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This means that trade with these countries has increased only at the same pace with the trade with Japan and the United States. Throughout the 1980s and the 1990s, Taiwan was one of the most active exporting counties in the world. The total exports in 1980 were about US$ 20 billion, ranking 20th among the 133 countries listed in WDR, and in 1995 were about US$ 112 billion, ranking 21st in the world.
B. Taiwan, Japan, and the United States Nexus.
The trade volume and the deficits with both countries from 1952 to 1974 become invisible when the scale is in billions of dollars. After 1988, exports to the United States slowed down under the watchful eyes of the U.S. government under the Omnibus Trade Competitiveness Act passed in the U.S. Congress in 1988 (Hsiao and Hsiao, 1995). At the same time, imports from the United States increased considerably, narrowing down the bilateral trade surpluses.
C. A Pacific Trade Triangle. There are several characteristics of the Taiwanese economy in the postwar period: (a) Taiwanese trade relies very heavily on the United States and Japan. Taiwan relies more on the U.S. markets for exports, and on Japan for imports. (b) In the 1980s, Taiwanese trade with both the United States and Japan bloomed significantly. Its increase in exports to the United States was paralleled by the increase in imports from Japan and, to a lesser degree, from the United States. (c) After 1968, Taiwan has persistently had real trade surpluses with the United States and trade deficits with Japan, although the overall trade balance with all traded partners is consistently positive since 1976. (d) Taiwan imports intermediate goods and raw materials mainly from Japan and exports manufactured goods mainly to the United States. These triangular relations among Taiwan, Japan and the United States are the backbone of the rapid growth of the Taiwanese economy.
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This is the answer to the important question how Taiwan's outward oriented strategy has been sustained. It is due to special geographical and historical circumstances. Taiwan was already an export - oriented country under the Japanese regime. The Taiwanese were very much accustomed to the notion of "production for exports" for living and profits. In the early 1960s, the postwar rapid economic development is the continuation of the prewar agricultural and industrial development. One of the major hurdles of an export business is international marketing. A country may produce goods, but may not find a market in which to sell the products. This venue of marketing through foreign companies also proved successful for conducting trade with the United States and other countries. Opening trade with industrial countries is effective in increasing the total factor productivity (TFP) of a developing country.
2.1.5. Direct Foreign Investment and Economic Growth. This Section shows that, after a postwar interruption, Taiwanese industrialization continued, especially after the mid-1960 when the Pacific trade triangle among Taiwan, Japan, and the United States was formed. The trade triangle sustained the rapid Taiwanese economic growth. Seeing Taiwan's success, Korea followed suit, along with other developing countries, China and the ASEANs in the 1980s. In any case, as with trade relations, Japanese and American investments have dominated DFI in Taiwan from 1966 to 1995. While investment from Europe is also increasing, after 1995 “other sources” of foreign investment have exceeded all others. The main areas in the “other sources”
category are British territories in Central America. As the Taiwanese economy matures, it has started investment in foreign countries. The spurt of outward investment occurred after the mid-1980s, mainly due to dollar depreciation against the New Taiwan dollar and yen, rising wage rates and labor shortage in Taiwan, and the lifting of martial law in 1987 that was followed by
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acceleration of economic and political liberalization, which in turn invigorated environment protection activities and labor movements. In 1999, Taiwan’s outward investment was about 80% of its inward direct foreign investment that year.
2.1.5. Trade and Investment in China.
The enmity between Taiwan and China separated both countries from 1949 to 1987, when the 38-year long martial law was lifted. While China started attracting trade and investment from Taiwan after its implementation of the reform program in 1979, the Taiwanese government lifted its strict restriction on travel to China only in 1987. In 1988 Taiwan granted indirect imports of some 50 Chinese agricultural and industrial raw materials through third countries, and only after 1990 indirect exports and indirect investment were permitted. Indirect contact with China made official statistical data hard to collect. Taiwanese investment in China has been not only increasing alarmingly, but also becoming so large that it consists of almost one- third to more than one-half of the Taiwan’s total outward investment in recent years consist of 44% of total outward investment from 1991 to 1999.
2.1.6. Taiwan and the Global Economy in the 21st Century.
This Section was helped by the inward direct foreign investment from Japan and the United States, especially in the 1970s and the 1980s. During the past 100 years, the Taiwanese economy has followed the classical case of development: It developed from the traditional feudal society to modern agricultural development. It went through the typical stages of exports of agricultural and processed goods, and then industrial development through the phases of import substitution, export promotion, and high-tech industrialization. In fact, the “Taiwan miracle” already started in the prewar period (Hsiao and Hsiao, 2000b). Due to an influx of the Chinese refugees, government mismanagement of the economy, and wartime mobilization to
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fight against the Chinese communists, the Taiwanese real GDP per capita recovered to the prewar peak only in 1963 (at $1,612).93
After the transition period, the economy took off to steady growth in the mid-1960s. It grew faster than any country in Asia including Japan. Likewise, by 1990, in terms of nominal GNP per capita, Taiwan came much closed to Spain and Portugal, its former colonial powers.
Eventually, Taiwan (at US$ 12,333, TSDB, 2000, 332) surpassed Portugal (US$ 10,690) and came very close to Spain ($14,080) in 1998 (World Bank, 2000, 231). If Taiwan continues its current track of progress, it is not inconceivable that Taiwan may even surpass the Netherlands and Japan.