Sun, Jan 11, 2004 - Page 8 News List

CEPA and CEOF are poison pills

By the Liberty Times editorial

An economic agreement among China, Hong Kong and Macau known as the Closer Economic Partnership Arrangement (CEPA) came into force on Jan. 1.

Members of the business community in both Hong Kong and Macau, along with Taiwanese businessmen, mostly believe that the preferential treatment offered by Beijing under the arrangement will bring a lot of opportunities. In Taiwan, some have begun to talk about how Taiwan ought to join in the integration of the "Greater Chinese region"to maintain economic growth and avoid the risks of marginalization.

Some have even proposed the "innovative" concept of a "Closer Economic Operational Framework" (CEOF), believing that CEOF would avoid the problems associated with the politically sensitive CEPA.

In other words, according to these people, substituting of "operational framework" for "arrangement" would allow the regulation of cross-strait economic and trade exchanges while circumventing potential sovereignty disputes.

Will Taiwan lose business opportunities and become marginalized if it does not agree to CEPA with China?

We should seek the answer through an in-depth analysis of the contents of the arrangement and and its potential effects.

CEPA encompasses three main issues -- trade in goods, trade in services and convenience in investments.

In terms of trade in goods, China on Jan. 1 stopped charging tariffs on the import of 273 categories of goods originating in Hong Kong.

In terms of trade in services, also effective Jan. 1, China opened up the service industries in China to Hong Kong, including the banking, stock, insurance, accounting, medical and management consultation sectors.

As for investments, administrative procedures will be simplified.

Focusing on CEPA's impact on trade in goods, manufacturing costs in Hong Kong are very high. Hong Kong manufacturing companies have mostly relocated to China already. Even with no tariffs, manufacturing costs in Hong Kong remain so high that prices of Hong Kong goods will still not be competitive in the Chinese market. In other words, preferential treatment under CEPA does not benefit the Hong Kong manufacturing industry very much.

The same would be true in Taiwan.

The most important aspect of CEPA may be giving the special administrative regions a competitive edge over foreign businesses in the area of trade in services. Under CEPA, the minimum capital requirement for Hong Kong banks seeking entry into China has been reduced to US$6 billion (NT$202 billion), which is much lower than the US$20 billion required of foreign banks. To qualify for offering banking services in yuan, a bank from one of the special administrative regions must have set up branch bank(s) in China at least two years beforehand, as compared to the three-year requirement for foreign banks.

Many banks in Taiwan have more than US$20 billion. If they seek authorization to offer banking services in yuan through Hong Kong, they save only about one year. This is not to mention that China has already made a commitment to the World Trade Organization (WTO) to completely open up its financial services sector by 2006, only two years from now. So the convenience offered to Hong Kong's small and mid-size financial institutions under CEPA does not hold any irresistible attraction for Taiwan.

Under the circumstances, it is obviously an exaggeration to say that "if we do not take after Hong Kong, we will lose business opportunities, and if we do not establish CEPA with China, Taiwan will be marginalized."

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