Beijing’s “carrot and stick” approach

l  Cross-Strait military situation continued to be a hot issue in Taiwan following the recent release of an assessment report on the Chinese military by the US Department of Defense (DOD).

l  The report identified that Taiwan remained the “main strategic direction” for the People’s Liberation Army (PLA) as it continued its modernization programs. Moreover, the Pentagon believed that China still posed a security threat to Taiwan despite reduced tension and improved relations.

l  More importantly, the PLA has been developing capabilities intended to “deter, delay, or deny” any assistance by a third country, in the event of a Taiwan Strait contingency.

l  Maintaining a strong military force that is capable of: (1) withstand a first strike, and (2) keep the enemy engaged until allied forces arrive remains one of the few policies that enjoys cross-partisan support in Taiwan.

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Taiwan’s manufacturing stayed sluggish

l  Since many expect Taiwan’s exports to slow down in the second half of the year, the performance of the island’s manufacturing industry has become an important indicator of its economic vitality.

l  With fluctuating oil prices, waning consumer confidence, and volatile stock markets in many of the developed economies, there is increasing concern that the island’s manufacturing sector, and exports, will have to endure some tough times ahead. In fact, Taiwan's manufacturing sector remained sluggish in July for the fourth consecutive month.

l  In terms of individual sectors, the decline in economic vitality of the food sector was most worrisome. This could be attributed to the scandal surrounding the use of illegal plasticizers in food manufacturing during May and June.

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When cross-Strait tourism slows down

l  As cross-Strait relations enter a period of uncertainty roughly four months before Taiwan’s next presidential election, a number of recent developments clearly indicated that exchanges between the two sides, particularly tourism, are slowing down.

l  From Taipei to Kaohsiung, the economic impact from the drop in the number of Chinese tourists was both direct and immediate. In fact, a growing number of hotels around the island have received cancellations from Chinese tour groups, raising industry-wide concern that the decline—and the cancellation orders—will continue.

l  These cancellation orders have affected not only hotels around the island, but related industries—food, transportation, and retail—are also experiencing a marked decline in business.

l  The situation has been particularly serious in Taiwan's southern cities like Kaohsiung, where hotel occupancy rates started to drop since the beginning of August. The cancellation orders have reached nearly 10,000 rooms in recent weeks. Furthermore, reservations for September have dropped about 45 percent year-on-year.

l  These unexpected cancellations by Chinese tour groups have, in turn, forced many retail shops and restaurants to scale back on stock and hold off on hiring more workers.

l  Among the possible economic factors for the drop in the number of Chinese tourists, Taiwan's Tourism Bureau’s recent decision to lower the Chinese tour group fees per person—from US$80 to US$60 per day—had the biggest impact. The lowering of group fees has subsequently led to a decline in profit for many Chinese tour companies, which has made them less willing to operate tours to Taiwan.

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Lower GDP growth projected for Taiwan this year

l  According to the latest projections by the Cabinet-level Directorate General of Budget, Accounting and Statistics (DGBAS), Taiwan’s gross domestic product (GDP) growth for the year is expected to fall below 5 percent.

l  In fact, following the recent global market volatility and the sluggish performance of the US and European economies, it should surprise no one that Taiwan's projected growth, which has been driven primarily by exports, will experience a slowdown.

l  Since the island’s export trade, which accounts for over 60% of the total GDP in the last five years, remains the key driving force of its continued economic growth and development, it will be hard to fill the gap—whether through private investment or domestic consumption—to keep the economic growth rate close to the original projections at slightly over 5%.

l  On the other hand, leading research agencies have kept its 2011 growth forecast for China unchanged at 9 percent. Therefore, if many of the developed economies do slump back into recession, or a protracted period of meager growth, China may not be in a position to reprise its role to help the global economy recover as it did in 2008-09.

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US Vice President Joseph Biden visits China

l  For the first time since assuming office in January 2009, US Vice President Joseph Biden traveled to China last week on an official visit. Though Washington reassured Taipei that Taiwan is not a priority issue on Biden’s agenda, there was nevertheless a lot of interest and anxiety in Taiwan over possible impact on US-Taiwan relations, particularly arms sale.

l  Taipei wanted to make sure that Washington would not neglect the so-called “Six Assurances,” particularly that the US would not set a date for termination of arms sales to Taiwan; would not alter the terms of the Taiwan Relations Act (TRA); and would not consult China before making decisions about US arms sales to Taiwan.

l  With less than five months to go before Taiwan's next presidential and legislative elections, issues pertinent to US-China-Taiwan relations can take on added political significance in the island's highly confrontational politics. This is the primary reason why Biden’s trip to China had attracted so much attention in Taiwan.

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