Tuesday, April 24, 2007

Free Trade Agreements and Taiwan

There's a strand of thinking that Taiwan's ambiguous status could actually become a permanent policy -- Taiwan could somehow become a virtual state, the first post-Treaty of Westphalia state, a Stainless Steel Rat in the concrete jungle of the modern state system. The recent Free Trade Agreement (FTA) between South Korea and the US shows how problematical this is. A commentary in the Taipei Times notes:

According to optimistic estimates, the FTA will bolster South Korea's GDP by 2 percent, increase its exports to the US by US$10 billion and increase foreign direct investment (FDI) in South Korea by US$40.4 billion. The Korea Institute for International Economic Policy (KIEP) even estimates that the agreement will boost South Korea's economic growth to 7 percent per year in the next seven to 10 years, clearly bringing new momentum to South Korea's economic growth.

In contrast to South Korea's optimistic economic outlook, Taiwan has been thrown into despondency. In addition to seeing South Korea's economy take off and increasing the gap in economic development that is certain to be the result, Taiwan also has to bear the practical losses resulting from such an agreement. According to the "FTA Alarm" Web site, the South Korean-US FTA will have the greatest impact on Taiwan of all the agreements signed in the world thus far.

Current estimates predict Taiwan will suffer trade losses to the tune of US$2 billion -- about 5 percent of Taiwan's total exports. In other words, a fifth of South Korea's increased exports to the US may be taken from Taiwan's current exports to the US.

The article goes on to discuss how it will lead to further FTAs, including one between Japan and Korea. At the moment, under the new agreement, Korean autos will gain a 2.5% advantage over Japanese in US markets, thanks to lower tariffs, a powerful advantage in a low-marging market.

The new FTA means that more investment will flow into South Korea, leading to a double whammy for Taiwan, which loses markets on one end while losing investment on the other. This is extremely serious, for while South Korea has retained its capital at home, upgraded its technology and productivity and raised living standards while exporting to China, Taiwan has invested its capital in China, which in the long term will lead to falling living standards at home while simultaneously raising the living standards of its enemy. The author goes on to observe, after arguing that Taiwan needs an FTA with the US:

While we work to make this dream come true, I suggest the government consider how Taiwan should respond to a worst-case scenario. Many years ago, I suggested that the government lower taxes to make up for the loss in price competitiveness suffered by Taiwan's companies as a result of the impact of FTAs between other nations. This approach, however, is only partially effective, because no policy can make up for the economic integration that follows the signing of an FTA.

The other option is to strengthen innovation ability. The government must, however, understand that without the help of an FTA the resources required to promote innovative abilities will diminish and it may become difficult to prevent a brain drain. The promotion of innovative abilities requires a huge effort.

The only answer to another nation's advantages in productivity is increased productivity..... The author argues that the Taiwan needs an FTA with the US -- but at the moment, the Taiwan government's big drive overseas is for entry into the World Health Organization (WHO). Entry into international organizations is important, but it won't result in long-run rises in living standards....


MJ Klein said...

a FTA with Taiwan sure would help what i do Michael, but a FTA with Korea isn't going to hurt what i do either. anyone in the outsourcing game will tell you "don't have anything made in Korea." i'm not sure where that 20% going to Korea will come from, but i doubt it will be contract manufacturing.

i think that if Taiwan can manage to get into the WHO it might lead to a different view of Taiwan on the world scene, a view more tolerant of an independant stance. that may in turn lead to a FTA with the US.

Anonymous said...

I can tell you where the growth will be for Korea mj. Korea and Taiwan produce very similar goods at similar price. With FTA, Korea goods will be cheaper to buy than Taiwan's (several % of a few millions is a lot of money). It is called taking Taiwan's orders and run.

i think that if Taiwan can manage to get into the WHO it might lead to a different view of Taiwan on the world scene, a view more tolerant of an independant stance. that may in turn lead to a FTA with the US.

The problem is what's the odd of Taiwan getting into WHO without China veto it which apprently it has the power to do so. And you don't need to be an independent state to have FTA with the US.

MJ Klein said...

here's what i'm saying Arty: china and other places make products that are similar in style and cost, and yet Taiwan has a market for these things _because_ they are made in Taiwan. i know what i am talking about because i make my living on China's ineptness, if you will. sure, Korean prices are cheaper. so are China, Malaysia and Thailand prices. the quality is lower too. if that is what you want, then by all means buy it. but there is a segment of the world market that just won't settle for low quality. Japan still manufactures a lot of products and they always will for the same reason. i just don't see a Korea-US FTA as a big threat to Taiwan.

as for the other thing, WHO knows? the world is a big stupid place sometimes....

Boyd Jones said...

Taiwan has a huge trade surplus with China. Taiwanese firms and individuals are getting rich off of their investment in China. Is this eroding Taiwan's middle class? It seems so -- but that's life in the big city.

Taiwan could take some tips from Hong Kong or Singapore and make the island more appealing to foreign investment. I will not hold my breath though.

Finally, not sure everyone in Taiwan would agree with you that China is Taiwan's enemy.

Michael Turton said...

Agreed on all points. The FDI problem here is just a symptom of the bigger problem of Taiwan's inability to grasp how much it needs to internationalize.

Michael Turton said...

And you don't need to be an independent state to have FTA with the US.

No, but apparently the US thinks so.

MJ Klein said...

the other thing that i have to say is that Korea is not really a direct competitor with Taiwan. however, if Thailand were to have a FTA with the US, that wwould really hurt Taiwan (and its going to happen someday). My new Nikon D-80 was made entirely in Thailand, including the lenses and plastic molded parts. let's face some facts here. no one is going to take manufacturing from Taiwan to Korea when China, the entire SE Asian list of countries and India are all cheaper. the FTA is mostly about stuff like cars and and ice boxes, neither of which are made in Taiwan for the US market anyway. TVs for sure, but all TW owned TV products are made in China already.

stuff like Asus, Acer and other computer products, they are not just made in Taiwan, but they are owned by Taiwanese companies. those companies are already outsourcing in China or elsewhere as necessary. if it were advantageous to be in Korea, they would be already.

i know people are threatening doom and gloom over this, but i just don't see it happening, not over Korea. watch out for Thailand and India however. i've seen Taiwanese businessmen in Thailand and that is a good sign.

much of the gloomy forecast is about stuff that Taiwan has done to iself already, such as investing in China instead of at home. again, that has nothing to do with Korea.

now, if North Korea ever wakes up and loses that 1950's Communist State Mentality, it will become the New China of manufacturing and at that point Korea will have a tremendous advantage. that is the kind of thing that i think about....