NEWLY INDUSTRIALIZING COUNTRIES EXPORT ASSISTANCE PROGRAMS: A GROWING CHALLENGE

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• Document Creation Date: December 22, 2016
• Document Release Date: December 21, 2010
• Sequence Number: 3
• Publication Date: July 1, 1983
• Content Type: REPORT

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Directorate of
Intelligence
Newly Industrializing
Countries' Export
Assistance Programs:
A Growing Challenge
GI 83-10174
July 1983
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"LLK
Directorate of Secret
s n Intelligence
Newly Industrializing
Countries' Export
Assistance Programs:
A Growing Challenge
This paper was prepared by
Office of Global Issues. Comments and queries are
welcome and should be directed to the Chief, Third
World Issues, Economics Division, OGI
Secret
GI 83-10174
July 1983
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secret
Summary
Information available
as of 6 July 1983
was used in this report.
Newly Industrializing
Countries' Export
Assistance Programs:,
A Growing Challenge
or financial incentive.
The newly industrializing countries (NICs) have established sophisticated
export assistance programs, which rival similar programs in industrial
countries. Brazil and Mexico do the most to promote exports, closely
followed by South Korea and Taiwan. Singapore has recently introduced
some export promotion measures to counter the effects of the global
recession, while Hong Kong retains its laissez faire trade policy. We have
no way of gauging how much government assistance has contributed to the
rapid growth of NIC-manufactured exports, but, based on a review of the
programs, at least one-half of these exports benefit from some form of tax
NIC industrial development plans and export assistance programs suggest
that the NICs are successfully adjusting their trade policies to support
their industrial goals by:
? Trying to shift their export-oriented industries away from traditional
"cheap labor" products-textiles, apparel, and consumer electronics-
toward manufactured goods that use more capital, skills, and technol-
ogy-machine tools, precision equipment, computers, and computer-
related equipment.
? Stepping up their use of certain export incentives-particularly officially
supported credits-and concentrating them on the industries targeted for
development.
lems are likely to preclude much restructuring of their industries.
textile, and apparel industries because their international payments prob-
We expect further changes in both the types of export incentives the NICs
offer and the industries they promote. US businessmen and bankers think
the NICs probably will try to trim the cost of export financing by reducing
direct loans to overseas buyers, which require substantial government
support, in favor of interest rate equalization programs, which involve a
transfer of funds equal to the difference between the lender's cost of
obtaining the funds and the preferential rate charged to the borrower.
Judging by their industrial plans, we anticipate that South Korea, Taiwan,
and Singapore will begin targeting more export assistance to the shipbuild-
ing, machinery, and electronics industries-including avionics and other
semi-high-technology sectors. By contrast, Mexico and, to a lesser extent,
Brazil will probably continue to focus on the steel, transport equipment, 25X1
iii Secret
GI 83-10174
July 1983
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The NICs are formidable competitors in certain product lines in the United
States, and we believe their export assistance programs enable them to
capitalize on US economic recovery by taking larger market shares of such
consumer goods as clothing and footwear and such industrial goods as
electrical machinery. In the medium term, we see NIC competition shifting
to higher technology products. While the NICs almost certainly will not
export across the board in high-technology goods, we believe they will
locate market niches that can be promoted by their export incentive
programs and exploited on the basis of price
Targeting of markets will have a dual impact on the West. Many of the
tensions between the NICs and the industrial countries over labor-intensive
goods will shift to new products. At the same time, the growing technical
sophistication of the NICs' output gives them the potential to become
alternative suppliers to the Soviets. If Western sales opportunities were
curtailed or if Soviet Bloc trade were to become more lucrative, little would
prohibit the NICs from expanding trade with the East. Any pressure to sell
to the Soviets and their surrogates will be even more intensive in NICs,
such as Mexico and Brazil, that are financially strapped.
Secret iv
Orlyl
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The Changing Focus of Export Incentives
Implications for Trade Partners
A. Synopses of NIC Export Assistance Programs 13
B. Glossary 35
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Table I
Newly Industrializing Countries:
Penetration of Selected US Manufactured Goods Markets
Imports
From NICs
Total
Clothing
Leather and
Footwear
Wood and
Cork Manu-
factures
Electrical Textiles
Machinery
Metal
Goods
Rubber
Goods
Nonelectrical
Machinery
1970
Value (million US $)
2,192
572
85
149
441
104
51
2
56
Share of total imports
(percent)
9.1
45.2
11.4
36.0
19.9
9.2
6.2
1.0
2.5
Share of total consump-
tion (percent)
0.5
2.8
1.5
1.3
0.9
0.4
0.1
NEGL
0.1
Value (million US $)
26,947
5,349
2,101
573
6,577
688
1,142
237
1,716
Share of total imports
(percent)
19.1
65.9
55.1
40.7
37.4
22.4
26.0
_
14.2
10.2
Share of consumption in
1979 (percent)
1.3
10.1
12.6
1.9
4.0
0.8
0.8
1.0
0.6
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Secret
Newly Industrializing
Countries' Export
Assistance Programs:
A Growing Challenge
Introduction
Brazil, Hong Kong, Mexico, Singapore, South Korea,
and Taiwan have moved rapidly toward becoming
relatively industrialized. Under strategies of export-
led growth, these newly industrializing countries
(NICs) experienced average annual real GDP growth
of over 7 percent during 1965-82, far more than the
4-percent growth registered by the OECD for the
same period. Moreover, the NICs' rapid emergence as
exporters of manufactured goods has led to increased
penetration of US and other industrial-country mar-
kets for selected products. Although the NICs have
only a small share of the US-manufactured goods
market, they have captured a large share of US
imports in certain product lines (table 1). Moreover,
the NICs' market penetration has occurred during a
period of slow world growth and high unemployment.
As a result, industrial countries have been sensitive to
the NIC challenge.
To maintain the dynamic growth they achieved over
the past 15 years, the NICs have been adjusting the
focus of their export strategies. They have shifted the
structure of their export-related industries away from
traditional "cheap labor" commodities toward the
production of more sophisticated products that use
substantial inputs of capital, skills, and technology.
An earlier study of the industrial plans for each
country indicated that the industries targeted for
development include machine tools, microelectronics,
transportation equipment, telecommunications equip-
ment, minicomputers and microcomputers, and finan-
cial and information services.
According to plans described in both press and official
NIC reports, the policy tools chosen by the NIC
governments to push development of these industries
fall into three broad categories: domestic demand
management, incentives for industrial development,
and export promotion. This paper examines the export
assistance programs used by the NICs, how they are
being changed to promote the export of more sophisti-
cated manufactured products, and the challenges they
pose.
Export Assistance
National Strategies. Under the development strate-
gies pursued by the NICs, trade is a driving force of
economic growth. The importance attached to trade is
clearest in the cases of South Korea, Taiwan, Hong
Kong, and Singapore. With ratios of exports and
imports to GNP in 1981 of 87 percent, 105 percent,
152 percent, and 172 percent, respectively, these
countries virtually live by trade. For the United
States, this ratio was only 20 percent.
Our survey suggests that the governments of Brazil
and Mexico are doing the most to promote exports
and Hong Kong and Singapore the least.' Although
NIC programs vary in size and content (table 2), their
main objectives are to increase the profitability of
manufactured goods to encourage domestic firms to
produce them and to lower the export prices of these
goods to ensure that they are competitive in world
markets. These goals are accomplished through such
broad-based measures as exchange rate policies and
more narrowly focused policies such as tax and duty
concessions, preferential credits, government promo-
tion and marketing, and an array of other measures
such as trading companies and free trade zones.
Brazil uses practically all of the known policy tools to
promote exports, including restrictions on imports
that compete with potential Brazilian exports, but
relies mainly on tax incentives and official export
financing. In its recent arrangement with the IMF,
Brasilia agreed to shift away from product-specific
incentives to incentives that improve the price compet-
itiveness of all exported manufactured goods and
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Table 2
CD Newly Industrializing Countries: Summary of Export Promotion Measures
Exchange rate Devaluation of cruzeiro No foreign exchange re- Two-tier exchange rate
policy in line with the domestic strictions. regime.
rate of inflation.
Import Tariff and nontariff bar- Imports are virtually free Fairly restrictive import
restrictions riers to protect industry of restrictions. duties and licenses.
and stem widening
balance-of-payments
deficit.
Fiscal incentives Incentives to exporting Flat 17-percent gross
firms: profit tax.
- Exemption from
value-added taxes. No protective tariffs,
- Value-added tax capital gains tax, or
credits. corporate income tax.
- Export-related
income tax reduction.
Incentives for export
production:
- Duty and tax breaks
on imported inputs.
- Duty drawback
system.
Financial Interest rate equaliza- No subsidies or support-
incentives tion export financing. ed funding programs.
Tax rebate on imported
machinery used in pro-
duction of exports.
Duty-free import of ma-
terials used in exports
that are not available
domestically.
Export and preexport
financing through a
discounting facility.
No foreign exchange re- No significant foreign
strictions. exchange regulations.
Almost all imports enter
freely.
Has initiated a major
import liberalization
program.
Exemption of corporate
income tax for specific
export-oriented
"pioneer" industries.
Reduction in corporate
income taxes for firms
exporting nontraditional
products.
Reduction in corporate
taxes for exported goods
and expenses for produc-
ing and marketing
exports.
Double deduction of ex-
port promotion expenses.
Interest rate equaliza-
tion facility.
Export bill rediscounting
scheme.
Preferential financial
assistance for domestic
shipbuilding.
Preferential short-term
export financing.
Provision of direct medi-
um- and long-term buyer
and supplier credits via
Korea Export-Import
Bank.
No restrictive measures
affecting trade
transactions.
Import restrictions have
been gradually reduced.
Customs tariffs are main
instrument of control.
Business tax exemption
on export sales.
Tax rebate on imports of
raw materials used in ex-
ported products.
Duty exemption for se-
lected imports of ma-
chinery and equipment.
The Export-Import Bank
of China directly
finances buyer and
supplier credits.
Refinancing through the
Fixed Rate Relending
Facility.
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Government
promotion
Marketing research and Industrial promotion
other promotions. offices.
Overseas export promo-
tion offices.
Conducts trade fairs;
otherwise, prefers each
firm to promote own
exports.
Trade fairs and exhibits. Streamline trade admin-
istration procedures.
A variety of market de-
velopment programs.
Sponsors trade fairs and
provides facilities for
export exhibits.
"Buy American" and
"Buy European"
programs.
Other measures Export finance Export finance
insurance. insurance.
Promotion of trading
companies.
Operation of six free
trade zones.
Recently imposed IMF Laissez faire trade
austerity measures im- policy.
prove price competitive-
ness of exports. Underly-
ing incentive system will
continue to promote tra-
ditional manufacturing
subsectors.
Export finance
insurance.
Export finance
guarantees.
Under pressure from ma-
jor trading partners, has
suspended tax credits for
exporters. IMF austerity
program aims to enhance
export competitiveness
by liberalizing import re-
gime and providing more
equitable distribution of
export subsidies.
Export finance
insurance.
Export finance
guarantees.
Generally avoids direct
export incentives. How-
ever, recently introduced
tax and financial pack-
ages favor capital-inten-
sive exports.
Export finance
insurance.
Export finance
guarantees.
General trading
companies.
Fifth Five-Year Plan for
1982-86 signals change
from detailed quantita-
tive export targets to pol-
icies that allow market
forces to operate more
freely, subject to some
government regulation
and protection.
Export finance
insurance.
Export finance
guarantees.
Three export processing
zones.
Objective of trade policy
is to diversify interna-
tional trade by widening
export lines and expand-
ing trade with new part-
ner countries.
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increase export earnings. Because of its pressing
foreign exchange needs, the government of Brazil's
long-term industrial ideology has yielded to short-
term pragmatism.
Since 1979, Mexico's export promotion program has
concentrated on industries selected by the government
as potentially competitive-mining, textiles, steel,
automobiles, capital goods, chemicals, metal products,
rubber, and petrochemicals. To promote the develop-
ment and exports of these industries, Mexico devel-
oped a complex system of import duties and licenses,
tax and duty rebates on machinery and raw materials
used in the production of exports, as well as export
and preexport financing. According to the IMF, these
measures have been uncoordinated, resulting in wide
disparities in the incentives granted to different indus-
tries. Because of its recent serious financial crisis, the
government of Mexico announced in mid-May a new
export development plan. Outlined in its letter of
understanding to the IMF on 7 January 1983, the
Mexican Government agreed to certain changes in the
tariff structure, tax incentives, and import licensing
requirements. These revisions are intended to enhance
the competitiveness of Mexico's less favored export
industries-such as mining-and to reduce subsidies
to industries primarily in the manufacturing sector
that have received what the IMF considers an inordi-
nate amouni of support
Last year South Korea deemphasized its practice of
closely managing both exports and imports in favor of
policies designed to strengthen the competitiveness of
exports in general. Seoul has not abandoned regula-
tion and protection of exporting sectors of the econo-
my, but it no longer sets specific export and import
targets, which frequently required manipulation of
tax and financial incentives. The government has
liberalized import licensing, reduced some tariffs on
goods imported by exporters, and begun to phase out
short-term preferential export credits.
A major objective of Taiwan's trade policy is to
diversify export product lines and expand trade with
countries other than the United States and Japan.
Although Taipei endorses freer trade, it provides a
variety of economic incentives to exporters. Manufac-
turers are exempted from the business tax on their
export sales and from duties on the imported raw
materials and machinery used in exported products.
The Export-Import Bank of China offers direct sup-
plier and buyer credits as well as below-market fixed-
rate relending facilities for the export of capital goods.
In providing these credits, government planners seek
to move domestic manufacturers toward the produc-
tion and export of such higher technology and higher
value-added goods as transport equipment, machin-
ery, electrical and electronic equipment, precision
instruments, and basic metals.
Hong Kong maintains a laissez faire stance toward
trade policy. There are no export subsidies or tariffs
and a minimum of trade restrictions. Government
participation in trade promotion is principally in the
form of export finance insurance, trade fairs, and
industrial promotion offices.
Singapore, like Hong Kong, has generally left local
firms to promote their own exports. According to
diplomatic reporting, however, Singapore has modi-
fied its policies in the face of rising international
protectionism and a decline in the competitiveness of
its traditional exports. To expand into higher value-
added exports, the government now offers tax breaks
to firms that export nontraditional products and is
providing concessional export financing to promote
capital-intensive industries. Only a select group of
higher technology industries such as aircraft compo-
nents, electrical tools, and microwave equipment qual-
ify for the tax relief incentives.
The Changing Focus of Export Incentives
Our examination of the NICs' export assistance pro-
grams suggests that two types of changes have been
occurring as NIC governments try to export more
sophisticated products and cope with growing compe-
tition for world markets. We believe the NICs are
using a broader mix of measures to promote exports,
and that these incentives are being increasingly con-
centrated on specific manufacturing subsectors such
as compressors, measuring devices, and photographic
and optical instruments.
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Measures Used. After employing outward-looking
growth strategies in the mid-1960s, the NICs imple-
mented programs that were built around import re-
strictions, fiscal incentives, exchange rate policy, and
free trade zones to promote the production and export
of their manufactured goods. Today, these instru-
ments are complemented by financial incentives, the
operation of general trading, companies, and aggres-
sive government promotion.
One of the more noteworthy developments in the
NICs' export assistance programs is the relatively
recent emergence of officially supported export cred-
its. Since the mid-1970s, each of the NICs except
Hong Kong has established a preferential financing
facility to soften the terms of export financing and
enhance the competitiveness of its exports. Moreover,
each NIC provides some form of export insurance or
guarantee to protect domestic producers against the
commercial and political risks encountered when ex-
tending credit to foreign buyers of their manufactured
goods.
The NICs' financing facilities are comparable in most
respects to those of industrial countries (table 3). They
operate several types of direct funding, interest rate
equalization, and refinancing programs.' One basic
difference, however, is that the NICs provide
assistance to export transactions with credit terms of
less than six months; industrial country governments
export credit programs with respect to financial out-
lays and product coverage. These are followed by
South Korea and then Singapore and Taiwan.
Although comprehensive data are not available on the
volume of NIC export credits, some notion of their
importance in promoting trade in manufactured goods
can be gleaned from studies of Brazil's and Singa-
pore's programs. The IMF calculates that credits
extended under Brazil's interest rate equalization
program rose from $700 million in 1976 to $1.7
billion in 1980. Data reported by the Monetary
Authority of Singapore indicate that exports financed
under Singapore's rediscounting scheme jumped from
$36 million in 1975 to about $1.3 billion in 1981. As a
share of total exports, these financed exports in-
creased from 0.7 percent in 1975 to 6.2 percent in
1981.
Because the NICs are beginning to enter markets in
which they have limited product recognition, they are
also emphasizing institutional ways to open up mar- 25X1
kets. South Korea, Brazil, and Taiwan already make
fairly extensive use of trading companies to enhance
financial resources and marketing expertise. This
approach already seems to be paying off. In Brazil,
for example, trading companies increased their share
of total exports to 28 percent in 1982, up from 19
percent in 1981.
Each of the NICs has established some form of
official trade agency to assist producers in marketing
their manufactured goods. These agencies sipport the
domestic producers by:
? Organizing seminars, conferences, and trade exhibi-
tions to promote potential export lines.
? Locating potential buyers.
? Providing information and assistance to these
buyers.
? Undertaking market research and related activities.
Although several NICs state that they intend to
reduce their reliance on industrial country markets,
we find little evidence to suggest that any of the
NICs' economic incentives are designed specifically to
promote exports to third-country markets. If the
NICs were to use any of their economic incentives to
discriminate between markets, we believe they would
use official export financing schemes, which govern-
ments can readily direct toward favored buyers. We
were unable to determine from the available data,
however, the extent to which the NICs export credit
agencies use the terms of these credits to promote the
export of manufactured goods to selected markets.
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Table 3
Newly Industrializing Countries:
Comparison of Export Financing Schemes
Country Type of Adminis- Date Repay- Currency
Program tered Estab- ment
by lished Period
Hong None None
Kong
months
to 10
years
Financed Domestic Fee
Portion Content Consider-
(percent) Require- ation
ment (percent)
(percent)
US dollars Less than 80 7.5 to 10.0
two
years, 100;
two to 10
years, 85
Mexico
Rediscounting Bank of
Mexico
Singapore
Interest rate
Ministry of
1979
equalization
Finance &
Export Credit
Insurance
Corp.
Rediscounting
Monetary
Authority
of
Singapore
NA
South
Buyer and
Eximbank
1976
Korea
supplier
credits
Taiwan
Buyer and
Eximbank
1979
supplier
credits
1979
Japan
Buyer and
Eximbank
1950
supplier
credits
30 days to US dollars Up to 50 6.0 to 8.75 1,563 Commitments
10 years and other 100 include export
approved percent and preexport
currencies of financing.
contract
Two to 10 Singapore Up to 85 None S $10.125 NA Operation
years dollars percent of to S $11.25 suspended.
and US Singapore US $11.25
dollars content to US $11.625
Up to 180 Singapore Up to
days dollars 100
Two to 10 Korean
years won, US
dollars,
and other
major
currencies
30 Generally 3,169 Commitments
rediscounted refer to gross
at 1.5 percent amount
below the rediscounted.
Singapore
prime rate
70 to 90 Up to 75 9.0 to 10.0 403 Commitments in
1979 were $928
million.
Two to US dollars Up to 85 50 8.5
seven years
Two to US dollars Up to 90 50
seven
years
Two to 10 Japanese Up to 55 50
years yen
Commit- Comments
ments
in 1980
(million
us $)
1,700 Devaluation of
the cruzeiro
reduced the
dollar value to
$800 million in
1982.
176 Commitments
include
discounting
offers and
buyer and
supplier credits.
9.25 3,900 According to US
bankers,
Japan's export
credit support
is probably the
broadest of
industrial
countries.
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The Question of Subsidies
Many developed as well as developing countries are
concerned that the NICs may be supporting their
exports excessively, thereby distorting international
trade competition and causing economic harm to
competing industries. To protect against this, the
GATT has established a means of recourse to offset
the economic effects of export subsidies and thus
prevent injury to domestic industries. According to
the US Special Trade Representative's Trade Action
Monitoring System, since 1976 there have been 13
affirmative countervailing duty determinations
against the NICs by the United States (see table 4). In
most instances, the countervailing duties levied were
on labor-intensive consumer goods that were subsi-
dized through the use offscal incentives.
In addition to the GATT, the Berne Union and OECD
attempt to establish and maintain discipline with
respect to the use of subsidies. The Berne Union is
concerned with matters related to the insurance of
export credits and foreign investment. The Union
presently has 36 member insurance organizations
from 28 countries. Of the NICs, Hong Kong, Mexico,
Singapore, and South Korea have insurance compa-
nies that are members of the Union. The OECD is
responsible for establishing international guidelines
on export credit terms. These guidelines, referred to
as the Consensus, in effect establish an international
code of conduct with respect to interest rates, repay-
ment periods, downpayments, and credit conditions of
government-supported export credits. The NICs gen-
erally follow the guidelines set by the Consensus, but
they make every effort to meet foreign competition
and are particularly aggressive where support for
their emerging capital-intensive industries is re-
quired.
Industries Promoted. In addition to using a new mix
of measures, we believe the NICs are moving away
from providing support to a broad range of manufac-
tured exports to the promotion of specific products.
This is being accomplished through tax and financial
incentives and, to a lesser extent, import restrictions
and free trade zones. In most instances, we found that
Table 4
United States: Countervailing Duties Against the
Newly Industrializing Countries, 1976-82
1976
Brazil
Castor oil products
1977
Brazil
Scissors and shears
Cotton yarn
South Korea
Handbags
Taiwan
Handbags
1978
Brazil
Textiles
1979
South
Korea
Bicycle tires and
tubes
1980
Brazil
Pig iron
Taiwan
Bicycle tires and
tubes
1982
Mexico
Ceramic tiles
Toy balloons and
balls
Litharge, red lead,
and lead stabilizers
11.3
15.6
19.8
NA
NA
Waived
0.5
Case by case
0.89
17.36
5.97 to 6.23
3.73
the industries promoted by these measures have at
some time been targeted for expansion under the
NICs' industrial development plans.
A review of NIC programs indicates that financial
incentives are the most extensively used sector-
specific measure. In Brazil, for example, over one-
third of total interest rate equalization credits are
extended to the transport equipment sector. The
principal recipients of Mexico's credit support are the
chemical, basic metal, machinery and electronic, and
textile industries. Singapore's rediscounting scheme
has been used to finance small- and medium-sized
producers' exports of capital-intensive products. Most
of South Korea's Eximbank loan commitments have
supported ship exports, while Taiwan's export credits
are extended principally for machinery.
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Table 5
Newly Industrializing Countries: Fiscal Export Incentives
Country
Incentives for
Incentives
Production of
Granted to
Exported Products
Exporting Firms
Exemption from import
duties.
Metallurgy, transport equip-
Value-added tax credits.
ment, mechanical, and electron-
ic machinery.
All exported manufac-
tured goods.
Transport equipment,
food, metallurgy, textile,
and mechanical equip-
ment industries.
Export-related income All exported
tax reductions. merchandise.
Mexico Reduction of import du- All firms that manufacture
ties on machinery and exported goods.
equipment not available
domestically.
Exemption from import All firms that manufacture
duties on temporary exported goods.
imports.
components and accessories,
diesel and gasoline engines,
compressors, transformers, elec-
tric portable tools, electrical
testing and measuring equip-
ment, microwave equipment,
magnets and magnetic measur-
ing devices, and a wide range of
plastic raw materials.
South Korea Tariff rebate system. All firms that import raw mate-
rials or components used in the
production of exports.
Tariff installment sys- Firms that manufacture goods
tem on capital equip- for export.
ment imports.
Special depreciation
allowance.
Firms that manufacture export-
ed goods.
Duty exemption on im- All firms that manufacture
ported machinery and exported goods.
equipment.
Export-related income Companies having ex-
tax reductions. port sales greater than
S $100,000 and export-
ers of nontraditional
products.
Tax rebate on exported All exports.
goods.
Export-related income All exports.
tax exemption.
As a further financial incentive, the Brazilian Govern- production of fibers, fabrics, footwear, and leather
ment provides working capital loans to export-orient- products. The preexport financing scheme operated in
ed firms; Mexico offers preexport financing to aid the Mexico favors the production of capital goods.
production of items to be exported. The working
capital loans in Brazil are provided mainly for the
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The Korean shipbuilding industry is a classic exam-
ple of government promotion and successful industri-
al development. Targeted for development in the late
1960s, the shipbuilding industry burst into the inter-
national market in the 1970s, ignored a worldwide
shipbuilding recession that cut tonnage produced in
half between 1976 and 1979, and eventually gained
enough European, Middle Eastern, and North Amer-
ican customers to become the world's second-largest
shipbuilder and exporter of ships. From 1971 to
1981, Korean production increased from roughly
40,000 gross tons of ships with no exports to over
1.1 billion gross tons, of which over 90 percent was
exported.
carrier ($42 million versus $55 million). On average,
South Korea can build ships for 15 percent less than
they are built in Western Europe.
The price competitiveness of Korea's ships has been
due to both its comparative advantage in labor costs
and the government's support policies. One industry
estimate puts Korean shipyard wages at one-third the
level of wages in Japan. The government's long-
standing support for the industry and its exports has
also been an important factor. For example, all
import duties and domestic taxes are waived on
shipbuilding equipment and material used in ship-
yards. Moreover, the Korea Export-Import Bank
provides concessionary export loans, which have re-
duced the cost of export financing by as much as
According to industry analysts, the principal reason
for the success of the industry has been price competi-
tiveness. Estimates by the Association of Western
European Shipbuilders put the Korean price advan-
tage over European builders at 12 percent for a
1,750-TEU (20-foot-equivalent unit container) con-
tainership (roughly a $38 million price tag in Korea
versus $43 million in Europe) and as high as 24
percent for a 13,600-D WT (deadweight tons) bulk
The NICs generally provide some form of tax incen-
tives to promote exports (table 5); those in Brazil,
Singapore, and Taiwan tend to focus on specific
industries. Brazil, for example, provides packages of
enterprise-specific tax and duty exemptions and re-
ductions to firms that agree to export a prearranged
amount of manufactured goods. The incentives pro-
vided by Mexico and South Korea do not promote
specific manufacturing sectors, but they do favor the
production of manufactured goods over primary prod-
ucts.
The use of import restrictions to protect export-
oriented industries varies among the NICs. Singapore
and Hong Kong have virtually no controls on imports.
Taiwan uses tariffs to control imports, while South
Korea uses both tariffs and import licenses. Both
countries have been liberalizing their import regimes,
but they are still highly restrictive on imports that
compete directly with export-oriented industries,
5 percentage points.
In 1980 and 1981, over 90 percent of the $400 million
and $810 million, respectively, of export credits
arranged by the Bank were for ships. These loans, in
turn, financed over three-fourths of the value of the
ships exported in each of these years
which are targeted for expansion under their industri-
al development plans. The most restrictive import
regimes are in Brazil and Mexico. Each relies on a
complex system of import licenses and duties that,
according to the IMF, actually discourages exports by
promoting import substitution. It is in part to correct
for this antiexport bias that Brazil and Mexico offer
financial incentives to domestic firms to stimulate
their production of exported goods.
Most of the NICs have some type of free trade zone.
These zones offer manufacturers of exports duty-free
entry of imported materials, tax holidays, subsidized
utility prices, less redtape in processing imports, and
numerous other incentives. According to UN and
OECD studies, these zones were an important factor
in attracting the labor-intensive textile, apparel, and
footwear industries that played a major role in the
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early phases of the NICs' outward-looking growth
strategies. The NICs' free trade zones now are crowd-
ed with factories that assemble machinery and electri-
cal appliances and components for export.
Outlook
We expect that most of the NIC programs will
continue to be industry-specific, but our analysis of
their industrial plans and supporting trade policies
indicates that the industries targeted will shift. We
believe the following exports will be heavily promoted
in the future:
? In Singapore, computer software and precision engi-
neering products.
? In Taiwan, precision and heavy-duty machinery and
consumer electronics.
? In South Korea, specialty vessels such as roll-
on/roll-off ship and nonvessels such as offshore
drilling rigs and steel structures, computers, semi-
conductors, and machine tools.
Because of their financial problems, we doubt that
Brazil and Mexico will be able to do much about
restructuring their industries for some time. As a
result, their export assistance programs will probably
remain focused on such industries as transport equip-
ment, steel, and apparel. Brazil could register some
gains in higher technology items, although we doubt
the growth will be all that substantial.
We believe that the type of incentives offered under
the NICs' export assistance programs will also
change. According to statements in the NICs' indus-
trial development plans and our discussions with US
bankers and businessmen, the main constraint on the
operation of the NICs' export assistance programs is
the lack of financial resources. We believe that the
NICs will shift away from some of the fiscal incen-
tives and direct buyer and supplier credit programs,
which require substantial government support, and
instead rely more heavily on:
? Interest rate equalization programs under which an
export credit agency pays the difference between
the lender's cost of funds and the preferential rate
charged to the exporter.
? Insurance and guarantees of export credits to pro-
tect against political and commercial risks.
By making these adjustments in their export
assistance programs, we believe that the NICs can
reduce their overall demand for financial capital and
Implications for Trade Partners
The NICs' advanced export assistance programs en-
able many NIC exporters to capitalize on the recovery
in the world economy. By having in place the trade
policies that promote the export of their traditional
products, the manufacturing facilities to efficiently
produce a larger volume of these products, and the
linkages to major retail outlets, we believe that the
NICs can increase their market shares of such con-
sumer goods as textiles, apparel, footwear, and electri-
cal products and such industrial goods as steel and
electrical machinery. This is especially likely to hap-
pen in the United States because of the NICs' strong
foothold in the US market and the strength of the
We believe that in the medium term the NICs will
also become accomplished exporters of selected manu-
factured products that they have not traditionally
exported. The NICs will almost certainly not compete
in the broad range of high-technology products that
sell on the basis of quality and product reputation.
Rather, as in the case of their clothing and footwear
exports, they will locate market niches in the capital-
and technology-intensive markets that can be promot-
ed by their export incentive programs and exploited
on the basis of price. As a result, many of the trade
tensions and adjustment problems that exist between
the NICs and the United States, Western Europe,
and Japan over labor-intensive goods will shift to new
products.
Although the NICs will probably become a growing
source of trade irritation to industrial countries, their
economic well-being-which depends heavily on
exports-is important to the West. If NICs such as
Brazil and Mexico are denied access to new external
markets, their export earnings potential and with it
their ability to handle their financial problems will be
reduced. Further financial disruptions in either of
these two countries could quickly spill over to other
less developed countries (LDCs). The Asian NICs,
although financially better positioned, are strategical-
ly located and are important to the national security
of the industrial countries. In a much less visible way,
failure by the NICs could alter the perceptions other
at the same time cover a broader range of exports.
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LDCs have toward the efficacy of the capitalist versus
socialist model of development. Many LDCs look to
the market-oriented NICs as an example by which to
model their own economies]
Possible NIC-industrial country trade frictions could
have other affects as well. The NICs have shown little
interest in substantial manufactures trade with the
Soviet Bloc. If Western recovery is insufficient to
spark NIC export sales or the NICs perceive that they
are being excluded from the gains of recovery, this
could rapidly change. The NICs have already demon-
strated that they will aggressively seek alternative
markets, such as OPEC countries, to maintain export
growth when OECD markets slump. Any decision to
boost trade with the East would not only aid the
Soviets economically and politically but would also
complicate Western efforts to limit technology trans-
fer to the Bloc.'
Over the longer term, a loss of technology through the
NICs is almost certain. The NICs' success in moving
production to higher technology goods will depend on
sales outlets abroad. If they are unable to achieve
reasonable export volume levels, they will be unable to
realize the economies of scale critical to being price
competitive. This alone would spark an interest in
sales to the East. At the same time the Soviets,
increasingly limited in their access to Western tech-
nology, will find NIC producers an attractive alterna-
tive source of high-technology items. Competition
among the NICs in their export promotion schemes
will only sweeten the pot by lowering acquisition costs.
As the NICs shift more toward high technology and
as trade linkages with the East become established.
the risk of losses will grow.
25X1
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Appendix A
Synopses of NIC Export
Assistance Programs
1983, the government of Brazil has been devaluing
the exchange rate in line with the rate of domestic
inflation to maintain rather than increase the price
Overview
Since the mid-1960s, Brazilian foreign trade policy
has focused on increasing the export orientation of the
industrial sector. To promote exports Brasilia has
established an extensive system of economic incen-
tives, which are administered by the Foreign Trade
Department of the Bank of Brazil (CACEX). Includ-
ed in the system are duty rebates, export tax credits,
reductions in corporate income taxes, exemptions
from certain import duties, and preferential financing.
The incentives tend to focus on manufacturing subsec-
tors. Studies prepared by the IMF', Brazilian Govern-
ment, and private consultants have concluded that the
export incentives weigh heavily in favor of the trans-
port equipment, electrical equipment, textile, apparel,
steel, and machinery industries. Moreover, these stud-
ies indicate the incentive system is structured to favor
the development of new markets in the Middle East,
Africa, and Latin America and to shift exports away
from traditional US and West European markets.F_
Brasilia's arrangement with the IMF for extended
funding has required a change in trade policy. In the
course of carrying out a three-year program of eco-
nomic adjustment, Brasilia has consented to a real
depreciation of the cruzeiro against the dollar and
approved a number of new measures to further stimu-
late exports. By improving the price competitiveness
of exports, Brazilian authorities intend to boost the
export earnings generated in the manufacturing
sector-particularly high value-added exports-and
to correct their mounting current account deficit.
Because of its pressing foreign exchange needs, Brasi-
lia's long-term industrial ideology has yielded to
short-term pragmatism
competitiveness of exports.
Brasilia maintains an array of exchange restrictions.
These range from a progressive surtax on the remit-
tance of profits, dividends, and royalties to a 25- 25X1
percent financial transactions tax on purchases of
foreign exchange for imports of certain manufactured
goods and services. According to the letter of intent,
Brasilia will eliminate many of its exchange restric-
tions during 1983. However, embassy reporting sug-
gests this will probably not occur immediately be-
cause of the overriding importance attached to
reducing the current account deficit.
Import Restrictions. Both tariff and nontariff barriers
are widely used by Brazil. At present, tariffs on
imported goods range up to 205 percent with the
majority of goods bearing a duty between 15 and
55 percent. Brasilia also maintains a broad range of
quantitative import restrictions. These include an
import licensing scheme, which involves considerable
redtape, and a quota system to restrain imports of
domestically produced machinery, equipment, vehi-
cles, and spare parts.
The Brazilian Government has recently introduced a
number of import restrictions to cope with its pay-
ments problems. Since late 1982 about 1,900 manu-
factured, semi manufactured, and primary products
have been added to a list of items for which import
licenses are not granted. Particularly affected are
chemicals, pharmaceuticals, and machinery. More-
over, import cuts of up to 5 percent have been imposed
on private firms in addition to the 10-percent cuts
imposed in July 1982; state enterprises have been
encouraged to further reduce their imports as well.
According to their agreement with the IMF, the
Supporting Policy
Exchange Rate. In terms of trade policy, an important
element of Brazil's economic adjustment program is
the commitment to a devaluation of the cruzeiro.
Following a 23-percent maxidevaluation in February
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Brazilian authorities will introduce a new foreign
trade system that will shift the protection of domestic
industry away from quantitative restrictions to tariffs
and thereby improve the predictability of import
regulation.
According to several studies, Brazil's system of import
restrictions actually discouraged exports by shifting
resources into import substitution industries. Al-
though authorities were attempting to change this
antiexport bias before the recent financial crisis, we
believe any gains they achieved will be more than
offset as new import restrictions encourage firms to
produce goods that can replace imports.
Fiscal Incentives. The most significant and perhaps
best known of Brazil's export incentives are its tax
exemptions and credits. All exports of manufactured
goods are exempt from two value-added taxes-the
IPI (Imposto Sobre Produtos Industrializados), which
is a federal tax of up to 31 percent levied on merchan-
dise produced, and the ICM (Imposto de Circulacao
de Mercadorias), which is an 11-percent state tax on
merchandise.
The Brazilian Government also grants an IPI tax
credit to firms that export certain manufactured
goods. Called a credito premio, this rebate to export-
ers can be applied toward either the payment of IPI
taxes on any other operation of the firm or, if
necessary, can be shifted to subsidiaries or to suppliers
of inputs. The IMF estimates that the value of the
IPI rebate was $2.2 billion in 1982, equivalent to
about 13 percent of the value of manufactured goods
exported in 1981. Accounting for roughly 60 percent
of the total fiscal incentives offered to exporters, the
rebate goes chiefly to the transport equipment, food,
metallurgy, textiles, and mechanical equipment indus-
tries
The rebates have long irritated US and other competi-
tors of Brazilian goods who consider them to be unfair
export subsidies. In response to pressure from these
parties, Brasilia phased out the rebate in 1979. How-
ever, it was reinstated in April 1981 with the under-
standing that it would be eliminated in 1983. In its
recent letter of intent to the IMF, Brasilia announced
that the rebate would be extended through April 1985
at its level of 11 percent.
Brazilian firms also benefit from an export-related
income tax exemption. All firms that export may
reduce their taxable income by the percent of total
sales represented by exported merchandise or services.
Moreover, income tax deductions are allowed for
export promotion expenses incurred abroad and for
the costs connected with the firm's overseas sales
operations. According to the IMF, these tax provi-
sions provide only a modest incentive and are to be
abolished at the end of 1985.
Another type of fiscal incentive for exports-credits
for the production of export products-is provided
chiefly through BEFIEX (Beneficios Fiscais e Progra-
mas Especiais de Exportacao), a system of enterprise-
specific export incentives provided in exchange for a
commitment from each participating firm to reach
agreed export targets, generally over a period of 10
years. The typical incentive package contains a 70- to
90-percent duty and tax reduction on imports of
machinery and equipment and a 50-percent reduction
of duties and taxes on raw materials. The key advan-
tages of the BEFIEX system are that the imports
received may be used for domestic as well as export
production. According to IMF data, the program,
which was established in 1972, covers 23 percent of
all manufactures exports, an increase of 7 percentage
points since 1977. The principal recipient of BEFIEX
incentives is the transport equipment sector, which
accounts for over three-fourths of the total benefits
conveyed under the program
An additional way for firms to reduce the cost of
inputs for export is the duty drawback system. Under
this scheme, enterprises are exempt from the payment
of import duties and certain taxes on inputs used in
the production of manufactured exports. According to
diplomatic reporting, $600 million of duties and taxes
were suspended under this program in 1981. The
main beneficiaries were the metallurgy, mechanical
and electronic machinery, and transport equipment
industries. Together, they accounted for over 70 per-
cent of the total exemptions.
According to diplomatic reporting, a new export
incentive called the Green-Yellow drawback went into
effect on 28 March 1983. Under this scheme, a tax
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exemption for IPI and ICM taxes is granted to
domestic manufacturers of inputs that are incorporat-
ed into products that are subsequently exported.
Currently, the textile industry is the only beneficiary
of the Green-Yellow drawback. However, embassy
reporting indicates that the government of Brazil is
considering extending it to the nonferrous metal,
IMF indicate that the average subsidy rate
under Resolution 674 was at most 8 percent in 1981.
The products most favored by the subsidy are fibers,
autoparts, or alcohol sectors.
Financial Incentives. Two basic types of official
export financing are offered in Brazil-an interest
rate equalization program and a direct working capi-
tal loan program. Under the interest rate equalization
program, Brazilian exporters arrange with approved
Brazilian commercial banks for buyer and supplier
credits at concessionary terms. CACEX then covers
the difference between the concessionary rate charged
to the exporter and the lending institution's actual
cost of obtaining these funds. Depending on the goods
exported and the length of the repayment period,
CACEX will finance up to 85 percent of the export at
interest rates ranging from 7.5 to 10 percent.
The IMF indicates that the credits extended by
CACEX increased from $700 million in 1976 to a
peak of $1.7 billion in 1980. Although CACEX has
continued to expand the value of credits extended, the
depreciation of the cruzeiro reduced their dollar value
to only $800 million in 1982. Estimates from CACEX
officials indicate that over one-third of these credits
are extended to the transportation equipment sector.
Other major recipients include the construction, ener-
gy, and communications equipment industries
In addition, working capital loans are provided to
firms that produce manufactured exports. Governed
by Central Bank Resolution 674, the program offers
highly subsidized, short-term cruzeiro loans through
commercial, investment, and state development
banks, using the discount window of the Central
Bank. The amount of subsidized working capital that
each firm is eligible to receive is determined by
CACEX in accordance with an involved set of regula-
tions. CACEX issues firms a certificate, which subse-
quently allows them to obtain Resolution 674 re-
sources through the commercial banks. This
certificate is awarded on the basis of the products
manufactured and the value of the firm's net exports
in the previous year
fabrics, apparel, footwear, and leather products, with
a subsidy close to or above 11 percent of the export
value. 25X1 25X1
As part of its economic adjustment program with the
IMF, Brasilia is attempting to reduce its massive
export credit subsidy programs. According to diplo-
matic reporting, the Monetary Budget for 1983 allows
a 15-percent increase in the volume of subsidized
export credit. This is intended to be in line with the
projected growth of industrial exports for the year.
The subsidy element of these programs, however, is to
be reduced. This reflects both a lower projected rate
of inflation and a shift in composition of credit
programs away from the more heavily subsidized
Central Bank working capital loan programs to the
less subsidized Bank of Brazil interest rate equaliza- 25X1
tion programs. 25X1
The government of Brazil has recently introduced
PROEX, a financial program used to stimulate ex-
ports. Companies that achieve agreed-upon export
targets can receive funding equivalent to 30 percent of
the realized increase in the company's export earnings
over a two-year period. The company can then spend
up to 70 percent of the PROEX funds for equipment
and 30 percent for working capital. As with most
incentive programs, only manufacturing firms with at
least 51-percent Brazilian ownership are eligible for
PROEX funding.
Government Promotion. The government also spon-
sors trade fairs and other promotions to spur exports.
The primary responsibility for these is divided be-
tween CACEX and the Ministry of Foreign Relations
(Itamarati), with CACEX responsible for promotions
within Brazil and Itamarati responsible for those
abroad. In practice, however, considerable overlap
exists between the two agencies.
Other. The Instituto de Ressguros do Brazil (IRB), a
government-controlled agency, provides three types of
export insurance to Brazilian exporters. The coverage
includes political and extraordinary risk, commercial
25X1
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Table A-1 Figure A-I
Brazil: Importance of Trading Companies Brazil: Flow of Export Financing
Year
Total
Brazilian
Exports
(billion US $)
Exports by
Trading
Companies
(billion US $)
Share of
Total
Exports
(percent)
1976
10.1
0.9
8.9
1977
12.1
1.5
12.4
1978
12.7
1.7
13.4
1979
15.2
2.4
15.8
1980
3.7
18.4
1981
23.2
4.5
19.4
1982
19.9
5.5
27.7
Official export
credit agency
(CACEX)
risk (primarily for commodity exporters), and breach-
of-contract risk (for manufacturers). Premiums vary
according to the risks and repayment terms. For
political and extraordinary risk coverage, the premi-
ums range from 0.18 percent for a six-month transac-
tion to 2.49 percent for five years. By comparison, the
premiums for commercial risk coverage range from
0.48 percent for six months to 3.33 percent for five
years
To support companies that are not large or sophisti-
cated enough to engage in export trade, Brasilia
promotes the creation and operation of trading com-
panies. Because these companies are provided subsi-
dized credits, are exempt from the value-added and
excise taxes on exported products and the income tax
on export profits, and are eligible for the IPI rebate,
they have become an important factor in Brazil's
trade sector. In 1982 the trading companies registered
a 22-percent increase in exports over 1981 and in-
creased their share of total exports to 28 percent, up
from 19 percent in 1981 (table A-1). Trading company
officials predict that the trading companies will ac-
count for $7 billion or one-third of the total exports
targeted for 1983.
In conjunction with the overall export incentive pro-
gram, the government of Brazil maintains six free
trade zones-Manaus, Belem, Corumba, Parangua,
Porto Velho, and Santos. According to government
promotion brochures, the most ambitious plans have
Domestic lending
institutions
Foreign lending
institutions
been devised for Manaus, which is in the heart of the
Amazon jungle. Manaus administrators say they want
to attract the entertainment electronics industry away
from Sao Paulo and to become a self-sufficient indus-
trial center.
25X1
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Overview
The Hong Kong Government maintains a laissez faire
stance toward trade and enterprise. There are few
regulations, no export subsidies, and, as a free port, no
general tariff. The government's Trade Industry and
Customs Department has primary responsibility for
overseas commercial relations, trade controls, and
collecting revenue from dutiable commodities.
One major problem plagues Hong Kong-the future
of the colony when Britain's lease with China expires
in 1997. We believe that, over the next five to seven
years, the continued political uncertainty surrounding
the 1997 issue will restrain economic growth and
deepen economic downturns, making it more difficult
for the government of Hong Kong to pursue its
traditional noninterventionist trade and industrial pol-
icies.
Supporting Policy
Exchange Rate. There are no exchange controls.
Import Restrictions. Other than controls on 20 items
for reasons of health, safety, and security, imports are
free from licensing control.
Fiscal Incentives. Hong Kong has no protective tar-
iffs, capital gains taxes, or corporate income tax.
Gross business profits are taxed at a flat rate of
17 percent, the lowest tax rate in Asia. Offshore
profits are not taxed.
Financial Incentives. There are no subsidized export
programs in Hong Kong.
Government Promotion. The Hong Kong Trade De-
velopment Council has primary responsibility for pro-
moting and developing Hong Kong's exports. The
council participates in many international trade fairs
and publishes four periodicals to keep overseas busi-
nessmen informed of the latest financial and industri-
al developments in Hong Kong. It also organizes
business group visits to explore new markets and
strengthen existing trade ties and has opened industri-
al promotion offices in San Francisco, Tokyo, London,
and Stuttgart.
Figure A-2
Hong Kong: Flow of Export Financing
Domestic lending
nstitution,
25X1
25X1
Other. The Hong Kong Export Credit Insurance 25X1
Corporation (HKECIC), a government entity, facili-
tates trade by protecting exporters against nonpay-
ment for goods and services sold abroad on credit. It
also provides export finance guarantees to lending
institutions. HKECIC is a member of the Internation-
al Union of Credit and Investment Insurance (the 25X1
Berne Union). 25X1
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Overview
In 1979 the Mexican Government introduced an
Industrial Development Plan for the 1980s that in-
cluded provisions for concentrating export incentives
on industries in which Mexico had the potential to
become competitive in world markets. Support was to
be provided for industries:
? With established world markets where the limiting
factor was supply rather than demand (such as
mining).
? That increased the value of local raw materials
(such as secondary petrochemicals, chemicals, and
metal products).
? That had suffered declining output from the lack of
investment (such as textiles and other traditional
export industries).
? Requiring large-scale production to supply domestic
and foreign demand (such as steel and capital
goods).
? Responsible for considerable trade deficits because
of foreign control and limited access to world mar-
kets (such as the automobile and rubber industries).
To promote the development and export potential of
these industries, the Mexican Government relied on a
complex system of import tariffs and licenses coupled
with several different types of fiscal and financial
incentives for exports. However, according to the
IMF, these mechanisms have frequently been applied
haphazardly, resulting in wide disparities in the incen-
tives and protection granted to different industries. In
general, the policies benefited final products in the
industrial sector and, to a lesser extent, agriculture,
while they discriminated against the intermediate-
good industries, mining, and traditional exports origi-
nally targeted for development under the Industrial
Development Plan.
Another major Mexican policy, laid out in the Indus-
trial Development Plan, is to diversify trading part-
ners and reduce the overwhelming involvement with
the United States. At present, it emphasizes building
trade relationships with other less developed coun-
tries.
Serious financial problems in late 1982 and 1983
forced the government of Mexico to diverge from its
Industrial Development Plan. To remedy the financial
crisis, the government recently introduced a new
foreign trade policy. In its letter of understanding
with the IMF, the government agreed to changes in
the tariff structure, export incentives, import permit
requirements, and the exchange rate system. These
revisions are intended to reduce subsidies to industries
benefiting from inordinate promotion and enhance the
competitive position of Mexico's other export indus-
tries
Supporting Policy
Exchange Rate. At IMF direction, Mexican authori-
ties liberalized the exchange rate system and elimi-
nated restrictions on many types of foreign exchange
payments. The exchange rate system has two basic
rates-a controlled rate for a specified list of transac-
tions and a "free rate" for all others-and a foreign
exchange restriction on the repayment of foreign debt
obligations.
percent for luxury and consumer goods.
Import Restrictions. Mexico has traditionally operat-
ed a fairly restrictive regime of import licenses and
duties. In 1981 import licenses were required for
27 percent of the items listed in Mexico's General
Import Tariff, accounting for almost 80 percent of the
total value of imports. Licenses can be denied if: the
import is a luxury good, the import price is higher
than a reference international price set by the govern-
ment, a domestic product of similar quality is avail-
able, import quotas have been exceeded, or the import
would necessitate too many future imports. According
to the IMF, the ad valorem duty rates range up to
100 percent, the rate being progressively higher for
luxury goods and for goods that are produced domes-
tically. Tariffs on raw materials are often zero, about
20 percent for capital equipment for development, 20
to 60 percent for less needed equipment, and 60 to 100
In mid-May, Mexico City announced changes in the
treatment of both imports and exports. According to
embassy reporting, export permits will no longer be
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required on 94 percent of exports, and the import duty
on nearly 8,000 import items-mostly raw materials
and spare parts-was either reduced or eliminated.
Moreover, most export regulations and incentive pro-
grams will now be administered by the expanded
Mexican Foreign Trade Institute (IMCE) rather than
the five or more agencies with which exporters previ-
ously had to contend
Fiscal Incentives. The government of Mexico grants
several types of fiscal incentives to domestic producers
and exporters. In our judgment, the most important
change in the structure of Mexico's tax incentives for
exports has been the suspension of the Certificados de
Devolucion de Impestos (CEDI). The CEDI was a tax
certificate issued by the government in an amount
equal to a percentage of the value of a firm's exports.
This certificate was then used by the firm as a credit
against a wide range of federal tax liabilities. Until its
suspension in August 1982, the CEDI program was
the most important fiscal incentive provided to ex-
ports, reducing the price of exports by as much as 10
to 15 percent. The principal recipients of these tax
credits were manufactured and semimanufactured
products. As Mexico City has only agreed to suspend
rather than eliminate the CEDI, it could be reinstat-
ed
Three fiscal incentive programs are in operation.
Under the first, a rebate of up to 100 percent of the
value of import duties is granted on machinery and
equipment used in the production of exports. To
qualify, the firm must demonstrate that the machin-
ery is not produced in Mexico in sufficient quantity
and that the new machinery will increase the overall
productive capacity of the firm. The amount of rebate
provided depends on both the increase in export
volume generated by the equipment and the geo-
graphic location of the plant. Under the second
program, the import tariff law provides for temporary
duty-free import materials, components, and supplies
not available in Mexico for production of goods that
will be exported.
Certificates of Fiscal Promotion (CEPROFIs), the
third fiscal incentive program, operates much like the
CEDI program. However, rather than providing tax
credits for the value of goods exported, CEPROFI tax
certificates are granted to firms that carry out invest-
ments in high-priority industrial activities. The
amount of the CEPROFI is based on the location of
the activity, the number of jobs generated, and the
value of the investment in new plants and equipment.
Although the CEPROFI subsidies are for domestic
production, they indirectly stimulate Mexican ex-
ports.
Financial Incentives. The principal source of export
financing in Mexico is the Fund for the Promotion of
Mexican Products (FOMEX). A trust fund adminis-
tered by the Bank of Mexico, FOMEX operates as a
discounting facility to Mexican banks for the promo-
tion of manufactured goods exports and for the
development of import substitution industries produc-
ing capital and consumer goods. According to
FOMEX publications, roughly two-thirds of the $3.1
billion of authorized financing in 1981 was directed
toward the promotion of manufactured goods exports.
The FOMEX export-related programs provide both
export and preexport financing. In 1981 export fi-
nancing accounted for one-half of FOMEX's total
funding. This support is provided primarily for suppli-
er credit transactions, but limited buyer credit support
is available under basically the same program. De-
pending on the type of goods exported, credit terms
vary from 30 days to 10 years, with capital goods
obtaining the longer terms. The percentage of the
contract financed by FOMEX varies with the repay-
ment period and Mexican content of the transaction.
The minimum Mexican content requirement is 30
percent. In 1981 the interest rate charged for export
financing ranged from 6 to 8.75 percent (table A-2).
According to FOMEX's annual report, chemicals and
related products, machinery and basic metals, elec-
tronic materials, and textiles are the principal recipi-
ents of FOMEX credit support.
Preexport financing accounts for almost one-fifth of
total FOMEX financing and is available for a wide
range of functions. These include financing for the
domestic production of an item that is subsequently
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Table A-2 Percent Figure A-3
Mexico: FOMEX Export Financing Rates, Mexico: Flow of Export Financing
1981
Country
Less
Two to
Five to
8.5 to
Type
Than
Two
Years
Five
Years
8.5
Years
10
Years
Relatively rich
6
8.5
8.75
Intermediate
6
8.0
8.50
Relatively poor
6
7.5
7.75
7.75
exported as well as for imports used in the production
of exports. For products with Mexican content of
between 30 to 50 percent, financing can be obtained
for 100 percent of the Mexican content. If Mexican
content exceeds 50 percent, 100 percent of the materi-
al cost or 70 to 85 percent of the f.o.b. price may be fi-
nanced. In mid-1982 the maximum interest rate that
credit institutions charged borrowers for FOMEX
preexport financing was 8 percent. FOMEX preex-
port financing has been provided primarily for capital
goods exports.
As part of the package of foreign trade reforms
announced in May, the Mexican Government will
reduce redtape and provide short-term financial sup-
port for export-related activities. The financial efforts
to assist firms in developing exports include a 400
billion peso ($2.7 billion) credit program that will be
administered by Bancomex, the government foreign
trade bank. A credit program now being negotiated
with the World Bank will provide funds to exporters
at preferred rates through several existing government
trust funds, and government export guarantees will be
raised from 109 million pesos ($2.0 million) in 1982 to
12.5 billion pesos ($84 million) this year
Government Promotion. IMCE is the principal gov-
ernment entity charged with promoting exports.
IMCE has representatives in the capitals of most of
Mexico's major trading partners and many cities in
the United States. It provides such services as com-
mercial information, marketing research, statistical
data, and training to Mexican executives. According
to embassy reports, IMCE has had a history of
frequent personnel changes and bureaucratic prob-
lems, which have prevented it from having much of an
impact on Mexico's export performance.
Other. Commercial risk insurance for export transac-
tions is provided by the government's Compania
Mexicana de Seguros de Credito (COMESEC). The
premium ranges and averages are not published by
COMESEC. FOMEX provides both political risk
insurance and credit guarantees. FOMEX guarantees
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will cover up to 90 percent of an export loan. Premi-
ums range from 1.25 to 4.6 percent, depending on the
country, credit terms, and nature of the transaction.
The states of Baja California, the city of Agua Paieta,
and a triangular area in the state of Sonora, as well as
a number of ports in the southern part of Mexico have
been established as free trade zones. Manufacturers
in the zones operate with a minimum of government
control.
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Overview
In the past Singapore generally eschewed direct ex-
port incentives because most manufactured products
were already highly competitive in international mar-
kets and were in growing demand. The government,
however, has recently begun to modify this policy
because of rising international protectionism and a
decline in the competitiveness of traditional exports.
To expand into higher value-added exports, the gov-
ernment has introduced a package of incentives de-
signed to restructure the industrial sector away from
the production of labor-intensive products toward
capital-, skill-, and technology-intensive industries. As
part of this package, the government has introduced
tax breaks for the export promotion expenses incurred
by firms and concessional export financing to promote
capital-intensive industries.
Supporting Policy
Exchange Rate. Since 1978 all controls on foreign
exchange transactions have been removed.
Import Restrictions. All imports enter freely except a
few that are controlled for health and security rea-
sons.
Fiscal Incentives. Singapore offers several fiscal in-
centives to promote exports. The major incentives
include:
? Tax relief for pioneer industries. To encourage the
establishment of specific export-oriented industries,
the Minister for Finance has published a list of
higher technology industries eligible for "pioneer
status." On the list are aircraft components and
accessories, compressors, transformers, diesel and
gasoline engines, electrical testing and measuring
instruments, electric portable tools, telephone ex-
change equipment, microwave equipment, magnets
and magnetic materials, and a range of plastic raw
materials such as polyethylene, polystyrene, polyvi-
nylidene chloride, and other resins. Additional prod-
ucts may be added to the list as the Minister for
Finance considers warranted. Pioneer status ex-
empts these industries from the 40-percent corpo-
rate income tax for five to 10 years from the date
they commence commercial production. According
to the statutes, the length of the tax exemption
granted depends upon, among other criteria, the
merits of the project, such as type of product
manufactured, investment level, and transfer of
skills and technology.
? Tax relief on export profits. Companies having
export sales of not less than $50,000 and totaling at
least 20 percent of total sales are eligible for a
90-percent reduction in the corporate tax rate (from
40 to 4 percent) on profits arising from exports. If
the company has not been granted pioneer status, it
is eligible for five years of tax relief. A pioneer
enterprise is eligible for three years after the expira-
tion of its pioneer status. If the enterprise incurs a
fixed capital expenditure of not more than $500
million or not less than $75 million and provided 50
percent of the company's paid-up capital is held by
permanent residents of Singapore, then its tax relief
may be extended to 15 years if it is not a pioneer
enterprise or for 10 years after the expiration of its
pioneer status.
? Tax relief for exporters. Companies that export
more than $5 million per year of qualifying Singa-
pore manufactured goods or traditional commod-
ities, or $10 million per year of nontraditional
commodities (excluding tin, natural rubber, palm
oil, coconut oil, logs, sawn timber, petroleum, and
spices) are entitled to a 20-percent corporate tax
rate for a period of five years.
? Double deduction for export promotion expenses.
Singapore manufacturers, exporters, banks, and
traders participating in an approved overseas trade
office to promote the export of Singapore manufac-
tured goods may claim a double deduction for the
promotional expenses incurred in the first two years
of operation.
Financial Incentives. Two major forms of export
financing are offered in Singapore, through the Fixed
Rate Export Finance program (FREF). Under
FREF's buyer credit program, a lending institution in
Singapore lends directly to an overseas buyer or bank
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Table A-3
Singapore: ECICS Fixed Rate Export Finance Scheme Rates
Country
Classification a
FREF
Contract Credit Period
Two to Five
Years
Five to 10
Years
Singapore dollars
Rich
11.00
11.25
Intermediate
10.50
11.00
Intermediate
11.38
11.38
Poor
11.25
11.25
a These classifications are based on World Bank per capita GNP
data for 1974. Rich is greater than $3,000, intermediate is between
$1,000 and $3,000, and poor is less than $1,000.
Over 10
Years
11.00
10.25
11.38
11.25
OECD Consensus
Contract Credit Period
Two to Five
Years
Five to 10
Years
Over 10
Years
10.50
11.00
NA
10.00
10.00
10.00
on behalf of the buyer. In the supplier credit program,
the lending institution in Singapore offers financing
directly to an exporter. In both cases the lender can
then apply for the Export Credit Insurance Corpora-
tion of Singapore Ltd.'s (ECICS) interest rate equal-
ization. ECICS will cover the difference between the
lender's cost of funding the export credit and a fixed
rate set by the Ministry of Finance. The fixed rate is
revised quarterly
FREF funding is provided for medium- and long-term
transactions (two to 10 years) and there is no mini-
mum Singapore-content requirement. FREF support
may be used for up to 80 percent of the Singapore
content of oil rigs and 85 percent of the Singapore
content of other capital goods. According to FREF
data, the interest rates offered for export credits
depend on the country classification, currency of the
contract, and credit period. The interest rate structure
used from 1 April through 30 June 1982 is given in
table A-3. For comparison, the OECD Consensus or
Guidelines for Officially Supported Export Credits
for that period is also provided. Because of recent
funding cutbacks, the FREF program has been tem-
porarily suspended.
Since 1975 the Monetary Authority of Singapore
(MAS) has provided export credit support through a
rediscount window for commercial banks. After
agreeing to finance an exporter, the commercial bank
can rediscount the full value of the export credit with
the MAS at a concessional rate. The loan is for three
months but may be extended another three months.
The discount rate set by the MAS is generally 1.5
percentage points below the Singapore prime rate.
Banks, according to MAS publications, are allowed to
charge a commission of no more than 1.5 percent of
the export credit. Small-scale exporters, therefore, are
able to receive export funding at least at the prime
rate. Table A-4 shows that the proportion of exports
financed under this scheme has dropped in recent
years. In 1981 petroleum and nonfuel primary prod-
ucts were excluded from coverage in line with the
government's policy of weeding out labor-intensive
industries. At present, the scheme is designed to
provide small- and medium-sized exporters a conve-
nient facility to finance their capital-intensive exports.
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Table A-4
Singapore: Exports Financed Under the
MAS Rediscounting Scheme
Year
Gross Amount
Rediscounted
(million US $)
Total
Exports
(million US $)
Share of Exports
Financed
(percent)
1975
36
5,381
0.7
1976
195
6,583
3.0
1977
458
8,237
5.6
1978
740
10,108
7.3
1979
1,193
14,225
8.4
1980
1,480
19,361
7.6
1981
1,295
20,961
Figure A-4
Singapore: Flow of Export Financing
Official export
credit agency
(ECICS)
Domestic lending
institutions
In a special program the Ministry of Finance provides
financial assistance for buyer and supplier credits
related to the construction of ships in Singapore. The
Ministry finances up to 85 percent of the contract for
a Singapore-registered shipping company and 80 per-
cent of the contract for a non-Singapore-registered
shipping company. For the former, up to one year is
allowed for drawdown, followed by two years grace,
and eight years repayment. Ships not owned by a
Singapore shipping company are not allowed a grace
period but have eight and one half years to repay. As
of April 1982, the interest rates were fixed at 10
percent for Singapore dollars and 12 percent for US
dollars
Although the government of Singapore has publicly
stated that it prefers each local firm to promote its
own exports, it conducts trade fairs in several overseas
markets. The Trade and Development Board has
announced plans to conduct 36 trade fairs in tradi-
tional markets in 1983, up from 24 in 1982. It also
plans to send several survey missions to new markets
in Africa, Latin America, and the Pacific islands
Other. The Export Credit Insurance Corporation of
Singapore Ltd. also provides insurance coverage to
Singapore exporters against nonpayment caused by
political and economic upheavals in the buyer's coun-
try. ECICS also offers guarantees to bankers covering
short-, medium-, and long-term credit needs of local
exporters. ECICS has been a full member of the
Berne Union since June 1979.
Monetary
Authoritc ut
Singapore (M \S)
Direct funding
Refinancing
0 Private credits
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Overview
In 1982 Seoul introduced a Five-Year Economic and
Social Development Plan, which espouses less inter-
vention in economic management than earlier plans.
For the export sector, the objectives outlined in the
Plan changed from achieving specific import and
export targets to strengthening overall Korean export
competitiveness. According to the IMF, to achieve the
growth and diversification of exports envisioned in the
Plan, Seoul intends to liberalize imports, restructure
tariffs, gradually eliminate short-term preferential
export credits, and expand long-term buyer credits for
capital goods.
Gloomy projections for trade with the recession-hit
West forced Seoul to look elsewhere for new markets.
Press reports indicate that leading manufacturers are
exploring several African markets-in particular Ke-
nya, Gabon, Senegal, and Nigeria-as potential trade
expansion of direct and indirect trade with China, the
USSR, Czechoslovakia, Yugoslavia, Romania, and
Vietnam. However, because of political differences-
which limit economic exchange to small amounts of
indirect trade-we do not expect South Korea to
become an important supplier to the Soviet Bloc in the
near future.
Supporting Policy
Exchange Rate. Korea operates a flexible exchange
rate regime whereby the Korean won is linked to a
multicurrency basket. At present, there are no foreign
exchange regulations that significantly affect the flow
of trade.
Import Restrictions. All imports into Korea require
an import license. Applications are either automati-
cally approved, subject to limits set by the Foreign
Exchange Supply and Demand Plan, or approved case
by case for restricted commodities. According to
embassy reports, the list of restricted commodities is
revised yearly under the Annual Trade Plan and is
one of the basic measures used by Seoul to protect
domestic manufacturers from import competition. In-
cluded in this list are such goods as shoes, apparel,
computers, and machine tools.
In May 1978 Seoul initiated a major import liberal-
ization program. Its objectives, according to the IMF,
are to improve the structure of industry by removing
price distortions and enhancing competition, to stabi-
lize domestic prices by increasing supplies, and to
facilitate trade negotiations with countries restricting
imports from Korea.
Considerable progress has been made in liberalizing
the import regime. Embassy reports indicate that
between 1977 and 1982 the share of imports on the
automatic approval list rose from 53 percent to 77
percent of all commodity categories in Customs Co-
operation Council Nomenclature (CCCN).5 As of
1 July this ratio was increased to 80 percent. Seoul 25X1
aims to increase the number of import categories on
the automatic approval list to 90 percent by 1986. The
majority of the liberalized goods have been raw
materials and capital goods, but increasingly consum-
er nondurables and newly competitive exportables are
being included. Based on the automatic import cate-
gory listing, it appears that the import regime is still 25X1
heavily protective of goods that either compete direct-
ly with industries that Seoul has targeted for further
expansion or that add to a severe Korean trade
imbalance with selected countries, specifically Japan.
Financial Incentives. According to IMF and embassy
reports, Seoul offers several tariff incentives and tax 25X1
benefits to exporters. Under its system of flexible
tariffs, Seoul can raise or lower the tariffs on selected
imports to attain certain short-term economic goals.
The most recent revisions were announced publicly in
June 1982. Tariffs on 14 raw materials used by export
processing industries were dropped by 10 to 20 per-
centage points to improve export competitiveness, and 25X1
the duties on 26 intermediate products were reduced
to assist the electronics, textile, and machinery indus-
tries. These revisions, although not significantly re-
ducing overall tariff barriers, are in line with previous
Korean moves toward the gradual liberalization of
imports
5 Data are not readily available to compute the share of the total
value of Korean imports automatically approved. Because of the
capital and technology intensity of restricted imports, we believe
that this ratio is considerably smaller than the 80 percent calculat-
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The tariff system, according to the IMF, also offers a
rebate mechanism and installment plan to exporters:
? Under the tariff rebate system, Korean firms that
import raw materials or components used in the
production of exported goods receive a rebate on the
tariffs paid for these imports. In theory, these tariffs
are to be paid when the commodities are imported
and rebated after the final product is exported. In
practice, however, the importer takes out a promis-
sory note of two to four months' duration that is
canceled if the exports are made within the specified
period.
? Under the tariff installment system, all tariffs levied
on capital equipment imports, which are specified
by the Ministry of Finance and used for manufac-
turing exported goods, may be paid by industries
over a two- to five-year period.
Korean exporters are also entitled to several tax
benefits:
? A rebate of the 10-percent value-added tax is
available on goods destined for export or on earnings
from overseas services.
? Special depreciation allowances of up to 30 percent
are allowed for firms that manufacture exported
goods.
? Costs related to the exploitation of overseas markets
may be treated as an expense for tax purposes.
Overseas construction firms receive a five-year tax-
able income reduction equivalent to 2 percent of
foreign exchange earnings and a 30-percent special
depreciation on all machinery purchases.
Financial Incentives. The Korean Government has
established a broad range of short-, medium-, and
long-term financial instruments, which offer preferen-
tial terms to Korean exporters. Short-term export
financing is extended by commercial banks. These
loans generally do not exceed 90 days and are based
upon the value of the firm's total net foreign exchange
earnings in the previous year. They are available for
the procurement of raw materials and finished goods
Table A-5
South Korea: Subsidized Export Loans From
Commercial Money Banks
Year Export Loans Share of Subsidized Credits
Outstanding to Manufacturing Sector
(billion US $) (percent)
1979
1980
1981
2.5 67
2.8 72
3.2 72
used in the production of exports; for overseas con-
struction and supply of services; and for financing the
collection and stockpiling of designated agricultural
and marine product exports.
These loans have been an important element of
Korea's support for export industries. IMF data indi-
cate that at the beginning of 1981 these loans covered
88 percent of the total value of goods exported. They
have also accounted for almost three-fourths of all
preferential bank lending to the manufacturing sector
(table A-5). The importance of these preferential loans
is also underscored by the fact that export-related
refinancing has amounted to about 30 percent of the
total claims by banks on the Bank of Korea.
According to embassy reports, Seoul has gradually
reduced the differential between the prime and pref-
erential interest rates and will phase out short-term
preferential export credits by 1986. In 1981 the
interest rate applied on short-term export loans was
12 percent compared with the average prime lending
rate of 16.5 percent. By mid-1982, the preferential
rate and the prime rate were lowered to 10 percent.
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Figure A-5
South Korea: Flow of Export Financing
Official export
credit agency
(KEXIMBANK)
Domestic lending
institutions
programs. Although authorized to provide refinancing
and discounting, the Eximbank does not offer either
type of funding,)
According to Eximbank data, the bulk of its re-
sources, over 90 percent in 1980, go to funding
supplier credits. This program has historically re-
ceived the greatest emphasis because it provides the
most direct means of extending financial support for
export transactions. The supplier credit program is
designed to encourage the export of capital goods and
services that normally involve larger credits and long-
er repayment terms than the average Korean manu-
facturer or commercial bank is prepared to provide.
Currently, Eximbank applies a fixed 9-percent inter-
est charge on these loans.
Foreign lending
institutions
--P Direct funding
--10-Private credits
Although Seoul has eliminated the interest subsidy on
short-term export loans, funding can be replaced with
medium- and long-term export credits. The principal
source of subsidized medium- and long-term export
financing is the Export-Import Bank of Korea (Exim-
bank). Established in 1976 the Eximbank offers buyer
credits, supplier credits, and several special credit
The buyer credit program allows either the buyer or
financial institution in the foreign country access to
Eximbank preferential financing. Called a Direct
Loan, these credits are for three to 10 years, cover up
to 70 percent of the contract amount, and carry an
interest rate that generally ranges between 9.5 and 10
percent. In 1980 this program accounted for less than
5 percent of Eximbank funding.
The remainder of Eximbank funding is provided for
the development and acquisition of overseas resources.
According to embassy reports, the main objective of 25X1
these programs is to ensure access to resources that
will be needed to manufacture exported products.F_~
To achieve the growth and diversification of exports
envisioned under the Fifth Five-Year Plan, the IMF
and embassy report that Seoul will expand the
financing programs offered by the Eximbank. In 1981
the bank's loans covered just over 4 percent of total
exports; by 1986 Korean planners see the bank lend-
ing some $4 billion covering over 7 percent of pro-
jected exports. The apportioning of these loans will
also be changed. In the 1971-80 period, the most
important use of these loans was to support ship
exports (65 percent) and exports of industrial plants
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(15 percent). The remaining 20 percent went for a
variety of smaller programs. According to embassy
reports, the Eximbank's management expects future
loan commitments to be 80 percent for ship exports,
10 percent for export of industrial plants, and 10
percent for overseas resource investments
Government Promotion. A special import surcharge of
0.35 percent is collected on all imports into Korea
with the exception of those destined for the Korean
Government or military use or reexport. These funds
are then turned over to the Korea Traders Association
(KTA), a government-supported business organiza-
tion, for export promotion. According to the KTA
budget, the import surcharge generated some $41
million in 1981. These funds were used to promote
small and medium business enterprises, trade fairs,
and exhibits as well as to support the Korean Trade
Promotion Corporation, the Korean International
Economic Institute (a quasi-government research or-
ganization), and other market development programs.
Other. The Korean export sector is also supported
through government-sponsored insurance and guaran-
tees, trading companies, and free export zones. The
Eximbank offers export insurance against political
and commercial risks. According to embassy reports,
this program has grown rapidly, with export coverage
swelling from $137 million in 1978 to over $2 billion
in 1981. This growth is based primarily on the brisk
business Korean construction firms are doing in the
Third World; over 90 percent of the insured exports
go to less developed countries. To operate this pro-
gram, the Eximbank receives direct capital infusions
from the government, which in 1981 totaled some $25
million. The Eximbank also has a small program
offering loan guarantees to domestic banks against
losses incurred in financing export sales
In 1975 Seoul began encouraging large Korean trad-
ing companies to specialize in the import and export
of products. To be accorded General Trading Compa-
ny (GTC) status, the firm has to have accounted for at
least 2 percent of total Korean exports in the previous
year. This status conveys benefits beyond those gener-
The GTCs have been particularly effective in promot-
ing Korean exports. In 1982, 10 firms were designated
as GTCs, and their combined sales of $12.5 billion
accounted for roughly 58 percent of total Korean
exports. By 1983 government planners expect that the
GTCs will export 68 percent of total exports. In
contrast, they accounted for only 5 percent of total
exports in 1975. According to studies published by the
Korean Government, this growth has occurred be-
cause the GTCs have been particularly effective in
seeking out new sales opportunities in foreign mar-
kets, negotiating package deals for a wide variety of
products, lowering transactions costs, and gathering
market information.
Korea also offers two free trade zones-the Masan
Free Export Zone and the Iri Free Export Zone. To
operate in these zones, entrepreneurs must produce
exclusively for the export market. In return, the firms
are provided with reasonably priced industry infra-
structure; exempt from the defense, special consump-
tion, and value-added tax on all imports of raw
materials, capital goods, and semifinished goods; ex-
empt from the corporation and property tax for the
first five years with a 50-percent reduction for the
next three years; allowed to freely import all raw
materials and capital equipment needed to manufac-
ture exportable products; and protected from the
formation of labor unions.
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Overview
According to the published Four-Year Plan for
1982-85, a major objective of Taiwan's trade policy is
to widen export product lines and expand trade with
countries other than the United States and Japan. In
diversifying product lines, government planners have
told US officials that they want to move industry into
the production of higher technology, higher value-
added goods. The government of Taiwan has already
developed a major trade link with the Middle East
and is cultivating trade relations with a number of
East European countries-Czechoslovakia, East Ger-
many, Hungary, Poland, and Yugoslavia. It also has
an unofficially sanctioned indirect trade with China.'
Although Taipei endorses freer trade, it provides a
variety of economic incentives to promote the goals
outlined in the Four-Year Plan.
Supporting Policy
Exchange Rate. Although there is strict control over
foreign exchange transactions, there are no restric-
tions affecting trade transactions.
Import Restrictions. Import restrictions have been
gradually reduced in recent years. Currently, most
imports require an import permit, but, according to
trade data, 97 percent of the licenses are freely
granted subject to the availability of foreign ex-
change. The main instrument of control is the customs
tariff. Tariff rates range up to 150 percent ad valorem
and duties are levied on the c.i.f. price plus 15 percent.
The tariffs fall primarily on luxury and consumer
goods.
Fiscal Incentives. According to official Taiwan re-
ports, Taipei's Statute for Encouragement of Invest-
ment provides several incentives for the development
and export of capital- and technology-intensive
manufactures:
? Export sales are exempt from the business tax.
? Imported raw materials used in exported products
are eligible for a rebate ranging from 70 to 100
percent of the duty paid.
? Duties on imported machinery and equipment need
not be paid by the following industries: food process-
ing, pulp and paper, rubber processing, petrochemi-
cals, nonmetallic mineral processing, basic metals,
machinery, electrical and electronic equipment,
transport equipment, ceramics, textiles, construction
materials, clinical and surgical instruments, photo-
graphic and optical instruments, and precision in-
struments.
Financial Incentives. The Export-Import Bank of
China (EIBC), a government institution established in
1979, offers supplier and buyer credits as well as
fixed-rate relending facilities. The supplier credits,
called an Export Loan, are available to Taiwan's
exporters of capital goods and services. Buyer credits,
called a Direct Loan, are available to foreign purchas-
ers of services and capital goods manufactured in
Taiwan. The Fixed Rate Relending Facility (FRRF)
provides funds to overseas commercial banks, which
in turn disburse these funds to customers who intend
to purchase capital goods from Taiwan
According to open government publications, the Ex-
port Loan and Direct Loan programs provide for a
repayment period of two to seven years from delivery
of the manufactured goods or completion of a project.
Export Loans are available for 100 percent of the
amount of the contract, less a cash downpayment, if
the loan is covered by a bank letter of guarantee;
otherwise, only 90 percent of the contract amount less
the cash payment may be financed. The Direct Loan
program provides for 100 percent of the contract
amount less whatever cash downpayment has been
made. A Taiwan content requirement of 50 percent is
required of both programs. The Export Loan is avail-
able to all manufacturing firms. Trading companies
with a three-year record of annual exports exceeding
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Figure A-6
Taiwan: Flow of Export Financing
Official export
credit agency
(EIBC)
Domestic lending
institutions
Table A-6
Taiwan: Eligible Goods and
Repayment Period Under
FREF Funding
Freezing machinery
Plastic machinery
Printing machinery
Pump and water supply fittings
Rubber machinery
Shipbuilding
Wood machinery
Maximum Repayment
Period (years)
Agricultural machinery
Casting machinery
Construction and mining
machinery
Food machinery
Textile machinery
Transport equipment
Paper machinery
Chemical machinery
Steel rolling machinery
Foreign lending
institutions
Direct funding
~? Refinancing
Private credits
$3 million are also eligible if they have been designat-
ed by a manufacturer to handle a particular export.
The Direct Loan program has a minimum transaction
requirement of $2 million. As of April 1982 the
interest rate for both programs was fixed at 8.5
percent
The FRRF may cover up to 90 percent of an export
contract as long as at least 50 percent of the content is
of Taiwan origin. Funding may range up to $3 million
for any financial institution. As of April 1982 these
funds were provided at a fixed interest rate of 8.5
percent. The maximum spread that the relending
institution can charge is 1.5 percent. The repayment
period may range from two to seven years when the
borrower is the end user of the exported products and
one to three years when the borrower is a dealer. Only
a select group of capital goods is eligible for this
funding. These goods, together with the maximum
repayment period for each, are presented in table A-6.
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Government Promotion. To enable Taiwan's traders to
capitalize on the recovery from the world recession,
Taipei's Board of Foreign Trade has been publicly
working to:
? Reduce some of the redtape and trade controls that
encumber trade administrators.
? Expand the activities of the Taipei World Trade
Center Corporation. The government is preparing to
begin construction of a world trade center building.
It will offer a six-story exhibition center and provide
an additional nonofficial channel through which
trade may be conducted with countries that lack
diplomatic relations with Taiwan.
? Improve Taiwan's trade relations with the United
States and Western Europe. Because of the concern
that Taiwan's trade surplus with the United States
and several European countries could spark protec-
tionist moves, Taiwan trade officials have been
sending a stream of procurement missions to "Buy
American" and "Buy European.'
The Board of Foreign Trade also has been working to
concentrate exports in large, more experienced trad-
ing companies. According to press accounts, an esti-
mated 50,000 exporters operate in Taiwan. In 1978
the Board established guidelines for the formation of
Big Trading Companies, which would become Tai-
wan's version of Japan's Mitsubishi or Mitsui. They
received special incentives such as access to low-
interest loans and the right to establish bonded ware-
houses. According to the press, however, the contribu-
tion of the existing five Big Trading Companies has
been limited, accounting for under 6 percent of total
exports. To further expand their role, they will soon
be eligible for the same 25-percent income tax ceiling
that applies to manufacturers and will be assigned the
role as middlemen between banks and manufacturers
seeking credit so that the latter will have greater
reason to entrust them with their exports.
Other. The Export-Import Bank of China also pro-
vides export insurance and export finance guarantees
with its lending facilities. The insurance programs
provide medium- and long-term coverage to both
commercial banks and exporters against most political
and commercial risks. The guarantees are available
primarily to assist Taiwan exporters in obtaining
commercial bank financing and they cover short-,
medium-, and long-term financing needs. An addi-
tional guarantee is offered for the export of technol-
ogy, engineering, and construction services. Insurance
premiums are based on credit types and repayment
periods. The normal guarantee fee is 1 percent.
Three export processing zones-Kaohsiung (KEPZ),
Nantze (NEPZ), and Taichung (TEPZ}-are operated
in Taiwan. Industries located in these zones are
exempt from all duties and taxes on imports of
machinery, equipment, and materials used in the
manufacture of finished products for export. Because
of the success of these zones, a new export processing
zone is planned. According to embassy reports, the
zone would differ from existing export processing
zones by eliminating Taipei's foreign currency con-
trols. These changes are designed to make the zone an
investment and financial center as well as a manufac-
turing zone
Investors may obtain a similar duty-free status for
factories located outside the export processing zones
by establishing a bonded enterprise. To qualify as a
customs bonded factory, the enterprise must be en-
gaged exclusively in the manufacture of exportable
goods and have a paid-up capital of more than NT $5
million (approximately US $140,000)
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Appendix B
Glossary
Berne Union Established in 1934 in Bern, Switzerland, the Union d'Assureurs des Credits
Internationeaux has 36 members from 28 countries. It provides for the free
exchange of ideas and information and "international acceptance of sound
principles of export credit insurance and the establishment and maintenance of
discipline in the terms of credit for international trade."
Buyer credit A financial arrangement in which a loan is extended by a bank or export credit
agency in the exporter's country to the foreign buyer or bank in the buyer's
country. These credits have relatively long repayment periods, generally over five
years, and are widely used to finance exports of capital goods.
Discounting
Export credit agency
Export processing zone
Also commonly called the OECD Consensus or Arrangement. An unsigned
agreement in February 1976 between Canada, France, West Germany, Italy,
Japan, the United Kingdom, and the United States establishing guidelines for
officially supported export credits. It has been revised several times.
The sale by a commercial bank of an obligation it has purchased from an exporter,
at a discount, to a central bank or export credit agency.
A governmental, semigovernmental, or private agency facilitating exports through
insurance, guarantees, direct funding, or funding support.
An industrial zone, often situated near a port or airport and sometimes operating
as a free trade zone, that is supplied with the necessary infrastructure facilities and
investment incentives to encourage foreign and domestic entrepreneurs to establish
a modern manufacturing complex, which is used for the production of exportable
products.
This term includes a wide range of direct funding programs with interest rates sub-
sidized or supported by export credit agencies. A distinction is drawn between
these direct funding programs and those where commercial banks discount
exporter obligations at favorable rates or receive favorable rate refinancing, which
they pass along for export transactions.
Free trade zone Designated areas generally near a seaport or airport into which goods from abroad
can be brought without quota restrictions or the payment of tariffs and excise
taxes. The goods are not subject to exchange controls or the majority of statistical
reporting requirements and regulations aimed at the protection of consumers.
An assurance provided by an export credit agency to a third party, most often a
bank providing financing, that in the event of nonpayment or noncompliance by
the creditor or exporter, the agency will pay the third party's premiums.
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Insurance A contract administered by a public agency or private company acting on behalf of
the public sector that protects the exporter against the loss of payment caused by
commercial or political factors in the importing country.
Interest rate equalization An export credit program that provides a commercial bank the difference between
the subsidized interest rate payable on the bank's supported export loan and the
bank's market cost of funds plus an agreed-upon interest spread.
Refinancing Funding provided by an export credit agency to a commercial bank to assure
liquidity and thereby enable the bank to finance export transactions. Generally,
this funding is extended to an overseas bank that in turn lends to its customers to
finance the purchase of goods and services from exporters in the country of the ex-
port credit agency.
Supplier credit A financial arrangement in which the supplier (exporter) extends credit to a
foreign buyer to finance purchases. Credit terms are typically extended up to five
years. These credits are normally used to finance all manufactured exports except
capital goods.
Trading company A firm authorized by the government to conduct the import and export transac-
tions of the industrial sector. These firms tend to specialize in product or service
lines and receive special fiscal and financial incentives that improve their
profitability and promote the country's trade.
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