japan. (2) The success of the sell-back plan will determine future government approval for the number of Japanese staff members companies can bring to Taiwan. (3) Companies wanting to buy property in Taiwan must present all required documents to the investment Commission of the Economics Ministry for approval. (4) The Central Bank of China will check the companies' registered capital to track its flow. (5) The Investment Commission will investigate companies that invest in Taiwan firms without the approval of the commission to determine its capital source. (6) The Bureau of Commodity Inspection and Quarantine will be more rigid in its inspection of imported Japanese products for proper labeling in Chinese. (7) Customs offices will inspect each and every shipment of imported Japanese products.

In a recent review of the enforcement of these regulations, P.K. Chiang, a vice minister in the Ministry of Economic Affairs, said the measures have not only obligated Japanese companies to strictly carry out their sell-back plans, but have also pressed them to ask Tokyo to take some action to address the trade imbalance. Chiang and many others believe that the 150-member trade mission was in response to this pressure. Speaking at a press conference before their departure, Shoichi Akazawa, the mission's leader and also president of a Japanese organization for international economic exchange, said their visit was in answer to Economic Affairs Minister Siew's five-point call. The five points were for Japan to increase investment in Taiwan, transfer technology, help local companies improve product quality, enlarge purchases of Taiwan products, and set up a team to monitor efforts to balance trade.

At the press conference, Akazawa also reported on the mission's activities during their visit. Representatives of 110 companies had held talks with their Taiwan counterparts for possible purchases of products such as machinery, hand tools, and electronic and electrical producls. Thirty-three Japanese companies discussed investment, technology transfer, and management techniques with local firms. Also, thirty-five members went on a tour of factories, and eighteen of these factories expressed a desire for technical cooperation with Japanese firms. The talks exploring investment opportunities for Japanese companies or cooperative ventures into the production of electronic products, machinery, and machine tools received special attention from trade authorities in both Taiwan and Japan. The trade mission's major purpose, after all, was to encourage more technology transfers.

Akazawa also said that the first thing his mission would do upon its return to Japan would be to set up a panel to monitor technology transfers resulting from the mission's visit. The panel would then deliver a report at an ROC-Japan economic meeting to be held in Taiwan in September. But the response on the ROC side was guarded. For example, Lu Kee-sheng, a panelist in the discussion on machine tool trade, warned, "Successful technology transfers are still a long way off. It requires a high degree of sincerity on the part of Japanese companies."

This skepticism about Japanese willingness to transfer technology is typical of the reaction of many Taiwan businessmen. Past ROC-Japan technological joint ventures have not led to the transfer of important technologies. Yet of all the more than 3,400 cooperative projects Taiwan companies have entered into with foreign firms since 1952, Japan accounts for 61 percent, far ahead of the United States with 23 percent and Europe with 13 percent. The bulk of the joint ventures with Japan have concentrated on the three industries of electronics, electrical machinery, and automobiles. But after nearly four decades, the Taiwan companies still rely on their Japanese partners for the supply of key parts and components.

Local businessmen often complain that Japanese manufacturers use cooperative ventures as selling tools to their own advantage, and that they withhold production information for fear that the Taiwan companies would be too commpetitive in the world market. Japanese businessmen, on the other hand, attribute the failure of the joint ventures in technology transfer to the inability of their Taiwan partners to absorb Japanese technology. This view was clearly echoed in Akazawa's remarks during the press conference when he advised that for technology transfer to succeed, Taiwan companies must sharply increase their investment in R & D.

Obviously, few Taiwan industrialists can argue this point. R & D expenditure by Taiwan companies is considerably lower than that of Japanese and Korean companies. This can be seen from the comparative figures provided by the chairman of the Chinese National Association of Industry & Commerce, C.F. Koo, who co-chaired the press conference with Akazawa. The figures showed that R & D accounts for less than 1 percent of Taiwan companies' business turnover, while for Korean companies it is more than 2 percent, and for Japanese companies it is over 3 percent. Thus, the only way for Japan to prove the sincerily of its promise to transfer technology and narrow the trade deficit is for Taiwan industries to invest more in R & D. Osman Tseng (曾慶祥) is a senior journalist based in Taipei.