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Home > Country Profiles > Taiwan

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Economy and Trade

Taiwan’s economy has evolved from reliance on agriculture, through manufacturing, to services. This is a country with a dynamic capitalist economy, with gradually decreasing government guidance on investment and foreign trade. In keeping with this trend, some large, state-owned banks and industrial firms have been privatized.

Exports have provided the primary impetus for industrialization. The island runs a large trade surplus and its foreign reserves are the world’s fourth largest behind China, Japan, and Russia.

Ties with China have increased significantly over recent years. China is now Taiwan’s second-largest source of imports after Japan, and the island’s largest destination for foreign direct investment. Three financial memorandums of understanding, covering banking, securities, and insurance, took effect in mid-January 2010, opening Taiwan to greater investment from Chinese financial firms and institutional investors, and providing new opportunities for Taiwan financial firms to operate in China. In January 2010, Taipei and Beijing began the first round of cross-Strait negotiations on an economic cooperation framework agreement.

Among the challenges facing Taiwan are a low birth rate and a rapidly ageing population. A birth rate of only 1.0 child per woman is among the lowest in the world, raising the prospect of future labor shortages, falling domestic demand, and declining tax revenues.

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Economic Policy over 12 Months

In September 2008, the Taiwanese government announced a stimulus package worth around US$5.6 billion comprising coupon vouchers, infrastructure spending, and tax cuts. In January 2009, the government followed this stimulus with a second package of measures entailing the distribution of more than US$100 in shopping vouchers to each of the island’s residents, the launch of a number of public construction projects, and the provision of incentives to encourage private investment. In total, this second package is worth approximately US$14.9 billion over four years.

Also in response to the economic downturn, Taiwan’s central bank reduced bank base rates by 2.375% between September 2008 and February 2009, to a record low of 1.25%. Central Bank Governor Perng Fai-nan has maintained a loose monetary policy since that time.

In 2010, however, it is likely that higher imported commodity prices and strengthening domestic demand will result in a tighter monetary stance. Taiwan’s monetary authorities have increased their issuance of certificates of deposit since the end of 2009, in order to absorb excess liquidity from the financial system. Many commentators believe that the cost of money (interest rates) will follow the volume of money (liquidity) on a tighter path later in 2010. For now though, the upward pressure on rates is, arguably, muted. According to the Directorate General of Budget, Accounting and Statistics, consumer price inflation rose by just 1.27%, year on year, in March 2010.

The continuation of an agenda of fiscal and financial reform is important to Taiwan’s longer term economic success, although commentators acknowledge that the economy is dependent on the continued recovery of consumption in Taiwan’s export markets.

Increasingly important are the trade and investment links that are being built with China. Annual trade between the two countries has increased from less than 3% in 2000 to 26% in 2008, and 40% including Hong Kong.

The challenge now is to broaden and deepen the economic ties. Cross-Straits negotiators have reached several agreements in the past, these agreements being designed to deepen economic links across industries such as finance and transport. Negotiators are now working on a free trade-style economic cooperation framework agreement that has the potential to reduce or dismantle selected tariffs and trade barriers, as well as to discover a mechanism for dispute mediation/resolution.

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Economic Performance over 12 Months

Taiwan’s economy contracted by 1.9% in 2009, and by the largest annual amount on record; this was due primarily to a sharp year-on-year decline in exports.

Exports, particularly of electronics and machinery, generate around 70% of Taiwan’s GDP growth, and have provided the primary impetus for economic development. This heavy dependence on exports makes Taiwan vulnerable to downturns in world demand. According to the Taiwan Association of Machinery Industry, the country exported machinery worth US$11.35 billion in 2009, down 31.7% year on year. China and Hong Kong were Taiwan’s largest export markets, followed by the United States, and then Japan.

Even so, for a country so heavily dependent on global trade, last year’s economic contraction was less severe than might have been anticipated. Exports picked up as the year progressed. Taiwan finally exited recession during the final quarter of the year, reflecting rising demand in the global economy for goods such as mobile phones and semiconductors. Data released by Taiwan’s Directorate General of Budget, Accounting and Statistics (DGBAS) in February 2010 showed that GDP rose 9.2% year on year in the three months through December.

As the economy shrank over the course of 2009, the consumer price index fell by 0.9%. However, owing to rising oil and commodity prices, inflation returned during the second half of the year.

In the domestic economy, a weak labor market and flagging consumer confidence depressed private consumption, particularly during the first half of the year. However, according to DGBAS, private consumption increased by 6.3% in the fourth quarter, as government stimulus measures began to take effect and consumers benefited from the positive wealth effect arising from higher asset prices.

In 2010, Taiwan is expected to benefit from its high exposure to global trade. A strengthening global economy, coupled with Taiwan’s ability to deliver new electronics products to the world, bode well for export growth this year. Meanwhile, the construction industry stands to benefit from reconstruction work in areas hit by Typhoon Morakot in 2009.

In April 2010, the Asian Development Bank raised its growth forecast for Taiwan to 4.9% for 2010, compared with the 3.5% that it predicted in December 2009. In addition, the bank forecasted growth of 4% in 2011. Even so, Taiwan faces challenges from labor-intensive economies, such as China and Vietnam. As such, Taiwan’s continued development depends on its further transformation to a high-tech and service-oriented economy, and the continued diversification of its trade markets.

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Support for Inward Investment and Imports

The Department of Investment Services (DOIS) promotes Taiwan as an investment destination among foreign and Taiwanese businesses, and seeks to consolidate the strength of public and private-sector businesses in Taiwan. DOIS carries out industrial assistance programs to help Taiwanese companies operating overseas and in mainland China to develop their businesses, on both a local and international level. In addition, DOIS plans and formulates programs to recruit science and technology personnel from abroad, and maintains a talent database to assist Taiwanese companies in their recruitment efforts.

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Tax Exemptions

The Ministry of Economic Affairs offers a variety of tax incentives for industrial development aimed at encouraging corporate investment and increasing research and development, personnel training, and new equipment and technology among Taiwan companies.

In April 2010, Taiwan’s government reached a consensus over a draft proposal to reduce business income tax from 20% to 17%. However, the proposals also entail the abolition of Taiwan’s tax-credit scheme. Taken together, the changes may be unfavorable to companies operating in high-tech industries, which currently attract effective income tax rates of only 5–10% due to the tax credits awarded for their research and development investments.

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Statistics

GDP growth: 21.9% (Statistics Agency, 2009 est.)

GDP per capita: US$29,800 (2009 est.)

CPI: 20.9% (2009)

Key interest rate: 1.25% (central bank, April 2010)

Exchange rate versus US dollar: NT$33.06 (2009)*

Unemployment rate: 5.9% (2009 est.)

FDI: US$107.2 billion (2009)

Current account deficit/surplus: US$31.1 billion (2009 est.)

Population: 23,024,956 (July 2010 est.)

* New Taiwan dollar

Source: CIA World Factbook except where stated

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Further reading on Taiwan

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