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Taiwan Economic and Political Background Note

Updated: February 8, 2012 | Bureau of East Asian and Pacific Affairs
Taiwan Map (State Dept.) (Photo: State Dept.)

Taiwan Map (State Dept.) (Photo: State Dept.)

Excerpt from the U.S. Department of State's background note on Taiwan. (Click here to get the latest and complete background note on Taiwan from the U.S. Department of State)

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ECONOMY

Through decades of hard work and sound economic management, Taiwan has transformed itself from an underdeveloped, agricultural island to an economic power that is a leading producer of high-technology goods. In the 1960s, foreign investment in Taiwan helped introduce modern, labor-intensive technology to the island, and Taiwan became a major exporter of labor-intensive products. In the 1980s, focus shifted toward increasingly sophisticated, capital-intensive and technology-intensive products for export and toward developing the service sector. At the same time, as a result of the appreciation of the New Taiwan dollar (NT dollar or NTD), rising labor costs, and increasing environmental consciousness in Taiwan, many labor-intensive industries, such as shoe manufacturing, shifted production and moved their manufacturing to China and Southeast Asia. Taiwan has transformed itself from a recipient of U.S. aid in the 1950s and early 1960s to an aid donor and major foreign investor, especially in Asia. Taiwan is now a creditor economy, holding the world's fourth-largest stock of foreign exchange reserves ($385.6 billion as of December 2011). Although Taiwan enjoyed sustained economic growth, full employment, and low inflation for many years, in 2001, Taiwan joined other regional economies in its first recession since 1949. From 2002-2007, Taiwan's economic growth ranged from 3.5% to 6.2% per year. With the global economic downturn, Taiwan's economy slumped into recession in the second half of 2008. Its real GDP, following growth of 5.98% in 2007, rose 0.73% in 2008 and contracted 1.81% in 2009. The economy saw a robust recovery in 2010, growing by 10.72%, the highest rate in 28 years. In 2011, growth slowed to 4.03% amid the European debt crisis.


Foreign Trade

 

Foreign trade has been the engine of Taiwan's rapid growth during the past 50 years. Taiwan's economy remains export-oriented, so it depends on an open world trade regime and remains vulnerable to fluctuations in the world economy. The total value of trade increased more than five-fold in the 1960s, nearly 10-fold in the 1970s, doubled in the 1980s, nearly doubled again in the 1990s, and grew more than 85% in the past decade. Export composition changed from predominantly agricultural commodities to industrial goods (now 99%). The electronics sector is Taiwan's most important industrial export sector. Taiwan became a member of the World Trade Organization (WTO) as a special customs territory in January 2002.
Taiwan firms are the world's largest suppliers of computer monitors and leaders in PC manufacturing, although now much of the final assembly of these products occurs overseas, typically in China. Imports are dominated by raw materials and capital goods, which account for more than 90% of the total. Taiwan imports coal, crude oil, and gas to meet most of its energy needs. Reflecting the large Taiwan investment in China, the P.R.C. supplanted the United States as Taiwan's largest trade partner in 2003. In 2010, China (including Hong Kong) accounted for over 29.0% of Taiwan's total trade and 41.8% of Taiwan's exports. Japan was Taiwan's second-largest trading partner with 13.3% of total trade, including 20.7% of Taiwan's imports. The United States is now Taiwan's third-largest trade partner, taking 11.5% of Taiwan's exports and supplying 10.1% of its imports. In 2010, Taiwan was the United States' ninth-largest trading partner, with Taiwan's two-way trade with the United States amounting to $61.9 billion. Imports from the United States consist mostly of machinery and equipment as well as agricultural and industrial raw materials. Exports to the United States are mainly electronics and consumer goods. The United States, Hong Kong, China, and Japan account for 60% of Taiwan's exports, and the United States, Japan, and China provide almost 46% of Taiwan's imports. As Taiwan's per capita income level has risen, demand for imported, high-quality consumer goods has increased. The U.S. trade deficit with Taiwan in 2010 was $9.88 billion, down $74 million from 2009. In addition to its formal diplomatic relations, Taiwan also maintains trade offices in nearly 100 countries. Taiwan is a member of the Asian Development Bank, the WTO, and the Asia-Pacific Economic Cooperation (APEC) forum. Taiwan is also an observer at the Organization for Economic Cooperation and Development (OECD). In 2009, Taiwan acceded to the WTO Government Procurement Agreement. These developments reflect Taiwan's economic importance and its desire to become further integrated into the global economy.

Foreign trade has been the engine of Taiwan's rapid growth during the past 50 years. Taiwan's economy remains export-oriented, so it depends on an open world trade regime and remains vulnerable to fluctuations in the world economy. The total value of trade increased more than five-fold in the 1960s, nearly 10-fold in the 1970s, doubled in the 1980s, nearly doubled again in the 1990s, and grew more than 85% in the past decade. Export composition changed from predominantly agricultural commodities to industrial goods (now 99%). The electronics sector is Taiwan's most important industrial export sector. Taiwan became a member of the World Trade Organization (WTO) as a special customs territory in January 2002.

Taiwan firms are the world's largest suppliers of computer monitors and leaders in PC manufacturing, although now much of the final assembly of these products occurs overseas, typically in China. Imports are dominated by raw materials and capital goods, which account for more than 90% of the total. Taiwan imports coal, crude oil, and gas to meet most of its energy needs. Reflecting the large Taiwan investment in China, the P.R.C. supplanted the United States as Taiwan's largest trade partner in 2003. In 2010, China (including Hong Kong) accounted for over 29.0% of Taiwan's total trade and 41.8% of Taiwan's exports. Japan was Taiwan's second-largest trading partner with 13.3% of total trade, including 20.7% of Taiwan's imports. The United States is now Taiwan's third-largest trade partner, taking 11.5% of Taiwan's exports and supplying 10.1% of its imports. In 2010, Taiwan was the United States' ninth-largest trading partner, with Taiwan's two-way trade with the United States amounting to $61.9 billion. Imports from the United States consist mostly of machinery and equipment as well as agricultural and industrial raw materials. Exports to the United States are mainly electronics and consumer goods. The United States, Hong Kong, China, and Japan account for 60% of Taiwan's exports, and the United States, Japan, and China provide almost 46% of Taiwan's imports. As Taiwan's per capita income level has risen, demand for imported, high-quality consumer goods has increased. The U.S. trade deficit with Taiwan in 2010 was $9.88 billion, down $74 million from 2009. In addition to its formal diplomatic relations, Taiwan also maintains trade offices in nearly 100 countries. Taiwan is a member of the Asian Development Bank, the WTO, and the Asia-Pacific Economic Cooperation (APEC) forum. Taiwan is also an observer at the Organization for Economic Cooperation and Development (OECD). In 2009, Taiwan acceded to the WTO Government Procurement Agreement. These developments reflect Taiwan's economic importance and its desire to become further integrated into the global economy.

Agriculture

 

Although less than one-quarter of Taiwan's land area is arable, virtually all farmland is intensely cultivated, with some areas suitable for two and even three crops a year. Agriculture comprises only about 1.6% of Taiwan's GDP. Taiwan's main crops are rice, fruit, and vegetables. While largely self-sufficient in rice production, Taiwan imports large amounts of wheat, corn, and soybeans, mostly from the United States. Poultry and pork production are mainstays of the livestock sector and the major demand drivers for imported corn and soybeans. Rising standards of living have led to increased demand for a wide variety of high-quality food products, much of it imported. Overall, U.S. agricultural and food products account for over 30% of Taiwan's agricultural import demand. U.S. food and agricultural exports total about $3.0 billion annually, making Taiwan the United States' sixth-largest agricultural export destination. Taiwan's agricultural exports include frozen fish, aquaculture and sea products, canned and frozen vegetables, and nursery products such as orchids. Taiwan's imports of agricultural products and the range of countries supplying the market have increased since its WTO accession in 2002, and it is slowly liberalizing previously protected agricultural markets.

Economic Outlook

Taiwan faces many of the same economic issues as other developed economies. As labor-intensive industries have relocated to countries with low-cost labor, Taiwan's future development will rely on further transformation to a high technology and service-oriented economy and carving out its niche in the global supply chain. Taiwan's economy has become increasingly linked with China, and the Ma administration is expected to further develop these links and liberalize cross-Strait economic relations, particularly through negotiations under the Economic Cooperation Framework Agreement (ECFA). Taiwan official statistics indicate that Taiwan firms had invested about U.S. $110.9 billion in China as of the end of November 2011, which is more than 60% of Taiwan's stock of direct foreign investment. Unofficial estimates put the actual number at between U.S. $150 and over $300 billion. Exact figures are difficult to obtain, as much Taiwan investment in the P.R.C. is via Hong Kong and other third-party jurisdictions. More than one million Taiwan people are estimated to be residing in China, and more than 70,000 Taiwan companies have operations there. Taiwan firms are increasingly acting as management centers that take in orders, produce them in Taiwan, the mainland, or Southeast Asia, and then ship the final products to the U.S. and other markets.

POLITICAL CONDITIONS

 

Until 1986, Taiwan's political system was controlled by one party, the Kuomintang (KMT), the chairman of which was also Taiwan's top leader. As the ruling party, the KMT was able to fill appointed positions with its members and maintain political control of the island.

Before island-wide elections in 1986, many "nonpartisans" grouped together to create Taiwan's first new opposition political party, the Democratic Progressive Party (DPP). Despite an official ban on forming new political parties, Taiwan authorities did not prohibit the DPP from operating, and DPP and independent candidates captured more than 20% of the vote in the 1986 elections. In 1987, President Chiang Ching-kuo ended the nearly 4 decades of martial law under which dissent had been suppressed. Since then, Taiwan has effectively improved respect for human rights and created a democratic political system, including ending almost all restrictions on the press. Vice President Lee Teng-hui succeeded Chiang Ching-kuo as president upon Chiang's death in 1988, and in 1990 the National Assembly elected Lee to a 6-year term as President, the final indirect presidential election conducted by the National Assembly. Under President Lee, the Legislative Yuan passed the Civic Organizations Law in 1989, which allowed for the formation of new political parties, thereby legalizing the DPP. In 1992, the DPP won 51 seats in the 161-seat LY, increasing the DPP's influence on legislative decisions. Chen Shui-bian's victory in the Taipei mayoral election in December 1994 further enhanced the profile of the DPP, which won 45 of the 157 seats in the 1995 LY elections.

In 1996, the KMT's Lee Teng-hui was elected President and Lien Chan Vice President in the first direct presidential election by Taiwan's voters. In the November 1997 local elections, the DPP won 12 of the 23 county magistrate and city mayor contests to the KMT's 8, outpolling the KMT for the first time in a major election. In a three-way contest in March 2000, DPP candidate Chen Shui-bian became the first opposition party candidate to win the presidency. His victory resulted in the first-ever transition of the presidency from one political party to another, validating Taiwan's democratic political system. In the December 2001 legislative elections, the DPP won a plurality of LY seats--88 to the KMT's 66, the People First Party's 45, and the Taiwan Solidarity Union's 13, with the remaining 13 seats being won by other parties and independents.

President Chen was re-elected by 50.1% of the popular vote to a second term in a very tight contest on March 20, 2004. The election was marred by a shooting incident the day before the election during which President Chen and his running mate Vice President Annette Lu were slightly wounded. While the KMT contested the results, it was the first time that the DPP had won an outright majority in an island-wide election. In the December 2004 legislative elections, the ruling DPP won a plurality with 89 of the 225 seats, gaining 2 seats more than it did in 2001. Despite this, the opposition KMT and its Pan-Blue allies continued to hold a narrow majority in the Legislative Yuan of 114 seats compared to the Pan-Green coalition’s 101. The ruling DPP's inability to form a majority coalition led to gridlock in the LY until 2008. Following a landslide victory in December 2005 local elections, the KMT won the 2006 mayoral election in Taipei City, while the DPP won in Kaohsiung City.

The March 2004 election included two "defensive referendums." Historically, referendums have been closely tied to the question of Taiwan independence, and thus a highly sensitive issue in cross-Strait relations. Both referendums in 2004 failed to meet the required participation threshold of 50% of eligible voters, as did four more referendums held in conjunction with the 2008 legislative and presidential elections. The 2008 DPP referendum on joining the UN under the name Taiwan was especially controversial.

In the January 2008 legislative election, the first to be held following the LY's reduction in size, the KMT won an absolute majority of 81 seats and KMT allies won a further five seats, giving them a significant majority over the DPP, which won just 27 seats. Taiwan's second democratic transition from one ruling party to another followed the March 22, 2008 presidential election, which went decisively (58%) to KMT candidate Ma Ying-jeou. Together with the KMT legislative victory 2 months earlier, Taiwan now had a unified government under KMT control. The DPP subsequently won several by-elections, and by April 2010 it had added six more seats, enough to prevent the ruling KMT from acting on its own to send proposed constitutional amendments to a referendum vote.

The January 2012 presidential and legislative elections were held concurrently for the first time per a 2004 constitutional amendment. In the presidential race, incumbent Ma Ying-jeou was re-elected by a 6-point margin over DPP challenger Tsai Ing-wen. In the Legislative Yuan elections, the KMT’s majority slipped to 64 seats compared to the DPP’s 40 seats, with independents and smaller parties claiming the remaining 9 seats.

Political Parties

 

 

In addition to the Kuomintang KMT (described above in "History" and "Political Conditions"), the other major political party is the DPP, whose membership is made up largely of native Taiwanese, and whose platform includes outspoken positions on some of the most sensitive issues in Taiwan politics. For example, the DPP maintains that Taiwan is an entity separate from mainland China, in contrast to the KMT position that Taiwan and the mainland, though currently divided, are both part of "one China." In sharp contrast to the tenets of both KMT and P.R.C. policy, a number of prominent DPP politicians openly advocate independence for Taiwan.

There are a number of small political parties, including the Taiwan Solidarity Union (TSU), the People First Party (PFP), and the New Party (NP). After the 2000 presidential election, former KMT President Lee Teng-hui broke with the KMT and in 2001 formed the pro-independence Taiwan Solidarity Union (TSU), which allied itself with the DPP, an alliance that has waned over time. The TSU failed to elect any members to the LY in January 2008, but did win 3 seats in the 2012 elections. The People First Party (PFP) was formed in the wake of the March 2000 presidential election by disgruntled KMT members who supported the presidential bid of former KMT Taiwan Provincial Governor James Soong, who did not receive the KMT nomination. The PFP and KMT subsequently formed the Pan-Blue Alliance to oppose the DPP government. The PFP gradually shrank and it largely merged with the KMT in the run-up to the January 2008 LY elections, although one PFP candidate did win election to the LY under the name PFP. In the 2012 elections, the PFP fielded its own presidential candidate, James Soong, and won 3 seats in the LY. The New Party, which also split from the KMT, holds several seats on the Taipei City Council, but has no legislators at this point. In addition, there are more than 100 other registered small political parties, such as the Hakka Party, the Green Party, and the Constitution Party. None of these small parties received seats in either the 2008 or 2012 elections.

Taiwan and the Mainland

 

 

Over the past several years, Taiwan has relaxed restrictions on unofficial contacts with the P.R.C., and cross-Strait interaction has increased substantially. In January 2001, Taiwan formally allowed the "three mini-links" (direct trade, travel, and postal links) from Kinmen (Quemoy) and Matsu Islands to Fujian Province and permitted direct cross-Strait trade in February 2002. Cross-Strait trade has grown rapidly over the past 10 years. China is Taiwan's largest trading partner, and Taiwan is China's seventh-largest. Estimates of Taiwan investment on the mainland, both officially approved by Taiwan authorities and investment made by Taiwan firms through third parties, range from $110 billion to over $300 billion, making Taiwan and Hong Kong by some measures the two largest investors in the P.R.C. This trade generally runs in Taiwan's favor and continues to grow, providing another engine for the island's economy. On June 29, 2010, following 6 months of negotiations, the two sides signed an Economic Cooperation Framework Agreement (ECFA), aimed at bringing about liberalization of cross-Strait trade in products and services and eventually creating an essentially free-trade regime. ECFA came into force on September 12, 2010. A 2-year phase-in period began on January 1, 2011 for bilateral reduction and elimination of tariffs affecting more than 800 products. Ma administration officials see ECFA as a critical first step in avoiding Taiwan's regional economic marginalization, paving the way for expanded trade relations with the Association of Southeast Asian Nations (ASEAN), the United States, and other major trading partners.

In February 2003, Taiwan and the P.R.C. agreed to allow Taiwan carriers to fly non-stop (although routed via Hong Kong or Macau airspace) to take Taiwan residents on the mainland home for the Lunar New Year holiday. The two sides agreed to conduct Lunar New Year charter flights again in 2005, with flights operated by both Taiwan and P.R.C. carriers flying over, but not having to land in, Hong Kong or Macau. Over time these flights were expanded to cover three other major holidays. In July 2008, Taiwan and P.R.C. carriers began operating cross-Strait charter flights every weekend. These flights are open to mainland tourists, as well as Taiwan and foreign travelers. Daily direct cross-Strait charter flight service began in December 2008, and the two sides have also begun cargo charter flights, direct shipping, direct postal service, and cooperation on food safety issues. To meet rapidly increasing air transport demand, both parties agreed to increase the number of passenger and cargo flights to 270 per week in 2009; carriers from each side operate 135 flights per week. Following an agreement in May 2010, cross-Strait flights eventually increased to more than 500 per week. As of 2011, a total of 558 weekly cross-Strait flights were in operation. More than 1.72 million P.R.C. citizens visited Taiwan in 2011, including 1.31 million tourists, according to statistics released by the Mainland Affairs Council. In 2011, Taiwan agreed to open "free and individual tours" by P.R.C. citizens residing in Beijing, Shanghai, and Shenzhen. A total of 15,533 P.R.C. citizens had entered Taiwan between June and October 2011 for “free and individual tours.” Many senior P.R.C. officials--including the culture minister, a vice minister of public security, the mayor of Shanghai, and numerous provincial governors and Communist Party leaders--have visited as part of an effort to improve mainland China's image among a generally wary Taiwan population.

The development of semiofficial cross-Strait relations has had ups and downs. In April 1993, the first round of high-level cross-Strait talks was held in Singapore between the heads of two private intermediary organizations--Taiwan's Straits Exchange Foundation (SEF) and the P.R.C.'s Association for Relations Across the Taiwan Strait (ARATS). These talks primarily addressed technical issues relating to cross-Strait interactions. Beijing suspended lower-level talks from 1995-97 following President Lee's U.S. visit. SEF Chairman Koo Chen-fu visited the mainland in October 1998 for the second round of high-level talks. In 1999 Beijing once again suspended the cross-Strait dialogue, canceling plans for a visit by ARATS Chairman Wang Daohan to Taiwan, because of statements by President Lee that relations between the P.R.C. and Taiwan should be conducted as "state-to-state" or at least as "special state-to-state relations." Following his May 20, 2000 inauguration, President Chen called for resuming the cross-Strait dialogue without any preconditions, but the P.R.C. insisted President Chen first acknowledge what it claimed was the "1992 consensus" on one China reached by the two sides. The cross-Strait dialogue remained suspended for the following 8 years of President Chen's two-term administration. Nonetheless, economic and social ties continued to develop rapidly despite the "one China" obstacle and Taiwan's resentment over the P.R.C.'s March 2005 "Anti-Secession Law," and the two sides were able through intermediary organizations to reach agreements on holiday cross-Strait charter flights. The KMT began its own dialogue with Beijing in 2005.

In his first term, President Ma's administration resumed the SEF-ARATS dialogue, expanded flights, and, in a major step to enhance cross-Strait relations, signed the Economic Cooperation Framework Agreement with Beijing. The United States has welcomed and encouraged the regular cross-Strait dialogue as a process which contributes to a reduction of tension and to an environment conducive to the eventual peaceful resolution of the outstanding differences between the two sides. The United States believes differences between Taipei and Beijing should be resolved peacefully in a manner acceptable to people on both sides of the Taiwan Strait. From 2008 until 2011, SEF and ARATS held seven rounds of talks and signed 16 agreements, including the ECFA and agreements to cooperate in areas of intellectual property rights, medicine, financial services, and nuclear power safety. President Ma has stressed the importance of people-to-people contact, and in 2010 the Legislative Yuan revised the University Law, the Junior College Law, and the Cross-Strait Relations Act to allow P.R.C. college students to go to Taiwan for graduate and undergraduate degree studies. In 2011, fewer than 1,000 Chinese students pursued undergraduate and graduate studies at Taiwan's universities, even though the Ministry of Education had set a quota to allow more than 2,000 Chinese students. The Ministry of Education attributed the lower number to the many restrictions set by Taiwan authorities on what Chinese students may study and do after graduation.

 

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