Economic policy requires focus

By Tung Chen-yuan 童振源  / 

Thu, Jul 05, 2012 - Page 8

Two years ago, when the government signed the Economic Cooperation Framework Agreement (ECFA) with China, President Ma Ying-jeou (馬英九) called a press conference where he announced that the ECFA was a big step toward ending the nation’s economic isolation. He said that it would enable us to evade the threat of economic marginalization, increase the competitiveness of China-bound exports, make Taiwan a magnet for foreign investment and invigorate domestic investment. Two years later, the ECFA has fallen short of those expectations and it is important that we strive to understand why

During a seminar the Council for Economic Planning and Development (CEPD) held in May, Minister Yiin Chii-ming (尹啟銘) said that the ECFA was little more than a framework agreement and “was never expected to have a major impact.”

Furthermore, on June 25 Ma himself admitted that efforts to sign free-trade agreements (FTAs) with other countries left a lot to be desired, and that something needed to be changed very quickly to avoid the nation’s economic marginalization.

I would like to assess the consequences of the ECFA, on four levels. First, the impact of the ECFA on the nation’s exports has been extremely limited. Last year, exports to China grew by only 8 percent, with even exports of those items on the “early harvest list” increasing by only 9.9 percent.

In addition, the amount of Taiwanese exports as a percentage of China’s import market has fallen to 7.2 percent, the lowest level since 1993.

Although the nation has signed the ECFA with China, it still does not have any similar agreements with ASEAN countries. Despite that, the growth in exports to ASEAN was three times higher than it was to China. Furthermore, over the first five months of this year, exports to China contracted by 10.2 percent, but those to ASEAN grew by 6.2 percent.

Second, there is no evidence that the ECFA has done anything to attract foreign investment — in fact, Taiwanese capital continues to flow overseas. In 2010, when the ECFA was signed, the financial crisis had passed, but the amount of foreign investment flowing into Taiwan dropped by 29 percent, to a level behind Thailand, Indonesia and Vietnam. Last year, the value of foreign investment was just US$3.4 billion. From 2008 to last year, the nation bled capital overseas at an average of US$27.7 billion per year, the most serious outflow of capital since records began. Last year was the worst, with US$50.4 billion of Taiwanese capital flowing abroad.

Third, it was originally said that signing the ECFA might benefit FTA negotiations with Singapore, but FTA talks have not been completed with any country over the past four years, and 18 months after talks with Singapore started, there have been no tangible results. Moreover, even if Taiwan does sign an FTA with Singapore, trade between the two countries represents just 3.6 percent of the nation’s total overseas trade, so the effect of such an agreement on the economy would be negligible.

Fourth, since the ECFA took effect, domestic investment in Taiwan has continued to slide. The investment rate during the 1990s was 28 percent. During the eight years the Democratic Progressive Party (DPP) was in power it stood at 23.7 percent. Over the past four years, with Ma in office, it has averaged 17.7 percent. In 2008 it was 18.4 percent; in 2009 it fell to 16.7 percent, the lowest level since 1981; in 2010 it was back up to 18.6 percent; and last year it fell to 17.2 percent, the second-lowest ever. This year the domestic investment rate is forecast to be 16.2 percent, which, if the prediction turns out to be accurate, will represent a new record low.

China is the nation’s biggest trading partner and the destination of the bulk of its foreign investment. It is only common sense that we sign a trade cooperation agreement. Nevertheless, the disappointing results of the ECFA to date show that Ma’s strategy is flawed and his commitment wanting.

It is also far from clear whether the ECFA will remove China’s objections to the nation negotiating FTAs with its major trading partners — the US, Japan and Europe — as Beijing itself has not yet signed FTAs with them.

In the face of fierce competitive pressure caused by rapid regional economic integration, it makes most sense for the nation to concentrate its efforts on negotiations with China and the US, prioritizing the signing of FTAs with those two countries. This should enable us to break through the political obstacles put in our way by China and maximize economic returns. The nation’s next priority should be negotiating FTAs with Japan, the EU, Southeast Asian nations and Hong Kong.

If the government wants to promote bilateral FTA negotiations it has to be prepared to promote economic liberalization and that requires reaching consensus with the opposition. Such an approach requires a thorough analysis of strengths, weaknesses, limitations and opportunities and the implementation of a set of comprehensive measures to address the conclusions of that analysis, while integrating business interests with economic restructuring.

Finally, and most crucially, the government must help get more people back into work.

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

Translated by Paul Cooper