Service pact puts tiger in sheep pen

By Peter C.Y. Chow 周鉅原  / 

Wed, Jun 26, 2013 - Page 8

As a trade economist, I understand that trade liberalization can enhance productivity through the relocation of resources. Inviting foreign competitors to enter a domestic industry, whether manufacturing or services, will stimulate local industries to compete with foreign-invested enterprises and enhance productivity, furthering economic growth. Given this, it is ironic, but nonetheless true, that a trade economist opposes opening up the Taiwanese service industry to China.

However, there is always a gap between the trade theory of textbooks and the real world. China and Taiwan are at different stages of economic development. Both have different socio-political systems and the size of their economies differ vastly. Most Chinese capital investment comes from official sources: either state-owned enterprises or those affiliated with these enterprises under the privation.

Hence, China’s invested enterprises in Taiwan will be structured as oligopolies or even monopolies to compete with the small and medium-sized enterprises in Taiwan’s service industries. The outcome of market completion is predetermined when asymmetric market power exists between competitors, which means that Taiwanese small and medium-sized businesses — which account for a significant majority of Taiwan’s economic sectors, especially the service sector — will become the victims of unfair competition once the industry opens up to China.

If one evaluates the net benefit of allowing Chinese tourists in Taiwan, it is clear who has really gained from it: the two tourist agencies owned and operated by the Chinese government and their affiliated hotels in Taiwan. Similarly, opening up the service sector to China is like inviting a hungry tiger into a pen with a flock of sheep.

It is critical to recognize that the service sector accounts for 70 percent of the nation’s GDP and nearly 60 percent of its employment. The impact of liberalizing cross-strait trade in services will be much greater than reducing tariffs in selected sectors from the “early harvest” product list under the Economic Cooperation Framework Agreement (ECFA).

To the best of my knowledge, there is no rigorous quantitative cost-benefit analysis on the liberalization of cross-strait trade in services. Unlike assessing the liberalization of merchandise trade, there is no time series data on trade available in the service industry that researchers can use to conduct simulations of the policy’s effects.

When the government negotiated the ECFA with China in 2010, it at least enlisted its think tank to conduct a research project that showed the plausible economic benefits of signing the trade pact — though the research report was revised by government bureaucrats. If the government has conducted an assessment on the liberalization of the service industry, it should release it to the public to convince them that the service pact will benefit the economy and the well-being of Taiwanese.

No accountable, responsible government should sign a trade pact with any country without fully evaluating the economic and non-economic costs and benefits, unless that government is doing what the Taiwanese government has been accused of doing by many of its constituents: pushing Taiwan to adhere to the “one China” framework. Former KMT chairman Wu Poh-hsiung (吳伯雄) recently said as much to Chinese President Xi Jinping (習近平), although the great majority of Taiwan’s 23 million people would prefer to maintain the “status quo” of de facto autonomy.

Other than the economic aspects, liberalization of trade in services would enable managerial personnel from China, if not laborers, to accompany Chinese capital to Taiwan. Not necessarily motivated by purely economic incentives, China’s political objective of annexing Taiwan to the “motherland” would prompt it to try to gain leverage to this end by investing heavily in Taiwan.

Hence, more and more Taiwanese workers would have to work under Chinese bosses. Politically, this would influence Taiwanese electoral politics — if Taiwan continues to be a democratic country. The socio-political costs of the pact supersede the economic benefits. Culturally, Chinese penetration in Taiwan’s cultural and educational enterprises will Sinicize, not globalize, the nation.

Unless a convincing and legitimate rationale is made by the government, the liberalization of the service industry will push Taiwan into China’s economic orbit in the short run and into its political grasp in the long run. This brings to mind the strategy of cooking a frog in a pot of water: The frog will jump out if the water is boiling hot, but if it is heated up gradually, the frog will feel comfortable and safe until it is too late to escape.

Peter C.Y. Chow is a professor at the City University of New York, a research associate at the National Bureau of Economic Research and a contractual consultant of the World Bank.