On 29 June 2010 Taiwan and mainland China signed a historic bilateral agreement that paves the way for closer economic cross-Strait ties. The Economic Co-operation Framework Agreement (ECFA) puts forth a general set of guidelines for future arrangements relating to the trade in goods and broader commercial ties. But it is not a true free trade agreement (FTA). Since Ma Ying-jeou became president of Taiwan in 2008, a range of liberalization measures, including the relaxation of rules governing air links, have already taken place, without the need for an ECFA, and, as such, some domestic constituents that oppose the deal have questioned its need. Nevertheless, the agreement will help to formalize already burgeoning trade links, and Mr. Ma has argued that it will send a positive diplomatic signal to other countries that have thus far been unwilling to sign trade agreements with Taiwan owing to fears that this would offend China. As the ECFA negotiations progress the two sides will expand the range of goods that enjoy reduced or zero tariffs, and include areas relating to services, investment and dispute resolution.
The “early harvest” list—an initial list of goods that will enjoy a reduction in tariffs—was finalized in June and favors Taiwan. The island will enjoy reduced tariffs and exemptions on 539 items that it exports to China, the value of which in 2009 was US$13.8bn (this represented 16.1 percent of the island’s cross-Strait exports in value terms). China will see a reduction in 267 items that it exports to the island, amounting to US$2.9bn last year (and represented 10.5 percent of the mainland's cross-Strait exports). The bias in favor of Taiwan reflects two main factors. Firstly, that Taiwan is far more reliant on the mainland as an export market than the other way around. Secondly, it is clearly hoped that an agreement that appears to benefit Taiwan will help the island’s government to stave off domestic criticism over the ECFA. Taiwan’s government has also argued that the need for such an agreement has increased since an FTA between China and the Association of South-East Asian Nations (ASEAN) came into force in January 2010. A range of products that have seen an exemption or tariff reduction in the China-ASEAN FTA have left Taiwanese exporters at a competitive disadvantage over ASEAN countries. There are therefore clear economic benefits for Taiwan in relation to its own deal.
However, the deal remains controversial, largely for political reasons. The main opposition Democratic Progressive Party (DPP) has argued that ECFA will accelerate the island’s growing economic dependence on China, and thus raises the specter that Taiwan risks losing its de facto independence. This official view is partly political—the party wants to portray Mr. Ma’s cross-Strait rapprochement as a risk to the island’s sovereignty in order to bolster its core supporter base, but economic linkages rose sharply during the DPP’s own period in power (between 2000 and 2008). But there are certainly reasons to warrant such concerns. It is likely that the mainland has been generous as it does believe that Taiwan’s growing reliance on the Chinese market will gradually give the mainland greater leverage over Taiwan’s political parties and voters in the future. Already, opinion polls suggest that the majority of Taiwanese voters believe that cross-Strait economic integration is essential if Taiwan does not wish to become marginalized internationally. Indeed, the ability of the DPP to use the sovereignty card against the ruling Kuomintang (KMT) party is already being undermined by the fact that, although many in the main opposition party do not believe that the ECFA will be the panacea for Taiwan's economic problems that the KMT has suggested, there is now pressure within the DPP for its leadership to adopt a more pragmatic approach to cross-Strait relations.
Cross-Strait rapprochement is likely to continue during the next three years. Although the DPP has done well in a series of by-elections and local elections in recent months, the KMT will control both the Legislative Yuan (parliament) and the presidency until 2012. Recent demonstrations that the DPP has organized to highlight its opposition to the ECFA have failed to find support outside its core support base, and thus such moves will at best keep the ECFA issue in the local media spotlight. Taiwan's government has been particularly mindful of the concerns of farmers, who would face losing out to the more competitive Chinese agricultural sector. The KMT has therefore already insisted that it will not agree to an increase in the number of Chinese farm exports allowed to enter Taiwan. It has also indicated that there will be no change in the ban allowing Chinese workers to enter the island (another concern among voters has been that cheaper Chinese labor could flood the market).
The mainland's political motives will remain a concern in Taiwan, but the trend of countries seeking bilateral or regional FTAs is likely to continue, given the failure of the World Trade Organization (WTO) to push another round of trade liberalization. These bilateral and regional trade agreements also allow the involved countries to focus their efforts more on investment and services than would arguably be the case under the WTO. The trend is likely to continue as a result, particularly where individual countries or trading blocs are seeking to promote themselves as financial and/or services hubs (as is the case in Taiwan, South Korea and several Gulf Cooperation Council states).
Kil Dosanjh - Senior Economist and Analyst Manager in the Country Risk Services Department for Asia & Australasia at The Economist Intelligence Unit.
