TAIWAN-UNITED STATES: ADDRESSING THE TRADE IMBALANCE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP86T00590R000100170004-3
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: February 11, 2011
• Sequence Number: 4
• Publication Date: April 1, 1985
• Content Type: REPORT

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Directorate of
Addressing the
Trade Imbalance
Taiwan-United States:
EA 85-10059
April 1985
Copy 2 8 8
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Directorate of Confidential
Intelligence
Taiwan-United States:
Addressing the
Trade Imbalance
China Division, OEA,
Office of East Asian Analysis. Comments and queries
are welcome and may be addressed to the Chief,
This paper was prepared by
Confidential
EA 85-10059
April 1985
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Taiwan_United States:
Addressing the
Trade Imbalance
Key Judgments Taiwan has had a trade surplus with the United States for 16 years and,
Information available barring uncharacteristically effective measures by Taipei, the situation will
as of 15 February 1985 continue:
was used in this report.
? The United States is Taiwan's largest market and absorbs nearly half of
Taiwan's total exports.
? Taipei's limited efforts to diversify to other markets have been hampered
by world recession and diplomatic isolation.
? Attempts to increase imports from the United States also have been
ineffective, in part because sluggish investment has reduced the need for
capital goods.
? In addition, US firms have not been competitive with firms from Japan,
Taiwan's. largest supplier, and from other Asian and European countries.
Taiwan's restrictions on imports and foreign investment also stifle growth
in US exports. Tariffs and fees can nearly quadruple the cost of imports,
and administrative restrictions hinder efficient product distribution. More-
over, Taiwan's current imports are already high relative to the size of its
economy.
Taiwan's economic plans for the 1980s call for export-led growth, develop-
ment of high-technology industries, and liberalization of trade. Potentially,
many of the planned programs could offer opportunities for US and other
foreign firms to sell plants, equipment, and technologies or to invest in
Taiwan production facilities. However, Taiwan officials have promised
several of these projects to US firms, only to later open the bidding to all
competitors, alleging that US costs are too high.
We believe that proposed trade liberalization will move slowly. Similar
efforts in 1973, 1979, and 1982 had no lasting effect, and Taipei is
concerned that rapid change will undermine its very successful economy.
For example, customs duties and commodity taxes account for more than
one-third of total tax revenues, and elimination of even part of those
revenue sources would cause budget problems. Furthermore, authorities
are worried that measures to reduce the trade imbalance with the United
States will benefit other trading partners as well and, for example, add to
Taiwan's own deficit problems with Japan. It is possible that Taipei is
holding out for Washington to approve its requests to buy advanced US
weapon systems and Alaskan oil, an unrealistic goal because arms sales are
constrained by US agreements with China, and Alaskan oil exports are
prohibited by law.
Confidential
EA 85-10059
April 1985
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We believe the combined effects of several measures could alleviate the
trade imbalance:
? Liberalization of Taiwan's import policies-however slow and conten-
tious-will permit US exports to Taiwan to increase.
? Diversification of Taiwan's export markets will take some of the pressure
off Taiwan to rely on US markets.
? Vigorous marketing by US firms and greater competitiveness may win
large-scale construction and equipment contracts.
? Unlinking the New Taiwan dollar from the US dollar and letting the US
dollar fluctuate freely against the Taiwan currency will make US
exporters more price competitive with Asian and European suppliers.
? Threatening US restrictions against Taiwan goods will spur greater
cooperation. Taipei has shown sensitivity toward US measures that may
hurt its exports, such as the loss this year of duty-free status on some
products.
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Key Judgments
iii
Scope of the Problem
1
Imports
Factors Underlying the Trade Imbalance
3
The 10-Year Economic Development Plan
5
Moderate Growth Targets
5
Self-Sufficiency in Major Grain Crops
6
Improved Forestry Practices
6
Taiwan's Measures Aimed at the Taiwan-US Trade Imbalance
8
Big Ticket Projects
9
Obstacles to C
hange
9
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Taiwan-United States:
Addressing the
Trade Imbalance
Taiwan has maintained a chronic trade surplus with
the United States since 1968. The surpluses have
caused officials in Taipei both embarrassment and
concern that the United States may take corrective
measures that could cripple the island's economy. But
this concern is offset by official relief that surpluses in
trade with the United States more than offset deficits
in trade with Japan, leaving Taiwan with a positive
balance (see table 1). By the end of 1984, Taiwan's
annual surplus with the United States reached a
record $9 billion according to US trade statistics-the
third-largest deficit for the United States behind
Japan ($33 billion) and Canada ($19 billion).
Exports
Taiwan's exports to the United States have long been
dominated by textiles, apparel, footwear, and, more
recently, consumer electronics.' US trade barriers,
particularly against textiles and apparel, have forced
Taiwan to diversify its product mix to maintain a
rapid rate of growth in exports. As a result, Taiwan is
now among this country's leading suppliers of toys,
plywood, furniture, yachts, luggage and handbag
bicycles, hand tools, and industrial fasteners.
The United States is Taiwan's largest export market,
accounting for more than 45 percent of sales in 1984.
Furthermore, our analysis shows that Taiwan has
become increasingly dependent on the US market,
especially since 1975. We believe Taiwan focuses on
the United States because:
Taiwan: Trade With the
United States, 1975-84
Exports to
the US
/
0000* Imports from
the US
? Diplomatic isolation hinders export diversification.
Many countries with buying potential eschew
Taiwan's goods, partly because they have no diplo-
matic relations with Taiwan that would facilitate
trade and partly because they fear that trade ties
with Taiwan might jeopardize profitable relations
with China.
? Long-term diplomatic ties-terminated in 1979-
set an early precedent for reliance on the United
States for export markets that is sustained by a
continuing, close commercial relationship.
? The US economic recovery provided expanding
markets while other potential buyers were still
suffering from the world recession.
' These four categories accounted for 49 percent of Taiwan's
exports to the United States in 1975. By 1984 the share had
ca restrict imports for financial reasons and there-
fore cannot expand acquisitions from Taiwan. The
high value of the New Taiwan (NT) dollar'
also makes Taiwan goods relatively more ex en nsive
than goods from many other Asian nations.
' The NT dollar is pegged to the US dollar, and currently is worth
about $0.025. Unless noted, all dollar figures in this paper are US
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Table 1
Taiwan Trade, 1975-84
Trade With the United States
Trade With Japan
Imports
Exports
Balance '
Imports
Exports
Balance
Imports
Exports
Balance
1975
5,952
5,309
-643
1,660
1,946
286
1,823
812
-1,011
1976
7,599
8,166
567
1,635
2,999
1,364
2,279
1,190
-1,089
1977
8,511
9,361
850
1,798
3,686
1,888
2,552
1,289
-1,263
1978
11,027
12,687
1,660
2,333
5,694
3,361
3,584
1,750
-1,833
1979
14,773
16,103
1,330
3,272
6,427
3,155
4,365
2,476
-1,889
1980
19,733
19,811
77
4,217
7,362
3,146
5,141
2,293
-2,848
1981
21,200
22,611
1,412
4,178
8,631
4,453
5,400
2,523
-2,878
1982
18,888
22,204
3,316
4,152
9,587
5,435
4,252
2,443
-1,809
1983
20,287
25,123
4,836
4,401
12,109
7,709
5,081
2,622
-2,458
1984
21,960
30,460
8,490
4,823
13,760
8,937
5,965 b
3,205 b
-2,760 b
a Because of rounding, components may not add to totals shown.
b Estimated.
GSP. Taiwan's exports to the United States benefit
tremendously from the Generalized System of Prefer-
ences (GSP), which reduces or removes US import
duties on certain products. Of all Taiwan exports to
the United States in 1983, nearly one-fourth (about $3
billion) were duty free under GSP rules. This year,
about 150 Taiwan products with an annual export
value of nearly $1 billion lost at least part of their
duty-free status because of the large -share. they
represented of US imports in 1984. Although Taiwan
lobbied vigorously to defeat it, US trade legislation in
1984 set new GSP criteria that will eliminate or
restrict the duty-free status of additional Taiwan
products beginning. in 1987. A proposal to bar Taiwan
and other primary beneficiaries (South Korea and .
Hong Kong) from GSP eligibility entirely failed, but
Taiwan is nonetheless painfully aware that failure to
manage the trade balance.may bring-further punitive
actions by the United States:
Imports
Taiwan's imports in the 1980s have diversified in
terms of both product mix and suppliers. Increased
self-sufficiency and alternative suppliers have cut into
US sales of the industrial supplies and "machinery that
dominated US exports to Taiwan in the 1960s and
1970s. Taiwan is rebuffing US suppliers now because
firms in other countries are more com etitive in terms
of price, financing, and other factors.
The Strength of the Dollar. The strength of the US
dollar is frequently blamed for slower growth in
imports from US firms. However, the US share of
total imports has remained fairly constant (about 22
percent) since 1975, which would not be the case if the
dollar's: strength were the primary factor. Moreover,
calculations of the exchange rate elasticity of imports
indicate no clear relationship between the NT dol-
lar-US dollar exchange rate and Taiwan's imports
from the United States. A sharp drop in the rate of
increase in imports in 1981-83 affected all suppliers,
not just the United States, and primarily reflects the
world recession and a lack of investment in Taiwan.
However, if the US dollar were free to fluctuate
against the NT dollar as do other currencies, the NT
dollar might strengthen, making US goods less expen-
sive relative to those from other suppliers.
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Japan, Taiwan's largest supplier, has provided the
strongest competition for US firms and leads in sales
of most machinery and equipment categories. Our
analysis of trade data shows that in those categories in
which US exports are preeminent, such as turbine
generators, Japanese efforts to export more high-
quality manufactured goods clearly have eroded the
US share of the Taiwan market.
Other Pacific Basin countries are also increasingly
active in Taiwan, resulting in a shrinking role for US
exports. For example, in 1975, the United States
accounted for 67 percent of Taiwan's imports of
integrated circuits; five Asian exporters (Hong Kong,
Singapore, the Philippines, Malaysia, and South Ko-
rea) together accounted for only 7.5 percent and
Japan for 16 percent. By 1983, the US share was cut
by half, Japan led with 37 percent, and the five other
Asian nations held more than 23 percent of the sales.
Similarly, Brazil, Spain, Sweden, and Singapore have
become increasingly important as suppliers of com-
puter equipment and peripherals, though the .United
States still dominates those products. US suppliers
have held their market share in agricultural goods
such as corn, wheat, and oilseeds.
Bilateral Investment
The United States accounts for about 30 percent of all
investment approvals' for the period of 1952-83.
Hundreds of US firms have sales representatives,
branch offices, and subsidiaries in Taiwan. In fact,
some Taiwan officials assert that many of the firms
that manufacture export goods in Taiwan are owned
by US-based multinational corporations. The United
States benefits, Taipei points out, because US citizens
are employed in the plants (especially as high-salaried
managers) and profits are remitted to the US home
offices. These officials neglect to point out that Tai-
wan businessmen similarly have invested in produc-
tion facilities in the United States (see table 2) and are
receiving from those investments some of the same
benefits that Taiwan. authorities imply accrue only to
US multinationals. According to an early 1985 press
report, 78 percent of Taiwan's $39.3 million in invest-
ments abroad in 1984 was in the United States.[
' Approvals are investment proposals that have been reviewed and
approved by the host country government. Generally, investors
Taiwan has, by design, enjoyed export-led growth for
nearly 30 years. In the mid-1950s, the government
recognized that agriculture alone could not support
sustained expansion of the economy and undertook
financial and trade reforms to encourage the develop-
ment of export and import-substitution industries.
Many of these policies persist, including low-interest
loans for export industries, preferential tariff treat-
ment of imports used to manufacture export goods,
foreign exchange controls, and high tariffs on imports
that compete with Taiwan-made goods. In 1965,
Taiwan established the first of three Export Process-
ing Zones, where export industries are provided
cheap, government-built infrastructure and financial
and trade benefits. By the 1970s, Taiwan had success-
fully established a dual trade structure, exporting
labor-intensive manufactures to developed countries
and more capital-intensive intermediate goods to less
developed countries.
Taiwan continues to be highly competitive in export
markets. Low labor costs have contributed greatly to
the price competitiveness of Taiwan goods.' In addi-
tion, the Central Bank has closely monitored the
money supply to control inflation. Because Taiwan
imports from 80 to 90 percent of its energy require-
ments,, lower energy prices also have contributed to
low inflation; in addition, wholesale prices in general
have increased more slowly-2 percent annually in
1981-83 after average yearly increases of more than
8.6 percent in 1976-80-removing some inflationary
pressure. The practice of manufacturing and selling
cheap counterfeit products that undercut sales by
legitimate manufacturers, both domestic and foreign,
also helps boost exports.
Taiwan's import picture has been less buoyant. Capi-
tal equipment imports, generally a major category,
slipped somewhat in the 1980s because of a lack of
'A 1984 labor law set minimum wages at $154 monthly. Average
monthly wages for mining and manufacturing workers in Taiwan
were about $344 in 1983, compared to $299 in South Korea.F_
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Table 2
Selected Taiwan Investments in the United States
Formosa Plastics Group
Polyvinyl chloride
New plant in Texas
Formosa Plastics Group
Polyvinyl chloride
Purchased plant in Delaware from Stauffer
Formosa Plastics Group
Plastic pipe
Purchased plant from Johns Manville
Ching Fong Investment
Computer components
Purchased plant from Exxon
Asian Polymer Corp.
Low-density polyethylene
Purchased plant from Occidental
Tatung Co.
Electric fans, TVs
New subsidiary in Los Angeles
Taiwan Power
Uranium exploration
Joint venture with Rocky Mtn. Energy Corp.
& Mono Co.
investment. High tariffs curb imports and shelter
Taiwan manufacturers from foreign competition.
Some items are subject to tariffs that could double
their price; an additional "commodity tax" on 31
specific items can bring the total tax to as high as 287
percent of the good's value. The highest tariffs are on
consumer goods, products US manufacturers want to
sell in Taiwan.
Taiwan also has formidable nontariff barriers restrict-
ing many imports. For example, one law sets a
minimum volume for wine imports that discourages
sample shipments designed to test marketability. US
exporters complain that a lack of bonded warehouses
also precludes safe storage of unsold products, neces-
sitating small shipments in response to individual
orders, which entails both delays and extra shipping
costs. On occasion, Taiwan has also restricted imports
from firms that trade with China; in September 1983,
trade authorities even urged importers to spurn goods
from Washington state, apparently in retaliation for
its ties with China.
Furthermore, Taiwan's economy may simply be un-
able to absorb additional large-scale imports. The
island's import ratio (total imports as a share of GNP)
is very high, exceeding 50 percent in 1983.5 This
suggests a paradox for bilateral trade: the rate of
increase in imports from the United States will fall
short of Taiwan's GNP growth rate; because the
economy is export driven, GNP growth will, in turn,
depend on an expansion of exports-an expansion that
would widen the trade gap even further, because the
United States is Taiwan's major export market. F_
Attempts to expand total imports have been disap-
pointing. Imports last year, in fact, did not meet
Taipei's publicly announced expectations; however,
we suspect that authorities privately had more conser-
vative import goals, but issued optimistic targets to
sidestep US demands for action to narrow the trade
surplus. Authorities have again set a high target for
1985-about 16 percent above 1984 levels-which we
believe will not be attainable.
Two general approaches that the economic leadership
is taking during this decade will affect the trade
imbalance. The 10-year plan, issued in March 1980 to
cover the 1980-89 period, includes several programs
that are intended to change the structure of the
economy and the nature of trade. On a less grand
scale, ad hoc decisions detail the administrative prac-
tices to be used to implement the plan's more general
goals.
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Counterfeiting An International Scandal
Trade in counterfeit products-those that violate
international patent, copyright, or trademark protec-
tion agreements-have bolstered Taiwan's exports
while undermining the favorable reputation of
Taiwan's business environment.
According to a 1984 study by the US International
Trade Commission, counterfeit products cost US
firms $6-8. billion in lost sales worldwide in 1982, and
Taiwan was. the most egregious offender.
Many countries now scrutinize imports of certain
Taiwan products for violations-notably popular and
high fashion apparel, auto parts, recordings, and
electronics hardware and software. Saudi Arabia has
prohibited imports of Taiwan-made auto parts be-
cause ofthe hazard posed by:their inferior quality. F_
Taiwan authorities are making very slow progress
eliminating commercial counterfeiting; new laws and
study commissions have had little effect because of
lax enforcement. Pressure from foreign governments
and from domestic firms that fear repercussions
against their legitimate products is beginning to push
Taipei into prosecution of offenders. According "to
Taiwan press reports, the Board of Foreign Trade
(BOFT) and police departments investigated more
than 850 counterfeiting cases in 1984, up from 612 in
1983; BOFT plans to expand its enforcement staff
this year.
The 10-Year Economic Development Plan
Nearly the entire development plan for the' 1980s
affects trade, either directly or indirectly. Concerns
about continued economic growth, increased self-
sufficiency in certain products, energy availability,
technological enhancements in industry, and manpow-
er development run through the entire document.
Some of the basic assumptions of the plan have been
overtaken by events, but the general direction and
most of the specific targets are still valid.
Moderate Growth Targets. The plan calls for overall
real economic growth in this decade of 7.9 percent
annually. Expansion of foreign trade is to remain the
primary means of economic growth and stability.
The Economic Decision Making Process
The American Institute in Taiwan has characterized
the economic decision making process in Taiwan as
simple on paper but, in practice, an arduous and
complex consensus process that usually results in
watered-down decisions. Dominated by President
Chiang Ching-kuo and Premier-Yu Kuo-hua, the
process is "top down" and very conservative. The
Ministers of Economic Affairs (Hsu Li-teh), Finance
(Lu Jen-k'ang), and Communications (Lien Chan), the
Governor of the Central Bank (C. C. Chang) and the
Chairman of the Council for Economic Planning and
Development (Chao Yao-tung) participate in the im-
plementation of general guidelines issued by Chiang
and Yu. Under the pervasive influence of the Kuomin-
tang and business interests,-these civil servants over-
seeiday-to-day economic management. Much of their
activity is reactive-attempts to maintain the status
quo in the face of either domestic or foreign pres-
sures-rather than innovative.
Under Yu Kuo-hua's guiding hand, Taiwan could
slow the minor advancements made to date in liberal-
ization. Yu, initially as the Minister of Finance and
later as the governor of the Central Bank, took a
leading role in the introduction of many of the
restrictive policies now under attack. It remains to be
seen if his broader responsibilities as Premier give
him a more liberal viewpoint. Hsu Li-teh, on the
other hand, as Minister of Finance, was in favor of
greater liberalization and apparently continues to
advocate that view as Minister of Economic Affairs.
Chao Yao-tung also has favored liberalization and,
together with Hsu, may continue to create friction
that could impede economic decision making. F__1
Exports of goods and services. in real terms are to
grow 12.4 percent yearly and imports 12.5 percent.
Except for imports, actual' accomplishments in 1981-
84 have been impressive: in real terms, both GNP and
exports have increased about 10 percent yearly, but
imports only 4.4 percent.
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Taiwan's Central Bank also has successfully con-
trolled inflation despite huge foreign exchange hold-
ings (more than $15 billion at yearend 1984). The 10-
year plan calls for maximum annual price increases of
6 percent, but wholesale prices through 1984 rose only
1.4 percent yearly. Consumer prices jumped 5.2 per-
cent yearly, still well within the plan guidelines. But
Central Bank governor Chang disclosed in February
that the bank was forced, to buy large amounts of US
dollars in January to ease pressure:on the NT dollar
(also thereby maintaining a stable exchange rate), so
inflation may become more worrisome.
Self-Sufficiency in Major Grain Crops. Taipei wants
farmers to switch from government-subsidized rice;
which is in surplus, to other small grains. Progress has
been slow, however; corn output has increased rapidly
since 1980, but wheat and millet production has
dropped considerably. Moreover, reliance on imports
has actually increased in the 1980s, with imports as a
share of grain supplies rising from 65 percent in 1980
to 71 percent in 1983. We believe Taiwan will not be
able to achieve self-sufficiency; increased domestic
production may reduce import requirements for some
small grains, but not by an amount sufficient to affect
US exports seriously.
Improved Forestry Practices. Taiwan plans to cut less
timber to improve soil conservation, which may in-
crease the need for timber imports. The United States
is Taiwan's third-largest supplier of timber and could
supply more. Strong competition, especially for hard-
woods, will continue to come from Malaysia and. the
Philippines, the two largest suppliers, as well as from
other Southeast Asian nations.
Energy Conservation and Diversification. The plan
was written at a time of increasing concern about
energy pricing and availability, so conservation and
diversification are prominent goals. Although energy
concerns of the 1970s have diminished, energy effi-
ciency has improved, with energy use per dollar of
GNP dropping 7.7 percent yearly since 1980.
To reduce dependence on Middle Eastern oil, Taiwan
is trying to diversify its energy suppliers. In January,
authorities approved a joint effort with a US firm to
explore for oil and natural gas in Indonesia; Taipei
also is negotiating to buy Indonesian liquefied natural
gas and is building new port facilities to handle it.
Taiwan has increased. the volume of coal imports 17
percent each year since 1980 while slightly reducing
oil purchases. Imports of US-origin coal have soared
nearly 50 percent a year since 1980.6 Additional
nuclear power plants (Taiwan Power Corporation's
plants 7 and 8>-for which US firms are competing-
have been under discussion for years and may be
contracted in- 1985. Plans to improve energy efficiency
in transportation by building mass transit systems
promise further opportunities for US firms.
Industrial Structure Modification.. Taipei plans to
direct the economy away from labor- and energy-
intensive industries, with emphasis on high technol-
ogy. Structural modifications have several implica-
tions, including increased investment, enhanced
energy efficiency, and new demands for manpower
development. Purchases of capital goods for new
industry may boost imports of US manufactures and.
technologies; however, Japan will maintain the com-
petitive edge. Taiwan plans to move labor-intensive
industries out of the export-processing zones and
replace them with firms that manufacture goods such
as precision instruments and computer products,
thereby enhancing the export competitiveness of
Taiwan-made high-technology products. We expect
the affected firms to resist any such moves because
they stand to lose many of the conditions that contrib-
ute to their profitability.
Manpower Development. A declining population
growth rate has left Taiwan with shortages of both
unskilled labor (for such traditional industries as
textiles) and highly skilled labor (for the planned high-
technology industries). One result has been nearly 15-
percent annual increases in average nonagricultural
wages, driving up production costs and weakening the
price competitiveness of Taiwan's exports. Already
having one of the more highly educated labor forces in
the Pacific Basin-Taiwan requires nine years of
formal schooling-Taipei plans more extended aca-
demic and technical training in support of the move to
6 Still, the United States accounts for only about one-fourth of
Taiwan's coal purchases. Australia is Taiwan's leading supplier;
South Africa and Canada also sell sizable volumes of coal to
Taiwan. All three sell coal at prices 5 to 20 percent lower than US
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Investment has been sluggish despite Taipei's efforts
to encourage industrial expansion and moderniza-
tion. Many industrialists cite the uncertainty they
feel because of the plan to focus on high technology.
Traditionally involved in more basic sectors, conser-
vative investors are hesitant to commit funds to
operations for which Taiwan may have neither ade-
quate skilled manpower nor sufficient research and
development capacity to be competitive. Moreover,
they see US expansion leveling off in 1985, which
would reduce demands for Taiwan products of any
sort and dictate against capital investment now.
Through the third quarter of 1984, idle capital in
Taiwan increased to 12.1 percent of GNP from only
1.2 percent in 1980.
In 1984, the government acknowledged the continuing
need for basic industries such as textiles and apparel,
but encouraged them to move up scale and to mod-
ernize equipment to be more competitive in interna-
tional markets. US recovery in 1984 induced some
investment to expand Taiwan industries that export
to US markets. Approvals offoreign investments have
increased as well, but Taiwan applies widely varying
restrictions on foreign investors on a case-by-case
basis and the lack of clear-cut regulations is discour-
aging to investors; since 1976, direct foreign invest-
ment from all sources totaled $761 million, about 31
percent of all approvals.
Moreover, Taipei is encouraging Taiwan businessmen
to invest abroad, especially if foreign investment
helps develop new markets for Taiwan products.
Authorities stress ties with the Caribbean Basin in
particular. Taiwan hopes to take advantage of the
Caribbean Basin Initiative to expand business by
investing in Caribbean firms that will increase ex-
ports to the United States.
more technology-intensive industry. Minister of Edu-
cation Li Huan is promoting academic and vocational
training in Taiwan to stem intellectual flight and is
trying to bring back to Taiwan those young profes-
sionals who have chosen to remain abroad after
training, mostly in the United States.
Trade and Finance Liberalization. The plan also
addresses taxation, trade restrictions, and foreign
exchange controls, with an eye toward loosening
constraints on imports and investment. While calling
for "stimulating the growth of trade by promoting
more effective fiscal and monetary measures," it
spells out few details on how this would be done. The
plan calls for reducing average customs duties from
39 percent to 20 percent by 1990, and for merging
commodity and stamp taxes.
It also lays out plans for a value-added tax (VAT).
Nominally a 5-percent tax, the compounding effect as
items work through the production-wholesale-retail
chain would increase the effective rate substantially.
The potential for negative impact on imports is high.
The VAT will be applied not to the declared value of
an imported good, but to the c.i.f. value of the import
(thus taxing the transportation and insurance costs)'
plus import valuation uplift,8 customs duties, harbor
fees, and any applicable commodity taxes. Hence,
importers would be paying the VAT on top of the
existing taxes. For example, an import costing $100
c.i.f. with a 10-percent valuation uplift, a 40-percent
tariff, the 2-percent harbor fee, and no commodity tax
now costs $156; under the VAT, it will cost $163.80,
for an additional 7.8 percent of the item's original
value. If valuation uplift is eliminated, the delivered
cost would be $142 without the VAT and $149.10
with the VAT, for an extra 7.1 percent of the original
value. Supporters of the measure say that authorities
will reduce tariff levels to offset the VAT, but there is
no guarantee that would be done. Authorities expect-
ed the VAT to be implemented in 1984, but it met
considerable legislative and business resistance and
they now hope to introduce it this year.
General Ad Hoc Decisions
The various decisionmaking entities on Taiwan also
issue aperiodic regulations and decisions affecting
trade and investment policy. These decisions may be
' Taiwan already assesses customs duties on the c.i.f. value of
imports, a practice which the United States and other trading
countries have objected to without result.
'Taiwan assumes that exporters understate the value o goods they
ship, so the Taiwan customs authorities automatically add a
percentage to the stated value.
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in response to investment proposals, domestic business
influences, trade problems, requests from foreign gov-
ernments, or other outside pressures. Because they are
in response to specific situations, they are not always
consistent and often provide mixed signals. Conse-
quently, they cannot be interpreted as general policy
and in many ways can confuse the regulatory arena
even further.
Highlights of recent ad hoc decisions include:
? Reduction of valuation uplift. The uplift has
dropped to 10 percent from 15 percent and is
eventually to be eliminated entirely.
? Reduction of import duties. Since September 1983,
Taiwan has cut import duties on several hundred
items. In August 1984, tariffs were reduced on 59
items that represented nearly 4 percent of 1983
imports from the United States. In September, the
Ministry of Finance announced plans to trim maxi-
mum tariffs on about 1,000 items to 65 percent;
these items account for only about 5 percent of
Taiwan's total imports. Tariffs on several textile and
apparel categories were reduced in October (see
table 3 for sample tariffs).
? Relaxation of import restrictions. At least 11,000
items are subject to import restrictions other than
tariffs. Most imports require a permit, which is
generally freely granted; but, in early 1985, Taiwan
announced that about 5,500 items-mostly textiles
and apparel-would no longer require import per-
mits. Taiwan also has loosened import bans and
relaxed rules that disallowed entry of certain prod-
ucts from specific countries.
? Reduction of the harbor tax. The tax paid by vessels
using Taiwan maritime facilities was cut from 4 to 2
percent.
? Changing domestic-content requirements. The 10-
year plan called for increased local content require-
ments for certain "important" industrial products.
On the other hand, the 1984 automotive industry
development plan indicated that lower domestic-
content requirements would be initiated to encour-
age greater foreign participation. In late 1983,
authorities ordered that 40 percent of all whole-
plant purchases by state enterprises be domestically
produced, but that too may be only loosely applied.
Apparently, the actual requirement will vary by
industry and, very likely, by the amount of pressure
foreign investors apply on Taipei for lower domestic-
content levels. On a similar note, some potential
investors have found that requirements vary by
industry on the degree to which investments show
Taiwan ownership; a recent ruling, for example,
requires 50 percent Taiwan ownership of leasing
firms. Yet AT&T will be permitted to hold 70
percent of a joint venture to produce electronic
devices.
? Changing export performance requirements. Tai-
wan requires that many partly or wholly foreign-
owned firms export a share of their production. The
share increases as needed to reserve domestic mar-
kets for Taiwan firms. Toyota late last year can-
celed plans to build automobiles in Taiwan partly on
the basis of export requirements. A US firm negoti-
ated for months before reaching a market-sharing
arrangement without explicit export requirements.
Though the change is minor, it demonstrates the
possibility of greater flexibility on export
performance.
Taiwan's Measures Aimed at the
Taiwan-US Trade Imbalance
In December 1983, President Chiang issued guide-
lines for the economy that included a call for reduc-
tion of the trade imbalance. An ad hoc ministerial-
level committee and a lower level task force were
formed to formulate specific proposals to offer relief.
Most of the suggestions made public have been simply
iterations of the ad hoc decisions listed above, but
with US goods receiving preferential treatment. If
Taipei takes such narrow actions, protests and per-
haps retaliation will probably follow from Taiwan's
other trade partners. Broader proposals that date back
to the late 1970s have, for the most part, been
palliatives, and are either unrealistic or have only a
marginal effect.
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Table 3
Sample Tariff Levels
on Taiwan's Imports
Wool carpet
Synthetic carpet
Bedsheets, tablecloths
Selected paper products
Chocolate
Household metal products
Electric irons, juice squeezers
Golf clubs
Tobacco products, accessories
Silk products
Finished leather
Apples
40 (reduced from 100)
40 (reduced from 75)
40 (reduced from 50)
40 (reduced from 50)
50 (reduced from 75)
35 (reduced from 40)
40 (reduced from 45)
35 (reduced from 40)
75 (reduced from 100)
75 (maximum)
31
75
Buy-American Missions. Taiwan has sent nine formal
buying missions to the United States since 1978, with
purchases totaling more than $7 billion. A 10th
mission is scheduled for April this year and plans
about $200 million in purchases. These missions are
primarily publicity for Taiwan's effort to address the
trade imbalance and buy goods that Taiwan would
probably have purchased in any case, predominantly
agricultural products and coal. On the ninth mission
(fall 1984), for example, $510 million of the total $572
million in purchases went for agricultural products
that probably would have been imported through
normal channels.
Big Ticket Projects. Leading government authorities
also have promised that US firms would have exclu-
sive bidding rights on many major capital projects
included in the 10-year economic development plan
(see table 4). For example, Chiang Ching-kuo in early
1984 announced that US firms would be "key sup-
pliers" for such major construction projects as nuclear
power plants 7 and 8, Taipei's subway system, and
three planned hospitals. However, several of the
promised projects have been opened to bids by firms
from other countries. The responsible officials claim
that US costs exceed those of other suppliers by too
much to ignore. Nonetheless, Taipei has hurt its
credibility by not complying with its own stated
business commitments.
Table 4
Selected Projects in 10-Year Plan
of Interest to US Firms
Thermal power plants (17 projects)
10.03
Nuclear power plants (8 projects)
8.04
Telephone networks (expansion)
6.19
China Steel Corporation (expansion)
5.02
Highway construction
2.96
Agricultural mechanization
(equipment procurement)
1.93
Hydroelectric power plants (8 projects)
1.83
Taipei and Kaohsiung rapid transit
systems
1.50
Civil aircraft (procurement)
1.25
Harbor coal-handling capacities
(expansion)
1.00
Rolling stock for island railroad
(procurement)
0.57
Arms and Oil. Trade and other government officials
have offered to reduce the surplus by increasing
imports of US weapon systems and Alaskan oil. These
options are obviously unrealistic because arms sales
are constrained by US agreements with China and
Alaskan oil exports are prohibited by law. Alaskan
natural gas can be exported, but Taipei has shown
little interest, preferring to tap Indonesian and other,
closer supplies. We believe Taiwan expects that US
concern about the trade imbalance will finally be
enough to force Washington to approve Taipei's
requests.
Obstacles to Change
It is difficult to be optimistic about the potential
impact of the current liberalization campaign. Similar
efforts-mostly tariff adjustments in 1973, 1979, and
1982-had no lasting effect. Yu Kuo-hua himself said
in late 1984, "Taiwan has been relaxing trade controls
and revising tariffs for years but without the desired
effect ... perhaps the range is not broad enough."
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Attempts now to change a wider spectrum of regula-
tions may suggest a more sincere effort; however, we
believe that the restrictions will be relatively easy to
reimpose if the government is pressured by domestic
business or revenue requirements to balance the bud-
get. Indirect taxes now account for three-fourths of
total tax revenues, with customs duties and the com-
modity taxes alone providing more than one-third.
Taipei estimates that just the reduction of valuation
uplift by 5 percent would reduce revenues by NT $3
billion, nearly 1 percent of total tax revenues. F_
Taiwan's economic leadership is understandably con-
cerned that rapid change will undermine its very
successful economy. It is, however, moving so slowly
that the adjustments have had little impact on the
trade imbalance. For example, the commodities for
which import duties have been cut are largely items
not exported to Taiwan by the United States-or any
other major trade partner, for that matter. The
political influence of domestic producers is too great
for the authorities to be able to initiate measures that
may enhance the competitiveness of foreign goods on
domestic markets. Yet, the government orchestrates
such massive press attention to accompany the intro-
duction of these measures that US observers are left
with the impression that massive progress is under
way in trade liberalization and that considerable
sacrifice was required to gain the support of Taiwan
industry.
Taiwan's security services are a powerful obstacle to
further opening of the domestic economy. Intent upon
excluding potential threats to the political stability of
the island-particularly from the mainland-the se-
curity services restrict the flows of people and data
that are necessary for modern international business.
Taiwan has been unable to participate fully in inter-
national banking practices, for example, in part be-
cause the security services will not permit the neces-
sary telex and information-sharing processes.
Taiwan officials also recognize that measures they
take to liberalize trade and investment would benefit
all partners, not just the United States. Former
Minister of Economic Affairs Chao explained in 1983
that one reason for the slow course is that Japan
might benefit most from liberalization because of its
existing competitive advantages, which would simply
add to Taipei's own trade deficit woes with Tokyo.
Trade authorities have expressed cautious interest in a
"free trade zone pact" with the United States that
would allow a strictly bilateral reduction of trade
barriers. However, they have considered and scrapped
plans for a free trade zone four times in the past three
years, and now intend to defer judgment of such
arrangements until they have "carefully studied the
impact of a US-Israel pact"; but that pact was
proposed in 1981 and is still not operational, suggest-
ing that a comparable Taiwan-US arrangement lies
only in the distant future.
There are several actions that can alleviate the trade
imbalance problem with Taiwan. Individually, none
can eliminate the imbalance, but, collectively, they
could make significant progress toward better man-
agement of bilateral trade:
? Liberalization of Taiwan's import policies.
? Marked diversification of Taiwan's export markets.
? Vigorous marketing efforts in Taiwan by US firms.
? Unpegging the NT dollar from the US dollar.
? US imposition of trade restrictions directed against
Taiwan goods.
We believe that Taiwan will continue to liberalize
import restrictions only slowly because of the pres-
sures of vested interests on the island and chronic
difficulty in reaching agreement on policies. For the
next few years, expansion of imports because of
liberalization will be slow as Taipei gradually reduces
the array of restricted products. Nevertheless, we
expect trade liberalization to help reduce the trade
imbalance in the long run.
Taiwan is trying to diversify exports, which may
reduce its dependence on US markets. However,
Taiwan's selling efforts are not necessarily concen-
trated on those goods that it exports to the United
States, and thus the US share of total exports may
decline while imports of sensitive high-volume goods
continue to climb. For example, Taiwan has engaged
in a massive effort to export turnkey plants, particu-
larly to developing countries; significant sales could
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improve the island's export record, but would not
affect shipments of textiles, electronics, or other prod-
ucts to the United States. The potential benefit to
Taipei might be that Taiwan would no longer be as
dependent on the United States for export revenues
and thus would be more willing to accept reductions
of exports of certain products to the United States. As
with trade liberalization, however, we believe this is a
long-term benefit, with no near-term effect.
If the Taiwan authorities were to eliminate the link
between the NT dollar and the US dollar, the NT
dollar could appreciate against the US dollar and US
exporters would benefit.
Despite Taipei's protestations that it is acting as
quickly as feasible to liberalize trade, little has hap-
pened. Consequently, we believe the most persuasive
measure the United States has to encourage liberal-
ization of Taiwan's trade structure is the threat of
restricting Taiwan's exports to US markets. Indeed,
some officials are extremely alarmed at that possibili-
ty. In December 1984 and again this past February,
Yu Kuo-hua reassured traders that Taiwan intends to
work toward free trade; we suspect that the increasing
frequency of such statements reflects rising anxiety
created in Taipei following the passage of the US
Trade and Tariff Act of 1984 and the threat to
eliminate Taiwan's GSP eligibility. This suggests that
a clear understanding that additional restrictive mea-
sures are in the offing may spur Taiwan into more
effective action. In the absence of such an understand-
ing, we believe the United States will see only slow
progress in resolving the trade deficit problem.
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