Analysis: US-S Korea pact poses threat to Taiwan

LAGGING: Analysts said that the free trade agreement would affect investment and trade in Taiwan, with traditional industries suffering the brunt of the new competition

By Jessie Ho  /  STAFF REPORTER

Fri, Apr 06, 2007 - Page 12

Already lagging behind the global trend in trade integration, Taiwan has been dealt a fresh blow by the signing of a landmark free trade agreement (FTA) between the US and South Korea on Monday, analysts said.

"Taiwan's exports and inbound investments will be negatively affected by the trade pact," Minister of Economic Affairs Steve Chen (陳瑞隆) said, as US$2 billion worth of the nation's exports to the US overlap with those from South Korea.

The figure accounts for around 5 percent of the nation's annual shipments to the US and 0.5 percent of its GDP growth, a report released by the Chung Hua Institution for Economic Research (中經院) said.

Under the US-South Korea trade pact, more than 90 percent of industrial and consumer goods traded between the two sides would become duty-free in the first three years after the enactment, and the remaining tariffs would be eliminated within the next 10 years.

The US-South Korea trade deal covers automobiles, textiles, pharmaceuticals, agriculture and market access. It needs to be ratified by the two countries' parliaments before going into effect.

The US is Taiwan's third-largest trading partner after China and Japan, with bilateral trade hitting US$55.02 billion last year. Taiwan exported US$32.36 billion worth of goods to the US last year, mainly electronics, information technology and communications products.

As Taiwan has signed an Information Technology Agreement (ITA) under the WTO that eliminates duties on IT products, this segment of exports will not be affected by the US-South Korea FTA. But local manufacturers of industrial and consumer goods may have cause for concern.

The trade pact also comes at a time when the percentage of Taiwan's exports to the US has been dropping over the past few years, said Tsai Hung-ming (蔡宏明), deputy secretary-general of the Chinese National Federation of Industries (全國工業總會).

Taiwan's exports to the US accounted for 2.36 percent of the US' total imports in 2004, but the figure dropped to 2.06 percent last year, Tsai said, citing US government statistics.

The decline could be attributed to the US' rising imports of low-cost goods from China, and it may continue to fall as US companies shift their orders from Taiwan to Asia's third-largest economy, he said.

Taiwanese manufacturers of textiles, garments, bicycles and other products will bear the brunt, as tariffs on these exports to the US are still high, Rita Hsueh (薛雅月), an analyst with the IBT Securities Investment Consultant Co (台灣工銀證投顧), said in a report released on Tuesday.

For instance, the US imposes a tariff of 17 percent on shoes and 32 percent on textiles and clothes imported from Taiwan.

A bigger concern is Taiwan's inbound investments, as US investors may skip Taiwan and go to South Korea, or South Korean investors explore opportunities in the US.

With the incentives provided by the FTA, the two countries may strengthen technology cooperation, Hsueh said.

In the long run, it may cause difficulty for Taiwanese companies when they try to introduce technologies from the US, she said.

South Korea has already overtaken Taiwan on the technology and economic front, and "the FTA will give South Korea a further lift in the competition," Tsai said.

The government has long considered inking an FTA with the US to prompt similar pacts from other nations. But US response has been lukewarm, citing the nation's poor intellectual property protection, restricted pharmaceutical market and the lack of direct cross-strait links among others.

The government has so far secured FTAs with Central American allies Panama, Guatemala and Nicaragua and hopes to break the nation's trade deadlock through the WTO mechanism. That has been stymied, however, after the WTO's Doha round of trade talks was suspended in September.

The government needs to address this issue soon, Hsueh warned, adding that there would be stronger trade integration in East Asia in the future that could leave Taiwan out.

The ASEAN plus three -- China, Japan and South Korea -- plans to remove all tariffs in the region by 2010, and form political, military and tourism alliances.

The free flow of goods at lower costs may further siphon off Taiwan's capital, which would cut into Taiwan's domestic investments and consumption, Hsueh said.

The analyst suggested that the government move to resolve the cross-strait dispute and liberalize trade and investment between Taiwan and China.

"With globalization, the government can no longer ignore the risk of Taiwan gradually being marginalized," Hsueh said.

However, Chang Chien-yi (張建一), a deputy director at the Taiwan Institute of Economic Research's (台經院) research division, said there was no reason to panic.

By upgrading core technologies and focusing on more valuable high-end products, made-in-Taiwan goods can become irreplaceable, Chang said.

"This is why Intel Corp still places orders with Taiwan Semiconductor Manufacturing Co (台積電), not Semiconductor Manufacturing International Corp (中芯) of China," Chang said.