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Taipei flops in trade-pact race

Asia Times

Taipei flops in trade-pact race

By Jens Kastner

16 December 2010

TAIPEI - Barely six months ago, Taiwan’s industrialists were jubilant. The Economic Cooperation Framework Agreement (ECFA), which the island signed with mainland China, was celebrated as a blow against trade arch-rival South Korea.

But with US and South Korean negotiators recently having struck a deal on their long-delayed Republic of Korea-United States Free Trade Agreement (KORUS FTA), Seoul decisively turned the tables on Taipei.

As exports to the US from Taiwan and South Korea to a large extent compete with each other, the KORUS FTA will effectively push Taiwan into the position of an underdog. The US is at present Taiwan’s third-largest trade partner and the final destination of most products Taiwan companies manufacture in China.

Taiwan’s troubles don’t stop here; Seoul shows no intention that it is settling for a pact only with the US. Last year, it completed the world’s largest bilateral trade pact with the European Union, and is now setting sights on an FTA with China which could well trump the ECFA. Taiwan, a global player in the markets for electronics and consumer goods, thus faces not a single but a triple crisis - in the US, the EU and in mainland China.

Under the KORUS FTA, the US is to eliminate tariffs on South Korea-made LCD TVs, among other items. As the 3.9% to 5% tax the US imposes for imported TVs is higher than that for most other industrial products, it will be very hard for Taiwanese manufacturers to cope with such a significant disadvantage.

Because Taiwanese LCD panels and other hi-tech exports are likely to be replaced by Korean substitutes on the US market, the numbers that illustrate the damage KORUS is to inflict on Taiwan are somewhat glaring: the hi-tech sector alone might cost Taiwan US$2 billion annually and half a percentage point of GDP.

Not yet included is the potential damage to other industries, particularly the island’s footwear and garment industries which, unlike their Korean counterparts, also face steep tariffs.

The KORUS FTA is not all about exports to the US. The US is the largest source of Taiwan’s foreign investment and with the signing the free trade pact, South Korea will be better positioned to attract investment from many US companies, particularly in the fields of finance and other services.

Therefore, as long as Taipei cannot find a rabbit to pull out the hat, things look rather bleak for a variety of sectors. The island’s Ministry of Economic Affairs is advising local companies to enhance their "product differentiation and technological advantages in order to remain competitive", but independent experts see only one plausible direction Taiwan could take to save its exporters - it had better start a race to get its own trade pacts back on track.

"Signing the ECFA with China was the right decision, but Taiwan and China haven’t yet signed agreements on trade in goods and trade in services," Liou To-hai, professor of diplomacy at Taiwan’s National Chenchi University and Director of the Center for WTO Studies, told Asia Times Online. "What worries Taiwan most is that Korea signs an FTA with China before Taiwan gets those agreements with China done, and that’s why Taiwan needs to conclude them as soon as possible."

Liou further emphasized the importance of a signing a Taiwan-Japan FTA and also the promotion of a China-Japan FTA.

Others see the US-Taiwan Trade and Investment Framework Agreement (TIFA), which aims to provide an official channel for dialogue on trade and economic issues between the two countries, as key. TIFA was signed in the mid-1990s, but has been suspended since 2007 mainly due to a conflict over a Taiwanese ban on imports of US beef. After news of KORUS emerged, Taiwan’s Ministry of Economic Affairs rather hastily declared that talks under the deal were soon to resume.

Signing an FTA is not child’s play for any country, and securing KORUS did not come lightly either for the US or South Korea. The pact was signed in 2007, but fell into limbo for three years due to deadlock over US auto and beef industry concerns. Since the agreement in principle would oblige South Korea to eliminate farm product tariffs, which are currently around 54%, on US imports, it’s also doubtful whether Korean farmers at a low productivity level can continue farming operations in the face off low- or tariff-free US imports.

Until KORUS was agreed on, both Washington and Seoul had accordingly to overcome considerable domestic opposition.

In Taiwan’s case, matters are far more complicated. As the island, claimed by mainland China, isn’t recognized as a sovereign state by relevant nations, and Beijing’s maintains an active interest in its fate, Taipei can’t just go about persuading domestic doubters and sign trade pacts as it pleases.

An FTA with the US has been discussed on and off for more than a decade, producing little in the way results mainly due to Washington’s impression that Taipei uses the negotiations as a political ploy as opposed to genuinely seeking closer economic cooperation. That’s also how other countries have seen such negotiations with Taiwan - because Taipei wanted to imply Taiwanese statehood, it sought to do what other states do, and that is signing FTAs.

After the ECFA was signed, however, countries interested in an FTA with Taiwan were less worried that they might be dragged into a cross-strait conflict and have their lucrative relations with Beijing tainted. Some signaled willingness to start talks. But Beijing has still not made it clear whether it will allow Taipei to sign FTAs, and neither has Taiwan been behaving as if it is in a hurry.

According to Professor Liou, Taipei’s failure to reach agreements on trade in goods and services with Beijing, which could give Taiwan a desperately needed edge in its fierce competition with South Korea, is related to domestic politics in both Taiwan and mainland China. President Ma Ying-jeou "is very concerned about his opponents’ perceptions of the ECFA, and China has to protect its own businesses’ interests," Liou said.

Taiwan’s Ministry of Foreign Affairs has also made clear that there is no hurry for an FTA with the EU, even though the EU-South Korea FTA will take effect next July 1. Since the EU imposes taxes ranging from 3.96% to 13.06% on items from both Taiwan and Korea, it’s again Taiwanese exporters who are to get the short end of the stick.

In terms of a Japan-Taiwan FTA, the Japanese private sector has been urging Taipei to start talks with Tokyo. For the time being, however, no official negotiations have started.

And while Taiwan and Singapore have started talks on an FTA, this certainly won’t help Taiwan with its quest in catching up with South Korea because trade between the two has little to no significance.

In contrast, Seoul has been keeping itself busy. KORUS, South Korea’s current coup, covers more trade than any other US trade agreement except the North American Free Trade Agreement. It’s indeed tempting to imagine Korea’s automakers popping the corks over the deal.

FTA negotiations between China and South Korea could be launched later this year or early next upon the completion of a feasibility study. A few months ago, Chinese Premier Wen Jiabao stated that the two countries should strive for a bilateral trade volume of US$200 billion by 2012. The possibility of a huge China-South Korea-Japan FTA is also being approached.

Somehow, Taiwan’s industries will have to find a place amongst all this. It is doubtful that the island can continue as in the past. One aspect, however, seems to be cemented. "Korea’s proactive FTA strategy is going to make Taiwan suffer a lot," said Professor Liou.