Shanghaied?: The Economic and Political Implications fo the Flow of Information Technology and Imvestment Across the Taiwan Strait
198
Shanghaied?: The Economic and Political Implications fo the Flow of Information Technology and Imvestment Across the Taiwan Strait
198Paperback
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Product Details
| ISBN-13: | 9780833036315 |
|---|---|
| Publisher: | RAND Corporation |
| Publication date: | 07/26/2004 |
| Pages: | 198 |
| Product dimensions: | 8.50(w) x 10.90(h) x 0.47(d) |
| Lexile: | 1800L (what's this?) |
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Shanghaied?
The Economic and Political Implications of the Flow of Information Technology and Investment Across the Taiwan StraitBy MICHAEL S. CHASE KEVIN L. POLLPETER JAMES C. MULVENON
Rand Corportaion
Copyright © 2004 RAND CorporationAll right reserved.
Chapter One
INTRODUCTION
BACKGROUND
For years, Taiwan's world-leading information technology (IT) industry has exploited the relatively cheap labor pool of the Chinese mainland to produce the lower-end items in its product lines, such as keyboards and disk drives. As the Taiwanese economy stumbles, however, more companies are looking to export their production base to the mainland, threatening to "hollow out" the island's leading industrial sector in the view of some Taiwanese observers. Taiwan's leaders have attempted to stanch the flow of production to the mainland, but economic logic and political enticements from Beijing have made the move too attractive for most companies to resist. More recently, Taiwan's President Chen Shui-bian has recommended the relaxation of controls on trade, transportation, and investment, portending an even greater acceleration of Taiwanese investment in and production on the mainland. At the same time, Taiwan has become increasingly important to the success of China's science and technology development, and the combined technology, capital, and labor of the two sides could prove to be a potent force, pushing China into the top ranks of the world's IT powers.
OBJECTIVE OF THIS REPORT
The goals of this report are threefold: (1) to comprehensively analyze the investment and technology transfer dynamics between China and Taiwan; (2) to assess the impact of these developments for relations across the Taiwan Strait writ large, the global semiconductor industry, and the advancement of science and technology development in China; and (3) to evaluate the implications of the findings for U.S. government policymaking, particularly in the area of high-technology export controls.
RESEARCH APPROACH
In the course of the research, we drew information from a wide variety of sources, including Chinese and Western media, company materials, and Internet resources. The project also built on the RAND Corporation's previous experience in gathering information from private-sector sources by incorporating interviews with researchers and industry experts, especially in the region. For this particular report, RAND researchers conducted extensive interviews with trade association representatives, company representatives, analysts, and government officials in Washington, D.C., Taipei, Hong Kong, Shanghai, and Beijing.
ORGANIZATION OF THIS REPORT
The remainder of this report is divided into three main chapters. Chapter 2 addresses the contextual environment for IT flows across the Taiwan Strait, including the overall dynamic of cross-Straits relations between Taipei and Beijing as well as Chinese and Taiwanese government policies on investment and trade. Chapter 3 analyzes the current cross- Straits IT flows, providing statistical estimates of the scope and scale of the movement of technology and capital, summaries of the integrated circuit (IC) industries in Taiwan and China, and case studies of key companies. Finally, Chapter 4 offers our conclusions on key issues, including the debates over whether the Taiwanese IT industry is being "hollowed out" by the movement of IT production to China, whether the "three links" between China and Taiwan would sound a death knell for Hong Kong, and how cross-Strait economic integration is changing the overall cross-Strait political dynamic, as well as the implications of these findings for U.S. government policymaking, particularly in the area of high-technology export controls.
Chapter Two
GOVERNMENT POLICIES AND CROSS-STRAIT FLOWS
THE MECHANICS OF CROSS-STRAIT TRADE AND INVESTMENT
This chapter addresses the mechanics of cross-Strait trade and investment and assesses the Taiwanese government's attempts to regulate trade with and investment in China.
The Evolution of Taiwanese Government Controls on Trade and Investment
Prior to 1979, there was virtually no economic interaction between China and Taiwan. At the beginning of the 1980s, Taipei enforced a nearly complete ban on exports to the mainland and permitted only certain Chinese foods and medicines to be imported from China via Hong Kong. As China became more open, however, Taiwanese businessmen began to see opportunities on the mainland. Despite the continuing prohibitions, trade between Taiwan and the mainland reached nearly $1 billion in 1985. Perhaps recognizing the futility of enforcing the ban on trade and investment, the Taiwanese government in 1985 adopted a noninterference policy with respect to indirect exports to China, with the result that Hong Kong became the main entrepðt for goods shipped to the mainland. Direct investment in China by Taiwanese companies also remained banned and had to be carried out through subsidiaries or front companies in Hong Kong. The Taiwanese government, however, generally tolerated investment in China as long as it was relatively small and involved "sunset" industries.
Yet, the economy in Taiwan was undergoing important changes that would lead to an accelerated transfer of production to the mainland. As a result of the economic "miracle" that occurred in Taiwan from the 1960s to the 1980s (with its peak in the 1970s), the standard of living in Taiwan began to increase. Between 1975 and 1985 the nominal wage rate in Taiwanese manufacturing increased at 13.7 percent annually, while nominal labor productivity was growing only half as fast, at 6.8 percent. Nevertheless, Taiwan's current account surplus increased to 20 percent of gross national product (GNP) in 1986, and foreign exchange reserves increased from $23 billion to $77 billion between 1985 and 1987. According to Barry Naughton:
The increase in reserves meant an excessive diversion of resources into low-yielding assets and thus a significant amount of income forgone. Moreover, by preventing appreciation, the government perpetuated large trade surpluses with the United States that were not politically sustainable. Finally in 1986 the currency was revalued upward by 40 percent against the U.S. dollar in two years.
Rising wages and appreciation of the Taiwanese currency reduced the competitiveness of Taiwan's labor-intensive industries and forced these industries to find low-wage markets, such as China. As a result, investment in the mainland was led by shoe manufacturers, whose labor-intensive factories in Taiwan suffered from rising wages and labor shortage, which made competition on the world market increasingly difficult. The appreciation of the currency also coincided with three Taiwanese policy moves in 1987: the lifting of martial law, approval for Taiwanese to visit the mainland, and the rescinding of the need for Central bank approval for remittances of capital for amounts below $5 million. In October 1989, Taiwan issued regulations sanctioning indirect trade, investment, and technical cooperation with the mainland. This mix of official restrictions and tolerance allowed for steady increases in trade between Taiwan and China. In 1978, the value of Taiwanese exports to the mainland totaled a mere $51,000, but by 1991 exports exceeded $4.6 billion. The principal exports were chemical fibers, cloth, plastics, raw materials for the chemical industry, machinery, and electronic parts and products. Indirect investment was more difficult to gauge but was reported by the People's Republic of China (PRC) government to have reached $3.4 billion by 1991. For the Taiwanese government, the growing trade with China raised concerns that the island's economy was becoming overly dependent on economic relations with the mainland. Taipei was also concerned that Taiwanese industry was losing a measure of its competitiveness to the mainland. Increasingly, labor-intensive products such as toys, footwear, and textiles as well as electronic products such as calculators, television sets, tape recorders, and other electrical appliances were being manufactured on the mainland, causing Taiwan's share of exports in these products to important markets, such as the United States and Japan, to decline. This trend prompted the Ministry of Economic Affairs (MoEA) in October 1990 to issue the "Regulations on Indirect Investment or Technical Cooperation in the Mainland Area," which required firms with investments on the mainland to register the amount and nature of their investment. After April 1991, firms planning to invest more than $1 million on the mainland had to obtain advance approval of their investment, and those investing lesser amounts had to report their investment to the Ministry. Failure to report mainland investments could be punished by denying the violator permission to travel or impede remittance of funds from abroad by enforcing stricter customs inspection of the violator's goods.
As a result of the new reporting regulations, the Taiwanese government learned that investments in the mainland totaled at least $750 million. While this number was considered to be far below the actual value of the investments, the new regulations did provide the government with a better means to track investment in the mainland. The regulations also allowed Taiwan firms to invest in the production of 3,353 products, mostly in labor-intensive industries such as apparel, footwear, household electronics, and food processing. This list of permissible investments was expanded to 4,895 products in 1996. In addition, in the early 1990s, Taiwanese investment began to move up the manufacturing chain. In 1992, eight Taiwanese camera manufacturers set up plants in China to compete with low-end Japanese camera manufacturers.
China responded to the increase in cross-Strait trade by establishing local Taiwan Affairs Offices to assist Taiwanese investors with investment applications and recruitment of local staff. In addition to official assistance, the State Council in July 1988 also issued "Regulations Of The State Council For Encouragement Of Investment By Taiwan Compatriots," which allowed Taiwan investors to enter into joint ventures or wholly own their own companies, purchase stocks and bonds of enterprises, and purchase real estate. In addition, the regulations exempted Taiwanese enterprises from many customs duties, industrial and commercial taxes, and import license requirements. Moreover, the regulations provided tax and duty exemptions for articles and vehicles in a reasonable amount imported by Taiwan staff members for their personal use during their service period in the enterprise. In addition, in May 1989, China established two investment zones for Taiwanese firms in Xiamen and Fuzhou.
The Chinese government finally legalized investment in China for a certain number of personal computer (PC)-related products in 1992. According to Naughton:
Leading producers such as Acer, First International Computer, and Mitac wasted no time in moving Foreign Direct Investment (FDI) into China. In 1993 there were already 35 Taiwanese subsidiaries in China as against 10 in Thailand, nine in Malaysia, and four in Indonesia. The number increased to 41 in 1995, constituting 70 percent of all PC firms that were running overseas subsidiaries. China accounted for almost half of Taiwanese offshore production of motherboards in 1993, one of the latest items to go abroad, with the rest being supplied by subsidiaries based in Thailand and Malaysia.
Although the Taiwanese government continued to ease restrictions on trade and investment in the mainland, there were still lingering suspicions about the political leverage that increased trade and investment would give to Beijing. This prompted former president Lee Teng-hui (1988-2000) to urge Taiwanese investors to divert their investments from China to Southeast Asia. The "Go South" policy, which was initiated by Lee Teng-hui in 1994, aimed to prevent the island from becoming overly dependent on its economic relationship with the mainland by encouraging Taiwanese companies to invest in Southeast Asian countries. The policy has produced relatively modest results: Taiwanese foreign direct investment (FDI) in the Association of South-East Asian Nations (ASEAN) in 1998 totaled $842 million, making Taiwan the seventh-largest investor in the ASEAN nations that year. Taiwan fell out of the top ten in 1999, but in 2000 ranked as the fourth-largest source of FDI for ASEAN countries, with $802 million in FDI. From 1995-2000, Taiwan was the seventh-largest investor in the region with total of $4.45 billion in FDI.
Having concluded that the "Go South" policy was not reducing the movement of Taiwanese capital to the mainland, the Lee government promulgated the "No Haste, Be Patient" (jieji yongren) policy in September 1996, requiring case-by-case approvals for Taiwanese investments in high-technology and infrastructure projects in China. The policy also placed limits on investments by companies listed on the Taiwanese stock exchange and imposed a ceiling of $50 million on individual Taiwanese investments in the mainland. Supporters of the policy argued that it was needed to prevent Taiwan from becoming overly dependent on its economic relationship with China. Some even asserted that Taiwanese investment on the mainland would leave the island vulnerable to economic coercion and enable China to develop military capabilities that would threaten Taiwan's security.
But Taipei's policies were beginning to lag badly behind the economic reality of cross-Strait trade. By 1999, only half of Taiwan's $40 billion worth of PCs, peripherals, and semiconductors were made at home, and by 2000, China displaced Taiwan to become the world's third-largest producer of information technology hardware, after the United States and Japan. In addition, the Taiwanese government in 2000 lifted restrictions on manufacturing notebook PCs on the mainland, prompting manufacturers to shift their production to China. By 2000, four of the five most important Taiwanese notebook PC makers-Inventec, Acer, Compal Electronics, and Arima Computer-had plants producing computer components in China. According to PRC statistics, by the end of 2000 Taiwan had invested $28.46 billion in China with two-thirds of approved new investment projects in 2000 in the electronics sector. But this figure reveals only part of the story, because much of Taiwan's investments are allegedly funneled through third countries, such as Hong Kong, the British Virgin Islands, and the Cayman Islands, to avoid government restrictions. This has led U.S.-China Business Council's Karen Sutter to estimate that contracted investment by Taiwanese firms could be as high as $70-$100 billion.
The go-go economy in Taiwan that continued throughout most of the 1990s came to a grinding halt in September 2000 with the global "dot com" crash. Gross domestic product (GDP) growth slowed from 6.73 percent to 3.82 percent during the fourth quarter of 2000 and contracted for the first time in Taiwan's history, by 2.18 percent in 2001. These announcements precipitated a fallout in the high-technology sector that seriously affected Taiwan's economy. Predictably, the high-technology bust also encouraged movement to the mainland as Taiwanese companies looked to the mainland for cheaper real estate and labor to improve their competitiveness. It was reported in 2001, for example, that notebook manufacturer Arima Computer Corporation was investing $100 million and planned to employ 650 research engineers in several Chinese projects. The continued flow of investment to the mainland led to charges by some, including many independence supporters, that trade with the mainland was "hollowing out" Taiwan's economy and that restrictions on mainland investment should be maintained.
(Continues...)
Excerpted from Shanghaied? by MICHAEL S. CHASE KEVIN L. POLLPETER JAMES C. MULVENON Copyright © 2004 by RAND Corporation. Excerpted by permission.
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