Is China Deindustrializing Taiwan: An Objective Look at the Facts

1. Is China Deindustrializing Taiwan: An Objective Look at the Facts (產業空洞化)

2. Lin Yutang “Will the dragon of China someday rise and conquer the world?” “Yes, if the Chinese people don’t drag on…”

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

4. 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?

5. What do We Mean by “Deindustrialization”? There are several suggested definitions

6. 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’ .”

7. 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

9. My definition – Deindustrialization is a general, multifaceted deterioration of the manufacturing sector relative to the rest of the economy.

10. Basic Symptoms of Deindustrialization • Declining manufacturing employment to total employment • Declining investment in manufacturing • Declining manufacturing output as a percentage of GDP • Large scale out migration of industries

11. How Could China Deindustrialize Taiwan? • Industries, Brain Power and Investment Move from Taiwan to China – Immigration and Outbound DFI • Taiwan Buyers Import Competing Products from China – Import Trade Displacement • Taiwan Loses Valuable Foreign Markets to China – Export Trade Displacement

12. 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. • The income elasticity of demand for manufactures is low. • Service sector of the economy is becoming more important • Productivity in the manufacturing sector may be rising

13. Natural Reason #1 Income Elasticity for Manufactures is Less than One

14. 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 BUT Double Income = Double or Triple Vacations Double Income = Double or Triple Eating Out Double Income = Double or Triple the Financial Services

15. Natural Reason #2 The Natural Rise of the Service Sector Causes the Manufacturing Sector to Shrink in Relative Size and Importance

16. Natural Reason #3 Aggregate Manufacturing Production Function Specific Example of Bo Increasing and the Demand for Labor Decreasing

17. Specific Example of Bo Increasing and the Demand for Labor Increasing

20. What Does the Most Recent Data Tell Us?

24. No Clear Deindustrialization According to this Data

26. Increased Imports Can Lower Domestic Output and Raise Exports

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

30. Total Exports and Imports for Taiwan

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

33. Taiwanese Can Save Due To Low Priced Chinese Imports

38. Strong and Stable Productivity Growth in Manufacturing

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

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

45. Worst Case Scenario 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)

46. Should Taiwan Fear Free Trade with China?

50. 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.