IV. Major risks encountering

IV. Major risks encountering

Over-dependence on China

On March 30  2014, up to half a million Taiwanese marched to protest against the passage of the Cross-Strait Service Pact with China, citing an unlawful approval process and the agreement’s potential overarching impact on national security. Becoming too dependent on China may have disastrous economic and political consequences for Taiwan.

Free trade and foreign investment are undoubtedly crucial to economic growth and a nation’s wellbeing, especially for a country like Taiwan, which relies heavily on trade. However, free trade is no longer the sole consideration when your trading partner poses a clear national security threat. The Ma administration’s policies conveniently neglect the consequences of “locking” Taiwan’s economy with the very source of the main security threat facing Taiwan. Ma claims that the Service Trade Pact will boost Taiwan’s economy by allowing Taiwanese companies to leverage the potential of Chinese markets through the lifting of trade and direct investment restrictions. However, this cuts both ways. The government has to bear in mind that the agreement would also expose Taiwan to its rival across the strait — a major concern that drove the people to the streets on March 30, and a concern that has been weakly addressed by the government since then.

In 2013, 62 percent of approved overseas investment and 39 percent of Taiwan’s exports went to China. The reliance of Taiwan’s economy on China is already disproportionate. The potential of a “hard landing” for China’s overheating economy, which already shows the signs of decelerating investment, could overwhelmingly impact Taiwan’s industries. Meanwhile, China’s ability to change laws and policies in an opaque fashion with little notice and possibility for redress adds another layer of risk. The recent examples — banning SOEs from hiring foreign consulting firms and prohibiting government purchases of Microsoft’s newest operating system — reveal the risks all foreign companies face when investing in China. As Taiwan continues to tie its economy more closely to China, unexpected new trade and investment policies from Beijing could pull the rug out from under Taiwan’s economy.

Recommendations-Over-dependence on China

Taiwan may actively seek to participate in regional and global economic integration, increase the added value ratio of industrial sectors and upgrade the international competitiveness of Taiwanese enterprises.

Taiwan’s market share in China to rise at the same time as a decline occurs in the proportion of Taiwan’s exports accounted for by cross-Strait sales. Though difficult, achieving that ideal is considered possible by trade experts – but only if Taiwan can make the transition to producing and exporting finished products with a strong brand image. Possessing that strength in finished products would make Taiwan less vulnerable to China's localization process.

It would also enable Taiwan to assert itself on the international stage to many markets, not just China – and such diversification would cause the percentage of Taiwan’s exports going to China to diminish. At the same time, if Taiwan has stronger brands it would be in a position to sell more to China at the expense of competing products from Korea and Japan, enabling Taiwan to achieve the dual goals of a higher market share on the mainland even while China accounts for a lower proportion of Taiwan's exports.

It would therefore be possible for Taiwan to be less trade-dependent on China and more competitive in the China market at the same time.

Higher electricity costs

Taiwanese manufacturers may have to shoulder higher electricity costs after the government announced it would stop construction on a new nuclear power plant.

Taiwan's three nuclear plants, altogether six reactors, are supplying nearly one-fifth of the island's electricity. When they are phased out by 2025 as planned and without a fourth plant to fill the energy gap, domestic power prices will have to rise by at least 40% to subsidize more expensive alternatives such as natural gas, solar and wind, Economics Minister Chang Chia-juch said.

Graph 1

Taiwan Power Company has already spent TWD 330 billion ($11 billion) building the fourth nuclear plant – one of the reactors is already finished – and it would have to write off the asset completely if the project were cancelled.

Tuntono calculates that the government could be forced to inject up to TWD 540 billion ($18 billion), or 3.7 percent of GDP, simply to keep the utility solvent. The government would likely have to float bonds to cover the expenditure, which is equivalent to one-fifth of annual government spending. That would increase the general government debt 3.7 percentage points to 46.1 percent of GDP, bringing the total public debt at all levels of government very close to the statutory limit of 50 percent.

Higher power prices would also hurt corporate earnings. Steel manufacturers would be among the hardest-hit, with an earnings hit of as much as 5 percent for each 10 percent increase in electricity prices. Finally, buying fossil fuels to cover Taiwan’s energy needs would increase total imports by $4.8 billion, or 27 percent, thereby slashing the island’s $57 billion current account surplus by 8.3 percent. That, in turn, would put pressure on the Taiwanese dollar.

Recommendation- Higher electricity costs

ü   Emulate Germany’s push into the green economy

Graph 2

That’s been the talk for several years, and President Ma Ying-jeou put green tech at the fore of his agenda early in his presidency. Ma vowed to put Taiwan on the path towards sustainability, promising huge reductions in carbon emissions while pushing green technologies that would open up new markets for Taiwan’s high-tech sector. Taiwan now has the world’s second largest solar cell manufacturing and LED industries and has staked significant market shares in energy storage and electric vehicles. In 2010, Taiwan was ranked second in Asia, sixth in the world for contributing to Green Economy by the International Institute for Management Development (IMD).

Taiwan has become a heavyweight in exporting green technology, it has lagged in renewable energy deployment at home. In 2013, the country had around 8% of installed power generating capacity in renewables, generating some 4% of its energy.

Taiwan may extend the life of the three existing nuclear plants and develop more comprehensive green technologies to generate electricity. So as to stabilize the price of electricity.

Reference:

Graph 1: https://www.thefinancialist.com/the-economic-consequences-of-de-nuclearization/

Graph 2:http://www.amcham.com.tw/connect/taiwans-renewable-energy-challenge/