global and local challenges and opportunities for taiwan · 2019-07-31 · 1 global and local...
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Lau Chor Tak Institute of Global Economics and Finance
The Chinese University of Hong Kong 13/F, Cheng Yu Tung Building, 12 Chak Cheung Street, Shatin, Hong Kong
Global and Local Challenges and Opportunities for Taiwan
by
Lawrence J. Lau
Working Paper No. 68
June 2018
Acknowledgements
The Lau Chor Tak Institute of Global Economics and Finance is grateful to the following individuals
and organizations for their generous donations and sponsorship (in alphabetical order):
Donors
Johnson Cha Agile Group Holdings Limited
Vincent H.C. Cheng Asia Financial Holdings Ltd
Jonathan K.S. Choi Bank of China (Hong Kong) Limited
Fred Hu Zuliu BCT Financial Limited
Tak Ho Kong China Concept Consulting Ltd
Lau Chor Tak and Lau Chan So Har First Eastern Investment Group
Lawrence J. Lau Four Seas Group
Chien Lee Hang Lung Properties Limited
Milton K.H. Leong Henderson Land Development Co. Ltd.
Antony Leung Hong Kong Exchanges and Clearing Limited
Wei Bo Li Hony Capital Limited
Francis Lui Industrial and Commercial Bank of China (Asia) Limited
Robert Ng Lai Sun Development Co., Ltd.
Simon Suen Lau Chor Tak Foundation Limited
Wong Ting Chung Man Wah Holdings Limited
Lincoln Yung Sing Tao News Corporation Ltd.
Allan Zeman Sun Hung Kai Properties Ltd.
Tai Sang Bank Limited
The Bank of East Asia, Limited
The Hongkong and Shanghai Banking Corporation Limited
The Lanson Foundation
Wing Lung Bank Limited
Programme Supporters
C.K. Chow Bangkok Bank Public Co Ltd
Alvin Chua Bank of China (Hong Kong) Limited
Fang Fang Bank of China Limited - Phnom Penh Branch
Eddy Fong Bei Shan Tang Foundation
Victor K. Fung China Development Bank
Wei Bo Li China Soft Capital
K.L. Wong HOPU Investment Management Co Ltd
Industrial and Commercial Bank of China - Phnom Penh Branch
King Link Holding Limited
Sun Wah Group
The Santander-K Foundation
UnionPay International
1
Global and Local Challenges and Opportunities for
Taiwan§
Lawrence J. Lau1
June 2018
Abstract: There are both global and local challenges for Taiwan during the next several
decades. Taiwan must think, plan, and act long-term. It must adopt a rational and sustainable
strategy that takes into account changes in the world (for example, the rise of the Mainland),
focuses on its own long-term best interests, and transcends short-term domestic political
differences. There are also opportunities for Taiwan. Taiwan must decide where it wants to
be, and where it expects to be, in, say, 2035 or 2050. It must decide what can be achieved and
what cannot and act accordingly. It is best to focus on developing the economy and promoting
peace.
§ © 2018 Lau Chor Tak Institute of Global Economics and Finance, The Chinese University of Hong Kong 1 The author is Ralph and Claire Landau Professor of Economics, The Chinese University of Hong Kong and
Kwoh-Ting Li Professor in Economic Development, Emeritus, Stanford University. This paper was prepared for
presentation at the international conference, “From the Western-Centric to a Post-Western World: In Search of an
Emerging Global Order in the 21st Century”, Taipei, June 2–3, 2018. He wishes to thank Yun-han Chu, Ayesha
Macpherson Lau, Jia-Dong Shea, and Chung-Shu Wu for their helpful comments and suggestions but retains sole
responsibility for all remaining errors. The opinions expressed herein are those of the authors and do not
necessarily reflect the views of the Institute.
2
1. Introduction
I am an economist. This paper is written from an economist’s point of view, focussing
on the challenges and opportunities faced by the economy of Taiwan. There are both global
and local challenges for Taiwan during the next several decades. Taiwan must think, plan, and
act long-term. It must adopt a rational and sustainable strategy that takes into account changes
in the world (for example, the rise of the Mainland), focuses on its own long-term best interests,
and transcends short-term domestic political differences.
Long-term thinking is important because what one does today can have lasting, and
often irreversible, impacts on the future. Moreover, developments are also often path-
dependent. Climate change (global warming) is one such example. If we do not do something
about it today, we shall regret it sometime in the future; but by the time we regret it, there is
nothing that we can do to change the (bad) outcome.
There are also opportunities for Taiwan. In order to assess these opportunities, it is
useful to consider the likely global developments during the next several decades. What will
the world look like then? Taiwan must decide where it wants to be, and where it expects to be,
in, say, 2035 or 2050.
2. The Evolving World
We begin by considering where the world economy will be by the middle of this
century. The world has changed dramatically since 1970. The Soviet Union and the Eastern
European Communist bloc are no more. The United States has become the sole hegemonic
power. Cell phones have supplanted fixed-line telephones, and the internet is now ubiquitous.
During this same period, the economic centre of gravity of the world has been shifting from
North America and Western Europe to East Asia and within East Asia from Japan to Mainland
China.
The “Washington Consensus” has not worked out well for developing economies. The
“Big Bang” shock therapy has failed miserably, as witnessed by the experiences of the former
Soviet Union and Eastern European Communist countries. The “Washington Consensus” also
faces a challenge posed by the “Beijing Consensus”.
3
The centre of gravity of the global economy has been shifting (see Charts 1 and 2). In
1970, the United States and Western Europe together accounted for almost 60 percent of world
GDP. By comparison, East Asia (defined as the 10 Association of Southeast Asian Nations
(ASEAN)—Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines,
Singapore, Thailand, and Vietnam—+ 3 (China including Hong Kong, Macau and Taiwan,
Japan, and the Republic of Korea)) accounted for only approximately 10 percent of world GDP.
(Hong Kong, the Republic of Korea, Singapore, and Taiwan are also known collectively as the
East Asian “Newly Industrialised Economies (NIEs)”.) By 2016, the share of United States
and Western Europe combined in world GDP has declined to approximately 41%, whereas the
share of East Asia has risen to around 28%. The share of the U.S. has shrunk to 25% from over
36%. The Japanese share of world GDP declined from a peak of almost 18% in the mid-1990s
to 6.7% in 2016, while the Mainland Chinese share of world GDP rose from 3.1% in 1970 and
less than 4% in 2000 to over 15.1% in 2016.
Chart 1: The Distribution of World GDP, 1970, US$
Brunei
0.0%
Cambodia
0.0%
Mainland China
3.1% Hong Kong
0.1%
Indonesia
0.3%
Japan
7.1%
Korea
0.3% Lao
0.00%Macao
0.0%Malaysia
0.1%
Myanmar
0.1%
Philippines
0.2%Singapore
0.1%Thailand
0.2%Vietnam
0.1%
Taiwan, China
0.2%
United States
36.4%
Euro Zone
21.5%
Other Economies
30.0%
1970
4
Chart 2: The Distribution of World GDP, 2016, US$
Chart 3: The Shares of East Asia, China, Japan, and South Korea in World GDP, 1960–Present
Brunei
0.0%
Cambodia
0.0%
Mainland China
15.1%
Hong Kong
0.4%
Indonesia
1.3%
Japan
6.7%
Korea
1.9%
Lao
0.02%Macao
0.1%
Malaysia
0.4%
Myanmar
0.1%Philippines
0.4%
Singapore
0.4%Thailand
0.5%
Vietnam
0.3%Taiwan, China
0.7%
United States
25.1%
Euro Zone
16.1%
Other Economies
30.5%
2016
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Per
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The Shares of East Asia, China, Japan and South Korea in World GDP, 1960-present
East Asian Economies
Mainland China
Japan
Korea
5
Long-Term Projections of the Mainland and the U.S. Economies
It is assumed that between now and 2050 the Mainland economy will continue to grow
above 6% per annum for a few years and then slow down gradually to between 5% and 6%,
and that the U.S. economy will grow at an average rate of 3% per annum. It may be thought
that the Mainland economy will be unable to sustain an average annual rate of growth of
between 5% and 6% for such a long time and that the U.S. should be able to grow faster.
However, our assumed rates are based on the actually achieved rates of growth during the past
two decades. Japan, Taiwan, and the U.S. all had higher rates of economic growth when their
economies had real GDP per capita in the range between US$10,000 and US$30,000 (in 2017
prices). This is precisely the range of projected real GDP per capita for the Mainland between
now and the early 2040s. (See Chart 4 in which the experiences of the Mainland, Japan,
Taiwan, and the U.S. are compared.)
Chart 4: Growth Rates of Real GDP vs. Levels of Real GDP per Capita:
Mainland, Japan, Taiwan, and the U.S.
In addition, the Mainland still has a relatively low tangible capital per unit labour.
Moreover, there is still and will continue to be significant surplus labour in the Mainland
economy. The share of employment in the primary sector on the Mainland is around 30%,
whereas the share of GDP originating from the primary sector is below 10%. For the U.S.,
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0 10 20 30 40 50 60
Per
cent
Real GDP per Capita, thousand USD, in 2017 prices
Rate of Growth of Real GDP vs. Real GDP per Capita (in 2017 US Dollars)
China USA
Japan Taiwan
6
given its already very high level of real GDP per capita, it is unlikely that its economy will be
able to grow much faster than 3% per annum in the long run. Chart 4 also shows that the U.S.
has had a systematically higher rate of growth than Japan at the same level of real GDP per
capita, and this can be attributed to the higher innovative capacity of the U.S.
The projections of the Mainland and the U.S. real GDPs and real GDPs per capita and
their rates of growth between now and 2050 are presented in Charts 5 and 6. Our projections
show that by 2031, Mainland real GDP will surpass U.S. real GDP (US$29.4 trillion versus
US$29.3 trillion), making the Mainland the largest economy in the world. However, in terms
of real GDP per capita, the Mainland will still lag behind significantly, with US$20,009
compared to US$82,502 for the U.S. By 2050, Mainland and U.S. real GDP will reach
US$82.6 trillion and US$51.4 trillion respectively, accounting for approximately 30% and 20%
of the world GDP, which is projected to be US$280 trillion. In terms of real GDP per capita,
the Mainland will reach US$52,870, slightly less than the current level of U.S real GDP per
capita, compared to US$134,071 for the U.S. It will not be until the end of the 21st century
that the Mainland real GDP per capita will catch up with the U.S. real GDP per capita.
Chart 5: Actual and Projected Levels and Growth Rates of Mainland and U.S. Real GDP
(2017 Trillion US$)
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Actual and Projected Chinese and U.S. Real GDPs and Their Rates of Growth
(trillion 2017 US$)
Rates of Growth of U.S. Real GDP (right scale)
Rates of Growth of Chinese Real GDP (right scale)
U.S. Real GDP, in 2017 prices
Chinese Real GDP, in 2017 prices
7
Chart 6: Actual and Projected Levels and Growth Rates of
Mainland and U.S. Real GDP per Capita (Thousand, 2017 US$)
The distribution of world trade has also been shifting (see Charts 7 and 8). In 1970, the
United States and Western Europe together accounted for almost 47% of world trade in goods
and services. By comparison, East Asia accounted for 9.6% of world trade. By 2016, the share
of United States and Western Europe combined in world trade has declined to 37.1%, whereas
the share of East Asia has risen to almost 28.1%. The Mainland Chinese share of world trade
rose from 0.6% in 1970 to 10.1% in 2016. The growth in Chinese international trade may be
attributed in part to the adoption of current account convertibility of the Renminbi by China in
1994, accompanied by a significant devaluation of the Renminbi, and to Chinese accession to
the World Trade Organization in 2001. Since 2015, Mainland China has also been the largest
trading partner of the U.S., surpassing Canada. The U.S. is also the largest trading partner of
Mainland China.
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Actual and Projected Chinese and U.S. Real GDP per Capita and Their Rates of Growth
(thousand, 2017 US$)Rates of Growth of U.S. Real GDP per capita (right scale)
Rates of Growth of Chinese Real GDP per Capita (right scale)
U.S. Real GDP per Capita, in 2017 prices
Chinese Real GDP per capita, in 2017 prices
8
Chart 7: The Distribution of International Trade in Goods and Services, 1970
Chart 8: The Distribution of International Trade in Goods and Services, 2016
Brunei
0.0%
Cambodia
0.0%
China
0.6%
Hong Kong
0.9%
Indonesia
0.4%
Japan
5.5%
Korea
0.4%
Lao PDR
0.0%
Macao
0.0%
Malaysia
0.4%
Philippines
0.4%
Singapore
0.7%
Thailand
0.3%
Vietnam
0.0%Taiwan, China
0.0%
United States
14.6%
Euro Zone
32.4%
Other Economies
43.3%
1970
Brunei
0.0%
Cambodia
0.1%
China
10.1%
Hong Kong
2.9%Indonesia
0.8%
Japan
3.8%
Korea
2.7%
Lao PDR
0.0%Macao
0.1%
Malaysia
0.9%
Philippines
0.5%
Singapore
2.3%Thailand
1.2%
Vietnam
0.9%
Taiwan, China
1.6%
United States
12.0%
Euro Zone
25.2%
Other Economies
34.8%
2016
9
During the past decade, the average annual rates of growth of the international trade of
the Mainland and the U.S. were respectively 8.6% and 3.2%. If these rates persist, which
appears likely given the rise of protectionism in the U.S., the Mainland is likely to surpass the
U.S. to become the largest trading country in the world by 2020. The Mainland and the U.S.
will each account for between 11% and 12% of world trade then. By 2050, the U.S. share of
world trade will be in the single digits. It is likely that the Mainland will maintain an
approximately 10% share of world trade on the strength of its large and growing domestic
demand for imports and its exports of new manufactured products.
Chart 9: Chinese and U.S. International Trade and Their Respective Rates of Growth
since 1970 (US$ Billion)
The distribution of wealth in the world has also been shifting in the same way: from
North America and Western Europe to East Asia and South Asia. Data on the world
distribution of wealth are not readily available on a time-series basis. However, a reasonable
proxy is the distribution of the market capitalisation of the stock exchanges in the different
regions. This is presented in Chart 10, which shows that the East Asian and South Asian stock
exchanges combined surpassed the European stock exchanges in market capitalisation in 2006
and is within striking distance of the market capitalisation of the U.S. stock exchanges. In
2017, the number of known U.S. dollar billionaires on the Mainland is reported to have
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per
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US
$ b
illi
on
International Trade & Its Rate of Growth: A Comparison of China and the U.S. since 1970
Rate of growth of total Chinese international trade, % (right
scale)Rate of growth of total U.S. international trade, % (right
scale)Total Chinese trade in goods and services (US$ trillions)
Total U.S. trade in goods and services (US$ trillions)
10
exceeded the number in the U.S., both more than 600. The number of unknown U.S. dollar
billionaires on the Mainland is probably on the same order of magnitude as the number of
known ones. Asian wealth is likely to surpass U.S. wealth within the next decade.
Chart 10: The Distribution of the Market Capitalisation of World Stock Exchanges by Region,
Percent
There is and has always been quite a bit of concern in the Western press as to whether
the Mainland economy is stable enough to survive. The Mainland has very low overall
dependence on exports. Exports as a percent of Mainland GDP have been declining over the
past decade and currently stand at 20%, compared to 12% for the U.S. (see Chart 11). Going
forward, the export share of the Mainland economy is likely to decline further to approach the
same level as Japan and the U.S. Moreover, the Mainland has shown itself to be relatively
immune to external economic disturbances. While the rates of growth of its exports and
imports fluctuate just like other Asian economies (see Charts 12 and 13), the rate of growth of
its real GDP has remained quite stable (see Chart 14). The Mainland economy survived the
East Asian crisis, the internet bubble, the global financial crises, and the European sovereign
debt crisis relatively unscathed. This is due to both the scale and the diversity of its economy,
which is today mostly driven by the growth in its own domestic demand.
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1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
The Distribution of the Market Capitalization of World Stock Exchanges by Region, percent
East Asian and South Asian Stock Exchanges
U.S. Stock Exchanges
European Stock Exchanges
11
Chart 11: Exports of Goods and Services as a Share of GDP in Selected Economies
Chart 12: Quarterly Rates of Growth of Exports of Goods: Selected Asian Economies
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Exports of Goods and Services as a share of GDP in East Asian Economies
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Quarterly Rates of Growth of Exports of Goods: Selected East Asian Economies
China,P.R.:Hong Kong India
Indonesia Korea
Malaysia Philippines
Singapore Thailand
China,P.R.: Mainland Japan
Taiwan Prov.of China
12
Chart 13: Quarterly Rates of Growth of Imports of Goods: Selected Asian Economies
Chart 14: Quarterly Rates of Growth of Real GDP, Y-o-Y: Selected Asian Economies
The fact that the Mainland economy has been able to keep growing at more than 6.5%
per annum since the global financial crisis of 2007–2008 lends credence to the partial de-
coupling hypothesis, namely, that the East Asian economies can continue to grow even as the
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China,P.R.:Hong Kong IndiaIndonesia KoreaMalaysia PhilippinesSingapore ThailandChina,P.R.: Mainland JapanTaiwan Prov.of China
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13
North American and Western European economies go into recession. While the Mainland
economy may have some financial vulnerability because of the non-performing loans resulting
from its excess production capacities, its high national savings rate, in the mid-forties, should
make any such financial crisis manageable.
Can India, which will have the world’s largest population sometime after 2030, be a
possible economic counterweight to the Mainland? While India has been growing in recent
years even faster than the Mainland, its GDP in 2017 was only US$2.6 trillion, or a little more
than one-fifth of the Mainland’s US$12 trillion (see Table 1). Indian real GDP is likely to
surpass Japanese GDP in another decade, but it will take a long time for India to catch up with
the Mainland in aggregate terms, and even longer in per capita terms, given that its rate of
growth is at most only a couple of percentage points higher than that of the Mainland. India
will be a major player in the world economy, but not until after the middle of the 21st century.
Thus, the “Indo-Pacific Quartet”, consisting of Australia, India, Japan, and the U.S., is unlikely
to become a major economic force any time soon. Neither is the “Trans-Pacific Partnership
(TPP)” without the U.S. and China. The European Union, with 2017 GDP of US$17.1 trillion,
is a possible economic counterweight to and perhaps a partner for the Mainland on the global
economic scene if it can remain united (less the U.K. of course).
Table 1: Comparisons of the Economic Indicators (2017) of Selected Economies
Mainland Taiwan U.S. India Japan
2017 GDP (US$ billion) 12,014.6 573.2 19,390.6 2,611.0 4,872.1
2017 year-end Population (milliion) 1,390.1 23.6 325.9 1,316.9 126.7
2017 GDP per Capita (US$ thousand) 8.6 24.3 59.5 2.0 38.4
2017 Real Rate of Growth (percent) 6.9 2.9 2.3 6.7 1.7
2017 Total Exports (US$ billion) 2,422.9 395.0 2,331.6 488.1 875.3
2017 Total Imports (US$ billion) 2,212.2 322.8 2,900.0 561.4 837.6
14
The Innovation Race
However, the U.S., despite its relatively slow growth, is still the most innovative
economy in the world. One indicator of the potential for innovation is the number of patents
created each year. In Chart 15, the number of patents granted in the United States each year to
the nationals of different countries, including the U.S. itself, over time is presented. The U.S.
is the undisputed champion over the past forty years, with 140,969 patents granted in 2015,
followed by Japan, with 52,409 patents. (Since these are patents granted in the U.S., the U.S.
may have a home advantage; however, for all the other countries and regions, the comparison
across them should be fair.) The number of patents granted to Mainland applicants each year
has increased from single-digit levels prior to the mid-1980s to 8,166 in 2015. The economies
of South Korea and Taiwan, granted 17,924 and 11,690 U.S. patents respectively in 2015, were
far ahead of the Mainland.
Chart 15: Patents Granted in the United States: Selected Economies
The Mainland has been strongly promoting innovation itself. The number of patents
granted on the Mainland is now the highest in the world. The Mainland has also stepped up its
enforcement of intellectual property rights in recent years by setting up permanent special
courts for intellectual property right disputes with jurisdiction over the entire nation.
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Patents Granted in the United States: G-7 Countries, 4 East Asian NIEs, China & Israel
Canada FranceGermany ItalyJapan United KingdomUnited States ChinaHong Kong, China South KoreaSingapore Taiwan, ChinaIsrael
15
The high number of patents granted to U.S. nationals is in part a reflection of the fact
that the U.S. has consistently invested a high percentage of its GDP in research and
development (R&D), averaging 2.5% over the years (see Chart 16). The Mainland’s R&D to
GDP ratio has risen very fast in recent years but still lags behind Israel, South Korea, Japan,
Taiwan, Germany, the U.S., France, and Singapore. Its target is to reach 2.5% in 2020.
Chart 16: R&D Expenditures as a Share of GDP and Their Target Levels in 2020:
Selected Economies
The R&D capital stock, defined as the cumulative past real expenditure on R&D less
depreciation of 10% per year, is a useful indicator of innovative capacity. R&D expenditure
should quite properly be treated as investment since R&D efforts generally take years to yield
any results. The R&D capital stock can be shown to have a direct causal relationship to the
number of patents granted (see Chart 17, in which the annual number of U.S. patents granted
is plotted against the R&D capital stock of that year for each economy). Chart 17 shows clearly
that the higher the stock of R&D capital of an economy, the higher is the number of patents
granted to it by the U.S. each year.
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16
Chart 17: U.S. Patents Granted and R&D Capital Stocks: Selected Economies
In order to have a chance to make a breakthrough discovery or invention, there must be
significant and sustained investment in basic research. Basic research is by definition patient
and long-term research. The rate of return of basic research, at any reasonable discount rate,
will be low. It must therefore be financed by the government or non-profit institutions and not
by for-profit firms. The atomic and hydrogen bombs, the nuclear reactors, the internet, the
packets transmission technology, and the browser are all outcomes of basic research done many
years ago. However, Mainland investment in basic research has remained low relative to the
other major countries (see Chart 18). The Mainland devoted only 5 percent of its R&D
expenditures to basic research, compared to the more than 15 percent of the U.S. Germany,
Israel, Japan, and Russia all devoted a higher percentage of their R&D expenditures to basic
research.
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17
Chart 18: Basic Research Expenditure as a Share of Total R&D Expenditure:
Selected Countries
Thus, it should be no surprise that the FAANG (Facebook, Amazon, Apple, Netflix and
Google), and Microsoft and Uber, all originated in the U.S. The Mainland internet giants,
Alibaba, Baidu, and Tencent, have all benefitted from the protection against foreign
competition on the Mainland. However, Tencent’s WeChat and its payment application are
genuinely original and innovative and fit the conditions on the Mainland, where no one has
personal checking accounts. Unfortunately, it is ingrained in the East Asian culture to respect
age and established authority, it is therefore more difficult to have breakthrough discoveries or
inventions of a revolutionary nature in East Asia, including China. While the Mainland has
made great progress in science and technology and has caught up with the U.S. in a number of
fields such as supercomputers and quantum communication, it still lags far behind the U.S. in
many other fields, for example, in semiconductor manufacturing. It will take a while, in some
cases a couple of decades, before the Mainland is able to match the U.S. technological
capability.
Military Power
In terms of military capability, the Mainland is currently no match for the U.S. If a war
breaks out between the Mainland and the U.S. today, there is no question that the U.S. will win
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18
readily, but it will possibly also suffer a significant loss of lives. The Mainland has a minimally
sufficient second strike capability as a deterrent to a potential nuclear attack by the U.S. (or any
other country). The Mainland is committed to a “no first use” policy as far as nuclear arms are
concerned. However, the potential outcome of a war between the Mainland and the U.S. is so
unthinkably devastating to both sides that it is most unlikely to occur. It is therefore in the best
interests of both the Mainland and the U.S. to avoid the so-called “Thucydides Trap”.
Will Pax Americana be Succeeded by Pax Sinica?
Given continuing American superiority in innovation and military power, it is
premature to talk about a post-Western world, even though a gradual transition may begin to
take place around the middle of this century. It took the United States more than a generation,
from the First World War to the early 1950s to finally assume undisputed leadership of the
Western (or non-Communist) world. It will likewise take more than a generation before the
world becomes more pluralistic, that is, not solely dominated by the West. However, as the
Mainland’s economic power grows, it is likely to become a more active participant in
international rule-setting, as it did in the unanimous passage of the Paris climate accord in 2016.
It is still far too early to be able to see the Mainland playing the same active role as the
U.S. on the world scene, to see Pax Americana succeeded by Pax Sinica. However, it is
possible to envisage the Mainland and the U.S. learning to live peacefully with each other,
respecting each other’s core interests, collaborating and cooperating when their national
interests align, and agreeing to disagree when their national interests differ, but without getting
into a war. For example, it is unlikely that the Mainland will privatise its centrally-controlled
state-owned enterprises any time soon. Historically, neither China nor the U.S. have treated a
friendly nation as an equal: so both of them have to learn. For China, it was either the centre
of the universe or a defeated country at the mercy of the victors. For the U.S., it won the two
World Wars for the world, occupied both Germany and Japan, and defended Western Europe
from the Soviet Union. The only country it considered equal was probably the former Soviet
Union, but it was an adversary, not a friend.
19
3. The Global Challenges
There are many global challenges, for example, global warming, cyber-security, geo-
political conflicts and uncertainties, truth decay, epidemics, terrorism, and the rise of artificial
intelligence. They will all affect Taiwan. Here we shall consider only the challenges which
have a much more direct and immediate impact on Taiwan’s future. We shall discuss in turn
the following global challenges: economic de-globalisation, the relative decline of U.S.
economic power, the risks of the “Thucydides Trap”, and intensified global competition.
Economic De-Globalisation
The growth of both world trade and cross-border direct investment have slowed down
in recent years (see Charts 19 and 20). They have met headwinds coming from nationalism,
isolationism, protectionism, and populism. Can economic globalisation be revived and
continued? The Mainland (and Taiwan before it) have been major beneficiaries of economic
globalisation. (The Mainland’s economic growth trajectory became noticeably steeper after its
accession to the WTO in 2001.) The Mainland is thus most likely to continue to support
continuing economic globalisation, working together with similarly-minded European Union
and other developed and developing economies, including Taiwan. From its own experience,
the Mainland fully understands the benefits of an open economy. Its Belt and Road Initiative
is a recognition that connectivity and openness can create enormous economic benefits to all
participants in the world economy.
20
Chart 19: Total World Trade in Goods and Services as a Percentage of World GDP since 1960
Chart 20: Total World Foreign Direct Investment (FDI), US$ since 1970
Given Taiwan’s high degree of dependence on international trade, protectionism and
isolationism are likely to hurt Taiwan much more than the Mainland. Unlike the Mainland, the
Taiwan economy cannot prosper by going alone. For Taiwan, the optimal strategy is to be as
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21
open as possible. Its economy is too small to achieve an efficient scale if it pursues a
protectionist trade and direct investment policy. Populism, which tends to favour protectionism
and isolationism, must be carefully managed in Taiwan.
The Relative Decline of U.S. Economic Power
U.S. economic power is based on a number of factors. First of all, it is the largest
economy in the world. Second, it is also the largest market. Third, it is the largest foreign
direct investor in the world. Fourth, it is the provider of the principal international medium of
exchange and the only safe haven currency (the U.S. dollar). Fifth, it is the leading source of
innovation in the world. Of course, U.S. economic power is also simultaneously buttressed
and supported by the military might of the U.S. All of this confers on the U.S. leverage that it
can use to enforce sanctions through banking, import controls, and other means against
countries deemed unfriendly, such as Cuba, Iran, and North Korea, successfully. With the
relative decline of U.S. economic power, it will become more difficult for the U.S. to exercise
such power unilaterally. The question is whether similar leverage will be available and used
by another country with rising economic power?
The Risks of the “Thucydides Trap”
Is a war between an incumbent power and a rising power inevitable? A war between
the Mainland and the U.S. cannot be good news for Taiwan. Taiwan is in the best situation if
Mainland and U.S. relations are good. Taiwan is actually worse off if relations between the
Mainland and the U.S. turn sour. Can the Mainland and the U.S. manage their potential conflict
and maintain good relations despite differences? Taiwan should avoid taking sides or being
used as a pawn in big-power games. Some in the U.S. are not yet willing or ready to accept
the possibility that economically the Mainland will be number one some day. However,
Mainland economic growth is unlikely to be stopped. If it ever stops, it is due to internal, rather
than external factors. A war between the Mainland and the U.S. will be unthinkably
devastating, with huge spillover negative effects. The U.S. will win, but there will be no real
winners, only losers.
However, whether the Mainland and the U.S. will be friends or foes in the future
depends on mutual long-term expectations, which can be self-fulfilling. If both sides expect to
22
be ultimately friends, and act accordingly, they will be friends. If both sides expect to be foes,
and act accordingly, they will be foes. Thus, it is the responsibility of leaders on both sides to
manage carefully the mutual expectations. The truth is that the degree of mutual economic
interdependence between the Mainland and the U.S. is already very high. ZTE, among the top
five cell phone manufacturers in the world, relies on the U.S. for more than 30 percent of its
critical components. The closure of ZTE will hurt both Mainland and U.S. enterprises and
workers. Apple not only assembles its iPhones on the Mainland, but sells one-quarter of its
iPhones on the Mainland, which accounts for a significant proportion of its profits.
Intensified Global Competition
The real threat to the Taiwan economy is the obsolescence of its technology. The
Hsinchu Science Park, founded in 1980, was very critical in Taiwan’s transition from an
exporter of light manufactured products to an exporter of high-technology products and
components. However, comparative advantages are not static. Taiwan must continually
upgrade its technology to maintain its competitiveness. The key is to encourage, promote and
support research and development (R&D), especially basic research, and to try to be always
one step ahead of potential competitors, and to make new investments. It is also important to
improve the business environment. The overall competitiveness of the Taiwan economy has
declined recently. The 2018 IMD (International Institute for Management Development)
World Competitiveness Rankings show that the Mainland has risen to 13th place from 18th
place, but Taiwan has slipped to 17th place from 14th place (see Table 2). Persistent tension
between the two sides of the Taiwan Strait cannot be good for business or for new investment
in Taiwan.
23
Table 2: The Top 20 2018 IMD World Competitiveness Rankings
(2017 Rankings in Parentheses)
4. The Local Challenges
The two principal local challenges to Taiwan are first, the rise of the Mainland economy
and second, how to manage its economic dependence on the Mainland and to create economic
interdependence with the Mainland.
The Rise of the Mainland Economy
Since the beginning of its economic reform in 1978, Mainland China has been growing
at an average annual rate of just under 10% per annum. It is already the second largest economy
in the world and the second largest trading country. It will become the dominant economic
power, certainly in Asia today, and in time in the world. In 1978, Taiwan GDP was US$65
billion (2017 prices), compared to a Mainland GDP of US$369 billion. The Taiwan economy
was almost 18 percent of the Mainland economy. Taiwan was among the earliest and the most
important direct investors on the Mainland in the 1990s and made significant contributions to
its economic development. However, by 2017, while the Taiwan GDP grew to US$573 billion
(2017 prices), the Mainland GDP surged to US$12.7 trillion. The Taiwan economy became
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Finland (15)
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The 2018 IMD World Competitiveness Ranking (2017 rankings in parentheses)
Canada (12)
Luxembourg (8)
Ireland (6)
China Mainland (18)
Qatar (17)
Germany (13)
USA (4)
Hong Kong SAR (1)
Singapore (3)
Netherlands (5)
Switzerland (2)
Denmark (7)
UAE (10)
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Sweden (9)
24
less than 5 percent of the Mainland economy. The economic bargaining power of Taiwan has
been greatly eroded.
Chart 21: Actual and Projected Mainland and Taiwan Real GDPs and Their Rates of Growth
(Trillion 2017 US$)
In 1978, the real GDP per capita of Taiwan was US$3,814 (2017 prices), ten times the
Mainland’s US$383. By 2017, the real GDP per capita of Taiwan grew to US$24,335 (2017
prices), only approximately two and a half times the Mainland’s US$9,138.
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Chart 22: Actual and Projected Mainland and Taiwan Real GDPs per Capita and
Their Rates of Growth (Thousand 2017 US$)
By 2050, Taiwan real GDP will be approximately US$2 trillion (2017 prices),
compared to a Mainland real GDP of US$82 trillion. The Taiwan economy will be less than
2.5 percent of the Mainland economy. However, Taiwan real GDP per capita will be
approximately US$66,000 (2017 prices), still higher than the Mainland real GDP per capita of
US$53,000 by 25 percent. In these projections, the rate of growth of real GDP of Taiwan is
assumed to be similar to the actual rates of the past decade. It is lower than that of the Mainland
because Taiwan real GDP per capita is higher.
In 1978, Taiwan international trade was US$26 billion, more than the then Mainland
international trade of US$20 billion. Mainland international trade did not surpass Taiwan
international trade until 1996. Mainland international trade increased by leaps and bounds after
its accession to the World Trade Organization (WTO) in 2001. By 2017, total Mainland
international trade has increased to US$4.64 trillion, almost seven times the total Taiwan
international trade of US$0.68 trillion. Over the past ten years, the average annual rate of
growth of Mainland international trade was 8.6% compared to Taiwan’s 3.4%. The disparity
in the rate of growth of international trade is likely to persist given that the demand for imported
consumer goods is likely to grow rapidly with the rising middle class on the Mainland. Since
2002, Taiwan has been running a huge trade surplus vis-a-vis the Mainland.
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Mainland Real GDP per capita, in 2017 prices
26
Chart 23: Mainland and Taiwan International Trade and Their Rates of Growth (Trillion US$)
Today, the Mainland is Taiwan’s most important trading partner. Taiwan is the
Mainland’s fifth most important trading partner. The Mainland has, since its accession to the
WTO, replaced the U.S. as Taiwan’s most important export destination and its most important
import origin (see Chart 24). The relative importance of the U.S. as a trading partner of Taiwan
has greatly declined. In 1985, almost half of Taiwan exports were destined for the U.S.; today,
less than 15%. In 1990, Taiwan exports to the Mainland were virtually zero; for the last decade,
they rose to almost 30 percent of total exports of Taiwan (see Chart 25). Many economies
count the Mainland as their most important trading partner. Taiwan is the 3rd most important
trading partner of Hong Kong, the 4th most important trading partner of Japan, and the 5th
most important trading partner of the Mainland, Singapore, and Vietnam (see Table 3).
-25
-15
-5
5
15
25
35
45
55
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
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1.0
1.5
2.0
2.5
3.0
3.5
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5.0
5.5
6.019
7019
7119
7219
7319
7419
7519
7619
7719
7819
7919
8019
8119
8219
8319
8419
8519
8619
8719
8819
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9019
9119
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9319
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9619
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0020
0120
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1020
1120
1220
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1520
1620
17
US
D t
rill
ion
s
Mainland and Taiwan International Trade (US$) & Their Rates of Growth Rate of growth of total Chinese international trade, %
(right scale)Rate of growth of total Taiwan international trade, %
(right scale)Total Chinese trade in goods and services (US$ trillions)
Total Taiwan trade in goods and services (US$ trillions)
Percn
et
27
Chart 24: Taiwan Exports to and Imports from the Mainland and the U.S. since 1981
Chart 25: Taiwan Exports to and Imports from the Mainland and the U.S.
as a Percent of Total Exports and Imports
0
10
20
30
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80
9019
81
1982
1983
1984
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1991
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2011
2012
2013
2014
2015
2016
2017
US
D b
illi
ons
Taiwan Exports to and Imports from the Mainland and the U.S. since 1981
Taiwan exports to the Mainland
Taiwan Imports from the Mainland
Taiwan export to the U.S.
Taiwan import from the U.S.
0
5
10
15
20
25
30
35
40
45
50
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
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1998
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2009
2010
2011
2012
2013
2014
2015
2016
2017
Per
cen
t
Taiwan Exports to & Imports from the Mainland and the U.S. as Shares of Total
Exports and Imports
Taiwan Exports to China as a Share of its Total Exports
Taiwan Imports from China as a Share of its Total Imports
Taiwan Exports to the U.S. as a Share of its Total Exports
Taiwan Imports from the U.S. as a Share of its Total Imports
28
Table 3: The Ranks of Mainland and Taiwan as Trading Partners of Selected
Countries/Regions and Vice Versa, 2017
Taiwan should manage cross-strait economic relations carefully to avoid
marginalisation in the long run. The experience of the Mainland economy before its economic
reform and opening in 1978 and those of the Cuban, Iranian and North Korean economies up
until now are cautionary tales. Taiwan should attempt to create economic interdependence
with the Mainland, taking advantage of the complementarities between the two economies. For
example, Taiwan enterprises supply many critical electronic components to the Mainland.
They should continue to invest to upgrade so that their products will always be needed. This
will require significant new investment in human capital and in R&D, especially basic research.
Country/RegionMainland Rank as Trading
Partner of Country/Region
Rank of Country/Region as
Trading Partner of the Mainland
Taiwan Rank as Trading Partner
of Country/Region
Rank of Country/Region as
Trading Partner of Taiwan
Mainland China NA NA 5 1
Taiwan 1 5 NA NA
Australia 1 7 12 11
Brunei 4 125 10 65
Cambodia 1 63 12 46
Hong Kong 1 3 3 4
Indonesia 1 17 10 14
Japan 1 2 4 3
Korea 1 4 7 5
Laos 2 85 28 119
Macau 1 81 11 88
Malaysia 1 9 6 7
Myanmar 1 44 10 64
New Zealand 1 41 11 36
Philippines 1 20 9 10
Singapore 1 14 5 6
Thailand 1 13 12 12
United Kingdom 3 15 30 17
United States 1 1 11 2
Vietnam 1 8 5 9
29
5. The Opportunities
Development into a “Silicon Island”
Given the already high level of human capital in Taiwan, as well as its existing high-
technology industries, Taiwan should increase its investment in R&D and technology to make
Taiwan into a “Silicon Island”. These investments will pay off much more easily with access
to the large Mainland market. This strategy requires both continuing investment in research at
the technological frontier and cooperation with the Mainland, taking advantage of the
technology-large market complementarity. If successful, this should transform Taiwan into a
high value-added service economy, specialising in basic research, applied research,
development, pilot production, and commercialisation.
Energy Research and Exploration
There are a number of possibilities for cross-strait collaboration and cooperation. There
are significant interest and efforts in fusion energy research on both sides of the Taiwan Strait.
I believe this is a real game changer for the world, especially in view of the risks of global
warming. There can be joint research on as well as joint application and implementation of
renewable energy, especially wind energy, which is gaining prominence in Taiwan. The
Taiwan Strait is supposed to be ideal for wind power because of its high winds. Joint
exploration for oil and gas in the Taiwan Strait and possibly in the Spratly Islands on a shared
revenue and cost basis is another possibility.
E-Commerce
Taiwan has the world’s highest rate of internet utilisation in the world. E-commerce
has the ability of making small and medium enterprises (SMEs) just as competitive as much
larger enterprises. Taiwan excels in having many SMEs developing and producing innovative
consumer products appealing to consumers in special niches (nougat candies and cookies are
one example). Distribution via e-commerce will expand the market and lower the costs for
SMEs. It should lead to a mushrooming of internet-savvy SMEs. What Taiwan needs to do is
to facilitate cross-border e-commerce, through the simplification of export and import,
30
remittance and tariff procedures, and allowing delivery services to operate both inbound and
outbound in Taiwan, thus opening new markets for its SMEs.
The Green Economy
Taiwan has an excellent record of environmental protection, preservation, and
restoration. It can provide lessons and services to other economies. For example, it leads the
world in the pre-sorting of waste so that it can be appropriately treated and recycled. It also
emphasises individual voluntary participation in environmental protection and preservation. It
can be a model for the rest of the world.
Tourism
Tourism is also something that should be promoted. As I often emphasise, with
economic globalisation, any job that can be moved away will be moved away. Tourism
generates jobs that cannot be moved away. People who want to see Sun Moon Lake will have
to come to Taiwan. Another source of “long-term tourists” is higher education. Taiwan should
consider opening its tertiary educational institutions to students from all over the world.
Taiwan has more than sufficient capacity to serve its own college-aged students. But it can
also generate a great deal of revenue and create many jobs by using the excess capacity to serve
non-local students. When these students graduate and return home, they become Taiwan’s
goodwill ambassadors in their respective home communities. And if they stay, they become a
source of talents for Taiwan.
31
6. The Alternatives for Taiwan: Confrontation or Accommodation?
The Taiwan economy risks being increasingly marginalised in the face of a rapidly
growing Mainland with rising economic influence. In the same way that the U.S. was able to
keep Cuba, Iran, and North Korea poor, the Mainland could in principle do the same to Taiwan
in the future. Taiwan should not and cannot be seen as a threat, or aiding and abetting a threat,
to the Mainland. Moreover, it is unlikely that the U.S. will ever go to war with the Mainland
over Taiwan.
The U.S. also has strong economic interests in maintaining stable relations with the
Mainland. The Mainland and the U.S. are the most important trading partners of each other.
Taiwan is only the eleventh most important trading partner of the U.S. Many U.S. companies,
such as Apple and Qualcomm, derive significant shares of their revenues from sales to the
Mainland.
There are many communalities between the Mainland (especially the Province of
Fujian) and Taiwan. There are common cultural, ethnic, historical, and linguistic ties. There
is economic complementarity. And the two sides have similar positions on the Diaoyu Islands
in the East China Sea and the Spratly Islands in the South China Sea. There are many possible
opportunities for cross-strait economic collaboration and cooperation as described above.
Successful collaboration and cooperation can generate goodwill and mutual trust, which both
sides need for an eventual peaceful resolution.
7. Concluding Remarks
It is necessary for Taiwan to think and plan ahead for twenty or thirty years. Where
can Taiwan be in Asia and the world then? Where will Taiwan be in Asia and the world then?
What can be achieved and what cannot? What is in the long-term best interests of the people
of Taiwan? It is best to focus on developing the economy and promoting peace.