Taiwan Overview

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5.2. Taiwan Overview

The Republic of China, commonly referred to as Taiwan, is considered the heart of the Asia-Pacific region, as it is considered an imperative hub for trade and investment at both the regional and global scale, especially in high-tech industries.

It is an island nation situated in the West Pacific Ocean some 180 km off China’s southeast coast, midway between Japan and the Philippines. Home to 23.3 million people, Taiwan is one of the most densely populated areas in the world at 650 people per km² and with a total surface area of about 36,000 km².

Over 95% of the population is of Han Chinese ancestry, and the rest composed of aboriginal peoples and recent marriage immigrants from Southeast Asia and mainland China. Chinese is the main language used in Taiwan. Various ethnic groups use Taiwanese Hokkien, Hakka or one of 16 indigenous languages in every- day speech. Taiwan shares the same linguistic heritage as China but differs in its continued use of traditional written Chinese characters instead of the simplified ones used in China.

5.2.1. Taiwan’s economy [12]

Taiwan is a highly developed market economy. The country’s level of socioeconomic development permits adequate freedom of choice for all citizens. Fundamental social exclusion due to poverty, gender, religion or ethnicity is qualitatively minor to nonexistent and is not structurally embedded. Taiwan’s poverty rate is low in international comparison and stands at 1.5 % according to the latest available data. Income distribution – as measured by the Gini coefficient – is relatively equal and has been stable around 0.34 since 2010 and throughout the review period. This stands in contrast to an energetic domestic debate on rising social inequality

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in Taiwan caused by low economic growth, stagnant wages and highlighted by their shrinking share of Taiwan’s GDP. According to the most recent data available (2014), Taiwan is considered a country with very high human development. At 0.882, it would rank 25th globally in UNDP’s Human Development Index. Moreover, Taiwan has a relatively low level of gender inequality, ranking 5th worldwide with a Gender Inequality Index of 0.052. The most socially excluded group is Taiwan’s 625,000 strong foreign blue-collar worker community employed as household caregivers, factory workers and in the fishing industry who suffer from low salaries and social discrimination, but also enjoy increasing support from civic groups and social organizations. The new DPP government has announced intentions to improve their legal and socioeconomic position. However, a major problem is the dependence of migrant workers on private brokerage agencies in Taiwan, which depress their salaries by taking huge commissions.

This results in many of them leaving their commissioned jobs very quickly to find better paying illegal work, which further increases their vulnerability to exploitation.

5.2.2. Taiwan’s Organization of the Market and Competition [12]

Taiwan’s market economy is institutionally sound with transparent, clearly defined and state-guaranteed rules for ensuring fair competition and largely equal opportunities for all market participants. A Fair-Trade Commission supervises business practices to ensure fair competition.

Business freedom is high and market actors face neither entry nor exit barriers. Taiwan ranks consistently high in global economic indices in terms of ease of doing business, economic freedom and competitiveness. According to the Economic Freedom of the World Annual Report 2016, Taiwan is ranked 23rd with a score of 7.65 out of 10 (based on 2014 figures), and 3rd in Asia behind Hong Kong and Singapore. It did particularly well in the categories of government size, sound money and credit market regulations. According to the Global Competitiveness

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Report 2016-2017, Taiwan is ranked 14 out of 138 countries, and in the 2017 Index of Economic Freedom, Taiwan was ranked 11th with very high scores for well-specified property rights, and freedom of business, monetary transactions and trade. The main limitation on Taiwan’s economic openness remains the restricted access for Chinese firms to Taiwanese markets despite considerable liberalization since 2008. Investment in a number of strategic sectors like LED, solar cells and display panels remain capped for mainland investors at less than 50%. In non-strategic sectors of Taiwan’s manufacturing industries, however, mainland Chinese capital can increase its ownership to more than 50%. Plans to reduce further the barriers of Chinese investment into Taiwan’s sensitive telecommunications sector and the lifting of Chinese capital inflow have stalled with the non-ratification of the Cross-Strait Trade in Service Trades Agreement (CSSTSA) in the aftermath of the 2014 Sunflower protests. The DPP government has pledged that it will not advance further cross-Strait liberalization until the Legislative Yuan passes a cross-Strait supervisory bill to monitor all agreements between China and Taiwan.

Even though the state maintains its monopoly over certain basic utilities and services (e.g., water supply and postal services), market competition is well established and legal frameworks exist to combat cartels. The Fair-Trade Law that took effect in 2002 ensures a coherent and effective approach to combating monopolistic structures or predatory price fixing. In January 2017, the Legislative Yuan passed an amendment to its electricity act that effectively ended the monopoly of state-run Taiwan Power Co. (Taipower) in the electricity market by allowing

“green” energy producers to sell directly to customers.

Taiwan enjoys a high degree of trade freedom, as its economy is heavily reliant on its export economy. The country is one of the world’s principal exporters of electronics and IT-technology.

Tariff rates on industrial products are comparable to those found in industrialized nations such

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as Japan and the United States, and Taiwan generally plays to WTO rules. With the exception of cross-strait economic relations, the state refrains from intervening in investment planning and foreign trade. Intervention in the former mainly takes place in order to control the level of Taiwan’s high trade dependency on China, but also to restrict mainland investment in sensitive sectors, most notably, real estate, finance and telecommunications.

Some 40% of Taiwan’s exports and more than 60% of its outbound investment have gone to the Chinese mainland (including Hong Kong) over the last two decades, resulting in a high trade dependency on China, which has worried critical observers for quite some time. The ratification of follow-up agreements to the cross-strait Economic Cooperation Framework Agreement (ECFA) to liberalize further trade in services and goods across the Taiwan Strait has been halted after the March 2014 Sunflower protests. The DPP government has pledged that it will not advance further Strait liberalization until the Legislative Yuan passes a cross-Strait supervisory bill to monitor all agreements between China and Taiwan.

According to official data, at the end of 2015 Taiwan had 39 commercial banks, which accounted for 79.24% of total deposit accepted and 89.08% of total loans extended in Taiwan.

30 local branches of foreign (including mainland Chinese) banks were responsible for 1.37%

of total deposits and 3.33% of loans. 23 credit cooperatives, which mainly service regional customers, accounted for 1.44% of total deposits and a market share of loans of 1.49%. Taiwan has a tightly regulated and transparent banking system, which is effectively supervised by the Financial Supervisory Commission (FSC) and an independent central bank. The capital and stock market are reasonably developed and in principle open to foreign participation. Banks benefit from a high proportion of stable customer deposits and flexibility to access domestic capital markets. Also, the system’s low use of cross-border funding makes it less vulnerable to

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contagion risks during periods of turbulences in global capital markets like the 2008/9 global financial crisis. The official non-performing loans (NPL) ratio of Taiwanese domestic banks was 0.23% and 0.27% at the end of 2015 and 2016, respectively. The slight increase during the review period was driven mainly by the economic slowdown in China. The capital adequacy ratio of Taiwan’s banking stood at 12.98 % in mid-2016, well above the statutory Basel III minimum of 10.5% that is required by 2019. A 2016 stress test under the auspices of the FSC diagnosed Taiwan’s banking industry as having sufficient financial resilience, and international analysts agree that Taiwan’s banking system is overall stable and poses low risk.

On the negative side, real estate-related loans account for an unhealthy 40% in the books of Taiwan’s domestic banks and the banking sector remains dominated by fully and partially state-owned banks and is highly fragmented. Taiwan’s banking system has the lowest banking concentration ratio of the large financial systems in the region. While this reduces the threats of excessive concentration in a few “too big to fail” institutions, it has led to fierce competition that drives down profitability close to unsustainable levels. Moreover, to improve profitability, Taiwanese banks have expanded into potentially unstable regional markets, including China and Myanmar, which exposes them to greater risks, as exemplified by the increase in non-performing loans in 2016.