There is a strong desire in some quarters in Taiwan to sign preferential trade deals now that it can and there will be pressure from external powers too. Taiwan may seek to sign trade deals for geopolitical reasons, but not for economic reasons.
The economic rationale for Taiwan to join the FTA game is weak.
The best economic argument for FTAs are that Doha is stalled and liberalisation via FTAs is the only alternative and may be better than nothing. There is now enough evidence that this isn’t the case (see work by Philippa Dee in the World Economy). Taiwan has very little leverage in negotiating trade access bilaterally with its major trading partners. So unilateral liberalisation is a better option. Unilateral liberalisation has served East Asia well in the past and the principle of open regionalism has brought into being a region that is economically much more integrated than Europe or North America, yet depends on those markets for final goods exports. There is evidence of this in recent studies by Zhi Wang (pdf) and myself and Peter Drysdale.
Taiwan is ideally placed to pursue a global strategy, and a strategy that focuses on domestic structural and regulatory reforms. The economic gains from structural reforms dominate gains from FTAs, even if FTAs are region wide. Estimates suggest that comprehensive unilateral regulatory reforms would deliver five times the gains of an ASEAN+3 agreement. The gains from bilateral FTAs are trivial.
Now that Taiwan can ‘go global’, a strategy of getting its own house in order will deliver larger gains, and faster, than when Taiwan had effectively cut itself off from China. A global strategy does not discriminate in trade dealings and instead lets market forces determine trade flows and economic integration. Making the Taiwanese economy stronger, more flexible, efficient and resilient will help it reap the gains from globalisation and integration into the Asian and global economy. ECFA is a framework for removing that discrimination against China; Taiwan should not now introduce discriminatory trade elsewhere.
The China-ASEAN FTA which comes into force next year is viewed by some as a threat to Taiwan and others in Asia that aren’t party to it. There is hope that it sets off competitive liberalisation through other FTAs. That would add more noodles to the mess of FTAs in the region. To date Taiwan has only signed 4 FTAs and they are with Central American countries that do not have significant trade shares in Asia. So Taiwan has a clean slate when it comes to FTAs.
The political capital and resources required in negotiating and signing FTAs are better spent elsewhere. There are political risks to Taiwan signing preferential deals with other countries that discriminate against the mainland. Article 16 of the ECFA is a termination clause where either China or Taiwan can notify the other of termination of the ECFA which takes effect 180 days later.
Taiwan can minimise political risk and maximise economic gains if it enters bilateral arrangements that avoid preferential treatment or allow ready sign-on by other countries. Taiwan has strongly pushed that point in one of its very few submissions to the WTO:
we propose new provisions… requiring parties of RTAs to provide an accession clause for third-party members, which would expand the reach of RTAs and thereby promote broader, more inclusive and comprehensive trade liberalization (paragraph 7)
third parties will not be granted automatic accession to RTAs. However, the original parties to the RTAs will be required to afford third parties, in good faith, adequate opportunity to negotiate individual terms of accession to the RTAs (paragraph 9)
(h/t to John Ravenhill).
Taiwan lifted itself into prosperity without FTAs despite, but also because of, its being politically between a rock and a hard place. Commitment to the multilateral trading system through unilateral tariff liberalisations, in which APEC played a significant role, was one way of doing that. Recent economic troubles, which gave the government a window of opportunity to sign ECFA, were not the result of Taiwan’s inability to join FTAs. They resulted from the global economic slowdown and significantly Taiwan’s being left out of the East Asian production networks.
The restrictions on trade and investment across the Strait have prevented deepening of Taiwan’s specialisation in the regional and international economy. This has slowed Taiwan’s climb up the value-added chain. Taiwan has not been able to add value to some cheap intermediate imports from China and is limited in what it can export to China. Taiwanese firms have not been able to take full advantage of China’s upstream or downstream processing capacity. As recently as 2006, Taiwan’s imports from China were half of what might have been expected given the size of the Chinese and Taiwanese economies, their distance apart and their trade structure. Taiwan’s imports from Chin was less than 50 per cent of its potential. Korea’s trade with China, for example, was much closer to its potential than was Taiwan’s trade with China (see references here). This severely limits the engagement of foreign MNEs in Taiwan as they look to participation in production networks with China as part of the advantage of location in East Asia.
FDI into Taiwan has been low and there is much fanfare that Taiwan will now become a more attractive destination after ECFA. Some wrongly point to the lack of FTAs as the reason low FDI in Taiwan. The real reason is that by severely limiting trade flows with the mainland, Taiwan was not an attractive destination for foreign capital. Everything else equal, why build a factory in Taiwan when you could set up in Korea or Vietnam, for example, and enjoy relatively unfettered trade with China, one of the largest, most dynamic and most important economies in the region.
Pursuing deep domestic reforms is not an easy strategy to pursue when there is pressure to sign FTAs. It may seem a lonely strategy although that is nothing new for Taiwan. But given its unique circumstance, Taiwan is in a position to become an exemplar of a new drive towards multilateral liberalisation and structural reform. Efficient specialisation in the international economy involves heavy interdependence across the Straits: global engagement reduces the economic and political risks associated with that.
It may be an outlier in the region but the economic gains and minimisation of geopolitical complications that come with a strategy that eschews preferential trade agreements is likely to provide maximum momentum and confidence in taking Taiwan’s economy to the next level.
Shiro Armstrong is a Research Fellow at the Crawford School of Economics and Government at the Australian National University and Editor of the East Asia Forum.
This article is based on a paper presented to ‘Beyond ECFA: Taiwan and Regional Integration in the Asia Pacific’, hosted by the Institute for National Policy Research in Taipei and available as a working paper here.
Shiro, the purpose of ECFA is not trade, but to integrate Taiwan so tightly into China’s economy that the island can finally be annexed to China. Chinese officials have repeatedly stated this; that is also the goal of the KMT, the current ruling party in Taiwan. It has nothing to do with legalization or liberalization or supply chains; these are merely magical terms invoked to justify what is ugly and evil. That annexation is being backed by powerful global financial forces — they strongly supported Taiwan’s current pro-China president, Ma Ying-jeou, an ardent Chinese nationalist, in the 2008 election. The important thing isn’t even trade — smuggling has been going on for decades — but the financial agreements, which rarely receive any publicity.
From the Taiwan point of view imports from China have zero benefit, which is why they were wisely and successful held at arms length for so long. They take jobs and push down wages. It is common when shopping in Taiwan and being offered a product, to have the salesperson hasten to explain that it is not from China. Consumers avoid Chinese products for their low quality, use of toxins, and of course, China’s threat to maim and murder Taiwanese if they do not annex their island to China. In the real world, away from graphs with sympathetic assumptions and elided inconvenient facts, increased trade from China means a general decline in the quality of life on the island, ranging from the everyday worries I face when shopping in local markets to avoid toxic Chinese produce, to the cheap Chinese labor even now being brought in to force wages down, to the greater influence of that brutal authoritarian government over our democracy. The tighter embrace you advocate may look nice on graphs, but it has real, negative consequences for the future of the island.
Amazingly, that threat and those consequences are entirely lacking in this discussion. I wonder why that is?
Michael
Greetings,
Although the promising outcomes reached by Beijing´s political establishment with the current Taipei Political Head is worth following, as the end game for China continues and will never be other than the return of one of its provinces to the Motherland, much in the manner of Hong Kong SAR and Macao SAR, it is also valuable to bear in mind at all times, that Taiwan can only move forward with Nations who recognize One China, be it in a bilateral or multilateral arena, with the concrete consent of the one sole and sovereign People´s Republic of China. In other words, Singapore and any other country who wishes to pursue a commercial agreement with Taipei, is only able to do so with a concrete OK from Beijing, and never on its own terms, even if it is just a commercial agreement. As such, my practical experience in the region and with China in particular in the field of FTAs and RTAs leads me to disagree with some of the issues raised in the article, as they certainly do not reflect the true messages that are stated/explained by China when it is asked informally or formally, regarding how they view Taiwan´s place after the ECFA commercial agreement. The fact of the matter remains that there is one sole China, one sole Independent and Sovereign Nation, recognized by an overwhelming majority of their peers in the world stage. Anything else outside that realm of reality is empty in fact.It remains to be seen if any Sovereign country who recognizes One China, will take a move with Taipei. I am one who is certainly viewing, reading and analyzing with much interest. My thanks for the interesting work undertaken by the East Asia Forum.
Thanks to the Australia-Taiwan Business Council for passing on the write up of a business forum they held at the end of July in Sydney. The pdf is after the photos:
http://www.atbc.asn.au/prosperity/upcoming_events.asp#a14
Michael, this comment reflects no understanding of the economics. In East Asia, it is the economics that are the underlying structural forces at play. The experience elsewhere in East Asia would prove your second paragraph wrong. Your argument is built on a naïve view that open trade and economic policies are irrelevant to economic welfare and national wealth.
For too long the negative security externalities of deeper integration for Taiwan have been used as an excuse for what in any other country would be seen as blatant and unjustified protectionism, with losses to Taiwanese incomes and welfare. I’m not ignoring the politics: I’m drawing attention to the costs of the bad trade and economic policy that has been justified by simple-minded analysis of Taiwan’s security circumstance which is cover for naked, self-seeking vested interests.
Shiro,
You are right to focus on the economics but wrong to assert that “The best economic argument for FTAs are that Doha is stalled and liberalisation via FTAs is the only alternative and may be better than nothing.” The best argument is to distinguish “economic integration” from preferential tariffs and see regional agreements, plurilateral or bilateral, as a mechanism for addressing regulatory issues which frustrate cross-border business.
Gary
Gary
I should have made my point more clearly: that the best argument that is given is that Doha is stalled and that I don’t agree with it.
However, traditional FTAs aren’t an obvious or effective way for dealing successfully with regulatory issues. These issues are dealt with in bilateral or regional negotiations within the framework of FTAs only in the most limited and economically distorting way. At their core these are issues that have to be dealt with domestically. The purpose is increasing the contestability of markets for domestic and all international suppliers. I don’t think most of the gains come from the ‘exchange of concessions’ in bilateral or regional trade negotiations.
Shiro, I’ve been waiting for this entirely predictable outcome. I blogged on it yesterday. From yesterday’s Taipei Times….
“People who possess large amounts of capital appeared to reap benefits from the Economic Cooperation Framework Agreement (ECFA), while those on the lower end of the economic scale absorbed the costs, a recently released report on the cross-strait trade pact signed in June last year suggested.
The report, conducted by National Sun Yat-sen University, was commissioned by the Executive Yuan’s Research, Development and Evaluation Commission in hopes of gaining a better understanding of attitudes in southern Taiwan toward the ECFA and making the government more aware of the causes of objection to the ECFA from people in the south.”
The report was commissioned by the RDEC, one of Taiwan’s most important agencies, and also one of its most pro-KMT. Far from supporting entrenched interests, as you claim above, the anti-ECFA position realizes that the there are only three beneficiaries of cross-strait integration: large and powerful local businessmen, global finance capital, and cross-strait organized crime. In other words, globally entrenched interests.
The KMT’s China policy under President Ma is simple: moving industries into China while bringing tourists into Taiwan. These two policies are two sides of the same minted-in-Beijing coin: dulling working-class opposition by throwing tourist dollars at it while hollowing out the local economy — and satiating investors with a convenient housing bubble.
Naive? Nonsense. I am quite aware of the difference between the neoliberal religion that legitimates the ECFA power grab, and actual economics. The former has the same relation to the latter as Social Darwinism does to real evolutionary science.
You should come over here and live for a while, shop in our markets, and experience the joy of figuring out which food is grown locally and which is toxin-laden rubbish from China. That might give you a new perspective on “East Asian integration.” The reason it is so popular is that the people who push it don’t have to live with its consequences.
Michael Turton
The View from Taiwan
“Your argument is built on a naïve view that open trade and economic policies are irrelevant to economic welfare and national wealth.”
This false dichotomy is exactly the neoliberal religious position that I am talking about. The issue is not whether openness is good for economic welfare and national wealth, but what kind of openness, and to who, and how.
Michael
One more, because it is important. A key purpose behind “integration” is enabling the Taiwan economy to preserve a certain kind of status quo — where money flows from China can be integrated into the local patronage networks of the KMT to help keep the latter in power. The way tourism monies are being used is a good example of this.
At the same time, moving to China has enabled Taiwanese SMEs to keep doing what they were doing, without significant upgrades in management and technology — indeed Lee Teng-hui noted in a speech a few years ago that moving to China had actually dumbed them down.
What economic integration really means for Taiwan is preservation of the domestic economic and political status quo. Ironically, ECFA is a status quo policy, not a forward looking one.
Michael
Michael
First, the assertion that organised crime and global financial capital benefit from ECFA appears to be yours, right? The report simply say that capital owners benefit.
It’s good that the report is pointing out winners and losers from ECFA. If there are distribution issues that need to be dealt with, those are correctable problems moving forward and what policy makers should be focused on. It’s still only the early harvest phase of ECFA and thus far China has made more market-opening concessions than Taiwan. Taiwan will benefit more, the more it opens up its economy – there is no dispute about that in economics. Lifting bans on imports from China will benefit those at the lower end of the economic spectrum who will pay less for the things they consume.
Your fear of China’s impact on the economy is an irrational response but one that is not uncommon. Japan went through the same phase of fearing industrial hollowing out 5 to 10 years ago. The Japanese realised, as others in Taiwan already know, that Japan like Taiwan is much more technologically advanced than China and the same things shouldn’t be manufactured in China and Taiwan. That is the case for Taiwan too unless Taiwanese would like to continue to weave cotton and do other low skilled labour intensive manufacturing.
On the food, I’ve lived extensively in Asia. In Japan there was the poisoned dumplings incident from China. The solution is not to cut off imports from China but to continue to regulate and monitor the quality of imports. Taiwan, Japan and other countries have the authority, responsibility and the interest to regulate food and quarantine issues as they see fit. That is not a high cost process relative to the gains the trade brings: cheaper food which benefits those at the lower end of the economic scale.
If the status quo you’re talking about is the growing economic integration across the Strait, yes, I suppose ECFA is a status quo policy. In my article I actually focused on the regional and global implications of ECFA which are very definitely not status quo.
Shiro