An Interview with Kuan Chung-ming, Minister of the National Development Council

Q: How will Taiwan’s FEPZs differ from the free trade zones in other countries?

A: The 1970s were critical in Taiwan’s economic takeoff. At that time the main idea for development was for the government to set aside land and pour in a lot of capital to construct infrastructure, hoping to attract foreign investment. But this approach has already hit a bottleneck.

The FEPZs will be different from the special economic zones in mainland China or Korea. In Taiwan we are no longer emphasizing investment in infrastructure, but rather innovation and deregulation. We want to reduce restrictions so that a new model of manufacturing will take shape.

Never underestimate the power of the idea “It’s OK now to do things that weren’t allowed before.” Businesspeople are amazing in the way they can create things you couldn’t even imagine at a given moment. For example, testing and repair of machine tools. When goods and materials are able to flow freely, machinery and equipment can be sent back to Taiwan from anywhere in the world to be tested and maintained. When old parts are replaced, the waste material can be reused, creating an entirely new product chain. These are the types of industries that we can try operating in the FEPZs.

Q: What goals do you hope to achieve with the FEPZs? What kind of impact do you expect?

A: We hope that through deregulation we can help enterprises create novel operating models, drive growth in peripheral industries, and create market opportunities. Although the Special Act for FEPZs is still being deliberated in the Legislative Yuan, already many firms—particularly Japanese—are interested. After last year’s tensions over the Diaoyutai Islets, they worry about the risks of investing in China, so they hope Taiwan can be an important operating base for their industrial and logistical deployments.

The FEPZs serve another purpose too. By promoting deregulation, they help create better conditions for joining regional economic groupings like the TPP and RCEP. The FEPZs are another bargaining chip we can bring to the table to win acceptance of our participation in international society.

Take the TPP, for example. Vietnam, which has a much less open economy than we do, is already in, but we are not. But Vietnam has done a lot of market liberalization in the past several years, showing real determination to change. The progress they have made is clear for all to see.

Taiwan’s promotion of FEPZs tells the world we are serious about market opening and deregulation. We can’t do it all at once, but we’re moving in the right direction.

Q: The plan will start by transforming some existing Free Trade Zones into FEPZs. What will change?

A: The Free Trade Zones had their own Act for the Establishment and Management of Free Trade Zones, with special advantages like tax exemption for bringing goods into and out of the zones. The FEPZs will enjoy greater liberalization than the free trade ports, which is why FEPZs will require passage of new legislation by the Legislative Yuan.

Just to clarify, the FEPZ process has two stages. The first, launched last August, involves deregulating administrative rules, without needing to amend legislation. For example, we finished loosening regulations on financial services late last year, and regulations on education in March this year.

The second phase will involve some legislative changes for international healthcare, education, and agriculture. We have to wait until the Special Act for FEPZs passes before we can move ahead in these areas.

Q: Some citizens have doubts about the extent of changes to be made regarding environmental impact assessments, international healthcare, education, and other areas. What can you say to alleviate these concerns?

A: Some in Taiwan do have doubts about liberalization. Rather than everybody arguing about it, it’s better to go ahead and try it out within a small, circumscribed context.

Take education, for example. A lot of people say there are already so many universities in Taiwan, why should we create incentives for foreign universities to offer courses here? In fact, having foreign universities “set up shop” here actually means nothing more than creating opportunities, through cooperation with local universities, for graduates of foreign universities to come to Taiwan for further study. It will not impact Taiwan’s own education resources.

Q: Deregulation creates the environment for getting on track with the international community, but might there not be some negative effects on, or marginalization of, Taiwan industries that are not in the FEPZs?

A: Most people know liberalization is good, but they fear being negatively affected. In fact, Taiwan’s biggest worries right now are that we are losing talented people, who are not coming back, and that capital is flowing out, not in. The goal of the FEPZs is to bring people and money into Taiwan.

Some people are saying that the FEPZs are just a way of introducing the Cross-Strait Agreement on Trade in Services [signed in June 2013 but still being deliberated in the legislature] through the back door. This is absurd.

The investment that the FEPZs will attract from abroad comes with no strings attached, completely different from trade negotiations where you have to make concessions. Education will mainly absorb foreign students, international healthcare services will earn money from foreigners, and logistics will mean re-exporting everything that is imported. There won’t be any negative repercussions for Taiwan.

Probably the only really controversial part is agriculture. Everyone is afraid that this is market opening through the back door. In fact, anything that is not allowed into Taiwan now, but that will be allowed into the FEPZs, will have to be completely re-exported after processing. It won’t be able to enter the domestic market.

Moreover, taking the long-term view, expanding value-added agriculture is a good thing, and industries that use agritechnology to process and produce goods will benefit.

Q: In fact, people are more worried about mainland Chinese investment in the FEPZs than about foreign investment. Will the two be treated the same?

A: Today the main economic obstacle for Taiwan in Asia is that we can’t create links everywhere, because as soon as we run across mainland China we get stuck.

In a lot of global industries, when firms make their international strategies and decide where to place their assets, they skip right over Taiwan. We get higher evaluations than other countries in virtually every category, so why don’t people come? One foreign academic stated openly that if you set up a factory in Singapore or Ho Chi Minh City, you can create links everywhere—it’s only Taiwan where you can’t. In essence, if you set up a factory here you’ve got to pay an additional “tax on Taiwan,” and those who aren’t willing to pay it simply won’t come.

I think the decline in foreign direct investment in recent years, and the fact that even Taiwan’s own people are unwilling to invest in Taiwan, are connected to this. Although there are still limitations in the FEPZs, at least you can get partly linked in. Only once there are no obstacles preventing Taiwan from linking up with the world, can we achieve the ultimate goal of attracting international companies.

You have to keep in mind that what Taiwan really needs is to build linkages with the international economy. Don’t pass up opportunities to link up with the world just because you are afraid of mainland China.