The government’s proposal of an economic cooperation framework agreement (ECFA) with China has polarized public opinion in Taiwan. The polarization is not only caused by differing economic and political perspectives, but also because the nature of the proposal remains undisclosed.
The government says that there is nothing to disclose because the agreement has yet to be negotiated. Such an argument is erroneous because it is not the details but the general nature of the pact that the public is eager to understand.
The WTO non-discriminatory principle, as embodied in the most favored nation clause, calls for equal treatment of similar products imported from different WTO members. However, Article 24 of the General Agreement on Tariffs and Trade (GATT) allows members to form a free trade area or agreement (FTA) to eliminate tariffs on substantially all trade and not to extend such preferential treatment to non-FTA members.
The strict requirement that an FTA eliminate tariffs on more than 90 percent of trade is to set a high standard for exception to most favored nation status. Otherwise, different groups of WTO members eliminating tariffs on portions of trade would nullify the most favored nation non-discrimination principle.
That said, to increase trade opportunities for developing members, WTO has an Enabling Clause to allow them to reach a preferential arrangements to reduce tariffs. An FTA requires elimination of tariffs on substantially all trade, while a preferential arrangement allows reduction of tariffs on partial trade; the two are different both in content and legal coverage.
The administration of President Ma Ying-jeou (馬英九) says an ECFA will be something similar to the ASEAN-China Framework Agreement. The WTO says it is a preferential arrangement. ASEAN and China signed a Framework Agreement on Comprehensive Economic Cooperation in 2002. China thereby offered early-harvest preferential tariffs on agricultural and fishery products from ASEAN members. The two subsequently signed an Agreement on Trade in Goods and an Agreement on Trade in Services in 2004 and 2006 respectively. Thereafter, the two parties gradually reduced tariffs on trade in goods, and are set to eliminate tariffs on substantially all goods, establishing an FTA next year.
The ASEAN countries and China are WTO developing members. They are therefore entitled to invoke the Enabling Clause — which permits trading preferences targeted at developing and least developed countries — and sign a preferential arrangement. However, the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu committed itself in its Accession Working Party Report of 2001 “not to claim any right granted under WTO Agreements to developing country Members,” so it is not entitled to sign any preferential arrangement with fellow WTO members.
Nevertheless, Article 24 of GATT also sanctions interim agreements aiming to establish an FTA. The maximum transitional period is 10 years. Even though Taiwan can only sign an FTA, it does not mean that Taiwan is obliged to liberalize all trade immediately. ASEAN and China plan to establish their FTA in eight years. If Taiwan signs an FTA interim agreement with China and sets the goal of implementing it in 10 years, it is no hastier than the ASEAN-China agreement.
An ECFA ought to be an FTA interim agreement. Yet, the government continues to be ambiguous.
Recent remarks made by an academic close to the Ma administration seem to reveal why the government has kept the nature of ECFA ambiguous.
This academic maintains that an ECFA ought not to be an FTA. He says that Taiwan’s import prohibition on some Chinese goods violates FTA rules, and China is concerned that other WTO members may invoke the most favored nation clause and request similar preferential treatment to what Beijing would offer Taipei. Because of this, an ECFA should not be an FTA and the WTO in this case, would not need to be notified. He further says that none of the Republic of China’s FTA agreements with its Central American diplomatic allies have been reported to the WTO; nor does the WTO require notification for regional trade agreements.
The argument that an ECFA is irrelevant to the WTO is false. Taiwan’s import restriction on some Chinese products is a violation of the most favored nation clause. On the other hand, provided that the agreement covers substantially all trade, an FTA agreement is precisely the legal cover needed for preferential treatment among specified members. Other WTO members have no right to such preferential treatment. So if China is to offer Taiwan preferential treatment in some areas, an FTA provides the legal cover. Even though it is true that Taiwan has not reported its four FTA agreements to the WTO, the fact has no bearing on the WTO rule on notification for all regional trade agreements.
If the ECFA were not reported to the WTO, one genuine reason would be that Beijing wanted it this way. The Ma administration understands Chinese President Hu Jintao’s (胡錦濤) statement of “an economic cooperation mechanism with cross-strait characteristics” to mean “between the two sides of the Taiwan Strait, and not between WTO members.”
Signing an ECFA and not reporting it to the WTO would be to internalize a WTO-related agreement. It would not be a wise choice for Taiwan.
In the face of Chinese insistence, Taiwan ought to contemplate whether the ECFA is essential for its survival. Various models show that the ECFA’s impact on Taiwan’s real GDP would be an increase of 0.5 percent. The boost may increase to between 2 percent and 3 percent, if movement of capital is taken into consideration. The effect is not particularly stunning.
What really matters to Taiwan’s connection to the world are the peace and stability and transportation between the two sides of the Taiwan Strait. The Ma administration has achieved great improvement in these two aspects. A closer economic arrangement with China is not essential to maintain Taiwan’s global competitiveness. Thorough administrative reform, laws encouraging innovation and an improved environment may be more effective in improving Taiwan’s competitiveness.
An ECFA should be an FTA interim agreement and has to be reported to the WTO. If the government is not planning to do so, then the ECFA needs to include a clause stipulating that China is glad to see Taiwan, as a WTO member, signing FTAs with other members. The clause’s potential in bringing further internationalization for Taiwan may mitigate the negative impact brought by internalization of the ECFA.
China simultaneously offers economic opportunity and poses a political threat to Taiwan. Ma must not ignore threats while chasing opportunities.
Cho Hui-wan is an associate professor in the Graduate Institute of International Politics at National Chung Hsing University.
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