China's latest customs statistics revealed a 9.2 percent decline in its imports from Taiwan for the first seven months of the year, despite continued growth in imports from other major markets such as Japan, South Korea, Southeast Asia, the United States and the European Union.

Taiwan's share of the China import market dropped to 7.5 percent, while South Korea remained China's largest source of imports with a 9.3 percent market share.

This is a complete reversal of the situation 20 years ago, when Taiwan's market share in China was 12.4 percent, while South Korea's was only 5.2 percent.

Back then, the rapid growth in Taiwan's exports to China was mostly driven by Taiwanese companies operating in China, which imported most of their equipment, raw materials and parts and components from Taiwan.

Taiwan, however, gradually lost ground due to the opening of China's market after its accession into the World Trade Organization in 2001 and the development of China's domestic supply chain. South Korea's market share surpassed Taiwan's for the first time in 2005.

The problem faced by Taiwan today may be attributed to its slow pace of industrial upgrade. In 2013, China-based Taiwanese companies imported only 27 percent of their raw materials and parts and components from Taiwan, down from 50 percent in 1996.

South Korea, with its sharp rise in industrial competitiveness, is now level with Taiwan in terms of machinery, electronics, optical products, plastics and steel production.

Another factor is a lack of consensus in Taiwan on its economic and trade policy toward China, which has hampered efforts to normalize cross-Taiwan Strait trade. A trade-in-services agreement between the two sides was shelved by Taiwan's Legislature after extended protests in March, and the negotiations on a trade-in-goods pact have also been delayed as a result.

Given that South Korea is already China's largest source of imports even without a free trade agreement, the conclusion of such a deal with China later this year will give South Korea a big boost. By then, Taiwan will lose its last remaining advantage to South Korea. With 40 percent of Taiwan's exports going to China, the impact on Taiwan's production and employment will be tremendous.

The opposition in Taiwan should calm down and think about whether they are helping or hurting Taiwan by blocking the normalization of cross-strait economic and trade relations. (Editorial abstract -- Aug. 18, 2014)

(By Y.F. Low)
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