An Alternative Perspective on Taiwan’s Economy and Stock Market: Compared with the United States
Taiwan is an island economy lacking in natural resources
Taiwan is an island economy that lacks natural resources, unlike the United States, which has a resource-rich continental economy. Therefore, economic theories and financial reports from the United States must be adjusted when applied to Taiwan.
The U.S. can rely on domestic consumption to support economic growth, while Taiwan must rely on both domestic consumption and exports to achieve healthy economic growth.
To illustrate this point, let’s use an extreme and simplified example.
Let’s assume that Taiwan has only one listed company, Company A, and that this company has no export performance. Let’s also assume that all of Company A’s products are imported.
The company’s annual revenue is NT$100 billion, it employs 10,000 people with an average salary of NT$1 million per year, resulting in a salary expense of NT$10 billion. Operating expenses are also NT$10 billion, and import costs are NT$70 billion. The profit is NT$10 billion, and there are one million shareholders, all of whom are Taiwanese citizens, holding 10,000 shares each with a value of NT$100 per share, giving the company a market value of NT$1 trillion.
The government issues consumer vouchers, the more dispersed the beneficiary companies, the better
Due to the pandemic, the government has issued NT$10 billion in consumer vouchers to stimulate domestic demand. As there is only one listed company, company A, which has no export revenue, we will use an extreme and simplified example to explain. Let’s assume that all of the products of company A are imported, and the company has an annual revenue of NT$100 billion, employs 10,000 people with an annual salary of NT$1 million per person, and thus has a salary expense of NT$10 billion. The operating expenses are NT$10 billion, import costs are NT$70 billion, and the profit is NT$10 billion. The company has one million shareholders who are all Taiwanese citizens, each holding 10,000 shares with a value of NT$100 per share, and the market value of the company is NT$1 trillion.
With the government injecting an additional NT$10 billion into the economy, company A’s revenue increased to NT$110 billion. The import costs increased to NT$77 billion and operating expenses increased to NT$11 billion. The number of employees and salaries remained the same, at NT$10 billion. As a result, company A’s profit increased to NT$12 billion, and the stock price rose to NT$120 per share, increasing the company’s market value to NT$1.2 trillion. However, for the Taiwanese economy as a whole, the impact is only on the operating expenses of NT$11 billion and the salaries of NT$10 billion.
In other words, when the Taiwanese government injects an additional NT$10 billion, for a company that imports products, the impact is only NT$1 billion. Such an action by the government also leads to a few individuals becoming extremely wealthy. If the stock market were not a single company, but rather 10,000 companies, each with an annual revenue of NT$10 million, the newly added profits would be distributed evenly among the 10,000 companies, thereby reducing income inequality.
The United States issued consumer vouchers to assist people affected by the epidemic, and the impact was the same as above.
Why is expanding domestic demand not a good medicine for Taiwan’s economic growth?
If all of A Company’s products are made from Taiwanese raw materials and manufactured by the company, then when the Taiwanese government invests an additional 100 billion NT dollars, the impact on Taiwan’s economy would be an increase of 10 billion NT dollars in operating expenses, 70 billion NT dollars in sales costs, and 10 billion NT dollars in overtime pay, totaling 90 billion NT dollars. This 90 billion NT dollars would generate a multiplier effect through the supply chain and other transactions, stimulating the economy.
If all the products are sourced domestically in Taiwan, then increasing consumption or production simply moves wealth from one pocket to another. The multiplier effect, however, would lead to economic growth and an increase in people’s wealth. However, if all raw materials come from Taiwan’s land, resources will eventually be depleted, and if there are no other options, the economy will decline.
(Several African and Middle Eastern countries are concerned that natural resources such as copper, platinum, and oil will be depleted, which is an example.)
To illustrate the case of imported products, if A Company previously imported 700 billion NT dollars, this means the country owes 700 billion NT dollars to foreign countries. With the government’s additional 100 billion NT dollars stimulus policy, the debt increases to 770 billion NT dollars. If the country has no ability to export or repay in foreign currency, and must pay interest, it will lead to national bankruptcy. Therefore, the government must consider the relationship between its consumption voucher, stimulus program, or industry incentives and the country’s imports. The government also needs to consider whether the money invested is for consumption, production, or speculation.
(Several African and Central and South American countries have debt problems resulting from consumption, and Greece in the past is an example.)
As everyone can see, Taiwan lacks resources. If the economy is to grow by relying solely on domestic demand, it will either result in excessive debt or a depletion of resources. Therefore, the economy needs to be stimulated by exports.
What exactly is the foreign exchange reserve created by export sales?
Continuing with the example of Company A, let’s assume that the company’s total revenue of 100 billion NT dollars is from exports. In this case, Taiwan would need to pay 70 billion NT dollars to other countries for imports, but would earn 100 billion NT dollars in foreign currency, creating a foreign exchange reserve of 30 billion NT dollars.
However, the actual foreign exchange profit is 10 billion NT dollars, while the remaining 100 billion NT dollars in operating expenses and salaries would circulate in Taiwan. Of course, people could choose to exchange their NT dollars for foreign currency, which would decrease the foreign exchange reserve of the central bank. At the same time, the NT dollars circulating in Taiwan would return to the central bank.
It’s important to note that in this example, the 30 billion NT dollars in foreign exchange reserve belong to the people, not the government. The government’s main source of funds is through taxes, not from private foreign exchange earnings. This also explains why the government should not treat foreign exchange reserves as its own and establish a sovereign fund to invest or speculate. Foreign exchange reserves are used to stabilize the economy, like working capital or margin money to facilitate transactions and credit.
(Foreign exchange reserves are held in US dollars as a hedge and settlement currency, so the US does not have to worry too much about foreign exchange reserves. The US government and the US people’s holdings of US dollars are the US’s foreign exchange reserves.)
Export sales contribute a lot to Taiwan’s economy, and discuss imports and wages
The contribution of exporting companies to Taiwan’s economy is the value added in Taiwan after subtracting the imported parts. Since all the raw materials are imported, there is no problem of depletion of local resources.
Therefore, the more the export business grows, the better it is for Taiwan’s economy. As the export amount grows and expands, Taiwan has more and cheaper funds, which in turn helps the export industry. The increased demand for labor also leads to an increase in employment and wage growth.
However, as wage increases affect export competitiveness, there comes a point where exports no longer grow and wages no longer increase. To break through this limit, it is necessary to develop an industry where export amount can continue to grow while employing a small number of people.
Currently, the digital technology industry and non-consumer finance investment industry, as well as the insurance industry or knowledge economy industry belong to this category. However, among these industries, only digital technology can extensively and highly employ workers with good salaries.
Silicon Valley in the United States is an example.
Different export industries have different impacts on Taiwan’s wages
Looking back: Taiwan’s electronics industry, due to its role in contract manufacturing for export, has had a low proportion of wages to the value of the products, with a disproportionately high share of raw materials. As a result, the added value in Taiwan has been limited, preventing it from significantly elevating the standard of living to the level of prosperity or middle class. Consequently, the stock market prosperity generated by the electronics industry has only had a limited impact on the salaried class.
Taiwan’s semiconductor industry, although having high added value in exports, has a relatively low number of employees. This has led to high wages and industry prosperity, fostering a middle and upper-middle class. However, it has not been able to significantly raise Taiwan’s overall average income and has contributed to income inequality.
If Taiwan could successfully develop an export-oriented digital technology industry, such as the software sector, it could capitalize on the large international market, high added value, unconstrained business growth, high proportion of salary costs in total costs, and a larger workforce compared to the semiconductor industry. Unlike product exports, the digital technology industry doesn’t face environmental issues or hidden social costs, which could lead to an increase in the overall average income and a reduction in income inequality.
However, the current state of Taiwan’s digital technology industry is mainly focused on serving domestic companies, with limited export volume. If the digital technology industry in Taiwan doesn’t grow to a point where it can be exported, it might be replaced by imported digital technology services. This essentially means that Taiwan would become a consumer of digital technology rather than an exporter of digital technology products or services, missing out on the opportunity to earn foreign exchange and contribute to the nation’s prosperity.
(The digital technology industry in the United States has provided opportunities for people to escape poverty and become part of the middle, upper-middle, and upper classes, creating numerous instances of great wealth. Latvia and Israel are additional examples.)
『Listed Companies and the Taiwanese Economy』
In terms of the stock market, shareholders, and listed companies, the focus is often on three major factors: company revenue, profitability, and stock prices. However, it is not always easy to discern the relationship between these three factors and the impact of a company’s activities on the Taiwanese economy.
Readers can analyze Taiwanese listed companies based on the aforementioned content to identify the following data and understand the substantive contribution of these companies to the Taiwanese economy (relying solely on fluctuations in stock prices may not provide a complete understanding):
1. Ownership Structure: Proportion of foreign and domestic ownership of the company.
2. Revenue Composition: Ratio of revenue derived from exports and domestic sales.
3. Import Amount: Percentage of import costs relative to the company’s total cost of goods sold.
4. Sales Costs and Value: Proportion of sales costs to revenue or the amount of domestic value-added.
5. Employment: Number of Taiwanese employees and their proportion within the total workforce.
6. Total Salary for Taiwanese Employees: Proportion of the total salary for Taiwanese employees relative to the company’s overall salary, revenue, and sales costs.
7. Profit and Profit Margin: Company profits and their corresponding profit margin.
『Conclusion: Product and service export industries must support each other to jointly foster economic growth.』
Summary:
Taiwan cannot rely solely on expanding domestic demand to drive economic growth, as it could lead to unsustainable debt accumulation. Expanding domestic demand is crucial for achieving economic stability, enriching infrastructure, enhancing citizens’ well-being, and boosting industrial competitiveness.
Taiwan needs to rely on exports to stimulate economic growth and achieve national prosperity. The contribution of exports to the Taiwanese economy varies based on the level of “in-Taiwan” added value generated by different business models.
Exports can be categorized into product exports and service exports. Historically, product exports have yielded lower gross profits, but focusing on areas like medical products, aerospace, and precision manufacturing can lead to increased profitability.
Service exports encompass digital technology, financial and insurance services, tourism, and the knowledge-based economy (e.g., management consulting, education, healthcare, factory automation transfer, etc.). These sectors are well-suited for Taiwan, which lacks natural resources, and if developed effectively, they hold the potential to achieve significant national wealth. However, without competitiveness, there’s a possibility of becoming a country primarily dependent on consuming imported services, which could subsequently impact product exports.
Hence, a robust product export industry should complement the growth of the service export sector. A thriving service export industry can provide support for the service needs of the product export industry, collectively shaping Taiwan’s economic future.
