An economic cooperation framework agreement (ECFA) may include cooperation in several areas, including industrial, agricultural and service industries, as well as capital and labor affairs. Regardless of how far reaching the aspects of an ECFA, the main goals will be to lower customs tariffs and deregulate markets. From this perspective, the direct consequences of such an agreement will be to increase the flow of products across the Taiwan Strait. This is also the perspective from which I want to discuss the impact of an ECFA on Taiwan’s trade status.
Taiwan’s economic development model is focused on exports. Without the export surplus, Taiwan’s economy would be in big trouble. Because the nation has maintained a trade surplus in recent years, it has also maintained a competitive edge.
In 2006, Taiwan’s trade surplus reached US$21.3 billion, in 2007 it was US$27.4 billion, in 2008, US$15.2 billion, and in January to August last year it reached US$19.5 billion. As a result of growing cross-strait trade exchanges, however, trade between Taiwan and China makes up an increasingly larger portion of the nation’s total foreign trade. In 2008, Taiwan’s China-bound exports reached US$99.57 billion, while imports stood at US$32.88 billion, giving Taiwan a trade surplus of US$66.69 billion. In the period from January to November last year, Taiwanese exports to China reached US$75.22 billion, while imports were US$22.87 billion, giving Taiwan a trade surplus of US$52.35 billion. Deducting this trade surplus with China from Taiwan’s total trade surplus converts the surplus into a deficit. In disregarding the principles of risk diversification, Taiwan is too dependent on its trade with China.
If Taiwan and China enter into an ECFA and lower customs tariffs to a certain level, cross-strait trade would be further intensified and this could bring large volumes of Chinese products into Taiwan. That in turn could gradually serve to eliminate the nation’s trade surplus. As Taiwan’s trade surplus with China decreases, the nation will experience a trade deficit. That would have dire consequences.
The East Asian financial crisis in 1997 erupted because Thailand and other Asian states were experiencing trade deficits that set off a chain reaction of financial collapse. These states were only able to save their economies thanks to capital infusions by the IMF and the World Bank. Taiwan is not a member of these financial institutions, so where could the nation turn if the same thing were to happen to the Taiwanese economy.
The current cross-strait trade relationship should really be in Taiwan’s favor, so it should be China that comes to Taiwan asking for an ECFA to balance cross-strait trade, while Taiwan should be procrastinating to maintain its advantage. This is not what is happening. Instead, it is Taiwan that is eager to implement an ECFA. This also carries many political implications that could cloud thinking on the issue.
There are those who say that the Taiwanese economy will suffer because ASEAN and China have already formed a free-trade area, and that if Taiwan and China sign an ECFA it would help bring Taiwan closer to being able to participate in ASEAN trade.
The situation is not as bad as that. The original six ASEAN states formed a free-trade area in 2006, lowering customs tariffs to below 5 percent. This did not have a great impact on Taiwan and the nation’s trade surplus with ASEAN is actually increasing. Trade with ASEAN nations has been growing since 2003, and Taiwan enjoys a trade surplus. When the global economic crisis hit in 2008, Taiwan’s foreign trade contracted — with the exception of its trade with ASEAN nations, where the nation still has a trade surplus of US$12.9 billion.