Premier Lin Chuan's Interview with Bloomberg News (May 5, 2017)

Transcript of Premier Lin Chuan’s interview
with Bloomberg News

May 5, 2017

(This transcript was translated from the Chinese and has been edited for length and clarity.)


Q1

BLOOMBERG NEWS: Premier, many thanks for accepting our interview. We often see a lot of economic data suggesting that Taiwan’s economy is in good shape—whether it’s the Taiwan stock market setting to close above 10,000 points, the employment data, growth in the gross domestic product (GDP), or the strong New Taiwan dollar. Would you agree with this outlook?

PREMIER LIN CHUAN: We usually maintain a cautiously optimistic outlook on this issue. The global economy is in the midst of a recovery, and since Taiwan’s economy is primarily driven by trade, our economy should be making a turn for the better. But we’re more concerned about whether our competitiveness can be improved, so we’re looking at this from a long-term perspective. This will cover a lot of areas, and if we can keep our economy growing faster than expected or slightly better than the global average, then that’s what we hope to do. The government’s objective is to bring about long-term structural change so we have to look further into the future, and while the effects may not be as noticeable in the short term, it will change people’s expectations.

Basically we are still cautiously optimistic and we’re confident Taiwan can enhance its overall competitiveness as long as our objectives and policies are clear and effective. We’re optimistic that the results will be positive. However, it won’t be easy for a mature economy like Taiwan to maintain high growth rates like countries in Southeast Asia. We still have to work on this part.

Q2

BLOOMBERG: The government recently raised the GDP growth forecast to 2.1 percent for 2017, and 2.7 percent for next year. We also interviewed some economists, many of whom don’t expect growth to be that high. Based on the current situation, are you still confident about reaching that goal?

PREMIER LIN: We don’t really have to make precise guesses about economic growth rates because so many external factors can affect those rates. But we can set some expectations using normative estimates or analytical models. That’s how most forecasters in foreign countries come up with their projections. Assuming other conditions will remain unchanged, we can tell Taiwan’s economic growth rate this year will likely be above 2 percent. But as for the decimal places after the 2 percent, there may be differences in opinion.

In Taiwan we have two kinds of estimates. First are normative estimates based on models designed by the Directorate-General of Budget, Accounting and Statistics (DGBAS). Second are estimates from the National Development Council (NDC) that incorporate subjective assessments in relation to our policy stance. We set goals with an optimistic outlook and then work to achieve them. But external factors can also have an impact on these efforts, and sometimes we may not meet all our goals. So I think we really have to view the forecasts from those two perspectives.

Regarding what you just mentioned, the NDC figures are a bit higher than DGBAS’s projections, and that may be because of the subjective policy factors that were taken into account. For example, if the special budget bill is passed during the current legislative session, then optimistically we can expect to attract a certain amount of private sector investment, and perhaps salaries can start to rise again. So under these circumstances, there’s nothing wrong with setting those kinds of subjective expectations.

Q3

BLOOMBERG: Among the problems in the world today such as the tension between the U.S. and North Korea, or the issue of Syria—which do you think has the most impact on Taiwan’s economy?

PREMIER LIN: Any small changes in the international arena can bring unforeseen results; this is what we call the “butterfly effect.” For instance, the collapse of Lehman Brothers set off a chain reaction worse than anyone could have imagined. It’s hard to pinpoint any one factor as the most dangerous, and those who lead companies or nations must consider all the factors seriously.

Let’s return to your example of Northeast Asia where the tension does appear to have escalated. This tension in the end may not have a substantive effect on our economy but it could flare into a major regional conflict, and it’s hard to predict at this point. We decision-makers will view this issue very carefully but we’re not too pessimistic about its impact on our economic future because we don’t think this matter will inevitably turn for the worse. We’re aware that it could become more serious, but we’re optimistic that there will be a better solution.

Putting aside these non-economic factors, I think the U.S. will continue to play a very important role in the global economy as a whole. Now that President Trump is in office, we must pay close attention to his approach to trade because his policies could have global ramifications. President Trump has said he would like to create more jobs and increase investments in the U.S., and if that can be done in a way that doesn’t interfere with the rules and practices of international trade, it would remove uncertainty. But if those measures create more uncertainty, then we must keep a closer eye on the situation. I think this is an issue everyone should pay attention to.

Q4

BLOOMBERG: Last week U.S. President Donald Trump decided not to completely pull out of NAFTA (North American Free Trade Agreement). Did that ease your mind a bit?

PREMIER LIN: Of course, that was a favorable outcome as many of the changes ahead won’t be too drastic. Nothing puts a damper on economic activity like uncertainty, and dramatic changes usually escalate uncertainty. We hope to reduce uncertainty as much as possible.

Q5

BLOOMBERG: Which of Taiwan’s domestic policies do you think will have the most impact on the economy for this year or next?

PREMIER LIN: The policies mainly aim to create investment opportunities. Looking back over Taiwan’s economic development, investments have declined since the mid-1990s, and that has to do with globalization and the offshoring of our industries. There are other factors such as Taiwan’s relationship with mainland China, which has made it more difficult for us to sign free trade agreements with other countries and created concern about marginalization. As you can see, the overall global trade environment and the international situation are not favorable to our investment climate.

We hope to create a better investment environment to nurture more emerging industries. Many of the government’s efforts are for the short and long term. The emerging industries proposed by President Tsai Ing-wen, including the “five plus two” industries, are all designed to create investment opportunities and diversify Taiwan’s industries. Right now, only our information and electronics industrial chains are internationally competitive, comprehensive and strong, but we need to create a better environment for other industries to develop.

After passing amendments to the Electricity Act last year, our first step was to promote green energy. Liberalizing the energy market should give green energy plenty of space for growth, and in fact we’ve already seen signs of development but it will take another three or four years before they can become truly robust, especially in the case of wind-powered electricity. If we don’t put in three to four years to work on the basics, these industries will not reach their full potential. This shows that it’s an excellent opportunity to invest in Taiwan’s industrial future. We’ve already seen positive results in the short term.

Nevertheless, the industries require a longer-term horizon. We’re promoting several projects that are core and central to our policies, especially the “Asian Silicon Valley” plan, which capitalizes on the Industry 4.0 trend. We believe smart production and management technologies will profoundly change the way people live and work. Taiwan is very strong in these areas but of course we’ll need to create an environment that allows innovative thinking and opportunities to be realized, and we’ll have to improve our software and hardware and review all the regulatory issues.

This is like a congested road that has too many bottlenecks: breaking through one bottleneck isn’t enough, and we’ll need time to clear up all the bottlenecks for traffic to flow smoothly. But the fruit of our labors will last beyond just five or 10 years, as in the case of Taiwan’s integrated chip industry. We began nurturing this industry in the 1980s and are still reaping the benefits today, so we must work harder in this respect. The Asian Silicon Valley plan requires a significant amount of work in this regard and will affect other industries, such as Taiwan’s machinery industry. This industry must embrace smart machinery and precision machinery, all of which are closely related to the Asian Silicon Valley plan.

Another effort requiring even more time is agricultural reform, and Taiwan’s agricultural industry has much room for reform. Production capabilities were not fully utilized in the past, and the agricultural development model hasn’t changed much because of the aging workforce. We feel this is an excellent time to make fundamental changes, but agricultural reform involves complex problems and issues that require more patience to address, one by one. This is especially true with the way farmland is utilized, and how we can attract young people into farming careers. Attracting young people, systematically modernizing the process from production, marketing, to point of sale, and linking with other sectors—these are the challenges we face. As I mentioned earlier, we won’t be able to see any improvements in traffic flow until we break through all bottlenecks on the road. The issues have to be addressed one by one.

Q6

BLOOMBERG: We sense that Taiwan’s economy has become a bit too dependent on mainland China and Apple. Do you agree? And if so, what needs to change?

PREMIER LIN: It’s inevitable that Taiwan’s economic growth will be closely tied to mainland China and investments by Apple. The industries on the two sides of the Taiwan Strait are in such close proximity, and even though there’s still a lot of competition, there’s also a lot of complementarity. As it is a huge market over there in mainland China, it behooves Taiwan to maintain friendly, smooth economic relations. In doing that, there’s no downside for Taiwan. International trade is founded on a division of labor, which creates mutual benefits. So as far as trade and the division of labor are concerned, the cross-strait economic relationship isn’t something that should be avoided. It should be about finding ways to create mutual benefit.

It’s the same with Apple. Its products are popular all over the world. But if Apple wasn’t supported by efficient Taiwan production, I’m sure it wouldn’t be so competitive. But on the other hand, this relationship also showcases Taiwan’s best attributes. In terms of trade, Taiwan is a small economy, so we can’t possibly devote all of the nation’s resources to the production, manufacturing and global marketing of just one product. It’s neither a smart way nor the way Taiwan has depended on for so long. Korea can choose to develop their automotive industry, which generates a high proportion of their GDP, but that’s not necessarily the path that Taiwan should take. Taiwan should be doing everything possible to allow our industrial sector to diversify. So electronics and information industries of Taiwan cooperating with Apple is a good thing for Taiwan’s economic development, not a bad thing.

And someday, if Apple becomes uncompetitive, what will Taiwan do? That’s not a problem because there will still be another enterprise that will rise up and cooperate with Taiwan. We think our production chains are extremely competitive so we’re very happy to work with any heavyweight enterprise, and show just how competitive we are. I think this is what makes Taiwan special.

But it must be emphasized that we can’t just rely on these two entities. We need a broader range of opportunities. Some people say a lot of Taiwan’s industrial investments come from Taiwan Semiconductor Manufacturing Company (TSMC), that it has a high output value and tremendous impact on the local bourse, and that our economy depends too much on it. I don’t think that’s an entirely fair assessment. TSMC has developed admirably, and has been a big help to Taiwan’s economy, but we should be more ambitious and nurture a few more TSMCs in other industries. The company’s chairman has said we shouldn’t think there can be many TSMCs and we shouldn’t take the company’s development for granted, but from our point of view, the government has to be a bit more ambitious to see if we can develop a few more TSMCs. We cherish that company, and we also cherish the achievements of our information and communications technology industries, but we still hope to find more opportunities, which is what the government wants to do.

So to get back to your question, I would say that yes, it’s true. Our economy is closely related with Apple, and the other side of the strait, but that’s not a bad thing. What’s more important is that we also have close ties with others, and that’s why we proposed the New Southbound Policy. Some say that policy was designed to counter the other side of the strait, but it’s not. The other side of the strait also has this misperception, as if we came up with the New Southbound Policy so we could abandon or leave it behind. That’s not the case. We just want to make more friends and broaden our horizons, and then have a few more opportunities. It’s a fact that the countries of Southeast Asia have enjoyed high economic growth over the past few years. We can’t disregard the facts that are right in front of us.

We’ve also seen that other countries are all strengthening their positions in Southeast Asia, and Taiwan has a strong foundation there. Although we don’t necessarily have formal diplomatic relations with many of the New Southbound Policy target countries, that doesn’t mean we don’t have close economic relations. There are already many Taiwanese businesspeople who have a strong foundation there. The issue is how to integrate them and avail ourselves of those business opportunities. This is what this administration wants to achieve. The government wants to give the public and enterprises a definitive developmental direction. In the past, perhaps we weren’t diverse enough, or clear enough in terms of policies, so many industries weren’t sure where the government was headed. So going forward, we have to communicate our direction more clearly.

So we do hope that the other side of the strait can understand why we’re emphasizing this New Southbound Policy, and why we want to push for free trade agreements with other countries. If Taiwan signs free trade agreements with other countries, that’s good for Taiwan-mainland economic relations. Why? Because Taiwan has to have a diversity of economic relationships to avoid the pitfall you mentioned—which is to only depend on mainland China and not on anyone else. That’s too risky, and a lot of people would come out and object to it. Cross-strait economic relations can only improve, become closer, and create bigger business opportunities after Taiwan develops better economic ties with other countries. Taiwan wants a more open economy that’s harmonized with international markets, and we want more industry opportunities for external development. But even more, Taiwan wants to create a cooperation environment of its own, right here at home.

If Taiwan’s own cooperation environment is lacking and only makes industries want to take their investment dollars overseas, that won’t help our own economy very much. That’s why we’re emphasizing creating employment opportunities. What does that mean? As we’ve told the industrial sector, if you invest overseas and it’s a good opportunity—congratulations, that’s great! But we hope it can help Taiwan’s employment situation, too. If your investment in Taiwan can create job opportunities, then we’ll go to great lengths, day or night, to help you resolve your issues quickly. This is our current policy development priority.

Q7

BLOOMBERG: Are you saying you’re not opposed to stronger trade and economic ties with mainland China?

PREMIER LIN: Of course we’re not opposed; it would be unfavorable to Taiwan’s development. We’re definitely not opposed to stronger trade and economic ties, but we’re hoping for more balanced development. That will help build closer ties with mainland China.

Q8

BLOOMBERG: It’s been almost a year since the new administration took office. Could you explain the work done this year and give us your assessment of the government’s performance?

PREMIER LIN: There are a few ways to grow the economy. The first is to introduce an immediate stimulus, and the second is to promote long-term improvements to change the overall industrial structure. The immediate stimulus usually does not have long-lasting effects on a small, open economy like Taiwan. To create an immediate result normally requires expansionary fiscal policies and expansionary monetary policies, which can boost the economy but often with short-lived effects. But Taiwan is one of the most trade-dependent countries in the world, so to a large extent stimulating demand will benefit import but will not help our industries create jobs. How then are we to achieve a multiplier effect? It’s extremely difficult to expand the economy without the benefit of the multiplier effect, but a lot of people want to see results right away. An economy like Taiwan is quite difficult to manage—contrary to the norm, it takes contractionary policies to produce immediate results, but this would be a mistake because it goes against Taiwan’s open economic policies.

So if we want to improve the economy, we should take a long-term approach. The effects of long-term measures will take longer to surface, but as long as we move in the right direction and people feel confident, that psychological effect will reflect immediately on our economic activities. So it’s very important to instill public confidence in the government and the economy, and this confidence comes from the actions we take. Some of our actions will help the economy—perhaps not right now but maybe in five or 10 years, but the psychological effect can help change things.

Again, there are a few ways to do this. The first is easing regulations and giving industries more opportunities for innovation, but we have to address some practical problems. Last year we devoted a lot of time addressing issues in the Labor Standards Act that were not resolved during the previous administration. A lot of controversies remained to be addressed, and we spent too much time addressing these issues and they have mostly been settled now. Even though many companies are dissatisfied, we still want to build on this foundation, using administrative orders to explain the details and implementing the Labor Standards Act in a pragmatic manner. We will take the unreasonable and hard-to-enforce parts of the act and make it reasonable. We had to resolve the basic problems before we could build a foundation on which labor and management can work out their differences, so that our industries can keep moving forward.

Second, we amended the Electricity Act, so we can expect solar energy to grow stronger within a year or two, and wind energy in three to four years. We have quite a few issues to wrestle with here, not just the amendments, so we’re addressing them one by one. As with a blocked road, we can’t open up four or eight lanes at once—we have to clear two lanes before working on the rest.

Our next focus is a recent proposal to expand public infrastructure. This will expand fiscal expenditures but our objective is to build Taiwan’s long-term competitiveness and modernize our society. We thought about the kind of infrastructure a modernized country should have and looked at what Taiwan lacks in comparison. This is why we asked for a special budget. Many claim this special budget will increase government debt, but that’s not the case. Since we are bound by the restrictions of the Public Debt Act, we intentionally limited the total amount of government borrowing under the program, so there will be no borrowing beyond the amount permitted by the Public Debt Act. We also did not use any legal provisions to exempt the program from any of the required procedures.

Our objectives are very clear, and when we tell the public our objectives and what we want to achieve, the public can build a consensus about where the country is headed. This is very important and it’s mainly why we proposed a special budget. We wanted to clearly convey to the public the direction of the nation’s infrastructure—at least a part of it.

Next and more importantly on our agenda is amending the Company Act. Although it has been amended several times throughout its history, it still contains too many provisions that lag behind the times, so we must make some adjustments. But these adjustments will be very controversial. Local businesses will be impacted by how much we adjust and how we incorporate modern social concepts into the law. Simply negotiating these changes will be a steep challenge, but we will not shirk our responsibilities because we have committed to changing the Company Act. Democratic Progressive Party think tanks began studying the changes before the administration took office on May 20 last year, and the Ministry of Economic Affairs has been on the task since. We have made good progress so far and will announce our plans gradually.

Q9

BLOOMBERG: Will these amendments primarily focus on taxation?

PREMIER LIN: Our primary focus is to make it easier to start and run companies, and make information more transparent. Taiwan has many procedures for setting up companies that need to be simplified and made transparent, and company business models need to be more flexible. For a long time, Taiwan was criticized for limiting the par value of stock issues to NT$10 (US$0.33) only, so we revised a provision in the Company Act permitting closed companies to issue stocks with no par value. But these measures haven’t been fully promoted, so we must address the remaining obstacles once and for all.

As examples, in terms of corporate governance and shareholders meetings, what kind of responsibilities should the director of the board have? Can the company make its information available online in real-time, and to what degree? All of these things involve a change of people’s fundamental concepts. In the past, companies registered in Taiwan must have their paid-in capital verified by the government. But if the capital amount declined after verification, oftentimes people wouldn’t know where the money went. The verification was like making government responsible for how much paid-in capital a company has. Now, scholars involved in the amendment process are advocating that the capital amount should be announced by the director of the board, but that he or she should be legally liable for the veracity or accuracy of the amount stated. Changing these concepts will affect the way people think, and many people in Taiwan cannot accept these ideas, but we must change and embrace modern thinking.

So we will be making many changes to the Company Act this time, but we have to strike a balance because this is a controversial piece of legislation that will have a broad impact on Taiwan. We have to seek a feasible way of amending the law, and we will find it. The purpose of the Company Act is to give every new business in Taiwan a chance to grow and not be limited by any constraints in the act. From the company’s establishment to operation, the Company Act will have a corresponding set of regulations to help create the same kind of environment that other modern countries provide for their new businesses. This is what we want to do and of course there will be many institutional issues to address.

Q10

BLOOMBERG: Do you think this past year was a good beginning?

PREMIER LIN: Based on my timetable, we could have done much more. For instance, the amendments to the Labor Standards Act were delayed for a long time, so the amendments to the Electricity Act had to be delayed. And that pushed back the schedule for amending the Company Act and other laws as well. So now, the special budget bill to expand investments in public infrastructure is also stuck in the Legislature, and there are more bills in the pipeline we won’t be able to promote.

There’s inevitably going to be controversy whenever a bill is forwarded to the Legislature. And with so many disputes, it’s hard to address the issues. Then add on pension reform, long-term care and other policy issues. So we really have to evaluate our progress, because progress has lagged behind expectations. Legal amendments keep getting pushed back, which means other bills also get delayed. All of these issues still have to be resolved, and resolving them now is better than seeing them go unresolved for years. But the process of resolving disputes is taking longer than expected.

So sometimes, compromise is necessary, and amending the Electricity Act is a good example. We originally hoped to make substantial changes. But we could see that massive changes might create controversies that would drag on in the Legislature for a few months, or even half a year, without passing the amendments. So tradeoffs had to be made. We thus chose the amendments that were least controversial, and liberalized the green electricity market first, leaving further market liberalization for later.

But when I actually said that, people who, like us, had long advocated energy industry liberalization were angry. They felt betrayed. But we had to make that tradeoff, because if we didn’t, progress would be even slower. If the Electricity Act amendments still hadn’t been passed, we wouldn’t have submitted the special budget bill, and there would be no telling how long it will take before Company Act amendments could be proposed. So this is our problem.

There are many things I still want to do, and we have many important pieces of legislation coming up that are crucial for national reform. But I have to acknowledge that in a democratic society, these things can’t be resolved just because I want them to be resolved. The key to having a democratic society is that we need to forge a social consensus. Freedom of expression is firmly ingrained in Taiwan society today, but having left the authoritarian era behind, we’re not a mature democracy just yet. So we need time to develop better social order and forge public consensus, and that’s always a slow process. So you can’t really expect to turn everything around in less than a year. But I’m glad to know that at least over the past year, we’ve been moving forward. The direction is set.

Taiwan lost its way there for a while, and some industries didn’t have directions for their future. We wanted to embrace liberalization, but many of our industries didn’t have a firm direction. So after running into some problems, we just stopped in our tracks, and industries lost confidence.

A while ago we joined President Tsai in having dialogues with experienced companies that are not too well-known but are among the leaders in their fields—the “hidden champions.” Taiwan has many excellent small and medium-sized enterprises (SMEs), and since they know that sector well, we wanted to speak with them, and ask them where they hoped to see their industries 10 or 20 years from now. We asked them about what we should do so they can get there, problems they’re currently facing, and what their core issues are that we should address. Of course, the enterprises had many opinions. But we wanted to use these discussions to create a consensus, because enterprises can only have confidence in a vision of the future when the government and industry leaders have a consensus about future development, and work together.

So as a government, these are our primary tasks right now, which are all dedicated to getting results. Some tasks are related to legislation and are systemic in nature, while others are not, and we just have to move one step at a time. So if you ask how we’ve done over the past year, or whether our achievements have met my expectations, let’s leave that for the public to assess. What we can do is to continue our very best and keep moving forward.

Q11

BLOOMBERG: You mentioned your hopes for nurturing more companies like TSMC. In which of Taiwan’s industries do you think this is likely to happen? And of the hidden champions you mentioned, which industries have impressed you the most?

PREMIER LIN: I think it’s better not to name companies but I will say that I see many opportunities to build large corporations in the “five plus two” industries. We won’t single out any specific industry or company because in my experience, and as the saying goes, “a watched flower never blossoms, but an unintended willow grows.” We just want to offer an opportunity and create an environment where any company that works hard and seizes the right opportunities can flourish. It’s the government’s job to remove the obstacles to growth.

There are many factors at play here and I won’t be able to go through all of them today, but as an example, the government wants to create an environment that makes people want to stay in Taiwan. So we recently proposed a special bill on recruiting foreign professionals, and we wanted to build a better environment than before for retaining the people we find. But as for which companies can find or keep good people—that depends on the companies themselves. So we can’t predict which specific industry will produce another TSMC, but we want every sector to have this kind of opportunity. As long as we work hard, we can increase the probability of that becoming a reality, so this is what we can do for them.

So we will focus our efforts on the “five plus two” industries I mentioned, and I believe opportunities abound in those industries. Even if it doesn’t happen there, it could happen elsewhere, as long as we improve the overall environment. So the government’s job is to create a better environment.

As I just mentioned, we want to make it easier to retain foreign professionals in Taiwan, but that doesn’t mean we prefer foreigners over locals. We do so because Taiwan’s overall environment is actually not that friendly to foreigners, and spouses of foreign professionals face many restrictions. There’s also a waiting period to qualify for national health insurance, questions about whether their children can remain in Taiwan after age 20, and the requirement of a work permit to stay in Taiwan—a whole host of unreasonable restrictions. Even the ID numbers we assign to foreigners have a different format than Taiwanese ID numbers, and that creates a lot of problems for them when applying for credit cards or doing other things. These restrictions are entirely unreasonable, and if we wanted to change every applicable law, we would have to contend with a different set of problems for every law. So we decided to propose a special bill to address all of these restrictions with the aim of making it easier for foreigners to stay in Taiwan. We must treat them properly once they are here because they worked so hard just to get into Taiwan. We have to do at least that much, but it is still not enough.

The next thing we want to do is to ease requirements for foreigners who want to come to Taiwan. This will be a challenge because there are people in Taiwan who have conservative views, thinking foreigners who become long-term residents will take away jobs from the Taiwanese. They think foreigners skirt the laws to work here illegally, and are often exploited by employers. We hope to change this kind of thinking. Of course there have been cases of violations in the past and we do need to take preventive measures, but we simply want to open the door a little wider and see if we can find good talent from abroad who can help drive Taiwan’s economy.

Why do I mention foreign professionals? It’s not because we think foreigners are better than Taiwanese. Rather, to help move the economy forward, we need people with special skills that Taiwan doesn’t necessarily have. Of course there are many Taiwanese expats living abroad who are outstanding candidates, but they’re not the only ones out there.

Taiwan boasts excellent technologies and manufacturing ability, but it doesn’t have too much experience with systems integration. Even if we have great technology, we won’t be able to remove the obstacles from our path without systems integration or the right market channels or people connections.

Morris Chang, chairman of TSMC, is an excellent example. His greatest contribution to TSMC was taking a new business model to the international market, and Taiwan lacks people with this kind of experience. TSMC is able to receive overseas orders very quickly and work as an OEM (original equipment manufacturing) contractor for foreign companies because of Chang’s contributions. He had the vision and the ability to combine different systems and it is this kind of talent that Taiwan lacks. We need people like that to help move Taiwan’s industries forward.

There are few people with this kind of skill set but I want to make Taiwan a friendlier environment for them so that we can bring Taiwan’s industrial chains to the fore. Where can we find a second TSMC? I don’t know, but we should at least try and open the door for foreign talent. If every company shuts its doors because their English is poor or they don’t want to communicate in English, then the foreigners will not want to work for them. But not every company is like this and I’m sure a lot of companies don’t work this way. Where will the second TSMC arise? I don’t even want to venture a guess; I just want to create a better environment for that possibility.

Q12

BLOOMBERG: President Tsai has said this Cabinet is a “reform cabinet,” and the Executive Yuan has proposed many plans to reform the pension system and energy policy, and implement a standard five-day work week. You just said that, at times, reform progress hasn’t met your expectations. So which issues do you think you’ll prioritize? And what pieces of legislation would you like to prioritize for passage during the current legislative session?

PREMIER LIN: Many of Taiwan’s problems over the past few years, and the issues that have cropped up, have been urgent issues that need to be resolved. Pension reform is the best example. Judicial reforms are also critical. But the Executive Yuan can’t take the lead on pension or judicial reform. Pension reform involves the Examination Yuan, so President Tsai had to take on the task of coordinating the various branches of government involved. That’s why Vice President Chen Chien-jen served as the convener of the National Pension Reform Committee and chaired many of the discussions about pension reform, and the Presidential Office is handling judicial reform. That will keep the Executive Yuan from getting involved in many political controversies and taking on unnecessary burdens, so it can focus on policies more closely related to economic development.

But “policies related to economic development” do not just address problems pertaining to economic development per se. We need to remove uncertainties that would impede investment, including those concerning labor, as well as environmental protection.

In Taiwan, veto power over whether a development or infrastructure project passes the environmental impact assessment, and can therefore proceed, lies with the Environmental Protection Administration (EPA), and not the various competent authorities. Such a system is rare compared with other countries in the world.

Why so? Because in the past, for a long time, Taiwan didn’t have a good track record handling environmental protection. So society created a system that goes a bit overboard, and lets the EPA deal with these issues. Quite often, environmental protection entities don’t have a firm grasp of finance, economics or public works. They’re focused on environmental impact assessments, and will often overlook investment uncertainties. That’s why environmental impact assessments for development projects can go on for seven, eight or nine years—and still not pass. The Formosa Plastics Group applied for an expansion of the nation’s sixth naphtha cracker only to have it rejected six years later, and have to start the application process all over again. Six years—for what? If a foreign investment firm wants to make an investment in Taiwan that has to pass an environmental impact assessment, how long will it take? Can’t tell. If it’s fast, maybe six to eight months. If it’s slow, maybe six to eight years. So do you think they’ll invest in Taiwan? Without windfall profits or certain privileges, who would want to come and invest? So this isn’t a good national industrial policy, and we need to reduce uncertainty surrounding investments. There are several ways to do that. I’ll tell the EPA that, no matter how restrictive or permissive the environmental regulations are, to please clarify the steps in the process. Whatever passes, passes. Whatever doesn’t pass, doesn’t pass. But we can’t keep dragging it out.

If the environmental protection requirements are so stringent that no projects pass the environmental assessment review, then the EPA should tell people right away. If 100 out of 100 cases fail the review, then we need to go back and review the environmental protection standards to see if there’s a problem. If 90 out of 100 cases pass, then there’s no problem. But don’t let those 90 cases wait five or 10 years to pass the review. If it can pass, then pass it right away. If it can’t, reject it right away. We’ll have to look into why these environmental assessment reviews drag on for so long. The EPA or the environmental impact assessment committee is not necessarily the cause for the drag, but the related processes and procedures do need to be refined.

The deputy minister at the EPA is well-respected in environmental circles, so I’ve asked him why environmental impact assessments take so long. He said there are a lot of systemic problems, but choosing the wrong project site in the first place is usually the main problem. If the site selected to build a factory is controversial to begin with, it is either highly unlikely to pass, or it will drag on for years. So to pass the environmental impact assessment, it takes good judgment from the start, and knowing how certain projects should proceed. That means the game rules have to be crystal clear, and the people carrying out the projects can’t have unrealistic expectations. Good in-advance communication between the government and the investors does help, and the competent authorities are responsible.

So when business units come to the Ministry of Economic Affairs (MOEA) and Ministry of Transportation and Communications (MOTC) with development or investment projects, these two ministries should tell the potential investors very clearly that they need to have environmental impact assessments and how to proceed with them to avoid complications. The ministries need to support and assist those business units with professionalism.

The current situation is that government agencies help potential investors with applications and locating resources, but often take on a hands-off approach when it comes to environmental impact assessments. Whether these projects pass or fail is entirely up to the EPA. Things can’t work like that. To reduce investment uncertainty, we need to refine our processes and procedures and make them more reasonable.

Apart from environmental protection, there are other uncertainties that impede investment, including land utilization, water and electricity supply issues that need to be addressed. As I just said, for Taiwan’s economy to progress, people have to be confident about the future. To instill that confidence, we have to combat uncertainties with clarity and transparency. We have to take a pragmatic approach when addressing these issues.

Take Taiwan’s energy situation for example, many people are concerned that after we become nuclear-free, there will be power shortages, so who would invest here? You can tell them: That’s not the case. We are still capable of maintaining steady energy supply after we stop using nuclear power to generate electricity. We must prove to them such assertion is not just based on empty words, but is backed by solid, feasible plans that people can see.

So we’re now being tested, and the test has been on-going since May 20 last year when the new administration took office. This will be a critical summer, because once we start phasing out nuclear power, Taiwan Power Company’s previous plans will all have to change. As long as we can make it through this year, next year, and maybe the year after, I think that everyone will have more confidence about Taiwan’s ability to provide a stable power supply. So we want to overcome this difficulty to reduce any uncertainty that investors may have. And we can do it.

Q13

BLOOMBERG: Which pieces of legislation have priority at the Legislature now? Which ones are more controversial but are still being promoted? Which ones do you think must be passed in the current session?

PREMIER LIN: We have many pieces of priority legislation that we hope to pass, and not all are related to finance or the economy. Based on past experience, we know it won’t be easy for these bills to clear the Legislature, but we’re hopeful.

Not long ago the speaker of the Legislature Su Jia-chyuan asked me to give him a list of priority bills and legislation so he can go back and negotiate with the caucuses at the Legislative Yuan. I compiled a list, but he said it was too long and asked if I could shorten it or pick out the higher priorities, so I reviewed the list again.

So, of the bills in front of us, we hope the special bill on recruitment of foreign professionals can receive priority review by the Legislature, and we hope to receive support for the special budget bill as well. These are important legislation related to finance and the economy. Of course there are other important items as well.

Q14

BLOOMBERG: What’s your blueprint for Taiwan’s economy? What needs to be done to change the structure of the economy?

PREMIER LIN: I think the fundamental issue for Taiwan is still about how we can keep innovating, so that we can add jobs. Taiwan’s biggest problem is the lack of new investment opportunities because many of our companies have moved abroad. The result is that our investments are heavily skewed toward the information and communications technology sector, with little for other sectors. This has to change. We must broaden the scope of investments and create new opportunities. To do so we have to let more talent into Taiwan.

We can’t simply expect jobs to grow and be done with it. If most of the new jobs created are low-salary positions, then that doesn’t help Taiwan much. So if we want to raise salary levels, we have to increase productivity. I think this is the challenge facing every country in the era of globalization. To raise salary levels, we have to tackle a few major problems.

The first is protecting our intellectual properties from plagiarism during the course of innovation. This is a big problem. Many companies in Taiwan have had their intellectual properties taken by former employees who are recruited to the other side of the strait. This deals a heavy blow to Taiwan’s industries and we want to solve this problem. We want our industries to be able to carry their innovative ideas through to reality, and keep the fruits, otherwise they’ll lose the drive to innovate and just copy other people. This is a major problem that needs to be addressed.

Another problem is losing our talent to places like mainland China and Singapore. The trend seems inevitable because our salary levels are indeed lower than those economies. Until wage levels come up higher, we can’t solve this problem; we can only open our doors so that foreigners can come in even as our talent goes the other direction, and then we’ll have an actively flowing pool of talent. This will beef up our chances of enhancing our competitiveness and driving wages up.

Another challenge that goes hand in hand with low salaries is low commodity prices. If we look at average purchasing power, Taiwan’s GDP ranks among the world’s top 20—higher than the U.K. as I recall—which means Taiwan’s real purchasing power is strong. So while salaries are low, commodity prices are even lower. Of course houses are very expensive here, but if one chooses to rent instead of buying a home, then he or she has sufficient purchasing power.

Under the circumstances where purchasing power is sufficiently strong, raising salary levels will eventually and inevitably drive up commodity prices—but rising commodity prices is something the Taiwanese public cannot accept, not even a moderate rise. This may have to do with long-held cultural and social beliefs that it’s the government’s duty to stabilize prices, and that any instability in this regard will affect low-income families the most because high-income earners can always afford what they need.

How is the government to strike a balance here? So I don’t expect salary levels to rise a great deal because that may lead to significantly higher commodity prices at the same time. That’s not what we want and I don’t think it’s politically feasible either.

Q15

BLOOMBERG: Has the appreciation of the New Taiwan dollar encouraged people to spend their income abroad, as they can buy more goods there now? Or has it enabled people to buy more imported goods and fuel here in Taiwan?

PREMIER LIN: The faster the New Taiwan dollar rises, the stabler the commodity prices become in Taiwan, thereby preventing price hikes. But hoping for miraculous effects from the exchange rate is just wishful thinking. The economy is something substantive, not something magical. That’s true with everything, and that’s why we must respect changes in the exchange rate as long as it does what it’s supposed to do in the market. We shouldn’t look to the exchange rate to boost our economy, and we won’t allow it to weaken our economy either. We just hope the exchange rate remains a neutral factor in the market. In practice, it shouldn’t be too difficult for Taiwan to do that with the exchange rate and currency.

Taiwan’s problem lies within itself. What development model do we want to follow for the future? Taiwan today has low prices, low salaries and low income, but its purchasing power in the world is strong―and this is where we are. If we were unable to change these conditions, how do we instill confidence and hope in people that Taiwan’s industries have a promising future? That’s what’s important. Many people think that we need to stop mainland China and Singapore from poaching our talent, but we don’t think this is entirely preventable. In reality, prices are higher in Shanghai than in Taiwan, so how do we stop this? There’s no way. Prices in Shanghai are already higher than Taiwan and therefore call for higher salaries. That’s only natural, so what can we do?

We need to create an environment that allows talent to come and go, but keeps those who have high expectations for Taiwan’s future. Some people will leave for a higher salary, but others will stay because they can learn, grow and find something meaningful in Taiwan. We need to find talented people who want to start a business here and put their abilities to use. Taiwan can serve as a good base for them to accomplish their goals and do their best. These people can stay and create miracles in their own industries. If this happens, Taiwan will have new paths to take. The economy cannot satisfy everyone; that’s not possible.

Q16

BLOOMBERG: Do you mean that your outlooks are neutral for salary growth, the exchange rate and commodity prices? Is this what Taiwan should look for in the future?

PREMIER LIN: What I mean is, we won’t blindly raise salary levels while ignoring the possibility that prices may go up.

Q17

BLOOMBERG: You won’t raise salary levels based on rising prices?

PREMIER LIN: I don’t think that would be an appropriate course of action. That would just be hoping for another magic trick. All that we can do is admit that Taiwan’s efforts over the last 20 years to keep prices stable probably contributed to Taiwan’s low wages today. And the offshoring of Taiwan’s industries has made it difficult to keep salaries up to international levels. Look at economies like Hong Kong, Singapore and Korea. Korea’s GDP is higher than Taiwan’s, but its real purchasing power is much lower than ours because its prices have risen tremendously. That’s probably not what people in Taiwan want. If we really wanted to do this too, everyone will have to pay a hidden price. Some people only look at the good side and ignore the bad, but the government cannot just ignore the likely impacts.

A responsible government must choose a realistic, feasible path. What does such a path tell us? It tells us that using price increases to push up salaries is not feasible in Taiwan. What we should try to create is an environment that lets Taiwan experience another industrial miracle, allowing people who want to start a business to remain in Taiwan to do just that. That is what we wish to see. We hope to see more of these industries in Taiwan.

As such, Taiwan can link up with international industries, just as some of our companies have linked up with Apple. If Apple does well, so will our companies. However, if one day Apple’s products can’t compete against better products by another company, that company will also need Taiwan. So we will continue to play our role in the industrial chain. And yet, it’s too risky for us to just rely on our current place in the industrial chain. We have higher hopes than this.

As an example, Taiwan has one of the best wind fields in the world, so we want to develop wind-generated power. We’ve asked international investors to come and invest in Taiwan’s wind power because they can bring in management and system integration experience and certain technologies that we don’t have. On the other hand, Taiwan has many other advanced technologies, so we hope the investors can find cooperation partners here. We won’t try to force upon them partners that are uncompetitive. Our hope is that their competitive partners in Taiwan can harness wind fields and later help develop wind power industries in other countries. This way, Taiwan’s industry chain can be integrated with the international wind power industry chain, like the cooperation model we have with Apple.

The world has so many good wind power companies that need Taiwan’s resources. In this respect, Taiwan is confident that it can offer high-tech, high-quality goods. The main problem is that we lack the right channels, talent and systems integration know-how. If our SMEs and companies have the right channels and systems integration capabilities, I’m confident their business prospects would be great.

Q18

BLOOMBERG: Is talent the problem that needs to be addressed the most?

PREMIER LIN: Of course a country’s economic development relies on people! Without people, we have nothing. But we can’t just depend on Taiwanese talent, so we hope people from other countries can work with ours and grow and learn from each other. Taiwan’s engineers and laborers are highly skilled, otherwise our wafer foundries would not be so competitive. Other countries also have competitive industries but Taiwan’s SMEs are known for being extremely nimble—they can provide customization and deliver products quickly. Few other countries can do this. Taiwan has outstanding engineers and manufacturing specialists, so what do we lack? What we need are the right channels and system integration know-how. Once we incorporate these elements, we can look forward to a bright future.

Q19

BLOOMBERG: Regarding your comments on innovative industries and attracting investment to Taiwan, several of Taiwan’s large manufacturers, including TSMC, have recently expressed interest in investing in the United States. Do you have any concrete measures for attracting more foreign investment to Taiwan? Have you heard of any foreign enterprises that are seriously interested in investing in Taiwan?

PREMIER LIN: The wind power industry is a good example. In the past, people thought the government was simply giving lip service without any real action, so everyone just waited around to see what would happen. However, this last year, our commitment to wind power has piqued a high level of interest, attracting nearly all of the major wind power enterprises in the world.

Q20

BLOOMBERG: Can you tell us the names of those companies?

PREMIER LIN: They include most of the well-known firms, as well as some that are not so famous now, but are eager to expand their reach. Most of these businesses come from Europe. European countries excel at wind power generation. Most of these firms have shown a very high level of interest, and have begun recruitment and business planning.

Of course the government needs to show its determination. We have to tell them that this time we are in this for real, and we will make it happen. Many challenges need to be addressed when it comes to wind power development. Investors want to know what the government has done. For example, we need wharves to transport heavy equipment and underwater support structure. So far, we have chosen the sites for our wharves, and we also have a clear plan about their future functions. Domestic industry integration is already happening, and the necessary regulations are in place, as we already passed the Electricity Act.

The Taiwan Power Company (Taipower) is another factor. After all, it manages the power grid in Taiwan, a fact that will not change for the time being. After the power generated by offshore windmills is sent inland, can Taipower make the grid integration and transmissions work properly? Does the company have a plan in place? Windmills can generate more electricity than the combined output of several nuclear plants. How is that electricity grid to be integrated and transmitted? There are a lot of problems with that.

We have demanded that Taipower propose a plan with a schedule, and that its planned capacity exceed what the government promises. That means, if we promise to install wind power facilities with a certain capacity in the next few years, Taipower has to be able to handle that level or more. This will give investors more confidence. These are the things that we hope to accomplish. But these are all bottlenecks, and they all involve many other problems. We need to demonstrate that we have solutions for each one of them.

Of course, just talking about them today won’t get things done. We need to have ideas and plans that are ultimately carried out, and there will be a lot of difficulties after that. So, just because we are discussing these things doesn’t mean they have already been accomplished. They will put us to the test for the next three or four years. We have demonstrated our determination over the past 10 months, but people want to know if we will remain committed over the next three years.

Q21

BLOOMBERG: In terms of power generation, your goal is to have green energy account for 20 percent of total power generation by 2025. It seems that the government is making great strides in developing wind power and solar energy. Is it possible to achieve that goal earlier or increase the target percentage? What about the goal of becoming nuclear-free?

PREMIER LIN: Right now we don’t want to be greedy, because being too ambitious can ruin things. We want everything to be feasible. Let me put it this way. Do you think that as long as solar power generation is developing quickly, everything is fine? Let me tell you. When solar power becomes more prevalent, many people may start to feel that our solar panels are so ugly, or even wonder if they may jeopardize other ecosystems. So we need to be extremely careful at every step. One of the things that the Executive Yuan is doing is making sure that our solar panels are aesthetically pleasing, so that people will see them as part of the landscape instead of an eyesore.

Q22

BLOOMBERG: So you don’t plan to change the goal for the time being?

PREMIER LIN: The most important thing is that we hit the target, because we have been talking about this for so many years and still haven’t been able to get it done. The first step is always the hardest, and our goal requires changes in regulations and people’s concepts. If you do it right in the beginning, things will move very quickly later on. The best example is smart meters. When I proposed implementing smart meters, many people said the Executive Yuan had talked about the issue many times in the past and yet had never succeeded. So they thought that many of the ensuing problems would end up not getting resolved, and everyone had his or her own explanation.

After I became premier, I discovered that the issue is whether or not the policy decision is clear. At that time, Taipower told me there were many different types of smart meters. The digital type generates data and keeps a record that you can check later, but not in real-time. And they are inexpensive. There are also meters with two-way communication capabilities that give data readings immediately. Taipower originally planned to begin with the digital type, and then adopt meters with communication capabilities later if needed, because given Taiwan’s low electricity rates right now compared with other countries, and the fact that most households are not big power users, it’s unlikely that communication-capable smart meters would help save much energy. After some debate, we had to make a judgment, and finally chose the meters with communication capabilities, hoping to get the best possible results with a single effort. But there were many problems with that type of meter. All we could do was review the whole thing. What the experts told us made sense so we decided to give it a try and press the schedule a bit harder. But after the new schedule came out, I still felt the whole process would take too long. But we had to trust these professionals and we cannot keep pressing them. So we are waiting to get a meter that has communication capabilities that will work, and that has all the functions we want.

If things start out slowly, that is acceptable, because we need to sort out many issues. But once we start the implementation phase, it will be easier to review our progress. So we want to take one step at a time, and we know that sometimes there can be a lot of pressure. For example, we want to become a nuclear-free country and eliminate nuclear power by 2025, but we’re facing serious air pollution right now, and people are demanding that our fossil-fuel plants cut down their power output. So we are under mounting pressure all the time. How do we guarantee power supply under these conditions? Ensuring a stable power supply is our biggest challenge, but we have to respond to society’s demands regarding our severe air pollution. That’s why we will not easily commit ourselves to overly ambitious and impractical goals. We are zooming in on our goals, but reform takes time, and there is no way to satisfy everybody in one try.

Q23

BLOOMBERG: About the Forward-looking Infrastructure Development Program you mentioned, the government is hoping that the NT$800 billion-plus amount to be invested in infrastructure will spur private investment. How did you come up with the projections? Can you talk about some specific projects?

PREMIER LIN: From a pragmatic perspective, people asked what economic contributions government investment can make, and whether the government has done any benefit assessments. There are several blind spots here. Just what are these so-called contributions or benefits? If we gauge things using GDP, then what constitutes a “benefit” is problematic, because many benefits of public investment will not necessarily be reflected in the GDP. For example, rail transport projects can reduce air pollution, but that kind of benefit will not show up in the GDP, and neither will the safety provided by public transportation. We want to create people-friendly aquatic environments in Taiwan, but the benefits to industry will be very limited.

From a technical standpoint, if we use GDP growth to evaluate the contributions made by public investment, then we have two questions. The first question involves the direct contribution that government spending makes to GDP. The second question involves the indirect contributions when government spending is combined with other factors. For example, when the government invests in wind power, it will only invest in wharves, basic infrastructure, and nothing else. The remaining facilities will be funded by the private sector, and the Electricity Act has just been amended specifically to allow private investment in the energy industry.

So let’s say the government invests several dozen billion NT dollars in public works. How will that directly contribute to GDP growth? With an investment of that size, the direct contribution to GDP is extremely limited. Taiwan is an open economy, so the multiplier effect is either non-existent or extremely small, so is direct contribution to GDP growth.

But after those public investments are made, laws and regulations amended, Taipower does its part, and the wind power facilities off the coast of Changhua County are ready, generating 3 gigawatts of power or more, we will begin to see an incredible amount of private sector investment. But we can’t expect that an increase in public spending will create these benefits overnight. It will still take a lot of coordinated effort.

From a strictly pragmatic point of view, calculating increases in investment or GDP growth based on what the government does is, in itself, a limited way of thinking. In Taiwan, the multiplier effect of public investments is extremely small, and the direct contribution of government spending to the economy is very limited. But what we are really looking at is future development. If the government doesn’t build the wharves, wind power will never get off the ground. But once the government puts the necessary hardware and software in place, it will drive significant private sector investment, about NT$1 trillion, and that will make a huge contribution to our economy.

If one really wants to calculate the benefits, there are more. After wind power comes in, it might drive other forms of consumption and bring in talent and management techniques—the benefits are incalculable. Wind power is a new industry, so private investment can be calculated. But what electrification of the rail system does to help Taiwan’s overall industrial situation is even more abstract, and hard to express in numbers.

For people like us who are doing the cost-benefit analysis, we want to see where the benefits really are. When we talk about benefits in terms of how much money was made, that’s the private sector perspective.

For government, the benefits are actually pretty simple: what is the difference for society before and after a public works project is completed? That’s called a nonmonetary effect, which is more meaningful for the government.

Sometimes it’s hard for the government to explain its decisions in strictly monetary terms. So many public policies are strategic public policies. When enterprises talk about mergers and acquisitions, they call them strategic mergers and acquisitions. An enterprise embarking on a strategic merger or acquisition might not only consider the immediate, concrete benefits of that particular move. Instead, it has to determine how much that move will help going forward, and whether it’s worthwhile, even if it is making a loss at the time.

National development involves strategic planning. The development of the railways has been a boon for Taiwan. It’s a very important strategy. Having a complete rail system, fully electrified, and a comprehensive two-track system around the island are among the most basic criteria for a modernized country. There are so many intangible benefits that can’t be calculated in monetary terms. So when we talk about this, it’s hard to account for every single thing. But still, we want to try and estimate the impact that increased government spending has on GDP, that is, the impact of an NT$880 billion increase in expenditures.

So NT$880 billion in government spending probably makes a direct contribution of about NT$1 trillion to GDP. Why? Because the multiplier effect in Taiwan is very small. For every NT$1 spent, it only generates about NT$1.2 or NT$1.3 in demand growth. But if we look at a country with a closed or nearly closed economy, the multiplier effect is two or three dollars for every dollar spent. Taiwan has an open economy and what we want is to encourage private investment, so I’ve explained a little bit about private sector investment in wind power, but I haven’t told you about the other benefits that public investment will drive. I haven’t told you about the benefits of the government’s investment in the digital economy, because it’s even more difficult to estimate. But I do expect them to be quite substantial.

So based on the analysis I just gave you, wind power really can take off in no more than five to 10 years. But if Industry 4.0, driven by the digital economy, really takes off as expected, the effects will be felt for 10, 20, or even 30 years.

Taiwan can’t afford to lag behind in terms of Industry 4.0. If we want national development, it’s something we have to do. There can be no hesitation. So you ask how extensive the benefits will be? I’m afraid that involves society’s subjective values. Sometimes, if you oversimplify the way you look at the benefits of public investment, it’s really hard to give comprehensive answers. We do hope to tell people throughout our society, from all different perspectives, about the direct benefits and direct impacts that public investments deliver on the economy. But we also need to tell the people about the strategic and intangible benefits that are desirable in the future. That’s the only way to convince the public whether these choices and these public works are ultimately worth it. What I’m concerned about is that the benefits of the public works we’re planning won’t achieve the expected goals. That’s the important thing—not how much public works contribute to GDP. As long as public investments achieve our expected goals, the social benefits will be clear for all to see.

Q24

BLOOMBERG: Following the launch of the New Southbound Policy, Taiwan is seeing tourist numbers from Southeast Asia approaching those of mainland Chinese tourists. Apart from that, what specific direction do you have in terms of economic and investment-related contact with these economies?

PREMIER LIN: For Taiwan, the New Southbound Policy isn’t just about overseas investment. Taiwanese businesses have been operating in Southeast Asia for a long time, investing in many different business sectors. What we hope to do is integrate these investments, and to a certain degree, maintain cordial links with Taiwan’s industry chains. Because these investments involve cooperation with Southeast Asia, we want these relationships to be complementary, just like the cooperation between Taiwan and mainland China in the past. It’s a pity that many Southeast Asian nations don’t have formal diplomatic ties with Taiwan, so we have to work hard to strengthen people-to-people relations, which involves some major issues. We hope to establish cordial, long-term relations with Southeast Asian nations based on mutual understanding and common experiences. So this is why the New Southbound Policy starts with people, because we hope that personal exchanges will fill in the gap, foster greater awareness of each other’s cultures, foster familiarity, and generate positive feelings. Relationships established under these kinds of circumstances make for solid, long-term relationships, and create a meaningful context for the development of our industries. This is really where we need to focus our efforts.

What advantages do we have? First, many Taiwanese enterprises have already established a presence in these countries. They are familiar with local conditions and have established substantial networks. We want to take into account their needs and views. Second, a large number of nationals from Southeast Asian countries are married to Taiwanese nationals and live here. They maintain strong ties with their home countries, and we hope they can help Taiwan better communicate and interact with these countries. The children of such couples, because of their parents’ backgrounds, have advantages in terms of their grasp of Southeast Asian languages and cultures. And in the future, we hope to involve these children in the development of the New Southbound Policy. But these efforts aren’t enough. We want to foster even closer ties. We hope to increase bilateral tourism, student exchanges, and also exchanges between management units in the public and private sectors to enhance mutual understanding and foster greater familiarity. These are the fundamental tasks we must undertake. We don’t need to start by thinking about what and where to invest, or what kind of connections to establish. We should first develop cooperative ties.

The establishment of such cooperative ties has its benefits. It boosts people-to-people exchanges. A lot of students from Southeast Asia come to Taiwan for internships, after which they return home. They can help create even better links between industry chains, and assist Taiwanese enterprises in setting up overseas distribution channels. So many exchange students have lived in Taiwan and are familiar with our country. It’s easy for them to work for Taiwanese companies, and they can play a role in helping Taiwanese companies explore business opportunities.

Of course, we must also cooperate with such countries as Japan, Korea, and others, as well as mainland China. By properly engaging in such cooperation, the New Southbound Policy can meet its targets, that is, ensuring close links between industry chains rather than just investing directly. There are risks in only investing, because if other aspects of the relationship are not strong, uncertainty arises. In a number of countries in Southeast Asia, the political situation is not very stable, with governments sometimes making dramatic policy changes. Without close ties in the private sector, we are depending on a government’s openness to our investments. If one day a government no longer welcomes our investments, or if its investment policies change, it will be very difficult to adapt.

That is why we are stepping up our efforts. Increasing people-to-people exchanges is the very first step we have taken, and we have seen some success. Last year, the number of tourists from Southeast Asian countries increased significantly, by more than 20 percent according to my understanding. The number of students from Southeast Asian countries is expected to grow nearly 10 percent this year. We hope to strengthen our efforts in this area.

Q25

BLOOMBERG: You just mentioned your ambition for reform and development. Due to political disputes, since 1996 the average length of a premier’s tenure has been 17 months. There is some controversy concerning your party affiliation. Now that you are at the Executive Yuan, are you confident you can break this cycle of instability? What is your view on tenure lengths?

PREMIER LIN: I am not interested in making breakthroughs in terms of the length of my tenure. In Taiwan’s political environment, the length of a politician’s tenure cannot be decided by the will of a single individual. There’s no job that can only be accomplished by a specific someone, so I don’t believe that there’s only one person who can do the job well. Let me put it this way. Since we are here to do this job, then we should not waste time, but rather try to fulfill our responsibilities. We should try to complete our tasks in as short a time as possible. It doesn’t have to be me. Maybe someone else can do the job better. So changes of personnel can happen. It really depends on the political circumstances then.

Of course, if I can do the job well, and if there is an opportunity to continue… By “opportunity” I mean both subjectively and objectively. Subjectively, I have to be interested in doing this work. If I cannot contribute here, then I should not waste my time. I would be happy doing other things. Objectively, even if there was interest on my part, I might not be asked to do the job. This is the political reality. The premier is not directly chosen by the people. Taiwan has a dual-leadership system. The president is elected by the people and has to appoint someone to head the Executive Yuan. So the president’s considerations as well as changes in the political landscape come into play.

What I can do is to devote my best effort while in office and not waste my own or anybody else’s time. This is an important job that requires full effort at all times of the day. However, if someone else is going to take over, then I would hope that the Executive Yuan will continue to do a great job. That’s all there is to it. The length of my tenure is of no concern to me. It has never bothered me.

Q26

BLOOMBERG: You mentioned external trade. Now that Taiwan has signed bilateral economic agreements with Singapore and New Zealand, will there be similar agreements in the near future?

PREMIER LIN: Taiwan would certainly like to improve trade relations with more countries and remove any barriers to open trade, but we also understand the political constraints we face. The other side of the Taiwan Strait has been boycotting our efforts because regretfully, it sees trade as not just an economic issue but a political one. We hope it can think more clearly and rationally about such matters.

Stronger economic ties between Taiwan and other countries will benefit not only Taiwan but cross-strait economic relations as well, and we hope the other side can understand that we’re willing to improve economic ties with it. When we pursue free trade agreements with other countries, that doesn’t mean we’re severing economic relations across the strait. That just means we want to balance our development and build a more rigorous economy. Taiwan is a small and open economy, and if we are to grow and move forward, we have to maintain open economic relations with other countries. Any actions to obstruct these efforts will only make things hard on the people of Taiwan. Our neighbors on the other side of the strait must understand that such a strategy is not beneficial to cross-strait relations either.

We also have to avoid this narrative created by the other side that we’re intentionally going up against it by pursuing economic and trade ties with other countries. We must steer clear of this kind of misunderstanding. So it has become necessary for us to adopt a more pragmatic, low-profile approach to building better trade ties with other countries. We’re not going to pass up any opportunities to make a breakthrough, therefore we have to be humble and pragmatic about it. So we won’t be saying to the mainland, “Hey, we’re going to sign a free trade pact with this country or that country, come and boycott us!” We won’t do things like that.

We hope everyone can approach this issue in a pragmatic and rational manner. Our neighbors on the other side of the strait must give this more thought and recognize that Taiwan’s economic progress will actually be helpful to them. In other words, blocking Taiwan’s economic development does not benefit them and makes things difficult for the people of Taiwan. They have to recognize this.

Q27

BLOOMBERG: How are trade talks going with the U.S.?

PREMIER LIN: The U.S. has its own priorities regarding trade, and it is currently rethinking its foreign policy with its overall agenda in mind. However, President Trump has expressed reservations about signing multilateral trade agreements because the U.S. prefers one-on-one free trade negotiations. This is their strategy of choice, and we respect that. In principle, we believe that any form of economic cooperation should be reciprocal and beneficial to both sides, and we would be happy to engage in that type of cooperation. If the U.S. chooses to give priority to free trade talks with Taiwan, we would come to the table with the greatest sincerity and find a way to make it work. But this isn’t something Taiwan can decide unilaterally; it also depends on whether the U.S. is willing to make Taiwan a priority.

The industrial relationship between Taiwan and the U.S. is marked by excellent complementarity and close industrial chain links. Looking at U.S. companies’ investments in Taiwan, we can see how strong this industrial relationship is and how the complementarity effect has helped boost the competitiveness of U.S. products. Apple is the best example but it’s not the only one. We have seen this effect with several other companies, but I won’t name them individually. If the U.S. wants its products to be more competitive, it will absolutely benefit from having a close economic relationship with Taiwan. We’re confident of that. So if the U.S. really wants to pursue this possibility, the two economies can definitely help each other.

Q28

BLOOMBERG: What about the European Union?

PREMIER LIN: Taiwan basically has some degree of complementarity with the various advanced economies of the EU. Taiwan offers outstanding manufacturing efficiency and flexibility, thanks to our many SMEs, and would be happy to hold discussions with the EU. The EU has also expressed openness to discussing a free trade pact with Taiwan. I believe the European Commission gave this indication one or two years ago, but it doesn’t necessarily mean that Taiwan will receive priority for trade agreement talks. So, we’re hopeful and will continue conveying our willingness to them, to see if they are interested in closer economic ties with Taiwan.

There are also preconditions to negotiating trade where both sides have to be willing to make improvements or open up more. This is a process of give and take and each side has certain expectations. As long as we seek mutual benefits and find common ground, I think it’s all good. And it doesn’t have to take the form of a free trade agreement—anything that promotes a closer economic relationship is good.

Q29

BLOOMBERG: Which of the more protectionist-leaning policies of the U.S. do you think will have negative impacts on Taiwan?

PREMIER LIN: I don’t believe President Trump is a trade protectionist, nor do I believe the U.S. will take a protectionist line because that would be inconsistent with values the U.S. has always held. I believe that what President Trump is advocating is not trade protectionism but fairer trade. Perhaps in past trade deals, the U.S. opened itself up too much and allowed certain countries to gain significantly, so not all trade was conducted in a fair competition environment.

The U.S. regulatory system has very high standards so if the U.S. enters negotiations with, say, a country with much lower labor standards, it would naturally be at a disadvantage. President Trump believes these problems resulted from unfair trade, so he’s seeking what he considers fair trade. And perhaps there’s a gap between what he’s seeking and what the international trade rules allow, so he’s trying to make some changes. I think this may be how the U.S. views trade.

I would agree that these ideas reflect anti-globalization views, which often see trade as being unfair. But fairness and unfairness are abstract concepts that must be reexamined by the international community. Regardless of how the U.S. adjusts its policies, I don’t believe it will adopt an entirely closed, protectionist regime. I don’t think that will happen.

For our part, Taiwan has raised its standards for labor conditions, environmental regulations, and other areas to the level of advanced countries. Even though the U.S. has asked us to work more on issues like intellectual property rights protection, we’ve already made great strides and the U.S. recognizes that.

So I think Taiwan can discuss a form of trade that the U.S. will view as fair. Given these conditions, we can still create complementarity effects because Taiwan has many competitive advantages the U.S. industry may not have. Building industrial links to any degree will definitely benefit both sides and make each other’s industries more competitive. I believe there are many opportunities for linking the industrial chains.

Q30

BLOOMBERG: You have a background as an expert on tax reform. Recently, the Ministry of Finance has begun drafting short-term and long-term tax reform plans, with the short-term plan addressing the tax rate on dividend income, and a draft should be submitted to the Executive Yuan in the near future. Can you discuss the direction you are pursuing? With regard to long-term reforms, for example, U.S. President Trump has started to put forth proposals concerning tax cuts, which are not yet very concrete, but it seems likely that the corporate income tax will fall to about 15 percent. In global competition for human resources and business investment, the tax rate is an important factor. Can you address your views on tax reform?

PREMIER LIN: First of all, tax reform issues are somewhat different in each country. The reform in the U.S. addresses long-term issues. Every tax reform is a double-edged sword, and promoting it requires a great deal of prudence and planning. Goals must be set first, and then we see what problems ensue that we want to solve, whether resolving these problems would win the support of society as a whole, and what costs it would entail.

Many people in Taiwan are calling for tax reform, but there are different opinions about exactly what should be done. Some people want to promote energy taxes, others believe that there are problems with real estate and property taxes. So there are many tax issues here in Taiwan that people criticize.

But all reforms have two sides, and they come with their costs. Is it being done to increase tax revenue, or to address issues of fairness or efficiency? These are things that must be weighed. Recent discussions about tax reform by the Ministry of Finance have centered on identifying what needs to be resolved. What is the goal? There will, of course, be other issues resolved on the sidelines, and we hope that we can kill multiple birds with one stone. But resolving other issues on the sidelines is a byproduct. The main goal has to be identified, and then the byproducts.

The important issues Taiwan wants to resolve through the current tax reforms are somewhat different from the U.S. When Taiwan was implementing the integrated income tax system, there wasn’t too much difference between the tax rates on foreign and domestic capital returns. Under that integrated system, after foreign investors paid their business income tax on capital returns, they couldn’t apply the integrated system’s tax refund provisions to calculate their consolidated income tax, so they pay a separate tax at a rate of 20 percent. A 20-percent tax rate doesn’t seem that high, but after adding in business income taxes, the total tax rate on capital returns for foreign investors was 33.6 percent. For domestic investors, the highest marginal income tax rate on consolidated income is 40 percent, and on a fully consolidated basis, the tax burdens on foreign and domestic capital returns were relatively close—33.6 percent versus 40 percent.

However, a series of tax reforms were also implemented during the Ma Ying-jeou administration. For one, those reforms changed the completely integrated system into a partially integrated system, which cut the business income tax credit by 50 percent. That change didn’t affect foreign investors, because they weren’t eligible for refunds anyway. But it did affect domestic investors, who saw their previous business income tax credit cut in half.

The second reform raised the highest marginal income tax rate from 40 to 45 percent. That increased the discrepancy between the tax rates on foreign and domestic capital returns, because foreign investors had been paying separate income taxes on a non-consolidated basis at the rate of 20 percent all along. So the discrepancy in tax burdens could reach 10 percent or more, and even approach 20 percent. That means what was originally about a six-percent discrepancy between the tax rates for foreign and domestic capital returns quickly shot up to almost 20 percent. As a result, funds from domestic investors were transferred overseas, and then brought back as foreign capital, so it’s called “fake foreign capital.”

Of course, when fake foreign investment capital showed up in Taiwan, domestic investors were incensed. Why? Because they’re thinking, “Other people are turning their funds into fake foreign capital. I don’t want to do that. But if I pay my taxes the honest way, I’m penalized for my honesty. I could pay a lot less by cheating on my taxes, because the difference between foreign and domestic tax burdens is almost 20 percentage points, which is totally unreasonable.” This is an issue bequeathed to us by the tax system reforms of the Ma-era government. The goal of the previous tax reforms was to increase tax revenues and target the wealthy. But a side effect of that goal is that in Taiwan, as the tax burden on domestic capital returns is far higher than on foreign capital returns, fake foreign capital shot up, in turn exacerbating the unfairness of the tax regime. This is an issue that we have to address.

We have to resolve this issue and create a fairer tax system, and the issue is the difference in tax rates for domestic investments versus foreign and disguised foreign investments. In Taiwan society, this problem has had negative consequences. Meanwhile, another issue is that the 45-percent highest marginal income tax rate is the world’s highest, or at least among the world’s highest, which has also made senior-level white-collar professionals less willing to stay in Taiwan.

This can be viewed as a cost. For example, you and your colleagues at Bloomberg, I don’t know if you can go to Hong Kong regularly, and if you do, I wonder how much you’re being paid. But if you have a high salary, you can do what many people in the financial sector are doing, which is fly to Hong Kong every Friday, and then fly back to Taiwan for work on Monday. That way you’re not a Taiwan resident, and pay a lower income tax, perhaps just 20 percent. High-income white-collar workers who have to pay 45 percent in taxes are thus put at a disadvantage. Who would still want to work in Taiwan under these tax rules? If you work in Taiwan, there is only one option, which is going to Hong Kong on Friday, then coming back to work on Monday. That’s a tremendous social cost, and another aspect of an unfair system.

So there are many tax issues to deal with. Therefore, we have to identify goals. These two aforementioned issues were left by the previous administration, and clearly seem to have created unfairness and had a negative impact on our industry. So first, how do we solve this problem? This is a big challenge. Do we have to roll back the integrated income tax to what it was before the Ma administration? Do we have to start over again? When the previous administration was working on these issues, they had their own pressures to grapple with. Their solution was not ideal, but the Ministry of Finance at the time still won an award from a certain European magazine, so obviously some people favored this approach. So this is our most difficult problem.

What we are trying to do right now is extremely challenging because people have such high expectations for income tax reform. There are many income tax issues to be resolved, so we need to find ways to create a fair system that makes the tax burdens for foreign and domestic investors more equitable. While doing that, we can’t cut taxes, because if the tax revenue falls we’ll be criticized for benefiting the wealthy. In fact, a slight increase in tax revenue would be best, which would allow us to satisfy demands for income tax reforms.

It would be best to see if we can slightly increase deductions and tax credits for salary and wage earners, because income tax reforms can’t just address capital income issues. Changes should also be introduced to benefit salary and wage earners. That way, the fruits of reform will be felt by people throughout society. So in other words, how far can we go with tax reforms? Reforms have to create certain benefits, resolving fairness issues while making sure that reforms also benefit others. This is a formidable challenge.

Q31

BLOOMBERG: So the conclusion is?

PREMIER LIN: The conclusion is that we haven’t found an appropriate answer yet, but people eagerly awaiting tax reform have become impatient and have started criticizing us. But looking back at our efforts to legislate the Electricity Act or the Labor Standards Act, and seeing the difficulties getting the special budget bill through the Legislature—we can see that reforms are generally met with negative pushback from the public. We must explain ourselves very clearly otherwise the reforms can fail even before we get them out the door.

Q32

BLOOMBERG: Will the Executive Yuan’s version of the reform plan be announced by the end of May?

PREMIER LIN: We’ll let the Ministry of Finance discuss it with all the parties first. The ministry has put forth some recommendations and the experts have put forth some versions, but the public still has concerns about these versions. So now the ministry will try to come up with one more version, and if people still can’t reach a consensus on this version then we’ll just have to let them continue the discussion. I don’t have a specific timeframe for this.

Q33

BLOOMBERG: So the Ministry of Finance will put out another version in addition to the existing 11?

PREMIER LIN: I understand they already have one version but it’s still being discussed. We have a proverb, “governing a great nation is like preparing a fresh delicacy”—every detail must be handled with great care and attention. Solving this problem will be a major challenge, especially for our society that’s facing a moment of change. Even if we satisfy the majority of people, some will still be angry. So we don’t expect that the government can earn support from the entire public for this type of thing.

Q34

BLOOMBERG: Many of Bloomberg readers are members of the financial sector who care a great deal about market stability. One major issue Taiwan faces is that the current governor of the central bank will step down this year or next. Have you and the president discussed potential candidates for a successor? What are your views on this?

PREMIER LIN: I don’t speculate on personnel issues. How do you know Governor Perng will definitely leave his post? I won’t speculate or comment on personnel matters.