Monday, July 27, 2009

ECFA and the Construction-Industrial Complex in Taiwan

The Cross-Strait Interflow Foundation (main page) was on tap claiming yesterday that GDP would grow an extra 1.83% (not 1.8 or 2.0, but precisely 1.83) from "liberalizing" cross-strait trade with China....
An Economic Cooperation Framework Agreement with China could result in extra growth of 1.83 percent for Taiwan’s Gross Domestic Product, a think tank said Sunday.

The Cross-Strait Interflow Prospect Foundation said in a study that while economic liberalization could benefit many sectors of the Taiwanese economy, it was also likely to harm some, including the electronics sector, agriculture, timber and transportation equipment.


The foundation report, published as a book, said ECFA would benefit Taiwan’s plastics, petrochemicals, petroleum, machinery, textiles, coal and steel sectors. Those areas were highly competitive, exported a high amount of their production to China, and faced higher taxes and tariffs in China than in Taiwan, the foundation said. Once an ECFA would cut the tariffs, there would be a strong growth in demand for those products from China, according to the foundation report.

Electronics might suffer though because China has a lower tariff of 0.58 percent for the products compared to Taiwan’s 0.71 percent.
Such calculations are fraught with assumptions about future performance, but more importantly, the question of who benefits is starkly outlined in that thick paragraph, second from the bottom: plastics, petrochemicals, petroleum, machinery, textiles, coal and steel sectors. There are, of course, exceptions, but on the whole these sectors receive heavy subsidies, are less technologically advanced, and are closely connected to the developmentalist state. They are yesterday's industries, competing against similar industries in China that are massively state-subsidized, and China can take over any sector it wants with such subsidy regimes. Tomorrow's industries, on the other hand, including our all-important electronics sector, will actually contract.

Both in China and Taiwan, these industries require energy subsidies to remain afloat -- and they China can subsidize much more than Taiwan, which relies on imported energy and cannot hope to match either China's vast budgetary resources or its endless supply of cheap coal. Thus, any boost these industries receive can only be a short-run boost -- in the long run China will overwhelm them.

Another factor to consider is the structure of the economy. Subsidized, polluting, water-hungry industries like steel and plastics should be phased out as the government phases in renewable energy, biotech, software, organic agriculture, and similar industries. A couple of years ago Wild At Heart blog translated an editorial on this:
Taiwan's petrochemical, steel, concrete, and paper industries have consumed more than 30% of Taiwan's energy production in recent years. Yet these industries have accounted for less that five percent of Taiwan's real GDP during the same period. In 2005, they accounted for just 2.49 percent of GDP. Taiwan is the world's biggest producer of steel per square kilometer. Can Taiwan, a tiny island nation that is virtually 100 percent dependent on imported energy, afford to continue developing this extravagantly polluting industry with its profligate energy requirements given the heavy environmental burden it already bears? Should we let FPG, which produces one third of Taiwan's carbon emissions, go on lining its pockets, destroying the environment, and preying on the weakest among us?
A growing trend in recent years has been the way China is sending tentacles deep into the heart of the construction-industrial state in Taiwan. As the report makes clear, ECFA is not about driving economic growth through increased productivity in key long-term growth industries. Rather, it is about attempting to preserve a certain kind of political economy in Taiwan: the developmentalist state with its tight links between System politicians, large firms producing inputs to the SME manufacturing sector, and local patronage networks driven by construction and land development. ECFA will simply re-orient those inputs on China's manufacturing sector, further involving China in the island's political economy. As it stands now, ECFA is a giant step backward politically and economically for the island and people of Taiwan.

REF: July 2009 World Steel Production Report. Taiwan Today has fuller report, says electronics will shrink by 7%.
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Craig Ferguson (@cfimages) said...

I'd be interested to see a comparison of growth/decline of industries under ECFA vs growth/decline without it but with forthcoming ASEAN-zone tariffs. Most of the studies look at it in comparison to now, not what costs/gains TW would face under the tariffs but without ECFA.

(Sorry if that's not clear, busy day).

Michael Turton said...

No, it's clear, and its an interesting question. Wish I could shed more light on it.


Anonymous said...


What exactly do you mean?

ASEAN isn't raising tariffs to Taiwan. They are lowering inter-region tariffs. I think that makes this whole situation very complex to measure: with ECFA, Taiwanese manufacturers should be able to export more to China. With ASEAN, SE Asian competitors to Taiwanese companies will be able to export to other ASEAN countries for cheaper than the Taiwanese companies. But Taiwanese companies with manufacturing located in SE Asia (as is already common, in Vietnam, Thailand, Philippines, Malaysia, Indonesia) will not have any problems since they are already exporting out of ASEAN countries.

The SE Asian markets aren't insignificant, but really Taiwan's biggest markets are 1) the US 2) Japan 3) Europe 4) China (with China increasingly important and all the others, at least as of late, in negative growth).

The thing with all this is serious Taiwanese manufacturing is mostly high end stuff--precision tools, higher end bicycles, yachts, electronics, chips, computers--stuff that isn't really affected by minor amounts of tariffs.

Taiwan isn't really where Vietnam, Thailand, etc are and it hasn't been at that stage of industrialization for a long time.

Craig Ferguson (@cfimages) said...

Anon, maybe I have it backwards and it's a lowering not raising. Would the cost to TW without ECFA at that time be more/less than with ECFA (from a purely economic standpoint). The reports I've seen all compare the situation now not an ECFA-less TW after tariff changes. I read somewhere a figure of 40% of Taiwan's markets will be affected by changing tariffs.

There's also talk of Japan joining the ASEAN trading bloc (probably poor phrasing by me, hope it's clear), so how would that affect TW if it happens?

Islander said...

Good blog and very worrisome indeed.