Tuesday, July 21, 2009

ECFA/China Investment Round Up

Two pieces in the Taipei Times today and yesterday point to what so many of us had feared.....

Korea lurks in the background of the debate, because Korea and Taiwan are always comparing themselves to each other, with China as a kind of Philosopher's Stone whose touch reveals the truth about each country. Yesterday and today Korea was raised in a fascinating report from the KMT's rubber-stamp legislature that casts strong doubt on the governments ECFA program to let Chinese capital hollow out Taiwan, as described in a Liberty Times editorial (Taipei Times)...
Surprisingly, however, the legislature’s Organic Laws and Statutes Bureau recently released a research paper on the prospects for Chinese investment in Taiwan that presents strong doubts about the government’s policy of attracting Chinese investment with few safeguards. The questions raised in the report are both substantial and pertinent and should trigger some alarms. It is by no means certain, however, that this report will wake Ma and his ministers from their stupor.

The report makes two main points. First, it criticizes the Ministry of Economic Affairs’ regulations governing Chinese investment as unclear, since they make no mention of safeguarding industrial technology. The report suggests that regulations governing cross-strait commerce should clearly prohibit Chinese investment in areas that concern national security and that have a monopolistic nature.

It also suggests the government appoint a committee to establish a threshold for investment in key industrial technologies and draw up measures for protecting commercial secrets.

Second, the bureau urged the government to prevent China from coercing Taiwanese doing business in China into acting as agents for Chinese investment. The report suggests the government refer to South Korean regulations to establish the real identity of investors.

The report suggests a mechanism be established to monitor the flow of Chinese investment. It notes that China prohibits private individuals from investing abroad, which means that almost all Chinese investment abroad is state-owned capital.

Taiwan must prevent politically motivated acquisitions by Chinese investors, and regulations on cross-strait investment should include precautions against the strategic withdrawal of investments. The government should be prepared to take over businesses with Chinese investment for the sake of national security if necessary.
All of this -- the lack of regulations, the lack of enforcement behind them, the unwillingness of the KMT Administration to protect the island's security -- has been heard before, but this is the first time the pro-China side has raised some of the same issues that the pro-Taiwan side has. After pointing out that China's strategy is to hollow out Taiwan economically, the Liberty Times then observes:
Our reservations about Chinese investment are not just ideological.

Even the distinguished Japanese writer Kenichi Ohmae, known for his unending praise for China, has expressed similar doubts.

Interviewed recently by Taiwanese media, Ohmae trumpeted China’s economic virtues. When asked about Taiwan’s policy of opening up to Chinese investment, however, he expressed concern, warning that it would be unwise to allow unlimited Chinese investment.
The report from the KMT-dominated legislature makes an interesting background for the DPP's completion of the first stage of the process of getting a referendum on the proposed framework, a combined DPP/TSU project, which was also announced this week...
The Democratic Progressive Party (DPP) yesterday completed the first stage of its application to hold a referendum, delivering 150,000 signatures petitioning for a referendum on the government’s planned economic cooperation framework agreement (ECFA) with China to the Central Election Committee’s Referendum Review Committee.
The Ma Administration has repeatedly said it will not submit the ECFA to a referendum and has studiously avoided any democratic oversight of the negotiations or the proposed framework. If even its own legislature has strong doubts, it is easy to see why the Administration has refused to submit the process or its results to democratic oversight; there's widespread opposition to it, and confusion about it.

The CNA reported yesterday that the Kinmen's mayor's request to permit Chinese labor to work on that island was rejected by the Executive Yuan.
Minister of the Cabinet-level Council of Labor Affairs, Wang Ju-hsuan, on Friday rejected Kinmen Magistrate Li Zhu-feng's proposal that the government legalize Chinese laborers in the outlying island as a pilot program before making it a nationwide policy.

Allowing Chinese people to work in Kinmen would neither take away the job opportunities of Kinmen citizens nor affect the rights of workers in Taiwan proper, Li said.
This aspect of the long-term KMT program, hinted at in the agreements over free movement of labor in the proposed airport free trade zone, can't be brought to fruition so soon, since it is likely to cause friction that will hurt the KMT badly at the polls.

Last year I posted on the silliness of criticizing the DPP by saying Taiwan should be more like Korea (good post, great comments), when in fact that DPP was attempting to do something similar to what Korea was doing: limit investment in China and limit the impact of China's low-wage, regulation-free manufacturing on Taiwan's economy. An excellent piece supporting my POV appeared in the Taipei Times the other day, pointing out the fundamental stupidity of massive Taiwanese investment in China:
Why do South Korean firms enjoy balanced domestic development when Taiwan’s do not? First, South Koreans generally do not speak Chinese, so language and cultural differences provide natural obstructions.

Second, South Korean enterprises are very patriotic, while Taiwan’s small and medium enterprises thirst to go to China is the result of pro-China education and media propaganda. Statistics show that by this year, Taiwanese capital in China was more than US$400 billion. This is 10 times higher than that of South Korea.

So the problem is not that Taiwanese businesses have stopped investing, but that they are investing in China. This is proven by Taiwan’s low domestic investment ratio, which averaged less than 20 percent of GDP over the past eight years, while South Korea’s domestic investment ratio has remained at between 25 percent and 30 percent of GDP.

Taiwanese businesses invest in, manufacture in and pay taxes in China. They also export from there and this is why Taiwan’s economic growth rate is so inferior to South Korea’s. This is likely to continue unless we stop believing that our economy is dependent on China.

Taiwan’s 19-year experience of investing in China and especially the “active opening” policy after 2000 have proven the results of the core-peripheral theory. That theory says that in the interaction between a big economy and a small economy that share the same language and culture, the capital, talent and technology of the smaller economy will be gradually attracted to the bigger. As the political and economic status of the small one goes down day by day, it will eventually deteriorate into a peripheral region. The process of attraction will be faster the more convenient transportation is and the more liberal interaction is.

This is why Taiwan’s export volume is half that of South Korea.
We send out productive industries to China where they build China; they send their state investment fund monies -- taxpayer funds paid by Taiwanese firms in China -- to hollow Taiwan out.

UPDATE: Administration mulls US$900 million plan to compensate ECFA losers. And the Administration is pushing the China economic sell-out with comic figures.
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Tommy said...


Ma seems to be betting the bank on an ECFA. If he can't make the pact pass with the huge KMT majority behind him, how can he have the face left to convincingly run for reelection? Of course, I think that it will pass in the end regardless. But if I were a force of influence within the KMT and wanted to make him back off a bit, I would start putting out some hints here and there that the ECFA might not be all that great. If the murmers got loud enough, a quietly organized KMT clique could have him by the balls.

So is it possible that the Executive Yuan is being sent a message by certain KMT party members against the backdrop of Ma's "election" campaign?

As for all of the military hooplah, I wonder if the tit-for-tat airspace requests, the cancellation of the Chinese participation at the military conference, the request by the SEF that China stop threatening Taiwan (OK, this is probably just posturing, but it can't make the Chinese happy either), aren't a signal that some parties are losing patience.

Unknown said...

interesting piece. so far, one of the best and most rational argument i've read. just few question.

as you stated in the article, Taiwan has more than US$400 billion investment in China. Just wonder, why didn't Chinese prohibit the investment? apparently most of the sectors are open to foreign investors except strategically vital ones, such as weaponary, energy etc. By Taiwanese law, those sectors are also under restriction, no foreign investors should have majority shares in these firms. Will ECFA change that? I don't think so.

Another point is that, in ECFA, i think what Taiwan should bear in mind is that, in short term, it is a quick cut to rise in export providing much needed GDP growth (or we can also argue this point, will ECFA actually bring any growth to Taiwan given severe potential competition from Chinese manufacturers), but in long term, Taiwan will grow dependence on China only if not already. Liberal idea is to forge free trade whenever people can, however, as the unique situatiion between China and Taiwan, one should be cautious abaout the intension of an enemy. :D

Unknown said...

just btw, your last paragraph about the core-periphery is one of the most interesting way of interpretating Marxism's idea of development. Please give me a reference, i would like to know. So far as my degree required, i've read quite intensively on Imperialism (core-periphery) theory, from John Hubson, to Lenin, never heard of your way of interpretating it as small and big economies geographically close and culturally resemble each other can result in transformation of tech, fiancial resources etc.
Would love to learn which brilliant article is that, that certainly explained why China is growing and Taiwan is declining, didn't it?

Michael Turton said...

Ariel, i didn't write the article on core-periphery, the author's name is in the link.

Just wonder, why didn't Chinese prohibit the investment?

Why would they? Their strategy is to hollow out Taiwan's democracy and economy. Cant do that if Taiwan's firms are doing great in Taiwan.