The student-led protesters may have left the Legislative Yuan, but they have added an important variable regarding the future of the service trade pact by pledging to surround the Presidential Office Building if the government breaks its promise to pass an act regulating the oversight of cross-strait agreements before reviewing the pact.
Meanwhile, South Korea is making every effort to negotiate a free-trade agreement (FTA) with China, which the two countries plan to conclude by the end of the year. Judging by precedent, if Beijing and Seoul do sign such a pact, more than half of all trade in commodities between them will be tariff-free starting next year.
Since as many as 60 to 70 percent of Taiwan’s exports overlap with South Korea’s, the Beijing-Seoul FTA would have a huge impact on Taiwanese commodities in the Chinese and South Korean markets. Taiwan’s exports to other countries would also likely suffer since Chinese and South Korean manufacturers would increase production volumes and reduce average costs. The future does not look too bright for the nation’s economy.
The government’s urgency in signing the service pact with China is understandable, seeing as all East Asian countries strove to sign FTAs with one another between 2000 and 2008. In addition, the previous administration attempted to bypass Beijing, but achieved almost nothing.
After the former government completed negotiations on a free-trade pact with Singapore in 2004, the two countries failed to formally sign it because Taiwan insisted on using the name “Taiwan.” This rendered Taipei unable to follow up on the talks with Singapore by signing trade pacts with any other ASEAN members and wasted a lot of time.
Today, China, Japan and South Korea have all signed trade agreements with ASEAN members and the expected decline in Taiwan’s trade is expected to hurt both the nation’s economy and employment. No matter which political party is in power, it will have to shoulder this burden.
To avoid marginalization, the current government signed the service trade pact and is attempting to join talks for the Trans-Pacific Partnership, as well as become a member of the Regional Comprehensive Economic Partnership. Though this is a step in the right direction, the government’s approach is questionable.
As South Korea continues to ink FTAs, its government is providing the industries affected with direct subsidies. For example, Seoul created a 1.2 trillion won (US$1.15 trillion) fund to mitigate the impact of trade deals when it struck an FTA with Chile in 2004, raised it to 2 trillion won after signing a pact with the EU and increased it again to 24.1 trillion won when it inked one with the US. It also provides a massive amount of subsidies, totalling 29.8 trillion won, meaning that altogether, it provides almost 54 trillion won to affected industries.
In addition, South Korea established one central and 16 regional FTA support centers across the country to help businesses prepare for the impact of deals and facilitate the liberalization of the legal, accountancy, telecommunications, cultural, radio and television sectors. When compared by economic scale based on purchasing power, South Korea’s economy was about 1.8 times bigger than Taiwan’s last year.
Considering economic scale, then, Taiwan would have to budget NT$780 billion to assist the industries that would be impacted by trade deals to equal the South Korean fund. Furthermore, since Taiwan’s economy is dominated by small and medium-sized enterprises, while the South Korean economy is dominated by large conglomerates, the government should allocate even more funds.
At present, the government has only allocated NT$98.2 billion (US$ 3 billion) — about 12 percent of the South Korean fund — for this and it is not enough. Despite the large number of services and companies in the domestic service industry, the government has only allocated NT$3 billion to mitigate the potential effects of the service trade pact. With about 1 million companies in the service sector, that amount equals about NT$3,000 per business. With such meager subsidies, it is unrealistic to think that the government will be able to convince these enterprises to support deregulation.
The government signed the pact based on the view that it will bring more gains than losses to the nation. However, unless there is a complete overlap between profits and losses, there will be an income redistribution problem if the pact is implemented. The government must therefore propose measures to transfer part of the profits and resources from the winners to the losers to make up for the latter’s financial losses under liberalization.
One example of such a policy is the special tax that South Korea is levying on all sectors that benefit from FTAs to prop up the industries that lose out. It is also proposing a diverse and complete set of measures, such as financing, certification assistance, provision of information, operation guidance, job transfer incentives, company transformation counseling, training subsidies, direct subsidies for financial losses and aid for businesses that shut down. Seoul’s measures highlight the oversimplification and insufficiency of Taipei’s.
The government should understand that if it hopes to avoid economic marginalization by signing FTAs, it needs to carry out a major reform of the whole economy to deal with global competition.
The related government agencies should not pass the buck by claiming to have insufficient budgets. Based on the spirit of Premier Jiang Yi-huah’s (江宜樺) proposal of “zero-based budgeting,” these agencies should reintegrate their resources and abandon the old approach of rewarding the successful companies instead of supporting the weaker ones, and provide full support for weaker industries. This is the only way to garner widespread support for free-trade agreements.
Tu Jenn-hwa is director of the Commerce Development Research Institute’s business development and policy research department.
Translated by Eddy Chang
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