Optimizing Taiwan's Economy
I am very pleased to be here today to share my parting thoughts after four years as the Economic Section Chief at the American Institute in Taiwan. Let me start with the most important words I have to say: Thank you AmCham. Under your leadership -- Andrea and Richard -- the American Chamber of Commerce in Taipei has proved daily why it is considered one of the most active and effective Chambers in the world. The annual White Paper provides a foundation for real change -- just look at how engaged Taiwan's government is on issues such as improving infrastructure and strengthening the financial system. AmCham's committees are a central source of information exchange for us all. I remember, for example, how the comments from the IPR committee about flaws in Taiwan's Copyright Law led AIT and USTR to elevate this issue to the top of our trade agenda.
II. Tribute to Richard Vuylsteke
I would like to pay special tribute to you, Richard, to thank you for these years of collaboration. You reached out to me when I got here and have provided valued advice, support, and limitless energy. Let us all take a moment to give Richard a hand... And Richard, the Cosi Cosi Restaurant would also like to thank you. Our monthly lunches there over a four-year period account for a significant proportion of their profits.
III. Taiwan and Globalization
As I said, I am coming to the end of four years representing U.S. economic interests in Taiwan. During this time, I have watched the island face difficulties such as the 2001 recession and the SARS outbreak -- and enjoy victories such as WTO accession and the current economic rebound. My most enduring memory of serving here, however, will be the transformation of Taiwan into a full-fledged member of the global economy. When I arrived, for example, Taiwan manufacturers made notebook computers on a contract basis and shipped them directly to the US. Today, it is Taiwan companies that perform the design, and the computers are assembled under their supervision using goods and labor from numerous places. Taiwan's economy now relies on supply chains and logistics management techniques that were unimaginable in the days before the Internet.
Taiwan's integration into the global economy is irreversible. With appropriate policies, Taiwan's prosperity is likely to increase further and the island's economic importance will only grow. But the competition that comes from globalization is also going to challenge Taiwan. If the island is to preserve its economic gains, Taiwan's work force, corporations, cities, and government institutions are going to have to respond in new ways. Knowledge workers will have to commit to constant learning. Companies will have to adopt cultures of unceasing innovation. Urban areas will need world-class infrastructure. And economic ministries will require policies and regulatory structures that encourage the free flow of people, ideas, goods, and investment.
Taiwan's information technology and electronics sectors have been enormously successful in meeting globalization head on. Few locations in the world have so quickly and deftly transformed from a focus on traditional labor-intensive industries like shoes and clothing to an economic structure dominated by cutting-edge hi-tech manufacturing, in many cases at levels of quality and efficiency unmatched in the world. The secret of Taiwan's economic transition has been the island's ability to draw on its flexible, well-educated workforce and engage a new industrial model whose existence was not dreamed of twenty years ago.
Unfortunately for Taiwan, IT and electronics manufacturing is subject to booms and busts. Ten years ago, dial-up modems, small film cameras, VCRs, and bulky car phones were "must have" items; today they are nearly obsolete. For this reason, Taiwan will be challenged to extend the success of its IT and electronics sectors to new areas, in order to "diversify its portfolio." There are many possibilities -- from emerging industries like biotech to more sophisticated financial services to innovative product design to an expanded role in regional transportation, just to name a few.
IV. What Needs to Be Done
Let me share a few thoughts on how Taiwan can maximize its future economic success. First, I should tell that I began studying Chinese history in college and have always been impressed by China's great thinkers. One characteristic I admire among Chinese historical figures is their use of catch phrases to help audiences remember their ideas. Sun Yat-sen, for example, had his "Three Principles of the People."
In that spirit, I would like to offer you my own principles for Taiwan's future economic success. Let's call them Weinstein's "Three Importants" and "Five Gotta Do's."
V. The "Three Importants"
Taiwan's ongoing economic transformation can remain a source of opportunity and a basis for further expanding U.S.-Taiwan bilateral trade relations. To make this happen, I believe Taiwan should be guided by three principles, forever to be known as Weinstein's "Three Importants":
?First is to Adhere to the spirit of WTO. It is not enough just to comply with WTO accession requirements. Tomorrow's successful economies will be the ones that most vigorously pursue WTO principles of comprehensive market liberalization.
?Second is to Encourage more international economic activity to take place on Taiwan itself.
?Third is to Ensure that Taiwan's financial sector can support the island's integration into the global economy.
VI. The First Important: WTO Spirit
Economies such as Singapore, Hong Kong, the UK, the Netherlands, and New Zealand routinely go beyond the minimum required to meet their WTO commitments and embrace what I call the "WTO Spirit." These places are laying the foundation for long-term global economic relevance through free trade and robust service sector growth.
Taiwan should join them in their "WTO Spirit." This means viewing trade policy reform not in terms of resolving narrowly defined trade problems, but instead as a means to maximize opportunities for commercial interaction that will maintain Taiwan's global relevance. The meaning of "WTO Spirit" is made clear when reviewing the five simple principles that Taiwan signed onto when it acceded to the WTO:
First, trade without discrimination, which means that economies should provide the same treatment for foreign and local goods and services.
Second, freer trade, which involves the reduction of tariff and non-tariff barriers.
Third, predictability: by creating rules and operating a trade regime in a transparent manner and by declaring that steps towards liberalization will not be reversed.
Fourth, promoting fair competition, which aims to make markets function optimally through well-crafted rules, such as the protection of intellectual property rights and transparency in government procurement.
Fifth encouraging development and economic reform, which recognizes that developing countries require flexibility as they liberalize their economies.
VII. The Second Important: Bring International Activity to Taiwan
Taiwan and foreign businesses are also now engaged in fruitful collaboration to design new products and to build international supply chains to produce them. Major American corporations like Microsoft, Broadcom, and Federal Express have signaled that they value the skills of Taiwan's knowledge workers by placing increased R&D and logistics activities on the island. This economic handshake across the Pacific between the U.S. and Taiwan is pushing the boundaries of numerous frontiers, including integrated circuit design, biotechnology, electronic gadgetry, and regional operations management.
It is essential that these trends continue. Unfortunately, some of you have expressed concern directly to me that foreign businesses are losing interest in pursuing activity that takes place on Taiwan proper. You note the relocation of regional expatriate managers to Hong Kong or the PRC. You complain that it is difficult to pursue Greater China business strategies from Taiwan because of visa rules. You express concern that Taiwan lacks direct links to its supply chains. You assess that Taiwan's infrastructure is falling behind that of its regional competitors. You tell me that red tape, weak IPR protection, and restrictive investment rules encourage collaboration between Taiwan and foreign firms to occur elsewhere.
Taiwan needs constant surveillance to detect how existing policies drive economic activity away from the island. I realize that not all of these issues have easy solutions and that some of the answers are hostage to geopolitics. But there is still much that can be done to encourage interaction with global economic players to take place here, on Taiwan -- rather than, say, in Japan or China. By doing so, Taiwan will avoid what many here refer to as "the threat of economic marginalization."
VIII. The Third Important: A Complementary Finance Sector
Taiwan's financial sector will play an essential role in the island's smooth economic restructuring. The work that has already been done by government and industry to reduce non-performing loans has strengthened Taiwan's banks and laid the groundwork for more rational lending in the future. There remains, however, much to be done to address structural issues dragging down banking sector profitability and to improve the consultation process with regard to crafting new financial regulations. The financial service sector here is also enormously frustrated by the inability to serve effectively Taiwan corporations' entities on the Mainland. One survey cited by the Economist Intelligence Unit concluded that 80% of firms transferring funds between Taiwan and China rely on Hong Kong's banking system to do so. While Taiwan alone cannot resolve all the issues that impede cross-Strait financial dealings, a stated goal of liberalization and incremental unilateral efforts to pursue it would send a strong signal that the island is dedicated to crafting a financial sector that can address the evolution of its economy. Enabling Taiwan-invested entities in the PRC to list on Taiwan's own stock exchanges would be yet another positive step in this regard.
IX. The Five Gotta Do's
I expect that the "three importants" I just laid out for you will shortly be engraved on the pedestal of my new statue next to AIT in Da'an Park. But the future is about more than just themes in policy making, it's about concrete action. Grand plans aside, there are a number of things that Taiwan has just "gotta do" to maintain its competitive edge. Here are the top five "gotta do's" on my list:
(1) Accede to the GPA: When Taiwan joined the WTO, it committed to joining the Agreement on Government Procurement, better known as the GPA. Improving the quality and efficiency of government contracting in Taiwan would attract new talent to the island in areas such as construction, transportation, and energy infrastructure. There are a number of reasons that Taiwan has not yet joined the GPA, but there is no reason not to live up to the spirit of that agreement by unilaterally changing government procurement regulations to conform to GPA requirements.
(2) Liberalize Visa and Human Resources Rules: Simple and convenient visa policies are a cornerstone of attracting business investment. The free flow of knowledge professionals allows technology to be transferred and decision-makers to get the information they need to expand their activities in this economy. Multinational corporations are attracted to locations where they can easily bring skilled workers across borders for meetings, training sessions, and short-term assignments. User-friendly and non-discriminatory visa rules will help Taiwan become a location of choice for the regional operations of global corporations, including those who wish to pursue "Greater China" business strategies in Asia.
(3) Continue Financial Liberalization: There has been more financial deregulation here in the last four years than the previous forty. Banks can now merge. And they can reach out to other financial enterprises like securities and insurance firms to form financial holding companies, a potential source of profitability to a banking sector that has struggled to make money. The Securitization Law has provided a tool to increase liquidity in the financial system. It has also become yet another means to get NPLs off bank balance sheets. But the banks need more government backing to finish cleaning up their loan portfolios, and market consolidation is still not complete. There are also technical measures that if implemented would further improve market quality and perhaps earn Taiwan a "developed market" classification on global benchmark indices such as the Financial Times Stock Exchange Index (the FTSE) and the Morgan Stanley Capital Index (the MSCI). All of these steps would further strengthen the financial sector, attract investment, and bolster the economy.
(4) Follow Through on IPR Protection: I am encouraged to see the growing commitment to IPR protection here among numerous government officials, executives in knowledge-based industries, and entrepreneurs in creative sectors. Taiwan's government is now beefing up IPR enforcement through efforts such as the Joint Optical Disk Enforcement task force. If it follows through on these efforts to turn the IPR situation around, the benefit to Taiwan's international investment reputation will be tremendous. I hope the increased police resources and new task forces will be made permanent, with stable budgets. I also hope that the growing problem of pharmaceutical piracy will be addressed, that Taiwan will provide for an adequate term of data exclusivity, and that the Copyright Law will be amended to bring it into compliance with WTO accession commitments. Also helpful would be the consistent application of deterrent sentencing by the courts to IPR cases.
(5) Ensure that Regulation Does Not Choke Off Economic Development: Taiwan's future prosperity depends in great part on products and services that do not exist today or are in their infancy. There is much talk, for example, about biotech playing an important role in the island's economy one day. But it will be hard for biotech to flourish here if existing pharmaceutical regulations lead investors to conclude that innovation will not be rewarded. The financial services sector will not prosper here if it cannot market financial instruments and funds available in other developed economies. Taiwan should regulate industry so that businesses and consumers on the island are ahead of the curve in access to innovative products and the rewards that go with them.
X. The Future Looks Bright
During my four years, I have seen numerous examples where political will and constructive dialogue have triumphed to bring lasting improvement to the structure of Taiwan's economy. WTO accession in 2001 gave this island both the status and platform needed to effectively advance ties with its trade partners. A new consensus for deregulation that grew out of the 2001 Economic Development Advisory Council made the island even more attractive to foreign investors and secured its place in Asian-based supply chains. A commitment to financial reform halved the non-performing loan rate. New legislation enabled foreign talent to more easily participate in key sectors here such as legal services. The Premier's "Challenge 2008" economic plan made a priority of transforming the island into a knowledge-based economy with a more developed services sector.
These economic policy successes have served Taiwan well. The island, for example, gracefully weathered the SARS crisis. And today, GDP growth is running at over 5%. Taiwan has become a true player in the global economy and is a recognized center for industrial research, hi-tech product design, and regional logistics management.
XI. US-Taiwan Bilateral Economic Relations
The U.S. remains one of Taiwan's top trade partners. Relationships between U.S. and Taiwan corporations are a key source of global business opportunities for both sides and an important means of technology transfer for Taiwan's manufacturing sector. The commitment of the U.S. private sector to Taiwan is demonstrated by the fact that our businesses have invested $12.3 billion in this economy over the past forty years -- more than any other trade partner.
Taiwan's efforts to liberalize its economic policy have led to recent positive steps to address some of the outstanding issues on our trade agenda. If this progress continues, it will brighten prospects for stronger economic ties, including renewed dialogue under our existing Trade and Investment Framework Agreement. We are very interested in further progress: Taiwan is our number eight trading partner, a key consumer of our agricultural goods, and a democracy whose prosperity is in our interest.
There has been recent discussion in the media and on the cocktail circuit about a Free Trade Agreement between the US and Taiwan. I should note for the record that no FTA talks are currently underway, nor have we even agreed to begin such discussions. We are certainly open to the possibility of considering an FTA in the future, but we believe that for the moment, the most productive course for US-Taiwan economic relations is for Taiwan to follow through in addressing the existing items on the table, such as IPR, pharmaceuticals, telecommunications, and agricultural trade.
I have now served in Taiwan three times, and I hope this is not my last. The vibrancy of this island is contagious, and the food delicious. And if I do make it back here a few years down the road, it is my sincere hope that the "Three Importants" and "Five Gotta Do's" will have played at least a small part in Taiwan's ongoing economic success.
I am truly optimistic for Taiwan's economic future, in great part because the new economic team here, led by Ho Mei-yue and Hu Sheng-cheng, already has what I defined earlier as "the WTO spirit." Minister Ho and Chairman Hu are also keenly aware of the importance to Taiwan of having international activity take place on the island itself. Meanwhile, Finance Minister Lin Chuan has done an impressive job ensuring that the financial system here evolves to meet the new demands of Taiwan's economic restructuring. I wish them well in their efforts and have one final piece of advice for all of them:
When in doubt, follow the advice in the AmCham White Paper!