China, Japan and South Korea have initiated negotiations on a free-trade agreement (FTA) that will unfold this year, and people from many sectors in Taiwan have expressed concern over such an agreement. However, the current debate still has not touched on a potential crisis that could result from such an agreement: It would signal the completion of an integrated East Asian economic region, excluding Taiwan.
It should be stressed that if Taiwan is marginalized in this way, it will not only be a Taiwanese problem. Such a development would impact negatively on other countries in eastern Asia and it would have an even greater impact on cross-strait economic integration.
Today, there are three major FTAs in place in the region: ASEAN plus China, ASEAN plus South Korea and ASEAN plus Japan. The only FTA missing is the one between China, Japan and South Korea, and by signing it these nations would be completing the economic integration of the region. Such an integration, accomplished through a series of multilateral FTAs, will of course not be as complete as one comprehensive East Asian agreement because the different agreements will be governed by differing rules. However, under such an arrangement, most of the products exported by any East Asian country to any other country within the region would be exempt from tariffs and this would in practice help bring about actual integration.
This integration would of course not include Taiwan. Although Taiwan and China have signed the cross-strait Economic Cooperation Framework Agreement (ECFA), this alone will not bring Taiwan into the east Asian regional integration process and it will not even be able to sustain cross-strait economic integration.
Once the agreement between China, Japan and South Korea has been signed, Taiwan’s trade situation will deteriorate rapidly while South Korea’s advantages will become clearer in parallel. South Korea will quickly replace Taiwan in terms of the Taiwan-China trade connection and trade integration between South Korea and China will overtake that between China and Taiwan. This will spell the end of deeper cross-strait integration.
As for Japan, the marginalization of Taiwan will have a negative impact on its competitiveness. The global competitiveness of Japanese brands is a result of the longstanding cooperation and division of labor between Japanese and Taiwanese manufacturers. If Taiwan is excluded from the East Asian economic integration process, higher tariffs will result in higher prices for Japanese products manufactured by Taiwanese OEMs, and that will blunt their competitive edge. This means that Japan may lose an excellent long-term partner and that will diminish its ability to compete with South Korea.
Taiwanese production has long been renowned for its extreme efficiency and, if an FTA between China, Japan and South Korea forces Taiwanese products off the market, that will be a change to trading relations that runs counter to economic efficiency. Not only will it weaken the competitiveness of the East Asian market in general, it will also hit global economic wealth.
This means that Taiwan’s marginalization will not only be a national problem, but it will be an East Asia-wide issue.
It is clear that the simple, current concern of the East Asian bloc is the pursuit of its own FTAs, and it is equally clear that they have not considered the negative impact on the participating states of excluding Taiwan from the integration process. Because there are international factors motivating the creation of an FTA between China, Japan and South Korea, such an agreement might come to fruition even faster than expected. The pressure exerted by the Trans-Pacific Partnership will make China particularly willing to take a forceful lead in the three nations’ integration, and in particular with Japan.
South Korea and Japan are keen to see greater northeast Asian integration: the former because China and Taiwan are hoping to complete the ECFA prior to any Chinese FTAs and the latter because of competition from South Korea.
At the moment, China is clearly directing the move toward an FTA between the three countries. Cross-strait cooperation is currently very good and the government has an excellent opportunity to test China’s willingness to support the inclusion of Taiwan in such an agreement and to persuade it to provide that support.
Given the pace of East Asian regional integration, it would be difficult for Taiwan and China to achieve the deeper integration they are aiming for by relying solely on the ECFA. Including Taiwan in the regional economic integration will speed up cross-strait economic integration.
Chao Wen-heng is an associate research fellow at the Taiwan Institute of Economic Research.
Translated by Perry Svensson
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