Until 1969, trade between Taiwan and the European Economic Community was small (annual aggregate levels never exceeded 0.2 billion U.S. dollars) and deficit-ridden. The situation reversed itself, however, during the 70’s. Trade then generated surpluses for Taiwan and moreover grew rapidly reaching U.S. $ 4.4 billion by 1980, with a surplus of U.S. $ 1.2 billion. Since the fourth quarter of 1980, Taiwan’s exports to the E.E.C. have decreased both in terms of the growth rate and the absolute amount. This new situation has attracted the attention of the government and the business community. The purpose of this study is to determine what the causes of this recent downturn are.
We first employed a simple formula to measure the changes in Taiwan’s export dependence on the E.E.C. during the past two decades. We found that structural changes in exported commodities did not significantly impact changes in export dependency. What was at cause was the relative advantage of the E.E.C. market compared to alternative export markets.
We next analyzed why the E.E.C. had become a relatively advantageous market. As a result of this examination we hypothesize that the relative advantage of the E.E.C. market was caused by one or most likely a combination of the following factors: 1) the relatively prosperous growth achieved by E.E.C. member states; 2) the prices of Taiwan’s exports have become more competitive because of some E.E.C. member states’ appreciated currencies; 3) the comparatively high rates of inflation experienced by E.E.C. members and other nations competing with Taiwan in the E.E.C. market.
To test the above hypothesis, we used a regression analysis. Our results reveal that both the G.N.P.s of E.E.C. members and Taiwan’s export prices have influenced the volume of Taiwan’s exports to the E.E.C.
Our study concludes that the latest export recession beginning in the last quarter of 1980 reflects the general recession in the E.E.C. In addition, prevailing high interest rates in the U.S. have caused the devaluation of the currencies of E.E.C. members, which in turn has reduced the competitive position of Taiwan’s exports. We suggest that the government should measure precisely the real effective exchange rate of each trading area to enhance Taiwan’s trading position and, moreover, await the recovery of the E.E.C. economy.
