After 12 years of effort and anticipation, Taiwan has finally finished its long wait to enter the WTO with China and Taiwan expected to become official members by early next year.
Only now that Taiwan's accession dream has finally been realized can we set aside all the propaganda and rhetoric to take a calm and serious look at exactly what impact WTO entry will have, and how it will effect the development of cross-strait relations.
It is regrettable that Taiwan's economic performance was generally strong throughout the 12-year wait, only to protest negative growth just on the eve of its WTO entry. Unemployment has more than doubled in the last year or two, the markets are shrinking and product sales are slow. There are even signs of deflation.
After entering the WTO, the anticipated export boost will not occur quickly, but import barriers will be immediately lifted -- especially those set up specifically against Chinese products. As Chinese products pour into Taiwan's market, the economic situation could drastically deteriorate.
Opinions still diverge on how serious the situation will be, but some have predicted that Taiwan's current trade surplus with China, some US$20 billion annually, could quickly disappear. In other words, imports from China may rise by a steep NT$700 billion to NT$800 billion (US$20 billion to US$23 billion) annually.
These cheap agricultural and industrial products may replace local products on a large scale, causing local manufacturers to cut production or even close down. Farmers may also lose their livelihood, further damaging Taiwan's already weak economy. Unemployment and deflationary pressure could continue to rise. Moreover, because most Chinese products cost only a fraction of the price of Taiwanese products, the replacement of local products by Chinese could occur on a scale that would be even more unthinkable.
The government's current actions also attest to how serious the situation is. The government knew full well that an announcement made just before WTO entry that Taiwan might adopt the exclusionary clause against China could have created major obstacles to Taiwan's entry. The government is still unwilling to rule out doing so, precisely because of concerns about the possible domestic impact of Chinese products.
Taiwanese officials have also expressed the hope that China will be unwilling to turn cross-strait relations into an international issue, and therefore choose not to file a complaint directly with the WTO even if Taiwan fails to remove existing trade barriers against China. Such a move might prevent a negative domestic impact in the short term.
Taiwan, however, cannot place its hopes on avoiding that impact in such an abnormal way. Given the slowdown in Chinese exports, and the fact that Beijing has always harbored ambitions to speed up economic integration with Taiwan, the only way for Taiwan to avoid an excessive impact on its economy is to plan effective strategies to mitigate the impact.
Direct transportation links across the Taiwan Strait, which have long been seen as closely related to entry into the WTO or its predecessor GATT, may turn out to be a great disappointment. On the one hand, the WTO still does not regulate transportation links between its members. Neither side of the Strait will therefore come under WTO pressure in this regard.
The main obstacle to direct transportation links lies in the two sides' ideologies. Beijing insists there will be no talks on direct transportation links if Taiwan does not recognize the "one China" principle. Taiwan, however, insists that without cross-strait negotiations, no customs entry will be allowed from the offshore transshippment centers. At least on this, the two sides have reached a consensus: no direct transportation links.
All told, what other effect will WTO entry have on cross-strait relations apart from the negative impact on Taiwan's domestic industries and resulting unemployment and deflation?
Because Taiwan has long been on a path of freedom and openness, it only has a few more adjustments to make. In contrast, China is moving from a communist system toward a market economy and has a thousand things waiting to be fixed. WTO entry will force China to accelerate its efforts to link up with international markets.
Under WTO supervision, China will have to fully implement various laws, regulations and systems. China may therefore become an environment more trusted by investors, thereby creating more business opportunities. In fact, such changes have begun to emerge since as China's WTO entry drew closer. Taiwan's economic downturn will also make investors all the more willing to seek opportunities in China. This in turn will speed up Taiwan's capital outflows, business migration and brain drain.
Of course, open markets will also have an impact on China. State-owned enterprises, which have always been protected by special privileges, will take the brunt of the impact. To offset the deleterious impact on the economy and employment, China is slowing down the sale of government shares in state-owned enterprises and announcing large-scale public infrastructure projects to expand domestic demand. In contrast, Taiwan has continued to cut government spending and investments over the past year in the face of the deteriorating situation. There is still no sign of a turnaround.
The long-term and political benefits of WTO entry cannot be ignored, but we should not lower our guard on potential short- and long-term damage to the economy. Instead, we need to respond with decisive action.
The most direct method would be to expand domestic demand by a large margin, using public resources to attract private capital and jointly investing in public infrastructure projects, thereby offsetting the impact of imports as much as possible. But the most aggressive method would be to take the opportunity of WTO entry to thoroughly remove all economic and trade shackles; establish a truly free and open environment; create conditions for local businesses to develop and prosper -- as well as for international investors to develop the enthusiasm to come here -- and turn Taiwan into an operations center for the Greater China economic area or even the entire Asia Pacific region.
Ma Kai is a research fellow at the Chung Hua Institute for Economic Research.
Translated by Francis Huang
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