Testimony of Terry Cooke

It is an honor to be asked to testify in front of this distinguished panel of Commissioners. It is also, personally, a distinct pleasure to see again a number of former Departmental and Embassy colleagues as well as others with whom I have had the past pleasure of working on various overseas and stateside activities. In the following brief statement, I will bring to bear my perspective as current Chief of the Commercial Section at the American Institute in Taiwan to address the issues identified in the July 24th invitation letter I have received from the esteemed Co-Chairs of this Commission.

The strategic interdependence of the US and Taiwan economies has grown steadily throughout the 1990s as Taiwan's economy has shifted from its traditional structure as a labor-intensive, export-oriented economy towards a more services-oriented, investment- and technology-intensive economy. While Taiwan's industrial sector has shrunk in relative terms over this period, capital- and technology-intensive industries have expanded dramatically. These industries accounted for approximately 75 percent of total manufacturing in 2000, compared to 48 percent in 1986. During this structural transition, labor-intensive industries, such as toys, footwear, umbrellas, and garments, relocated offshore. Their place was taken by petrochemicals, metal products, machinery, and ñ most dramatically during the 1990s ñ by technology-oriented industries, such as electronic, electric, and information products.

By 2000, more than half of the top ten manufacturing firms in Taiwan were electronic and computer manufacturing firms, compared to only two in 1993; and more than half of the top ten manufactured products were in the areas of integrated circuits (ICs), personal computers, and computer peripherals, whereas in 1993, only ICs had been among the top ten. Taiwan now supplies 60% of the world's motherboards and is the world's leading supplier of notebook computers, monitors, mice, keyboards, video cards, sound cards, on-off switches, LAN cards, graphics cards, scanners, and laser disk drives. Through the strength of is foundry model, Taiwan has emerged as a preeminent semiconductor supplier to the world. This transition from the production of labor-intensive goods to high-tech goods has, to date, proceeded relatively smoothly, even against the background turbulence of China's 1996 test-missile firing off Taiwan's northern coast, the turmoil of the Asian Financial Crisis in 1997-98 and a major earthquake occurring on September 21, 1999.

Against the broad backdrop of this structural transformation, two major dynamics have emerged clearly over recent years: (1) the growing regional partnership and global interdependence of the US and Taiwan high-tech industries and (2) the accelerating shift of the lower-end of Taiwan's high-tech production offshore, particularly to mainland China. One clear indicator of the degree of evolving interdependence with the US was the fact that, following the so-called 9-21 earthquake in Taiwan, the tech markets in New York dropped more in percentage terms than in Taipei. The scale of this interdependence is likewise highlighted in other ways: the fact that four top US. suppliers of PCs alone procured $20 billion (USD) of components from Taiwan to support their 1999 global sales or the fact that Taiwan will soon have more state-of-the-art 300mm chip-wafer fabs in operation than the US, Germany, Japan or any other world market.

The accelerating shift of high-tech production from Taiwan to mainland China has been equally pronounced over this period. The Taiwan Government's Office of Budget, Accounting, and Statistics reported in February that government-approved Taiwan investments in China for 2000 had more than doubled from the 1999 levels. The Taipei Computer Association reported in the same month that that 30 percent of Taiwan's 411 high technology companies had established major investments in mainland China and that fully 90 percent of those 411 companies planned to be invested in China by the end of 2001. A final statistic to illustrate this point. In 2000, China for the first time edged out Taiwan for the number three slot in world IT production value behind the US and Japan, registering $25.5 billion against Taiwan's $23 billion; notably, however, Taiwanese companies generated fully 70% of that $25.5 production value in Mainland China.

The impending accessions of China and Taiwan to the WTO will likely further accelerate this process of growing cross-straits commercial interdependence in high-tech, with consequent implications for the already highly interdependent US and Taiwan high-tech economies. Although Taiwan's relatively late liberalization and privatization of its fixed-line monopoly regime will limit somewhat the impact of this development in the telecoms sector, the likely effect will be continued fast-accelerating cross-straits interdependence in sectors such as PC and notebook assembly, motherboard and other PC component manufacture, production of chipsets for mobile telephony and other applications, scanner and computer peripheral production, and lower-end IC production. A number of important trends will reinforce WTO financial linkages and commercial disciplines and tend to produce this outcome:

First, the network of business relationships which Taiwan firms have established in China represents largely an extension into China of pre-existing product and service supply-chain relationships originally established in Taiwan. This "Greater Taiwan" phenomenon in China, localized in growth centers such as Dongguan (Guangzhou), Xiamen (Fujian) and, increasingly, the Greater Shanghai area, has now reached a critical mass sufficient for greater efficiency in the global supply chain;

Second, the commoditization of IT production worldwide is increasingly pressuring production costs, forcing manufacturers to distribute a growing number of lower-end steps in their production processes to the world's lowest-cost production centers. Under more than a decade of the KMT's "Go South" policy, Taiwan manufacturers have quite fully exploited the advantages of relatively low-cost production centers in the Philippines, Thailand, Vietnam and elsewhere in Southeast Asian. At the same time, the KMT's (and now the DPP's) "Go Slow" policy vis-‡-vis investment in the mainland tended to limit the degree to which Taiwan firms could take advantage of the even lower costs-of-production in China. However, since cost pressures started mounting sharply in March 2000, Taiwan high-tech firms have found themselves no longer able to maintain global competitiveness without relocating a greater share of their production to China, the lowest-cost major production center in the Asian production platform;

Third, a number of technology trends underlie an emerging division of labor in high-tech production between Taiwan and the PRC. Among these, are (a) the increasing specialization of national economies in globalized IT industry-segments (e.g., fully half of Finland's GDP is now generated from wireless related technologies); (b) the migration of value away from hardware assembly and towards imbedded software (e.g., scanners and other peripherals, Internet Appliances, etc); and (c) the steep rise in investment cost and shorter product cycles in the IC/semiconductor sector; and

Fourth, a natural complementariness between the Taiwan and China markets creates unique opportunities for commercial cooperation between these political rivals. One example: Taiwan firms have generally failed to establish global brands and to capture the higher market valuations that accrue to brand-name products. The large size of the China market, the skill and cultural familiarity of Taiwan business managers with that market, and the high regard which Chinese consumers have for Taiwan products, however, are now giving Taiwan firms the chance to establish important brand-names on a large-scale regional basis. A second example: Taiwan's proven skills in development and service-oriented management of global IT technologies, coupled with the breadth and potential of China's basic research capabilities, create distinct opportunities for partnership in regional innovation.

Each one of these trends holds important implications for US interests. The establishment of Taiwan regional brands might, for instance, tend to weaken the existing cooperative bonds between US and Taiwan alliance partners and foster more direct competition in the region. Conversely, the combination of US innovation, Taiwan regional management skill, and the largely-untapped potential of the developing China market is already creating a different set of opportunities for enhancing commercial cooperation among traditional US and Taiwan partners.

Both ways, the rapid proliferation of commercial ties between Taiwan and China is of major importance to US interests. There are the narrower set of commercial implications for the US competitive posture in regional and global markets, to which I have just alluded. Also, as the President of the US-ROC (Taiwan) Business Council pointed out in his June 14 testimony to this Commission, there are equally important implications which fast-growing commercial interdependence between Taiwan and China has for traditional US military and security interests in the Straits of Taiwan. I commend the Commission for focusing attention on the extent to which commercial dynamics in the computer electronics and telecommunications sectors are affecting these interests. It is my personal observation that these market- and technology-driven dynamics are not always fully captured in the dialogue regarding our key interests in this potential flashpoint region of the world.