6. Balance of Payments
6.3 Current Account
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sector, shifting the cashflows within the balance of payments, but not affecting the exchange rate.
6.3 Current Account
6.3.1 OverviewWhen looking at Taiwan’s balance of payments in the period from 1984 to 2013, Taiwan always recorded a current account surplus, i.e. it exported more goods and services (plus difference in out- and inbound income and transfers) then it imported - with an increasing trend that started around 2000.
Looking at the composition of the current account reveals the causes of its surplus. As Figure 4.3.1 illustrates, the balance of goods has always been positive since 1984, , and has been mostly growing with a dent at 2004. The services balance has been negative for a long time, counterweighting the goods trade surplus, however after 2008 it became positive, therefore from then on adding to the surplus. The balance of income was consistently positive, and increases at an accelerating momentum. This is unsurprising, considering the accumulation of outbound investment and its increasing trend (Figure 6.1), which in turn generates more and more interest and other income. Transfers on the other hand have always been and remain negative - with a few exceptions where they have been close to zero before 1994 -, due to a notable share of foreign labour in Taiwan. The impact however is not large and increasing only slowly over time.
6.3.2 Trade
Trade between Taiwan and China (including Hong Kong) is traditionally strong, which is unsurprising considering geographic conditions, especially when referring to Hong Kong alone.
Unfortunately, export data for Taiwan is not readily available from
international sources, while the Taiwan Statistics Bureau only publishes data dating
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back to the year 2000. However, the IMF collects import data from all its members, which in turn enables the reconstruction of Taiwanese exports. While each country uses its own methods to compute the total value of imports by source, these
differences cancel each other out when comparing countries by their share of export to certain members or groups of members using import data, which it would not, if reported export data were used.
Doing so for Taiwan and Korea results in Figure 6.3.2 (a). Before 1990, China did not report any imports, its share of Taiwanese exports jumping thereafter is hence easily explained. It did so more for Taiwan then it did for Korea, however the
difference relaxed after a few years (from 10% to about 5%). In the first three years of the recent century, China’s share increases by more than 10%, nearly doubling the Taiwan-Korea difference (from 5% to 9%) and while both countries see an increasing share of their exports going to China, this difference has remained and even slightly grown (to 12% in 2013). While China is a big export market for most nations, it in 2013 accounts for more than 46% of Taiwanese exports. The argument of geographic
Figure 6.3.1 Current Account Balance
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198419861988199019921994199619982000200220042006200820102012 Balance on Goods
Balance on Goods and services Balance on Goods, Services, Income
Balance on Goods, Services, Income and Transfers
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proximity is still valid in general, but relative to Korea it is less convincible, especially when looking at the composition of Taiwanese exports. While in 2013, according to the Taiwan Statistical Bureau, those consist of 1.29% agricultural and processed agricultural products, the share of non-heavy industries’ products and heavy industries’ product was 17.31% and 81.40% respectively. As Taiwan does not have any land route (road or rail) to any other country, shipping is the preferred mean of transport. For shipping however, transport distance matters less than for road or rail transport, as no infrastructure network is required and due to scale a larger share of costs is associated with stevedoring than with mileage. The proximity aspect therefore has only limited convincibility.
Looking into the openness of trade (Figure 6.3.2 (b)), we find the indicator for Taiwan to be permanently larger than for Korea. This is expected, as smaller countries - at the same level of specialisation - have less variety in industries and products, and therefore need to trade more. For instance, if one family would represent an economy, then nearly all of its production would be traded, as it can only produce a few goods itself (e.g. accounting services). This trade dependency decreases with scale, looking
Figure 6.3.2 (a) Share of China-Exports
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at a town district, town, city, country etc. Since Korea’s population is approximately twice as large as Taiwan’s, its trade openness is naturally smaller.
However, starting at around the year 2000, Korea’s sum of exports and imports started to be larger than Taiwan’s, by an increasing margin. During the same period though, Korea did not grow faster than Taiwan, which is puzzling: Relative trade openness remained the same, growth remained the same, but total trade drifted apart.
To understand this, one needs to be aware of the effect of exchange rates on the trade openness. Assuming a country is a price taker, its revenue from exports and cost of imports will remain the same in USD terms as the value of its local currency changes. GDP on the other hand will be influenced, it increases with appreciation of the local currency and decreases with depreciation. Therefore, even without any change in real trade, trade openness can change significantly with a change in exchange rate.
Approaching the puzzle from another side: If goods are more expensive on the international market than they are on the national market, then selling the same
Figure 6.3.2 (b) Trade Openness and Total Trade
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1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010 2013 Import+Export to GDP Taiwan Import+Export to GDP Korea Absolut M+X Taiwan Absolut M+X Korea
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amount of goods internationally and nationally will lead to exports being larger than consumption in aggregated monetary terms, even though the actual goods distribution is 1:1.
As mentioned earlier, increasing the price of a good does not increase real GDP because inflation is deducted during the calculation. When calculating trade openness however, export/import prices are assumed to inflate at the same rate as local prices do, which clearly was not the case for Taiwan.
It is therefore necessary to adjust trade openness by using the real exchange rate for local currency to USD for the GDP and compare it with the sum of imports and exports.
Doing so for Korea and Taiwan (figure 6.3.2 (c)) shows that while Korea’s trade openness in real terms has decreased, starting in the early 2000s, i.e. the time when international price levels converged, Taiwan’s trade openness remained steady.
Therefore, while an increasing share of goods produced and consumed in Korea were traded, the traded share of goods produced and consumed in Taiwan did not show an increasing trend.
Figure 6.3.2 (c) Adjusted Trade Openness
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Import+Export to GDP (PPP) Korea