Would an ECFA keep firms here?

By Chao Wen-heng 趙文衡  / 

Wed, Aug 12, 2009 - Page 8

Despite a flourishing of research and debate about the possible effects of signing an economic cooperation framework agreement (ECFA) with China, the potential relocation of Taiwanese businesses has been largely ignored. This is partly because relocations are a form of dynamic investment that is hard to predict with trade models. However, it is also clear that ECFA proponents are steering clear of the subject.

The most negative effects of trade between Taiwan and China have not been any toll on Taiwan’s imports or exports, but rather the relocation of Taiwanese businesses to China. This has undermined Taiwanese industries.

Therefore, as we consider the potential effects of an ECFA, it is senseless to project the impact on trade alone, while ignoring the threat of further relocations.

The government has repeatedly said that an ECFA will help Taiwan avoid marginalization. However, relocation of businesses is a key indication that a country is being marginalized.

Without evaluating the risk of business relocations, it is therefore impossible to analyze how the ECFA would affect Taiwan’s marginalization.

When businesses move abroad, they take their value-added production with them. If that trend intensifies after an ECFA is in place, it will exacerbate unemployment, cause output value to drop and eat into exports. These effects would diminish the business opportunities that the government says an ECFA would create. They are also classic signs of marginalization.

For an economic agreement to prevent Taiwan’s marginalization, it must be able to decrease the amount of Taiwanese businesses moving to China. The ECFA alone will not be enough to do that.

Because of Chinese pressure on other governments, Taiwan has been unable to sign free trade agreements (FTA) with other countries, which has contributed to its international marginalization.

There is no reason to believe China will change its stance. Regardless of whether Taiwan and Beijing ink an ECFA, China is likely to continue pressuring other governments not to sign an FTA with Taiwan.

That would leave Taiwan with only an ECFA with China to rely on, while China continues to sign deals with important trading partners such as the ASEAN Plus Three countries. Taiwanese businesses will leave Taiwan even faster than before.

The following business types would be at especially high risk of leaving Taiwan:

The first to leave if an ECFA is inked would be those involved in exports. Because tariffs are levied on Taiwanese exports to China and other countries, while China enjoys tariff-free exports, Taiwanese exporters would move to China and export their products from there. The rules of origin stipulated in FTAs would force Taiwanese businesses to set up their factory production in China, too.

The more countries China has FTAs with, the greater the export profits. This would strengthen the incentive for Taiwanese businesses to relocate across the Strait.

The second type of companies to leave Taiwan would be those that need to import raw materials from a third country. For raw materials that are imported from countries other than China, any company reliant on materials that are subject to import tariffs in Taiwan but not China could be expected to move their operations across the Strait to lower costs.

Both businesses that sell locally and those that export most of their products rely on imported raw materials.

Because imports and exports between Taiwan and China would be tariff free, even Taiwanese businesses that focus on the domestic market would consider moving their production to China to gain access to tariff-free raw materials.

Third to leave Taiwan would be businesses affected by imports from China.

Some Taiwanese companies affected by an influx of Chinese imports would struggle to survive. These companies may look for opportunities in the Chinese market rather than attempting to stick it out in Taiwan. They could transfer all operations to China and focus on the Chinese market.

If an ECFA is signed and China, but not Taiwan, signs more FTAs with other countries, relocations are a grave risk.

The ECFA could, in these circumstances, do more harm than good. But things would be different if the ECFA were a springboard to FTAs with other governments.

An ECFA with China has two possible outcomes. What happens is up to the government’s ability and determination to salvage Taiwan’s future.

Unless signing an ECFA would allow Taiwan to ink FTAs with other countries, an ECFA would only be harmful.

Chao Wen-heng is an associate research fellow at the Taiwan Institute of Economic Research.