11/01/2019 No. 147
 
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Where will Taiwan go from here?
By Binghe Shui Translator Sheng-Wei Wang
August 1, 2016


Binghe Shui argues that Taiwan will reverse course only after reaching a dead end.

 

After Tsai Ing-wen came to power becoming Taiwan’s political leader, she immediately, as expected, began a new diplomatic direction by "keeping the mainland of China at a distance, but strengthening partnerships with the US and Japan." At the same time she also started the so-called "New Go South” economic policy.

 

We must admit that her policy is in line with the mainstream public opinions in Taiwan. Otherwise the Kuomintang (KMT) would not have lost the election so badly. And her policy of course inherits from the Democratic Progressive Party’s (DPP’s) politics in command, in which economic policy always consistently follows political direction. If her policy is successful, the cross-strait reunification will not happen within the foreseeable future. But what will happen, if it fails?

 

Tsai Ing-wen said that Taiwan should join the US-led Trans-Pacific Partnership (TPP), which of course will hold Taiwan with the US and Japan together to resist the economic and trade embargo which the mainland of China will for sure impose on Taiwan. It now appears that Hillary Clinton becoming the next US president is almost a foregone conclusion. But under the pressure of her competing presidential campaigner Bernard "Bernie" Sanders, she has said that she now repents for having once enthusiastically supported the TPP. Well, will she change her mind to promote the TPP again after taking the Oval Office? It would be pretty hard. On the other hand, if Donald Trump is elected, then the isolationism he advocates will not tolerate the existence of the TPP. Therefore, most commentators predict that Obama will likely try to sneak through the TPP formula during the time after the US presidential election and before his departure from the White House. However, if the Senate Democrats realize that the great political wind has changed direction and young voters, unions and blue-collar whites who support Trump are all against the TPP, will these politicians really rather threaten their own political future by handing over a historic gift to an outgoing president? They cannot be so generous or stupid. Of course, if Trump wins the election, then the Senate Republicans will not dare to pass the Obama-led TPP before Trump takes power.

 

If the TPP cannot be approved, Taiwan would be quite embarrassed after trying to please the US. It will inevitably add more difficulties in taking refuge with the US and Japan. Nevertheless, let us assume that the TPP does get approval from the US, Japan and ten or more other countries’ Parliaments, and indeed establishes a free trade area excluding the mainland of China.  What will be the benefits for Taiwan? Will they be sufficient to offset the loss resulting from the boycott of the mainland?

 

A detailed analysis on this issue cannot be carried out here. We can only make a few observations from a macroscopic perspective.

 

First, we have to look at the overall environment. It is very clear: Taiwan’s area is small, population growth is slow and the economy shows nearly no growth. Therefore its domestic consumption power is very weak. To stimulate the economy Taiwan must rely on export. Speaking about export, due to high wages, the main products of Taiwan's light industries basically cannot compete with those of the Southeast Asian countries. So Taiwan’s main exporting goods are the value-added mid- and high-tech products targeted mainly at developed countries (except for fishery and agricultural products which are mainly targeted at the market of mainland China; but this is likely to change due to a boycott by the mainland of China in the future). Unfortunately, the consumption desire and the spending power of all European and other developed countries have fallen into a long slump. In order to stimulate the economy, the central banks in Europe and Japan have issued public debts of negative interest rates, amounting as high as ten trillion US dollars. The capacity of these countries to absorb Taiwan’s products is very limited. In addition, to increase exports to these countries, Taiwan has to compete with the mainland and other Southeast Asian countries, which have already reached the similar level of technological development. Is this difficult?  Yes, it is. This is the first observation.

 

Over the years, in order to reduce costs and to achieve economy of scale, Taiwanese businessmen have set up widespread factories in the mainland of China, relying on low cost and hardworking laborers of the mainland to make money.  In case the Taiwanese businessmen refuse to collaborate with the mainland, or in the event of a boycott from the mainland, it is natural for Taiwan to push for the “New Go South” policy.  However we know that since 2014 or even earlier, the US, Japan and other Western capitals were aware of the economic slowdown in the mainland of China, and that they have withdrawn large sums of money from there and invested them in Southeast Asia and South Asia, in particular Vietnam, the Philippines, Myanmar and India. If the “New Go South” strategy of Taiwan also wants to follow suit by investing in these countries and sell the products to developed countries, it will follow the same path of the US, Japan and other Western countries. Can Taiwan compete with them and succeed?

 

It is hard to say. But we know that Foxconn, Taiwan's most successful electronic processing enterprise, and also the world's largest, is employing hundreds of thousands of workers in 12 huge factories of the mainland. People who have visited Foxconn’s plants said that these factories are managed with military discipline.  Workers are frequently required to work overtime and have little vacation time, causing many to commit suicide (later, protective screens were installed outside the dormitories to prevent workers from jumping). The company’s efficiency is probably unique in the world, but its profit margin is only 2 percent, yet a huge profit is earned by Apple and other Western companies which master the technology and the design. Imagine, when Taiwan businessmen go to Southeast Asia to establish an enterprise, how many can beat these advanced technological enterprises? If they cannot blaze new trails, but only act as original equipment manufacturers’ (OEM) suppliers, then the “New Go South” seems at best to make hard-earned money, which cannot revitalize Taiwan's industry.

 

Of course, the “New Go South” strategy can also start a new path. For example, Taiwan’s dialysis industry is very advanced (it may be related to Taiwan’s salty food which easily causes renal injury). In Southeast Asia there are indeed many dialysis clinics run by the Taiwanese. This is a clear path. But how many similar kinds of industries are there in Southeast Asia with which Taiwan can earn foreign exchange? This is the second observation.

 

As we all know, Tsai Ing-wen, like her political godfather Lee Teng-hui, is a sympathizer of Japan. She is obsessed with Japan and Japanese Culture, and is even pro-Japan. In short, she has placed many nearly superstitious expectations on Japan. So let us talk about Japan and see whether Japan can become Taiwan’s savior.

 

First we must have some basic understanding of Japan before drawing any conclusion. Japan is a very rich country and the world's third largest economy. It has huge assets abroad, allegedly more than three trillion US dollars. Its manufacturing industry is well developed. Many of us drive Japanese cars and use Japanese cameras. In Taiwan, the Japanese-owned 7-ELEVEN stores are at almost every corner street of the island. The Chinese people who have traveled to Japan are impressed with and rave about the quality of Japanese products, admiring the living standard of the Japanese people and their civic attitude. These impressions, of course, are all true.

 

But on the other hand, we should also see the reality of its shrinking economy. Japan's recent census data showed that over the past five years, its population was reduced by one million. This is quite amazing. Japan's aging population is well known. According to the data recently released by the Japanese government, the population aged 65 and over in Japan in 2015 reached 26.7 percent of the total population. Due to depopulation plus an aging population, Japan’s spending power absolutely cannot be increased. This explains why the Japanese economy has been stagnating for a quarter century. It is universally acknowledged that Abe Economics is a total failure.

 

Also well-known is Japan’s debt issue: its public debt is up to 2.3 times GDP. The debt can never be repaid. There are issues even more serious than this. As mentioned earlier, the Japanese government is now issuing negative interest rates on 10-year bonds. Due to negative interest rates, these are money-losing investments. Who would buy them? Although Japanese are patriotic, they do not love the country to the point of losing money in addition to receiving no interest income. So only the central bank purchases these bonds on its own. Not only does the central bank buy government bonds, in order to shore up the stock market, it has also acquired a large number of stocks. Among the companies included in the current Nikkei225 index, the central bank is one of the top ten shareholders of 90 percent of these companies. This figure is also very alarming. In economics, the behavior of a central bank buying bonds and equities is called monetization, which means printing money, or borrowing money to support the economy. It is also called a bubble economy. The US Internet bubble in 2000 and the real estate bubble in 2007 told us that a bubble sooner or later will burst.

 

Honestly speaking, the US, Europe, Japan and China all have considerable economic bubbles. Their differences lie in the size of the bubble and which bubble will burst first. Japan is undoubtedly the one having the weakest economic power, so has the highest likelihood of its economic bubble bursting.

 

Because of these realities, many experts predict that Japan's economy is bound to face a big collapse, but no one knows how soon it will happen. If Tsai sides with Japan and hopes that Japan can become her backseat driver, then the Japanese economy had better not collapse within the coming four years, or else she would be in a very difficult situation. Also, since the Japanese people lack spending power, the Japanese government urgently needs to earn foreign exchanges from Taiwan to help Japan’s debt reduction. If Taiwan sides with Japan, will Taiwan benefit from Japan in the end or will Japan profit from Taiwan? This is the third observation.

 

After the Eighteenth National Congress of the Communist Party of China, the direction of the mainland’s reform is to promote domestic consumption instead of investment and exports. Currently the mainland of China has more than three hundred million people in the middle class. They travel all over the world and enjoy shopping. Their spending power is very strong. The great opportunity for Taiwan's economy lies in participating in the mainland's economic restructuring to connect with the middle-class consumption chain of the mainland, and to attract mainland tourists to visit Taiwan.  Everyone can see that it would be absolutely stupid to not walk on this royal road placed in front of Taiwan but to curry favor with Japan and compete with the Southeast Asian countries.  What makes us sigh is that as long as politics commands, the economy will suffer. This is the reality. This is the fourth observation.

 

Tsai Ing-wen and the DPP know these clearly, but they for sure will "keep the mainland of China at a distance, but strengthen partnerships with the United States and Japan." That is, they will certainly march to a dead end. This is a hopeless prospect. Because look at it openly: there have been decades of anti-communist education and conflicts between late arriving mainlanders and early settlers, coupled with the very late start of the mainland’s development.  Even a decade ago, the mainland’s economy did not impress Taiwan. All these factors have made the Taiwanese people regard themselves as being superior to the mainlanders and it is not worth reunifying the island with the mainland. Even now, except for Jiangsu, Zhejiang, Fujian, Guangdong and other coastal provinces right at the opposite side of the Taiwan Strait, the mainland’s standard of living is still inferior to Taiwan and people’s manners are still less civilized than those in Taiwan. However, the mainland has a huge land, a large population and great potential. Its industry has a very broad development. Even with a 5 percent growth rate, the scale and strong spending power are unparalleled anywhere else.

 

Looking forward, if Taiwan intends to confront the mainland of China, and sides with the US and Japan either by proclaiming independence or by maintaining the status quo, its future is not promising. Nevertheless, Tsai Ing-wen and the DPP will try their approaches for sure. Until they become desperate, they will not turn back. This is a hopeless prospect. Although reunification, in particular peaceful reunification, is the best way to resolve the cross-Strait conflict, so that Taiwan can continue to maintain its proud way of life, it cannot be forced. So, it will depend on the future developments of the US, Japan, and the mainland of China, and the result of their interactions in Southeast Asia. Furthermore, it will also depend on how Taiwan will be tossed in this great game. In this regard, we can only have the patience to wait and see.

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Binghe Shui was born in Lanzhou City of the Gansu Province of China in 1942. He moved with his parents and all other family members to Taiwan in 1949 and settled in Hsinchu. After graduating from the Hydraulic Engineering Department of Chung Yuan Christian University, he went to the United States to study and changed his major to politics. After passing the qualifying examination as a Ph.D. candidate in political science at the University of Michigan, he entered the United Nations services until retirement. For over thirty years, his commentaries appeared throughout the press of Hong Kong, Taiwan and the US. For a long time, he used the pseudonym Peng Wenyi (彭文逸) to write commentaries for the column "Beneath the Statue of Liberty" of The Nineties., a Hong Kong-based magazine. He has done editorial work for two U.S.-based magazines The New Earth and Intellectuals, and for the Hong Kong-based bimonthly magazine Dousou (Stir Up《抖擻》). He now lives in Las Vegas. E-mail: b.h.shui @ gmail.com
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