2/10/2002
Cross-Strait Economic Relations and
Global Economic Division of Labor
Chen-yuan Tung
I. Trade Relations Between Taiwan and China
Taiwan’s indirect trade with China via Hong Kong was only $460 million in 1981 and $279 million in 1982. Thereafter, cross-Strait trade increased tremendously to $3.9 billion in 1989, $22.5 billion in 1995, and $31.2 billion in 2000. In the last two decades, Taiwan’s trade with China has increased 112 fold, or an average annual growth rate of around 26 percent, far exceeding the growth rate of Taiwan’s or China’s foreign trade during the same period.
In addition, Taiwan has enjoyed a continuous and large trade surplus with China for the past two decades. In 1981, Taiwan ran a trade surplus of $310 million, with $385 million of exports to, and $75 million of imports from, China. In 1989, Taiwan ran a trade surplus of $2.7 billion, with $3.3 billion of exports to, and $0.6 billion of imports from, China. In 2000, Taiwan ran a trade surplus of $18.8 billion, with $25 billion of exports to, and $6.2 billion of imports from, China (see Table 1).
Table 1. Trade between Taiwan and China, 1981-2000
Unit: $million
Period / Taiwan’s Exports to China / Taiwan’s Imports from China / Total Trade between Taiwan and China / Taiwan’s Trade Surplus with China1981 / 385 / 75 / 460 / 310
1985 / 987 / 116 / 1,103 / 871
1989 / 3,332 / 587 / 3,919 / 2,745
1990 / 4,395 / 765 / 5,160 / 3,629
1991 / 7,494 / 1,126 / 8,619 / 6,368
1992 / 10,548 / 1,119 / 11,667 / 9,429
1993 / 13,993 / 1,104 / 15,097 / 12,890
1994 / 16,023 / 1,859 / 17,881 / 14,164
1995 / 19,434 / 3,091 / 22,525 / 16,342
1996 / 20,727 / 3,060 / 23,787 / 17,668
1997 / 22,455 / 3,915 / 26,371 / 18,540
1998 / 19,841 / 4,111 / 23,951 / 15,730
1999 / 21,313 / 4,522 / 25,835 / 16,790
2000 / 25,010 / 6,223 / 31,233 / 18,787
Note: These figures are estimated by Taiwan’s Mainland Affairs Council.
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 105 (May 2001), p. 22.
Since 1993 China has become Taiwan’s third largest trading partner, next to the United States and Japan. In 1993, Taiwan’s trade with the United States, Japan, and China was $40.2 billion, $23.2 billion, and $15.1 billion, respectively. In 2000, Taiwan’s trade with the United States, Japan, and China was $60 billion, $55.2 billion, and $31.3 billion, respectively. In addition, since 1993 China has also become Taiwan’s second largest export market, next to the United States. Nevertheless, if trade between Taiwan and Hong Kong is included in China’s share, since 1994 China has been Taiwan’s largest export market. This is particularly true after Hong Kong reverted to China sovereignty in July 1997. According to Taiwan customs figures, in 1994 Taiwan’s exports to China (including Hong Kong), the United States, and Japan were $29.8 billion, $24.3 billion, and $10.2 billion, respectively. In 2000, Taiwan’s exports to China (including Hong Kong), the United States, and Japan were $41 billion, $34.8 billion, and $16.6 billion, respectively.
In comparison, since 1990 Taiwan has become China’s fourth largest trading partner, next to Japan, the United States, and Hong Kong. In 1990, China’s trade with Japan, the United States, Hong Kong, and Taiwan was $16.6 billion, $11.8 billion, $40.9 billion, and $5.2 billion, respectively. In 2000, China’s trade with Japan, the United States, Hong Kong, and Taiwan was $83.1 billion, $74.5 billion, $54 billion, and $31.3 billion, respectively. In addition, since 1993 Taiwan has also become China’s second largest supplier, with Japan the largest. In 1993, China’s imports from Japan and Taiwan were $23.3 billion and $14 billion, respectively. In 2000, China’s imports from Japan and Taiwan were $41.5 billion and $25 billion, respectively.
The Merchandise Structure of Taiwan’s Exports to China
Based on Taiwan’s customs statistics, Taiwan’s exports to China are concentrated in four of the 22 sections in the HS system: section 7 (plastics and rubber); section 11 (textiles); section 15 (base metals); and section 16 (machinery, mechanical appliances, electrical equipment, parts, and accessories). These four sectors included 61 percent of Taiwan’s total exports to China in 1992, 75 percent in 1994, 77 percent in 1996, and 79 percent in 1998. Moreover, the merchandise structure of Taiwan’s exports to China was similar to that of Taiwan’s total exports and these four sections were the same four largest sections of Taiwan’s overall exports between 1992 and 1998.[1]
In particular, the share of both section 15 and section 16 has been increasing spectacularly. In 1992, section 15 represented 5 percent of Taiwan’s total exports to China and section 16 represented 25 percent. In 1998, section 15 represented 13 percent of Taiwan’s total exports to China and section 16 represented 33 percent. These two sections accounted for about 46 percent of Taiwan’s total exports to China in 1998. By contrast, section 12 (footwear, headgear, and artificial flowers) accounted for 16 percent of Taiwan’s total exports to China in 1992 but then it declined dramatically to 2 percent in 1998 (see Figure 1). This trend is closely related to Taiwan’s investment in China. In the late 1980s and early 1990s, most of Taiwan’s investment in China was in the shoe, textile, apparel, and plastics industries (sections 7 and 12). After the early 1990s, the bulk of Taiwan’s investment in China concentrated in electronic and electric appliances, and basic metals industries (sections 15 and 16).
Note:
Section 1. Live animals; animal products
Section 2. Vegetable products
Section 3. Animal or vegetable fats, oils, and waxes
Section 4. Prepared foodstuffs, beverages, and tobacco
Section 5. Mineral products
Section 6. Products of the chemical or allied industries
Section 7. Plastics and rubber, and articles thereof
Section 8. Hides and skins; leather and articles thereof; travel goods, handbags and similar containers
Section 9. Articles of wood, cork, or plaiting materials
Section 10. Wood pulp; paper, paperboard, and articles thereof
Section 11. Textiles and textile articles
Section 12. Footwear, headgear, and artificial flowers
Section 13. Articles of stone or ceramics; glass and glassware
Section 14. Pearls; precious stones and metals; jewelry; coin
Section 15. Base metals and articles of base metal
Section 16. Machinery and mechanical appliances; electrical equipment; parts and accessories thereof
Section 17. Vehicles, aircraft, and other transport equipment
Section 18. Optical, photographic, measuring, and medical apparatus; clocks and watches; musical instruments
Section 19. Arms and ammunition; parts and accessories thereof
Section 20. Miscellaneous manufactured articles
Section 21. Works of art, collectors' pieces and antiques
Section 22. Special classification provisions
Source:
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998) [Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait (1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 216-218.
The Merchandise Structure of Taiwan’s Imports from China
According to Taiwan’s customs statistics, the merchandise structure of Taiwan’s imports from China also concentrated in four of 22 sections in the HS system: section 5 (mineral products); section 6 (products of chemical or allied industries); section 15 (base metals); and section 16 (machinery, mechanical appliance, electrical equipment, parts, and accessories). These four sectors accounted for 61 percent of Taiwan’s total imports from China in 1992, 61 percent in 1994, 69 percent in 1996, and 73 percent in 1998. These four sections were also the same four largest sections of Taiwan’s overall imports between 1992 and 1998.[2]
In particular, section 16 (machinery, mechanical appliance, electrical equipment, parts, and accessories) has increased rapidly from 0.3 percent of Taiwan’s total imports from China in 1992 to 37 percent in 1998. In addition, section 15 and section 16 accounted for about 57 percent of Taiwan’s total imports from China in 1998. By contrast, section 2 (vegetable products) at first accounted for 15 percent of Taiwan’s total imports from China in 1992, then declined sharply to 3 percent in 1998. Furthermore, section 5 (mineral products) also declined from 28 percent of Taiwan’s total imports from China in 1992 to 9 percent in 1998. Overall, Taiwan’s imports from China are no longer China’s basic agricultural and industrial raw materials, but products closely related to Taiwan’s investment in China (sections 15 and 16).[3] (See Figure 2.)
Source:
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998) [Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait (1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 221-223.
II. Financial Relations Between Taiwan and China
After the late 1980s, Taiwan’s investors rapidly increased their investment to China. Taiwan’s investors were primarily attracted by China’s cheap labor (the most important reason) and potential local market (the second important reason).[4] However, Taiwan’s investment is still subject to the regulation and review of the Taiwan government as of 2001. Every six months, Taiwan’s Ministry of Economic Affairs reviews approximately 8,000 items of HS coded 8-digit commodities and classifies them into either permitted items, prohibited items, or case-by-case evaluation items. By September 1999, 6,658 items were classified as permitted and only 342 items as prohibited.[5]
According to Taiwan’s official figures, in 1991 Taiwan’s FDI into China was only $0.17 billion. Since 1992, China has become the largest recipient of Taiwan’s outward investment. In 1993, it increased dramatically to nearly $3.2 billion, which was 66% of Taiwan’s total FDI for that year. By the end of 2000, Taiwan’s cumulative FDI in China was $17.1 billion, or 39 percent of the $44.1 billion of total Taiwan outward FDI. In such a short period of a decade, China became the destination with the most accumulated Taiwan’s outward FDI.
Overall, Taiwan’s FDI in the late 1980s and early 1990s involved mainly small-medium, labor-intensive enterprises looking for overseas manufacturing bases, most of them focusing on China as well as the members of the Association of South East Asian Nations (mainly the Philippines, Indonesia, Thailand, Malaysia, and Vietnam, hereafter ASEAN-5). After the mid-1990s, Taiwan’s FDI in China involved more and more large enterprises with high capital and technology intensities, companies looking for both overseas manufacturing bases and access to China’s huge potential market.[6]
According to Tung Chen-yuan, Taiwan’s official figures considerably underestimate the extent of Taiwan’s investment and this study will use China’s official data on Taiwan’s investment in China.[7] According to China’s statistics, since 1992, Taiwan’s investment in China has been increasing dramatically with an average annual contracted amount of $5 billion or an average realized amount of $2.8 billion. As of 2000, Taiwan’s accumulated contracted investment in China was $47.8 billion (46,624 projects), of which $26.2 billion was actually utilized, with an average contracted amount of $1 million per project --- average project size has grown up by about 20 percent (see Table 2).
Table 2. Taiwan’s Investment in Chinaa, 1991-2000
Unit: $ million
Period / Projects (Cases) / Contracted Amount / Average Contracted Amount / Realized Amount1991b / 3,446 / 2,783 / 0.81 / 844
1992 / 6,430 / 5,543 / 0.86 / 1,050
1993 / 10,948 / 9,965 / 0.91 / 3,139
1994 / 6,247 / 5,395 / 0.86 / 3,391
1995 / 4,778 / 5,777 / 1.21 / 3,162
1996 / 3,184 / 5,141 / 1.61 / 3,475
1997 / 3,014 / 2,814 / 0.93 / 3,289
1998 / 2,970 / 2,982 / 1.00 / 2,915
1999 / 2,499 / 3,374 / 1.35 / 2,599
2000 / 3,108 / 4,042 / 1.30 / 2,296
Accumulated to 2000 / 46,624 / 47,816 / 1.03 / 26,160
Average between 1992 and 2000 / 4,798 / 5,004 / 1.04 / 2,813
Note:
a: Data is from the Ministry of Foreign Trade and Economic Cooperation, PRC.
b: The 1991 figure includes data before 1991.
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 105 (May 2001), p. 26.
In addition, as of March 2001, the share of Taiwan’s cumulative realized investment in China was 7.5 percent of total FDI in China. Taiwan was the fourth largest source of FDI for China, next to Hong Kong (48.6 percent), the United States (8.6 percent), and Japan (8 percent). Nevertheless, Chinese figures underestimate Taiwan’s “real” investment in China because many Taiwan businesspeople began in the mid-1990s to invest in China through their holding companies in British Central America, such as Virgin Islands and Cayman Islands.[8]
Regarding Taiwan’s investment in China by industry, there are no available Chinese data and thus this study will rely on Taiwan’s official data. As of April 2001, according to Taiwan’s Investment Commission under the Ministry of Economic Affairs, Taiwan’s total investment in China includes: $5,168 million (28.9 percent) in electronics and electrical appliances; $1,467 million (8.2 percent) in basic metals and metal products; $1,378 million (7.7 percent) in plastic products; $1,292 million (7.2 percent) in food and beverage processing; $1,149 million (6.4 percent) in chemicals; $986 million (5.5 percent) in non-metallic minerals; $832 million (4.6 percent) in textile; $899 million (5 percent) in precision instruments; $763 million (4.3 percent) in transportation equipment; and $574 million (3.2 percent) in machinery equipment. Taiwan’s investment was focused significantly in the manufacturing industry, which accounted for 91 percent of Taiwan’s total investment in China as of September 1999.[9]
The Taiwanese government began to compile statistics on individual remittances to China on May 21, 1990 and on both Taiwan business remittances to China and remittances from China to Taiwan on July 29, 1993.[10] In 1993, Taiwan (including both individuals and companies) remitted $254 million to China and China remitted $26 million to Taiwan. In 1999, Taiwan remitted $843 million to China and China remitted $509 million to Taiwan. As of end-1999, Taiwan has remitted a cumulative $4,543 million to China and China has remitted a cumulative $1,298 million to Taiwan. Nevertheless, the Taiwanese government’s figures can hardly tell the truth of capital flow across the Taiwan Strait. For example, Taiwan’s Central Bank estimated in late 2000 that Taiwan’s total capital flow to China was around $70 billion, of which $40-50 billion was Taiwan’s FDI in China. That is, Taiwan might have remitted as much as $20-30 billion in total to China.[11]
III. Cross-Strait Economic Division of Labor
Industrial Level: FDI-Driven Trade and Intra-Industry Trade
Essentially, the comparative advantage of resource endowment, capital, technology, and management capability determines the basic pattern of division of labor between Taiwan and China. According to a 1997 study by Taiwan’s Chung-Hua Institution for Economic Research, there exist three types of division of labor across the Taiwan Strait. Type I: China provides Taiwan with raw materials for food, construction materials, petroleum-chemistry, and paper industries. Taiwan typically processes these raw materials and exports final goods to other countries. Type II: Taiwan provides China with raw materials and critical intermediate goods for plastics, apparel, consumer electronics, information, and motor vehicle industries. Then China manufactures, processes, and exports finished goods to other countries. Type III: Both Taiwan and China, based on their particular production advantage, provide critical parts for machinery industry for one another, but only Taiwan exports finished machines to other countries.[12]
Since Taiwan’s exports to China far exceeded Taiwan’s imports from China ($25 billion vs. $6.2 billion in 2000), most of the economic division of labor across the Taiwan Strait falls into type II and III. That is, Taiwan provides China with intermediate and capital goods, and China serves as the production base for Taiwan firms. These types of division of labor can be further illuminated by examining FDI-driven trade and intra-industry trade between Taiwan and China.
Along with the expansion of Taiwan’s outward investment beginning in the mid-1980s, Taiwan began exporting more intermediate and capital goods (semi-finished goods, equipments, parts, and machinery, etc.) and fewer consumer products.[13] The proportion of intermediate goods to Taiwan’s total exports increased from 33 percent in 1987 to 49 percent in 1993. The share of capital goods (machinery and transportation equipment) in Taiwan’s total exports increased from 8 percent in 1987 to 20 percent in 1993. By contrast, the share of non-durable consumer goods in Taiwan’s total exports declined dramatically from 34 percent in 1987 to 18 percent in 1993. There was little variation in other product categories.[14]
Kao Charng and Cheng Chu-yuan argue that the changes in Taiwan’s export pattern were driven principally by overseas affiliates of Taiwan companies in China (and ASEAN-5). Taiwan’s Board of Foreign Trade of the Ministry of Economic Affairs also asserts that the boom of Taiwan’s exports to China were driven mainly by Taiwan-invested enterprises (TIEs) purchasing Taiwan intermediate and capital goods, such as raw materials, parts and equipments, and machinery. In particular, in the initial stage of investment, the majority of TIEs heavily relied on the supply of machinery and raw materials from Taiwan and re-exported finished goods created with Taiwan inputs and low-cost Chinese labor.[15]
Indeed, China’s official figures also show that China’s imports were overwhelmingly driven by foreign-invested enterprises (FIEs) in China. In 1995, the value of foreign goods imported by FIEs was $62.9 billion or 48 percent of China’s total imports, while it was $12.3 billion and 23 percent in 1990. The value of foreign goods imported by FIEs was $76.7 billion or 55 percent of China total imports in 1998; it was $117.3 billion or 52 percent in 2000, respectively.[16]
The bulk of Taiwan’s exports to China is comprised of textile fabrics, plastic materials, machinery and equipment, and electric machinery and electronic equipment, which are intermediate and capital goods.[17] In 1994, these four categories accounted for 67 percent of Taiwan exports to China, indicating that the export boom, to a great extent, was investment driven. According to Chung Chin, as of 1995 the share of intermediate products remained as high as 74 percent of Taiwan’s total indirect exports to China. According to Taiwan and Hong Kong customs, in 1996 and 1998, two-thirds of Taiwan’s exports to China were focused on three sections classified by the HS system, which are basically intermediate and capital goods. In 1996, plastics and rubber, and articles, accounted for 12 percent of Taiwan’s total exports to China; textiles and textile articles, 25 percent; and machinery and mechanical appliances, electrical equipment, parts and accessories, 29 percent. In 1998, plastics and rubber, and articles, accounted for 12 percent of Taiwan’s total exports to China; textiles and textile articles, 22 percent; and machinery and mechanical appliances, electrical equipment, parts and accessories, 33 percent.[18]
In 1998, Taiwan’s top export items to China were electric machinery, machinery and parts, plastics, man-made filaments, iron and steel. These items amounted to $10.4 billion, or 57 percent of Taiwan’s total exports to China. In 1999, Taiwan’s top exports to China were electric machinery, machinery and parts, plastics, iron and steel, man-made filaments, and textile articles for industry. These items accounted for $13.9 billion, or 66 percent of Taiwan’s total exports to China.[19] These items are typical intermediate and capital goods, which are driven by the need of TIEs.
According to a 1992 survey of 431 Taiwanese firms from different manufacturing sectors, 71 percent of raw materials, components and parts necessary for their subsidiaries in China were purchased from parent and other firms in Taiwan. A similar survey conducted among 285 firms indicates, however, that sourcing from Taiwan had declined to a mere 36 percent in 1995. The same studies showed TIEs procured 69 percent of their machinery and equipment from Taiwan in 1995, as compared with 86 percent from Taiwan in 1992.[20] According to a 1998 study by Kao Charng, 65 percent of TIEs purchased raw materials from Taiwan. However, the trend for TIEs to import inputs from Taiwan has been declining.[21] According to two reports by the Taiwan Ministry of Economic Affairs, Taiwanese factories abroad preferred to obtain raw materials and intermediate goods from Taiwan. In 1995 and 1998, Taiwan supplied 53 percent and 44 percent of the raw material for TIEs, respectively. During the same period, 56 percent and 48 percent of parts and semi-finished products also came from Taiwan, respectively (see Table 3).