Taiwan's Economic Tunnel Vision

By Philip Bowring

18 January 2012

Taipei -- President Ma Ying-jeou's re-election victory in a Taiwan poll widely seen as a referendum on cross-Strait relations with mainland China signals lukewarm approval for further economic engagement. The result also suggests both sides of the political divide here would do well to stop obsessing about ties with the mainland and focus more attention on the rest of the world. Taiwan is missing big opportunities with the U.S. and the European Union.

Mr. Ma campaigned hard on his economic record, the centerpiece of which is improved ties with the mainland -- including an Economic Cooperation Framework Agreement. Voters approved of that (or, conversely, disapproved of the less friendly rhetoric of opposition candidate Tsai Ing-wen), handing Mr. Ma a victory by a nearly six-percentage-point margin.

But the fact that the poll was not a landslide suggests some ambivalence about Mr. Ma's mainland strategy, coupled with a sense that he doesn't have enough of a plan for dealing with other economic issues. And voters inevitably will worry about whether a cross-Strait strategy buys Taiwan's prosperity at the cost of its autonomy.

Mr. Ma's best antidote to those concerns is to develop other economic relationships. A defensive, inward-looking Taiwan busy arguing about its identity has failed so far to take advantage of its position as an open, trade-based economy with close historical links to the U.S. and Japan and a strategic location.

Taiwanese and foreigners alike are too often taken in by the fact that the mainland buys about 41% of Taiwan's exports. Roughly 70% of those exports are components for products made by Taiwanese-owned and operated factories that are ultimately exported as finished products like iPads or Nike shoes to the rest of the world. Add to those Taiwan's direct exports and the mainland is no bigger than the EU and North America as a source of final demand for Taiwan.

The proportion of exports to the mainland may anyway have peaked as more components are now made in China. Direct exports of finished products to the global market will become more important for Taiwan in future.

Improved global trade ties would support Taiwan's aspiration, so far unrealized, to be a regional trade and services hub. It has the infrastructure, a highly educated workforce, a respected currency, clean air, polite people and good food. Failure to exploit these advantages was long blamed on the absence of cross-Strait links, particularly after China emerged as a major player. But the creation of those links by the Ma government has exposed the fact that other forces are thwarting Taiwan's growth.

The biggest problem is protectionism. Taiwan has resisted opening its marketplace for services to foreign competitors. Its agricultural market remains closed. And so does its labor market, as Taipei resists opening its doors to foreign workers.

While Mr. Ma has talked up mainland commercial deals, relations with the U.S. have been on hold because of a partial ban on U.S. beef imports imposed in a frenzy of concern over possible mad-cow disease. What folly. There is no science to support the ban, and as a result of it Taiwan is falling well behind an aggressive South Korea. Seoul, which overcame domestic political opposition of its own to resume American beef imports, now has free trade deals with the U.S. and the EU and is keen to negotiate more.

Though Taiwan's lack of official international recognition is an obstacle, lack of zeal is equally to blame. It is talking about free-trade agreements with Singapore and New Zealand, yes, but these are of scant significance compared with the U.S., EU, Japan and the Association of Southeast Asian Nations. Talks with the U.S. over a Trade and Investment Framework Agreement (itself not a very ambitious goal) are at a standstill because of the beef issue. Mr. Ma said recently that Taiwan wanted eventually to join the U.S.-promoted Trans-Pacific Partnership agreement but envisaged a 10-year time frame. Such a tepid goal reflects the extent of protection that still prevails in Taiwan.

Foreign chambers of commerce have pleaded year after year for liberalization of work permits and access to service industries to which they could offer the highest global standards. But progress has been slow thanks to the attitudes of the bureaucracy and politically powerful vested interests.

Obstacles to internationalization are the result of populist pressures in the media and in the legislature -- protecting farmers, overstating environmental and health risks. Taiwan badly needs leaders who can resist populism and urge that closer links with the mainland go hand in hand with liberalization and internationalization. In a fast-aging society with an extremely low birth rate, only in this way can autonomy and economic progress be sustained.

Mainland tourism and investment are only part of the answer for an economy where, as in Japan, dynamic and innovative technology and manufacturing industries are propping up inefficiency in many others. Weak productivity growth in services has meant that wages for most workers have been static even as the economy has grown partly because of lack of competition. Services such as banking are massively over-staffed.

These are the pressing issues to which, with cross-Strait relations now stable, a re-elected Mr. Ma should turn his attention.