SE Asia more important than ever for Taiwan’s businesses

Even before the advent of ASEAN plus China and the signing of free trade agreements between many of the Southeast Asian countries, Taiwan in the mid-1980s looked towards Malaysia, Indonesia, Thailand and Vietnams for business opportunities. These countries have large ethnic Chinese populations, an educated labor force, stable infrastructure and lower production costs. For Taiwanese businesses to gravitate towards these Southeast Asian countries was a natural progression.

During that same period, Taiwan’s political relationship with China remained contentious, leading to the 1996 “Go Slow, Be Patient” principle promoted by former President Lee Teng-hui, aimed at limiting investments in China. The feeling of caution continued during the eight years of the Democratic Progressive Party (DPP) administration as well. However, this all changed when President Ma of the Kuomintang took office last year.

In the 1980s, Malaysia responded to a lack-luster economy and mass unemployment by encouraging Taiwanese investments. With one-quarter of Malaysia’s population being ethnically Chinese, or having ties with Taiwan, finding qualified help was not difficult. Also, as a former British colony, the country’s legal system was much more developed than China’s.

Like Malaysia, Thailand also has an educated and skilled workforce. Large-scale investment from Japan’s automakers over the last 30 years has helped the country to develop its infrastructure. Last November, Thailand sought to attract investments from Taiwan by setting up the Office of the Board of Investment (BOI) in Taipei. Although Malaysia and Thailand might have more developed infrastructure and a better-educated workforce, these advantages also increase production costs and have driven some businesses to take the route of lower production costs in China and Vietnam.

Today, there are about 40,000 Taiwanese people contributing to the rapid development of Vietnam. Investment-driven trade between Taiwan and Vietnam reached US$9.15 billion last year, with Taiwan enjoying a trade surplus of US$6.73 billion. Although Vietnam does offer relatively cheap labor, its poor infrastructure and a less educated work force are limiting factors. The country’s more restrictive policies also hampered investments in Vietnam. Until this past January, foreign companies had to have a Vietnamese partner in order to enter the retail sector there.

As more ASEAN agreements take effect, Taiwanese businesses have also hedged their bets by setting up production bases in certain Southeast Asian countries in the hope of taking advantage of free trade agreements of that country. Currently, Taiwan is at a significant disadvantage by not having free trade agreements with any other Southeast Asian counties.

With the signing of a comprehensive ECFA – economic cooperation and framework agreement - with China, Taiwan will not only enjoy favorable rates of duty with China, but also have the chance to sign free trade agreements (FTA) with other Southeast Asian countries. Without these FTAs, Taiwan will end up paying substantially more duty which will reduce Taiwan’s share of the regional trade pie.

A case in point is Chew Boon Swee who would like to import cakes from Isabelle Taiwan Co. If he were to import directly from Taiwan, he would have to pay a 25 percent duty as opposed to 5 percent if he were to import them from the pastry maker’s mainland Chinese plant. This will all change once ASEAN plus China takes effect, eliminating the duty.

“ASEAN’s effort to build closer ties with its trading partners is good news for businesspeople in the ever-growing trading block, but not for those in Taiwan, if Taiwan continues to be excluded from it,” says Jerry Yang of the Ho Chi Minh City TECO office. Currently, China accounts for 54 percent of Taiwan’s exports and 78 percent of Taiwan’s overseas investments, according to the October 2009 issue of Taiwan Review. As an export economy, with as much as 40 percent going to China, Taiwan simply cannot afford to be omitted from the benefits of belonging to ASEAN.

With the onset of ASEAN plus China due to take effect on January 1st, 2010, Taiwan is gearing up to face the challenges and benefits from this new alignment with ASEAN along with other FTAs due to emerge over the next several of years.