Sat, Jul 21, 2018 - Page 8 News List

Trade deals critical for economy

By Darson Chiu 邱達生

In economic theory, international trade is the game of comparative advantage. Free trade removes trade barriers and lets the game of comparative advantage be played to an extreme.

With free trade, overall economic welfare can be maximized and total resources can be optimally allocated. Hence, free trade offers a fair chance to compete.

When it comes to competition, there will certainly be winners and losers. Winners are an economy’s more competitive industries, whereas losers are its more vulnerable sectors.

Free trade can bring in external competition, which could have a significant effect on defenseless domestic industries in the short run. However, in due course, the stimulus of healthy competition can help make industries more resilient. As a result, free trade can ultimately help economic growth.

As an export-oriented economy, Taiwan’s free-trade agreement (FTA) coverage is insufficient. Taiwan has not yet had a fair chance to compete in the international arena.

It has been proven over and over that exports is the most important and reliable engine for the economy. The economic slowdown since the second half of 2014 due to the plunge of global crude oil prices until the first half of 2016 is the most recent proof.

Although most East Asian countries, including Taiwan, experienced consecutive declines in exports during that period, Taiwan was the only country that experienced three quarters of recession, from the third quarter of 2015 to the first quarter of 2016.

As for the structure of the nation’s exports, about 34 percent is information technology, parts and components; 11 percent communication products; and 55 percent traditional manufacturing products, such as basic metals, machinery, plastics, chemicals, equipment and textiles.

The 45 percent of exports that are high-tech items do not meet tariff barriers in most of the nation’s exports destinations thanks to the Information Technology Agreement, which has been enforced by the WTO since 1997.

However, the remaining 55 percent, which are traditional products, are running into tariff barriers from 5 percent up to as high as 40 percent because Taiwan has not concluded any FTAs with major economies.

South Korea has been Taiwan’s No. 1 competitor for market share around the world, as export similarity between the two is almost 80 percent. Taiwan’s market share in Southeast Asia was larger than South Korea’s until 2007, when the ASEAN-Korea FTA came into effect.

The ASEAN region is Taiwan’s second-largest export destination, behind China, whereas the US and Europe are the third-largest and fourth-largest destinations respectively.

As South Korea has concluded FTAs with all of Taiwan’s major export markets and its FTA coverage almost eight times larger than Taiwan’s, local exporters have been gradually losing market share to South Korean industries.

As trade and investment are highly correlated, outbound investments in those markets have significantly decreased. A lack of outbound investment is bad for Taiwanese businesses operating overseas and their ability to form supply chains with domestic enabling firms. As more than 78 percent of the nation’s exports are intermediate goods, difficulties forming supply chains could hurt GDP growth, as well as export momentum.

It is essential that Taiwan sign FTAs, which would give it fair chance to compete. As Taiwan is way behind its major competitors, it ought to aim to join the most advanced FTA: the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).

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