Taiwan-China Fishery Joint Ventures: An Economic Quest and Assessment

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1 Taiwan-China Fishery Joint Ventures: An Economic Quest and Assessment Dr. Lee, Yao-Hsien, Associate Professor of Finance Department of Chung-Hua University, Taiwan Lu, Ying-Jui, Ph. D. Candidate of Institute of Technology Management, Chung-Hua University, Taiwan Dr. Chuang, Ching-Ta, Professor of Institute of Marine Resource Management, National Taiwan Ocean University, Taiwan ABSTRACT This paper compares the fishing operations and identifies the possible cooperative arrangements concerning fishery resources management between Taiwan and China. We evaluate productivity of inputs such as labor and capital from Empirical results imply that the high fishery output growth in 1970s-1980s was propelled by an increase in productivity and return of scale for Taiwan and China. However, high production growth and ineffective fisheries management have led to rapid depletion of fishery resources. Profit margins have shrunk over years for both sides. The results also indicate that under the appropriate fishery cooperative arrangements, the joint venture and strategic alliance efforts in fishing operations can benefit each other and attain the maximum utilization of fishery resources. Keywords: Fishery cooperative arrangement, Fishery management, Common property, Joint Venture. INTRODUCTION Taiwan is a densely populated island with limited natural resources and owns a land area of 36,006 square kilometers with a population of more 20 million. Roughly two-thirds of this island is covered by rugged mountain ranges and only one-third of total area is potentially arable. Being surrounded by sea and in the absence of natural resources, the fishing industry in Taiwan is important for both food security and economic development purposes. This obviously makes Taiwan s fishing industry development and marine policy related to coastal states and/or fishery nations fisheries management policies. In the last two decades, public consciousness and awareness of high sea resources management via International Oceans Law and Responsible Fishing have overwhelmingly increased. The declaration of 200-mile Exclusive Economic Zone (EEZ) by coastal states allow them having the sovereign rights exploring and exploiting natural resources within 200-mile of their continental baselines. As a consequence, foreign fishing activities are not allowed within the EEZ without a negotiated agreement. For instance, fishing licenses or royalty fees are required for foreign fishing vessels to access to harvest the fish stocks in the EEZ. These result in the fact that foreign fishermen and fishing vessels can access the fishing ground only through bilateral and multilateral fishery agreements. In fact, Taiwan s fishing industry is facing a drastic shortage of fishing grounds resulting from the enactment of the 1982 International Ocean Law. Limitations on the number of vessels and harvest quota are the two greatest impacts on Taiwan s fishing industry which is extensively involved in the distant-water fishery. In order to minimize impacts resulting from decreasing in the number of fishing grounds, Taiwan has sought out for cooperative arrangements to meet the challenges of changes in the fishery environment. As a result, a joint-effort with coastal states to reduce unnecessary conflicts and disputes in the marine resources conservation and depletion problems has been recognized by the Taiwan government. Therefore, the marine policy of Taiwan now needs to take a broader and comprehensive approach in initiating the policy of fishery utilization and management.

2 Available literature on solving these above problems is relatively scarce and generally emphasizes management regulations rater than cooperation concerns (Chou and Chen,1994 and Wang and Zhan, 1992). Most of the papers about cooperation issues have addressed international concerns and focused on the feasibility of aquaculture investment (Ou, 1995, Lee and Chuang,1994, Chuang 1995). However, these papers do not address the difficulties caused by changing international marine fishery regulations. In the study of Japanese-Russian fishery joint ventures and operations, Akaha (1993) states that two countries have developed joint ventures and other cooperative arrangements concerning fishing and fishery products in the North-west Pacific. He notices that the short-term benefits of the bilateral arrangements might have potentially damaging effects on resource management. Ludwig and Valencia (1995) investigate several factors helping a prominent role for Japan in a future North-east Asian maritime regime for fisheries and environment including particularly its lack of the political dichotomies which hamper China/Taiwan and South/ North Korea. Honh(1995) discusses three factors including the geopolitical situation, the lack of land area and natural resources and the socioeconomic agenda that shaped the marine policy of the Republic of Korea. Davos(1998) examines cooperative coastal-zone management policies that can be used for coastal sustainability. Davos et al.(2002) report the findings related to attitudes toward participation in cooperative coastal management in the cases of four European countries. They consider that the effectiveness of coastal management depends unavoidably on the cooperation of a multitude of stakeholders. Kaplan and McCay(2004) argue that the social dimension of fisheries science and management should be considered in cooperative research and co-management techniques. However, the previous papers have not paid attention to the fishery cooperative arrangements between Taiwan and China. The purpose of this paper is to address the fishery joint ventures between Taiwan and China and to assess the feasibility of alterative forms of fishery cooperative arrangements. We use the fishery data from 1961 to 1993 to examine the efficiency of factors of production of Taiwan and China. The reason for using the above data is that Taiwan and China do not need to consider the EEZ and international regulations related to both countries. In addition, the significant trends in factors of production have still maintained the same patterns between two countries over the last ten years. In this paper, we adopt the joint ventures concepts from Lynch (1993) and related fishery cooperative management from OECD(1997). The remaining of the paper is as follows. In Section Ⅱ we discuss the fishery development and operation costs between Taiwan and China. In Section III we use the Cobb-Douglas production function to analyze factor productivities and provide an operational cost analysis. In Section IV we discuss and compare fishery cooperative arrangements between Taiwan and China. In Section V some concluding remarks are made. THE DEVELOPMENT OF FISHERY IN TAIWAN AND CHINA Taiwan Fisheries Taiwanese fishermen harvest an abundance of fish products which are categorized into marine (distant-water, offshore and coastal) and aquaculture fishers. Taiwan fisheries development has reached the world class level and has obtained a top ranking position in the international fishery Industry. Fish products also play a significant role in agricultural export. According to FAO 1995 report, the production of Taiwanese fisheries ranks 18th in the world, while the fish products trading 6th and the distant-water fishery 5th. Rapid development in fishery began in the 1960s. Due to the changes in the economic development patterns and implementation of modern fisheries technologies, the total fishery production was million tons, which is NT$98.95 billion in The fishing industry provides a significantly contribution to the animal protein for domestic consumption and creates about 300 thousands job opportunities. Over the years, average Taiwanese seafood consumption has increased from 25.3kg in 1961 to 30.99kg per capita in

3 2004. Fishing products have also taken a significant role in agricultural export. In 2003, the total fishing export was US$1.39billion, which was 64% of the total agricultural export. The total fishing import was US$ 524 million, which was 1.3% of the total agricultural import. The net export-import for the fishing industry yielded a positive gain in foreign exchange earnings. However, the industry has suffered from several domestic and foreign challenges such as the declaration of the EEZ by coastal states, domestic crew shortages resulting from low wage payment, the fall in fish prices affected by trade liberalization and fish smuggling activities from China. The several difficulties in the fishing industry can be highlighted as follows: (1) loss of traditional fishing grounds due to the declaration of the EEZ by coastal states has increased cases of detention of fishing vessels by foreign authorities; (2) moratorium on some of the disputable fishing gear of fishing methods due to rising consciousness of ecosystem protection and conservation of marine resources; (3) increasing cases of smuggling, stowaway and sea robbery due to frequently contacts of fishing boats from both sides of the Taiwan Strait after the lift of martial law in Taiwan; (4) decreasing productivity of coastal and offshore fisheries resulting from overexploiting fisheries resources and pollution in the coastal area; and (5) shortages of crew labor supply and potential labor force like students who graduated from maritime institutions are not willingness to work on fishing vessels. China Fisheries On the other hand, China possesses the basis of fishing grounds for fishery development. The Chinese marine fisheries resource area consists of the Yellow and Bohai Seas, the East China Sea and the South China sea, which total approximately 4.83million square kilometers and span tropical and temperate zones. Most resources are found to be concentrated in shallow water less than 200 meters deep associated with a large number of species, and moderate potential productivity. These resources are composed of more than 150 marine species of some economic value, with 30 species of economic importance. Total potential production of the resources is estimated to be approximately 15.5 million tons. After the economic revolution in 1978, rapid growth in the fishing industry has brought China to the number one position in the world at million tons in The majority of fishery business comes from coastal operations and cultivation. Four species traditionally constitute the foundation of marine fisheries: little yellow croaker, large yellow croaker, hairtail, and cuttlefish. The Zhoushan fishing ground in the East China Sea is the leading fishing ground. In recent years, food production has fallen short in meeting the overall demand. Thus, China is aggressively working on fishery development in the hope of increasing food supply, which is commonly known as The Blue Revolution. In general, China fishing fleet has expanded substantially to achieve the country s development goal, which is to increase employment and food production. Despite being number one in fishery production, the average personal consumption on fishery product is barely 10kg, which is far below the world average at 16kg. With regard to fishery trade, China has put forth a full effort in developing production for export to increase foreign exchange earnings. The main products are live and frozen fish, which have high value for seafood export. China marine fishery resource have been rapidly developed to increase employment and food production since the open door policy initiated in 1978 which encouraged increasing in fishing power and improving fishing technology. The economic reform program enacted in the late 1970s, a financial reward system and price decontrols introduced to raise fishing income and thereby stimulated expansion in the fishing industry. As the result, the marine fishery has experienced new entries, expansion of fishing capacity, and increases in yields. While achieving tremendous success in increasing employment and food production, the drastic expansion of marine fisheries has cause some problems. Some traditional important fishery resources have been overexploited and average productivity has dropped by more than half since the 1950s indicating problems of overcapitalization and overfishing. For example, four traditional species, including little yellow croaker, large yellow croaker, hairtail and cuttlefish have been overexploited. The annual

4 landing of lesser yellow croaker declined steadily from its peak of 148,000 tons in to about 20,000 tons in 1989, 13% of its peak. At present, the little yellow croaker fishery is closed. The large yellow croaker fishery followed a similar pattern. Its annuals landings peaked at 1,584,000 tons in and declined to 40,700 tons in 1984, about 25%of its peak. The hairtail fishery experienced wide fluctuations in catches, and the resource is presently overexploited in the yellow and Bohai Seas. In the recent years, the cuttlefish has landed only 10%of recorded catch of 118,000 tons. The fishing grounds between Taiwan and China are rich in marine organisms. With a convenient geographical location having access to world s major fishing grounds, Taiwan and China fishermen utilize these favorable natural conditions by spreading fishing vessels all over the worlds. Moreover the scientific and technical support of the fisheries research institutes and the universities continue to contribute to further development of the fishing industry. Between 1960s-1990s, Taiwan fishery production has enjoyed a steady growth at an average annual rate 17%. During the same period, China fishery production has growth at an average annual rate of 12%. This dynamic fishery growth was propelled by rapid increases in fleet size and fishing capacity beginning with economic reform in 1970s, which put Taiwan and China in a competitive position. Yet, the ever changing international-water regulations in recent years have put Taiwan and China in a difficult position in terms of development of distant-water fishing. To be specific, reduction in allocated fishing grounds, high royalties and low level of profitability in the industry have put a halt on fishery development. Today, the increasing operating costs, shortage of crew labor and competition in fishing grounds have created a bottleneck to the development of the distant-water fishery for Taiwan. While China has risen to the number one position, aggressively developing their distant-sea fishing business, expansion in the fleet and international markets, but restrained by limited capital and technical deficiency. Thus, there is a mutual advantage for Taiwan and China to take a closer look at the feasibility of economic cooperation in fishery sectors. THE FACTOR PRODUCTIVITY AND OPERATIONAL COST ANALYSIS Today, the shortage of crew labor ahs created a bottleneck to the further development of the fishery industry. According to Hwang s(1993)investigation, there was a shortage of about 45-50% in crew labor for distant-water fishery company fleets. Ou s(1995) report also indicated that the total amount of crew deficiency is 21,310 with 8,400 for far-sea fishing, and 12,910 for coastal and offshore fishing. Information provided by China, based on records collected for the past years, indicated that they have actually exported 88,692 crew labor forces to Taiwan. Average potential productivity across China offshore fishery is estimated to be approximately three tons per square kilometer, in compassion to 8.4 tons for Taiwan, 11.8 tons for Japan, and 7.2 tons for Korea. Trades between Taiwan and China are constantly increasing. In order to further develop the fishing industry, Taiwan is encouraging to upgrading vessels, improving process automation, developing machinery equipment and tools for fishing and netting, expanding cold storage facilities and marketing networks to a strong foundation for having higher completive position. The transfer of input factors and experiences between Taiwan and China should help resolve the above mentioned problems. In addition, the government policy and the economic impacts of hiring China crews to work on Taiwan-based fishing boats should be reviewed and implemented in the economic aspects. Using the Cobb-Douglas production function analysis, Table 1 shows the following advantages and disadvantages: Taiwan Advantages: Being fully developed economic position and capital-rich, Taiwan is in a position suited for joint venture. Much effort has been made in academic research and development in fishing resources

5 and analysis of fishing process, these make Taiwan has capable to expand into new market channels. Disadvantages: the declaration of EEZ has decreased the number of fishing grounds. In addition, overcapacity of vessels has made fishing activities very competitive with reduced profitability. Severe labor shortage has resulted in high price labor manpower. Moreover, heavy reliance on export of fishery products with unstable price, limited domestic demand, and appreciation of NT dollars has been unfavorable for export. China Advantages: Abundance in fishery resources, great potential for domestic seafood market, ample supply of labor, similarity with Taiwan in terms of language and culture. Exchange rate for RMB dollar is relatively low, which is an advantage in export, more open economic policies for coastal area attract foreign investment and technical transfer. Disadvantages: Relatively slow in fishery development, lack of capital, inefficient productivity in government-owned fishery companies, limited experience in technical, export marker and fishing ground development. In addition, China has developed fishing agreements with Japan, Vietnam and North Korea. For example, China and Japan signed non-governmental fishery agreements in 1955and In 1975, the two counties signed a formal fishery agreement in which six conservation zones and seven fishing closed zones were established to protect the resources in the East China Sea. This agreement is jointly enforced by both countries. For example, during the open season of the sixth conservation zone, each nation is allowed to send a maximum 74vessels on 600 HP class to fish in the zone. They also send an enforcement vessel to implement this measure. Table1. Index Year Marine Fisheries Productivity Indices-Comparison between Taiwan and China (1970=100) Taiwan China PPI L PPI K CPUE TFPI PPI L PPI K CPUE TFPI

6 THE STRUCTURE OF FISHERY COOPERATION The major forms of fishery cooperation are (1) Quota system (2) Buying system (3) Reciprocal (4) Licensing system (5) Renting system (6) Joint venture. According to Taiwan Deep Sea Tuna Boat owners and Exporters Association, Taiwan at present is associated with 24 countries in fishery cooperation involving a total of 952 vessels: 5 governmental agreements, with account for 60 vessels; 19 civilian fishery cooperation agreements account for 892 vessels. Among all, Tuna longlines, trawling, purse seine and squid jagging fishery are the most common categories of cooperation. The most popular fishery cooperation is pure licensing system. As for China, it has established cooperation with over 60 countries. In earlier years, the licensing system was implemented but increases in license fees have discouraged such form if fishery cooperation and recently joint venture is considered instead. Many advantages come with joint-venture, especially for the less developed nations, namely capital assistance, technological advancement, human resources indoctrination. Cooperation between Taiwan and China is needed to cope with the new marine policy and assures the fishery operations. An aggressive plan in promoting strategic alliance to penetrate into common boundary and other economical fishing grounds with the most efficient and effective operation is the key to maintaining continuously development. Table 2 presents the basis model for fishery cooperation with comparison of the existing economical and political situation. For fishery development and resources management, the reciprocal arrangement allows for cooperative breakthroughs. Joint-venture reduces uncertainty and environmental risk and is the best way to develop fisheries resources to the maximum potential utilization. This is where the comparative advantage is likely to lie. In addition, it increases the bargaining power while negotiating terms and conditions with other countries. Risk and reward attain a maximum level in strategic alliance. With the complimentary combination, both countries share the advance fishing tools, techniques, and technical know-how. Lower cost of labor helps to conserve cost and job opportunity while developing new fishing grounds. Strategic Alliance is the best form of fishery corporations to penetrate into the world market, which is also proven to be the most efficient in sharing the entrepreneur risk and capital, reaching an economical scale, expanding marketing channels, and increasing rate of return. The stumbling block has been the unstable political situation which is considered the highest risk among all other factors that hinder the fishery cooperation. Many failed to take political situation into consideration while drafting the alliance agreement. A legal shield should be included in the clause. Language, culture, and religion should also be considered as the 50 years of separation that has drastically changed the environmental and social conditions, the method of training, the way of life, the value system among many other differences. The above facts have created obstacles for the Chinese people to enjoy fishery cooperative efforts in strengthening interests as a whole in the international community. In view of the fishery and trade exchange between Taiwan and China, both possess strong fishery background and have strengths and weaknesses particularly in factors of production. Thus, both can benefit from each other through cooperation in production. Along with the common fishing grounds, language, culture similarity, the intensity of contract between fishermen started very early. The announcement of the open policy towards the world and the

7 Taiwan government s lifting of restrictions from visiting relatives have great impacts on ideas and life of Chinese fishermen. These are important for China to consider strategic alliances in fishery with Taiwan. The shortage of crew labor for Taiwan has increased over the years. Operational fishery grounds are declined. High licensing fees have produced a bottleneck situation. The fishery development plan is in need of joint investment to create future opportunity. This is the critical time for fishery cooperation between Taiwan and China in terms of resources complement and fishery benefits. In order to obtain the highest efficiency in improving the competitive position, cooperation not only helps to increase competitiveness, it also creates a win-win strategy for fishery management. Cooperation Methods Reciprocal System Quota System Buying System Renting System Licensing System Joint-Ventures Table 2. Comparative Advantage of international Fishery Cooperation Intensity High Explanation Medium Low Economic fishing ground overlapped or due to other hands, permits entrance into each other fishing grounds for fishery collation. No agreement or exchange of ideas, if political issues can be overcome, endorsement of reciprocal system will ease resolution of conflicts, stability at the sea, and resources management. Dual or multi-nation agreement to permit other vessels entrance to own territory, with the sanction to access the allocated fish catch. The quota set is to protect environment and avoid overfishing. In general, the quota system applies to country which is restricted to the coastal area prior to expansion already exist in the area. In response to responsible fishing, allocation based on past years fish stocks.with cooperation, both will definitely advantage over quota allocation. Agreement between deep-sea and coastal fishery country so to allow foreign fishing and cargo vessels entrance to designated port to unload fishing product. Fish prices, tax value of fishing products, all handle equally according to the contact. It is common to conduct barter trade at the common sea to avoid tax, with cooperation, effective rules to blend such activities to meet demand, reduce hygiene and emulation or fluctuation. Country A vessels wish enter country B economic boundary to conduct fishery operation and thus sign the agreement to rent vessels informally transfer to country B, and obtain the fishing right through licensing. Country A will provide vessels, labor, fishing equipment cooperation expenditures; Country B rewarded with fishery product as rental fee, and responsible in obtaining permits from the local government. Using this model, it helps to upgrade efficient utilization of vessels and human resources. Many South Pacific developing island countries, after the announcement of the EEZ, has gained expanded fishing grounds and plentiful to fishery resources which do not have the capability to utilize, thus has adopted licensing system to allow deep-sea fishing oriented countries to access these resources with licensing fees. Recent years, these countries which increase the financial burden have placed more importance on fishery development and reduce granting licenses and raise the fees instead as it does truly benefit the local fishery. With cooperation, it can definitely strength the bargaining power. In order to obtain fishing rights and stability in fishery production, deep-sea fishery countries cooperate with coastal country agree to develop fishery resources, and coastal owners benefit from capital, technical and facilitated assistance, to develop related industries. Joint venture is a form of investment which both parties complement each other and benefit from corporation to maximize mutual gain. CONCLUSION Marine fishery resources are common property. With no access restriction over-capacity of fishing efforts and rapid diminishing of fishery resources are inevitable. Without proper fishery management, fishermen conflicts have arisen. As a consequence, joint venture and fishery cooperation have been advocated to minimize conflicts and to better utilize fishery resources. In this paper, we compare the fishing operations efficiency between Taiwan and China from 1961 to We evaluate productivity of inputs, such as labor and capital. The results imply that joint efforts in fishing operations can assure better utilization of fishery resources with comparative advantage in production and elevate these operations to a

8 more competitive position. Taiwan and China have great potential in fishery development. Prior to lifting the barrier, fishermen of both countries have already laid down the foundation for fishery cooperation. The language, cultural similarities and geographical location have made up the most ideal circumstances for fishery cooperation. For the present moment, there is an urgency to make preparation for changes resulting form the resolution of ocean laws. In order to maintain the international territory for fishing operations, Taiwan and China must co-work to maintain continuous development as a fist priority. Thus, aggressively maintenance of the strategic alliance between both countries to obtain a win-win situation in fishery management deserves more attentions from related fishery exchange units and agencies. Although there have been many visits and cross-training programs, meetings, numerous contracts and idea-exchanges, the effort put forth for the strategic alliance is still inefficient. From the above analysis, Taiwan holds the capital and technical advantage while China is endowed with resource and labor, which is the prefect match in business relations. To maintain competitiveness and fisheries cooperation with mutual benefits, we conclude with the following suggestions: (1) Exchange of Input Factors Crew labor shortage is a serve problem faced by Taiwan marine fishery. The responsible units and agencies should legalize hiring China crew and develop a certified management system. Taiwan at the same time should maintain a vertical integrated in sharing resource and a horizontal re-engineering in producing fishery food and semi-finished value-added products. Taiwan could also sell retire excess vessels to China, while China could supply supplement for fishing operation and harbor services. (2) Enhancement of Fishery Cooperation Taiwan and China are facing a decline fishing grounds resulting from international regulations. Working in cooperation, both can avoid competition externality, resolve conflicts and hostility, and gain the bargaining power to achieve higher quota amount which is based on past historical harvest data and set up by an international committee. This can be arranged through allocation on the Total Allowable Catch (TAC) or Individual Transferable Quota (ITQ). (3)Share of Academic Expertise and Information Both have their expertise in distinct area of studies. With fifty years of separation, exchange of information was prohibited that hindered the expansion and acquisition of aggregated experience from each others. It needs to establish a research center to link the academic research activities and joint efforts in fishery technology. Additional needs are interchange in fishery programs and invited professional exchange from all aspects in fishing explorations.

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