Is China Deindustrializing Taiwan:

An Objective Look at the Facts

(產業空洞化 )

Lin Yutang

“Will the dragon of China someday rise and conquer the world?”

“Yes, if the Chinese people don’t drag on…”

China today is not dragging on. The dragon has risen.

But….does this mean that Taiwan must decline as China ascends?

Will Taiwan’s economy be “hollowed out” by the rising dragon

of China? Will Taiwan be deindustrialized by China?

What do We Mean by “Deindustrialization”?

There are several suggested definitions

Bluestone and Harrison (1982) – “By deindustrialization is meant a widespread and systematic disinvestment in the nation’s basic productive capacity.”

Rowthorn and Ramaswamy (1997) – “…employment in manufacturing as a percentage of total employment has fallen…a phenomenon widely referred to as ‘deindustrialization’ .”

Rowthorn’s definition of deindustrialization is very clear, but all

advanced economies appear to be going through deindustrialization. It is a

natural process to him.

Consider the following graph showing employment in

manufacturing and services

My definition –

Deindustrialization is a general, multifaceted deterioration of the manufacturing sector relative to

the rest of the economy.

Basic Symptoms of Deindustrialization

1.Declining manufacturing employment to total employment

2.Declining investment in manufacturing

3.Declining manufacturing output as a percentage of GDP

4.Large scale out migration of industries

How Could China Deindustrialize Taiwan?

1. Industries, Brain Power and Investment Move from Taiwan to China – Immigration and Outbound DFI

2. Taiwan Buyers Import Competing Products from China – Import Trade Displacement

3. Taiwan Loses Valuable Foreign Markets to China – Export Trade Displacement

However, China’s booming economy is not the only possible cause for Taiwan’s

possible deindustrialization. There are many natural reasons why that

manufacturing in Taiwan might begin to decline...completely apart from trade with

China.

1. The income elasticity of demand for manufactures is low.

2. Service sector of the economy is becoming more important

3. Productivity in the manufacturing sector may be rising

Income Elasticity for Manufactures is Less than One

Natural Reason #1

As Our Incomes Grow We Typically Buy More Services and Relatively Less Manufactured

Goods

Double Income ≠ Double Demand for Cars

Double Income ≠ Double Demand for Refrigerators

Double Income ≠ Double Demand for Washing Machines

Double Income = Double or Triple Vacations

Double Income = Double or Triple Eating Out

Double Income = Double or Triple the Financial Services

BUT

The Natural Rise of the Service Sector Causes the Manufacturing Sector to Shrink in Relative Size and Importance

Natural Reason #2

)}/(1{ LBKCAY ooo

),(~

),( KCLBFAKLFY ooo

Aggregate Manufacturing Production Function

Specific Example of Bo Increasing and the Demand for Labor Decreasing

Natural Reason #3

})(){( 11 LBKCAY ooo

Specific Example of Bo Increasing and the Demand for Labor Increasing

What Does the Most Recent Data Tell Us?

No Clear Deindustrialization According to this Data

Increased Imports Can Lower Domestic Output and Raise Exports

This shows that there is very little evidence of deindustrialization in Taiwan using Rowthorn’s definition

Total Exports and Imports for Taiwan

)ln()ln()ln( 14

24

14

ttot CYC

Simple Permanent Income Model of Consumption Tracks the Data Well – Until 2003

Taiwanese Can Save DueTo Low Priced Chinese Imports

Strong and Stable Productivity Growth in Manufacturing

Labor Productivity Growth in Manufacturing, Metals, Electronic Parts, and Computers and Parts

Low Prices Mainland Products May Be Contributing to a Fall in Manufacturing Prices Relative to the General Price Level

20% of 5% unemployment rate = 1%

1% of 10 million workers = 100,000 workers

Cost per worker per month = $40,000 NT/month

$ 4,000,000,000 NT/month or $48,000,000,000 NT/ year

Taiwan’s GDP in 2009 = $ 12, 512,678,000,000 NT

Proportional Cost to Taiwan = $48,000,000,000/$12,512,678,000,000

= 0.38% of GDP (Not Large)

Worst Case Scenario

Should Taiwan Fear Free Trade with China?

Thus. Adam Smith believed that the wealth of a nation sprang from its labor’s productivity; that this productivity could be

enhanced by division of labor and specialization of industry; that such division of labor required large markets; that large markets

would occur naturally from free and balanced exporting and importing – i.e. free trade. But, that opening the economy to free

trade must be done slowly– step by step.

Some Conclusions

1. There is only limited evidence that Taiwan is being deindustrialized.

2. Manufacturing Output/GDP was relatively constant last 15 years

3. Manufacturing Employment/Total Employment was relatively constant last 15 years

4. Small drop in investment growth in manufacturing last 10 years

5. Service sector rising in Taiwan, manufacturing sector steady

6. Strong productivity growth over last 20 years, but little change in employment in manufacturing – capital & tech not replacing labor

7. Unemployment rose mid-1990’s with cost of about 0.5% GDP per year to workers – however there have been benefits as well

8. Manufacturing prices have strong downward pressure from China, but this can help maintain export markets

9. Taiwan enjoying large and expanding trade surpluses with China and this will probably continue for the next decade

10.Expansion of markets is the key to any future success – this is best accomplished with both exports and imports expanding

11. Markets should be gradually opened, rather than suddenly opened, to allow for rational adjustment to changing conditions

Special Note: ECFA is only a stepping stone to a larger integration of Taiwan with the expanding Chinese economy. But, economic integration is not the same as political integration. The people of Taiwan must be always seek to protect the achievements they have made in liberty, democracy, and the rule of law. This is what Taiwan was – and this is what Taiwan will always be.

Thank you for your Attention