Recently, two noteworthy incidents related to Taiwan's economic and trade development have taken place. It is a pity that the media and the public have not given them more serious consideration. The first was the approval of the Central American Free Trade Agreement (CAFTA), which passed by a close vote of 217 to 215 in the US House of Representatives on July 28. The second was the signing of a Taiwan-Guatemala Free Trade Agreement (FTA), which will go into effect on Jan. 1 after the two countries ratify the deal. These two events might not seem connected, but in fact they are closely related.
Due to Taiwan's diplomatic predicament, its efforts to sign FTAs with other countries, whether they are diplomatic allies or not, have almost all ended up being in vain. Following on the Taiwan-Panama FTA, which took effect on Jan. 1 last year, the signing of an FTA with Guatemala, Taiwan's second free-trade partner, is an important development.
Bringing CAFTA into law involved an even tougher fight. The agreement involved the US and six Central American signatories. It suffered a bruising battle in the US Congress, because of heavy opposition by the US sugar and textile industries. Under the agreement, the six Central American countries -- the Dominican Republic and the Central American nations of Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica -- will be able to link to the North American Free Trade Agreement (NAFTA) and other broader free trade zones through CAFTA.
The Taiwan-Guatemala FTA will help Taiwan build trade relations not only with certain CAFTA nations, but also with the US and members of NAFTA. It is a precious opportunity for Taiwan, which has long been ignored by the international community. Therefore, it must seize the chance to create some space for itself to play a role in the global economy.
As China's economy has risen in recent years, the world's leading countries have felt threatened and have therefore maintained protectionist policies. Even the US, which has always supported liberalization and internationalization, has become increasingly conservative in this respect.
From China's decision on July 21 to allow the yuan to appreciate, we can also see the effects of the rise of protectionism in the international community. China had come under constant international pressure to revalue the yuan over the past two years. The US Senate even proposed a bill earlier this year to impose punitive tariffs on Chinese imports if Beijing failed to revalue the yuan.
Due to the cancellation of global quotas on textile products at the beginning of this year, large quantities of cheap Chinese textiles have been dumped onto the US market. The volume increased 86 percent during the January to May period, compared to the same time last year. Naturally, this has put enormous pressure on the US textile industry, fueling the ferocious debate in Congress over CAFTA.
In order to win the support of Republican members of the US Congress from states that value the textile industry, US President George W. Bush's government promised to control the total volume of Chinese textiles imported in the future.
But even with this promise, 27 Republican members of congress still rejected the agreement. The deal barely passed, clearly showing that many Americans feel uneasy about free trade.
In terms of textiles, the US supporters and opponents of CAFTA have different short-term and long-term considerations. From a short-term perspective, the tariff-free products imported to the US from Guatemala and the other five Central American countries after the agreement becomes effective will surely further threaten the US' textile industry. Opposition to the agreement is mainly based on this type of short-term consideration.
CAFTA's supporters, meanwhile, look at longer-term considerations and take a wider perspective. They argue that when the agreement comes into effect, the US and the six Central American countries will be able to complement each other, creating a win-win situation even in the most sensitive industry, textiles.
In fact, the Central American countries import much of the cotton used in their textile goods from the US. If CAFTA had failed to pass, they would be unable to enjoy tariff-free treatment that would let them compete with Chinese textile goods in the US market. Over the longer term, they would reduce or stop their imports of US cotton. It was on this understanding of the complementary benefits of CAFTA that the deal managed to scrape through the US Congress.
The Taiwan and Guatemala FTA negotiations were tortuous, but eventually Guatemala agreed to grant tariff-free treatment to 447 agricultural products from Taiwan, or 46 percent of Taiwan's agricultural export categories.
For Taiwan's exported industrial products, 66 percent will enjoy tariff-free treatment, accounting for 60 percent of Taiwan's exports to Guatemala. As for industries with "comparative economic advantages," the Ministry of Economic Affairs (MOEA) has included the textile, shoe, food processing, household electric appliances and automobile parts segments, among others.
Through the connection between the FTA and the CAFTA, Taiwanese businesspeople investing in Guatemala should seize the opportunity to use Central American countries not only as their factories but also as a bridge to the entire Central American region and even the US.
If we are able to find a new region, other than China, to serve as a factory and market for Taiwan's goods, distributing the risk of foreign investment, this is surely a praise-worthy effort.
Christina Liu is a People First Party legislator.
TRANSLATED BY LIN YA-TI AND EDDY CHANG
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