Macroeconomic Indicators

In 2006, Taiwan's economy continued its steady expansion from the latter half of 2005 to record an annual growth of 4.7 percent for the year, compared with 4.1 percent in 2005. In the second half of the year, the economy took a downturn due to weak domestic demand. By December, the monitoring indicators for Taiwan's economic climate were flashing the "blue light," which represents a recessionary trend, for the first time since the SARS epidemic in 2003.

Domestic demand was weak in 2006, with private consumption registering a sluggish growth of 1.5 percent. In the first half of the year, private investment showed a negative growth rate due to the near completions of the fourth phase of a sixth naphtha cracker project and the high-speed rail, and because the importation of airplanes came to a halt. However, it showed a positive growth rate of 8.9 percent in the second half as semiconductor manufacturers boosted their production capabilities, with a 3.3 percent growth recorded for the whole year. Both government consumption and public investment showed negative growths of 0.2 percent and 5.9 percent, respectively, due to constraints on government spending and delays in the execution of certain projects.

Industrial production registered growths of 8.1 percent, 6.6 percent, and 5.2 percent in the first three quarters, respectively, and plummeted to 0.7 percent in the final quarter, due largely to the manufacturing sector's inventory controls and reduced production toward the end of the year. This put the average growth in industrial production for the whole year at 5 percent.

With the global economy and world trade volumes expanding steadily in 2006, Taiwan's foreign trade registered robust, double-digit growth in both exports and imports, which reached record highs of US$224 billion and US$202.7 billion, respectively.

Export orders registered growth of 16.7 percent to reach US$299.31 billion in 2006. Most orders were for electronic products and information and communications products. Still in top place, the United States accounted for 26.5 percent of all export orders, followed by China (including Hong Kong) at 25.2 percent.

With the increase of the health and welfare tax on tobacco products and the rise in oil prices, the consumer price index (CPI) rose 1.5 percent in the second quarter of 2006. However, the ample supply of fruits and vegetables in the third quarter, coupled with falling prices of consumer electronics and lower-than-expected private spending, caused the CPI to fall in the second half of the year. Overall, the CPI rose by 0.6 percent in 2006.

The wholesale price index (WPI) rose only 1.85 percent in the first quarter, despite the fact that international crude oil and raw materials prices remained high. When international crude oil and raw materials prices increased in the second, third, and fourth quarters, the index reflected the rises, with the WPI averaging 5.6 percent growth for the whole of 2006.

The local stock market recorded heated trading and witnessed rises in both stock prices and trading volume, closing at 7,824 points at the end of 2006, an increase of 1,275 points over the previous year. The total trading value of US$736.5 billion was an increase of 26 percent on 2005.

In 2006, the unemployment rate fell to 3.9 percent—the lowest in six years—thanks to a vibrant global economy that boosted employment in production and exports and a wide variety of government programs.

Trade

To strengthen its position in the international supply chain and utilize its favorable trading location in East Asia, Taiwan has established five free trade zones at Taiwan Taoyuan International Airport and the harbors of Keelung, Taipei, Taichung, and Kaohsiung. To further expand trade opportunities, Taiwan has signed ATA Carnet agreements with several countries to eliminate customs paperwork for commercial travelers. Agreements on investment protection and the avoidance of double taxation have also been reached with trading partners.

In 2006, Taiwan's total foreign trade registered a 12-percent growth to reach US$426.72 billion. With exports far outweighing imports, Taiwan recorded its third-highest annual trade surplus since 1991 at US$21.32 billion, representing a 34.8 percent growth on the previous year.

Exports

Taiwan was the world's 16th-largest exporting nation in 2006, with exports valued at US$224 billion, representing a year-on-year growth of 12.9 percent. Industrial products accounted for 99 percent of all exports and registered growth in value of 13.2 percent over the previous year. Meanwhile, agricultural and processed agricultural products, accounting for 1 percent of total exports, dropped 8.8 percent and 12.2 percent, respectively.

Exports of heavy industrial goods have registered double-digit growth for five consecutive years, and in 2006, they accounted for 81.9 percent of all exported industrial products, an increase of 15.3 percent over the previous year. Light industrial exports bounced back from their negative growth in the previous year to 4.1 percent.

The top categories of exports were, in order: electronic products, optical instruments, iron and steel and articles thereof, machinery, chemical products, and electrical equipment, each of which registered more than US$10 billion (see chart on the previous page) in export value.

Imports

The total value of Taiwan's imports in 2006 increased 11 percent to reach US$202.7 billion. Agricultural and industrial raw materials increased 15.6 percent and accounted for 75.4 percent of all imports, due mainly to increased imports of crude oil, electronic parts and components, chemical products, and "other metal products." Capital equipment accounted for 17 percent of imports, a drop of 0.5 percent on the previous year due to reduced imports of airplanes, transportation equipment, and information and communications products. Consumer goods constituted 7.6 percent of all imports, a fall of 2.3 percent over the previous year.

The top import categories in descending order were electronic products, crude oil, machinery, "other metal products," iron and steel and articles thereof (see chart on left). High international oil prices pushed the value of crude oil imports to a record high, while "other metal products" saw the highest growth for the year. Machinery imports, which have traditionally been representative of the level of domestic investment, registered a soaring growth of 24.2 percent in the second half of 2006, in contrast to a negative 12.3 percent growth in the first half of the year.

Major Trading Partners

In 2006, about 80 percent of Taiwan's external trade was conducted with China, Hong Kong, Japan, the United States, Japan, and members of the Association of Southeast Asian Nations (ASEAN) and the European Union (EU).

China (including Hong Kong) has become Taiwan's largest trading partner. Bilateral trade amounted to US$115.9 billion, or 27.2 percent of Taiwan's total trade in 2006. This was followed by Japan at US$62.6 billion or 14.7 percent, and the United States at US$55 billion or 12.9 percent.

Exports to China (including Hong Kong) comprised nearly 40 percent of Taiwan's total exports, demonstrating Taiwan's increasing reliance on the Chinese market. In the course of 2006, Taiwan developed trade surpluses of US$6.83 billion with EU countries, and US$7.79 billion with the ASEAN member states.

China (including Hong Kong) is now Taiwan's second-biggest import source. In 2006, Japan remained the country's leading import source, though imports from Japan grew a mere 0.5 percent in 2006, creating a trade deficit for Taiwan of US$29.98 billion, Taiwan's second-highest annual trade deficit with Japan. Imports from the United States bounced from 2.8 percent negative growth in 2005 to over 7 percent; nevertheless, Taiwan still garnered a trade surplus of US$9.7 billion over the United States in 2006.

WTO Membership

Taiwan's trade has been on an upward trend since WTO accession, registering 6.1 percent growth in 2002, 12.1 percent in 2003, and a roaring 26 percent in 2004. Despite a year of unstable oil prices in 2005, total trade still grew 8.5 percent, rising to 12 percent for 2006. Any negative impacts on the industrial sector have been mitigated chiefly thanks to governmental deregulation, tariff reduction, and other trade liberalization measures introduced prior to accession. Exceptions are industries that sell most of their products in the domestic market, such as electrical machinery, home electronics, and paper and textile industries, which now face competition from imports.

In the agricultural sector, WTO membership had previously impacted negatively on certain sensitive products, such as rice and fruit. Nevertheless, exports of agricultural products as a whole registered growths of 3 percent, 9.6 percent, 0.8 percent, and 1.3 percent in the years from 2003 to 2006. Bananas, mangoes, lichees, pineapples, and citrus fruits were among the more competitive export fruits. Despite lower employment in the sector, overall production values and per capita production increased in 2006.

Advancements in the service sector since accession has helped attract foreign investment, improve operating skills, raise service quality, reduce costs, and enhance the international competitiveness of Taiwan's service industry. Liberalization in telecommunications, finance, and transportation have fuelled growth in these sectors significantly, in turn boosting overall economic growth. In 2006, the service sector's production value accounted for 71.7 percent of the nation's GDP, compared to 70.5 percent in 2001.

Prior to its accession to the WTO, Taiwan agreed to cut its average nominal duty rate on 4,491 items from 7.97 percent to 5.46 percent by 2011. For the industrial sector, the simple average nominal duty rate will be reduced to 4.06 percent for most items once scheduled tariff concessions (covering 3,470 industrial items) have been completely phased in. In the agricultural sector, comprising 1,021 items, the average rate before accession was 19.33 percent, to be lowered to 12.84 percent by 2011.

Investment

In its December 2006 Business Environment Risk Report, Business Environment Risk Intelligence ranked Taiwan as having the sixth-best investment climate among 50 major economies worldwide, and third-best in Asia after Singapore and Japan. The highest "1A" rating indicates that Taiwan is a low-risk investment area. Meanwhile, the Economist Intelligence Unit upgraded its rating of Taiwan's business environment prospects from "good" to "very good" for 2006-2010, putting Taiwan 19th worldwide and 3rd in Asia after Singapore and Hong Kong.

Inward Investment

In 2006, Taiwan approved 1,846 cases of inward foreign direct investment, totaling a record US$13.97 billion, an increase of 230.4 percent over the previous year. The largest investors were the Netherlands (38.8 percent), British territories in the Caribbean (12.8 percent, though much of this investment came from foreign-owned companies registered in the territories), Japan (11.4 percent), the United Kingdom (10.8 percent), and Singapore (6.8 percent).

The greatest attraction for inward investment in 2006 was electronic parts and components manufacturing, which accounted for 37.8 percent. Next came financial services at 18.3 percent, followed by venture capital investment at 11.8 percent; computers, communications, and audio and video electronic products manufacturing at 9.2 percent; and professional, scientific and technical services at 6.2 percent.

Outward Investment

Investment overseas (excluding China, discussed in the following section) by Taiwan's businesses in 2006 totaled 478 cases, valued at US$4.32 billion and representing an increase of 76 percent compared with 2005. Local investors channeled a 42.2 percent of their outward investment into British territories in the Caribbean, though much of this was then directed to other countries. Investors were also active in Singapore (18.7 percent), the United States (11.2 percent), the Netherlands (8.9 percent), and Hong Kong (6.3 percent).

Venture capital investment was the top sector of outward investment in 2006, accounting for 46.1 percent of the total. Electronic parts and components manufacturing came second, absorbing 21.5 percent. These were followed by wholesale and retail businesses at 11 percent, chemicals at 6.6 percent, and financial services at 3.6 percent.

Economic Ties with China

Cross-strait economic activity has expanded rapidly in recent years, especially since both China and Taiwan were admitted to the WTO. Cumulative investment in China by Taiwan's businesses has ballooned since restrictions were eased on cross-strait ties in 1991. In 2006, there were 1,090 cases of approved investment in China valued at US$7.64 billion and representing a growth of 27 percent over the previous year.

Cross-strait trade increased from US$8 billion in 1991 to US$115.85 billion in 2006. China (including Hong Kong) is not only Taiwan's largest trading partner but also its top export market. Trade with China also accounts for the largest share of Taiwan's trade surplus.

In 2006, the top five categories of Taiwan's investment in China were electronic parts and components manufacturing (21.2 percent); computers, communications, and audio and video electronic products manufacturing (14.9 percent); electrical machinery, supplies, and equipment manufacturing and repair services (8.7 percent); chemicals (7.2 percent); and basic metal industries and fabricated metal products manufacturing (5.8 percent).

Taiwan's chief exports to China in 2006 included electrical equipment and accessories, optical equipment and accessories, machinery and accessories, plastics and plastic products, organic chemical products, steel, copper and copper byproducts, and synthetic fibers.

The trade facilitation policy in place since Taiwan's WTO accession has not only allowed more industries to invest in China, but also made room in Taiwan's market for more of China's products. As of the end of 2006, over 8,660 items, or 79.5 percent of all categories of products made in China, could be imported. Manufactured goods comprised about 84 percent of these products, while the remainder was made up of agricultural products.

In light of China's economic rise and the globalization of trade, in his 2006 New Year Message, President Chen Shui-bian announced a cross-strait economic policy of "proactive management and effective liberalization" designed to maintain the competitiveness of Taiwan's industries. It is aimed at ensuring that the nation's technological advantage is not lost through technology transfers (see chapter 7, "Taiwan-China Relations").

Services

Taiwan's service sector can be divided into the following categories: wholesale and retail trade; accommodation and eating and drinking establishments; finance and insurance; real estate, rental, and leasing; transportation, storage, and communications; professional, scientific, and technical services; educational services; cultural, sporting, and recreational services; health care and social welfare services; government services; and other services.

In 2006, 57.9 percent of Taiwan's 10.1 million workers were employed in the service sector, which accounted for 71.7 percent of Taiwan's GDP, a percentage similar to that of many other advanced nations. The total value of services reached US$261.1 billion, an increase of nearly 4 percent over the previous year. Wholesale and retail trade was the largest component of this sector, accounting for 25.8 percent, followed by finance and insurance at 14 percent.

Industry

The 2006 Taiwan Design Expo in Tainan County featured numerous innovative items created by local and overseas designers aimed at providing elegant and stylish living experiences.

In 2006, 36.6 percent of the workforce were employed in industry (including manufacturing; construction; electricity, gas, and water supply; mining, and quarrying) which contributed about 26.8 percent to Taiwan's GDP. Manufacturing alone accounted for about 86 percent of industrial output in 2006. Electronics and information technology (IT) have become the mainstays of industry, replacing consumer goods and textiles. In terms of production value, information and communications technologies (ICT) industries accounted for 34.7 percent, the chemical industry 28.6 percent, metal and machinery industries 26.9 percent, and consumer goods industries 9.9 percent. In 2006, industrial production increased by 4.9 percent.

Energy

A lack of natural energy resources has forced Taiwan to rely heavily on imports. Locally produced energy accounted for a mere 1.8 percent of total energy supplies in 2006. Meanwhile, supplies from abroad have been growing rapidly by an annual average of 6.2 percent since 1986, totaling the equivalent of 138.6 million kiloliters of oil in 2006. Total consumption in 2006 was 109.8 million kiloliters of oil equivalent, with per capita consumption at 4,829 liters.

Oil remains the most important energy source. Eighty percent of Taiwan's crude oil purchases in 2006 came from the Middle East. Oil refinement is carried out at three refineries belonging to CPC Corporation, Taiwan (hereafter, CPC) and one belonging to Formosa Petroleum Corporation, a member of the Formosa Plastic Group (FPG).

For coal, Taiwan is completely dependent on imports, having closed its last mine in 2001. In 2006, it imported 62 million metric tons of coal, mainly from Australia, China, and Indonesia, with power generation accounting for 77 percent of the coal consumed. Similarly, three-quarters of the natural gas used was for power generation. Taiwan imported 96 percent of the 10.63 billion cubic meters of natural gas it consumed in 2006, Indonesia and Malaysia being its major suppliers of liquefied natural gas (LNG).

The demand for power continued to increase, and electricity generation climbed 3.4 percent from 2005 to total 235.1 TWh (terawatt-hours) in 2006. Electricity supplied by the state-run Taiwan Power Company (Taipower) is supplemented by private corporations that have developed cogeneration systems and sell surplus electricity to Taipower. As of 2006, Taipower operated 74 power plants, including 3 nuclear power stations housing 6 reactors that produced 17 percent of Taiwan's total electrical power in 2006.

Information Technology

Taiwan is a focal point for companies that, collectively, are the world's largest suppliers of notebook PCs, motherboards, and liquid crystal display (LCD) monitors. In 2006 alone, Taiwan's IT manufacturers based in Taiwan and China shipped a total of US$88.6 billion worth of hardware globally. Eight major products—notebook PCs, desktop PCs, motherboards, servers, digital still cameras (DSCs), optical disk drives, color display tube (CDT) monitors, and LCD monitors—together accounted for 90 percent of the IT hardware industry's export value. Of these products, DSCs attained the highest growth in terms of volume (30.1 percent) and value (29.5 percent) in 2006.

North America and Western Europe remained the principal markets, accounting for over 60 percent of total shipments in 2006. Manufacturers continued to move production offshore, with the result that, in 2006, a mere 4.2 percent of Taiwan's IT hardware products were actually produced in Taiwan.

The production value of Taiwan's software industry totaled US$5.34 billion in 2006, up 6 percent from 2005. The software market can be divided into two main segments: software products and software services. In 2006, sales of software products climbed 10.7 percent to US$552.1 million. Software products cover business software, information security software, and games, which had market values of US$170.9 million, US$340 million, and US$41.2 million, respectively. Software services grew 5.5 percent to US$4.79 billion in 2006, with system integration and network services enjoying market values of US$2.83 billion and US$1.95 billion, respectively.

Semiconductors

The semiconductor industry has been a boon for Taiwan, having distinguished itself with a complete supply chain, significant clustering, and world-class capabilities in contract wafer manufacturing, with an estimated production value of US$37.15 billion in 2006.

Taiwan is home to the world's two largest contract chip makers—Taiwan Semiconductor Manufacturing Company Ltd. and United Microelectronics Corporation. In 2006, Taiwan's integrated circuit (IC) packaging industry ranked number one in the world, with products and services valued at US$5.53 billion. Second only to the United States, Taiwan's IC design sector was valued at US$9.67 billion. IC manufacturing and testing yielded production values of US$19.69 billion and US$2.26 billion, respectively, while LCD driver IC exports continued to grow, and large LCD panels enjoyed the strongest export demand.

Taiwan boasts the highest efficiency in wafer fabrication and the highest density of 12-inch wafer fabs in the world. In 2006, it had eleven 12-inch, twenty 8-inch, eight 6-inch, and three 5-inch wafer plants.

Optoelectronics

Taiwan's optoelectronics industry spans four major areas: optical information, optical displays, optical communications, and optoelectronic components. In 2006, the industry recorded an output of US$42.46 billion, representing a 46 percent growth over the previous year.

Optical information products, including digital still cameras and optical drives and discs, represented 24.7 percent of total production in 2006, but experienced a negative growth of 6 percent compared with 2005.

Optical displays registered 24 percent growth and claimed a 70.2 percent share of the total optoelectronics output. This category covers thin-film transistor (TFT) LCDs and twisted nematic/super twisted nematic displays as well as organic light-emitting diodes (OLEDs) and microdisplays.

Although the optical communications sector grew by 10 percent, it made up less than 1 percent of the industry's output. Communications products include optical fibers, cables, and components. Optoelectronics components, mainly LEDs, accounted for 4.1 percent of production value and registered a growth of 15 percent due to growing markets for cell phones and traffic lights.

Flat-panel Displays (FPD)

Local investments secured Taiwan second place in the global FPD industry in 2006. Large demand from local notebook PC manufacturers and technological advantages, especially the island's integrated chain of semiconductor industries, have put Taiwan's TFT-LCD industry in a very strong position. It was estimated that the industry created a value of US$39.4 billion in 2006, with exports accounting for 59.7 percent of production.

Taiwan's FPD industry is expected to grow at an annual compound rate of 21 percent for the period 2004-2008.In large TFT-LCD production,Taiwan is on a par with South Korea. Earnings are expected to increase with the growing markets for monitors, notebook computers, and LCD TVs. However, Taiwan is less competitive in the market for medium-sized and small TFT-LCDs, which are used in cell phones, digital cameras, and other handheld devices.

Communications

The estimated output value of communications services reached US$11.4 billion in 2006. Mobile and network services have become much more important than conventional services. In network services, ADSL has dominated the market for broadband Internet access both in terms of revenue and number of subscribers.

Communications equipment registered an estimated production value of US$21.5 billion, with the wireless segment contributing three-fourths and wired broadband networks the remainder of this total. Major export destinations for Taiwan's communications equipment in 2006 were Europe, North America, and China, which respectively accounted for 43 percent, 23.3 percent, and 12.7 percent of shipments.

In 2006, Taiwanese companies' top ten communications products, in terms of output value, were (in descending order): mobile phones; global positioning system (GPS) equipment; wireless local area network (WLAN) components; digital subscriber line consumer premises equipment (DSL CPE); small office and home office (SOHO) routers; Ethernet switches; cable CPE; Bluetooth devices; personal handy-phone systems (PHSs); and internet protocol (IP) phones.

Textiles

Due to ongoing competition from other countries, Taiwan's textile industry has continued to decline. In 2006, the output value was US$11.76 billion, which represented 5.3 percent of total manufacturing output. However, the industry continued to play an important role in foreign exchange earnings, racking up US$9.1 billion.

Taiwan was the second-largest producer of synthetic fibers worldwide in 2006, manufacturing over 2.7 million tons. It was also the second-largest producer of polyester fiber, which accounted for 10 percent of total output.

In 2006, fabrics dominated textile exports with a 58 percent share. With a continued decrease in clothing and accessory shipments, Taiwan's textile industry has shifted its export focus to midstream and upstream fiber and yarn products. In 2006, the primary destinations for Taiwan's textile exports were Hong Kong, China, the United States, and Vietnam.

Petrochemicals

In 2006, Taiwan's petrochemical industry had a production value of US$39.06 billion (excluding textile and plastic product businesses), with 62 percent of the petrochemicals produced being sold in the domestic market. Taiwan's petrochemical production capacity, as roughly gauged by ethylene output, was sufficient to satisfy about 89 percent of domestic demand in 2006.

FPG, the largest petrochemical conglomerate in Taiwan, has an annual processing capacity of 21 million metric tons of crude oil (about 450,000 barrels per day) and 1.7 million metric tons of ethylene. The Ministry of Economic Affairs' Industry and Technology Intelligence Services (ITIS) predicts that FPG will become the world's fourth-largest ethylene producer and the biggest in the Asia-Pacific region once the fourth phase of its sixth naphtha cracking plant in Yunlin County has been completed. The plant is expected to produce 3.1 million tons of ethylene annually.

CPC is Taiwan's second-largest petrochemical conglomerate, with an annual ethylene production capacity of 1.1 million metric tons and an aggregate daily crude oil processing capacity of 770,000 barrels. As Taiwan's largest domestic supplier of gasoline and diesel fuel, CPC enjoys a market share of about 70 percent.

Vehicles

Taiwan's vehicle industry registered a negative growth of 17.6 percent over 2005 to record a production value of US$14.5 billion in 2006. Automobiles accounted for 71 percent of this figure, motorcycles 17.3 percent, and bicycles 11.7 percent. Of the roughly 366,311 automobiles sold in Taiwan in 2006, 59.6 percent were sedans and 85.9 percent were domestically made.

In 2006, 746,500 motorcycles were sold in the local market, accounting for 52.5 percent of total vehicle sales. Intense competition and a saturated local market have encouraged manufacturers to turn to production of all-terrain vehicles and electric carts. Taiwan also exports automotive and motorcycle parts, the top three destinations being the United States, China, and Japan.

The local bicycle industry has countered loss of competitiveness due to lower production costs in developing countries, by producing high value-added models. In 2006, it exported 4.7 million bicycles at an average unit price of US$192. Taiwan is the largest supplier of high-end bicycles to the United States.

Biotechnology and Pharmaceuticals

Advanced academic R&D capabilities form the backbone of the upstream and midstream segments in Taiwan's biotechnology and pharmaceutical industries. In 2006, the downstream segment was composed of 368 pharmaceutical companies, 500 medical device companies, and 268 biotech firms. The biotech firms were mostly focused on genomics, pharmaceuticals, diagnostics, agricultural and environmental biotechnologies, biochips, and bioinformatics. In 2006, Taiwan's biotechnology and pharmaceutical industries had a total revenue of US$5.5 billion. Of this figure, 24 percent came from the biotechnology sector, 37 percent from the medical devices sector, and 39 percent from the pharmaceutical sector. Biotech-related industries attracted investment of US$646 million in 2006.

• Ministry of Economic Affairs: http://www.moea.gov.tw
• Council for Economic Planning and Development: http://www.cepd.gov.tw
• Directorate-General of Budget, Accounting and Statistics: http://www.dgbas.gov.tw
• Bureau of Foreign Trade: http://www.trade.gov.tw
• Industrial Development Bureau: http://www.moeaidb.gov.tw
• Investment Commission: http://www.moeaic.gov.tw
• Bureau of Energy: http://www.moeaboe.gov.tw
• Small and Medium Enterprise Administration: http://www.moeasmea.gov.tw
• Intellectual Property Office: http://www.tipo.gov.tw
• Executive Yuan: http://www.ey.gov.tw
• Mainland Affairs Council: http://www.mac.gov.tw