Taiwan Editorial

A Window to Opportunity

by Oscar Chung, Taiwan Review staff writer

On March 6 this year Taiwan's drive for economic liberalization delivered major benefits for the financial sector. On this day the Republic of China (ROC) government granted certificates to 12 securities companies in Taiwan to conduct new types of international business through their offshore securities units (OSU).

An OSU is an independent account set up in Taiwan for international securities business such as brokerage, underwriting and proprietary trading, and the OSU milestone is part of the government's push to carry out the Free Economic Pilot Zones (FEPZ) plan. According to the Financial Supervisory Commission, the overseer of Taiwan's financial institutions, the sector will need roughly 20,000 additional workers this year due to the deregulation of the securities business.

'My friends in Hong Kong and Singapore were quite puzzled by Taiwan¡¯s conservative financial sector regulations, which have caused capital as well as talent to flow from Taiwan to those global financial centers,' says Lin Chien-fu, a professor in the Department of Economics at Taipei's National Taiwan University. The money went overseas because of the diverse financial products the two places offer, he explains, whereafter Taiwan's professionals followed suit to provide wealth management services for Taiwanese interested in such products. In December 2013, another measure was passed that allows the offshore banking units of financial institutions to use a negative list approach in order to widen the range of financial products available. The negative list approach delineates only those services or sectors that are excluded from liberalization; any item that is not on the list is liberalized. As Taiwan's financial sector moves toward liberalization, both the capital and personnel could flow back, while its banking and securities sectors expect to generate an additional NT$30 billion (US$1 billion) and NT$40 billion (US$1.33 billion) in revenue respectively within five years, according to government estimates.

FEPZs can be viewed as operating inside national territory but outside customs jurisdiction. Proposed by ROC President Ma Ying-jeou as part of a campaign promise when he was running for his second term as president in 2012, the first phase of the FEPZ plan officially started in August 2013. For now, the plan focuses on liberalization in five sectors: smart logistics, financial services, international health care, education innovation and value-added agriculture. More sectors could be added in the future. The goals of such liberalization are increasing domestic production value, high-end jobs and private investment. The first phase of the project commenced with the promulgation of administrative regulations that do not require the Legislative Yuan's approval. Likewise, the regulations that allowed securities firms to establish OSUs did not need legislative approval.

The second phase of the plan is contingent on the Legislative Yuan's approval of the Special Act for Free Economic Pilot Zones. In compliance with related government regulations, the act is expected to loosen residence restrictions on foreign white collar workers. The 73-article act was initially drawn up by the Council for Economic Planning and Development, which merged with the Research, Development and Evaluation Commission to form the National Development Council (NDC) in January this year.

The act also offers new tax incentives. Under current FEPZ regulations, raw materials and goods for agriculture and industry that are imported into the zones are exempt from all taxes and tariffs.

According to the act, foreign accountants, architects and attorneys are allowed to set up or invest in a firm that provides professional services in an FEPZ. Once it takes effect, for the first three years of work, a foreign national's salary shall be counted as half of its actual amount for the purpose of filing an individual income tax return. This is expected to help enterprises recruit foreign specialists in an effort to upgrade service personnel. The increase in the number of professionals from abroad will also improve opportunities for local professionals to interact with them.

Taiwan's high quality medical services provide a solid foundation for development of international health care. The notion of free economic zones is not a recent concept in Taiwan, as it started with the Asia-Pacific Regional Operation Center, a project planned for the mid-1990s. The project's deregulation measures were aimed at converting Taiwan into a six-sector economic hub ranging from finance to shipping. In 2003 the government began setting up free trade areas at the nation's major harbors and Taiwan Taoyuan International Airport in accordance with the Act for the Establishment and Management of Free Trade Zones that was passed by the Legislative Yuan in July that year. Until Ma took office in 2008, the effectiveness of these projects was diminished by conservative policies governing transportation links between Taiwan and mainland China as well as cross-strait relations in general. The then newly elected president began a significant push to loosen restrictions on communications with mainland China, which is the largest economy in the region.

The results are evident in the figures provided by the Ministry of Transportation and Communications, the government agency that supervises the operation of these free trade zones. The FEPZ near Taiwan Taoyuan International Airport in northern Taiwan is one example. It is operated by Farglory Free Trade Zone Co. on a build-operate-transfer model under a 50-year contract that started in 2003. Trade volume from the zone amounted to NT$38.7 billion (US$1.2 billion) in 2007 and ballooned to NT$167.1 billion (US$5.6 billion) in 2013.

The FEPZ plan is unique both for the history of its development and for its double-track implementation mechanism. The first track comprises clearly demarcated areas¡ªthe ones located near the six major seaports and the one at the Taiwan Taoyuan International Airport, for the most part according to the 2003 free trade zones project, as well as the Pingtung Agricultural Biotechnology Park (PABP) in southern Taiwan. The second track involves designated test-points for projects not feasible for implementation inside the first track areas. For example, an OSU is more likely to be a test-point in an urban region than in a remote site near a port. This is also the case for a hybrid university co-founded by a local school and its foreign counterpart, although such a school can debut in Taiwan only after the passage of the special act.

Off-Site Manufacturing

Another feature of the plan is the 'shop on-site, factory off-site' model, wherein businesses that operate in the pilot zones add value to export goods by commissioning outside manufacturers to install a key component or process an imported raw material. 'The economic benefit of the FEPZ plan is quite limited if you confine the value-adding job to the pilot zones. The plan can have significant influence only if off-site manufacturers are involved,' says NDC Deputy Minister Chen Chien-liang. The ROC Customs Administration is building a sophisticated electronic system, the official notes, to track goods moving in and out of the pilot zones to prevent smuggling and other problems that might arise due to the 'shop on-site, factory off-site' practice.

The FEPZ plan does not focus solely on manufacturing. Instead, it highlights the service sector and emphasizes institutional reforms and deregulation to facilitate the cross-border flow of funds, human resources and goods. Moreover, it will not require large swaths of land nor devote a large amount of money to building infrastructure. When land use is involved, according to NDC Minister Kuan Chung-ming, the government will look to land resources that have already been developed, such as those in established industrial parks. This expedites the plan's implementation as the process of land expropriation and environmental impact assessment can be quite time-consuming.

To date, pushing for FEPZs has led to results that include additional revenues from newly opened international banking and securities businesses. Between August 2013 and April 2014, seven businesses invested a total of NT$47 million (US$1.56 million) in logistics. The PABP, which is tasked with developing value-added agriculture, saw 13 firms, including Lohmann Animal Health GmbH and Co. KG, the world's fourth largest supplier of poultry vaccines, invest NT$2 billion (US$66.6 million) in the same period. According to Chen, during the first phase of the FEPZ plan, the PABP has attracted more investment than any of its counterparts in Taiwan.

DHL International is a major operator in the Taoyuan Aerotropolis pilot zone. These results are just appetizers, however, as the main course will be served after the plan enters its second phase. It will include streamlining procedures for land purchases and construction approval, customs clearance and business registration. It is hoped that such deregulation will constitute a real incentive for businesses to invest. Also, once the special act takes effect, local governments will be able to apply to the central government to set up pilot zones in their respective administrative areas with the expectation that they will develop local resources and distinct industries. According to the NDC, at least eight local governments have expressed a strong interest in the FEPZ plan.

Wu Ming-yen, director-general of the Taiwan Nongovernmental Hospital and Clinics Association, is among those who have high hopes for the FEPZs. 'Taiwan needs to catch up in international health care services, as the global market is increasingly competitive,' he says. Wu, who is a dentist by training, often refers to Connexion, a newly opened medical center in Singapore that comprises the state-of-the-art Farrer Park Medical Centre, the Farrer Park Hospital, One Farrer Hotel & Spa and the Owen Link shopping mall, when speaking of the fierce competition Taiwan faces to win international clients. The brand new high-rise complex is only one recent example of the city-state's effort to garner international customers by combining tourism and medical services. By contrast, although Taiwan has already started to move in this direction, its international health care sector is still comparatively small in scale, with a few participating hospitals converting part of their space to offer this new service.

The special act is expected to improve the scale of international health care services in Taiwan. It encourages foreign specialist groups and domestic medical care institutions to jointly establish international medical institutions by, for example, allowing a foreign national to serve as chairperson of the board of directors, which is currently prohibited by the Medical Care Act. At least two major hospitals, in Taichung and Taoyuan respectively, are keen on building such a partnership.

In the era of liberalization, Taiwan also has the potential to become a regional center for higher education. ROC Minister of Education Chiang Wei-ling notes that at least seven prestigious universities around the world, from Cornell University and Kyoto University to Hong Kong University of Science and Technology, have already shown an interest in cooperating with local schools under the FEPZ plan. 'Foreign schools naturally feel more motivated to come to Taiwan due to the lack of restrictions on local colleges and universities in areas such as teacher employment,' says Jan Fang-guan, director of the NDC's Department of Industrial Development.

Linking the World

In the logistics sector, Farglory Free Trade Zone Co. also looks forward to seeing increased business activity as the FEPZ project solidifies. 'The FEPZ plan will further link Taiwan and its businesses to the world while attracting investments from major international enterprises,' says Paul Chen, assistant vice president of the company's business management planning department. Today the only FEPZ in Taiwan for air cargo logistics is located on a 45-hectare tract of land where space in Farglory buildings is leased to companies such as Germany-based DHL International and Kintetsu World Express Inc., a major logistics operator from Japan. The pilot zone, which is located at the core of a major urban development plan, the Taoyuan Aerotropolis, could expand to surrounding areas in the future as more enterprises look to cash in on the incentives provided by the FEPZ plan.

Paul Chen notes, however, that prospective investors could take a wait-and-see attitude or might remain wary of putting large amounts of money into the free economic pilot zones, primarily because the special act has met resistance in the Legislative Yuan. The draft of the special act was approved by the Executive Yuan in December 2013 and was sent to the legislature for deliberation for the first time in March this year. The deliberation, however, has been going at a snail's pace.

The resistance in the legislature echoes concerns among certain members of the public about the negative impact of the FEPZs. One of the issues raised, for example, concerns resource allocation. Some worry, Wu says, that Taiwan's doctors and nurses will choose to work in the international health care parks due to their higher financial rewards, and that this would lead to a shortage of medical workers for local patients. However, the government plans to set up only a couple of such parks for now, each with 200 beds, as Kuan once explained in a real-time online communication with the public to clarify misunderstanding and dispel fears about the FEPZs. The number of beds, 400 at most, translates to a need for about 200 doctors, a small percentage of the more than 43,000 doctors in Taiwan. 'And there will be stipulations limiting the time a local doctor can spend providing services in the health care parks,' Wu notes, adding that if international health care services are not developed in Taiwan, it is likely that more doctors will leave Taiwan to seek similar opportunities in places like Singapore and mainland China.

Another concern is the easing of restrictions on people, capital and goods from mainland China. However, the policy governing mainland China's participation in the FEPZ plan is subject to many stipulations. For example, mainland Chinese are not allowed to invest in businesses involved in Taiwan's national security. In addition, products made in the FEPZs using controlled agricultural goods such as peanuts from mainland China are not allowed to enter the domestic market. Furthermore, medical personnel from mainland China, Hong Kong and Macau cannot work in the FEPZs, whereas their counterparts from elsewhere can.

Despite all these concerns, Chen Chien-liang says that the plan is worth pursuing as it can help prevent Taiwan from being marginalized in the global trade arena and paves the way for the country's long-term development. Indeed, by implementing the plan Taiwan hopes to achieve two goals, adding momentum to the nation's economic growth and showing the world Taiwan's sincerity and determination to join the global trend toward liberalization. At present, the government is making efforts to join negotiations in two regional free trade blocs, the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). The RCEP comprises member states of the Association of Southeast Asian Nations and its free trade agreement (FTA) partners. Both blocs are of great significance to Taiwan due to its close economic relationships with many of the participants in the two trade groups. Establishing FEPZs is expected to accelerate the liberalization of Taiwan's economy, which will then help the nation's efforts to join the RCEP and TPP.

Notably, a more liberalized environment would help Taiwan compete against South Korea, which many consider to be Taiwan's major trading rival. For now Taiwan has signed economic pacts with seven countries in addition to mainland China. As of May this year, out of every US$100 in foreign trade from all of Taiwan's trading partners, US$9.65 came from trade items covered by FTAs, up from US$ 0.14 prior to similar agreements Taiwan signed with mainland China, New Zealand and Singapore after 2008. The current figure is still in sharp contrast with US$36.1 for South Korea, which has signed 10 pacts involving 48 countries.

In the face of fierce competition and the trend for regional economic integration, Taiwan needs to make major breakthroughs. 'Taiwan's economic development has reached a plateau. So why not open a little window through which we can connect with the outside world?' asks Wang Chien-chuan, deputy director of the Chung-Hua Institution for Economic Research. 'The situation could change for the better accordingly and then we can continue on a larger scale. We just want to open a little window.'

Indeed, the FEPZ plan, which is effective for a period of 10 years starting on the date of its promulgation, is just a pilot project after all. Through it, Taiwan can experiment with deregulatory measures and new business models on a small scale while assessing its negative impact on Taiwan's economy and society before making revisions and moving forward. 'This little window could mean a lot for Taiwan,' Wang adds.


Write to Oscar Chung at mhchung@mofa.gov.tw


This article was published in the August, 2014 issue of Taiwan Review. For Taiwan news, editorials, feature articles and more, go to Taiwan Review.

Cover photo by See-Ming Lee