Evaluating Taiwan as a Trade Partner

A Risk-Reward Analysis of the Taiwanese Business Environment

May 25, 2009 Daniel Workman

While Taiwan has a rich and impressive résumé of international trade accomplishments, the Silicon Island also poses some political, economic and legal risks.

Taiwan is the world’s leading supplier of notebook personal computers (PCs), liquid crystal display (LCD) monitors, PC cameras and DVD discs. Taiwan also makes 90% of the world’s wireless local area networks (LANs) and is a global leader in bicycle manufacturing.

Nicknamed the Island of Innovation, Taiwan had the fourth-most patent applications from any country during 2004. The World Economic Forum rated Taiwan as the fourth-most growth-competitive nation for that same year.

Taiwan is also called Silicon Island because of its advanced technological infrastructure.

Taiwan’s global brands include Trend Micro (network antivirus and internet security software), Asus (computer accessories), Acer (PC products), Benq (LCD monitors and digital cameras) and D-Link (wireless LANs) and Giant (bicycles).

To stay highly competitive, each year Taiwan’s External Trade Development Council grants prestigious Symbol of Excellence awards to Taiwanese products that best represent innovation, quality and the latest in design. This award in recognized in over 90 countries. Two examples of excellence award winners in 2009 from among 561 Taiwanese-submitted products are:

• HiTi P510S Photo Printer
• 810 USB Flash Drive.

Silicon Island’s world-leading technology has earned a reputation as being easily affordable. Taiwan even has a motto for what it calls the democracy of technology: “Great products in the hands of everyone.”

Political Risks in Taiwan

The biggest risk to trading with Taiwan comes from questions about whether emerging superpower China will eventually take over and assimilate Taiwan’s dynamic and highly profitable capitalist economy. To date, Taiwan’s current government has decreased its stewardship of Taiwanese investment and foreign trade. For example, some large, state-owned Taiwanese banks and industrial firms have already been privatized. However, these government policies may change should mainland China enforce its will on the Island of Innovation.

While Taiwan’s trading relationship with China will likely remained intertwined, other trading partners may react adversely and avoid trading with Taiwan out of fear of retaliation should the People’s Republic become aggressive with its tiny neighbor.

Thirdly, the risk that the government might expropriate land or capital becomes much higher should China start governing for Taiwan. As evidenced by the recent 2008 Beijing Olympics, Chinese authorities will not hesitate to confiscate land they want and evict previous owners without compensation.

Similarly, the strong central government in Beijing may decide to nationalize recently privatized Taiwanese banks, industrial companies and other capitalist enterprises as a signal of Chinese control of Taiwan’s economy.

These political risks can affect Taiwanese importers and exporters in three ways:

• Raise the cost of doing business
• Create shortages in the market
• Prevent permanent stability.

Economic Risks in Taiwan

Even though Taiwan joined the World Trade Organization (WTO) at the start of 2002, Taiwan still maintains trade barriers that restrict American exports of automobiles, rice, poultry, livestock and pharmaceutical drugs. Some U.S. exporters are pushing for free trade with Taiwan touting the political, security as well as economic benefits of such an agreement. Few barriers currently exist on products coming out of Taiwan.

Recently, the exchange rate between American currency and the Taiwan dollar shows a relative weakening of the U.S. dollar in May 2009. Over a 6-month period, an average 33.6 Taiwan dollars (TWD) bought one U.S. dollar, with a minimum of 32.5 TWD on December 18 and a maximum of 35.2 TWD on March 2. Today, Taiwanese exports cost more in American funds due to the lower relative value of the U.S. dollar.

The unemployment rate in Taiwan was a very healthy 4.1% in 2008, compared with 7.2% in the U.S. as of December 2008. Taiwan’s estimated inflation rate was a modest 3.7% last year, compared with 6% in China. The central bank discount interest rate in Taiwan was 1.5% in January 2009, compared with 3.5% in Canada which is revered for its conservative financial institutions.

Perhaps because Taiwan is such a successful player in global trade, the Island of Innovation is not associated with a high level of black market activity like that associated with Venezuela.

Finally, Taiwan’s ratio of trade (exports plus imports) to its GDP of US$738.8 billion in 2008 was an impressive 66.6%.

Legal Risks in Taiwan

Taiwan is a participating member in the International Chamber of Commerce (ICC), the world’s leading organization for international commercial dispute resolution. Therefore, foreign traders with Taiwan can escalate disputes for ICC arbitrators to resolve.

Legal risks from breach of contract apply to both import and export partners with Taiwan. Back in April, Taiwan’s China Shipbuilding Corp announced a breach-of-contract lawsuit after Israeli shipping line Zim canceled orders for 6 container ships.

Legal jurisdiction for the legal action will likely be Taiwan, since the proceedings of a legal action generally take place in the country of export.

Taiwan applies case law, the same type of civil law that China practises. This sometimes leads to legal conflicts, because nations like the U.S. and Canada practise common law which involves more argumentation.

The greatest legal barriers may be caused by language, since Mandarin Chinese is the official language in Taiwan with some Taiwanese (Min) and Hakka dialects.

Taiwan is Trade-Friendly

Generally, Taiwan’s record in world trade legal actions is enviably clean. Currently, there are no legal complaints or disputes involving Taiwan on the World Trade Organization online listing for dispute settlement by country. This compares with 14 for China, 47 for Canada and 198 cases for the United States.

Even in legal matters, Taiwan is eager to resolve issues in the best interests of international trade.

Sources for this Article

This article presents independent calculations and insights based on data drawn from the CIA World Factbook, the Heritage Foundation article Free Trade with Taiwan is Long Overdue and the YouTube video It’s Very Well Made in Taiwan.

The copyright of the article Evaluating Taiwan as a Trade Partner in International Trade is owned by Daniel Workman. Permission to republish Evaluating Taiwan as a Trade Partner in print or online must be granted by the author in writing.

Taiwan is world's leading supplier of DVDs