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Is a common market even feasible?

The idea of launching a cross-strait common market proposed by Chinese Nationalist Party (KMT) Chairman Lien Chan (連戰) after his recent visit to China has attracted wide attention from academics, experts and the mass media. Although interested parties have vigorously discussed and debated the issues related to such a common market, there is a significant gap in perceptions of the concept, definition and operation of such a market between academia and reality under the WTO framework. It is necessary to clarify the vagueness and disparities.

When it comes to common-market schemes, the EU often comes to mind. From an academic perspective, the scale of economic integration of a common market is relatively broader than a free-trade agreement, a service agreement or a preferential trade arrangement.

In politically correct terms, a common market lies somewhere between a customs union and an economic union. The member economies of a customs union adopt a common set of tariffs toward non-members. However, an economic union goes one step further by allowing the free flow of goods, people and capital within the contracted area,and implementing collective fiscal and monetary policies in addition to a common set of tariffs. The EU is an unprecedented example of an economic union.

The above definitions are theoretically correct, but they are inconsistent with the present reality under the WTO framework. Instead of espousing the cliched and bookish definition, the WTO framework goes for a more matter-of-fact explanation of a common market. The WTO defines all possible forms of regional economic integration as "regional trade agreements."

Let us take a look at the list of regional trade agreements posted on the WTO Web site. There are four types: customs union, free-trade agreement, preferential-trade arrangement and service agreement.

Under the WTO framework, there exist at least five economic integration examples adopting the name of common market although their scales of economic integration show a considerable discrepancy. For example, the WTO lists The Common Market for Eastern and Southern Africa as a preferential-trade arrangement, but groups the Central American Common Market as a customs union and the Caribbean Common Market as a service agreement.

All of these common markets use the term common market, but differ in terms of the scale of economic integration. It is obvious that the WTO recognizes all of them as regional trade agreements and leaves the contracting parties to freely characterize the integration scales. The WTO grants all members a full degree of freedom to sign regional trade agreements, although the contracting parties need to submit the agreements for the WTO's inspection and approval.

Consequently, the proposed cross-strait common market is not necessarily identical to the academically defined common market. We should not use the EU's example to forecast the proposed cross-strait common market. Under the WTO framework, the EU is not an apply-all prototype, but a unique case. This means that the proposed cross-strait common market will not automatically accelerate the pace of bilateral political integration, as the EU model does.

If the situation arises where Taiwan has to sign a customs union, free-trade agreement, preferential-trade arrangement, or service agreement with China, we insist that it must be signed under the WTO framework. The reasons are:

First, a cross-strait common market agreement under the WTO framework could prevent other WTO members from objecting that the agreement was signed under the table.

Second, the WTO framework would secure Taiwan's equal status as an independent customs territory versus China's.

The possibility of signing a Closer Economic Partnership Arrangement (CEPA) with China has also been raised. Taiwan must reject a deal based on the China-Hong Kong CEPA, since it includes the "one country, two systems" clause. If the People's Republic of China represents China, Taiwan is not a part of China. Therefore, Taiwan will not accept a cross-strait CEPA similar to the China-Hong Kong pact.

If China is willing to forgo the "one country, two systems" clause to sign a regional trade agreement with Taiwan, Taipei could begin to seriously consider the feasibility of a Taiwan-China common market, either in the form of a free-trade agreement, a preferential-trade arrangement or a services agreement. There is no distinct difference in the content of a common market or other regional trade agreements, regardless of "one country, two systems."

Taiwan can start to negotiate with China regarding a potential cross-strait common market under two conditions: that such common market follows the regional-trade agreement rules under the WTO framework and second, the clauses of a cross-strait common market pact shall not include terms related to political sovereignty but remain solely in the economic dimension with mutual benefits.

Shunyo Liao is an associate research fellow at the Taiwan Institute of Economic Research. Darson Chiu is an assistant research fellow at the Taiwan Institute of Economic Research.
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