Author: Min-Hua Chiang, NUS

Taiwan’s economic growth has long been based on exporting intermediate goods to mainland China for final assembly, but this is now showing signs of change. Taiwan’s monthly exports to China and Hong Kong have registered negative growth since November 2018 according to Taiwan’s official statistics.

In January–June 2019, Taiwan’s exports to China and Hong Kong shrank by 8.8 per cent compared to the same period in 2018. In comparison, Taiwan’s exports to the United States grew by 17.4 per cent. Overall exports declined by 3.4 per cent during the same period. As a result, China’s share in Taiwan’s total exports declined from 41 per cent in 2017 to less than 39 per cent in the first half of 2019. China’s falling significance was balanced by the growth of exports to the United States from 12 per cent to 14 per cent during the same period.

Taiwan’s decreasing investment in China explains the shrinking exports to the country. Although China remains Taiwan’s largest outward investment destination, its importance has dropped to 37 per cent in the first half of 2019 from its peak of 84 per cent in 2010.

Taiwan’s decreasing investment in and export to China has been caused by China’s transformation towards a more consumption-based economy. The growing trade dispute between the United States and China has accelerated the shift in Taiwanese investment away from China. In 2016, 8 out of the top 10 US-bound exporting companies in China were Taiwanese firms.

Taiwan’s declining investment in China did not boost its investment in developing countries in Southeast Asia as China and Southeast Asia are within the same supply chain networks — Southeast Asian countries supplied raw material and intermediate goods for final assembly in China. Trade interdependencies mean that Taiwanese firms’ withdrawal of their factories from China might negatively impact their investment in Southeast Asia.

Some Taiwanese firms choose to invest at home in the face of US trade retaliation against Chinese products. From January–June 2019, the total return on investment from China amounted to over NT$440 billion (about US$14 billion). This considerable return sustained Taiwan’s economic growth despite falling exports.

The Taiwanese government tried to reduce Taiwan’s investment in China before in the 1990s but the result was not fruitful. The opening of US markets to Chinese goods following US–China reconciliation underpinned export-oriented investment in China. As most Taiwanese exports produced by Taiwanese firms in China are destined for the US market, Taiwan has transmitted its economic reliance on the United States to intermediary China.

Unlike president Lee Teng-hui (1988–2000), president Chen Shui-bian (2000–2008) realised the prohibition only resulted in extensive hidden investment that the government could not control. He then adopted a relatively open economic policy towards China. When Ma Ying-jeou took office in 2008, he opened Taiwan’s economy a step further to China as he believed greater cross-strait economic integration would rescue Taiwan’s ailing economy.

Ironically, Taiwan’s investment in China started to decrease and its exports to China also became stagnant during Ma’s administration (2008–2016). China’s rising wages and stricter rules for environmental protection explained diminishing investment from Taiwan. China’s industrial upgrading further reduced its demand for intermediate goods from Taiwan. Beyond weak global demand, Taiwan’s wearying investment-driven exports to China also explained its bleak economic performance.

Unlike Ma, current President Tsai Ing-wen vowed to revitalise the economy through diversifying economic relations after she took office in 2016. This comes in the wake of China’s economy facing downward pressure exacerbated by the worsening investment environment and prolonged US–China trade tensions. Tsai’s policy of economic diversification may succeed because it complements the current US economic policy towards China as well as China’s economic structural changes.

The future of Taiwanese investment remains largely contingent upon US–China relations. A complete shift of its supply chain network from China to other countries seem unlikely in the short term. Given China’s huge population, the China market-oriented firms may continue to stay.

US President Donald Trump’s plan to bring manufacturing back to the United States may also delink the traditional US–Asia economic connections where Asia produces and…

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Author: Adam Triggs, ANU

‘China has always used currency manipulation to steal our businesses and factories, hurt our jobs, depress our workers’ wages and harm our farmers’ prices’ tweeted the President of the United States. ‘Not anymore!’ Mr Trump’s assertions on currencies range from overblown to completely baseless. But this has not stopped his actions likely to endanger the US and global economies.

US authorities labelled China a currency manipulator on 5 August 2019 for the first time in 25 years after the RMB fell below the 7 RMB-per-dollar level. This was despite China’s actions failing to satisfy the US Treasury’s own definition of a currency manipulator. While US institutions may keep President Trump in check in the near term, this represents a dangerous escalation in tensions and a serious challenge to financial markets, US institutions and the rules-based system.

An undervalued exchange rate makes a country’s exports cheaper than they otherwise would be compared to those of other countries. Economists measure whether an exchange rate is undervalued by calculating what an exchange rate ought to be based on the characteristics of that economy, how much it trades with the world, how much it invests overseas and how much other countries invest in it. If an exchange rate is below what these fundamentals imply it ought to be, it is possible (though not conclusive) that the country is depreciating its exchange rate to achieve a competitive advantage.

This has not been the case for China. The IMF judges that China’s exchange rate in 2018 was broadly in-line with its fundamentals. This is not new. The IMF reached the same conclusion in its analyses of China’s currency for at least the last five years and, before that, found that China’s exchange rate was only marginally undervalued. US Treasury analysis comes to the same conclusions, supported by the fact that China’s current account surplus is almost non-existent: down from 10 per cent of GDP in 2007 to almost zero today.

Economists also assess whether a country is manipulating its exchange rate to achieve a competitive advantage by monitoring whether they persistently engage in one-sided interventions in foreign exchange markets. The US Treasury has never been able to demonstrate this for any major US trading partner, including China.

It is therefore perplexing why China has suddenly been labelled as a currency manipulator, a label which opens the door to sanctions and further trade restrictions. The trigger was that, for the first time in 10 years, China’s central bank has allowed the RMB to fall below the 7 RMB-per-dollar level. But the key word in this sentence is ‘allow’. A slowing Chinese economy, weakening exports due to US trade restrictions and an almost balanced current account means a weaker Chinese currency is to be expected. ‘They are not driving the currency down’ notes Marc Chandler, Chief Market Strategist at Bannockburn Global Forex ‘but just accepting market forces’.

Cornell University’s Eswar Prasad notes that China doesn’t even meet the US Treasury’s own definition of a currency manipulator. Mark Sobel, a 40-year US Treasury veteran, made a similar point. ‘It [China] has not been intervening’, he says. ‘By Treasury’s own foreign exchange-report criteria, China doesn’t even come close to meeting the terms for manipulation’. Labelling China as a currency manipulator, contrary to its own criteria, undermines the credibility of the US Treasury.

China is not alone. President Trump has regularly accused Europe and Japan of pushing down the value of their currencies to unfairly compete with the United States. It is true that the exchange rates of Germany, Japan, South Korea, Mexico and the euro area have been persistently undervalued in recent years. But even for these economies, the reality is more complex than what Trump suggests.

Germany’s exchange rate, for example, is undervalued by between 8 and 18 per cent. But this is primarily because it shares an exchange rate with the rest of the euro area. And although the common currency gives Germany an undervalued exchange rate, it gives France, Italy and a host of other euro area economies an overvalued exchange rate, netting-out most of the euro-wide impact.

US punishment of these economies for currency manipulation would rightly leave them feeling aggrieved and make the prospect of a currency war more likely. The costs would be substantial. Most economic models suggest that a currency war will distort trade and investment…

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