ECFA Round Up

Jon Adams at the Global Post, the new online news site, has a piece on ECFA and the Taiwan economy that observes:

In his campaign a year ago, Ma offered a "633" plan, promising 6 percent GDP growth, $30,000 per capita income by 2016, and an unemployment rate under 3 percent.

The government now forecasts GDP to contract nearly 3 percent in 2009, with a corresponding drop in per capita income (from last year's $17,600). And the latest unemployment rate, for January, rose to 5.3 percent, with record numbers now seeking unemployment benefits.

Ma was half right -- we will have 6-3-3 -- 6% unemployment, a 3% drop in GDP, and a 3% drop in income. Adams also has a good quote from the Chinese side showing how it considers the CECA/ECFA to be merely a proxy for the coming political integration:

Chu Shulong, a political scientist at Tsinghua University in Beijing, said that China is eager to move the agenda from economic to political issues.

"By the summer, there will be basic resolution of all major economic and social issues," said Chu. "Then, if the two sides want to continue, they'll have to move to political issues. But political talks won't be as easy, because they will touch on fundamental issues for both sides."

A while back economist Ma Kai published an article in the Commonwealth arguing that the economic meltdown and the rise of China require a complete restructuring of Taiwan's economy, and that Taiwan was overdependent on China.

Why is overdependence on China such a problem? Consider the issue of who owns Chinese businesses. As a recent Heritage piece notes:

There certainly has been privatization of Chinese state assets during the reform era. But it has never been extensive and, in the third decade of reform, it has faded. The number of individuals who own businesses fell 15 percent to 26 million from the end of 2005 to the end of 2006, a pittance in such a large population.[12] Official data show that truly pri­vate companies contributed less than 10 percent of tax revenue in the first nine months of 2007 and that the private sector's proportional contribution is actually beginning to drop.[13]

The "truly private" aspect is important because privatization has become confused with the spread of a shareholding structure and sales of minority stakes. In such cases, 100 percent state ownership is diluted by dividing ownership into shares and mak­ing some available to non-state actors such as for­eign companies or retail stock investors. Nearly two-thirds of state-owned enterprises and subsid­iaries have undertaken such changes.[14] Some for­eign observers reclassify these firms as "non-state" or even "private." This reclassification is incorrect, conceptually and practically.

Conceptually, the sale of stock does nothing by itself to alter state control: For instance, dozens of centrally directed enterprises are no less state-owned simply by being listed on foreign stock exchanges (e.g., Guodian Power, an electric com­pany which has a Hong Kong-listed subsidiary). As a practical matter, three-quarters of roughly 1,500 companies listed as domestic stocks are still state-owned. It is also true that state enterprises and the government share the same pool of officials. It is routine for Chinese officials to repeatedly bounce back and forth from corporate to government posts, each time at the behest of the Party.[15]

No matter their shareholding structure, all large corporations in sectors that make up the core of the economy are required to be state-owned. The list of sectors that must by law be state-controlled is impressive:

[T]he State should solely own, or have a majority share in, enterprises engaged in power generation and distribution, oil, pet­rochemicals and natural gas, telecommuni­cations and armaments. The State must also have a controlling stake in the coal, aviation and shipping industries.... Central SOEs [State-Owned Enterprises] should also become heavyweights in sectors including machinery, automobiles, IT, construction, iron and steel, and non-ferrous metals.[16]

Remarkably, that is not exhaustive. Rail, grain distribution, and insurance are dominated by the state, for example, even if no edict was issued to that effect.

Moreover, the state exercises control over most of the rest of the economy through the financial sys­tem, especially its banks. The outstanding stock of loans was more than $4 trillion and annual growth more than 14 percent in the first half of 2008, mak­ing lending perhaps the principal economic force. All large financial institutions are state-owned, the People's Bank assigns them loan quotas every year, and, within these quotas, lending is directed according to the state's priorities.[17]

The central bank's loan quotas frustrate non-state borrowers. They might try to raise funds through bond or stock sales, but these are also dominated by the state.The volume of government bond issuance is more than a dozen times that of corporate bonds and is growing relentlessly, crowding out private firms. In stocks, a purported solution to the huge quantity of non-traded state shares launched domestic stocks on a wild bull run in 2006 and 2007.[18] That solution relied on keeping non-traded state shares locked up for three years. With the lock-ups starting to expire, state shares again loom large over the market and share prices have come crashing back to earth.[19]

In Taiwan's case, one claim was that Taiwan's logistics firms can compete in China markets. No way: shipping and aviation must remain under State control, as the China Daily noted two years ago. We have seen this already in the Chinese restriction that Chinese nationals must fly to Taiwan on Chinese aircraft. Direct links cannot be a boon to Taiwan's transport firms because Taiwanese airlines cannot capture any of the Chinese passenger flow to Taiwan. Can private Taiwanese firms compete in China with state-run Chinese firms with preferential access to capital and markets? Perhaps -- such firms are remarkably inefficient. Yet the whole economy is organized by the visible hand of the State, and as the case of the gravel shippers shows, China will not hesitate to use its law-making power to lever Taiwanese firms out of Chinese markets. These examples also show that one important short-term goal of China's "economic integration" policy is to move Taiwan firms out of such markets and Chinese firms into them.

The government in Taiwan has promised that there will be no Chinese workers, and no more Chinese agricultural products into Taiwan. Formal prohibitions are of limited use; both commodities are already routinely smuggled onto the island, and closer links will only mean more smuggling. Economist Peter Chow notes of the ECFA plan that it has three likely outcomes:

If Beijing were genuinely interested in accommodating Taiwan’s desire to break through this marginalization, it need only allow Taiwan to join the ASEAN FTA, which would fulfill the “open regionalism” principle of the WTO.

Another alternative would be for Beijing to offer “most favored nation” status to Taiwan.

Since neither of these options have come into play, the question arises: What’s behind the proposed economic cooperation framework agreement (ECFA)? Since any negotiation is a “give and take,” it appears that what Beijing would like best is to erode Taiwan’s de facto independence and sovereignty.

There are at least three possible outcomes from the arrangement. The first possibility is that Taiwan would gain economic benefit without suffering an erosion in its sovereignty. This is the version President Ma Ying-jeou’s (馬英九) government has been trying to sell to the Taiwanese people. Under such a scenario, the treaty would be similar to the “Closer Economic Partnership Agreement” between Australia and New Zealand and must be signed in accordance with the WTO trade framework. However, Chinese President Hu Jintao (胡錦濤) has already declared that China would sign a trade pact with Taiwan only under the “one China” principle.

President Ma has said that Taiwan must sign ECFA to prevent it from being marginalized in the ASEAN region. But being prevented from entering FTAs with other nations, while being forced to sign an FTA with only one nation, is the very definition of marginalization. If Ma does not want to be marginalized, FTAs with other nations should be pursued, and made a condition of ECFA cooperation.

While a tiny group of protesters argued that any such large pact with its effects on sovereignty and on Taiwan's future should be subject to a public referendum, Economists at the pro-Green Taiwan Thinktank have criticized the Administration for deceiving the public with fearmongering tactics. Taiwan Thinktank head Chen Po-chih argued last week that the Ma's numbers were suspect:

President Ma Ying-jeou (馬英九) has said the country would see another 110,000 workers lose their jobs and GDP drop by another percentage point if it did not sign a cross-strait comprehensive economic cooperation agreement (CECA), which Ma renamed the "economic cooperation framework agreement" (ECFA) on Friday.

"We do not know what documentation or research Ma based those economic figures on," pro-independence Taiwan Thinktank chairman Chen Po-chih (陳博志) said at a press conference on Sunday.

Citing the Chung-Hua Institution for Economic Research, Chen said that GDP would see a long-term drop of 0.15 percent after the ASEAN Plus One (China) free-trade zone is launched. Citing the same research, Chen said GDP would shrink 0.98 percent after the ASEAN Plus Three (China, Japan and South Korea) free-trade zone begins.

The ASEAN Plus Three zone will cut Taiwan's exports by 1.58 percentage points, Chen said, adding that this was only a drop in the bucket compared with the 40 percent plunge in exports in recent months.

"Without citing the source of his figures, Ma's use of them frightens people and the purpose of this is to force the public to accept his proposed economic arrangement with China," he charged.

Frightening as our economy is, it should not be used as a club to re-arrange our sovereignty. Yet that is precisely how the KMT Administration is using it.

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