KONKURENCESCHOPNOST TAIWANSKÉHO KVĚTINÁŘSKÉHO PRŮMYSLU A SVĚTOVÁ OBCHODNÍ ORGANIZACE

The Competitiveness of the Taiwanese Floral Industry

and WTO Challenges and Opportunities

Konkurenceschopnost taiwanského květinářského průmyslu a Světová obchodní organizace

Jason Tsai

Adresa autora:

Department of Cooperative Economics, National Chung-Hsing University, 67, Sec. 3, Min-Shen E. Road, Taipei, Taiwan, R.O.C. 104-33

E-mail: jason @ cc.nchulc.edu.tw.

Abstract:

For the past decade, Taiwanese floral industry has been growing rapidly in terms of both utilized space and production. The total planted space had increased from 5,134 hectares in 1988 to 10,427 hectares in 1997. The dramatic growth of the floral industry is the result of a greater demand for domestic floral consumption and the increases in cut flower exports. However, the structure of the industry has been adjusted in favor of nurseries and potted flowers rather than cut flowers. On the other hand, floral imports are increasing due to the increased demand for upper market floral products. Floral production in both Taiwan and Japan is mainly catering to the domestic market despite the growth in world floral trade. Sooner or later Taiwan will become a member of the World Trade Organization (WTO). Once Taiwan is signatory of the world trade organization, increased floral trade activity can be expected. The total impact of the floral trade on Taiwanese floral industry must be considered in order to reduce the potential repercussions from floral imports. In addition, the expansion of the floral export market provides potential opportunities for government to switch other agricultural sector resources to the floral industry. The competitiveness of Taiwans floral industry is crucial for a profitable level of floral exports.

This research investigates the competitiveness of Taiwans exporting of cut flowers through a comparison of the Taiwanese and Japanese floral industries in terms of cost of production, size, structure, government regulations, and research and development. Two measures of the competitiveness of the Taiwanese floral industry, net social profitability (NSP) and domestic resource cost (DRC), are specifically calculated and compared. The results show that R&D efforts for new variety development, capital intensive production facilities, and promotional research need to be encouraged to enhance the competitiveness of Taiwans floral industry.

Anotace:

Taiwanské květinářství se v uplynulém desetiletí prudce rozvíjelo jak co do rozlohy, tak do produkce. Celková výměra vzrostla z 5,134 ha v r. 1988 na 10,427 ha v r. 1997. Tento dramatický vzestup je výsledkem rostoucí domácí poptávky a zvýšeného vývozu řezaných květin. Rozvoj tohoto odvětví však šel především směrem ke školkařství a k produkci hrnkových květin, spíše než směrem ke květinám řezaným. Současně se ale zvyšuje dovoz květin ve vyšší kvalitativní kategorii. Domácí produkce květin na Taiwanu a v Japonsku uspokojuje především domácí trh. Taiwan se má brzy stát členem WTO a poté lze v této oblasti očekávat zvýšenou aktivitu. Růst exportu květin umožní taiwanské vládě přesunout některé zdroje pro zemědělský sektor do odvětví květinářského průmyslu. Konkurenceschopnost taiwanského květinářství je životně důležitá pro ziskovost vývozu květin.

Tento příspěvek se zabývá konkurenceschopností taiwanského exportu květin a porovnává taiwanské a japonské květinářství z pohledu nákladovosti, velikosti, struktury, státních zásahů, a z pohledu vývoje a výzkumu. Zejména se vypočítávají a porovnávají dvě měřítka taiwanské konkurenceschopnosti, a to čistý společenský zisk (NSP) a náklady z domácích zdrojů (DRC). Výsledky ukazují, že je nutno posílit výzkumné a vývojové úsilí po vyšlechtění nových odrůd, kapitálově náročná výrobní zařízení, a výzkum podpory prodeje tak, aby se dosáhlo zvýšení konkurenceschopnosti taiwanského sektoru květinářství.

Key words:

competitiveness, floral industry, Taiwan

Klíčová slova:

konkurenceschopnost, květinářství, Taiwan.

INTRODUCTION

For the past decade, Taiwans floral industry is growing rapidly in terms of utilized land and production. The total planted space had increased from 5,134 hectares in 1988 to 10,427 hectares in 1997. That is to say the total planted space has doubled within these ten years (Table 1). The product quality has improved due to the introduction of new varieties from abroad, the choice of commercial products from indigenous plants, and the utilization of greenhouse facilities in production. The dramatic growth of the floral industry is the result of a greater demand in domestic floral consumption and the increase in cut flower exports. High quality flower imports, especially from the Netherlands, are increasing due to the increased demand for differentiated floral products. On the other hand, Taiwan exports a lot of traditional cut flowers, such as chrysanthemums, roses, and gladioluses to Japan. Floral production both in Taiwan and in Japan is mainly catering to the domestic market despite the growth in world floral trade. However, the industry product structure has been adjusted in favor of nurseries and potted flowers rather than cut flowers.

Table1 Floral Planted Area in Taiwan Unit: ha

Source: Taiwan Agricultural Yearbook, Department of Agriculture and

Forestry, Taiwan Provincial Government, 1999.

Sooner or later Taiwan will become signatory of the World Trade Organization (WTO). Once Taiwan is a member, increased floral trade activity can be expected. The purpose of this paper is to investigate the expected impact of floral trade on the Taiwanese floral industry in order to reduce the negative repercussions from floral imports. In addition, expansive floral exports provide potential opportunities for the government to switch other agricultural sector resources to the floral industry. The competitiveness of Taiwans floral industry is crucial for floral exports.

The structure of the article is organized as follows. The development of Taiwans floral industry in terms of floral production, consumption, and trade is discussed in Section ?. Then, in section ?, the competitiveness of Taiwans exporting of cut flowers is investigated through comparisons between the Taiwanese and Japanese floral industries in terms of costs of production, size, structure, government regulations, and research and development (R&D). Two measures of the competitiveness of Taiwanese floral industry, net social profitability (NSP) and domestic resource cost (DRC), are specifically calculated and compared. In section ?, the author discusses the challenges and opportunities of Taiwans floral industry during its integration into the world trade system. Finally, the suggestions and implications are provided in section ?.

THE TAIWAN FLORAL INDUSTRY

While the space used for floral production increased substantially during the past decade, the industry product structure has also changed. Although the space utilized for cut flower production has been decreasing since 1994, the space for nurseries and potted flowers has been increasing. The space for bulbs and herbaceous flowers and seeds are less than one percent of the total utilized floral space. The utilized floral space is increasing because farmers of other crops are seeking alternatives to their current crops in order to avoid the trade impact after Taiwan joins WTO. However, specific operational knowledge for floral production and marketing channels is necessary to enter this industry. Floral production requires higher operational knowledge along with capital intensive greenhouse facilities. The establishment of agricultural co-ops is important for operational technique training and meetings for the exchange of experience between producers. The newly developing regions for production will be located near the traditional regions for floral production because of the well-established infrastructure.

The quantity of floral imports has increased from 5,480 tons in 1990 to 9,283 tons. The value of floral imports increased from US8,555,000 dollars in 1990 to US18,403,000 dollars in 1996. The quantity of floral imports increased 69.40 percent while the value of floral imports increased 115.11 percent. The quantity of floral exports was unstable during the period of 1990 to 1996. However, the value of floral exports exceeded that of floral imports (Table 2). The general volume of trade for the floral industry increased.

Table 2 Taiwanese Floral Trade Statistics Unit: ton, US$1,000

Source: Agricultural Trade Statistics, Council of Agriculture, Executive

Yuan, 1997.

Major floral consumption countries such as the United States, Japan, and Germany have prosperous domestic floral industries. The space used for cut flowers in Japan in 1994 was 18,700 hectares. In 1994, the cut flower planted area in Italy, Netherlands, and the United States was 7,654 hectares, 6,121 hectares, and 5,825 hectares, respectively. In 1992, the cut areas planted for flower in Germany and the United Kingdom were 3,003 acres and 4,307 hectares (Table 3). Therefore, Japan used more land for flowers than any other major floral producing country. The floral production of some European countries has not been enough to satisfy the domestic demand for floral products. Therefore, they need to import from other floral producing countries via the Netherlands. Currently, Taiwan exports some native flowers and bonsai to Europe through the Netherlands.

Table 3 Production of Cut Flowers by Major Floral Consuming Countries

Unit: ton

Source: Flower Data Statistics, Japanese Floral Promotion Center, 1996.

THE COMPETITIVENESS OF TAIWANS FLORAL PRODUCTS

Factors affecting competitiveness are both price-related (such as foreign exchange rates, income, and price indexes) and non-price-related (such as quality, culture, and R&D). The competitiveness can be evaluated in terms of the comparative advantages of this industry such as net social profitability (NSP), domestic resource cost (DRC), and effective rate of protection (ERP) (Pearson, 1973)

Assuming the opportunity costs of inputs and outputs are estimated by social values, the NSP measure can be expressed by equation (1).

(1) where aij indicates the ith output of jth production activity, pi represents the shadow price of ith output, fsj indicates the sth input used in jth production activity, vs represents the shadow price of sth input, and Ej represents the external effect.

Assume that all products are tradable and the costs of inputs can be divided into two categories, the costs of domestic inputs and foreign inputs, equation (1) can be rewritten as equation (2).

(2) where uj indicates the values (calculated according to international prices) of all outputs of jth production activity, mj represents the value (calculated according to CIF prices) of all intermediate inputs of jth production activity, rj indicates the values of inputs held by foreigners of jth production activity, and v represents the shadow price of foreign exchange.

The alternative measure, DRCj, calculates the values of domestic resources to earn or to save of jth production activity and is expressed by equation (3).

(3)

Assume the net foreign exchange earned or saved is positive, i.e. uj- mj - rj > 0, the NSP measure and the DRC measure can be compared. When DRCj<1, or NSPj>0, jth production activity has comparative advantages; when DRCj=1, or NSPj=0, jth production activity is break-even; and when DRCj>1, or NSPj<0, jth production activity has comparative disadvantages.

The NSP measures of chrysanthemum and gladiolus are all positive. The result indicates the comparative advantage of these two products. The DRC measures of chrysanthemum and gladiolus are all less than 1, which reinforce the above result. However, the NSP measure of rose in 1995 is negative which indicates the disadvantage of rose exports. The DRC measure of rose in 1995 is greater than 1 which indicates the disadvantage of rose export. The NSP and DRC measures of rose in both 1994 and 1996 indicate that rose export have comparative advantage. Though the chrysanthemum exports to Japan have comparative advantages, the export quantity decreased during these years. A possible reason is the Japanese development policy of growing chrysanthemum in Okinawa island. Government trade intervention should not be neglected while considering floral trade. The NSP measure of gladiolus decreases which indicates the advantage (Table 4).

Table 4 The Comparative Advantage of Major Cut Flowers in Taiwan

Both the NSP and DRC measures show that Taiwan gladiolus possesses comparative advantages for exporting to Japan. However, the comparative advantage reduced in 1996 due to the increase of production costs. The figures for the rose changed during the period from 1994 to 1996. The figures for NSP and DRC in 1994 and 1996 show that rose possesses comparative advantage; however, the measures of NSP and DRC in 1995 shows it also has some disadvantages. This is due to the relative changes in domestic and foreign prices. The domestic rose price is higher than the export CIF price resulting in a lower quantity of rose exports. Generally speaking, the high domestic price is the main reason for insubstantial Taiwanese floral exports.

THE CHALLENGES AND OPPORTUNITIES FOR THE TAIWANESE FLORAL INDUSTRY

Due to the change in its world trade situation, Taiwan has to adjust the use of domestic resources and to improve its floral marketing channels in order to enhance its competitiveness.

The main problems of agricultural sectors are the generally small size of farms and high labor costs. The average farm size is only one hectare per family which is too small to reach an economy of scale. Farmers need to find off-farm income to meet their living expenses. On the other hand, the prices of farm lands are extremely high which accounts for a large portion of farm production costs. It is difficult to reach economic efficiency by relying primarily on manual labor rather than on machinery. Consequently, high land prices and labor costs cause high production costs.

The quality of floral products depend on the handling processes of product grading and packaging. The average transportation costs are difficult to reduce because of the small amount produced on each farm. Some production cooperatives and cooperative marketing teams are organized to help collect products in order to reach a reasonable volume of transportation. The auction system has been adopted by floral wholesale companies especially for cut flowers since 1988. There are four floral wholesale companies in Taiwan employing the auction system. The market information is provided on computer networks and a fax-on-demand system for people to request information at any time. The marketing channel for cut flowers is better than that for potted plants. Most potted plants are sold through bargaining rather than auctioning.

IMPLICATIONS AND SUGGESTIONS

Taiwans floral production and distribution are similar to most developed countries, and the floral consumption increases along with the national income. The main challenges and opportunities for the Taiwan floral industry derive from the new floral trade situations, arising from Taiwans membership in of WTO. Floral products will begin to be imported from mainland China and some South-East Asian countries. On the other hand, Taiwan will need to promote its floral products in Japan and other potential markets. Therefore, Taiwans floral trade will increase in terms of quantity and value in the future.

The domestic floral production has to be adjusted in product structure in favor of high quality products. More new varieties of cut flowers will be produced to replace the traditional low value-added cut flowers. In addition, potted plant production must be increased to satisfy the increased consumers needs. Although domestic floral producers do not compete vigorously in export activities due to the high profits earned domestically, they will need to pay more attention to the overseas market in the future.

Most of the flower imports from North America and Europe are of temperate flowers. On the other hand, more than one third of Japanese floral imports are tropical flowers including orchids (Laws and Galinsky, 1995) . Tropical flowers are less popular in major flower countries such as the United States, Canada, Germany, France, the Netherlands, and United Kingdom. Therefore, Taiwan may choose to produce tropical and subtropical flowers as a product differentiation policy. The international vertical cooperation among Taiwan, mainland China, and Japan can be divided into three stages, R&D and nursery production, greenhouse production, and marketing. Taiwan should emphasize the R&D and commercial nursery production. Mainland China will need to improve its production facilities to produce flowers. Japanese companies may sell the imported intermediate products from mainland China and Taiwan. Once the vertical integration is well established, Taiwan can develop its floral industry by the segmentation strategy under the challenge of the high quality imports from the Netherlands as well as the cheap floral imports from mainland China and other South-East Asian countries.

REFERENCES

Bruno, M., (1972) ”Domestic Resource Costs and Effective Protection : Clarification and Synthesis.” Journal of Political Economy 80,p17-33?

Krueqer, A.O. (1972) ”Evaluating Restrictionist Trade Regimes : Theory and Measurement,” Journal of Political Economy 80, p48-62?

Laws, Nancy and Robert Galinsky (1995) ”The World Market for Tropical Floriculture and Market Opportunities for Asian Suppliers.” RAP Market Report No. 1, Regional Agribusiness Project.

Pearson, S.R., (1973) ”Net Profitability, Domestic Resource Costs, and Effective Rate of Production” Food Research Institute, Stanford Univ. monograph.