Past Issues

More Freedom, Economically

• Byline:OSCAR CHUNG
• Publication Date:12/01/2009

China Southern Airlines’ office in Taipei. The ban on investments from mainland China was lifted in June this year, with mainland Chinese airlines dominating the first wave of capital flowing across the strait to Taiwan. (Photo by Huang Chung-hsin)

It is becoming easier to conduct trade and make investments across the Taiwan Strait, which is causing both excitement and anxiety among the public.

On August 15, one week after Typhoon Morakot claimed hundreds of lives in southern Taiwan, an event took place relevant to Taiwan’s long-term economic development, although few noticed it amid the ongoing news of the deadly natural disaster. The occurrence was the signing of a bilateral investment agreement between mainland China and the Association of Southeast Asian Nations (ASEAN), following a pact between the same parties on trade in goods in 2004 and another one on trade in services in 2007. With these pacts, a free trade zone consisting of ASEAN and mainland China is taking shape, ready to exert a potent influence when the vast majority of items traded between the two economies become exempt from tariffs from January 1, 2010.

For those worrying about the impact of closer economic cooperation among East and Southeast Asian nations on the local economy, the ASEAN plus China free trade zone would be a serious threat if Taiwan were excluded from the trend toward regional integration. That is why they look to the Economic Cooperation Framework Agreement (ECFA) as a key to normalizing economic relations with mainland China. The cross-strait pact, which echoes a campaign pledge made by Republic of China (ROC) President Ma Ying-jeou in the lead-up to the 2008 presidential election and is currently in the joint discussion stages, is seen by its supporters as a prerequisite to further growth for Taiwan and the building of closer economic ties with other economies in the world.

Capital Flow

The normalization process has gained momentum since the Kuomintang (KMT), which supports closer relations with mainland China, returned to power last year and contrasts with the stance of the Democratic Progressive Party (DPP), the ruling party of Taiwan between 2000 and 2008. Less than three months after Ma’s inauguration as president on May 20, 2008, restrictions on investments by Taiwanese in the mainland were greatly relaxed. Previously limits on Taiwanese investment in the mainland were set at 40 percent of net worth for businesses with an asset value of up to NT$5 billion (US$150 million), 30 percent for those with assets between NT$5 billion and NT$10 billion (US$300 million) and 20 percent for those with more than NT$10 billion. The ceiling has been lifted to 60 percent for all companies since August 1, 2008, and those officially headquartered in Taiwan are not hobbled by investment restrictions at all. “[In the past,] Taiwanese capital could go freely anywhere in the world, except mainland China,” says Woody Duh, director-general of the Industrial Development Bureau (IDB) under the Ministry of Economic Affairs. “The government eased investment restrictions so that Taiwanese businesses can have more room for global deployment in regard to manufacturing and marketing,” he says.

The policy change incurred criticism that a large amount of capital would quickly move from Taiwan to the mainland, with some critics saying that the amounts of capital outflow would be huge. This did not happen, however, because most of the enterprises planning to invest in the mainland had already done so and few of those who have yet to do so would start to put money into mainland operations just because of the loosening of investment restrictions. Duh explains the significance of the reduced restrictions, saying it is “mostly that enterprises whose mainland-bound investments are nearing or already have surpassed the official ceiling can deploy their capital with greater flexibility and enhance their competitive edge.”

When Ma took office in May 2008, a total of nearly US$70 billion had already been legally invested across the Taiwan Strait, or about 54 percent of all money Taiwanese businesses invested around the world, since the ROC’s government gave Taiwanese capital freedom to go to the mainland in 1991. These days, mainland-bound investment is flowing at a slower pace because of the global economic downturn as well as mainland China’s Labor Contract Law promulgated by Beijing in June 2007, which has greatly increased operational costs for businesses there. According to IDB figures, mainland-bound investment from January through August reached just US$2.67 billion, down by 52.34 percent compared with the same period of the previous year.

The easing of restrictions on the flow of cross-strait capital in the other direction is also significant. Taiwan could receive no investment from the mainland before June 30, 2009, but the ban has since been lifted, allowing mainland investments in sectors such as manufacturing, the service industry and infrastructure construction. There are restrictions on Taiwan-bound investments from the mainland, though. For example, mainland funds are limited to 64 segments, or 30 percent, of Taiwan’s manufacturing sector, and must stay away from flat screen and wafer manufacturing, areas where Taiwan still enjoys an obvious competitive edge. In terms of infrastructure construction, mainland investments can be made in 11 areas, but may not account for more than 50 percent of the total capital when it comes to the building of airports and harbors.

The 2009 global competitiveness report released by the World Economic Forum in September ranked Taiwan 12th, up five places from the 2008 report, and one of the reasons for the progress is Taiwan’s new policy toward mainland investment. “The openness of Taiwan’s economy is expected to boost confidence among international investors in Taiwan,” Woody Duh explains.

By the end of October, eight mainland airlines and two businesses in the information technology industry had gained approval from Taiwan’s government to introduce funds from across the Taiwan Strait, bringing a total of NT$39 million (US$1.18 million) to Taiwan. In addition, Duh expects two major automakers from the mainland to complete negotiations with their Taiwanese partners soon on joint investment projects on the island. The government plans to evaluate the policy’s impact on Taiwan’s economy and society by the end of the year, six months after the flow of funds from mainland China began, before making any decision on whether to be more open to mainland capital or open more investment categories.

Then there is the proposed ECFA, the talk of the day for those concerned about Taiwan’s economic development, and an accord poised to be influential as an interim arrangement prior to a free trade agreement (FTA) between Taiwan and mainland China, according to Roy Chun Lee, assistant executive director of the Taiwan World Trade Organization (WTO) Center at Chung-Hua Institution for Economic Research.

An 85^oC store in Shanghai. The bakery and café chain from Taiwan is a success story in the mainland, where the business potential for Taiwanese service providers appears to be equal to that of manufacturers. (Photo by Central News Agency)

Things to Come

Lee says ECFA will pave the way for a complete free trade agreement since it includes a timetable for subsequent cross-strait talks on trade in goods and services and other fields. The pilot agreement would also authorize related government agencies to carry out their own talks with their mainland counterparts.

The need to push for ECFA and then a cross-strait FTA is increasingly urgent, says Lin Chu-chia, an economics professor from National Chengchi University in Taipei. Lin says mainland China has been active in recent years in creating free trade agreements with other economies, notably the ASEAN bloc. “The signing of ECFA is intended to counter the impact of the free trade pacts inked between mainland China and its partner economies,” he says.

The cross-strait free trade pact is particularly important because mainland China-bound goods account for 40 percent of Taiwan’s total export volume. Although trade in some areas, such as segments of the electronics sector, is already partly tariff-free and will not be greatly affected by the proposed pact, the average tariff for goods from Taiwan to the mainland is 8.94 percent. Once the ASEAN plus China free trade agreement takes full effect in 2010, the tariff on products bound for mainland China from ASEAN members will drop significantly, in many cases to zero, leaving Taiwan goods at a big disadvantage in the mainland market. But that gap would start to narrow and even disappear if Taiwan and mainland China ink an agreement on trade in goods.

ECFA is also expected to include an Early Harvest Program for industry segments such as auto parts, textiles and petrochemical products from Taiwan, which are expected to lose their competitive edge in the mainland market to a great extent after Beijing’s pact with ASEAN takes effect. The Early Harvest Program would allow such products to enjoy the benefits of a free trade arrangement immediately on signing an interim agreement.

“The cross-strait pact could make our products more competitive and could even give us the lead in the competition with those of our trading rivals that haven’t yet reached an FTA with mainland China,” Woody Duh says. In addition, “international companies looking to the mainland market will be more willing to invest in Taiwan’s manufacturing sector” in areas where Taiwan still enjoys a competitive edge, the IDB director-general says of another potential benefit of ECFA. Duh adds that some European manufacturers have shown interest in setting up shop in Taiwan to produce goods bound for the mainland market.

Apart from its current focus on tariff elimination and easing trade restrictions for goods, ECFA could facilitate economic integration in other areas, such as trade in services. This is significant, especially since mainland China is endeavoring to stimulate its domestic market amid the global downturn, which will rely a lot on the development of the service industry from retailing and distribution to warehousing.

Broad Network

“An influential service provider needs to have a broad network of operations as well as managerial know-how to get each of these operations to the same level of service quality. Taiwan is good in these areas,” Woody Duh says.

According to Roy Chun Lee, Taiwan’s financial institutions have shown the strongest desire to enter the mainland market compared with other service providers. In response, the government is planning to put the financial sector on the Early Harvest Program list, which would give specific service segments easier access to the mainland Chinese service industry. Meanwhile, a memorandum of understanding (MOU) on cooperation in the supervision and regulation of cross-strait financial institutions is expected to be signed by the end of this year. The MOU is seen as paving the way for Taiwan’s banking, securities and futures and insurance sectors seeking a significant presence in mainland China under the proposed ECFA pact.

The signing of the cross-strait financial MOU will help Taiwanese businesspeople gain greater access to loans and enable them to restructure their operations, which is especially significant amid the global financial crisis, said Chiang Pin-kung, head of the Taiwan-based Straits Exchange Foundation, the semi-official body that handles Taipei’s contact with Beijing, in a meeting with a delegation from the Bank of China in September.

Formosa Petrochemical Corp. in Yunlin County, southern Taiwan. As mainland China inks FTAs with economies around the world, a cross-strait economic pact could ensure the competitiveness of products from Taiwan. (Photo by Hao Chen-tai)

The final shape of ECFA is uncertain, but it might be extended to include the signing of agreements on the protection of bilateral investments and intellectual property rights as well as on cross-strait cooperation over joint technical standards and certification, to name just a few. “The more urgent the issue, the more likely it will be discussed at the negotiating table at an earlier time,” Roy Chun Lee says.

Most importantly, an economic agreement with mainland China would clear the way for Taiwan to seek closer economic ties with other economies around the world.

International Interest

Today, due to the diplomatic difficulties confronting Taiwan, Taipei has signed FTAs with only five countries, all located in central America and all Taiwan’s formal allies, and the total trade volume with them is less than 1 percent of Taiwan’s trade with the world. “As Taiwan has started to talk with mainland China about ECFA, several major countries have already shown interest toward signing an FTA with us,” says Huang Chih-peng, director-general of the Bureau of Foreign Trade (BOFT), who is quite confident that mainland China will not interfere with other countries’ attempts to ink FTAs with Taiwan. “After we sign a cross-strait pact, mainland China will find it hard to say to other countries that express interest in signing an FTA with Taiwan ‘You cannot have what I have,’” he says.

However, all policies have their pros and cons and ECFA, or any FTA, is actually a game of give-and-take. As Taiwan’s goods gain free entrance to the mainland market through the elimination of tariffs, those from mainland China will also become very price competitive in Taiwan’s market, threatening the survival of some local manufacturers, especially those targeting the domestic market. “Within three years of tiles from the mainland starting to come to Taiwan, half of the 50 tile manufacturers on the island would have to close down,” says Eric Yu, secretary-general of the Taiwan Ceramic Industries Association, adding that tile manufacturing in Taiwan is already affected by a large amount of low-priced tiles smuggled from mainland China.

According to Yu, the impact will be more severe for local tile manufacturing than for other vulnerable segments such as shoe and towel manufacturing, since the local tile market has not been opened yet to mainland products while towels and shoes made on the mainland already can enter Taiwan legally, although they are subject to various tariffs. In response, he is advising local tile makers to adapt to the emerging challenges.

Competitive Edge

“Most of them produce a variety of different kinds of tiles, but I’m telling them to each focus on certain items. By doing so, each can be good at making specific high-quality products in large quantities and retain a competitive edge,” he says.

For the government’s part, it is taking action to help businesses vulnerable to the impact of free trade with mainland China. The BOFT has held more than 100 seminars with businesses from at-risk industrial segments since March this year. It has also made a list of “sensitive” industrial items likely to fall victim to the newest wave of free trade, in hopes of formulating measures to help them remain competitive and thus dissolve their opposition to ECFA.

One such measure is to request a moratorium on tariff elimination for mainland Chinese products in these “sensitive” categories during negotiations with mainland officials. At the same time, President Ma has promised many times that he will not allow agricultural items from the mainland to enter the domestic market except those that had already received the green light before he took office in May 2008. At present, of the more than 2,200 agricultural items for sale in Taiwan, the local market is open to 1,415 items from the mainland.

Meanwhile, the IDB is ready to earmark funding to help manufacturers endangered by imports from mainland China, just as the Council of Agriculture allocated some NT$100 billion (US$3 billion) for the agricultural sector when Taiwan entered the WTO in 2002. The IDB’s Duh says that this time the amount of help will not necessarily be greater than in 2002, however, “because Taiwan’s industrial sector is generally more competitive than the agricultural sector,” adding that the funds will mainly be used to upgrade manufacturing know-how, train workers in new skills, and market products.

Freer cross-strait trade is likely to have a great impact among local tile manufactures and other businesses in Taiwan targeting the domestic market. Innovation is seen as key to their long-term survival. (Photo by Huang Chung-hsin)

Eventually, however, the traditional manufacturing sector on the island will have to face the music. This is inevitable, since any bilateral economic agreement signed between WTO members should be based on the WTO principle that the adjustment period for policies favoring domestic businesses should be limited to a “reasonable” period, generally 10 years, unless the situation is quite special.

“Taiwan has to make a choice of the lesser of two evils,” says National Chengchi University’s Lin Chu-chia. “Critics think only of the negative effects of ECFA, but what will Taiwan do in the future if everyone in East Asia joins the trend of regional integration while we’re outside of it?”

Of all Taiwan’s trading rivals, South Korea is perhaps the most formidable since there is a broad overlap between the products made by these two economies. This means that a competitive advantage for either economy can be very significant. For example, from 2004–2006, exports from South Korea to ASEAN grew 16.6 percent annually, compared with 20.1 percent for exports from Taiwan to ASEAN during the same period. In 2007, an FTA between South Korea and ASEAN came into effect and in the first year after implementation of the pact exports from South Korea to ASEAN grew 24 percent, in sharp contrast with 11.8 percent growth for those from Taiwan to ASEAN. In June 2007, South Korea clinched an FTA with the United States, although it has yet to take effect. Once free trade between South Korea and mainland China occurs—the two began joint research on a bilateral FTA in November 2006—it could be a severe blow to Taiwan’s exports.

Free Trade Impact

Supporters of ECFA hope that once the pact is signed with mainland China, Taiwan will be able to complete FTAs with other major markets including ASEAN and the United States.

Still, some critics like Kenneth Lin, an economics professor at National Taiwan University in Taipei, strongly question the ever-closer cross-strait economic links, which they fear will endanger Taiwan’s future. “China’s economy is highly unpredictable because of problems such as unbalanced development across the nation and its serious environmental problems. Although China’s economy has developed relatively well in the past 20 years, we’re not sure about its development in the next 20 years,” the scholar explains.

The long-term political rivalry between Taiwan and mainland China may further explain his uneasiness about cross-strait economic integration. “The relationship between Taiwan and China is not normal. China has deep hostility toward Taiwan. That’s why we should be very cautious when dealing with them,” he says. “I oppose the introduction of Chinese capital to Taiwan. But since it’s already here, we need to oversee it very carefully.” Similarly, the pro-independence DPP has shown deep concerns about the trend in cross-strait relations since the KMT took power last year, demanding a referendum on ECFA. This, however, is not on the agenda for the KMT. ROC Premier Wu Den-yih says that Taiwan’s representative politics suffice to reflect public opinion and points out that ECFA will still have to be ratified by the Legislative Yuan after it is signed. While this is not a foregone conclusion, it must be noted that the KMT currently holds a large majority in the legislature.

NTU’s Kenneth Lin has other concerns regarding what he deems the subordination of Taiwan to mainland China when it comes to economic development. “Why does Taiwan have to sign a pact with China before developing closer ties with other countries?” asks the scholar, who is for signing ECFA only when Taiwan inks a pact with another major economy first.

Others see this as unrealistic, however. “You might not like it, but this is the international political reality we’re facing,” says the BOFT’s Huang Chih-peng, referring to the fact that it is unlikely for Taiwan to make any significant breakthroughs in international economic relations before signing an agreement with mainland China. According to Huang, about 350 FTAs have taken effect around the world. Each of those agreements, especially ones involving East Asian economies, which have adopted an active attitude about signing economic pacts with each other since 2000, has had a more or less negative impact on the local economy because Taiwan, which is heavily dependent on exports, is being left behind in the global trend towards economic integration. “ECFA is not a cure-all for Taiwan’s economy and it does have its negative aspects, but we must have it because the impact of not signing it would be huge,” the official says. “I won’t say Taiwan will be marginalized immediately after January 1, 2010 [when the ASEAN Plus China free trade zone emerges], but it would definitely be so in 10 years.”

Write to Oscar Chung at oscar@mail.gio.gov.tw