TAIWAN'S TRADE PROSPECTS: A QUANTITATIVE ASSESSMENT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001600030161-0
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 27
• Document Creation Date: December 22, 2016
• Document Release Date: October 24, 2011
• Sequence Number: 161
• Publication Date: November 1, 1970
• Content Type: IM

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am 70 -/& 0
DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Taiwan's Trade Prpects. A Quantitative A ffeament
DO IN
miaov
ER IM 70-160
November ,1970
copy N2 57
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WARN ING
't'his docunicnt contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transnussion or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
caour i
CN,luded (.nm vulmm~llt
Dorn grading and
Jrdnulf,alien
ILLEGIB
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CONFIDENTIAL
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
November 1970
INTELLIGENCE MEMORANDUM
Taiwan's Trade Prospects: A Quantitative Assessment
Introduction
Taiwan's economic success since 1960 has been largely due to rapidly
rising exports of manufactures. Because of this export-oriented growth,
Taiwan has been able to finance large increases in imports, to add to its
foreign exchange reserves, and at the same time to eliminate its reliance on
US economic aid. A continuation of rapid export expansion is required to
maintain economic growth, while allowing Taipei to lower its import barriers
and to lessen its dependence on US military aid. This memorandum
identities and quantifies the most important influences on the growth of
Taiwan's exports. The quantitative relationships derived from the past are
used to project exports and the balance of payments for the 1970-73 period,
taking into consideration the possibility of US restrictions on imports of
woolen and manmade textile products.
Background
1. In less than a decade, Taiwan has been transformed from a
predominantly agricultural economy dependent on US aid for essential
imports to a manufacturing-led economy earning enough foreign exchange to
pay its own way. This transformation resulted largely from Taipei adopting
an export-oriented development policy in the early 1960s after the
opportunities for efficient import substitution had been largely exhausted.
Foreign investors establishing export-oriented plants were given tax breaks
and substantially reduced duties on imported capital equipment. The foreign
exchange system was simplified and a realistic exchange rate adopted. This
development strategy paid off handsomely as exports rose more than 20%
Note: This memorandum was produced sole!' by C/A. it was prepared by the Office of
liconomic Research and was coordinated with the Office of Current Intelligence.
CONFIDENTIAL
25X6
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per year during the 1960s. While foreign sales of processed agricultural
goods-such as canned asparagus and mushrooms-grew rapidly, the major
export stimulus came from manufactures such as textiles, clothing, and
electronics, which grew 35% annually during the past decade and their share
of exports increased from less than 40% to more than 70%. This striking
performance of manufactured exports is doubtless the most important factor
in Taiwan's growing induArial orientation. Manufacturing's share of net
domestic product increased from 17% in 1960 to 25% in 1969 while
agriculture's share declined from 33% to 21%.
2. Largely because of higher exports over the past decade, Taiwan has
been able to reduce its current account deficits from $125 million in 1960
(when receipts covered 62% of expenditures) to only $50 million by 1969
(when receipts covered 97% of expenditures). Even if the current account
fails to improve further during the next several years, Taiwan still will have a
favorable balance of payments because the capital account is likely to be in
surplus.
3. Taiwan's overall balance-of-payments position improved markedly
during 1961-69, with foreign exchange reserves increasing from $117 million
to $477 million. In 1960, US aid covered about 40% of imports. By 1969,
US economic aid had ceased, but net long-term private capital inflows load
reached $130 million, well in excess of the current account deficit.
Trends in Exports
4. Taiwan's export success is closely associated with the inflow of
foreign investment. The country offers a highly literate, hard-working but
relatively low-paid labor force while providing tax relief and other incentives
and a highly stable political climate. Even more important, Taiwan has
attracted the kind of investor that supplies not only capital, technical
know-how, and management techniques, but also access to foreign markets.
Many America. firms have simply moved their labor-intensive operations
from the United States to Taiwan. They sell their Taiwan subsidiary the
components for assembly and ship the finished product back to the United
States. Japanese firms make similar use of Taiwan, but export their output
to third countries, especially the United States-not to Japan.*
25X1.
CONFIDENTIAL
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CONFIDENTIAL,
5. The United States has been by far Taiwan's fastest growing market
(see Figure 1). Exports to the United States increased from $7 million in
1956 to about $400 million in 1969. Most US purchases have been
manufactured consumer goods such as radios and other electronic appli-
ances, textile products, and wood products. Taiwan's exports to Japan have
increased relatively slowly, from $46 million (37% of total exports) in 1956
to $162 million (15% of exports) in 1969. The composition has changed.
Formerly dominated by sugar and rice, they now consist mainly of
high-value foods, such as bananas, because of rising incomes and a shift to a
rice surplurf, in Japan. However, unlike the Uni;,ed States, Japan has not
become an important market for Taiwan's manufactures, because Tokyo has
continued to severely restrk t manufactured imports.
6. Taiwan's exports to other developed countries have expanded from
$8 million in 1956 to $158 million in 1969. After the United States, this
market, especially Canada and West Germany (see Figure 2), has bean the
most dynamic, and its share of Taiwan's exports increased from 7% in 1960
to 15% in 1969. Processed foodstuffs, especially asparagus and mushrooms,
make up a large share of the increased sales to this group.
7. Taiwan's exports to the less developed countries grew from $63
million in 1956 to $349 million in 1969, or an average of over 14% annually.
SoLth Korea, Malaysia, Singapore, Hong Kong, the Philippines, and Thailand
account for about 60% of exports to less developed countries (see Figure 2).
Except those for Hong Kong and Singapore which are mainly foodstuffs;
Taiwan's exports to less developed countries consist largely of manufactures,
but of a different kind than those sold to developed countries. They arc
generally the products of industries financed by Taiwanese capital and
include commodities such as cement, paper, and traditional Chinese
pharmaceuticals for the overseas communities.
8. The extraordinary growth of exports (23% a year since 1960) had
profound repercussions on Taiwan's economy. It opened up the economy to
an accelerated growth of imports (17% a year since 1960) because the new
export-oriented manufacturing industries involved for the mxt part the
processing of imported materials and components, and also because the
foreign investor:, in these industries imported nearly all their requirements
for capital goods. However, the importation of machinery and equipment for
the new industries was not a burden on the nation's foreign exchange
supplies, because it was covered by the inflow of foreign capital.
CONFIDENTIAL
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160
Exports IQ Ino ..
less Developed Exports to J"span -'
100 Countries / /0.0
32.3%
Less Developed
Countries
14.7%
Other Developed l 15.0!5
Countries Japan
CONFIDENTIAL
TAIWAN'S EXPORT MARKET
EXPORT TRENDS
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Figure 2
EXPORTS TO OTHER DEVELOPED COUNTRIES: 1900
Australia
014% Netherlands
7j '0./
2'/e/e Italy
Franca
0.5%
West Germany
30.071
EXPORTS TO LESS DEVELOPED COUNTRIES: 1908
5.5% S, Korea
Hong Kong
21.2%
Mali - Yale
and
Singapore
12.7'/
Philippines
-5-
CONFIDENTIAL
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Thailand
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CONFIDENTIAL
Projections
9. To project the current account balance through 1973, exports,
imports, and service payments and receipts were estimated using 'an
econometric model.* Past relationships between these current account
categories and those factors affecting them were estimated and the results
used for forecasting.** Taiwan has good statistics for a developing country.
The problem is that its economy is changing se; rapidly that it is difficult to
estimate economic relationships using data for a period long enough to be
statistically significant, yet still representative of current trends.
Exports,
10. Analysis of the growth of Taiwan's exports reveals two predominant
influences-aggregate demand in foreign markets and the stock of private
foreign capital in Taiwan.*** But the relative importance of these two
influences varies greatly from one market to the other. Private foreign capital
is the dominant explanation of growth of Taiwan's exports to the United
States since 1965-it explains 95% of export growth while the growth of US
income explains only 5%. The United States has been the largest and most
open market for Taiwan's new manufactures. Yet the main imports from
Taiwan still make up only a small share of total US imports in the same
categories so that they can easily increase rapidly even when total US
demand is sluggish.
11. Taiwan's exports to other developed countries (excluding Japan)
appear to be influenced to a significant degree by the growth of aggregate
demand in these countri,-s, but here also the stock of foreign capital in
Taiwan is the most important factor (it explains almost two-thirds of export
growth since 1965). Exports to Japan and to the less developed coup fries,
* * In general the regressions are based on 13 or 14 annual observations covering the
period from the mid-1950s to the late 1960s, sec the Appendix.
* * * The stock of foreign private capital was ca!cu.,lated by cumulating the inflow of private
foreign capital, with a 10% a.;nual deduction for depreciation.
CONFIDENTIAL
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CONFIDENTIAL
however, are explained almost entirely by the growth of aggregate demand in
these countries. Foreign capital in Taiwan is not a factor,, because the
exports resulting from it are not directed to these markets. A complicating
element in Japanese demand is the influence of the country's rice situation,
from deficit to surplus.
12. Export projections thus require projections of aggregate demand in
the importing countries. The following tabulation shows the average annual
growth rates of the relevant measures of aggregate demand in the four
market areas (in current prices) for various periods between 1956 and 1969.
Percent
Periods
Japan GNP
Economic Activity
In Less Developed
Countries
GNP
Other Developed
Countries
US Disposable
Income
1957-60
12.5
5.5
7.2
4.5
1961-65
15.5
8.8
8.3
6.2
1066-69
17.1
14.0
0.0
7.4
1957-69
15.0
9.3
7.8
6.1
1956-60 growth rates are used for a "low" projection because they represent
the slowest growth for all areas. Similarly the high 1965-69 rates are used for
a "high" projection for all areas except "other developed countries."
13. Private capital inflow has risen dramatically but erratically, which
makes it difficult to project (see Figure 3). Continuation of the 50% annual
increase of the 1966-69 period cannot be expected. But there continues to
be keen foreign interest in establishing plants in Taiwan and thus we
estimate, as a maximum, that foreign investment will increase at half the rate
of the past four years, or 25% a year. At a minimum we assume no increase
at all. The high and low export levels obtained under the above assumptions
as to foreign demand and capital inflow are shown in Table I and Figure 4.
Both the high and the low estimates show Taiwan's exports continuing to
increase rapidly during 1970-73. The rather narrow range between the high
and low estimate is due,to the fact that (a) for more than half of Taiwan's
exports-that is, exports to the Unified States and other developed
countries-foreign capital stock in Taiwan influences exports much more
than income growth abroad and (b) the foreign capital stock continues to
increase rapidly even if the capital inflow levels off.
CONFIDENTIAL
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CON F! DEN'I'IAL
TAIWAN: PRIVATE LONG-TERM CAPITAL INFLOWS
U1111on $US
Imports
14. Imports of raw materials, capital goods, and consumer goods are
projected separately. Raw material imports are estimated as a function of
exports of industrial products and of industrial output for domestic use.* As
would be expected, the import content of industrial raw materials for export
goods is high, about 42%, while that of output for domestic consumption is
12%.
* More pecifically, industrial output for domestic use is GNP less agriculture,
government, and industrial exports.
CONFIDENTIAL
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CONK! DENI'IAL.
15. Capital goods imports are estimated as a function of domestically
financed fixed investment and foreign capital inflow, A high import
content-92%,-for foreign-financed investments is obtained, compared with
30%, for domestic investment. Consumer goods imports are simply related to
total private consumption-some 3%, of goods consumed privately are
imported.
1 6. Among the determinants of imports, those reflecting domestic
demand (industrial production for domestic use, domestic investment, and
private consumption) are assumed to increase at the 1965-69 rate. The
export-related determinants (exports of manufactures* and the inflow of
foreign capital), however, are the largest influence on imports. A slowdown
(or increase) in exports of manufactures causes a slowdown (or increase) in
imports regardless of the growth of domestic demand in Taiwan.
Current Account Balance
17. These projections of commodity exports and imports, together with
projection of earnings and payments on service transactions,** yield
projections of Taiwan's balance of payments on current account in the form
of a range, as shown in the following tabulation:
Million US $
Year
Low
High
1970
30
93
1971
106
175
1972
93
270
1973
51
385
The lower limit results from assuming relatively slow growth of aggregate
demand abroad and no h.crease in ti!e inflow of foreign investment. The
upper limit results from assuming high demand growth abroad and a 25%%
annual increase in foreign investment in Taiwan.
18. The results of these calculations indicate that foreign exchange
supplies are highly unlikely to limit Taiwan's economic growth in the next
few years and that a balance-of-payments surplus is likely. Under optimistic
* These are estimated as a Janction of exports to the various markets.
** Service earnings and payments are estimated ass function of total merchandise trade.
l.O F1r) Vr1AT.
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CONFIDENTIAL
assumptions, which in effect continue
most of the trends of the past few
years, the current account surplus
increases rapidly, reaching almost
$400 million by 1973, and the inflow
of foreign private capital more than
doubles, to more than $200 million a
year, in the same period. But even if
the growth of exports slows consider-
ably, there will be more than enough
foreign exchange to support the same
high rate of growth of GDP-10% a
year-as in the past decade. Under
relatively pessimistic assumptions re-
garding foreign markets and the in-
flow of foreign investment, we project
current account surpluses averaging
about $85 million a year, to which
must be added an inflow of foreign
capital of some $100 million a year.
The reasons for this favorable result
are that continued growth of foreign-
owned capital stock insures continued
growth of manufactured exports,
while the leveling off of the inflow of
new foreign capital results in a leveling
off of imports of capital goods for
export industries. In the long run,
however, lack of dynamism in the
inflow of foreign investment would
result in a sharply reduced growth of
manufactured exports and economic
growth would be slowed.
Textiles-A Special Case
19. Manmade and woolen textiles
have been major items in Taiwan's
rapidly expanding exports to the
United States; they accounted for
28% of the increase between 1965 and
1969. Pending US legislation would
reduce these textile imports in 1971
to the average 1967-69 level and allow
CONFIDEN'I'!Ar.
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CONFI DENTIAL
TAIWAN: EXPORT PROJECTION RANGES
(Million $ US )
Flburn 4
EXPORTS TO THE
UNITED STATES
EXPORTS TO OTHER
DEVELOPED COUNTRIES
EXPORTS TO LESS
DEVELOPED COUNTRIES
~:vrE. iiiyh prujociiuns assume growth in aronomic activity in the maker areas equal to the highest rate achieved
during any I've year period (19054909) since 1956 and a 25% annual growth in the privatr+ capital inflow.
Low projections assume growth in economic activity in the market areas equal to the lowest rate experienced during
any live year period (1956.1900) since 1956 and no growth in the private capital inflow
CONFIDENTIAL
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C:ONF1 DENTIAL
a 5A annual increase during 1972 and 1973. We have accounted for this
possibility by recstimating the function for Taiwan's exports to the United
States to exclude the relevant textile products. The derived equation projects
non-textile exports to the United States, to which are added the textile
exports allowed by the proposed legislation and Taiwan's projected exports
to the other market areas. The results for exports and the current account
balance are shown below for the lowest and highest cases.
Your
1970
1971
1972
1973
Low
Porcintopo Growth
HIgh
Porcontogo Growth
1296
20
1344
24
1430
10
1582
10
1818
13
1933
22
1799
11
2354
22
1970
80
103
1971
42
125
1972
15
200
1973
-48
288
20. Exports continue to grow rapidly in all cases. The smallest growth
occurs in 1971 when the textile restrictions are assumed to become effective.
r:.ven so, under the assumption of the lowest reasonable increase in income in
Taiwan's markets and constant private capital flows, the export growth in
1971 is still a respectable 1017o. Except for the final year of the low estimate,
the projections of the current account balance are in surplus.
21. Taiwan enters the 1970s with a highly favorable foreign payments
position. After a decade in which export growth exceeded import growth by
one-third, Taiwan has almost eliminated its previously large current account
deficits and still receives a fairly large net capital inflow from private sources.
CONFIDEN'T'IAL
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CC)NFI DLN'1'1AL
22. Projections of Taiwan's trade outlook during 1970-73 yield balance-
of-payments surplr*ses under almost any likely circumstances. liven If
aggregate demand in Taiwan's export markets expands relatively slowly and
foreign private investment inflows into export-related industries fail to
increase over the 1969 level, the current account would still be in surplus.
The outlook is also favorable if the United States restricts imports of
Taiwan's manmade and woolen textiles.
23. The bright outlook for Taiwan's balance of payments is bolstered by
a relatively low level of external debt, fairly high foreign exchange reserves,
and a likely continuation of foreign investor confidence. Under these
circumstances, Taipei will likely be in a good position in the next few years
both to increase its purchases of military goods--to compensate for any
reduction in US military assistance-and to liberalize somewhat its import
restrictions. Under favorable circumstances, Taiwan would also be able to
greatly increase its official reserves.
CONFIDENTIAL
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Taiwan: Projected Exports
With 251-C A:inual Growth in Foreign Investment With `o Growth in Fc.-eign izvest=ent
0111,
High Low b High ? Low b
VI :e Valle Valve Value
(MiiGon Percentage (Million Percentage (Million Percentage (Miflien Percentage
Year t ;zS) Growth U SS) Growth US$) Growth C a Growth
z
1970....
...
1.314
21
1.297
20
1,3344
24
1,297
20
..r
19iI....
1,67'
23
1.574
21
1.6'_4
21
1,519
17
197
2,07,
2i
1,SQ4
21
1 .S113
17
1.731
14
1973..
2.3 i9
23
2.20
21
2.193
15
1,934
12
? Hi;Sh e,tirnat" c( expart.s a+.+T.rre, gr')Wth in economic activity in the market arese eq, a1 to the h:ghes: rate sth+ieved drriag
any five.y -ar periw i (l96 i-i; 3) since 193i1I.
Low estimate of export., adsua:es grow-ph in economic activity in the market arc eq the lowest rate a hiieved d=i=g any
five-rear psriod (1936-60) since 1956.
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GO NI'I1)FIN'I'iA1,
APPENDIX
Methodology
A system of 13 equations is developed to pmlect
Taiwan's exports, imports, and service payments And
receipts in order to dete'rrnine the current accolntt
balance. Ten CgUatlt11A A,-, stochastic and are esti-
mated using ordinary least :u;uarr!c regression. Exports
are estirntltrd by area destination and imports by type
of produQt. Published data on balance of payments,
froth export (f.o.b.) and import (c.i.f. ), arr. available
only as aggregates and differ from customs fignies
which do break down the totals. The export srrirs
ti .rd In this memorandum wax derived by applying,
the country shares As given in customs data published
in Irulturirj of Prea Chinn to the figure for total ex.
ports (f.o.b.) given In the IMP Balance of lnnVmenfA
Yearbook. The Import series was similarly derived by
applying toe relative shares given for capital goods,
rag materials, and consumer goods given by the plank
of Taiwan and the Committee for International FeY)-
nonlic Cooperation and Development published In the
Taiwan Siattttical Data nook 1969. The series derived
arr. shown In Tables A-I and A-3.
Exports to Japan
Taiwan's exports to japan Are estimated as it ftme-
tion of Japanese GNP And jnpantse rice Inventories s
using annual data for the period 19M to 1900, as
muew~s:
Xl?( 9+1.t3 )NP-00171 It1)?
(4.37) (72k) (-7671)
Ana? ? +? O.tl4.7
1)W?????1.1f3
? I'i gtstn shown in parenthe. a txkew the m ptrsak n t.nef f I.
titmts ate the I statbtke or Shulrnt'e t.
? ?The msltkirat of dets'nnnlnatiap teorreect.J for depts's
of ire!wlturrt.
? ? ?The DtutttMW.taon Statistic tress *h.th+r the residnatt
of the reKt:xeinn rqustken are 0xUTrn&"d from ems otw~na-
tksn to she test (ho eettal eenelation). In g nett, for the
rurmte.er at abaft Isort+ seed in this n* W, atxi .slips rrj ~
Heins een..lning tsne l dspratir-t 'r.ttahl., a 7)W $atmic b
ewrva 107 and 1,03 Inditvts!t wtually no erica) ctrrtedstine.
esther pouter or er O" rot rrpreskssr tgoataining tern tar
three indr7rerndwA vast.blea the roar we 1.23 or 4.73 and
1.48 in 9.34? rraprdtvely.
Whore:
X)-''Taiwan's f.n.h. ewlxnU to japan In mtllkm UNi.
)NP' Japan's GNI' in cyu ert pokes In billion USt.
111) - likes Inventories held by the Japanese government
at the rout of October of each year in thasra-ul
metric ton.,
Exports to less bauelopiul Countries
Lest developed cottnttie-x are defined to include all
t oiintrira except OECD) members, japan, Australia,
and South Africa.
'171' results using annual data for the px'risxl MOO)
are shown below.,
X1.1)c;-- -71.u+30o.o AMC,:
(--8.47) t1N.9o)
11111- 0.083
D W - 1.71
X1.t)C"Tatwani t reptxts to ieat developed tvrntries in
mmksn 115$.
AMAX-A 30 0-based wrfghtwl index at rctenomk at.
tivity in alt countries whkh in 1000 ato+n,nted
for 00% of Tai*ati R Moretti to lea. de e1sp .'4
mantrirs. The weights were aatigtrnt .ccno :ng
to the Importing cocmttir.' release share of
Taiwan's, eaptets. The Nnsnttict, rse1ghts, anal
variable used to rttrawue the level of emtaxntsk
attivily are strewn twk+wt
t .,a..r...
W.acht
fa?leaetrs variable
itr?og Kong
.447
IUM-basrd tenet of total
Ntaleys1a aril
.811
19whasrd lode-a col (: 4
in t !OetsOI pri..ra
t of trxn ?
t 0erit