Since taking office, Premier Wu Den-yih (吳敦義) has claimed to stand for grassroots economics. We want to ask Wu this: If an economic cooperation framework agreement (ECFA) with China were to cause more harm to the grassroots economy, would he still advocate signing one?
At a press conference naming the new Cabinet last month, Wu said the signing of any cross-strait agreement should observe the principles of national need, public support and legislative oversight.
Now that the government has refused to hold a referendum on an ECFA, how can it claim to have obtained public support or to have reached a broad public consensus on the matter?
Rushing to sign an economic pact with China, the administration of President Ma Ying-jeou (馬英九) has aggressively promoted the necessity of an ECFA with Beijing and cited an assessment report by the semi-official Chung-Hua Institution for Economic Research that endorses the view that an ECFA would be favorable to the Taiwanese macro economy.
The Ministry of Economic Affairs made “expert adjustments” in line with the report to minimize or eliminate any negative impact on certain industries before coming to the conclusion that signing an ECFA with China would have substantial and positive economic results.
In fact, several of the hypotheses in the Global Trade Analysis Project (GTAP) model on which the report is based defy reality.
First, the assumption of full employment excludes the possibility of unemployment.
Second, it is assumed that after signing an ECFA, tariffs on most Taiwanese industrial exports to China would be removed.
As a result, Taiwanese petrochemical products would replace petrochemical products from South Korea and Japan, which accounted for 38 percent — US$38 billion — of the Chinese market in 2007, while Taiwanese mechanical products would replace corresponding products from South Korea and ASEAN countries, which accounted for 23 percent — US$27 billion — of the Chinese market.
These assumptions are entirely unrealistic. Tariffs are not the only factor affecting product competitiveness, and petrochemical and mechanical products are not identical from country to country. Thus, it is out of the question that Taiwanese products would replace other products.
In addition, production capacity of the Taiwanese petrochemical and mechanical industries is not sufficient to replace products manufactured by Japan, South Korea and the ASEAN countries.
Worse, the GTAP model uses market overlap to estimate replacement levels, but it only considers the possibility that Chinese products may replace products from Japan, South Korea and ASEAN countries in the Taiwanese market, failing to mention the possibility that they may also replace Taiwanese products. This is the most significant problem, and the one that will most affect Taiwan’s market.
Since labor costs and rent in China are far lower than in Taiwan, cheap and inferior Chinese products and agricultural produce will likely enter the nation on a large scale under zero-tariff preferential treatment. The influx of Chinese products will cause domestic agriculture and industry to collapse — especially small and medium-sized enterprises manufacturing towels, ready-made garments, shoes, bedding and ceramics — and raise unemployment levels even higher.
The result of increasing unemployment in Taiwan will be depressed wages and increased income inequality.
Wang To-far is a part-time professor of economics at National Taipei University.
TRANSLATED BY TED YANG
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