The Declining Competitiveness of the Taiwanese Products in the German Market

Abstract This paper examines the trade relations between the Federal Republic of Germany and Taiwan and tries to gauge the competitiveness of the Taiwanese products on the German market. The remarkable economic growth in Taiwan in the past two decades has to a great extent been attributed to the increase in its exports to the overseas markets, of which the German market has been the most important one (second only to the United States). Among the factors which have contributed to its growth in exports are (a) overall growth, (b) commodity composition and (c) competitiveness. To quantitatively measure them, use has been made of the constant market share model. Our results reveal that since the early sixties the growth rate of the German imports from Taiwan has been steadily falling, something which can be almost fully explained by the declining competitiveness of the Taiwanese products. In the early sixties, their strong competitiveness accounted for almost 89 % of the increase in the German imports from Taiwan. However, since then the figure has been consistently diminishing and by 1980 it stood at the level of some 24 % only. Therefore the gradual reduction in the quantity of the German imports from Taiwan was essentially due to the declining competitiveness of the Taiwanese products, in other words, due to the vanishing advantage which these products used to enjoy in Taiwan's early stage of industrialization. The extent to which the growth effect has increased corresponds roughly to the decline in competitiveness, implying that Taiwan's exports were highly vulnerable to economic fluctuations in Germany. Finally, commodity composition has been persistently negative and this negative effect demonstrated the disadvantages of a newly industrialized country in its trade with an advanced industrialized country. They export predominantly cheap labour - intensive consumer goods, which are subject to low income and price elasticities as well as keen competition, and also to high non-tariff barriers. A number of factors are responsible for the declining competitiveness. Besides the lack of technological innovation, two other major factors have been identified as the most serious culprits: firstly, the rising wage rates which were set in motion after the disguised unemployment existing in the agricultural sector was exhausted, and secondly, the rising costs of energy which have plagued the world since the first oil shock.