Taiwan: 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.

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.

Sources:

CIA World Factbook (February 2012)
U.S. Dept. of State Country Background Notes ( February 2012)

Glossary