1997 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 1998.

TAIWAN

Key Economic Indicators

(Billions of U.S. dollars unless otherwise noted)

1/ 1997 figures are estimated based on data from the Directorate General of Budget, Accounting and Statistics, or extrapolated from data available as of September 1997.
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; 1997 figures are estimates based on data available through August 1997. Taiwan MOF figures for merchandise exports (FOB) to and imports (CIF) from U.S. respectively were (US$ billions): (1995) 26.4/20.8, (1996) 26.9/20.0, (1997) 29.2/22.5.
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% . In 1996, real gross domestic product (GDP) increased 5.7% ; it is expected to grow by 6.6% in 1997. Per capita GDP was US$12,732 in 1996. As of August 1997, Taiwan held US$88 billion in foreign exchange reserves, the third largest in the world (after Japan and the PRC). Prices rose 3.1% in 1996 and are expected to rise 2.6% in 1997.

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 60% of GDP. Exports of goods and services account 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. In 1997, Taiwan adopted austerity measures to control the government budget deficit. As a result, outstanding public debt will decline from 21% of GNP in fiscal year 1997 (July 1-June 30) to 20% in fiscal year 1998. During the same period, the central government's deficit will fall by half, from 4% of GNP to 2% . 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 improved infrastructure and social welfare spending, including a national health insurance plan initiated in early 1995.

Taiwan wishes to accede to the World Trade Organization (WTO) Agreement in the near future. It also aims to develop into an Asia Pacific regional operations center, and is an active member of the 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 banks set rates independently. The Taiwan authorities, however, control the largest banks authorized to deal in foreign exchange. 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. The CBC uses direct foreign exchange trading by its surrogate banks and public policy statements as its main tools to influence exchange rates. Beginning in July 1996, the CBC ceased to set banks' overbought and oversold positions; banks are now authorized to set these positions. In May 1997, the CBC lifted limits on banks' foreign liabilities. The CBC, however, still limits the use of derivative products denominated in New Taiwan Dollars.

Trade-related funds flow freely into and out of Taiwan. Most restrictions on capital account flows have been removed since late 1995. Laws restricting repatriation of principal and earnings from direct investment have been lifted in principle, but some necessary amendments are still pending in the Legislative Yuan. Despite significant easing of previous restrictions on foreign portfolio investment, some limits remain in place.

3. Structural Policies

Six state-owned enterprises have been either totally or partially privatized in the past three years. Two more are targetted for privatization in 1998. State-owned enterprises account for 10 of GDP, a proportion which shrinks annually. Taiwan's Fair Trade Commission (FTC) acts to thwart noncompetitive pricing by state-run monopolies. FTC exemptions granted five years ago to several state-run monopolies were not renewed in 1997, making such firms subject to anti-monopoly laws.

In July 1997, Taiwan began implementing tariff reductions on 289 high-tech goods as part of its commitment to the multilateral Information Technology Agreement. It is expected that tariffs will be lowered on an additional 1,130 items in early 1998 (legislation is pending). Taiwan's current average nominal tariff rate is 8.6%; the trade-weighted rate is 3.6% . High tariffs and pricing structures on some goods -- in particular on some agricultural products -- nevertheless hamper U.S. exports. Taiwan continues to ban imports of products such as peanuts, poultry products, and bellies and offal 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

Unofficial estimates put Taiwan's outstanding long- and short-term external debt at US$17.5 billion as of December 1996, equivalent to 6.4% of GDP. Official figures show that Taiwan's long term outstanding external public debt totaled US$89 million, compared to gold and foreign exchange reserves of about US$93.6 billion. Taiwan's debt service payments in 1996 totaled US$3.0 billion, only 2% of exports of goods and services.

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 and to foster development of small and medium enterprises (SME). Taiwan also contributes to the Asian Development Bank (ADB), one of the two multilateral development banks in which it has membership. Taiwan is also a member of the Central American Bank for Economic Integration (CABEI). The ADB, CABEI, and the European Bank for Reconstruction and Development (EBRD) have all floated bonds in Taiwan.

5. Significant Barriers to U.S. Exports

Accession to the WTO Agreement by Taiwan will open markets for some U.S. goods and services. Currently more than 86% of all import categories are exempt from controls. Some 878 categories require approval from relevant authorities. Another 287 require import permits from the Board of Foreign Trade or pro forma notarization by banks. Imports of 264 categories are banned, including ammunition and some agricultural products. In June, 1997, Taiwan began implementing the HS system to bring its tariff schedule into line with international standards.

Financial: Taiwan continues to liberalize steadily its financial sector. Taiwan enacted a Futures Exchange law in March 1997; a futures market will be established in late 1997 or early 1998. The Securities and Exchange Law was amended in May 1997 to remove restrictions on employment of foreigners by securities firms, effective upon Taiwan's accession to the WTO Agreement. Limits remain on foreign ownership in listed companies. Foreign investors, both individual and qualified foreign institutional investors, are subject to some limits on their portfolio investment and restrictions on their capital flows.

Banking: In May 1997, banks' foreign liabilities limits were removed. In June 1997, the restriction that commercial paper guaranteed by a foreign bank could not exceed ten times the bank's local net worth was dropped. Also in June 1997, the annual limit on a company's trade-related outward (or inward) remittances was raised from US$20 million to US$50 million. Inward/outward remittances unrelated to trade by individuals or companies are still subject to annual limits. NT-dollar-related derivative contracts may not exceed one-third of a bank's foreign exchange position.

Legal: Foreign lawyers 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. Draft legislation is pending which would clarify the status and scope of work for foreign-licensed attorneys.

Insurance: In May 1997, the financial authorities announced that in principle insurance companies would be allowed to set some premium rates and policy clauses without prior approval from regulators. Insurance companies are still required to report such rates and clauses. In July 1995, Taiwan removed a prohibition against mutual insurance companies; as of October 1997, however, authorities had not issued implementing regulations. In 1996, a U.S. mutual insurance firm was denied authorization to establish a branch in Taiwan.

Transportation: The United States and Taiwan concluded an Open Skies Agreement in February 1997. An amendment to the Highway Law allowing branches of U.S. ocean and air freight carriers to truck containers and cargo in Taiwan went into effect on November 1, 1997.

Telecommunications: As part of a long-term liberalization plan, authorities in early 1997 awarded 8 mobile telephone licenses, 8 paging licenses, 20 trunking radio licenses, and 8 mobile data licences to private service providers. Maximum allowable direct and indirect foreign investment in these private service providers is limited to 20%, although Taiwan has proposed increasing the limits to just below 50%. Private service providers currently face excessively high interconnection fees imposed by monopoly wireline provider Chunghwa Telecom. Taiwan's Directorate General of Telecommunications has been unwilling to mediate the interconnection fee problem, putting U.S-invested mobile providers at a significant cost disadvantage to Chunghwa, with whom they also compete.

Pharmaceuticals and Medical Devices: Under pricing principles adopted in late 1996, Taiwan's Bureau of National Health Insurance discriminates against imported drugs by setting prices for leading brand-name products at artificially low levels, while providing artificially high reimbursement prices for locally-made generics. Foreign drug makers also face long delays in seeking regulatory approval and pricing from relevant authorities for new drugs. In a similar way, imported medical devices are put at a competitive disadvantage by a reimbursement system which fails to account for significant quality differences between different brands of medical devices.

Motion Pictures: Taiwan restricts the import of foreign film prints to 38 per title (up from 31 as of June 1997). No more than 11 theaters in any municipality may show the same foreign film simultaneously. Effective August 1997, multi-screen theaters are allowed to show a film on up to three screens simultaneously, up from the previous limit of one. Taiwan has pledged to abolish these restrictions upon accession to the WTO Agreement.

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. U.S. agricultural exports in particular suffer under existing requirements. 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. In 1997, Taiwan authorities promulgated new electromagnetic emissions standards for computer and other electronic goods. Discussions are underway on arrangements to avoid disrupting U.S. computer exports to Taiwan.

Investment Barriers: Since 1996, Taiwan has relaxed investment restrictions in a host of areas, including petroleum refining, coal coking, office digital electronic switching systems, and a number of other value-added network services. Foreign investment remains prohibited in key industries such as agriculture, basic wire line telecommunications, broadcasting, and liquor and cigarette production. In October 1997, Taiwan streamlined foreign investment review procedures.

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 50 to 100% . Foreign ownership limits for securities investment trust companies were removed in 1996. Other limits -- such as a 33-percent limit on holdings in airlines, air cargo forwarders and air cargo ground-handling -- remain unchanged. However, an amendment to the Civil Aviation Law that would raise the holding limit to 50% is now pending legislative approval. In August 1997, Taiwan raised the cap on foreign investment in independent power projects from 30% to 49% . Local content requirements in the automobile and motorcycle industries will be lifted as part of Taiwan's WTO accession. 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 (AGP) as part of its WTO accession process. The draft Government Procurement Law includes giving the Dispute Settlement Committee increased authority to arbitrate contract disputes, not just bid challenges. The law is expected to be passed in 1997. The U.S. concluded its bilateral discussion on Government Procurement with Taiwan in December 1997.

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

The United States removed Taiwan from the Special 301 list in November 1996 based on its implementation of a comprehensive, 18-point IPR action plan. Taiwan authorities implemented new regulations requiring Taiwan CD manufacturers to use source identification (SID) codes on their products. They plan to begin requiring SID's on video CD's as well. They stepped up enforcement actions and continued education efforts. Taiwan also opened an IPR service window to assist foreign firms facing IPR infringement.

Taiwan is not a party to any major multilateral IPR conventions. In line with WTO Agreement accession efforts, Taiwan has passed laws to protect integrated circuit layouts, personal data, and trade secrets. Likewise, the Legislative Yuan in April 1997 passed an amended Patent and Trademark Law. As a result, Taiwan's IPR legal structure, with the exception of its Copyright Law, is consistent with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs).

Copyrights: Export of counterfeit copyrighted goods has dropped markedly over the past few years, but unauthorized copying of computer software and manufacture of counterfeit video games remain problems. Taiwan currently protects copyrights dating from 1965. The revised Copyright Law now under review in the Legislative Yuan will bring Taiwan into TRIPs conformity by extending retroactive protection to 50 years upon Taiwan's accession to the WTO.

8. Worker Rights

a. The Right of Association: The Labor Union Law (LUL) restricts the right of association of workers on Taiwan. It forbids civil servants, teachers, and defense industry workers to organize trade unions and forbids workers to form competing trade unions and confederations. However, as democratization has continued, workers have gradually established independent labor organizations, either legally or illegally. During 1997, the number of unions and their members declined slightly due to relatively slow economic growth and to jobs taken by foreign labor. As of June 1997, three million workers, or 32% of Taiwan's labor force, belonged to 3,706 labor unions.

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, 1997, there were 295 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 1997.

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 3.6 million of Taiwan's 6.4 million salaried workers. In October 1997, the minimum wage was raised by 3% from NT$15,360 to NT$15,840 (or about US$520) per month. During this period, the average wage in the manufacturing sector was over NT$37,000(or about US$1,320), 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 December 1996, the LSL was adjusted to give employers more flexibility in adhering to work hour limits. 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.

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.

Extent of U.S. Investment in Selected Industries
-- U.S. Direct Investment Position Abroad on an Historical Cost Basis -- 1996

(Millions of U.S. dollars)

(1) Suppressed to avoid disclosing data of individual companies
Source: U.S. Department of Commerce, Bureau of Economic Analysis