With ASEAN Plus One (China) and ASEAN Plus Three (China, Japan and South Korea) coming into effect next year and in 2015 respectively, highly competitive Japanese and South Korean products such as semiconductors, liquid-crystal displays, petrochemicals and machinery will be given tax-exempt access to the ASEAN market, which accounts for 15 percent of Taiwan’s exports.
With the exception of some products that enjoy tax exemption within the WTO framework, Taiwanese exports will be subject to a tax rate of approximately 6 percent, which happens to equal the net profit margin of the nation’s industries. This will put Taiwan in an unfavorable position.
Furthermore, these industries account for nearly 20 percent of the nation’s production value and 15 percent of the nation’s GDP. If the government lets them wither, it would make the unemployment situation worse. However, an economic cooperation framework agreement (ECFA) is aimed at promoting economic and trade liberalization across the Taiwan Strait rather than between Taiwan and ASEAN or between Taiwan and Japan or South Korea.
In other words, even if Taiwan were to ink an economic pact with China, Taiwanese products would not enjoy preferential treatment from ASEAN members, let alone free trade with Japan and Korea.
In economics, tariff-jumping means that when faced with high export tariffs, companies may choose to move to a location that allows them to escape tariffs. For example, Japanese car companies set up manufacturing plants in the US to deal with US import tariffs. By the same logic, when ASEAN Plus Three takes effect, Taiwan’s exports will face higher tariffs, possibly leading companies to relocate their factories to places that impose lower tariffs.
Given this situation, the Taiwanese manufacturing industry would wither away, but this is just the beginning of the story.
Over the past 20 years of globalization, Taiwanese companies have set up factories throughout the ASEAN area and in China. Thus, after ASEAN Plus Three comes into effect, Taiwanese companies will not lose their competitiveness, but they will become less competitive by setting up factories in Taiwan.
The root cause of the problem lies in Taiwan’s industrial structure. If the government protects the industries that are in keen competition with South Korea, they are likely to move overseas following the launch of ASEAN Plus Three to evade increased costs from tariffs. An economic agreement with China would still lead to closures of Taiwanese companies unless Taiwan can transform and provide these industries with more advanced raw materials and technological licensing. In addition, to comply with regulations for a certificate of origin, it is likely that more Taiwanese companies will move their factories to China.
On the other hand, if Taiwan can extricate itself from the predicament arising out of intense competition with South Korea and heavy dependence on Japanese technology, and instead emulate northern European countries by developing new and innovative industries, ASEAN Plus Three would have little effect on Taiwan. Then, signing an economic pact with China would only normalize cross-strait economic and trade exchanges rather than relieve any pressure caused by the launch of ASEAN Plus Three.
The importance of upgrading the nation’s industrial structure has been overshadowed by the dispute over whether cross-strait trade should be normalized. This has also diverted the focus from the very important issue of the future development of Taiwanese industry.
Lian Ke-shaw is a doctoral candidate in international trade at National Chengchi University.
TRANSLATED BY TED YANG
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