Taiwan is soon to sign a service trade agreement with China. Certain sectors of the industry may be quite happy about this, but the agreement is unlikely to be particularly helpful to the nation’s economy as a whole.
China continues to make concessions to Taiwan, but primarily by using the “commercial presence” mode of supply, in which the service is supplied within China itself, as opposed to the “cross-border” mode of supply, in which the service would be provided to customers in China by companies in Taiwan. This means that in the future there will continue to be a drain of talent and capital across the Taiwan Strait.
Taiwan does not seem to have a coherent strategic plan in place for the liberalization of trade in services — the sale and delivery of an intangible product — and is placing all its hopes in China favoring Taiwan in opening up, tailored to specific industrial sectors.
The service sector is important to Taiwan’s economy, accounting for 70 percent of its GDP and 58 percent of jobs. Nevertheless, the export competitiveness of the nation’s service trade has declined over the past decade or so, falling eight places in world rankings — from 18th place in 2000 to 26th last year — and down two notches last year.
Taiwan is not only far behind countries and areas such as China, India, Japan, Singapore, Hong Kong and South Korea, it is also being bested by Thailand, and even Macau is nipping at its heels. As a result, a regional trade pact that will increase the competitiveness of the service industry is extremely important to its economic development.
China’s service sector is still relatively weak, accounting for 44.6 percent of GDP. Consequently, Beijing is wary of opening it up too much to the outside world, following a distinctly conservative trade liberalization policy. While it is relatively open to the service sector in Hong Kong, to which it has exceeded the WTO multilateral market-opening commitments on trade in services by 10.7 percentage points, its average degree of openness to other countries has only increased by a paltry 2.6 percentage points.
In addition, China is primarily interested in the “commercial presence” deregulation, and not overly keen on the “cross-border” mode, for two reasons. First, because this makes it easier for China to supervise and control the speed of deregulation; and second, because it is better for internal investment and job creation.
China’s service trade market presents considerable opportunities for Taiwan’s service sector and its development because of the shared language and cultural similarities between the two countries. In the talks for this cross-strait agreement, China has opened up 65 service trade items, exceeding its multilateral commitments to the WTO. Taiwan, for its part, has opened up 55 items to China, which is below Taiwan’s WTO commitments.
Although China has deregulated more items than Taiwan in this agreement, one has to take into account that its multilateral openness commitment terms with the WTO is only 37.1 percent of its GDP, hence, its degree of openness to Taiwan has already exceeded this. Taiwan’s commitment to the WTO is higher, at 58.2 percent of its GDP, and because it has not applied most favored nation status to China, its degree of openness to China is for the most part lower than or equal to its WTO commitments.
Having China open up more service categories to Taiwan, while Taiwan offers less is not necessarily better for Taiwan. Taiwan needs to combine the interests and strengths of its domestic services sector and use these talks to demand large-scale mutual liberalization with China if it wants to be able to attract investment and talent from overseas.
At the very least, it should demand that China remove trade barriers on items in which it offers free access to other countries or areas, those it has exclusively opened to Hong Kong, the main items on the service industry development part of China’s 12th Five-Year Plan, the many items that Taiwan has opened up to a greater degree than China has and those items on which Taiwan is relatively strong and China is relatively weak.
Looking over this agreement, Taiwan has done well for itself when it comes to e-commerce. Nevertheless, there is also a considerable amount of items that China has opened up to other countries that Taiwan has not demanded, including real estate, market research, management and consulting, environment, entertainment, science and technology consulting, printing and publishing, and personnel placement. China has also liberalized a total of 22 items exclusively to Hong Kong, but Taiwan has only asked for three. Moreover, of the 16 services targeted by the 12th Five-Year Plan, Taiwan has only asked for four to be opened up as part of this agreement.
Finally, of the seven items that Taiwan has opened up to a far greater degree than China has, Taiwan has only asked for one to be further deregulated.
If Taiwan wants to put an end to the decline of its international competitiveness and the ongoing capital and brain drain, it needs to have a consolidated services sector and a liberalization strategy. Whether it can get China to liberalize more items in the service trade between the two countries depends upon how much it is willing to open up. If Taiwan simply wants China to make more concessions to benefit certain sections of the industry, then of course China’s degree of openness to Taiwan is going to be limited.
Taiwan has missed an opportunity here to use cross-strait trade in services liberalization to expand the nation’s service sector.
Tung Chen-yuan is a professor in the Graduate Institute of Development Studies at National Chengchi University. Lin Yu-lung is a graduate at the institute.
Translated by Paul Cooper
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