III. Economic Trends and Outlook Taiwan enjoyed real GDP growth of 6.2 percent in 1993. Although this was high by most standards, it was well below the pace set during the past several decades and down from the 6.7 percent rate of 1992. A lower growth rate in private consumption and an unexpected slackening in the growth of public spending were the largest factors in explaining the lower-than-expected growth. Exports and the net foreign sector, while lackluster as compared with Taiwan's recent past -- the trade surplus fell 17 percent -- were no worse than expected and appear to have improved late in the year. The private sector continued to be the economy's workhorse, with both private investment and private consumption up 14.8 percent and 7.7 percent, respectively. In recent years, Taiwan's economic growth has depended on at least two of the three categories of public spending, private spending or the net foreign sector being strong. For the last two to three years strong public and private domestic spending have kept the economy growing in the face of a faltering world economy. Recently, public consumption spending has been frozen and the ambitious six-year development plan cut back, curtailing the public sector's future contributions to growth. Fortunately, a modest revival in the world economy seems to be in the works, and stronger exports in the year ahead may compensate for the weaker public sector. Nevertheless, even the usually optimistic CEPD has lowered its prediction of economic growth for 1994 to 6.2 percent, the rate predicted by DGBAS. Principal Growth Sectors The 6.2-percent GDP increase in 1993 was mainly due to rapid growth of the construction and the community, social and personal services sectors. Continued implementation of public investment projects was the main driving force behind the fast growth of the construction sector with a 12.5 percent increase in 1993. Mainly propelled by rising per capita income, the community, social and personal service sector expanded at a rate of 9.5 percent. A steady increase in living standards also led the commerce and financial related services to soar 8.7 percent each in 1993. The other two contributors of GDP growth were the mining/quarrying and electricity/gas/water sectors which registered 8.2 percent and 7.6 percent increase respectively. The manufacturing sector only showed a 2.8 percent increase, while the agricultural sector had the lowest growth (0.7 percent) in 1993. Government Role in the Economy Taiwan is now at a stage of transition in its economic structure. The economy has gradually moved from the double-digit growth to more moderate growth. To insure the continued economic progress, the authorities have been actively seeking to upgrade Taiwan's industrial structure by signing letters of intent to form strategic alliances with multinational companies. Through this effort, Taiwan is expected to enhance its ability to produce high valued-added products by strengthening the technological capacities in the areas of design, manufacturing, management, and R&D. To alleviate the reliance of the island's economy on the mainland China market, the authorities in Taiwan have proposed a "Southward Policy" to encourage local firms to invest in Southeast Asian nations - - especially Indonesia, the Philippines, and Vietnam -- instead of mainland China for low cost production. In view of the critical importance of private investment for the sustained economic growth, Taiwan authorities have also initiated several programs to stimulate domestic investment by local enterprises. For example, in mid-1992, the Ministry of Economic Affairs (MOEA) set up an Investment Promotion Task Force to provide guidance for private-sector investment projects above NTD200 million (USD7.6 million). In addition, in July 1993, MOEA also passed the Economic Revitalization Program to bolster sagging industrial investment. This program aims to help local businessmen overcome barriers to investment and give them additional assistance in the areas of land, technology, human resources, and finance. Balance of Payments (BOP) Taiwan ran a modest balance of payment surplus, USD1.45 billion, in 1993, after running a deficit in 1992. Taiwan ran a balance of payments surplus during the first three quarters of 1992 and only fell into an overall deficit during the fourth quarter when very large prepayments for military aircraft were made. During 1993 Taiwan ran a BOP surplus in all but the second quarter. Conspicuous influences on the BOP during the first half of 1993 included a fall in the merchandise trade surplus and a sharp rise in overseas travel expenditures, which together caused a 24-percent drop in the current account (c/a) surplus compared to the same period of 1992. In addition, continuing growth in overseas direct investment and real estate purchases caused the long-term capital account deficit to double, far offsetting a net short-term capital inflow resulting from the gap between interest rates available in Taiwan and those in the United States and Japan. In addition to the final statistics for the second half of 1993, there is other evidence that factors influencing Taiwan's BOP have changed markedly in the period. One factor was a drop in direct foreign investment, particularly in the Chinese mainland where concern over contractional measures has deterred many Taiwan investors. Direct foreign investment fell to USD872 million in the second half of 1993, twenty percent below the same period of last year. The pace of foreign institutional investment in Taiwan turned up sharply in the second half of 1993, in part stimulated by a series of deregulation measures and also foreign mutual fund managers' efforts to increase their Asian portfolios. Incoming funds increased steadily from about USD70 million a month in the first half of 1993 to USD278 million in November and USD1,189 million in December, amounts which exceeded the inflow of USD1,083 million in 1991 and 1992 combined. Taiwan's foreign exchange (forex) reserves rose from USD82.31 billion at the end of 1992 to USD83.57 billion at the end of 1993. Trade and Investment Barriers A. Major Trade Barriers Taiwan has made considerable progress in reducing its average tariff level on non-agricultural products over the past several years. In early 1989 Taiwan implemented a "Trade Action Plan" (TAP), that was intended to reduce its trade surplus with the United States. Tariff reductions were a key component of this plan. Taiwan's most recent tariff reduction bill, passed in December 1991, lowered the average nominal and effective tariff rates to 8.89 percent and 4.97 percent respectively. (These rates fall short of the 1991 TAP targets of 8.08 percent and 3.9 percent respectively.) Taiwan has announced that it will postpone the further tariff reductions promised in the TAP until negotiations with GATT Contracting Parties for its GATT Schedule are completed. (In a September 1992 council meeting, GATT set up a working party to consider Taiwan's accession to that body. Several meetings of that working party have already been held.) Taiwan continues to maintain an import licensing system, but the number of items requiring import licenses is being gradually reduced. As of January 1994, 6,082 items, or 65.5 percent of the 9,284 items in Taiwan's tariff schedule, could be imported without a license. Of the 2,981 items that did require some kind of license, 2,210 required only pro-forma import visas from commercial banks, and 771 required import licenses from the Board of Foreign Trade (BOFT). As of January 1994, another 221 items, largely arms, munitions, and several important agricultural products, including rice, were banned outright. Problems still remain in the pharmaceutical industry, where import licenses are not granted for seven specific products. In other cases where licenses are required, the importer may need to first obtain the authorization of numerous agencies, such as Taiwan's Department of Health for medical equipment. Often these additional approvals and documentary requirements add to the administrative burdens of importing the products into Taiwan and cause long delays. To simplify the process, Taiwan computerized its customs clearance process for air cargo in November 1992, and plans to do the same for sea cargo in 1994. In January 1993, the Legislative Yuan passed a Trade Act that provides for replacing the import licensing system with a simplified "negative list" that would reduce the number of items subject to licensing. The commodity tax is a domestic excise tax applied to 39 domestic and imported products. The tax is assessed on the C.I.F. and duty- paid value of affected imports. On a few important products, most notably autos, Taiwan imposes commodity taxes at higher rates for certain types of products not produced locally. Other trade barriers include requirements that industrial products (such as air-conditioning and refrigeration equipment) undergo testing to verify energy efficiency and capacity before clearing customs. Registration procedures for imports of pharmaceuticals, medical devices, and cosmetics are both complex and time consuming, and have been the subject of a number of complaints by U.S. firms. In addition, Taiwan continues to restrict the entry and distribution of foreign films. All public enterprises and administrative agencies must procure locally if the goods and services can be manufactured on Taiwan, if acceptable substitutes are available locally. U.S. industry has been hindered in the bidding on major projects by non-transparent procurement procedures, which include the use of invisible ceiling prices on bid tenders and liability requirements which are inconsistent with international practices. Other problems include: non-transparent warranty provisions, unclear payment requirements, and liberal suspension of work provisions. Taiwan has taken a number of steps to protect IPR, however serious problems remain with respect to copyrights, patents and trademarks. Although generally adequate IPR laws and regulations are now in place, enforcement still frequently depends on vigorous complaining by the foriegn firm. B. Major Investment Barriers In an attempt to upgrade Taiwan's industries, Taiwan authorities instituted a "Statute for Upgrading Industries" effective January 1, 1991. The new statute provides tax incentives for investment in R&D and high technology industries. In the past several years, Taiwan has removed most barriers to foreign investment, abolishing export performance and local content requirements (except in certain portions of the automotive and electronics industries) and liberalizing earnings and capital repatriation. The latest liberalization measures implemented in May 1989 opened to foreign investors all industries except agriculture, power generation, petroleum refinery, railroads, trucking, telecommunications, housing construction, cigarette and liquor manufacture, and defense-related industries. In all sectors, however, the authorities are continually making small changes to liberalize the investment climate. Taiwan's telecommunications market is still closed to foreign investment. Since 1989 some 40 domestic value-added network (VAN) service companies have been established, but telecommunications services on Taiwan are still dominated by the Directorate General for Telecommunication (DGT) under the Ministry of Transportation and Communications (MOTC). The Taiwan authorities are currently drafting a new Telecommunication Law which will allow foreign equity participation in local companies providing type II service, i.e., enhanced services including data and value added networks (VAN). Taiwan also restricts access to its insurance market. U.S. companies were granted access to the local market under a bilateral agreement signed in 1986. However, an amended insurance law, submitted to the LY in May 1990, was enacted in January 1992. This law provides for the establishment of new domestic insurance companies, and gives the Ministry of Finance the authority to liberalize market entry for other foreign insurance companies. Foreign banks face restrictions in terms of establishing branches; taking deposits of New Taiwan Dollars (NTD); foreign exchange liabilities ceilings and dealing in commercial bills. In January 1991, the local stock exchange was opened to foreign institutional investors. However, institutional investors can only bring in a limited amount of capital. In addition, these investors can repatriate capital only after three months, and can repatriate profits only once a year. Other restrictions exist on foreign participation in the local stock exchange as well. Foreign firms are barred from ownership in the Taiwan stock exchange. Labor Force There are about 8.9 million people in the labor force, representing a labor participation rate of 59 percent. The male participation rate in 1993 was 72.7 percent while that for female was 44.9 percent. Unemployment is rare: the unemployment rate averaged 1.45 percent in 1993 and 1.51 percent in 1992. About 28 percent of the island's total working population is employed in the manufacturing sector. This figure is, however, expected to decline sharply in the future, with the service sector alone accounting for an estimated 52 percent of the labor force by the end of the century. In general, it is possible to find competent personnel to fill almost any white-color or blue-color position. There is an abundance of talent in engineering, financial services, computer science, and nearly all export-related business such as banking, shipping, and manufacturing. Qualified employees in consumer retailing and marketing, research and development, and investment analysis remain in short supply, but this is primarily a reflection of the comparatively recent development of demand in these fields rather than any inability of the educational systems to produce such specialists. Foreign investors have little difficulty in finding a sufficient supply of skilled, hard-working employees. Wage rates may appear somewhat higher than in many less-developed countries in the region. Major Local & Third Country Competitors in Specific Sectors Foreign products are highly regarded by Taiwan's buyers, but competition among U.S., Japanese, and European firms is fierce. Japan is the primary source of capital equipment goods for Taiwan's industries, and has made strong inroads into Taiwan's booming consumer goods market. U.S. products remain competitive, however, assisted by the relative strength of the yen and European currencies versus the dollar. Several years ago, Taiwan set aside certain tenders exclusively for U.S. bidders, but our foreign competitors complained loudly, so Taiwan has gradually phased out the "Buy-America" guidelines. However, Taiwan authorities often encourage local firms to buy European or American while discouraging purchases from Japan. In 1990 and 1991, many significant contracts were awarded to Western European competitors. Taiwan's sourcing policy can sometimes help on the margins, but will not help U.S. firms as much as their bidding the best technologies and prices. Our experience is that it can sometimes be used to eliminate overt Japanese competitors, but otherwise has little effect on the decisions of procurement officers. In short, U.S. firms face real and effective competition. Increasingly foreign firms must team up with local firms to win contracts. With the exception of special projects like the fourth nuclear power plant, contracts are frequently awarded to local firms with foreign companies as sub-contractors. The projects are many, varied and very large. American firms need to exercise good salesmanship. One of the most difficult things for new entrants to cope with in this market is the small size of Taiwan's companies. Unlike some markets in which key companies can rapidly be found as potential representatives, Taiwan is still a small business environment. There are very few large companies, a fact requiring U.S. exporters to undertake exhaustive searches for buyers or representatives. We strongly advise new-to-market companies to use ADS, WTDRs and trade events to penetrate this market, and to find representatives with the ability and integrity to do the job. Another unexpected problem which often confronts new-to-market American companies is the high cost of doing business in Taiwan. Over the past decade, as Taiwan's living standards have risen, so have the costs of doing business. As a result of these increases, Taipei is now the second most expensive capital in Asia. Infrastructure Situation Re: Goods/Service Distribution A. Transportation Taiwan is one of Asia's leading transshipment centers, with a well- developed infrastructure for sea and air transport that is capable of handling an enormous volume of international cargo traffic. As a result, almost all of the major international air-and ocean-freight carriers and forwarders are represented here. Air Freight: Some 344,793 metric tons of fright arrived in Taiwan by air in 1993, while 407,937 metric tons left the island during the same period. This cargo went through Chiang Kai-shek International Airport, which is about one hour from Taipei. Leading carriers and forwarders have offices in almost all major cities on the island. Ocean Freight: Taiwan is now the third largest cargo handler in the world, ranking behind only the U.S. and Japan, while Kaohsiung is the fourth busiest port in terms of overall container volume. In 1993, total cargo tonnage moving through the island's ports amounted to about 132.5 million metric tons. B. Telecommunications Taiwan has generally adequate communications facilities. The telephone system is one of the most dependable and comprehensive in Asia, with about 36 main lines per 100 people. The number of telephone subscribers is about eight million. International direct dialing is available to over one hundred countries and facsimile service to more than forty. Individuals and companies have taken full advantage of these convenient international links, recording approximately 442 million minutes in calls in 1993, up 20.4 percent over the preceding year. C. Postal Service Taiwan has an efficient postal system. Surface mail is normal delivered to any part of the island within one or two days, and a special delivery service is available that features delivery six to eight hours after posting, depending on destination. Major Infrastructure Projects Underway The Six-Year Development Plan is the island's largest development project. The plan was established to upgrade Taiwan's infrastructure to world standards and to raise the standard of living on the island. In light of financial constraints, the Taiwan authorities have reduced the scope of Taiwan's Six-Year Development Plan (1991-1996) from a total of 775 projects worth USD305 billion to 632 projects budgeted at USD224 billion and extend the implementation period of the plan to more than six years. Transportation, telecommunications, energy generation, environmental protection, and recreation are key public sectors in the Six-Year Development Plan which have larger shares of equipment procurement and construction budgets from the Taiwan authorities. Transportation and telecommunications projects comprise 88 projects worth USD73 billion; power generation projects consist 73 projects worth USD22 billion; environmental projects, 50 projects worth USD9.55 billion; and recreational projects, 26 projects worth about USD3.5 billion. These sectors account for nearly one-half of the total plan and have a combined budget of USD108 billion. Approximately USD30-35 billion worth of these projects will be open to bidding by foreign firms. American companies remain very competitive in infrastructure projects in the following areas: Engineering, transportation, telecommunications, energy generation, environmental protection, and recreation. The Taiwan authorities are encouraging privatization of transportation projects and attempting to lift a long-standing ban on private sector investment in power generation facilities. We anticipate that it will offer both short- and long-term opportunities for foreign direct investment and U.S. exports of both goods and services.