Chapter 3: El Salvador-Republic of China (Taiwan) Relations
3.2 Economic Overview of Both Countries
3.2.1 Republic of China (Taiwan)
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39 Chapter 3: EL SALVADOR-REPUBLIC OF CHINA (TAIWAN) RELATIONS
3.1 Introduction
This chapter deals with El Salvador – Taiwan relations in terms of development cooperation, trade and investment. First, the author gives an economic and development overview of both countries, addressing also an introduction of Taiwan’s development, to conclude the chapter with the presentation of the current situation on bilateral investments and trade relations.
3.2 Economic Overview of Both Countries
3.2.1 Republic of China (Taiwan) (map 1 Appendix I)
Due to its industrialization, Taiwan is considered one of the so-called Asian Tigers22; however, to become a newly industrialized country, the island underwent a process of development in which the US and multilateral organizations played an important role. For instance, Taiwan’s agricultural sector received important benefits from US aid. In accordance with some scholars, US covered around two-thirds of all expenses, and Taiwan the remaining third, in order to modernize this sector. This technical aid plan concurred with the expansion of the ROC’s official relations in Africa - from 8 countries in 1960 to 24 in 1969. The US finally ceased to fund ROC agricultural missions starting from 1975 (Atkinson, 2014).
Currently, the island is well-known for its dynamic economy and its exports, led by machinery, electronics, and petrochemicals, which have provided the initial stimulus for its economic development. However, this strong dependence on exports has exposed the economy to fluctuations in world demand. In 2009, Taiwan's GDP decreased 1.8%, due mainly to a fall on
22 The Asian Tigers comprised 4 newly industrialized economies: Hong Kong, Singapore, South Korea and Taiwan.
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40 its exports of about 13.1% for that year. In 2010, Taiwan’s GDP grew 10.7%, as exports returned to the level of previous years; but in 2011, its growth rate went down to 4.0%. In 2012, growth fell back again to 1.3%, due to a slowdown in global demand (CIA23, 2014). In 2011, Taiwan was the world’s 16th largest exporter and 16th largest importer, and it had the world’s 5th highest foreign exchange reserves (Wang, 2011).
Taiwan's major long-term challenges are its diplomatic isolation, its rapidly aging population and a lowering birth rate (CIA, 2014). Except for the Economic Cooperation Framework Agreement (ECFA) signed with mainland China in June 2010, so far Taiwan has been excluded from the economic integration, mainly because of its diplomatic status. In 2006, China became Taiwan's second-largest source of imports after Japan, and the former is also the island's main destination for the export of capital on the form of direct investment. Bilateral trade on securities, banking and insurance took effect in January 2010, opening the island to greater investments from the China's financial firms and institutional investors, thus providing new opportunities for the ROC financial firms to operate in mainland China (CIA, 2014).
According to the CIA, in 2012, Taiwan’s GDP (purchasing power parity) was US$ 894.3 billion, positioning it on the 20th place in the world, more than the double of Sweden’s rate:
US$393.8 billion in 2013 (35th). The GDP - real growth rate was 1.3% (in 2010 it was 10.8%), higher than Germany’s rate: 0.9%. The GDP - per capita (PPP) was US$38,400, ranking 29th position, higher than France’s: US$ 35,800 (39th). The population below poverty line in the same year was 1.5%, lower than Austria’s rate: 6.2%. The Human Development Index (HDI) during the same year was 0.890 (23rd), considered as a very high level (CIA, 2012), which is similar to Finland’s rate: 0.892. It means that despite the moderate economic growth (contrary to 2010), the living conditions and welfare remain high; moreover, the low index of population living
23 Central Intelligence Agency
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41 below the poverty line, as well as the very high HDI, reflect the high quality of life that a person may have in this country. Each rate is being compared with different countries considered as developed countries from which ROC surpassed almost all rates. Regarding the population below poverty line Taiwan’s rate is much lower than Austria’s and the HDI is almost the same to Finland’s.
3.2.1.1 Commercial Environment
The ROC is a member of the World Trade Organization (WTO) since January 1st 2002, hence in June 2006, it had its first trade policy review, in which the main features of its commercial environment were the following (SIECA24, 2007):
Since the ROC’s accession to the WTO, the value of its trade on commercial goods has experienced a growth of 66.9%, from US$ 248.5 billion in 2002, to US$ 414.8 billion in 2006. Taiwan’s exports rose from US$ 135.3 billion in 2002, to US$ 213.2 billion in 2006, and its imports also grew from US$113.2 billion in 2002, to US$201.6 billion in 2006.
The dynamism and strength of the island's economy is reflected in studies by recognized
international organizations such as the Business Environment Risk Intelligence (BERI) which classifies its environment investment as the 5th among 50 economies, and the 5th in competitiveness among the 118 economies studied.
Regarding Taiwan’s investments, in 2005 inward investment reached a volume of US
$4.228 million, thus increasing by 7% over the previous year. This increase responds to the expansion of manufacturing sectors and the continued growth of the service sector, which have improved the investment framework of the island. Meanwhile, outbound investments reached US$8.454 million, which were destined mainly to Asian countries,
24 Secretariat for Central American Economic Integration
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42 such as Cambodia, China, Indonesia, Malaysia, Thailand and Vietnam, as well as some countries from the American continent, such as Cayman Islands, United States, Panama, Mexico and Canada.
With respect to Taiwan’s tariff policy, since its accession to the WTO it began to reduce import tariffs. Pursuant to its accession commitments in 2002, to modify the rates applicable to some 5,000 tariff lines, the government reduced the tariffs average from 8.2%
in 2001, to 5.67% in 2005. In case of agriculture, average tariffs decreased from 20.02%
to 13.46%. Meanwhile, the industry sector reduced its tariffs from 6.03% to 4.16%.
Furthermore, in 2004 all tariffs applicable to pharmaceuticals, toys, furniture, medical equipment, agricultural equipment, construction equipment, paper, and steel were eliminated.
In order to promote the liberalization and internationalization of trade, Taiwan adopted in
July, 2003, the Law on the Establishment and Management of Free Trade Zones, entering into operation in 2006. The aim is to provide four advantages to companies established in free zones: administration of "one stop shop"25, free movement of goods within the zones, autonomous corporate governance, and free exercise of the international companies’
commercial activities.
As stated in the 2014 Baseline Profitability Index (BPI), Taiwan foreign investment climate ranks 3rd with the same value as 2013 (1.2) which means that the ROC has maintained its position as the world's third best investment destination. Other Asian countries like South Korea ranked on the 19th position, and Japan climbed from 92nd in 2013, to 70th this year (Liao
& Huang, 2014). Moreover, most of the countries with which maintain diplomatic relations with
25 One stop shop is a single location where all of the needed services for a particular activity are provided, http://www.investinganswers.com/financial-dictionary/economics/one-stop-shop-526
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43 the ROC are located in Central America, the Caribbean, and one more in South America (Table 1.2 chapter 1). With a view to reinforce Taiwan’s diplomatic relations, the island provides assistance to improve the economy of these countries (SIECA, 2007).