In recent years, Taiwan’s principal trading rival, South Korea, has focused on signing free-trade agreements (FTA) with other countries, a policy that has been particularly fruitful this year. South Korea’s FTA with the EU came into effect on July 1, and the US Congress approved a US-South Korea FTA on Oct. 12. These are major trophies for Seoul in the trade race.
Compare South Korea’s advances with what has happened to Taiwan, where the administration of President Ma Ying-jeou (馬英九) has leaned heavily toward China. Ma’s government thinks the Chinese market is all that matters, so right from the start, it made signing the cross-strait Economic Cooperation Framework Agreement (ECFA) its primary objective. It also tried to fool the public into believing that the ECFA would open up new opportunities, and that once it was signed, inking FTAs with other countries would be plain sailing.
However, Taipei has not signed a single FTA since the ECFA. In contrast, South Korea, with its sights set on the global market, has signed one agreement after another, leaving Taiwan in its wake.
There is no point denying that when it comes to exports, Taiwan and South Korea are rivals locked in a zero-sum game. When South Korea gains, Taiwan loses.
As South Korea’s FTAs with the EU and the US come into effect, 90 percent of its goods will enjoy tariff-free access to these two markets — the biggest in the world.
It is estimated that South Korea’s FTAs will have a considerable impact on Taiwan’s manufacturing industry, to the tune of US$5.3 billion for the EU agreement and US$3.3 billion for the US pact.
Taiwan and South Korea’s economies took off at roughly the same time, focused on exports. Both economies are counted one of the four Asian Tigers, along with Hong Kong and Singapore. Up until the 1990s, Taiwan stood at the head of the four Tigers and was ahead of South Korea in export trade.
However, starting in the 1990s, South Korea first drew level and then overtook Taiwan. Since then, Seoul has widened its lead and by the third quarter of this year Taiwan’s exports amounted to less than 60 percent of South Korea’s. Display panels and DRAM chips are two areas of manufacturing in which Taiwan has been almost completely routed by Seoul and there is no indication of how we can stem the tide any time soon.
Examining why the two countries have swapped places with regard to the relative competitive advantages of their manufacturing sectors reveals one key factor. The 1990s, when the reversal took place, marked the end of the Cold War and the collapse of the communist bloc. It was around this period that the Soviet and Eastern European communist parties fell from power.
In order to save its own skin, the Chinese Communist Party started to open up its economy to attract foreign investment capital, making available the cheap labor of hundreds of millions of people. As a result, both Taiwan and South Korea’s manufacturing sectors were faced with ever-sharper competition.
Some Taiwanese manufacturers chose to “go west” by investing in China and closing down their factories in Taiwan. They decided to cut costs by relocating to China, while sticking to a low-price competitive strategy. South Korea, in contrast, chose to raise the core competitiveness of its manufacturing industry and set its sights on global markets.
Of course, industrial development involves all sorts of complicated questions. South Korea’s industrial development strategy has also encountered serious problems. For instance, the state has tended to support the big chaebol conglomerates while ignoring small and medium-sized enterprises. It also overextended its fiscal leverage and accumulated too much foreign debt, so that when the 1997 Asian financial crisis struck, the South Korean economy was brought to the edge of ruin. A complete collapse was only averted by IMF assistance.
However, Seoul did not let this humiliation get it down. Instead, it worked hard to rebuild. Today, it is far ahead of Taiwan, even though Taiwan had largely avoided the 1997 crisis.
If there is a key factor that explains the two countries’ relative rise and decline, South Korea’s success can be attributed to its focus on developing domestic industry and its manufacturing sector being geared toward global development. That has given South Korea a big advantage over Taiwan, which has relied on China alone to cure its malaise.
While Seoul has embraced the world, Taiwan has embraced only China.
Faced with competition from South Korea, the only response the Ma administration has come up with is the idea of reaching out to the world through China. Hence Ma’s assertion that signing the ECFA would help Taiwan sign FTAs with other countries — that the ECFA would be a stepping stone leading to that end.
Ma is delighted with what he sees as his great achievement — getting the ECFA signed — but since then no progress has been made on the FTA front.
The proposed economic cooperation agreement with the EU and the mooted Trade and Investment Framework Agreement with the US have been delayed again and again.
An indication of the government’s attitude, as revealed by Democratic Progressive Party lawmakers, is that funding for the Office of Trade Negotiations, which is the main department entrusted with FTA negotiations under the Ma administration, has been cut from NT$50.45 million (US$1.67 million) in 2009 to NT$34.47 million in next year’s budget — a fall of 31.7 percent.
This demonstrates that the Ma administration’s policy is centered on the ECFA and that talk of signing FTAs with other countries is just a pretense.
Having signed the ECFA, the government thinks it has completed its mission and there is no need to pursue FTAs.
Policies like this have ensured that instead of vying with South Korea for trade supremacy, Taiwan has surrendered without even putting up a fight.
Translated by Julian Clegg
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