Testimony for the U.S.-China Commission
Thursday, June 14, 2001
Rupert J. Hammond-Chambers
President, US-ROC (Taiwan) Business Council
Taiwan-US and Taiwan-China Trade and Investments
Taiwan has been one of the world's fastest growing economies over the past ten
years and more, and the island is the seventh largest market for U.S. products
and the eighth largest trading partner for the U.S., behind Canada, Mexico,
Japan, mainland China, Germany, the U.K., and South Korea. In 2000, the United
States was ranked the top market for Taiwan exports, accounting for 23.5% of
the total. The U.S. also served as Taiwan's second largest source of imported
products, behind Japan, accounting for 17.9% of the total. In the ten years
from 1990 to 2000, the value of Taiwan's exports to the US grew by more than
60%, while the import growth rate was almost 100%. (Figures 1- Much of Taiwan's
success can be attributed to effective positioning strategies and sound economic
policies. Taiwan's IT manufacturers have been able to maintain a competitive
edge in the global IT outsourcing marketplace, and as a result, US companies
have increasingly come to rely on Taiwan manufacturers for IT products and supply
chain management expertise. In respect to economic policy, strong government
support for the IT sector has encouraged innovation and increased trade in information
technology products. Taiwan's IT companies have strategically positioned themselves
to meet increasing global demand, and their success in this area has elevated
Taiwan's status as an important player in the global economy.
Mainland China has played an important part in the success of Taiwan's IT companies,
as those companies are increasingly investing in the mainland as a way to raise
their profit margins. Manufacturing costs in China can be 15-30% lower than
in Taiwan, which is significant in an industry where gross margins are generally
very thin. Taiwan's government officially forbids direct investment in China,
but domestic companies and individuals have invested about US $50 billion in
China over the past decade, according to an estimate by the Taiwan's Central
Bank. (Figure 4) Around 40 percent of Taiwan's total foreign investment is in
mainland China, and two-thirds of that amount is invested in electronics and
high technology. Mainland Chinese investments in Taiwan, on the other hand,
are negligible, as Taiwan strictly prohibits such investments.> The mainland
is also becoming an important trade partner for Taiwan, and according to the
Board of Foreign Trade, Taiwan exports to mainland China in 2000 reached US
$26.1 billion, marking a 23.3 percent annual growth and accounting for 17.6%
of the island's total exports. Taiwan's trade surplus to China was also the
highest on record in 2000, reaching US $19.9 billion. (Figures 1-3)
WTO Accession
China's pending membership to the World Trade Organization (WTO), immediately
followed by Taiwan, offers potential economic benefit for all parties, as well
as opportunities for resolving the political controversies that has complicated
the WTO entry process. The China-WTO package has a direct impact on U.S., Taiwan,
and China business interests, as under WTO rules and regulations U.S., Taiwan,
and Chinese companies will be able to expand their business operations abroad.
On the political front, many proponents of China and Taiwan's entry into the
WTO maintain that political differences between the two sides will be alleviated
as economic relations improve. That would, to some degree, calm U.S. worries
over the politically charged issue of Taiwan's sovereignty and its independent
entry into the WTO.
There are two central issues relating to the China-WTO package. One issue involves
the political factors that convolute the WTO process, while the second issue
involves Taiwan's role in the global technology supply chain, and how the WTO
trade deal strengthens Taiwan's position in the global technology-driven marketplace.
There are three overarching areas of question that warrant examination and analysis
in delineating the implications of China's pending accession to the WTO. First,
how do trilateral political considerations affect the WTO process, and how do
they affect potential political gains and business opportunities for the three
sides? Second, do the WTO provisions outlined in the China-U.S. bilateral trade
agreement have a direct impact on the business environment in China, and on
the global technology supply chain? How will those provisions affect the information
technology regulatory regime in China? How will a shift in free trade and investment
patterns in the PRC complement U.S. and Taiwan business partnerships? Third,
what are the potential risks facing U.S. and Taiwanese firms given China's past
record in creating a strong regulatory environment?
Political Controversy in the Context of the WTO
The WTO agreement presents some interesting challenges, because the nonpolitical
nature of the WTO process is increasingly being challenged by political considerations
that relate to U.S., China, and Taiwan interests. China's ultimate accession
to the WTO is a complex process affected by political dynamics in U.S.-China
relations, U.S.-Taiwan relations, and cross-Strait relations. Many of the political
issues affecting this process overlap with economic interests, thereby potentially
threatening the business benefits the WTO has to offer. In order for Taiwan,
China, and the U.S. to reap the full benefits of the WTO agreement, a number
of political issues must be resolved. In an effort to understand those issues,
it is necessary to provide a brief history of the political forces that surround
China and Taiwan's accessions to the WTO.
Some of the political dynamics that have created controversy during the WTO
accession process involves the political relationship between China and Taiwan
that first began at the closing of the Communist Revolution in Mainland China.
The outcome of this conflict set the stage for a diplomatic tug-of-war between
China and Taiwan, with both fighting for international status and political
legitimacy on the international stage. Both have tried, with varied success,
to isolate the other from the international community by attempting to influence
international organizations. More specifically, this battle spilled over into
international organizations such as the General Agreement on Tariffs and Trade
(GATT), and later into the World Trade Organization (WTO), and the United Nations
(UN). After the communist victory on the Mainland, the Taiwan government claimed
that they were the only legitimate government of China. Later, Taiwan authorities
conceded that there was "One country" but two systems, with Taiwan
being the only legitimate government of China and the other system being the
communist system in place in the Mainland. However, the Mainland Chinese government
has maintained their version of a "One Country" policy, stating that
Taiwan is a "runaway province", and they later went on to modify this
position by adopting a "One Country, two systems" policy approach.
Under this approach, China maintains that they are the sole government of the
People's Republic of China, an approach that is used for Hong Kong and Macau
today.
In 1965, Taiwan was successful in achieving observer status at sessions of the
GATT. However, in 1971 Taiwan lost its status in GATT because of a decision
by the UN Assembly recognizing the legitimacy of the People's Republic of China.
In 1992, Taiwan was able, through diplomatic maneuvering, to influence GATT's
Council of Representatives to establish a separate working party to examine
a request for accession of the separate customs territory of Taiwan, Pengu,
Kinmen and Matsu (referred to as "Chinese Taipei"). The conclusion
of this examination lead to a consensus recognizing the "One China"
principle, in which the PRC would take priority over a "Chinese Taipei"
initiative to establish a separate customs territory. When GATT evolved into
the WTO council, a similar rule was adopted for the process of accession for
"Chinese Taipei" and Mainland China. The agreement was that "the
Council should give full consideration to all views expressed, in particular
that the Council should examine the report of the Working Party on China and
adopt the Protocol for the PRC's accession before examining the report and adopting
the Protocol for Chinese Taipei, while noting that the working party reports
should be examined independently"> Today, Taiwan's leadership must overcome
the political adversity that the Beijing leadership has created, if it is to
reinforce its economic strength in the world community. By gaining accession
to the WTO, Taiwan's business community will get an opportunity to maintain
and increase its access to the global economy. This will empower Taiwan in the
expansion of its multinational manufacturing base in business environments such
as China. Although Taiwan's efforts to achieve member standing in international
organizations has been largely unsuccessful, Taiwan has been able to achieve
a significant amount of success through their continual economic liberalization.
The fact that they are currently ranked the14th largest trading nation in the
world bears some consideration, which should promote accession of Taiwan under
protocol for Chinese Taipei. In the past year, Taiwan has witnessed some extraordinary
political change, which have added some interesting dynamics on cross-Strait
relations. President Chen clearly supports China's WTO membership and welcomes
an expansion of cross-Strait economic relations. Chen has officially stated
that Taiwan "would welcome the normalization of U.S.-China trade relations,
just like we hope the cross-Strait relations (between China and Taiwan) can
be normalized; We look forward to both the People's Republic of China's and
Taiwan's accession to the WTO."> Taiwan's long-term political goal is to
increase economic cooperation with China while coming to a consensus over the
interpretation of the "One China" principle. In order for Taiwan to
take advantage of the benefits offered by the China-WTO deal, Taiwan must ensure
its own entry to the WTO. Furthermore, if China is successful in implementing
the WTO provisions, Taiwan will be more empowered to expand its investments
in Mainland China by increasing its base of operations in high-tech manufacturing
in the Mainland. In addition, Taiwan's import/export industries will make significant
gains through open trade. Much of this, of course, depends on a resolution of
current political differences stemming from the issue of Taiwan's sovereignty.
If political considerations are put outside the WTO process, or resolved through
cross-Strait dialogue, then both sides will be in a better position to gain
mutual economic benefit from their membership in the WTO.
China has, for the most part, aimed at blocking Taiwan's accession to the WTO.
A political mandate by the Communist leadership seems to be driving a great
deal of this initiative. China's goals are to politicize the WTO process over
the issue of Taiwan's entry. If successful, that strategy would reinforce political
legitimacy for China on the international stage, while adding impetus to its
growing nationalism. As a measure to meet this objective, China has insisted
in the final stages of the protocol agreements that the WTO use legal language
that recognizes its sovereignty over Taiwan, although, to date, the U.S. government
has rejected this language. Furthermore, the Mainland has taken the position
that Taiwan should only be allowed to join the WTO as a customs territory, part
of their notion of a "Greater China". This is a gambit by China to
ensure its position of international primacy over Taiwan. Taiwan's entry to
the WTO is something that threatens this notion, and consequently the leadership
in Beijing is willing to disregard the potential economic benefits of Taiwan's
entry. This stance has increased tensions in China-Taiwan political relations,
and has stalled economic cooperation as well. How effective China is on this
policy position depends greatly on how effective the WTO is in adhering to the
nonpolitical criteria for admitting entry.
WTO requirements are based on nonpolitical considerations, and if China's political
pressure proves successful, the "Taiwan issue" threatens to undermine
WTO procedures. The implications are that U.S. and Taiwan business interests
will not benefit from the concessions outlined by WTO guidelines. This is of
enormous importance, as it has direct bearing on Taiwan's high-tech manufacturers
who are working to expand their operations in China in order to lower production
costs and access the market. It is also of importance to American firms that
would reap the benefits of lower production costs of Taiwan manufacturers, as
they represent an integral part of the global technology supply chain.
Taiwan's accession to the WTO proffers economic and political benefits for the
U.S. In economic terms, membership for both economies promotes technology investment.
On the political front, the U.S. would be indirectly adding a small amount of
international legitimacy to Taiwan's economic importance without compromising
U.S. political commitments to Mainland China. The U.S., Taiwan, and China would
then be able to take a step forward in the WTO process by separating politics
from economic objectives.
Moreover, Taiwan's eventual accession to the WTO would lead to a more liberal
trade regulatory environment in Taiwan that not only advances U.S. and China
economic interests, but also empowers Taiwan's economic strength globally. This
will enabling Taiwan companies to expand their operations in China under WTO
rules and regulations and therefore give U.S. companies more business opportunities
in China, through their relationship with their Taiwan manufacturers. Moreover,
assuming China is successful in meeting WTO obligations as outlined in the agreement,
Taiwan companies will have an added advantage in performing business operations
in Mainland China. A freer and more transparent Chinese business environment
greatly complements Taiwan's position in the global technology supply chain
by enhancing its ability to meet the growing demand from American high-tech
manufacturers.
WTO Implications for U.S., Taiwan, and China Companies
Provisions and requirements for China's entry into the WTO, as outlined by the
U.S.-China WTO trade agreements, represent solid concessions in free trade,
and a large number of those provision focus on information technology trade
issues. Taiwan and U.S. companies stand to achieve enormous economic gain from
concessions outlined in the U.S.-China WTO trade agreement.
Taiwan's View
If Taiwan's accession immediately follows that of China, Taiwan views their
combined accession as an enormous opportunity for business on both sides of
the Taiwan Strait. At a Ministerial Conference in Singapore in December 1996,
former Taiwan Economics Minister Dr. Wang Chih-Kang further expressed Taiwan's
commitment to cooperate with the WTO process in the areas outlined above by
stating: "In the area of further liberalization, we support the proposed
Information Technology Agreement which we believe will achieve the full liberalization
of the market for information technology products, what is particularly worth
mentioning is our commitment under the TRIPS and the GATTs; Our protection of
Intellectual Property Rights (IPR) has much exceeded the requirement of the
TRIPS, especially in the area of border control".
In addition to Taiwan's efforts to meet WTO standards, Taiwan has been moving
in a direction towards more liberalized information technology policies on issues
of trade, while also supporting China's goals for entry to the WTO. Taiwan is
supporting China's bid for WTO entry, because a more liberal free-trade environment
in China will improve Taiwan's economic and trade position. One forecast predicts
that WTO accession, will add a further NT$30 billion (U.S.$0.95 billion) per
year to Taiwan's export growth. The incentives are great and the implications
are that the U.S., China, and Taiwan have a great deal to gain by pushing China's
accession forward. For the first six months of the year 2000, Taiwanese investment
in Mainland China reached U.S.$ 1.03 billion. Although that figure is down 17
percent for the same period in 1999, contracted investment is up 31 % (valued
at U.S.$1.99 billion), which is significantly higher than the same period in
1999. Much of this reflects how China-bound investments are on hold until the
WTO deal plays out. After accession, the increase in foreign investment flows
gives impetus to economic growth while also providing incentives for the Chinese
government to adhere to WTO principles and rules to further encourage this flow
of funds.
In examining Taiwan's approach to economic growth, it is clear that the trade
concessions offered by China in the WTO trade deal complement Taiwan's industrial
goals. Taiwan's approach to economic development consists of minimal government
intervention, diversification of products, and a movement away from labor-intensive
products. This has lead to a great deal of success in small and large-scale
business operations, and has lead to increasing competitiveness. The added competitive
edge has enhanced the ability of Taiwan companies to penetrate the global market.
The opening up of China's markets, and a more transparent regulatory regime,
will enhance Taiwan's comparative advantages in local Chinese markets, while
promoting their ability to compete with other leading information based economies
in Asia and in the West. One reason why Taiwan has been successful is due to
its ability to upgrade its production standards. Taiwan has been moving away
from labor-intensive products, and thereby away from direct competition with
the other Asian "Tigers", toward more innovative trade strategies
and diversified product lines. Moreover, they have been successful by emphasizing
more effective globalization strategies. This means the Taiwan government has
avoided choosing which industries to develop, but rather has adopted a functional
policy that provides incentives or levies to influence companies' external behavior.
Consequently, Taiwan companies have been able, with a high degree of success,
to expand the development and export of information technology products.
Today, Taiwan represents one of the top producers of information products. WTO
free-trade rules help create a more open market where Taiwan's industries can
further grow. In the future, Taiwan manufacturers will be empowered through
the WTO to increase its trade in information technology products. As this trade
increases, so will their continued success in the production of information
technology products. Taiwanese firms will be able to achieve this through a
production shift, whereby manufacturers can focus on different approaches that
promote product differentiation in high-tech and high-quality products. Furthermore,
an important area of note is that Taiwan governmental policy has led its domestic
industry core to upgrade its quality product standards during a relatively short
period. The implications are that Taiwanese companies have a tremendous ability
to compete in the dynamic, fast-paced global technology market. Eventually,
Taiwan's domestic environment will reflect higher standards in its legal system,
higher manufacturing capacity, and a product mix equal to most advanced countries.
One implication of WTO accession is that as China and Taiwan become members
of this global trade body, China will help accelerate upward, as well as downward,
trends in the technological evolution of the global supply chain. These trends
will contribute to the evolution of information technology industries by promoting
the expansion and diversification of multinational operations for the U.S. and
Taiwan business community. This will empower all three sides to gain a comparative
advantage in international markets by enabling them to use their economic strengths
in a triangular relationship. For the United States, this strength involves
the ownership of intellectual property (IP), while for Taiwan its strengths
are marked by their advancement in high-tech manufacturing and production, coupled
with their success in sourcing those operations to or in China. As WTO provisions
for China's entry are phased-in, local Chinese firms and foreign businesses
will have a greater opportunity to develop trade dialogues, to operate in a
freer and more liberal business environment, and to utilize dispute settlement
mechanisms offered by the WTO forum. China's membership in the WTO will advance
Taiwan's end goal by involving greater participation from Taiwan manufacturers
in the production of computer-based products and further opening the China market
for the sale of those products.
As WTO principles and guidelines help ensure a more friendly business environment
in China, inviting more foreign direct investment, it will help upgrade Taiwan's
manufacturing capabilities, adding impetus to President Chen Shui-bian's plan
to achieve a "sustainable green silicon island." After widening profit
margins by producing low end products in the mainland, Taiwan companies will
be able to invest more on research and development, and to focus on creating
more patents and establishing rights to intellectual property. As a result,
a significant portion of Taiwan's high-end business activities will remain in
Taiwan, thereby reinforcing President Chen's economic plans. This has already
hastened some substantial developments in R&D. For example, "the average
number of patents filed in the U.S. each year by ROC citizens per one million
people is approaching 70, behind only a handful of nations such as the U.S.,
Japan, Germany, Switzerland and Sweden. This is three times the number filed
by its fellow high-tech (Little Dragon) economies, such as South Korea and Singapore.)>
American Business Benefits
American companies can gain a great deal from China's membership in the WTO.
The heart of the U.S.-China trade agreement are information technology trade
issues, and with the WTO trade provisions U.S., Taiwanese, and Chinese companies
will have more latitude in formulating their global business strategies. This
means that global players in IT will be able to shift their patterns of investment
in the global market, which in turn, will spur IT policy reform that directly
relates to the business environment in China. Consequently, one can expect fundamental
changes in China's IT regulatory regime. A different IT regulatory environment
creates a great deal of opportunity for local, Taiwan, and American companies,
working together or independently in the China market, if implementation proves
successful. In many ways, U.S. high-tech manufacturers will be able to improve
business strategies in the China market as trade access improves. For example,
China's participation in the Basic Telecommunications Agreement, as outlined
in the WTO agreement, will create greater access for U.S. and Taiwanese business
interests in the China market. By liberalizing telecom, U.S. and Taiwan companies
investing in Internet ventures will be in a better position to operate in China
as Internet services liberalize, and as China's Internet use dramatically increases.
The burgeoning Internet market in China offers tremendous business opportunities
for foreign investors. According to a report issued by the China Internet Network
Information Center, the latest total for August 2000 indicates that the number
of online users has risen to 16.9 million people. This represents an increase
of 8 million users since the second half of 1999. In addition, the number of
Chinese websites has risen from 15,153 in 1999 to 27,289 for June 2000. China's
online business is estimated to have reached U.S.$ 220 million in 2000, and
by 2005 online transactions are expected to reach levels as high as U.S.$11
billion. According to a different report, issued by NUA Internet Surveys, Asian
Pacific online transactions are expected to reach U.S.$ 1.6 trillion by 2004.
Most of this will be Business-to-Business transaction (B2B), and it illustrates
the enormous growth potential for Taiwanese and American technology firms planning
to expand their services and operations region upon the entries of China and
Taiwan to the WTO./p> After the phase-in schedules are implemented in accordance
with WTO provisions, U.S. and Taiwanese firms will be able to devise better
investment strategies relating to the China market, either through cooperative
business strategies or through independent initiatives. They will face lower
tariffs on information technology products; and will be operating in a business
environment that is more transparent and where risk assessment is easier. In
addition, they will have the option to shift investment vehicles. This in essence
means that U.S. and Taiwanese firms will be empowered to offer after-sales service
and customer support services, which will promote their ability to penetrate
the China market.
Finally, the WTO will provide U.S. and Taiwanese companies with an outlet for
trade disputes. This will empower foreign companies, as it provides them with
a means to overcome the challenges they face when doing business in China. Trade
dispute mechanisms encourage transparency between the business space and China's
government regulatory structures, while also rapidly modifying China's system
of trade.
Conclusion
The China-WTO package offers the potential for a liberalized and more open Chinese
market, and could allow China to leapfrog in its economic development. China's
economic policies can either promote or impede a direction that fosters economic
engagement, elevates human resources, and advances its expertise in technology
development. The struggle for China lies in maintaining political control and
regional stability, while creating a more transparent regulatory environment
and inducing renewed confidence from foreign investors, which include Taiwan's
myriad technology companies and entrepreneurs. As information becomes more accessible
to its citizens, it is likely to corrode social cohesion and political identity.
The increase in imports of new technologies and Western ideas will ultimately
force the leadership to shift some of its domestic practices if social cohesion
and political stability are to be maintained, and if economic cooperation is
to be advanced. Ultimately, how effective China's behavior is regulated through
the WTO will, for the most part, be determined by how successfully economic
and political interests merge to produce a freer, more open, and more transparent
Chinese market.
China and Taiwan's accession to the WTO, coupled with cross-Strait trade policy
reform, should further strengthen the role Taiwan plays in the international
trading community. In a self-propagating cycle, lower costs for Taiwanese companies
due to investments in the Mainland will continue to promote offshore operations
and trade, as greater profit margins attract further investments in China from
Taiwanese companies. Increased trade will accelerate capital flows from Taiwan
into China, as Taiwanese companies develop more ways to form joint business
ventures with their Mainland counterparts. As trade levels increase, so will
access to the Chinese market. This trend will bring direct benefits to international
corporations who have forged business partnerships with Taiwanese companies.
To be successful in developing service and marketing networks in China, international
companies must first gain access. Taiwanese companies' success in this area
proffer opportunities for foreign companies targeting China's growing markets.
By forging closer business arrangements with Taiwanese companies, American companies
will then be in a unique position to grab a foothold in the China market. The
most important beneficiary of direct trade between Taiwan and China under the
umbrella of the WTO is the global technology-driven marketplace, which is dominated
by US companies.
Taiwan Economic News, March 22, 2001
The Board of Foreign Trade
Taipei Times, April 19, 2001
Central News Agency, February 27, 2001
"Accessions", WTO Archives. ("http://www.wto.org/about/china.htm"
). 3-23-00
Ibid
"Taiwan leader backs WTO for China report", Reuters. 3-22-00
"Accessions," WTO Archives (http://www.wto.org/wto/archives/st130.htm).
3-23-00
"Taiwan Exports May Increase US$ 0.95B. A Year Upon WTO Accession,"
Taiwan Central News Agency. By Deborah Kuo. ( HYPERLINK "http://www.taipei.org/teco/cicc/news/english/e-11-26-99/e-11-26-99-2.htm"
11-26-00
"Taiwan Investment In China $1 Ban In 1H 2000; down 17%,î Dow Jones
News wires. By Stephanie Oho. 8-7-00
"Specific Measures for Taiwan's Economic Development and Liberalization
over the Past Decade and into the Future," Government Information Office,
Republic of China. (http://www.taipei.org/press/gio04301.htm).
3-28-00
"China Internet Network Information Center: Chinese Internet users soar
to 16.9 million," Nua Internet Surveys. 8-02-00
Ibid
"Foreign Investment in China's Internet Business: Forbidden, Forgiven,
Forced Open?" Center for Strategic and International Studies. By Frank
Xing Fan (http://www.cisi.org/ics/foreigninvestchina.html). 09-00-00
"Forrester Research: USD7 Trillion in E-commerce Revenues by 2004,"NUA
Internet Surveys. 4-21-00
U.S.-China Commission Testimony
June 14, 2001