Who wins with ECFA?

Taiwan and China have begun negotiating the details of the FTA-like Economic Cooperation Framework Agreement (ECFA) with a hope of scheduling an official meeting this May or June. Among the important preliminary items under discussion are Taiwan’s petrochemicals, textiles, mechanical equipment products and automobiles entering China tariff free. As the main source of Taiwan’s foreign exchange, these four industries create total exports worth NT$280 billion (US$8.75 billion), accounting for 30 percent of Taiwan’s total exports.

Commonwealth monthly reported that in order to minimize the holdups in the official negotiation process, the associations of these four industries have had their chairmen working with China since 2009. According to these businessmen, they have done their part in the give-and-take negotiations with their counterparts, and now await the formal announcement of negotiations between the two governments.

Petroleum, textiles seek equal footing with ASEAN

The petrochemical industry accounts for 20 percent of Taiwan’s total exports. In all, 40 percent of Taiwan’s petrochemical exports head to China, making that country the island’s biggest market. Most of Taiwan’s petrochemical exports are in upper string raw materials that are sent to China for processing. As an example, Formosa Plastics Corporation has a fleet of vessels to ship raw materials from its complex in Mailiao, Yunlin County, to production facilities in eastern China for further processing.

For the petrochemical industry, the most important issue is not the quality, but fast delivery and competitive costs. The addition of tariffs in China would have an enormous impact on Taiwan’s petrochemicals. Starting from January 2010, ASEAN member countries now enjoy zero tariffs on their petrochemical exports to China, meaning that Taiwan’s petrochemical raw materials are now priced 5 to 10 percent higher than those of ASEAN members.

For all intents and purpose, the textile industry is lumped with the petrochemical industry. Taiwan Textile Federation sent a delegation led by W.U. Wang, executive director of Formosa Chemicals and Fiber Corp., to sign a memorandum with his Chinese counterpart in July 2009. There they learned that almost half of Taiwan’s textile exports might enjoy zero tariffs once the ECFA takes effect.

The significance of the ECFA does not lie in increasing the strength of Taiwan’s petrochemical industry, but in achieving an equal footing with the ASEAN nations. It is also crucial for the petrochemical industry to retain the supply chain in Taiwan. Wang said by maintaining similar competition conditions, the ECFA will prevent Taiwan becoming more dependent on China.

Mechanical equipment Industry depends on China

Like petrochemicals, Taiwan’s mechanical equipment industry is also heavily dependent upon exports, which account for 60 percent of total exports. China is the also the largest market for Taiwan’s mechanical equipment products, receiving 30 percent of Taiwan’s total exports in this sector.

For the mechanical equipment industry, the ECFA would not only reduce the tariffs of exporting to China, but the agreement could mean that Taiwanese firms might set up manufacturing plants in China. Operating in Taiwan has all the advantages except Taiwan’s real estate is more costly and is also farther from the end-market consumers.

The mechanical equipment industry maintains a complicated supply chain. While in Taiwan, all the sub-contractors are within a 50-kilometer range, in the mainland, they are spread across hundreds of kilometers. Mechanical equipment is heavy and costly to transport by land. For Taiwan, transportation costs could be reduced and delivery speeded up if items were shipped by sea instead of over land. This is why only 20 percent of the mechanical equipment businesses invest in facilities in China. With the ECFA in place, Taiwanese firms would take advantage of lower costs in China to increase their global market share.

Auto sales shrinking

Unlike the petrochemical and mechanical equipment industries, Taiwan’s auto-makers are facing shrinking sales, estimated at 300,000 cars annually. With such a small market, they can’t afford to develop brand names and must count on promoting joint ventures with foreign companies to reduce production costs.

For the auto industry, the ECFA would help simplify the sale of 12 million Taiwan-made cars to China annually. Chen Guorong, general manager of Taiwan’s Yulon Motor, told Commonwealth that the ECFA offers an opportunity for Yulon to cooperate with China’s Geely Automobiles to develop a lower priced car. Yulon plans to import cheap Chinese auto components for assembly in Taiwan, with 40 percent added value to sell in Taiwan or export to other markets. This would convert ‘Made in China’ to ‘Made in Taiwan.’

However, Chen also understands that the ECFA poses a risk of converting Taiwan’s market into a part of the Chinese market. For example, after the merger of markets across the Taiwan Strait, Nissan, which has had a long term partnership with Yulon, might stop production in Taiwan, and only manufacture autos in China for export to Taiwan.

Japan and Korea poses greatest threat

Although these four industries have their own reasons for promoting the ECFA with China, their real intention is to block stronger competitors of Taiwanese goods – Japan and South Korea. A high ranking manager in the petrochemical industry said, as a matter of fact, Taiwan is not afraid of ASEAN plus one (China). The real threat to Taiwanese industry is Japan and Korea plus one (China).

In the face of China’s rising market, the largest in the world, Taiwan’s main strategy is to sign an ECFA with China before Japan and Korea, thus gaining a competitive edge over those two countries. This is one reason Japan and Korea have been avidly watching the ongoing progress of the free trade agreement developments between Taiwan and China.