WTO Effect on Taiwan - Essay Example

Running Head: WTO EFFECT ON TAIWAN WTO effect on Taiwan WTO effect on Taiwan Introduction Financial internationalization has been a prevailing trend in the global financial scene since the 1970s. Countries vie for an upgrade in their competitiveness by integrating domestic financial markets with foreign ones. Although financial internationalization covers a wide range of issues, the opening of the capital account is undoubtedly the most complex and the most controversial. This is mainly because capital account liberalization allows capital to move freely across borders, which may erode the stability of the stock market, foreign exchange market and money market, which in turn makes it more difficult for the central bank to maintain financial stability. (Antkiewicz, 2004) In other words, the more internationalized the financial markets and the more liberalized the capital account, the more challenges the autonomy of monetary policy have faced. In fact, financial internationalization underlay both the Latin American financial crisis happening earlier and the East Asian crisis a few years ago. Experts and scholars, by drawing important lessons from financial crises, have, retrospectively, advocated a progressive approach rather than an aggressive one to financial internationalization. They have singled out relaxation of capital account controls as the bottom-line defensive measure and have even viewed a certain degree of re-regulation as necessary in the aftermath of financial liberalization and internationalization. (Cai, 2005) By doing so, the negative impact of rapid and large-scale international capital movements on a countrys economy can be minimized. Connotation of Financial Internationalization Generally speaking, financial liberalization includes cross-border flows of funds, personnel and commodities. In addition to opening the capital account, it also includes expanding offshore business, establishing foreign exchange call-loan markets, and allowing foreign bank operations and branches. The following phenomena, which are independent in itself but not exclusive of each other, illustrate the connotation of financial internationalization: 1) The restrictions on the currency exchanges and other international financial activities of residents and non-residents (including individuals, corporations and financial institutions) are relaxed Domestic banks are allowed to establish overseas branches. Domestic corporations can raise funds by issuing corporate bonds overseas or by investing overseas. Foreign banks and corporations are also permitted to conduct reciprocal financial businesses locally. (Weixing, 2006) 2) International capital movements increase Following the easing of capital controls, cross-border capital movements become more active. For example, capital inflows have increased significantly in Taiwan since the middle of 1990s (Ohashi, 2006). It goes without saying that the frequent flows of capital are made possible not by economic factors alone but also by the relaxation of related regulations. 3) International or regional financial centers are established An international financial center, by its very definition, brings together cross-border capital, financial institutions, personnel, financial commodities, and financial information. Therefore, the establishment of international or regional financial centers is also a phenomenon of financial internationalization. The development of such centers requires sustainable economic growth, modernized legal frameworks, and tax regulations that conform to international practice. In addition, cities and communities in which foreign languages are spoken and living conditions are up to international standards are also essential to the operation of international financial business. (Antkiewicz, 2004) 4) Domestic currencies are internationalized With regard to the internationalization of domestic currencies; the NT dollar is currently not a regional currency, let alone an international one; while the Japanese yen has achieved a considerable degree of internationalization. (Guiguo, 2006) It has been a key currency in the major international foreign exchange markets and its fluctuations exert a great influence on international financial markets. Taiwans Current Status Over the years, Taiwan has made great progress in expanding offshore financial business, establishing foreign exchange call-loan markets, allowing foreign bank operations and branches, among other aspects relating to financial internationalization. At the same time, foreign exchange controls have been relaxed significantly and restrictions on capital movements have been lifted in a gradual and orderly manner. Taiwan has also been actively developing itself into an Asia-Pacific financial center since 1995. At the end of November 2000, foreign banks had a total of 39 head offces and 70 branches in Taiwan; while the number of Taiwan banks setting overseas offies or branches amounted to 166. (Weixing, 2006) In terms of financial tax law, Taiwan has conformed to international practice by exempting financial derivatives, corporate bonds, financial bonds and call loans from business tax. The business tax rate for financial institutions was reduced from 5 percent to 2 percent, and may have a further reduction to 0 percent. The major liberalizing measures adopted by Taiwan over the recent years with respect to the capital and foreign exchange markets are listed as follows: The Capital Market 1) The remittance ceilings are raised to US$50 million and US$5 million per year for corporations and individuals, respectively. 2) The ceiling on shareholdings by foreign investors in the domestic stock market was raised to 75 percent on October 19, 2000 from 10 percent as of 1994. On November 21, 2000, the Ministry of Finance decided to abolish the ceiling on foreign shareholdings, which have taken efiect later. (Cai, 2005) 3) Each qualified foreign institutional investor (QFII) was previously allowed to invest a total of US$1.5 billion in the domestic stock market. On November 21, 2000, the Ministry of Finance raised the quota to US$2 billion. 4) Domestic corporations are allowed to seek listings in foreign stock exchanges and foreign corporations are also allowed to be listed in the domestic stock market. 5) Foreign corporations are allowed to issue depository receipts and bonds in Taiwan. 6) Foreign individual investors are allowed to invest in the domestic stock market. 7) By the end of December 2000, the Asian Development Bank (ADB), the Central American Bank for Economic Integration (CABEI), the European Bank of Reconstruction and Development (EBRD), Nordic Investment Bank (NIB), the European Investment Bank (EIB), the Inter-American Development Bank (IADB), the Council of Europe Social Development Fund and other international organizations issued 132 million in US dollar-denominated bonds, 1.5 billion in Japanese yendenominated bonds, and 144.1 billion in NT dollar denominated bonds in Taiwan. (Weixing, 2006) The Foreign Exchange Market 1) The ceiling on the amount of foreign liabilities of authorized foreign exchange banks is lifted. 2) Authorized foreign exchange banks are allowed to purchase or sell their foreign exchange positions subject to approval of the Central Bank of China (CBC). 3) Forward foreign exchange transactions are allowed. 4) Ofishore banking units (OBUs) are encouraged to expand their business scope and participant number. At the end of November 2000, 68 OBUs were in operation with a total asset of US$47.4 billion. 5) The foreign exchange call-loan market is expanded, with the CBC providing 10 billion US dollars, 15 billion Japanese yen and 1 billion Euros as seed funds. Financial Internationalization after Taiwans Entry into the WTO The Republic of China (ROC) signed the General Agreement on Tarifis and Trade (GATT) back in 1948 and was, therefore, one of the founding members of the GATT. However, two years later it lost its membership following the communist takeover of the Chinese mainland. In the early 1990s, the ROC sought re-entry to the GATT by filing a formal application for membership under the name of the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu. Mainland China approached the GATT for re-entry as early as in 1965, but issued a formal application much later in 1986. Currently, both sides of the Taiwan Strait have entered into WTO. (Ohashi, 2006) The WTO was aimed to promote global trade relationships and settle disputes between member countries. Based on the principle of regulating the internal rather than the external, it focuses on how member countries set limits on import trade and internal investments, and does not restrict member countries from setting limits on export trade and external investments. (Cho, 2005) The purpose is to ensure trade liberalization and national treatment. Therefore, under the spirit of free trade, when both sides of the Taiwan Strait had entered theWTO, they have to address the new conditions of opening up domestic markets and competition from international businesses. Issues concerning financial internationalization after Taiwans accession in the WTO are summarized as follows: 1) Appropriate capital account management Financial internationalization has accelerated cross-border movements of short-term capital. Such capital movements have destabilized the capital accounts and led to financial crises in several economies. We believe that the trend of financial liberalization and internationalization have gone on, continuously facilitating rapid movements of short-term capital. Within this context, after Taiwan entered the WTO, it has inevitably faced the pressure to further open up its domestic financial markets. (Cai, 2005) Hence, capital has moved in and out of Taiwan more actively than before. The lessons from the 1997 Asian financial crisis and the prospect of entering the WTO combine to show the necessity of appropriate capital account management during the course of financial internationalization. For instance, supervision should strengthened with regard to financial institutions (such as foreign exchange positions, capital adequacy ratios, liquid asset ratios, and ratios of credit extended to a single corporation) and foreign exchange markets (such as restrictions on offshore transactions, and reporting of foreign exchange transactions). 2) Increasing cross-Strait financial activities As the two governments across the Taiwan Strait adopt a friendlier attitude and an easier policy, cross-Strait exchanges have been increasing. As far as financial activities are concerned, cross-Strait exchanges intensify both in terms of frequency and speed. Evidence is seen in mutual personnel visits and the talks of establishing Taiwan bank branches and ofices in China. (Ohashi, 2006) As Taiwan and China have entered the WTO, both of them have faced the pressure to open up its domestic financial markets under the WTO framework, which have paved the path for even more cross-Strait exchanges. (Cho, 2005) Therefore, how to maintain financial stability in the midst of this inexorable trend of exchanges has been an important issue confronting Taiwan after its WTO entry. 3) Maintaining financial discipline and emphasize risk management Financial liberalization and internationalization is an existing government policy in Taiwan, while financial discipline is the foundation upon which this policy may be attained. It is of paramount importance to maintain financial discipline for the purpose of sound developments of financial markets. After accession to the WTO, Taiwans financial markets have opened further and capital has moved in and out of Taiwan with less limits. As a result, fluctuations in the stock market, foreign exchange market and money market of Taiwan have been magnified, which can generate financial risk. In order to maintain financial discipline, the monetary authorities should strengthen financial supervision, by conducting on-site and follow-up examination of financial institutions. (Ho Szu-Yin, 2004) On the other hand, financial institutions should abide by the rules of the game and should especially emphasize risk management, so that self-regulation within them can be established; in particular, financial institutions should monitor asset quality, enhance internal control, follow regulations relevant to foreign exchange businesses, utilize various hedge instruments, such as forward contracts, option contracts and swap contracts, in order to effectively manage risk. Besides, as far as the cross-strait business is concerned, since there is no legal business treaty between Taiwan and the mainland, any investment in China from Taiwan is exposed to some kind of investment risk. Conclusion Taiwan and mainland China have entered the WTO at the same time. Taiwans existing China policy \Go slow, be patient" has been challenged by the so-called \three links" policy, that is, direct trade, transportation and postal links between Taiwan and China, which, pushed through, have transformed the Taiwan Strait into one of the worlds busiest trading zones. After entry, both have addressed the new conditions of the liberalization of domestic financial markets, the competition from international businesses, and the impact of opening the capital account on domestic financial markets. While implementing capital liberalization, Taiwan should also adopt appropriate capital account management and alleviate expectations on NT dollar fluctuations. These measures have been conducive to Taiwans monetary policy autonomy. It is worth noting that financial crises can occur in any place at any time without a predictable track and often with an impact stronger than could be imagined, if appropriate measures are not taken. Even if the crisis-hit country still retains its monetary policy autonomy, it cannot single-handedly weather the financial storm. In order to prevent crises from escalating and to swiftly relieve crises, a financial cooperation mechanism is needed for the crisis-troubled area. The two sides of the Taiwan Strait appear to be showing favorable gesture at the present stage for an improvement of relationship. WTO entry is an opportunity to promote an East Asian financial cooperation mechanism. For example, the two sides of the Taiwan Strait can help launch the Asian Monetary Fund proposed by Japan in August 1997, participate in the ADBs Asian Currency Crisis Support Facility, promote the Currency Swap Agreement proposed by the ASEAN+3 (Japan, China and South Korea), and engage in other regional financial support mechanisms. References Antkiewicz, Agata and John Whalley. 2004. “China’s New Regional Trade Agreements.” NBER Working Paper 10992, Cambridge: National Bureau of Economic Research, December. Cai, Kevin. 2005. “The China-ASEAN Free Trade Agreement and Taiwan.” Journal of Contemporary China Volume 14(45): 585-597. Cho, Hui-Wan. 2005. “China-Taiwan Tug of War in the WTO.” Asian Survey Volume 45 Number 5: 736-755. Ho Szu-Yin and Leng Tse-Kang. 2004. “Accounting for Taiwan’s Economic Policy Towards China.” Journal of Contemporary China, Volume 13 (41): 7433- 746. Hu, Weixing. 2006. “The Political-Economic Paradox and Beijing’s Strategic Options.” In Edward Friedman eds. China’s Rise, Taiwan’s Dilemmas and International Peace. New York: Routledge. Ohashi, Hideo. 2006. “China’s Regional Trade and Investment Profile.” In David Shambaugh, eds. Power Shift: China and Asia’s New Dynamics. Berkeley: University of California Press. Guiguo, Wang. 2006 The across-the-Strait relations against the background of globalization. The Journal of World Investment and Trade, Volume 7, pp. 5-24. Wang, T.Y. and I-Chou Liu. 2004. “Contending Identities in Taiwan: Implications for Cross-Strait Relations” Asian Survey. Volume 44(4): 568-590. Read More