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1996 Country Reports On Economic Policy and Trade Practices

Department of State report submitted to the Senate Committees on Foreign Relations and on Finance and to the House Committees on Foreign Affairs and on Ways and Means, January 1997.

	1994	1995	1996	1/
Income, Production and Employment
GDP (at current prices)	241.0	260.2	273.8
Real GDP Growth (percent)	6.5	6.0	5.9
GDP by Sector:
Agriculture	8.6	9.2	9.3
Manufacturing	69.9	73.2	76.5
Services	116.9	129.4	137.9
Government	25.6	27.3	28.7
Per Capita GDP (US$)	11,456	12,164	12,797
Labor Force (000s)	9,081	9,210	9,377
Unemployment Rate (percent)	1.5	1.8	2.5
Money and Prices (annual percentage growth)
Money Supply (M2)	13.0	8.2	9.0
Consumer Price Inflation	4.1	3.7	3.1
Exchange Rate (NT$/US$) 2/
Official	26.24	27.27	27.46
Unofficial	26.39	27.37	27.36
Balance of Payments and Trade
Total Exports (FOB) 3/	93.0	111.7	119.1
Exports to U.S. (CV) 4/	26.7	29.0	29.9
Total Imports (CIF) 3/	85.3	103.6	106.2
Imports from U.S. (FAS) 4/	17.1	19.3	18.1
Trade Balance	7.7	8.1	12.9
Trade Balance with U.S. 4/	9.6	9.7	11.8
External Public Debt	0.4	0.3	0.2
Fiscal Deficit/GDP (pct)	5.7	7.4	7.2
Current Account Deficit/GDP (pct)	2.5	1.8	2.7
Debt Service Payments/GDP (pct)	0.8	1.1	1.1
Gold and Foreign Exchange Reserves	98.3	95.9	93.7
Aid from U.S. 5/	0	0	0
Aid from Other Countries	0	0	0

1/ 1996 figures are estimated based on data from the Directorate General of Budget, Accounting and Statistics, or extrapolated from data available as of September 1996.
2/ Average of figures at the end of each month.
3/ Taiwan Ministry of Finance (MOF) figures for merchandise trade.
4/ Source: U.S. Department of Commerce and U.S. Census Bureau; exports FAS, imports customs basis; 1996 figures are estimates based on data available through November 1996. Taiwan MOF figures for merchandise exports (FOB) to and imports (CIF) from U.S. respectively were (US$ billions): (1994) 24.3/18.0, (1995) 26.4/20.8, (1996) 27.8/19.5.
5/ Aid disbursements stopped in 1965.

1. General Policy Framework

For four and a half decades, Taiwan has maintained rapid economic growth and macroeconomic stability. Annual economic growth during this period averaged 8.5 percent. In 1995, real gross domestic product (GDP) increased 6 percent; it is expected to grow by 5.9 percent in 1996. Per capita GDP was US$12,264 in 1995. As of September 1995, Taiwan held US$87 billion in foreign exchange reserves, the third largest in the world after Japan and the PRC. Prices rose 3.7 percent in 1995 and are expected to rise 3.2 percent in 1996.

Rising labor and land costs have led many manufacturers in labor intensive industries to move offshore, mainly to Southeast Asia and mainland China. The pace of relocation has now slowed, however, in large part because those intending to move have already done so. Industrial growth is now concentrated in capital and technology intensive industries such as petrochemicals, computers, and electronic components, as well as consumer goods industries. Services account for over half of GDP. Exports of goods and services accounted for nearly half of GDP.

Falling official savings and growing public expenditures have caused domestic public debt to increase steadily. The Taiwan authorities now rely largely on domestic bonds and bank loans to finance major expenditures. Outstanding public debt will measure about 21 percent of GNP in the 1997 fiscal year (July 1, 1996 to June 30, 1997). The central government's deficit will be equivalent to about five percent of GNP. Defense spending still accounts for the largest share of public expenditures (about one quarter) but is falling in relative terms. The greatest pressure on the budget now comes from growing demands for social welfare spending, including a national health insurance plan initiated in early 1995.

Taiwan wishes to accede to the World Trade Organization (WTO) in the near future. It also aims to develop into an Asia Pacific regional operations center, and is an active member of Asia Pacific Economic Cooperation (APEC) forum. Taiwan has in recent years accelerated liberalization of its trade and investment regime.

2. Exchange Rate Policies

Taiwan has a floating exchange rate system in which bankers set rates independently. The Taiwan authorities, however, control the largest banks authorized to deal in foreign exchange. As of October 31, 1996, 41 foreign banks were engaged in foreign exchange business, compared to 717 domestic bank offices (including headquarters and branches). The number of domestic banks permitted to deal in foreign exchange has been steadily increasing.

The Central Bank of China (CBC) intervenes in the foreign exchange market when it feels that speculation or "drastic fluctuations" in the exchange rate may impair normal market adjustments. Two tools the CBC uses to influence the foreign exchange market are restrictions on banks' overbought and oversold positions and limits on banks' foreign liabilities. Beginning in July 1996, the CBC ceased to set the banks' overbought and oversold positions; banks are now authorized to set these positions. The CBC also limits the use of derivative products denominated in New Taiwan Dollars.

Trade-related funds flow freely into and out of Taiwan. Restrictions on flow of funds in the capital account have mostly been removed since late 1995. In September 1995, restrictions on repatriation of principal and earnings for direct investment were, in practice, lifted, although amendments to relevant laws are still pending at the Legislative Yuan. The corresponding restrictions for foreign portfolio investment were removed in January 1996. Restrictions on borrowing of long-term foreign loans (including bank loans, global depository receipts (GDRs), and convertible bonds (CBs)) were phased out in October 1996. GDRs and CBs are no longer subject to a US$3 billion limit, and foreign loans may be converted into New Taiwan Dollars. However, some limits remain on foreign portfolio investment. Limits on foreign ownership in listed companies still exist. Both qualified foreign institutional investors (QFIIs) and non-QFII foreign investors are subject to limits on portfolio investments, although the ceilings have been raised. Remittances by non-QFII foreign investors are strictly restricted.

3. Structural Policies

Several state-owned enterprises have been either totally or partially privatized in the past three years. State-owned enterprises now account for twelve percent of the economy and 16 percent of industrial production. Taiwan's Fair Trade Commission acts to thwart noncompetitive pricing, but state-owned firms are able to apply on a case-by-case basis for five-year exemptions.

In March 1994 and July 1995, Taiwan authorities cut tariffs on many industrial products at the behest of the United States. Taiwan's average nominal tariff rate is 8.6 percent, the trade-weighted rate is 4.7 percent. High tariffs and pricing structures on some goods -- in particular on some agricultural products -- nevertheless hamper U.S. exports. Taiwan bans imports of products such as peanuts, poultry products, and bellies and offals of hogs. The Taiwan Tobacco and Wine Monopoly Bureau (TTWMB) has a monopoly on domestic production of cigarettes and alcoholic beverages. The United States is seeking to improve market access for these and other products as part of Taiwan's WTO accession process.

4. Debt Management Policies

According to an unofficial estimate, Taiwan's outstanding long- and short-term external debt totaled US$20 billion as of December 1995, equivalent to 7.7 percent of GDP. Official figures show that Taiwan's long term outstanding external public debt totaled US$305 million, compared to gold and foreign exchange reserves of about US$94 billion. Taiwan's debt service payments in 1995 totaled US$2.8 billion, only two percent of exports of goods and services.

Until recently, Taiwan authorities did not encourage public and private enterprises to borrow abroad. In June 1996, Taiwan lifted the limit of US$3 billion on global depository receipts (GDR's) and corporate bonds (CB's) issued by business firms overseas which could be changed into New Taiwan Dollars. In October 1996, Taiwan removed a ban on the conversion into New Taiwan Dollars of long-term loans that businesses borrow from foreign financial institutions.

Foreign loans committed by Taiwan authorities exceed US$1 billion. Taiwan offered low-interest loans to the Philippines, Eastern Europe, Vietnam, South Africa, and Latin America, mostly to build industrial zones. Taiwan also contributes to the Asian Development Bank (ADB), one of the two multilateral development banks in which it has membership. In addition, the ADB has floated bonds in Taiwan. Taiwan is also a member of the Central American Bank for Economic Integration (CABEI).

5. Significant Barriers to U.S. Exports

Accession to the WTO by Taiwan will open markets for some U.S. goods and services, but will also remove area restrictions which favored some U.S. imports over those from other nations.

On July 1, 1994, Taiwan implemented a negative list system for imports. More than 85 percent of all import categories are now exempt from controls. Some 859 categories require approval from relevant authorities. Another 276 require import permits from the Board of Foreign Trade or pro forma notarization by banks. Imports of 256 categories are banned, including ammunition and some agricultural products.

Services Barriers:

-- Financial: In the past year, Taiwan has removed restrictions on foreign ownership in securities investment and trust companies. Limits on foreign ownership in listed companies have been raised from 7.5 percent to 10 percent per foreign investor and from 15 percent to 20 percent for all foreign investors. The limits will be further raised in late 1996 or early 1997. In 1996, Taiwan removed a prohibition on foreign individuals trading in shares on the Taiwan Stock Exchange (TAIEX). All foreign futures markets except those in the PRC are now open to domestic investors. However, limits remain on foreign ownership in listed companies, and non-QFII foreign investors are still subject to limits on their portfolio investment and restrictions on their capital flow.

-- Legal: Foreign firms may not operate legal practices in Taiwan but may set up consulting firms or work with local law firms. Qualified foreign attorneys may, as consultants to Taiwan law firms, provide legal advice to their employers only.

-- Insurance: Taiwan removed its prohibition against mutual insurance companies in July 1995; as of November 1996, however, it had not issued implementing regulations. In 1996, a U.S. mutual insurance firm was denied authorization to set up branches in Taiwan.

-- Transportation: Despite a bilateral agreement between the American Institute in Taiwan and the Coordinating Council for North American Affairs signed in 1987, and repeated assurances by Taiwan authorities, legislation which would allow Taiwan branches of U.S. ocean and air freight carriers to truck containers remains mired in the Legislative Yuan.

-- Telecommunications: On January 16, 1996, Taiwan's Legislative Yuan passed new telecommunications legislation which stripped the Directorate General of Telecommunications (DGT) of its role as a monopoly provider of telecom services and established a state-run operating company, Chunghua Telecom (CHT). In May 1996, Taiwan's Ministry of Transportation and Communications (MOTC) announced it would privatize mobile phone, paging, mobile data and trunk radio services, and would by the end of 1996 grant 53 licenses to qualified firms for these services. Foreign ownership in each firm is limited to 20 percent. Following bilateral U.S.-Taiwan consultations in July 1996, Taiwan agreed to take steps to remove its cap on return on investment for telecommunications firms and to ensure that foreign firms would compete on equal footing with CHT. U.S. companies have nevertheless expressed concern that the bidding process has not been sufficiently transparent.

Motion Pictures: Taiwan restricts the import of foreign film prints to 31 per title (up from 28 as of June 1996). No more than 11 theaters in any municipality may show the same foreign film simultaneously.

Standards, Testing, Labeling, and Certification: Taiwan will bring its laws and practices into conformity with the WTO Agreement on Technical Barriers to Trade as part of its WTO accession. Existing requirements for agricultural goods particularly affect U.S. exports. These include a lack of an internationally-accepted set of pesticide tolerance levels for imported fruits and vegetables, stringent microbiological and chemical testing of imported food products, and standards on preservatives for soft drinks. Imported agricultural goods are routinely tested while local agricultural products usually are not. Industrial products such as air conditioning and refrigeration equipment, electric hand tools, and synthetic rubber gloves must undergo redundant and unnecessary testing requirements, which include destructive testing of samples. Imported autos face stringent noise, emissions, and fuel efficiency testing requirements.

Investment Barriers: In 1996, Taiwan relaxed restrictions to allow 100-percent foreign participation in investments in petroleum refining, coal coking, a number of value-added network services (fax related services, E-mail, voice mail, and electronic data interchange), and manufacture of office digital electronic switching systems. Real estate industries were also opened to foreign investors. Two out of twenty categories subject to foreign investment restrictions were dropped from Taiwan's restricted investment list. Two of seventeen categories closed to foreign investment were reclassified and added to the list of restricted categories. Foreign investment remains prohibited in industries such as agriculture, basic wire line telecommunications, broadcasting, and liquor and cigarette production.

Limits on foreign equity participation in a number of industries have been relaxed in the past year; for example, permissible participation in shipping companies was raised from 33 to 50 percent. Foreign ownership limits for securities investment trust companies have been removed. However, other limits -- such as a 33-percent limit on holdings in airlines, air cargo forwarders and air cargo ground-handling -- remain unchanged. There is a 30-percent cap on foreign investment in Independent Power Projects. Local content requirements remain in the automobile and motorcycle industries. Restrictions on employment of foreign administrative personnel in foreign-invested firms remain in place.

Procurement Practices: Taiwan has committed to adhere to the WTO Agreement on Government Procurement (GPA) as part of its WTO accession process, a point on which the United States insisted as a condition for Taiwan's WTO accession. Since April 1995, Taiwan has actively conducted bilateral GPA negotiations, including with the United States. In preparation for GPA membership, Taiwan has begun to reform its procurement policies. As of November 1996, a draft Government Procurement Law was under review by the Executive Yuan; after that review is completed, the Law will be submitted to the Legislative Yuan. The Public Construction Commission publishes a daily "Government Procurement Gazette" which covers local tender announcements by 628 of Taiwan's central, provincial, and municipal entities. The Central Trust of China and other agencies procuring on behalf of smaller agencies publish tenders in the Gazette. The Gazette includes tender announcements for consulting services, product contracts, and research contracts with procurement amounts exceeding NT$4.5 million (US$160,000) and construction-related procurements exceeding NT$50 million (US$1.8 million).

6. Export Subsidies Policies

There are few subsidy and tax policies to subsidize exports. Taiwan's small rice and sugar exports enjoy indirect subsidies through guaranteed purchase prices higher than world prices. Producers of some fruit, poultry, and livestock receive financial assistance with packaging, storage, and shipping via marketing cooperatives and farmers' associations. Taiwan's Tobacco and Wine Monopoly Bureau guarantees prices for products used in production of its products. Taiwan authorities also offer guaranty prices for a portion of rice and other cereal crops produced by farmers. Taiwan subsidizes the manufacture of fertilizer by offering lower fuel prices to domestic manufacturers.

7. Protection of U.S. Intellectual Property

As a result pressure from the United States under Section 301, the development of Taiwan's information technology and other high-technology industries, and Taiwan's desire to accede to the WTO, protection of intellectual property rights (IPR) has improved substantially in the past few years. In 1995, Taiwan passed laws to protect integrated circuit layouts, personal data, and trade secrets. As a result, Taiwan's IPR legal structure is now largely consistent with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs).

Improved enforcement efforts, such as an export monitoring system for computer software and trademarked goods, have reduced piracy. In April 1996, following consultations with the United States, Taiwan announced an "Action Plan" to strengthen its domestic enforcement and crack down on participation by Taiwan firms in CD piracy in mainland China. Under this plan, Taiwan's CD-manufacturing firms will place specific identification codes on their products. Taiwan's CD producers have also agreed not to sell CD manufacturing equipment to any firms engaged in piracy. As a result of these efforts, the U.S. Trade Representative in November 1996 removed Taiwan from the all Special 301 lists.

Taiwan is not a member of any major multilateral intellectual property conventions. Taiwan plans to set up an intellectual property rights bureau in charge of all IPR- related issues.

Taiwan has revised its patent, trademark, and copyright legislation; these revisions are currently under review in the Legislative Yuan.

Patents: The revised patent law now under review in the Legislative Yuan limits compulsory licensing and replaces most criminal penalties for patent infringement with tougher civil penalties. In the past, U.S. companies had expressed concerned that, in light of Taiwan's relatively undeveloped civil law system, penalties were insufficient to deter infringement. Taiwan's April 1996 "Action Plan" addressed many of these concerns.

Trademarks: Counterfeiting of famous name products has decreased but remains a problem. Taiwan's voluntary export monitoring system for trademarked goods may help reduce infringement.

Copyrights: Export of counterfeit copyrighted goods has dropped markedly. Unauthorized copying of computer software and manufacture of counterfeit video game remain problems, although the authorities have strengthened their crackdown on such piracy. Taiwan has not yet adopted 50-year retroactive copyright protection as mandated by TRIPs, and currently only protects copyrights dating from 1965. The revised Copyright Law now under review in the Legislative Yuan will extend retroactive protection to 50 years upon Taiwan's accession to the WTO.

New Technologies: Official inspection and monitoring have sharply reduced unauthorized use of copyrighted programming on cable television. Meanwhile, many cable TV stations now legally transmit the programs from satellite channels for pay.

8. Worker Rights

a. The Right of Association: Under the Labor Union Law (LUL), the right of association of workers on Taiwan is still restricted. The LUL not only forbids civil servants, teachers, and defense industry workers to organize trade unions, it also forbids workers to form competing trade unions and confederations. However, as democratization has continued, workers have gradually established a number of independent labor organizations, either legally or illegally. Over the past year, the number of unions and their members declined slightly due to jobs taken by foreign labor and relatively slow growth in Taiwan's economy.

b. The Right to Organize and Bargain Collectively: With the exception of civil servants, teachers, and defense industry workers, the LUL, the Law Governing the Handling of Labor Disputes, and the Collective Agreement Law give workers the right to organize and bargain collectively. However, the laws also restrict workers' exercise of these rights. The LUL, for example, stipulates that workers shall not strike to demand an increase in wages exceeding standard wages. Collective bargaining agreements exist mainly in large-scale enterprises. As of June, 1996, there were 290 such collective agreements.

c. Prohibition of Forced or Compulsory Labor: The Labor Standards Law prohibits forced or compulsory labor. The maximum jail sentence for violation of the law is five years. Except for cases involving prostitution, there were no reports of such practices in 1996. (Reportedly, some factories compel their workers to work overtime, for overtime pay. This does not qualify as forced or compulsory labor.)

d. Minimum Age for Employment of Children: The Labor Standards Law stipulates age 15, after completion of the 9-year compulsory education required by law, as the minimum age for employment. County and city labor bureaus enforce minimum age laws. Child labor is rare in Taiwan.

e. Acceptable Conditions of Work: The Labor Standards Law (LSL) mandates basic labor standards. At present, the law covers 3.4 million of Taiwan's 6.3 million salaried workers. In September 1996, the minimum wage was raised by 3.2 percent from NT$14,880 to NT$15,360 (or about US$560) per month. During this period, the average wage in the manufacturing sector was over NT$36,500(or about US$1327), more than twice the legal minimum wage. The LSL limits the workweek to 48 hours (8 hours per day, 6 days per week) and requires one day off every 7 days. In addition to wages, employers typically provide workers with additional payments and benefits, including a portion of national health insurance and labor insurance premiums, the distribution of labor welfare funds, meals, and transportation allowances. Taiwan's working conditions for labor have been significantly improved by Taiwan's remarkable economic growth.

f. Rights in Sectors with U.S. Investments: U.S. firms and joint ventures generally abide by Taiwan's labor law regulations. In terms of wages and other benefits, workers rights do not vary significantly by industrial sector.

Category		Amount
Petroleum		(1)
Total Manufacturing		2,914
Food & Kindred Products	93
Chemicals & Allied Products	1,106
Metals, Primary & Fabricated	(1)
Machinery, except Electrical	240
Electric & Electronic Equipment	1,177
Transportation Equipment	(1)
Other Manufacturing	84
Wholesale Trade		430
Banking		488
Finance/Insurance/Real Estate		176
Services		157
Other Industries		(1)
TOTAL ALL INDUSTRIES		4,391

(1) Suppressed to avoid disclosing data of individual companies.

Source: U.S. Department of Commerce, Bureau of Economic Analysis

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