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....

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