President Tsai Ing-wen (蔡英文), in a clear-cut announcement on Tuesday, revealed the “new southbound policy.” The policy aims to establish a wide-ranging mechanism for negotiations and dialogue with ASEAN, South Asia, New Zealand and Australia to gradually build mutual trust, shared economic community awareness and establish new relationships. It also aims to combine national will, policy incentives and business opportunities to promote and expand trade and investment.
The most effective and tangible way to achieve these goals is by making unilateral concessions. In trade, making a concession does not necessarily mean harm to oneself, and sometimes can even bring benefits. Lowering import taxes on finished products is good for domestic price competition and breaking monopolies, while lowering import taxes on raw materials is beneficial to lowering production costs, promoting investment and increasing exports.
Clever cuts in the number of import tax items and tax rates could even mean that tax revenue will not shrink while trade investment improves. It is not necessary to wait for the signing of a free-trade agreement.
Taipei should let ASEAN member states know that Taiwan, within the WTO framework, intends to unilaterally lower import taxes on some products in a way that is beneficial to ASEAN exports to Taiwan and Taiwanese investment in ASEAN member states. Choosing this kind of import tax concession is ostensibly beneficial to all WTO members, but in practice, it is a concession aimed at ASEAN states.
This is likely to be of great interest to ASEAN, which is likely to suggest what items Taiwan could cut import taxes on. This could be the mechanism for talks with ASEAN.
Assume that the import tax for a certain product in the WTO framework is 15 percent, but because this product is on the Economic Cooperation Framework Agreement early harvest list, there is no import tax on products from China and therefore all imports of this product come from China. Taiwanese businesses are investing in manufacturing of a product in China for export to Taiwan.
Lowering the import tax under the WTO framework would have the following two effects: First, the product in question would be exported from ASEAN member states instead of China and Taiwanese investment in China would be redirected toward ASEAN, which could result in increases in import tax revenue. Second, if the product is a raw material and if the original cost in ASEAN member states is lower than in China, the result of lowering the import tax would be that Taiwanese investment will go down.
As trust is formed, Taiwan could take advantage of ASEAN member states’ exports to Taiwan through a similar approach. This is a flexible way of dealing with pressure from Beijing on any attempts to develop bilateral trade agreements.
Tsai said that “we should not rule out talks with China on [southbound] related issues... so that the ‘new southbound policy’ and cross-strait relations can develop together.”
The “new southbound policy” punches a hole in China’s trade blockade. Cooperation with someone who blockades you is like cooperating with a kidnapper. Perhaps Tsai has to say certain things that appeal to China, but care must be taken that such pretense does not become reality and transform Taiwanese trade policy into Chinese trade policy.
Above all, it must not be an economic policy that functions in concert with China’s South China Sea policy.
Lin Kien-tsu is a former general manager of a foreign-owned company in Taiwan and a former director of Tamkang University’s Department of International Business.
Translated by Perry Svensson
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