Britons on Thursday last week voted to leave the EU. It was shocking, because the EU is a great example of regional economic integration. The economy of the UK and that of Singapore are driven by financial services. Unlike New York, which is supported by the largest economy in the world, London and Singapore have to leverage their outreach through regional economic integration.
Singapore’s participation in such integration in terms of free-trade agreement (FTA) coverage is the highest in Asia, whereas London has been enjoying access to the EU’s single market to secure its status as the No. 1 global financial center. It seems that London might lose that status soon.
Regional economic integration would certainly boost the overall economic welfare of a region. In economic theory, when barriers are eliminated, the producers’ and consumers’ surpluses are expanded. As a result, overall economic welfare increases. As long as barriers are eliminated, resources can be more optimally allocated as stressed in Economics 101 textbooks.
Economic integration is good for a region. As for the members of a regional economic integration platform, there are winners and losers. That explains why certain people tend to reject regional economic integration. However, the losers can become winners, as regional economic integration brings in external challenges that stimulates them to conduct much needed structural reforms and build up capacity.
What Taiwanese truly care about is Taiwan’s exclusion from such integration platforms, because non-members excluded from a particular regional integration process are unlikely to become winners. For example, Taiwan’s major export destinations and import sources, such as China, ASEAN, the US, the EU and Japan, are either members of the nascent Trans-Pacific Partnership (TPP) or the Regional Comprehensive Economic Partnership (RCEP). Once the partnerships come into effect, Taiwan’s position in the region’s services and manufacturing supply and demand framework will shift, and negative effects are likely to come along with it.
According to an IMF forecast, Taiwan is expected to grow 2.06 percent each year from last year to 2020, lower than Hong Kong, Singapore and South Korea. Taiwan is in recession. In terms of year-on-year growth, two consecutive quarters of negative economic growth is recognized as a recession. Taiwan has had three consecutive quarters of negative GDP growth since the second quarter of last year.
Other Asian economies all had positive growth during the same period. According to the IMF, only two developed economies are in recession: Taiwan and Greece.
One serious structural problem hindering Taiwan’s growth potential is insufficient FTA coverage of Taiwan’s economic and trade activities. Taiwan’s FTA coverage is less than 10 percent, but South Korea and Singapore enjoy more than 80 percent FTA coverage.
As the coverage is extremely low in Taiwan, foreign and even local investors are discouraged from making investments and deficient capital formation further weakens exporters’ competitiveness. A vicious circle occurs.
Taiwan has been striving to gain membership to the TPP and the RCEP. That is the right move: Becoming a member of the two most important regional economic integration processes could certainly expand Taiwan’s coverage. Nonetheless, it is difficult for Taiwan to acquire entrance tickets to the two because of political constraints.
Although Taiwan is not a member of the TPP and the RCEP, it is a member of APEC and the Trade in Services Agreement (TiSA). By following the roadmaps for APEC and TiSA, Taiwan can mitigate the effects of being an outsider and enjoy the potential benefits of liberalization in services.
In terms of regional economic integration, more members create more benefits, but more members are also more difficult to negotiate with. The TPP was concluded on Oct. 5 last year, but is not yet ratified by its member nations. The RCEP recently finished its 13th round of negotiations in Auckland with limited progress.
Therefore, sectoral liberalization might be a more feasible solution for Taiwan’s region. The Information Technology Agreement (ITA) is a good example of this.
The ITA was concluded by 29 participants at the Singapore ministerial conference in 1996. Since then, the number of participants has increased to 82, representing about 97 percent of world trade in information technology (IT) products. The participants are committed to completely eliminating tariffs on IT products covered by the agreement. Not having FTAs with major trading partners, Taiwan, as a strong IT manufacturing center, has been enjoying the benefits of the ITA.
The ITA is the first lifeboat for Taiwan when addressing the wave of regional economic integration and TiSA could be the second lifeboat. TiSA is based on the WTO’s General Agreement on Trade in Services (GATS), which covers all WTO members.
This means that if enough WTO members join, TiSA could be turned into a broader agreement and its benefits could be extended beyond its current participants. Taiwan is one of the 23 participants of TiSA. The participating nations account for 70 percent of global trade in services. The negative impacts of being a non-member of a regional economic integration process can be reduced.
Could APEC be another lifeboat? The answer is “Yes.”
APEC leaders recognized the APEC services cooperation framework in 2014. The framework is to last until 2020 as a strategic goal of APEC. It should not be forgotten that APEC plans to fulfill the Bogor Goals the same year, aiming trade and investment liberalization and facilitation.
Recalling the Bogor Goals of 1994, APEC leaders resolved to bolster their efforts in services through the following principles of cooperation: free and open trade and investment in services consistent with WTO principles; transparent and improved communication; collaboration and engagement across the APEC platform and with various stakeholders; competitiveness in services through human and institutional capacity building; and increased participation of developing member economies.
The Bogor Goals’ desired outcomes are increased value-adding capacity; cultivation of globally competitive services sectors and the addition of measures in pursuit of the APEC leaders’ growth strategy for inclusive, innovative, balanced, secure and sustainable growth.
In addition, APEC this year initiated the APEC services competitiveness roadmap. It is to be recognized by this year’s ministerial meeting and started next year. The key objective of the roadmap is to enable concrete action toward agreed targets both at local and regional levels.
Regional economic integration is good for regional growth and it is good for growth in the service sector in Taiwan’s region. There are winners and losers in integration processes; but regional economic integration can help empower losers and turn them into winners. As for outsiders, it is unlikely for them to be winners.
However, there are lifeboats for outsiders to mitigate the impacts. TiSA has many chapters that are similar to the TPP and the TPP’s chapters in services must be a reference for the RCEP.
APEC is also working on TiSA consistent services liberalization with the aim of boosting growth.
Taiwan’s economic performance has been miserable. Despite its limited FTA coverage, taking part in TiSA and APEC services agreements might give it an opportunity to achieve recovery and long-term growth momentum.
Darson Chiu is deputy director of the Macroeconomic Forecasting Center at the Taiwan Institute of Economic Research.
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