A report published by the Chung-Hua Institution for Economic Research (CIER) showed that the effects of trade diversion and trade creation from signing an economic cooperation framework agreement (ECFA) with China would not be beneficial to Taiwan’s overall economic development.
After the signing of an ECFA, China’s exports to Taiwan would increase. Taiwan’s exports to China would increase, too, but this would have the effect of crowding out Taiwan’s exports to the US, Japan, Southeast Asia and Europe. This trade diversion would result in Taiwanese manufacturers losing market share to Chinese firms, which have lower production costs.
At the same time, it would make Taiwanese industries that enjoy comparative advantages heavily reliant on the Chinese market. The overall effect would be to make Taiwan’s economy even more dependent on China than it already is.
Besides, under the impact of zero tariffs under an ECFA, Taiwan’s electrical, electronics, medical equipment and other industries would be certain to shift their production to China to take advantage of the cluster effect, leading to a decline in production in these sectors in Taiwan. China would be the one to benefit from the trade diversion in these fields. Taiwan wants to develop its biotechnology sector, in which medical equipment is the field with the most potential. Unfortunately, as the institution’s report showed, the medical equipment sector is one of those that would suffer from the impact of an ECFA.
Electronics forms the foundation of modern technology, as well as the information and networking sectors, and is the cornerstone of a modern defense industry. These are the industries that attract Taiwan’s technical and scientific elite. They cause relatively little pollution but offer high profit potential. They are also areas in which Taiwan competes well with Europe, the US and Japan. It is hard to understand, therefore, why the Taiwanese government is willing to give up these industries in favor of high polluters like chemicals, plastics, machinery, upstream textiles, petrochemicals, catalysts and steel.
The CIER report does say that Taiwan’s chemicals, plastics, machinery, upstream textiles, petrochemicals, catalysts and steel industries would benefit from the trade creation effect of the proposed ECFA, but these are all relatively high-pollution industries with high external costs.
Besides, Taiwan does not have advantages in these industries compared with other countries. Over the past 50 years, these sectors have not been the focus of Taiwan’s development or professional training. So, while developing these sectors may gain Taiwan a share of the Chinese market, it would also make Taiwan a concentrated location for high-polluting industries within the greater China economic sphere.
One of the main reasons put forward by the government for signing an ECFA with China is that it would benefit the textiles sector. However, industries listed in a report published by the Ministry of Economic Affairs on July 27 as likely to suffer from the impact of an ECFA include many textile products such as stockings, shoes, underwear, towels, knitwear, bedding and swimwear, and these findings were confirmed by the CIER report.
Taiwan’s home appliance makers use Japanese technology, import components from China and assemble their products in Taiwan. With no tariff protection under an ECFA, this model would break down under competition from cheap equipment made in China.