After reading the opening case "The Evolution of Taiwan's International Trade" ATTACHED HERE, explain which of the theories (discussed in Chapter 6) explain or relate to Taiwan's trade policy during each of the eras described in the case. If you were the manager of a US company doing business with Taiwan, would you agree with Taiwan's trade policy? Why? Why not? Below is the picuture of theories and reading

CASE Taiwan, officially the Republic of China, is a small southeast Asian island country (slightly larger than the U.S. state of Maryland), with a 2015 population of about 23.4 million. Given a lack of natural re- sources, Taiwan's main natural advantage is its location on the impor- tant seaway connecting the east-Asian mainland with the rest of the world. (Map 6.1 shows Taiwan's location and major export markets.) Taiwan has been called one of the \"Asian Tigers\" because of its rapid economic growth. Despite being ranked only 55 among coun- tries in terms of population, it is 28" in per capita GDP, rising from 38" in 1950. International trade has been an important engine of its economic growth, and it is the world's 21 S.largest exporter. Dur- ing the last half century, Taiwan's economic and export dependence have shifted from agricultural to industrial products. Evidence of Taiwan's habitation go back about 10,000 years, but we will overview its trade policies only since the beginning of the Japanese occupation in 1895. THE JAPANESE OCCUPATION (1895-1945) Japan took over Taiwan (a Chinese province since 1885) in 1895 after defeating China at war. At that time, Taiwan depended almost en- tirely on agricultural exportsmainly tea, sugarcane, and rice. (The opening photo shows tea harvesting in Taiwan's highlands.) In fact, its only significant manufactured export was fake Panama hats. This dependence changed little under Japanese occupation; however, the Japanese did much to make Taiwan's business environment more competitive. With funds and Japanese technical experts, it modemn- ized the infrastructure and social structure through the building of roads, railroads, dams for electricity, hospitals, schools, and irrigation systems. It also brought law and order, often brutally, through strict police control. At the same time, Japan absorbed almost all Taiwanese exports at higher-than-world-market prices in order to feed its agri- cultural needs because a considerable portion of the Japanese popu- lation was moving from agriculture into the manufacturing sector. THE PERIOD OF IMPORT SUBSTITUTION (1945-1958) At the end of World War Il in 1945, Taiwan once again became a part of China, but trade was short-lived. The communists took power in the mainland the same year, the nationalist government moved to Taiwan, and business between the mainland and Taiwan came to a virtual halt. Taiwan expelled nearly all Japanese (over 400,000), and lost its protected Japanese export market. It faced a food short- age, high inflation, unemployment, and insufficient foreign eamnings to buy the imports it needed. The government focused on increasing production and exports while decreasing imports. To do this, the gov- emnment strictly controlled imports and gave production subsidies to The Evolution of Taiwan's International Trade Used with permission of the author, Lichung J&s many sectors so that domestic consumers would buy domestic: produced goods rather than imported ones (known as an import s stitution policy) and so that its traditional primary products would competitive in external markets. These policies allowed domestic industries to develop and creased Taiwan's foreign earnings and reserves. For example, 1950 Taiwan forbad the import of radios, but not radio parts, & encouraging local assembly of radios to sell domestically. In a tion, the policies helped the survival of some light, simple-techm and labor-intensive industries, such as textiles, plywood, and he appliances. During this period, Taiwan's economy boomed with real GDP increasing steadily at 7.1 percent a year. However, the negative effects of the import substitution pe included (1) overproduction of some goods because of insuffics domestic demand coupled with a lack of scale economies to cos pete internationally; (2) industry inefficiency because noncompetits manufacturers were not eliminated through market competition; 2 (3) the emergence of several monopolies that damaged consus and societal welfare. THE PERIOD OF EXPORT EXPANSION (1958-1969) Given the negative effects of import substitution, especially reliance of production for the domestic market, the govern changed its trade policy to promote export expansion. It promote series of policies to encourage exports. First, Taiwan depreciated currency (the NT dollar) by 50 percent to make its products chez when bought in foreign currencies. Second, the government set a system whereby companies could be rebated for the taxes ties) they paid on imported raw materials when they used them exported finished goods. Third, companies could avoid duties 2 gether if imports were processed in bonded factories or warehous and then exported. Fourth, the government set up export process zones (the first in the world) in three cities. There were no img duties in these zones as long as companies exported all the finis goods produced therein. In the meantime, companies in industrially advanced count such as Japan and the United States, invested in Taiwan to & advantage of its abundant low-cost labor. This furthered Taiwe economic growth. The result was that in 1966, the export v of Taiwan's industrial goods exceeded those of agricultural ge for the first time, despite continued agricultural growth resuf from agricultural productivity gains that took place in the so-c \"green revolution.\" In turn, this growth freed agricultural to move into the manufacturing sector. The economic structure the economy had also changed from dependence on domestic AP 6.1 Taiwan and Its Major Export Markets B e for 2012 Enates for 2U1 2 Taiwan demand. Meanwhile, Taiwan became a bigger part of the economy, and its exports became the principal thrust of its ic growth. E SECOND PERIOD OF IMPORT BSTITUTION (1969-1980) the first period of import substitution sought to reduce de- e on finished foreign consumer goods, the aim during this import substitution period was to reduce foreign dependence equipment and components needed to produce finished goods. During this period, the government sought to improve competi- by investing in what was referred to as the \"The Big Ten ctions.\" These focused on six transportation projects (a new y, extended railroad, railroad electrification, two harbor devel- nts, and an international airport) and four projects in heavy in- ies (steel, shipbuilding, petrochemicals, and nuclear power). In jon to decreasing foreign dependence, \"The Big Ten Construc- * speeded up economic growth and created 146,000 new jobs. er, not all of the heavy industries were equally successful; hemicals were more successful than shipbuilding and steel. ndicate that 61 4 percent of Taiwan's exports went to only five countries/territories.\" Unirted Stares 10.3% The 1970s also saw the growth of small- and medium-sized com- panies, most of which were family owned, dependent on private loan clubs, labor intensive, export oriented, and involved in processing inputs from other companies. The portion of these companies' sales in export markets grew from 56 percent in 1972 to 75 percent in 1983. This period also saw the growth of foreign investment in export industries. The number of foreign companies exporting from Taiwan increased from 52 in 1966 to 300 in 1980. FDI in exporting businesses increased from US$10 million to US$380 million in the same time frame. THE PERIOD OF ECONOMIC REFORM AND CONTINUOUS EXPORT EXPANSION (1981-1989) Although exports continued to expand during this period, the basic government policy was \"Liberalization and Globalization.\" The aim was to increase competition and to open the economy more to imports. The first step was to reduce import duties. This was done gradually to lower the impact on domestic industries. The average nominal import duty fell from 31.71 percent in 1980 to 9.65 percent in 1989. The second step was to liberalize fi- Theories and Ibut nance and banking, such as by the deregulation and establish- M ment of private banking institutions, the use of market forces to determine interest rates, and the relaxation of foreign currency Sir controls. str 20 THE ECONOMIC POLICIES IN THE 1990s 20 A major change for Taiwan during the 1990s was its renewal and pel growth of trade and investment with China. While part of this ha change was caused by political leadership change, economic fac- tion tors influenced the growth. By this time, Taiwan was no longer en- aln gaged primarily in the labor-intensive processing of components from abroad. Instead, its economic growth, rise in technology, and ecc accompanying higher-wage rates required it to offshore and out- ble source assembly (e.g., laptop computers) to a lower wage-rate abr country in order to be competitive. Chinese coastal cities across the strait from Taiwan were ideal for this, and China needed the it n jobs it would create. At the same time, many Taiwanese firms made from investments in the Chinese assembly operations and moved ma- its chinery and equipment into China as part of their investment. The Uni result was that China became Taiwan's largest export market and recipient of its direct investment. Concomitantly, Chinese exports to and direct investment in Taiwan have consistently been lower than Taiwan's exports and investments in China. However, official sta- 6-1. tistics obscure both the value and direction of trade. For instance, when Taiwan ships components to China, those components may be reshipped in finished products that go, say, to the United States. # 6-2. But U.S. and Taiwanese trade figures show the reshipment merely as Chinese exports.MASSIVE FDI AND FACTOR MOBILITY (2000-PRESENT) Since the millennium, Taiwan has continued to reduce its trade re strictions, such as by joining the World Trade Organization (WTO) it 2002. (We will discuss the WTO's functions in Chapter 8.) Between 2000 and 2013, its exports increased 100 percent and its imports 90 percent. Because unemployment rates have been very low, Taiwan has had to utilize foreign contract workers to help keep its produc- tion increasing-more than 400 thousand of them in 2013. These are almost all from other Asian countries-over 60 percent from Vietnam and Indonesia-and are employed at the bottom rung of the socio- economic ladder. Meanwhile, Taiwan's outward FDI more than dou- bled between 2000 and 2015. By 2016, its stock of direct investment abroad was almost four times greater than the FDI within Taiwan. At the same time, the Taiwanese government has indicated that it needs to make two changes: it needs to change its production base from an efficiency seeking model to one of innovation and change its primary export market dependence from China to Japan and the United States.dieck mark indicates that a theory of trade co columns you can see how each theory responds Descri How Much Is Traded? A arventionist & frog trade Comparative advantage National trade patlems Country stro Factor proportions Courtry smierily Export dynamics Product life cycle (PLC) Diamond of national competitive advantage 26-2 Map 6.1 1Dshows that 61 1 percent of Taiwan's exports go to 279 tv MAR 11