Pros, cons of a cross-strait ECFA

By Lin Wuu-long 林武郎  / 

Sun, Dec 27, 2009 - Page 8

When President Ma Ying-jeou (馬英九) came to power in May last year, one important task was to improve cross-strait ties. In Ma’s words, “The icy ties are just beginning to thaw and the construction of a bridge [for dialogue] is just starting.”

His top priority was direct links in trade, transportation and other areas, a drastic change in policy over previous “indirect” economic links between Taiwan and China, in which transactions had to transit through Hong Kong.

Moreover, it was a change from the previous arrangement of unilateral economic transactions to bilateral agreements duly signed by both governments.

One issue that has emerged is talks between the two governments on a cross-strait economic cooperation framework agreement (ECFA). An ECFA, under the framework of the WTO, can be summarized as having three integrated components:

First, a free trade agreement (FTA). The FTA would allow no tariffs, in the spirit of the WTO. Now, Taiwan and China are both members of the world trade body, but an ECFA as it stands lacks the reciprocity of an FTA. That is, in an ECFA’s current form, China would be giving up a lot and asking for little from Taiwan.

Second, liberalization of service sector. Among other services, Taiwan expects to be the first choice for special privileges from China on banking and finance.

Third, foreign direct investment (FDI) liberalization and protection. Among other things, this development would include intellectual property protection.

Details of an ECFA began to emerge in concrete form in March. Current debate has since settled on the following themes: While the Chinese Nationalist Party (KMT) government emphasizes economic benefits for Taiwan, the Democratic Progressive Party (DPP) has emphasized corrosion of Taiwan’s sovereignty and a heavy economic dependence on China. The discussion that follows focuses on the economic aspects of this debate.

President Ma has repeatedly stated the need for negotiations and passage of an economic agreement with China. The aim is not only to improve cross-strait relations, but also, and most importantly, to strengthen Taiwan’s international competitiveness. An agreement would also be the first step in a new era of attempts by Taiwan to economically integrate with the region.

In the beginning, 60 percent of Taiwanese supported signing an ECFA and major industry groups immediately voiced support for the initiative.

For instance, the Chinese National Federation of Industries, a Taiwanese organization, gave conditional support to an ECFA. It urged the government to sign it next year at the latest. However, it also urged the government to take several precautionary measures, including avoiding over-reliance on China’s economy, protecting Taiwan’s business advantages and strengthening cooperation with the US, Europe and Japan on technology imports.

One immediate advantage for Taiwan would be the increase in the size of its economy. China, the world’s third-largest economy with an estimated GDP last year of US$7.973 trillion, has great potential in terms of consumer purchasing power. It also happens that China is Taiwan’s biggest export partner, accounting for about 40 percent of exports. Furthermore, China, with a population of 1.3 billion, would increase Taiwan’s economic reach.

An ECFA would also avoid the further marginalization of the Taiwanese economy, which even now has precious few FTAs with other countries. A statement from the Ministry of Economic Affairs has argued that, with the FTA between ASEAN and China to take effect next year, Taiwan’s competitiveness vis a vis ASEAN would suffer without an ECFA because Chinese customs charges would be 5 percent to 10 percent greater than those applying to ASEAN exporters.

The need for an ECFA is more urgent now given that the grouping of ASEAN 10+1 will include China, that ASEAN 10+3 next year will incorporate Japan and South Korea in an FTA, and that ASEAN 10+6 will then include Australia, New Zealand and India. ASEAN is emerging as a strong regional bloc in the 21st century; its potential, as production base or market, is not to be ignored.

Taiwan is geographically close to ASEAN. Although Taiwan is not part of the grouping, its economic ties to ASEAN remain very close. In 2007, ASEAN 10+3 accounted for 54 percent of all Taiwanese exports and 75 percent of all Taiwanese FDI. The addition of China to ASEAN will thus be hazardous to Taiwan as 40 percent of its exports already go there.

Two reports have also revealed that an ECFA could result in extra GDP growth, with separate estimates of 1.83 percent and 1.65 percent to 1.72 percent in the short term. In addition, the unemployment rate was predicted to fall to 2.63 percent.

This is good news, because Taiwan suffered a record 10.78 percent economic contraction in the first five months of this year. Also, the unemployment rate, which stayed the same in 2007, increased by 0.23 percent last year and then 1.84 percent in the first five months of this year. All this was caused by significant negative export growth of 34.84 percent in the first five months of this year amid the prolonged worldwide economic recession.

An ECFA would also benefit Taiwan’s plastics, petrochemicals, petroleum, machinery, textiles, coal and steel sectors, according to a study by the Chung-Hwa Institution for Economic Research. These areas are highly competitive and make up a substantial proportion of Taiwan’s exports to China. Were an ECFA to end high tariffs imposed by China, there would be strong growth in Chinese demand for these products, stimulating production in Taiwan.

As to petrochemicals, the China market absorbs 66 percent of Taiwanese exports. If an ECFA is signed before China signs an FTA with Japan and South Korea, Taiwan’s petrochemical suppliers will more than double their share of the Chinese market, from the current 15 percent to 38 percent.

The textiles industry used to be a big contributor to Taiwan’s foreign currency earnings in the 1970s and the 1980s. Unfortunately, it has since been cited as a sunset industry and many have relocated to China and Southeast Asia since the 1990s, not only because of the well-known factor of lower labor costs, but also because of advantages such as market proximity and ASEAN integration.

The Taiwanese textile industry would be one of the greatest beneficiaries under an ECFA, with less pressure on firms to relocate to ASEAN states. Without an ECFA, ASEAN 10+3 would place in jeopardy 12,000 out of the present 200,000 jobs in the sector.

Finally, Taiwan will attract more FDI. Wages are lower in China, but the quality of labor and intellectual property protection is more advanced in Taiwan. Thus, FDI in production could benefit Taiwan even as marketing targets China with its massive population.

The Ma administration’s push for an ECFA is pragmatic. However, it has not alleviated growing concerns over Taiwan’s increasing economic dependence on China or over Chinese efforts to use economic measures to unify with Taiwan under Beijing’s “one China” policy.

More recently, just over 70 percent of people surveyed wanted a referendum on an ECFA. Taiwanese therefore want the right to decide on an economic union just as Europeans had the right to vote on joining the EU.

Opponents to an ECFA raise several points.

One convincing point involves sovereignty. As former president Lee Teng-hui (李登輝) has suggested, an ECFA could be part of a Chinese plot to hijack Taiwan economically and thus enforce unification. Lee has also stressed the correctness of the policy direction during his presidency that Taiwan ought not engage in direct talks with China until it has democratized.

Second, there is growing concern over the possible negative impact on small and medium-size enterprises. The organizing secretary of the Hong Kong Confederation of Trade Unions, Vincent Sung (宋治德), said during a symposium in Taiwan that the Closer Economic Partnership Arrangement (CEPA) signed by Hong Kong and China in June 2003 had only benefited multinational corporations and a minority of special interest groups, and had not revitalized the local manufacturing industry nor generated an increase in wages. In Hong Kong, employment in manufacturing fell from 170,000 in 2003 to 140,000 in 2007, while exports fell by 1.1 percent in 2006 and by 19.1 percent in 2007. He urged Taiwan’s government to consider this point before signing an ECFA with China.

Third, opponents to an ECFA are not just ideological. Their reservations are also built on practical aspects of investment. The following illustrates three different, but related, matters.

China prohibits individuals from investing abroad. That is, almost all Chinese investment abroad uses state-owned capital, which draws on the political influence of the Chinese Communist Party. In case of China’s strategic withdrawal of investment, Taiwan must be prepared to take over key businesses in the interests of national security.

Two, South Korea has often been cited in the debate because that nation and Taiwan have had similar processes of economic development. Taiwanese businesses have diverted investment from the domestic market to China. As a result, domestic investment as a percentage of GDP has averaged less than 20 percent over the past eight years.

By contrast, the percentage in South Korea was between 25 percent and 30 percent, or 5 percent to 10 percent higher than Taiwan. The DPP has thus been proposing something similar to the present South Korean government’s policies on limiting investment in China and reducing the impact of low Chinese wages. To a certain extent, the DPP’s position is similar to Lee’s “no haste, be patient” policy in 1996.

Three, according to the core-periphery theory, it is feared that China will gain from the hollowing out of capital and technology in Taiwan. The theory predicts that in interaction between a big economy and a small economy that share the same language and culture, all production components for capital, talent and technology in the small economy will gradually gravitate to the larger economy. Even distinguished Japanese writer Kenichi Ohmae, known for unending praise of China’s economic growth, warned that it would be unwise to allow China unlimited or unregulated investment in Taiwan.

Any economic reforms along the line of ECFA will involve income redistribution. Some people will gain, others will lose. It is not a zero-sum game, however: Policy choices cannot simply be based on net positive economic gains. Wisdom must also play a part.

The democratic nature of Taiwanese society requires public debate and building up a greater degree of consensus. Thus, the timetable for Taiwan to reach a formal agreement with China has lengthened; a formal agreement is now not expected until early next year.

The KMT has unanimously decided to support an ECFA based on the very convincing argument that it will strengthen Taiwan’s international business competitiveness. In a democratic society, however, the majority does not dictate to the minority, and the minority should be able to present constructive counterproposals. An eventual consensus on an ECFA between the governing and opposition parties will be a good test of Taiwanese democracy.

Lin Wuu-long is an adjunct professor at the University of the West in Los Angeles, California, former head of enterprise management research at the UN and a former consultant to the Council for Economic Planning and Development.