Will ECFA lead to FTAs with other nations?

By Chuang Yih-chyi 莊奕琦  / 

Fri, Dec 18, 2009 - Page 8

China and Taiwan are on the verge of signing an economic cooperation framework agreement (ECFA), and this has the government and opposition at loggerheads. With elections looming, the debate is reaching a boiling point. The main issue surrounding the signing of an ECFA with China, as far as Taiwan is concerned, is this: Will closer economic relations with China help make Taiwan’s economy more international and free? Or will it tie the Taiwanese economy too closely to that of China? The crux of the matter is whether or not Taiwan will have the opportunity to sign free trade agreements (FTAs) with other East Asian countries.

Taiwan’s best strategy here would be to first sign the ECFA with China and then go on to sign the FTAs, making economic integration with East Asia possible and avoiding economic marginalization. This will also have the added benefit of allowing Taiwan to position itself in the global economy. At present, the administration of President Ma Ying-jeou (馬英九) is happy to sign the ECFA with China first in the hope that China will allow Taiwan to sign those FTAs.

For China, it appears the best policy would be to sign the ECFA, but prevent Taiwan from signing FTAs with other East Asian countries. This will enable them to achieve their ultimate objective of first securing economic, and then political, integration. If, as the opposition camp believes, the ECFA leads to Taiwan’s economic overdependence on China and hampers integration with the global economy, their concerns will turn out to have been well-founded.

However, seen from the perspective of game theory, signing the ECFA with Taiwan and then preventing Taiwan from signing FTAs with other East Asian countries would not actually be the best strategy for China to adopt.

This is because marginalizing Taiwan is not in the best economic interests of the Asia-Pacific region, and neither is it good for regional political security or stability. Furthermore, it would threaten US interests in the region, and the US would be unlikely to sit back and watch Taiwan be marginalized in this way. Its hand would be forced, and it would find itself obliged to sign its own FTA agreement with Taiwan.

This would set off a domino effect that would see Japan and other East Asian nations lining up to sign similar agreements with Taiwan, and China’s strategy of integrating Taiwan economically would fail. This being the case, China would be best advised to sign the ECFA with Taiwan and then allow it to sign other FTAs. We could call this a cross-strait dominant strategy, leading to a Nash equilibrium, in which both sides would emerge as winners.

China, then, should make it appear that it is quite happy to see Taiwan sign these FTAs with other East Asian countries just as it is signing the ECFA. This gesture would be well received by the Taiwanese public, who would see it as evidence of far-sightedness and magnanimity on the part of the Chinese leaders. Ironically enough, it just so happens that this is what Ma would have wanted in the first place.

Chuang Yih-chyi is a professor of economics at National Chengchi University.