Wall St Journal

Taiwan Isolated by Asian Trade Agreements

By Paul Mozur, Aries Poon and Jenny W. Hsu

25 May 2011

TAIPEI—A warning from a government trade council in Taiwan highlights concerns that the island has become increasingly isolated by the burgeoning network of free trade agreements connecting Asia and the rest of the world.

Although Taiwan signed a landmark trade agreement with China last year, many experts say the island’s trade negotiations with key markets such as the European Union and Japan have been bogged down by Chinese opposition and political differences. This has led Taiwan’s export-dependent economy to become increasingly cut off from the network of trade agreements that have proliferated over the last decade, giving Taiwan’s regional rivals a competitive advantage that could harm the island’s long-term growth prospects, they argue.

In particular, an agreement that will eliminate most tariffs between South Korea and the European Union that is set to take effect July 1 will likely harm Taiwan, as its exports to the EU in industries such as plastics, auto parts and machinery will continue to be subjected to tariffs ranging from 16% to 55%, the Taiwan External Trade Council warned Wednesday.

"Taiwan’s major competitor is South Korea; almost 70% of Taiwan exports to Europe overlap with South Korea. This will bring tremendous pressure on Taiwan’s businesses," said Chen-yuan Tung, professor at National Chengchi University’s Graduate Institute of Development Studies. If Korea’s trade agreement with the U.S. —which was originally crafted in April 2007 but has yet to gain approval—passes, the pressure will be even higher, he added.

Eric Chuo, chairman of Hiwin Technologies Corp., one of Taiwan’s largest machine-tool parts maker, said manufacturing companies are likely to increasingly automate production to cut costs and focus on higher-quality products.

He said Hiwin already operates a factory in Germany that produces ballscrews—used in rotation and movements for aircrafts, robots and other precision machinery—to get around EU tariffs.

"We have been asking Taiwan’s government to step up in signing more FTAs...although we fully understand the political reality," said Mr. Chuo, who is also president of the Taiwan Machine Tool and Accessory Builders’ Association.

Last summer Taiwan signed the Economic Cooperation Framework Agreement with China to reduce tariffs and liberalize investment. Many analysts also said the deal could reduce China’s opposition to Taiwan signing trade agreements with other countries. But outside of an agreement with Singapore that may be inked later this year, agreements with the island’s major trading partners like the EU, the U.S. or Japan remain distant.

"This (marginalization) is one key reason why Taiwan hasn’t been doing that great over the past decade...and recently the agreement between (the Association of Southeast Asian Nations) and China has given Southeast Asian countries better access to the Chinese market than Taiwan," said Royal Bank of Scotland economist Erik Lueth.

That agreement, known has Asean Plus One, was cited by Taiwan President Ma Ying-jeou as a key impetus for the signing of the framework agreement with China.

Mr. Lueth said Taiwan companies would likely find ways to circumvent the trade barriers they face and remain profitable. But that, he added, would likely mean cost cutting and moving production to areas that have more favorable trade pacts with key markets.

"That means capital moving from Taiwan to Europe and the U.S., and that will lead to fewer jobs and lower wages in Taiwan," he said.

Although Taiwan’s economy has staged a dramatic recovery from the global economic crisis, posting 11% growth in 2010, it has struggled to sustain growth in domestic consumption and attract foreign investment, something economists say will be key for it to wean itself off the boom-and-bust global electronics demand cycle.

While Taiwan is vying to widen its global market access, its neighboring competitors—namely Japan, China, and South Korea—are eyeing a trilateral free-trade pact. During a tri-nation summit in Tokyo Sunday, the leaders of the three countries agreed to further study the feasibility of a three-way trade pact.