Cross Strait, Talking Point

History in the making

Consequences of free trade deal with Taiwan will be far-reaching

History in the making

Down the hatch: negotiators celebrate at the ECFA signing ceremony

If you are looking for an illustration of the complexity of China’s relations with Taiwan, the air route between Xiamen and Taipei is a good place to start.

It should be the quickest way to cross the Taiwan Strait and China’s aviation authorities are keen to see it flown frequently. The proposed flight would reduce the journey time to 30 minutes, save fuel and ease air traffic congestion. For many Taiwanese businesspeople it would be a boon – they currently spend up to three hours flying to their factories in and around Xiamen, using more circuitous aviation routes.

But if it makes so much sense, why has Taiwan failed to approve the route? The problem is that the island’s military see it as a security risk. The very directness of the flight – it’s just 180km – raises concerns that civilian aircraft could be used to disguise a surprise bomber attack.

For the more practically-minded members of China’s aviation elite, that looks like paranoia. “It is ridiculous that some people fear war planes would follow passenger planes to enter Taiwan. If they learn aviation basics, they would know it is impossible,” China’s civil aviation administration director Li Jiaxiang told a forum in Xiamen.

But there you have, in a nutshell, Taiwan’s attitude to China. On the one hand, it’s viewed as a threat – after all, around 1,000 Chinese missiles are still pointed at the island. And yet China is also vital to Taiwan’s economic future. Taiwanese businesses have already invested more than $200 billion in their neighbour and rely on it to buy 40% of their exports.

A similar set of hopes and fears have come to the fore again this week with the signing of a pact known as the Economic Cooperation Framework Agreement (ECFA).

What is ECFA?

ECFA (it hardly trips off the tongue) is a free trade agreement that Taiwanese negotiators expect to boost two-way trade with China (which already amounts to $110 billion). Primarily, it will vastly reduce or eliminate a range of existing tariffs.

Daniel Rosen of the Peterson Institute for International Economics calls it “an ambitious accord that fundamentally changes the game between Taiwan and China”. He forecasts it could add 5.3% to Taiwan’s GDP over the next decade. “We can think of few (if any) other policy reforms available to Taipei that could deliver such gains.”

Hence a delegation from Taiwan’s ruling party, the KMT, travelled to the Chinese city of Chongqing to sign the agreement on Tuesday. The location was symbolic because that same city (then spelled Chungking) served as the country’s capital between 1937 and 1945 – when the KMT still ruled and was allied with Mao Zedong’s Communists against the Japanese. Chiang Kai-shek’s party only fled the city in October 1949, when the KMT decamped to Taiwan.

What is covered by the ECFA?

What got signed this week is best understood as ‘phase 1’ of the ECFA.

The Chinese call it ‘the early harvest’ as it will see tariff cuts on only a selection of goods. But the list of just over 800 items is designed to to maximise benefits for Taiwan’s consumers and businesses – while also protecting the more vulnerable parts of the Taiwanese local economy from job losses.

Lest it should be doubted that Beijing has skewed the agreement in Taipei’s favour, just look at the numbers. Tariff cuts have been agreed for 539 Taiwanese products, versus just 267 Chinese ones.

“The reductions on the Taiwanese items are said to amount to $13.84 billion while those from the mainland are valued at $2.86 billion,” reports the South China Morning Post.

All in all, the reductions will prove positive for around 15% of Taiwan’s exports to China, in key areas such as petrochemicals, textiles and foodstuffs.

Not only that, the agreement will also free up Taiwanese firms to invest in China’s financial sector as well as the media, medical and airline maintenance businesses.

“The ECFA will enhance Taiwan’s competitiveness, help Taiwanese firms to get established in the booming mainland market and normalise cross-Strait relations,” concludes HSBC in a research note. Japanese management guru Ohmae Kenichi told Taiwanese newspaper the China Post that ECFA would prove to be a “vitamin” for Taiwan’s economy.

So the ECFA must be popular in Taiwan?

Not with everyone. Although the China Post believes the ECFA “clearly favours Taiwan over the mainland”, there were protests at the weekend against it. According to the police, 32,000 took to the streets in Taipei to oppose the agreement. The opposition Democratic Progressive Party (DPP) claims there were many more.

From the outset, the DPP has campaigned against the ECFA. In a televised debate earlier this year (see WiC60), its leader vowed to repeal it if elected. DPP strategy has been to scare the electorate with scenarios in which cheap Chinese goods are dumped in Taiwan, leading to job losses and the hollowing out of the local economy. It also warns of the political impact. Says the BBC’s Taipei correspondent, Chris Hogg: “Taiwan’s opposition complains these changes will bind the two economies closer together. It fears China, the dominant partner, will in time gain greater control over what goes on here as a result.”

The Associated Press quoted one of the weekend’s demonstrators, a rubber factory worker, as saying: “The Taiwanese have worked so hard to achieve the democracy we have today, and we will not allow China to control us.”

The Taipei Times goes back to Ohmae’s analogy: “The vitamin metaphor is an interesting one. Not all doctors, for example, agree on exactly how much good they do us.”

A necessary pick-me-up?

As WiC has pointed out, Taiwan’s economy was among the worst affected by the global financial crisis of 2008, pushing it into a greater reliance on trade with China. That fact alone would seem to be reason enough for supporting the ECFA.

Taiwan’s leader, Ma Ying-jeou reckons the island had no choice but to make a deal. China has long been whittling away at Taiwan’s diplomatic status (only 23 states now ‘recognise’ the Taipei government, a list including the likes of Saint Kitts and Nevis, Kiribati and Burkina Faso).

But the fear of sitting on the economic sidelines was even greater, especially when China signed a free trade pact (see WiC44) with the 10 members of ASEAN (the Association of Southeast Asian Nations) this year. None of these ASEAN members would have been willing to agree a similar pact with Taiwan – and risk upsetting Beijing. And that would have put Taiwanese firms at a huge disadvantage, leaving them excluded from a free trade bloc of 1.9 billion consumers.

By signing up to the ECFA, Ma has ensured that Taiwan will be able to negotiate a similar agreement with ASEAN. His central message during the year-long debate over the ECFA – “we can handle diplomatic isolation, but economic isolation is fatal” – seems to have won the day.

Winner and losers…

Over the longer term, says the BBC, the ECFA will hit labour-intensive industries in Taiwan, due to competition from Chinese goods. But the broadcaster also surmises that the beneficiaries will include Taiwan’s big businesses – especially banks, petrochemical companies and high-tech firms seeking greater access to China’s market. Taiwanese farmers could also see a surge in Chinese sales (see page 6).

The Taiwan Stock Exchange could be a winner too. It has begun to win listings from firms owned by Taiwanese but which have the bulk of their operations in China.

Take the example of Christine Foodstuffs, owned by Taiwanese entrepreneur, Luo Tian’an. It has a chain of 500 pastry stores in Shanghai (and not a single outlet in Taiwan), but plans to list in Taipei in the third quarter. Luo told Oriental Outlook he hoped to set an example for his peers.

The increasing integration of the two economies will be a trend to watch in the coming decade and the potential is huge, says the president of the Taiwan Greater China Fund.

“Taiwan companies have learned what happens in a Chinese society when it urbanises,” Steven Champion told the Financial Times. “[They] have gone through this experiment in the ‘test tube’ that is Taiwan, and they are taking their experiences to the market comprised of 1.3 billion people in China and scaling up there.”

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