Recently, the two presidential candidates have ardently debated the idea of a common market for China and Taiwan. In fact, regional trade agreements (RTAs) have been a global trend since the 1990s. But people should learn a little more about RTAs.
Currently, 98 percent of global trade is carried out between members of the WTO. The WTO not only prohibits quantitative restrictions or discriminatory treatment, but also negotiates tariff cuts, which greatly liberalizes global trade.
The organization also allows its member to further remove trade obstacles, such as tariffs or restrictions on movement and production, thus unifying the market for goods, services and production factors. Such preferential arrangements are exceptions to the WTO's principle of non-discrimination, for these treatments do not have to apply to all member states.
There are five categories of RTAs, depending on their level of integration. Preferential trade agreements grant lower tariffs for developing countries, while free-trade agreements (FTAs) eliminate tariffs and other obstacles to trade between members.
Custom unions have common tariffs and trade policies for imports from non-union countries. Common markets further allow free movement of production factors, such as labor and capital.
Economic unions, like the EU, go further by establishing common policies on trade, currency, finance and social welfare.
RTAs may produce many economic results: First, members of an RTA abolish import tariffs and other commerce restrictions, thereby increasing trade within the area and producing a "trade creation" effect.
On the other hand, there may be less trade with non-RTA members, resulting in the "trade diversion" effect.
Second, since trade obstacles are removed between RTA members, the level of market competition will be enhanced, and the price of imported raw materials will drop. In the long term, these will increase the global competitiveness of RTA members.
At the same time, the expanding market within the RTA allows for more economies of scale in factories. This further reduces production costs and increases the division of labor in the industry, so that its competitiveness increases.
In the long run, these can create trade diversion on countries outside of the RTA.
Third, Foreign Direct Investment (FDI) may increase investment to take advantage of cheaper production and a larger consumer market for the RTA, hence resulting in an "investment creation" effect. This effect can push FDI away from non-RTA-members.
In addition, factories within non-RTA-member countries may also want to invest in the RTA area, so they move their investments away, which can also result in "investment diversion."
After the end of the Cold War, a sharp decline in security threats together with the acceleration of globalization facilitated international economic competition. Countries seeking trade and investment have encouraged a surge in RTAs. Currently there are more than 400 RTAs in the world.
As a member of the WTO, Taiwan has the right to sign RTAs; as the 16th largest trader in the world, Taiwan also offers sufficient incentive for other countries to sign RTAs with it. But because of obstruction from China, Taiwan has so far only signed FTAs with five of its diplomatic allies in Central America.
The integration of the EU, North America, ASEAN, ASEAN plus China, and ASEAN plus China, Japan and South Korea, may divert trade and investment away from Taiwan, hurting the country's exports and economic development.
Therefore, it is a good policy to seek further liberalization, direct flights between Taiwan and China, and signing an FTA with Beijing, since China has enormous economic potential, is Taiwan's largest export market, and is also the greatest obstacle in Taiwan signing RTAs.
The public need not see these policies as dangerous.
However, Taiwan's trade dependence on China is much greater than that of China on Taiwan. Moreover, China claims sovereignty over Taiwan. For these reasons, Taiwanese must be cautious about a greater dependence on China resulting from further economic integration.
I have always been in favor of the direct links, as they would not only connect Taiwan to China, but also connect Taiwan to the world. Taking advantage of business opportunities in China, Taiwan could build a global commercial network as a means to manage risk.
Strong links between foreign business interests and Taiwan security interest could provide some protection to Taiwan.
The economic disadvantages of avoiding dealing with China are obvious: it is clear that the risk-aversion strategy of the pan-green camp does not work.
But the pan-blue camp must explain how it would manage the risks of its policy of openness.
Economic liberalization and RTAs serve to increase economies of scale and market competition, which in turn increase a country's overall competitiveness. But the presidential candidates should also address the question of how they intend to help industries that are not strong enough to compete internationally.
How will the government help encourage innovation among companies?
And should the government help companies to withdraw from certain industries?
The proposal of a common market between Taiwan and China has incited a lot of debate, because a common market integrates further than an FTA or a customs union. It allows free movement of labor.
The pan-green camp is very worried about the possible consequences and has questioned wisdom of this policy.
RTAs always develop in stages.
The government has said before that it is willing to consider an FTA with China, but China sees an FTA as an agreement between sovereign states, and rejected the proposal, just as it opposes Taiwan signing FTAs with other countries.
China countered by proposing a Closer Economic Partnership Arrangement (CEPA) with Taiwan, but the Taiwanese government opposed this, because the CEPAs signed between China and Hong Kong and between China and Macau were under the premise of "one country, two systems."
When these arguments are scrutinized under international law, none is accurate.
Since an FTA is a preferential arrangement between WTO members, China is interpreting too much when it says that it is an arrangement between sovereign states.
Unlike what Taipei believes, a CEPA is not necessarily under the premise of "one country, two systems."
The WTO categorizes both the China-Hong Kong CEPA and China-Macau CEPA as FTAs.
To win the trust of the public, the two presidential candidates must fully present and explain their positions.
Cho Hui-wan is an associate professor at the Graduate Institute of International Politics at National Chung Hsing University.
Translated by Anna Stiggelbout
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