Monday, March 20, 2006

Taiwan Racks up Huge Trade Surplus With China

Is Taiwan's embrace of China a good thing? Huge trade surpluses are usually thought to be good....

Taiwan was China's largest source of trade deficit in 2005 and "intra-industry" trade across the Taiwan Strait surpassed half of that between China and the rest of the world in the same year, a World Trade Organization report said Saturday.

The report said that although Taiwan has maintained bans on the import of about 2,000 categories of products from China, its huge trade surplus and "intra-industry" trade with China indicate that trade exchanges across the Taiwan Strait have continued to increase.

According to a trade policy review on China soon to be published by the WTO Secretariat, Taiwan enjoyed a trade surplus of US$58 billion with China in 2005, topping all countries in the world, including South Korea, which posted a surplus of US$42 billion with China in the same year to become the second-top surplus earner, and Japan in third place with US$16.5 billion.

The report suggested that Taiwan's, South Korea's and Japan's huge trade surpluses with China partly reflect the huge amounts of investment and large numbers of manufacturing operations that these countries maintain in China.

In fact, the report said, Taiwan, South Korea and Japan have "exported" their trade surplus with the United States and the European Union to China by investing in, producing and exporting their products from China, the so-called "world factory."

According to the report, Taiwan was China's third largest import source, providing 11.3 percent of China's entire imports in 2005, after Japan's 15.2 percent and South Korea's 11.6 percent.


Jimmy the Stud said...

The Taiwanese trade surplus resulted from heavy investments in China may reflect the "prosperous" economy Taiwan "seems" to enjoy. However, the macroeconomy in China is still in doubt because of its monetary policy. The Chinese economy has not yet committed to be efficient; in fact, it's the most inefficient economy in the world. Being an efficient economy requires the free-flow of information for all investors and a fluid and market-driven monetary policy.

China is still controlling its exchange rate and the flow of hot money within its economic system. Yes, businesses can invest in China, but how about freely utilizing its profit from the Chinese economy? Not quite so. Chinese government has constantly monitor and limit the amount of money to be wired out of its country. This creates a fictious prosperity to lure more investors to pour money into China.

Not only so, Chinese government has total control of the exchange rate between the Yuan and other currencies. I know some readers may start blasting me claiming that China has taken the approach to a free exchange rate (FX) system. I think that's bullish. FX rates are determined by many factors in the world including deficit, government budget and overall economic performance of a currency. Yuan is still locked in! Yes, Chinese government allows some sort of flexuation, but it's stilled locked, and FX cannot be based on "buckets". The new buckets system is designed to fend off some of the heat from the EU and the US.

The mere illusion of great trade surplus of Taiwan with China could only create more risk in the volatile Taiwanese economy, especially with looming problems of consumer debts. The ideal method of personal investment is to create the optimal combination of risky assets, and the same method is true in the macro environment. You never put all, or most, eggs in one basket. Given the weak economy of China, only thriving on external funds and fixed FX rates, it is just matter of time before the Chinese economy blows up in front of everyone's eyes. When that day happens, it is the doom's day of Taiwan's, South Korea's and Japan's economy.

Everyone in the world has raised its caution level with the Chinese economy, and only Asian countries are still stubborn to ignore analysis and recommendations to continuously inject more funds into an already overheated economic system. What Taiwanese businesses need to start doing is to divest from its Chinese establishments into Vietnam and India, like more and more US corporations. Only winning in a fair play can sustain winning in the long-run, and China is not a fair environment to domestic and foreign businesses.

Anonymous said...

Jimmy, could you explain more why you think the surplus is an illusion?

By maintaining the yuan at artificially cheap rates, my understanding is that they are basically selling China at bargain basement prices... so what's there not to like from the perspective of a foreign investor?

It is true that capital doesn't move freely--it can't move out so freely--but the idea is that eventually they'll have to allow it to move out freely, no?

Kanwa-Kyudai said...

The crazilly growing Chinese economy is surely a big bubble, which is destined to bust some day just like one in Japan fifteen years ago. The way of business in China is immoral and corrupt, and everything is allowed if it's profitable.

It's quite risky to heavily depend on Chinese economy, which is easily affected by unstable social conditions and the Taiwan issue. Every trading partners of China should gradually diversify its business and investments in the long run.

It's true that Taiwan/South Korea/Japan's huge trade surpluses with China are an illusion because such money never stay at home and mainly fly to the US to buy their bonds. In this sense, the three nations have two big risks, China and the US.