International Political Economy: Taiwan

International Political Economy: Taiwan

Made in Taiwan, an all too familiar sticker found on many products you and I purchase everyday. Taiwan is slightly smaller than Delaware and Maryland combined yet boasts an economy rivaling that of the top nations in the world. Taiwan is known for its rapid economic growth in the 80s and 90s due to the demand for textiles and electronic computer chips manufactured there. However, Taiwan’s once boisterous economy is now beginning to slow its pace due to outsourcing and government restrictions on trade with China.

Taiwan is a democratic nation that has a dynamic capitalist economy. Its neighbor China, on the other hand, is a communist state. This normally would not be too much of a problem except for the rough history between these two countries. To explain the economic crisis Taiwan faces with China, one must understand the history between the two. In 1895, military defeat forced China to cede Taiwan to Japan. Taiwan reverted to Chinese control after World War II. Following the Communist victory on the mainland in 1949, 2 million Nationalists fled to Taiwan and established a government using the 1946 constitution drawn up for all of China. Over the next five decades, the ruling authorities gradually democratized and incorporated the native population within the governing structure (CIA WFB 2006). So Taiwan never formally left China, but is not ruled by the Chinese government either. China does not formally recognize the government of Taiwan, therefore communication between the two on issues such as trade is almost non-existent.

The crisis being discussed is not so much a crisis as it is an economic predicament. Taiwan and China must work out some differences so that Taiwan’s economy can get back on the fast track as it once was. As of early 2006, Taiwan’s restriction on trade and investments with China has been a huge burden upon their economy. A conference concerning these issues was called in July in Taiwan to discuss and try to remedy the situation with China, but it did not accomplish much. As of early 2006, Taiwan’s fifth largest trading partner is China, but most of the trade is done indirectly to China through Hong Kong and Japan. It seems that the protectionist policies placed on China by the Taiwanese government are only slowing the growth of the Taiwanese economy. There is a rationale behind the government policies in regulating business in Taiwan however.

If Taiwan’s government relaxed all trade restrictions with China and removed protectionist polices in place to protect Taiwan businesses, then a lot of Taiwan businesses would be undercut by Chinese imports because of the cheap labor and products made in China. Another problem Taiwan faces is Taiwanese businesses outsourcing or completely moving to China because of the cheap labor found there. Much like the United States is facing with Mexico; Taiwan is losing business to cheap Chinese labor. There is not much Taiwan can do about this problem either because it is an inherent problem of all free capitalistic economic systems. Businesses will always find the cheapest way to make the most profit, even if it means laying off their local labor for cheap foreign labor.

As China becomes more and more of a factor in world trade, Taiwan must begin to realize this and adapt its trade policies. In the 80s and 90s, the United States was Taiwan’s largest trading partner composing more than 20% of Taiwan’s trade. Taiwan did not have to rely on China’s trade as much. Now that China is a large factor in the world economy, Taiwan’s government must take the steps necessary to take full advantage of the opportunity that is knocking at their doorsteps.

Taiwan’s current president’s protectionist attitudes could be explained through the partisan model of Keynesian economics. The partisan model explains that political parties on the right prefer low inflation, and will tolerate higher unemployment to achieve this. Political parties on the left, however, prefer low unemployment. Low employment tends to occur when jobs stay at home, rather than being outsourced to foreign countries. Left wing parties also prefer expansionary monetary polices. President Chen belongs to the Democratic Progressive Party, which obviously is a left wing political party. The restrictive policies in place follow the left wing model by keeping jobs in the country.

Currently one Taiwan New Dollar buys a little over four Chinese Yuan. Now common sense dictates that goods and labor in China are going to be cheaper than goods and labor in Taiwan and this proves to be true. Why would any company in Taiwan in their right mind choose to stay in Taiwan when they could move to China and make loads more money because everything is cheaper there? This is yet another reason why Taiwan insists on keeping protectionist barriers in place with China, to dissuade Taiwan companies from doing just that. These regulatory barriers keep Taiwan business in Taiwan, but hurts overall growth by forcing Taiwan business to buy expensive local goods.

As of now, the Taiwanese economy sits at around 4% gross domestic product or GDP increase per year with a low 4% unemployment rate. Now one would think that Taiwan is doing pretty good from those numbers, but the GPD is actually down and the unemployment rate is up compared to previous years. To understand this fully, one must look to Taiwan’s past to see where it came from and how it progressed into a world economy. Through nearly five decades of hard work and what some would call sound economic management, Taiwan transformed itself from an underdeveloped, agricultural island to an economic power that is