China and South Korea have concluded free-trade agreement (FTA) negotiations. Their agreement will have a massive economic impact on the two countries, as well as Taiwan, and the news has shaken many on this side of the Taiwan Strait.
The Ministry of Economic Affairs immediately released an estimate saying the agreement would cost Taiwan’s economy NT$650 billion (US$21.23 billion) and shave 0.5 of a percentage point off the nation’s GDP. Labor and industry organizations have called on the government to quickly conclude talks on a trade in goods agreement with China. The government responded that the opposition parties and non-governmental organizations are blocking the passage of the service trade agreement as well as talks about the establishment of free economic pilot zones and the trade in goods pact.
The Seoul-Beijing FTA will indeed have a great impact on Taiwan, but it will not be as bad as the ministry makes out. The ministry estimates that the display-panel industry will suffer the biggest blow, followed by the petroleum, steel, textiles, machine tool, glass and automotive industries. Last year, the display-panel industry exported products worth NT$509.2 billion to China, and according to the estimate, orders worth NT$109 billion will be diverted over the next three years.
However, under the Seoul-Beijing FTA, tariffs will be removed only after 10 years, which casts doubt on the ministry’s claim that orders worth NT$109 billion will be diverted in the next three years. Meanwhile, the automotive and car parts industries are not being deregulated. South Korean automakers have had production lines in China for a long time, so import tariffs are not an issue, and the South Korean automotive industry worries that deregulation would bring Chinese vehicles into South Korea. As for car parts, that was an exchange to protect South Korea’s agricultural industry by restricting the import of Chinese agricultural products.
Taiwan’s machine tool industry lost 16 percent last year due to the rampant depreciation of the Japanese yen. While Chinese import tariffs on machine tools are about 9 percent, the Japanese yen has depreciated by 30 percent recently. The impact of this depreciation far exceeds the impact of the new FTA, but the ministry has failed to come up with a response.
As to the petroleum and steel industries, China, not South Korea, is the main threat.
In addition, the FTA will only take effect after being approved by the Chinese and South Korean parliaments, and after that, import tariffs will be removed in stages over five to 20 years. So the ministry’s estimate appears designed simply to frighten the public. We can only speculate if this is the result of ineptitude or because the ministry has ulterior motives.
It is true that the FTA will have a great impact on Taiwan, but it would be as wrong to exaggerate this fact as it would be to ignore it and do nothing. Taiwan should work hard to liberalize its economy, and it should sign a goods and services trade agreements with China, but not under the present conditions.
When estimating the benefits and negative impact on different industries, the government should be clear and concise, and it should provide complementary measures for guidance and assistance. Before any agreements are signed, any impact assessment and complementary measures should be explained in detail to the public. It must under no circumstances sign the agreements before providing information to the public, which requires more than glossing things over and saying that the benefits outweigh the shortcomings.
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