The Republic of China on Taiwan (hereafter, ROC) is strongly influenced by this volatile trade atmosphere because its own trade-oriented economy markets almost half of its exports to the U.S., where the ROC has enjoyed a commodity trade surplus of over $10 billion each of the last two years. The powerful retaliatory step of Section 301 wielded by the U.S., the appreciation of the New Taiwan Dollar (NT$), various trade negotiations, and the Generalized System of Preference (GSP) all play an ever-increasing-and a tension-building-role in the daily lives of the people in Taiwan.
By the same token, the ROC's media have made the trade-related names of Mr. Yeutter and Mr. Baker, as well as Mr. Volcker and Mr. Greenspan, as familiar as local celebrities. Beyond name recognition, there is a growing perception of "pressure" from the U.S. on a scale never before experienced.
Many people in the country, both inside and outside of government, believe that the ROC has already conceded to the limits of what can be tolerated. American actions have prompted commonly repeated questions: Why does the U.S. keep on sending the ROC so many messages of dissatisfaction? What is the bottom line for the U.S.? Will the ROC economy be strong enough to sustain an exchange rate of US$1 to NT$30 or even lower? Answers to these questions will not only have tremendous impact on the whole trade picture with the U.S., but also on the immediate and longer term future of the ROC.
There is reason for some optimism. Distinct, positive measures can be taken by both the U.S. and the ROC to alleviate the ever-worsening dispute caused by the huge trade imbalance. While some measures have already been taken to alleviate pressures, there is still room for improvement in the overall environment-and still considerable room for maneuver.
A brief review of the background of ROC-US bilateral trade issues, as well as the measures taken so far to mitigate recent problems, will set the context for some concrete suggestions about courses of action that could lead to their solution. These are presented in tandem with some possible economic and political implications.
Sino-American trade relations began some two hundred years ago when the "Empress of China" sailed into the harbor at Canton on August 28, 1784. The event marked the beginning of an era of bilateral trade that has flourished down to the present day.
From the outset, both countries regarded trade as mutually beneficial. Although business today is understandably quite different from what it was in the days of sailing ships and steam vessels, there has been no change in the mutual expectations for profitable trade relations.
Economists since David Ricardo have demonstrated that international trade is of considerable benefit, for countries gain from the simple act of exchange as well as from the process of product specialization. The ROC-US trade experience has been no exception.
According to the existing data drawn from the U.S. Bureau of the Census, the ROC's—Council for Economic Planning and Development, and other sources-from 1825 until 1895, China had a trade surplus with the U.S., although the amounts are rather trivial by current standards. But bilateral trade shifted in favor of the U.S. from 1896 to 1967. While it is true that the trade advantage has been with the ROC since 1968, the blame for this does not rest on one side.
When the island province was retroceded from Japan to China in 1945, the ROC government began major reconstruction and development. In order to provide an already large population of 8 million people with a decent livelihood, and at the same time to restore the war-damaged economy infrastructure, the government adopted development policies that emphasized foreign trade.
Beginning in 1954, the trade between the ROC and the U.S. grew rapidly, jumping from a mere $100 million to $19.5 billion by 1985, and to $24.4 billion in 1986. While bilateral trade recorded high growth rates in both directions, ROC exports to the U.S. have expanded faster than its imports from the American marketplace.
The U.S. has always been one of the ROC's major trade partners, and it has been the largest since 1972, with a total share of 38.4 percent in 1985; Japan holds the second place with a share of 17.7 percent for the same year. From the U.S. side, however, the ROC was the fourth largest source of imports and the eighth largest market for U.S. export goods in 1986.
This trade relationship developed with considerable assistance from the U.S., which played an important role in the ROC's economic expansion via economic assistance and joint participation in development projects in the early days. The U.S. continues to provide a huge market, relatively free of both tariff and nontariff barriers, to the ROC and other developing countries. Because of the highly interrelated economic relationship between the two nations, it is also true that "when the U.S. sneezes, Taiwan catches cold."
Thus, the ROC has every reason to share America's deep concerns over the trade imbalance with its associated problems of declines in production and rising unemployment in various regions of the U.S. There are several fundamental causes for the trade imbalance:
— Considerable differences in market size and industrial structures exist between the U.S. and the ROC that create long-term natural constraints.
— The ROC products that do so well in the U.S. market can no longer be profitably produced in the U.S. itself, which therefore gives the comparative advantage or competitive edge to the ROC.
— Policy factors have a vital role to play in the whole process. On the ROC side, tariff and nontariff barriers have been relatively high, including duties and other impediments to imports as well as restrictions on investment and foreign exchange. On the U.S. side, GSP and the relatively strong dollar have benefited the ROC's exports. But restrictions on sales of high-tech military equipment and Alaskan oil have impeded imports from the U.S.
Completely balanced bilateral trade between the ROC and the U.S. is physically impossible because of a major constraint: the market size in the ROC is less than one-tenth that of the U.S., and it is quite natural for an island of 19 million people to supply more to a country of 240 million than vice versa.
However, this kind of argument should not be used forever. The ROC has been taking advantage of the huge U.S. market for a little too long. It is time for the ROC to show some additional good faith to its American friends, for it surely has responsibilities as the fifteenth largest trading economy in the world.
In a speech delivered to the American Chamber of Commerce earlier this year, David Dean, director of the American Institute in Taiwan (AIT) Taipei, said: "We all know that trade is a two way street. We should not look upon our trade and economic ties as an adverse relationship, or a zero sum game, but as a mutually beneficial relationship in which two good friends work together and both, ultimately, prosper."
The ROC government agrees that a healthy economic relationship is based upon a fair and reasonable bilateral trade relationship, and in recent years it has taken a number of steps to ensure greater progress in trade liberalization. Five are particularly significant:
— Import tariffs reduction. Import tariffs on hundreds of items of particular interest to U.S. exporters have been reduced as a result of continuous trade negotiations. From 1974 to 1985, the tariff reductions on U.S. exports to Taiwan came to a total of 5,027 items; among these, 117 became duty free. Recent government actions have further confirmed the willingness of the ROC to liberalize its bilateral trade with the U.S.
The average nominal tariff rate of the ROC has come down from 43.58 percent in 1978 to 22.83 percent in 1986. During the same period, the average effective tariff rate has also been reduced from 11.26 percent to merely 7.62 percent. Even more impressively, there has been a more than 50 percent reduction in the average effective tariff rate for U.S. products during the same period.
It is interesting to note that in less than a year the ROC has removed the highest tariff bracket (60.1-67.5 percent) completely, and most of the taxable items have been confined within the range of 5.1 to 20.0 percent. Although the tariff is still fairly high when compared to the U.S., the ROC is committed to continuing tariff reduction and removal.
— Market access for service industries. The U.S maintains the competitive edge in this area and can hold its own against all comers. American banks now provide a wide range of services in the domestic market. The ROC agreed that starting in August of this year it would allow two American life insurance and two property insurance companies to open branches in Taiwan each year. Advertising, consulting, and engineering firms will all be welcome, and some are already becoming active in the local market.
American fast food chains have already become a significant challenge to restaurants serving traditional Chinese cuisine. The novelty of the food, as well as its fashionable image, has given people—young and old—some feeling of connection to American culture. Furthermore, the demonstrated popularity of the clean and efficiently run fast food operations has prompted revolutionary changes in the service and appearance of nearby Chinese restaurants.
— Major purchases and special concessions on certain import items. In an effort to decrease the trade gap, the ROC government has already approved several major purchases from the U.S., such as the boilers for the Taichung thermal power plant, and state-run enterprises have been encouraged to purchase needed machinery and equipment from U.S. manufacturers.
This year, as the ROC begins the primary stages of 14 major construction projects, the U.S. will also be given an opportunity to supply large ticket items. High on the selling list are mass transit systems, pollution control devices, and garbage disposal facilities. The ROC has drawn criticism from other trading partners because of these measures favoring U.S. business.
— Dispatching regular "Buy American" groups to the U.S. From early 1978 through 1986, twelve of these missions have visited the U.S. The thirteenth mission returned to the ROC in July of this year.
Nearly $8.2 billion worth of goods have been purchased in this way, excluding the current year's order of $2.4 billion. Although some criticize these missions as just a formalization of the routine orders the ROC has to place for such items as grains anyway, it is important to recall that the ROC is not required to import all of those items from the U.S. alone. If it were not for the "Buy American" theme, the ROC might well make many more fundamental purchases from other nations.
— Helping promote the sale of U.S. products in Taiwan. In order to assist the introduction of American products to the local market, the ROC government helped the U.S. Department of Commerce set up an American Trade Center in Taipei, and even provides space for the center rent-free. In addition to the American product exhibitions sponsored by the ROC government, seminars on ROC-US trade and investment have also been held several times since 1979.
An annual Joint Conference of the ROC-USA and USA-ROC Economic Councils has been held since 1977, which has attracted thousands of U.S. businessmen. The 10th session was held in December 1986.
Happily, a great deal of progress has been made in the area of intellectual property protection, which includes copyright, patent, and trade mark protection. Taiwan has done much to eliminate its image as a "pirate" of commercial goods.
Finally, as a good friend of the U.S., the ROC has been cooperative in the negotiation of conflict in trade issues. The cancellation of a tariff schedule based upon "customs value," the opening up of the Taiwan market to American-made wine and cigarettes, as well as the continuous appreciation of the NT dollar are good examples of this. Another positive step took place earlier this year when the ROC agreed to either cut or exempt from tariffs a full 62 of the 66 agricultural and industrial products requested by the U.S. at the Sino-U.S. annual trade consultations.
Measures can still be taken, however, that would help avoid harsh, restrictive, "protectionist" legislation harmful to all trading partners in the long run. Both the ROC and the U.S. would benefit from examining their own trade polices to see what measures can still be taken to preclude deleterious trade restrictions.
From the ROC side.
— Conceptually, both people and government should realize that the ROC is no longer an underdeveloped economy, at least from the U.S. point of view. In fact, the $64 billion trade figure, combined with more than $60 billion in foreign exchange reserves and a $3,750 per capita GNP, have already placed the ROC in the upper ranks of so-called rapidly developing countries. In light of this, the mentality of protectionism lent by government to business should be totally removed.
The domestic industry is not entitled to the same type of protection it has been afforded all these years. Tariff and nontariff barriers may be needed for infant industries, but not for those that supply much of the world's goods, such as textiles, footwear, radios, and computers. As one prominent economist has observed, the ROC needs a "gymnasium" setting to strengthen the competitiveness of its industries instead of an "oxygen mask" to shield it from outside competition. It is time for the ROC to learn to play an international game using the standardized international rules.
— Good faith and mutual trust have to be established. In the past the ROC has maintained that a complete opening of the market would benefit American exporters less than the Japanese, who offer generally cheaper products and relatively better post-sale services, as well as enjoying the advantage of geographical proximity.
Government officials and businessmen from the U.S. have complained that this is merely a poor excuse, believing that the quality of American-made products will eventually surpass all others. It is clear that the time has come for a complete opening of the ROC market to establish mutual trust. For any items that could not be opened at this time, the ROC should provide convincing reasons or a time schedule.
— A better environment and climate of investments should be offered to attract both additional investments from the U.S. and more Sino-American high-tech cooperation. There already is a steady growth of investments from the U.S., and in the near term an even faster and wider range of American investment in construction, transportation, and the service industries can be expected.
In addition, the recently released control over the foreign exchange reserve may indeed pave the way for ROC capital to enter the U.S. market. Further more, ideas like venture-capital firms and high-tech cooperation could be approached more sensibly than at present.
A feasible cooperative model posed by one analyst goes something like this: an American company first completes development of a new technology and successfully proves it in prototype testing, and then seeks to manufacture it in cooperation with entrepreneurs in the ROC. At this juncture, assistance might be sought from venture-capital firms. Cooperative manufacturing in the ROC might cover the whole target product, or just part of it. While production is going on in the ROC, the U.S. can still continue research and development. Since manufacturing costs are comparatively cheap in the ROC, the resulting products would still be competitively priced when they are sold back to the U.S. When sold in Taiwan, on the other hand, they would have a special edge because of the geographical advantage.
— The ROC must pay even more respect to the protection of intellectual property rights. This is a controversial task of considerable difficulty, especially given the dissimilarities in the legal codes of different nations. However, the inducement for the protection of intellectual property rights in all nations is the economic benefits that such protection may bestow.
Fulfilling this fundamental aim requires forming a consensus that protection is valuable and necessary, and a recognition that the investigation and prevention of counterfeiting are alone inadequate to combat piracy. More active ways to protect intellectual property rights must be developed, such as creating brand names in the ROC, investing more in R&D, and promoting triangular cooperation among U.S. high-tech factories, ROC research institutes, and industry. If these standards are reached, then there is no reason for anyone to refer to the ROC as a so-called "Kingdom of Piracy."
From the U.S. Side
— The U.S. should revise its system of computing import and export totals, thereby giving it a framework that is more consistent and commonly accepted. Its system at present often confuses the issues.
People in the ROC are often puzzled because the U.S. values its exports by the Free Along Side (FAS) system of computation, instead of the more widely used Free on Board (FOB) system. The difference between values calculated on the basis of FAS versus FOB may occasionally run as high as $2 billion. For instance, the surplus in the ROC's favor last year was $14 billion according to ROC computations, but it was $15.7 billion by U.S. methods of calculation.
Significantly, military sales are not included in calculations of U.S. exports to foreign countries; as a result, the ROC cannot use its average annual $700 million purchase of U.S. military equipment to help bridge the trade gap.
In the realm of multinational enterprises lies yet another major disadvantage for the ROC when faced with American complaints about the trade figures. The sell-back to the U.S. from Taiwan-based firms having American equity has been growing steadily. It is questionable whether this amount should be counted as ROC exports. Although the amount of sell-back has only come to $5 billion in the years 1981-1986, when the Original Equipment Manufacturer (OEM) figures are also taken into account, there is reason for strong argument on the ROC side that its exports to the U.S. have been over-valued. OEM figures for 1986 exported products to the U.S., for example, totalled slightly more than US$19 billion.
Last but not least, none of the trade figures includes trade in services, where the U.S. enjoys a tremendous surplus over the ROC.
Clearly the size of the trade gap is skewed by the way the U.S. arrives at its figures. Unfortunately the American public has a misconception about the genuine totals, which is detrimental to their achieving accurate perceptions of the ROC's role in the international marketplace. The U.S. should reconsider not only their computation methods, but also give the ROC better media coverage on this issue than it currently does. If these occur, the trade imbalance between the two countries would look much less severe.
— The U.S. should promote the signing of the Free Trade Area (FTA) agreement between the ROC and the U.S. It seems valid to argue that establishing the FTA would be an excellent way to avoid protectionist legislation and yet address the severe trade imbalance. The FTA is not only legal under the General Agreement on Tariffs and Trade (GATT), but also complementary to the multilateral trade liberalization process.
Under an FTA agreement, the two countries could remove essentially all barriers to trade over a defined period of time, making more goods available at lower costs. The economic benefits of an FTA could be enormous. However, the U.S. administration so far seems unmoved by such economic reasoning, and it is said that political concerns not economic logic, are the real stumbling block. Voices of wisdom on both sides should call for negotiations to commence as soon as possible.
— The U.S. should ease up on export licenses and red tape. High-tech industries in the U.S. have been growing rapidly in recent years; these industries are a major focus of development in the ROC as well. Consequently, the ROC needs to import American's high-tech to combine with its own human talent and basic technology, but when it comes to attaining export licenses, unbelievable red tape and long waiting periods scare off many agents and companies.
The U.S. has limited ROC applications for imports directly and indirectly for both national security and political reasons. The Japanese government IS doing exactly the opposite. They process orders quickly and efficiently. As a result, Japanese bidders receive more orders from Taiwan, causing Americans to lose sales to their close competitors. For an improved trade picture, unnecessary limitations and restrictions which actually block exports should be lifted immediately.
— The U.S. should adopt more export-oriented practices. Because of its vast domestic market, U.S. manufacturers and businessmen are generally not very serious about foreign markets, a basic attitude that has made a big difference between the American and Japanese businessmen. While most Americans come to Taiwan as buyers, most Japanese come to Taiwan as sellers.
Manufacturers and exporters in the U.S. have to keep a closer eye on the ROC market. As long as the American products are competitive in price and quality, the products made in the U.S. should have a vast potential market in the ROC.
The measures suggested above have both economic and political implications for the U.S. and the ROC.
Economically, there is no doubt that Americans today face two major issues: the federal budget deficit and the trade deficit. Observers in the ROC have every reason to believe that there exists a strong link between the federal budget deficit, the value of the dollar, and the international balance of trade of the U.S.
Unfortunately, there is no quick fix to these critical problems. And it is understandable why Americans are so concerned about their trade deficit, for studies indicate that for every $1 billion increase in the trade deficit, 25,000 jobs are lost. Americans claim that the only sensible approach to the problem is for their trading partners to examine their own restrictive trade policies and open their markets to U.S. products where they are now unfairly closed.
The ROC, as one of the major U.S. trading partners with a big trade surplus, must remind its American friends that trade is a two-way street and there are, accordingly, certain areas where the U.S. must also change. If the U.S. asks other nations to remove unfair trade barriers and import quotas, then the U.S. should also be willing to do the same for any barriers that it has unfairly erected.
Everyone must learn from history. The world-wide economic disaster of the 1930s makes this vividly clear. Protectionism is doomsday economics, and is a certain path to mutually assured depression. Therefore, only sound budgetary and monetary policies, not protectionism, can best tackle the trade problem.
While it is true that ROC imports "disturb" some specific areas of the U.S. market, it is also clear that low-cost, high-quality products from the ROC have provided American consumers greater opportunities and choices in the market place. Millions of individuals are shopping for bargains and saving money by doing so. With the money saved, they can either spend or invest, which in turn will create or preserve jobs. The trouble with protectionism is that it fails to address or confront the real world in which real individuals produce, consume, and save.
In short, it should be realized that the best way to resolve bilateral trade disputes is through consultation and negotiation. And negotiations should be carried out in a spirit of good faith, rationality, patience, and concession.
By the same token, a global instead of a local view of the world trade problem, plus far-sighted long-term capital returns for the shareholders, along with a policy oriented toward exports, should all contribute to lower costs and higher productivity for American business.
Nevertheless, if in fact the U.S. must choose targets for retaliation, then it should first consider mailers beyond the amount of trade surplus—issues such as the length of time the surplus has existed, the nation's population, its per capita income and industrial structure, as well as its willingness to cooperate with the U.S. If judged on this basis, it can be argued that it is totally unjustifiable to include the ROC in the same list as Japan and West Germany.
Politically, other issues arise. In a comment on the succession of U.S. congressional delegations demanding that the ROC and South Korea open their markets and revalue their currencies, Patrick Smith of the Paris-based International Herald Tribune said that Americans should learn that U.S. multinationals are among those exporting everything from cars to computers from the Asian region back to the U.S. He called this kind of trade pressure "irrational," because it is not likely to affect the overall U.S. balance of trade.
Although Smith's comment may not be valid from a strict economics point of view, it is believed and shared by the general public in Taiwan. And they are also inclined to agree with a remark made earlier this year in an Asian Wall Street Journal article that stated:
"Making the dollar weaker to make trade look better is akin to moving the markings on a thermometer when it gets too cold." In short, the political implication of U.S. pressure is a possible arising of "anti-Americanism" and the feeling that" Americans are irrational" among the people of Asia.
In conclusion, it can be said that the American protectionist locomotive is undoubtedly driven by the trade deficit because it is not easy for the American people to accept that their country is now a debtor nation. Many Americans believe that the current sluggish growth, 7 percent unemployment rate, and other economic problems are in no small part related to the huge trade imbalance. This has created growing resentment in the U.S business community and among American workers about the success of products from Asian and Pacific nations.
The ROC shares the U.S. concerns, and agrees completely that retaliatory legislation may trigger a general trade war that will close markets on both sides of the Pacific. But it is evident that not all of the U.S. trade deficit is due to unfair trading practices. Part of it is caused by rapid growth in the U.S. economy when compared with most other countries, and especially in its recent experience with some of the highest real interest rates in the world. These have in turn influenced exchange rates, have made the dollar too strong, and have caused other complicated results.
In any case, maintenance of good economic relations between the U.S. and the ROC is essential. Retaliatory legislation or any measures along that line will eventually hurt both sides. Any trade legislation that does not take into consideration the potential costs—such as a trade war—would be irresponsible. What is needed most at this time is fair, rational, and candid international consultation, because excessive pressure and unreasonable demands will only exacerbate rather than solve trade problems. —(Dr. Chung-lih Wu is an associate research fellow at the Institute of Economics in Academia Sinica, Taipei. This is a revised and edited version of a paper presented at the 29th Annual Conference of the Western Social Science Association held at El Paso, Texas, April 22-25, 1987).