Taiwan may be left out in the cold

By Tung Chen-yuan 童振源  / 

Thu, Feb 26, 2009 - Page 8

THE CONFLICT BETWEEN the government and the opposition over the signing of a comprehensive economic cooperation agreement (CECA) with China may soon reach a point when it is necessary to lay all cards on the table. President Ma Ying-jeou (馬英九) has not offered a complete policy evaluation and plan for the CECA since proposing it during the presidential campaign. The lack of a consensus between the government and the opposition has allowed some government officials to explain the concept as they see fit, which has both clouded the debate and increased its emotional intensity.

A CECA, a free-trade agreement (FTA), or a closer economic partnership arrangement (CEPA) such as the one between Hong Kong and China are all economic integration agreements within the WTO framework. ASEAN has already signed a CECA with China and South Korea that includes far-reaching bilateral economic integration. Within that CECA framework, ASEAN and China have signed agreements on an FTA, service and trade liberalization, a conflict resolution mechanism and opening up areas for investment. Although it has been seen as a “one country, two systems” framework, China registered the CEPA with the WTO on Dec. 27, 2003, in accordance with Article 24 of the General Agreement on Tariffs and Trade and Article 5 of the General Agreement on Trade in Services.

Quantitative analysis of many computable general equilibrium (CGE) models shows that if Taiwan is not allowed into the ASEAN Plus One (China) free-trade area, this would have a negative impact of less than 0.2 percent on Taiwan’s GDP. Not being allowed into the ASEAN Plus Three — Japan, South Korea and China — free-trade area would have a greater impact, but it would still be less than 2 percent. And even if Taiwan were not allowed into the proposed ASEAN Plus Six free-trade area — adding Australia, New Zealand and India to the above three — a grouping that is still in the discussion stage, the negative impact on GDP would only be 2.23 percent.

Relying on these figures when trying to prove that Taiwan already has been marginalized would probably be pushing the issue a bit too far.

However, the greatest impact on Taiwan from East Asian economic integration would not be on international trade, but rather international investment.

Much of Taiwan’s foreign trade is a result of investment in other countries, which means that changes in foreign investment will affect foreign trade and create a compound effect.

In theory, economic integration agreements will give companies advantages in the economically integrated region such as effects of scale, growth opportunities and resource consolidation. It will also encourage local and foreign firms to boost investments in the area of economic integration. At the same time, discriminatory treatment and competitive pressures in the economically integrated region could lead to local and foreign businesses reducing investments in countries outside that region.

A survey I conducted of 1,019 Taiwanese and foreign businesses shows that if Taiwan were kept out of the East Asian economic integration process, 26 percent to 35 percent of Taiwanese and foreign businesses would reduce their investments in Taiwan. If Taiwan were allowed to join, 23 percent to 37 percent would increase their investments in Taiwan. If a cross-strait economic integration agreement were signed, 29 percent to 42 percent would increase their investments. These are stunning figures. This is also why the petroleum industry constantly warns that if Taiwan fails to accept East Asian economic integration, it will move its investments elsewhere.

Although a cross-strait economic integration agreement would be beneficial to Taiwan’s overall economy, there are other things to consider, such as the cost of economic structural adjustments, political implications and overall economic integration strategies.

When the government said it would not accept a CEPA, its decision was based on political considerations. Even if the government hopes to avoid denigrating Taiwan’s sovereignty by signing a CECA, this does not mean that Beijing won’t try to belittle Taiwan within the CECA framework. After all, Chinese President Hu Jintao (胡錦濤) said late last year that China would only sign such an agreement with Taiwan based on the “one China” principle. This is why the Ma administration must not ignore the opposition’s concerns that an agreement would denigrate Taiwan’s sovereignty.

Finally, Taiwan is having problems joining East Asian economic integration, not a problem with the two sides of the Taiwan Strait being unable to sign an economic integration agreement. A cross-strait CECA would not mean that China would agree to Taiwan signing economic integration agreements with the US, Japan or ASEAN.

Even if a cross-strait CECA meant that China would be less averse to Taiwan signing economic integration agreements with other countries, Ma cannot rely on Beijing’s goodwill and must come up with a more substantive and complete comprehensive economic integration strategy. If it doesn’t, Beijing will gain control of any bargaining chips that Taiwan might be able to play in CECA negotiations, as well as over the progress of Taiwan’s participation in East Asian economic integration.

Tung Chen-yuan is an associate professor in the Graduate Institute of Development Studies at National Chengchi University.