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
Natural Reason #1
Income Elasticity for Manufactures is Less than One
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
Natural Reason #2
The Natural Rise of the Service Sector Causes the Manufacturing Sector
to Shrink in Relative Size and Importance
Natural Reason #3
Aggregate Manufacturing Production Function
~
Y  F (L, K )  Ao F (Bo L, Co K )
Specific Example of Bo Increasing and the Demand for Labor
Decreasing
Y  Ao { Co K  1 /( Bo L)}
Specific Example of Bo Increasing and the Demand for Labor
Increasing
1
Y  Ao {(Co K )
1
 (Bo L)
}
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
Simple Permanent Income
Model of Consumption Tracks
the Data Well – Until 2003
4 ln(Ct )  o  14 ln(Yt )  24 ln(Ct 1 )
Taiwanese Can Save Due
To 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
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)
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