Fisher Investments Editorial Staff
Others

Make Trade, Not Taxes

By, 06/16/2010
Story Highlights:
  • While countries in the West implement fiscal austerity measures, many Asian nations are cutting taxes and opening trade.
  • Hong Kong and Singapore cut taxes recently, even as a free trade agreement between China and ASEAN countries took effect January 1, 2010.
  • In Taiwan, lower taxes, freer economic relations with China (thought virtually impossible just a few years ago) and a booming economy are hard to miss.
  • Throughout the years, few strategies have been quite as effective at boosting growth (and therefore government revenues) as freer trade and lower taxes.

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While euro debt problems have many Western countries scrambling to prove their fiscal mettle by way of tax increases and spending cuts, some Asian policy makers are seeking to improve their economic prospects by lowering taxes and opening trade. Historically, that's been a great way to boost growth and attack deficits—though it seemingly gets little lip service these days.

 

Many folks remember the late 1990s "Asian Contagion," when it was feared Asia's economic woes would spread worldwide (they didn't). Today, lower taxes and freer trade emanating from the Far East would be a much more welcome contagion than the 1990s version. It may only take one or a few countries to start a tax cutting/free trade trend—regional competition will do the rest. Recently, Hong Kong and Singapore have aggressively lowered taxes, even as a free trade agreement between China and the ASEAN countries (Association of Southeast Asian Nations) took effect January 1, 2010.

 

Determined to keep up with Asian peers, Taiwan has followed suit in dramatic fashion. Taiwan's tax cuts, freer economic relations with China (thought virtually impossible just a few years ago), and booming economy are hard to miss. Parliament has twice lowered corporate taxes this year, most recently from 20% to 17%—a corporate rate now on par with Singapore's and just above Hong Kong's. After decades of nerve-rattling animosity, President Ma Ying-jeou continues a successful push to normalize economic relations with China. The countries have signed 12 agreements aimed at promoting trade and improving economic relations in 24 months. Last year's financial memorandum of understanding is fostering cross-border banking, and relaxed travel restrictions made Q1 the first time in 60 years Chinese visitors to Taiwan outnumbered Japanese.

 

On Sunday, envoys finalized negotiations on (but have yet to sign) a free trade agreement (FTA), dubbed the Economic Cooperation Framework Agreement. The FTA would eliminate or reduce tariffs on 500 Chinese goods exported to Taiwan and 200 Taiwanese goods exported to China. At a minimum, the agreement should boost economic growth, but it could also pave the way for FTAs between Taiwan and other nations, who have historically sought to avoid angering China by recognizing Taiwan as an independent country. (Currently, Taiwan's only FTA is with Panama.)

Recent growth in Taiwan has been quite impressive. The economy grew 9.1% year-over-year (y/y) in Q4 2009, the fastest rate since 2004, and 13.3% y/y in Q1 2010, the fastest rate since 1978. Trade was massively higher in May—exports and imports grew 57.9% and 71.4% y/y, thumping expectations of 39.6% and 49.9% respectively. Exports to China were up 65.8% y/y, as exports to the US grew a record 46.3% y/y. (Incidentally, Taiwan's strong export growth could be a good sign for the Technology sector as surging Taiwanese exports have historically been a reliable indicator of demand for technology products.)

As the chorus for higher taxes and fiscal austerity grows louder in Europe and elsewhere, perhaps policy makers should shift their gaze to Asia. There's more than one way to skin a deficit—and few strategies are quite as effective at boosting growth (and therefore government revenues) as lower taxes and freer trade. 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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