A Multi-Country Evaluation of Trade Imbalances

Table of Contents

United States
United Kingdom

by John Buda, Narissa Mohd Khalid and William A. Montgomery
April 1999


I. Introduction

Taiwan, know as one of the four "tiger economies" of East Asia, has enjoyed more than twenty year of solid GDP growth. The country's economy has been a real success story. Taiwan is perhaps the only East Asian country that weathered the Asian financial crisis. Taiwan is a net international creditor with trade surpluses. The Taiwanese situation is not particularly worrisome. Taiwan's economy is export driven. Every year, Taiwanese industries produce more than their domestic demand level. This does not imply that domestic demand is weak in Taiwan. With a population is only 21 million persons and healthy developed industries, in order to be prosperous, Taiwan must produce for the world economy. Even though it has a fairly large trade surplus, the GDP growth rate in Taiwan has remained steady for many years, and the C + G per capita has also risen. Overall, Taiwan is in a favorable position when compared to some of the other countries in this examination.

It could be stated that Taiwan's economy is more centrally planned than that of the US, but from a business standpoint, one of Taiwan's strengths is that it allows for a high level of competition in the marketplace. Businesses are allowed to fail rather than ever exist in a state of debt (ex. South Korea's Chaebol). Taiwan's economy is characterized by small to medium-sized businesses that, during the Asian Crisis, displayed their ability to quickly adapt to the changes of the marketplace. Taiwan has significant investment overseas. Taiwan is a small country (equal to the size of the Netherlands with a population of 22 million persons), but in the investment arena, it is quite large. Taiwan has emerged in recent years as the second largest investor in mainland China after Hong Kong. Perhaps as much as $50 billion US dollars has been invested in manufacturing and other enterprises in Mainland China.

II. Analysis

International Investment Position

As can be seen from Figure 8.1, the Republic of China has been a significant net international creditor for all but two of the fourteen year time period being examined (1984-1997). A closer look at the numbers reveals that Taiwanese companies typically spend more than twice as much on foreign direct investment projects than companies form other nations spend on FDI projects in Taiwan. As well, Taiwanese investors have recently tended to hold more international debt and equity, than the amount of Taiwanese debt and equity held by other international investors. Some of this is likely explained by the Taiwanese government's regulations restricting the ability of international investors to freely invest in their stock exchange.

Figure 8.1 Net International Asset Position in US$ and as a % of GDP
Source: Financial Statistics, Taiwan

All investment must currently be done through an approved investment company, effectively limiting foreign portfolio investors to buy mutual funds that focus on Taiwan's listed companies. As the graph on Net International Equity Position (see Appendix, Figure 8.11) shows, however, the amounts of investment in these types of instruments--from both Taiwanese and international investors--has increased sharply since 1993.

With the exception again for the two-year period in the mid-1980s when Taiwan briefly was an international debtor, the Republic of China has also maintained a substantial net international credit position since 1984 (see Appendix, Figure 8.10). For most of the 1990's, this credit position has been between $5 and $10 billion a year. Much of this has been possible because the Taiwanese government has amassed foreign exchange reserves of over US$85 billion and has sustained a substantial trade surplus. Thus, Taiwan fits into the category of a net international creditor nation with trade surpluses, but has not shown any signs of real danger. GDP growth is strong and investment has been growing. Finally, the currency is centrally controlled, and Taipei showed great wisdom by briefly relaxing the currency controls at the beginning of the Asian Financial Crisis, letting the New Taiwan Dollar depreciate about 15 percent.


Figure 8.2 GDP Change
Source: Financial Statistics, Taiwan

Taiwan's GDP has grown almost fourfold in the last fifteen years (Figure 8.2). With the exception of a 40% growth rate in 1986, growth has remained steady under 10% for most years. Of course, in 1995, growth rates moved into negative territory for one year largely due to currency fluctuations. The Asian Financial Crisis showed up in 1997 with small GDP growth also due to the currency.

Trade Balance- Merchandise

The current account component, merchandise or goods, for Taiwan has been a source of strength for twenty some years. Taiwan's economy is built on exports, therefore every year it exports more than it imports. This merchandise trade balance grew steadily until 1988 when it began to level off. As a % of GDP the merchandise balance has declined slightly since 1988. (See Appendix, Figure 8.4)

Current Account- Goods and Services

This component of the current account which includes services has remained steady with some rises and dips in the last fifteen years. (See Appendix, Figure 8.5) As a % of GDP, this measure has declined from a high of 15% of GDP in 1987, to only 2.5% of GDP in 1997.

Current Account- Goods, Services, and Income

This measure parallels the previous measure. The goods, services, and income percentage of GDP is very similar to goods and services. This measure has declined from a high of 20% of 3.6% GDP in 1986, to only % of GDP in 1997 (Figure 8.3). This measure shows that Taiwan does an excellent job of selling its export products and earning income from overseas investments.

Figure 8.3 Current Account - Goods, Services and Income as a % of GDP
Source: Balance of Payments Quarterly

Private Consumption

Private domestic consumption in Taiwan has risen five times in the last fifteen years. As a % of GDP, this measure has remained steady throughout this period, varying from 1-2 percent of GDP. This measure shows how Taiwanese living standards have improved and continue to do so. As the Taiwanese GDP continues to grow, so private consumption has kept pace. As the Taiwanese have become more prosperous, they are able to increase their direct consumption. This measure, as much as or perhaps more so than Per Capita GDP, which has also increased, displays that the real living standards for Taiwanese has increased.

Government Consumption

Government consumption or spending has risen four times in the past fifteen years. As a % of GDP this measure has remained incredibly steady in this time frame.

Taiwan Consumer Price Index and Currency Exchange Rate

Taiwan's CPI has been rising in the 1990s. The almost 20% appreciation in this measurement closely follows the 15-20% depreciation in the currency exchange rate. This is a very manageable rate of inflation for a ten-year period, especially given the fact that most of this inflation and currency depreciation has occurred since the advent of the Asian financial crisis.

III. Conclusion

Even taking into consideration the economic setback of the Asian Financial Crisis, Taiwan perhaps is in the best economic shape of any country in this study. It is a net international creditor nation with trade surpluses. None of the indicators for this condition which would reflect a worrisome situation are not present for Taiwan. The currency has depreciated in the past 2-3 years. Private consumption has been steadily rising indicating rising living standards. Investment levels have remained constant. The government's protection of the economy through currency and outside investment controls have shielded the economy (and stock market) from outside economic shocks. Taiwan's massive foreign direct investmenthave actually paid off during the Asian Financial Crisis. Most of Taiwan's foreign investment is located in China. China has its own currency controls, therefore investments have remained strong there. Also, the large Taiwanese investments in Europe and the U.S. continue to be very strong relative to those in Asia.

Works Cited

Balance of Payments Quarterly, Taiwan District, The Republic of China. August 1998. Economic Research Department, The Central Bank of China.

Financial Statistics, Taiwan District, The Republic of China. September 1998. The Central

Bank of China.

Monthly Bulletin of Statistics of the Republic of China. September 1988. Directorate-General of

Budget, Accounting, and Statistics, Executive Yuan Republic of China.


Figure 8.4 Trade Balance, Merchandise
Source: Financial Statistics, Taiwan

Figure 8.5 Current Account: Goods and Services
Source: Financial Statistics, Taiwan

Figure 8.6 Government Spending as a % of GDP
Source: Monthly Bulletin of Statistics

Figure 8.7 Private Consumption
Source: Monthly Bulletin of Statistics

Figure 8.8 Consumer Price Index
Source: Monthly Bulletin of Statistics

Figure 8.9 New Taiwanese Dollar Exchange Rate with US$
Source: Monthly Bulletin of Statistics

Figure 8.10 International Debt Position in US$ and as a % of GDP
Source: Financial Statistics Taiwan

Figure 8.11 International Equity Position in US$ and as a % of GDP
Source: Financial Statistics Taiwan

Growth of Taiwan's Outward Direct Investment 1991-1995
Size in thousands of US dollars

 Mainland China Southeast Asia
Year Amount Share Amount Share
1991 174,158 9.5% 726,658 39.7%
1992 246,992 21.8% 310.126 27.3%
1993 3,168,411 65.6% 437,836 9%
1994 962,209 37.3% 409,081 15.8%
1995 673,522 39.4% 299,339 17.5%

Note: "Share" refers to the % of each year's total for all countries. Data for 1995 are for January through July. Due to registration procedures, 1993 numbers include some of the previous year's data. Source: East Asian Executive Reports and Ministry of Economic Affairs, Taiwan

©1999 The Elliott School of International Affairs, The George Washington University, ALL RIGHTS RESERVED Last Updated on 10/9/99