China-Taiwan Free Trade Deal in Regional Context

Given all the bilateral deals being signed in Southeast Asia as well as a plethora of free-trade agreements on the drawing board, you'd be forgiven for asking, "But what about Taiwan?" The main intuition is that the rest of us in Asia are not eager to cross China given its growing influence in the region. Thus, most other East and Southeast Asian nations have been wary of even contemplating trade deals with Taiwan as doing so will offend the PRC (the big dog). Remember that the mainland treats Taiwan as a (renegade) province and not a country in its own right.

Thus, balancing commercial interests with political ones has been a tricky act for the rest. While the relationship of China with Taiwan remains unsettled, there are spillover effects to the rest of the region. A few months ago, Taiwan expressed alarm with all the preferential agreements being signed. The Taiwanese do fear that they will eventually lose out as all other nations in the region grant each other lower tariffs--but not Taiwan--to appease China. From Taiwan's official Central News Agency:

Taiwan is pushing for bilateral free trade agreements with individual Association of Southeast Asian Nations (ASEAN) members as a more feasible way for the country to participate in regional economic integration, a Ministry of Foreign Affairs (MOFA) official said Tuesday.

Because Taiwan is neither an ASEAN dialogue or development partner, it will be more difficult for the country to forge a free trade pact with the association as a whole than taking a bilateral approach, said Frances Lee, deputy director-general of MOFA's Department of East Asian and Pacific Affairs, in a press briefing.

With ASEAN countries looking to set up a free trade zone with China, Japan and South Korea as early as 2010, Taiwan is afraid of being economically marginalized in the region. If it is left behind in the integration process, its goods sold to countries in the region will face higher duties than those offered by its main competitors.

Taiwan is currently focusing its efforts on negotiating with ASEAN countries that have greater trade ties with Taiwan, including Singapore, Malaysia and Thailand, as bilateral free trade deals with those countries would be mutually beneficial, Lee said. Taiwan may also try to work out special arrangements with individual ASEAN nations to lower tariffs in specific industries, which would have a similar impact as a free trade deal, she said.

Lee stressed that Taiwan already has close economic ties with ASEAN states, as overall trade with the association's 10 members totaled US$63 billion last year. Taiwan is also among the top three sources of foreign investment in Thailand, Malaysia, Vietnam and Cambodia.

However, do note that China and Taiwan have recently agreed to an Economic Cooperation Framework Agreement (ECFA) that may partly help alleviate Taiwanese isolation. It is similar to agreements China already has in place with Hong Kong and Macau. Xinhua provides a backgrounder of what this free trade deal involves:

The Chinese mainland, the world's third largest economy, has been Taiwan's largest trading partner and export market since 2007, according to statistics released by both sides. Taiwan has been the sixth largest trading partner of the mainland, with an accumulated cross-Strait trading volume reaching 960 billion U.S. dollars by the end of 2009. The agreement also provides protection for cross-Strait investments to boost two-way capital flows.

A list of items and services to benefit from the pact first with preferential duty cuts and treatment, dubbed the "early harvest program," was agreed on by both sides. The "early harvest program" will launch within six months of the ECFA taking effect, the agreement said. The two sides will reach their zero-tariff goal on commodities as outlined in the "early harvest program" within two years after implementation of the program.

Under the agreement, the two sides will continue discussing agreements for commodity trade, service trade and investment for six months after the ECFA takes effect. Further discussions on commodity trade agreement will include: tariff reduction and removal; rules of origin; customs procedures; and trade remedies.

Discussions on service trade agreement will focus on cutting and removing restrictive measures gradually, enlarging the service sectors covered, and enhancing cross-Strait cooperation. Meanwhile, discussions concerning cross-Strait investment aim to establish an investment protection mechanism, enhance transparency of relevant regulations, reduce restrictions on investment, and facilitate unhindered investment.

Meanwhile, here is The Economist on what it may spell for the political economy in the region:

The ECFA is indeed a welcome development, though it guarantees neither peace nor China’s ultimate goal, the “reunification” of Taiwan with the mainland. It should be taken for what it is: a trade deal that should help Taiwan both economically and politically...[T]here are still at least three good reasons why Taiwan (and the West) should welcome the deal.

First, it is, as befits a sop to public opinion, a good one for Taiwan’s export-oriented economy. It not only opens up the Chinese market further; it also reduces the risk that Taiwan, the world’s 17th-biggest exporter, will be left isolated, by the “noodle-bowl” of bilateral trade agreements, in which its regional competitors are entangling their economies.

Second, its impact on Taiwan’s domestic politics will be limited. [S]ince a declaration of independence might provoke a Chinese invasion, the vast majority would like to prolong Taiwan’s current, peculiar status of de facto independence. Politics in Taiwan looks like a battle between pro-independence and pro-unification camps. In fact it is about how best to preserve the status quo.

Since the alternative might mean a war, possibly even with America, Chinese moderates also have an interest in that status quo. That is the third advantage of the ECFA. In China it can be used to show hardliners that, slowly, progress is being made towards unification.

So the Economist believes the most important aspect of ECFA is political in making the chances of a China-Taiwan military conflict less likely. Returning to the realm of purer political economy, however, you do have to wonder if Taiwan will have more room to manoeuvre in terms of striking trade deals, either in conjunction with China or on its own with ASEAN members and the like. That is, has ECFA affected the dynamics of China effectively freezing Taiwan out of the system of bilateral deals emerging in the region, or will other countries perceive more room to make a deal with Taiwan?

The opposition, pro-independence Democratic Progressive Party (DPP) already points out the answer may be in the negative, but it may just be positioning:

The DPP gained some ammunition in early June when a Chinese spokesman gave a seemingly negative response to [Taiwanese President Ma Ying-jeou's] oft-stated hope that the ECFA might encourage other countries to sign FTAs with Taiwan. They [Taiwan] have hitherto held back so as not to upset China. The Chinese spokesman’s remarks, though not explicitly ruling out such FTAs, drew a rare rebuke from Mr Ma’s government.

With $63 billion worth of Taiwan-ASEAN trade under consideration, it will be interesting to watch!