In a paper about income disparity, economic integration and foreign direct investment (FDI), professors Liu Liang-chun (劉亮君), Lin Yan-shu (林燕淑) and Hwang Hong (黃鴻) stated that in economies seeking economic integration through bilateral trade agreements, the welfare of the respective nations depends on the size of the income gap in these nations, not just the size of the nation itself, as previous research has suggested.
The cross-strait Economic Cooperation Framework Agreement (ECFA) is a bilateral trade agreement signed under the WTO framework. The aforementioned paper’s findings are therefore very useful in gaining a deeper understanding of what effects the ECFA will have on Taiwan.
The paper assumed a scenario in which two economies with different income levels undergo economic integration. The two entities hope to attract FDI from a set number of businesses from non-integrated nations. In the simplified model, the authors assumed that the average number of companies engaged in FDI would only be influenced by the income differences between the two economies. As a result, as the level of economic integration increases, the number of companies engaged in FDI in the economy with the higher income will decrease, while the number of companies engaged in FDI in that with the lower income level will increase. The paper shows that there is an inverse relationship between the degree of income disparity and social welfare in the two entities in question; that is, when social welfare in the economy with higher incomes decreases, social welfare in that with lower incomes increases. The greater the difference in incomes, the more pronounced this inverse relationship.
A glance at real economic data appears to support these findings. While President Ma Ying-jeou’s (馬英九) administration is working hard to show how the ECFA will be able to attract Chinese investment as well as from other countries and increase employment opportunities, government figures indicate that from January through October last year, FDI in Taiwan, with the exception of China, shrank 19.5 percent, while Taiwanese investment in China during the same period grew 130.1 percent.
A look at what happened after Hong Kong signed the Closer Economic Partnership Agreement with China suggests that a succession of undesirable developments is unavoidable: For example, many Taiwanese industries will move their operations to China, while employment opportunities for disadvantaged workers at home will decrease and the wealth gap continues to widen.
Based on the aforementioned paper’s theoretical findings, the future looks bleak for the Taiwanese economy now that the ECFA is in effect. As Taiwan’s trade reliance on China and its China-bound exports and investments increase, Beijing will very likely use political blackmail to snare in Taiwan economically before its political annexation.
Faced with this dangerous prospect, Taipei should work to fend off Beijing’s attempt to isolate it internationally by actively pursuing free-trade agreements with partners such as Japan and the US. It’s Taiwan’s only hope for staying alive.
Tsaur Tien-wang is a professor of economics at Soochow University.
TRANSLATED BY DREW CAMERON
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