Free trade agreement with China on track

Taiwan is on track to sign an economic cooperation framework agreement (ECFA) with China by the end of 2009. With the signing of the FTA-like agreement, Taiwan hopes to remain competitive with other Asian countries, and increase the island’s annual GDP by between 1.65 to 1.72 percent. Foreign direct investment in Taiwan is also expected to increase by US$8.9 billion over the next seven years.

Taiwan out in the cold

The Ministry of Economic Affairs (MOEA) made the projections based on a recent study by the Chung-Hua Institution for Economic Research (CIER). Taiwan has long been concerned that free trade agreements between its Asian neighbors might leave Taiwan at a disadvantage. In particular, the Southeast Asian Nations (ASEAN) and China (the so-called ASEAN plus 1) are set to introduce exemptions on customs tariffs on imports starting in 2010. As Taiwan is excluded from the agreement, its products are likely to be subject to tariffs, resulting in a loss of competitiveness for products exported to China and other ASEAN nations.

The situation for Taiwan is set to worsen further when Japan and South Korea join (ASEAN plus 3) in 2013. Taiwan has been unable to join ASEAN because of opposition from Beijing. According to Liu Bih-jane, vice president of CIER, Taiwan’s exclusion from regional economic integration in ASEAN plus 1 could see the island’s GDP drop by 0.176 percent, and shrink further by 0.836 once ASEAN plus 3 becomes a reality.

Two possible scenarios

The CIER report outlined two possible scenarios following the signing of an ECFA with China, according to the Taipei Times. The first scenario forecasts a GDP increase of 1.65 percent and the creation of 257,000 jobs, while Taiwan would eliminate tariffs on the importation of Chinese agricultural and industrial products. In the second scenario, GDP would increase by 1.72 percent and see 263,000 jobs created, with Taiwan lifting import restrictions on Chinese industrial products and eliminating import tariffs, while maintaining current arrangements for the importation of Chinese agricultural products.

The MOEA asked the CIER to look at two scenarios as the ministry did its own forecasting, the results of which fell somewhere in between those made by CIER. The MOEA forecasts see Taiwan’s GDP increasing by 1.83 percent with the addition of 273,000 jobs – 10,000 more than set out in CIER’s second scenario. Taiwan’s GDP in 2008 totaled around US$390 billion.

At the same time, Economics Minister Yiin Chii-min said China is now Taiwan’s top trading partner, the largest investment outlet, the biggest export market, and the largest source of trade surplus, making the mainland indispensible to Taiwanese enterprises. Quite a few countries have expressed their willingness to sign free trade agreements with Taiwan if a cross-strait ECFA is signed. Hence, the signing of an ECFA with China is the first step for Taiwan towards regional integration, and in preventing the island’s economy from being marginalized.

In addition, Yiin predicts that the island will attract an additional US$8.9 billion in foreign direct investment as more international companies set up subsidiaries in Taiwan in the seven years following the signing of an ECFA.

Not everyone a winner

President Ma Ying-jeou has said his administration will go ahead with the ECFA and emphasizes that the agreement puts politics aside while focusing purely on economics, reported the United Evening News. The agreement would not touch on politically sensitive terms such as “one China”, “peaceful unification” or “one country, two systems,” according to the government. Minister Yiin noted the ECFA mainly covers the liberalization of commodities trading, but Taiwan would seek to include financial services, telecommunications, the retail sector, construction, and tourism in the initial negotiations, with trade investment dealt with at a later date.

Although the agreement would bring benefits to certain sectors by increasing trade in petrochemicals, plastics, machinery, textiles and steel production by between 7 to 14 percent, it is likely to hurt the electronics, transportation tools, and timber products industries.

In another study commissioned by the Cross-Strait Interflow Prospect Foundation, the CIER looked at the potential effects of an ECFA on different sectors. The study predicted that Taiwan’s IT and electronics industries would lose up to NT$350 billion (US$10.7 billion). Yiin refuted this claim by saying that the impacts would be minimal because both Taiwan and China are members of the World Trade Organization whose Information Technology Agreement is binding, and in-effect eliminates tariffs for most Taiwanese firms. As for the negative impacts shown in the study, Yiin disagreed with the results and has asked the Bureau of Industry in MOEA to look again at the findings.

The potential fallout

According to a report in The United Daily News, the CIER mainly highlights the positive aspects of an agreement while barely mentioning the drawbacks for Taiwan, apart from noting that transportation tools and timber products are likely to face annual losses of US$400-500 million. This outlook appears overly optimistic, according to the paper. It is widely accepted that when the tariffs are eliminated, weaker sectors are likely to struggle necessitating government intervention.

The Apple Daily commented that the plans to set up a NT$30 billion (US$914.7 million) relief fund to help weaker sectors as inadequate. On joining the WTO in 2002, when the annual agricultural product value was NT$180 billion (US$5.4 billion), an “Agricultural Development Fund” worth NT$100 billion (US$3.1 billion) was set aside to help affected farmers. Based on today’s value, the relief fund should now be at least NT$60 billion (US$1.8 billion), according to the Apple Daily.

Remaining competitive is first priority

While an FTA requires several rounds of negotiations spread out over three to five years, a framework agreement is merely a framework that sets out key points, scope, and the projected direction for future negotiations. Yet, what Taiwan needs now, according to the government, is just such a framework, with the details put aside to be hashed out at a later date. Since ASEAN plus 1 will soon become a reality, the government is keen to see certain key industries protected from higher tariff barriers, such as the petrochemical, machinery and textile industries.

While most commentators agree that Taiwan needs to sign the ECFA as soon as possible, they stress that the island also needs to negotiate with other countries such as Singapore, USA, Japan, and Korea. According to Yiin, discussions with China should begin in October.

Thus far, Taiwan has produced a host of statistics on the impacts of signing an ECFA with China, but the two countries still have a long way to go toward finding the middle ground that can satisfy both sides. Although the opposition party Democratic Progressive Party (DPP) sees an ECFA as a threat to Taiwan’s sovereignty, it also acknowledges an agreement is needed if Taiwan wants to remain competitive.