Thursday, May 26, 2011

ECFA not panacea for free trade agreements.

WSJ has a nifty piece on ECFA today, pointing out that ECFA has not improved Taiwan's situation with regard to the free trade agreements proliferating around Asia. Back in 2009 I wrote:
The KMT Administration's position is the classic "shock doctrine" position:

1. Hurry! The rest of Asia, including China, is forming a free trade region!
2. We'll be locked out of this if we don't get on board now!
3. Our economy is in the tank! We must do something now!
4. Claims that opponents' objections are "ideological"
Fast forward to 2011 and this important rationale for the KMT Administration's ECFA signing has turned out to be a dud so far. As the WSJ piece notes:
Although Taiwan signed a landmark trade agreement with China last year, many experts say the island's trade negotiations with key markets such as the European Union and Japan have been bogged down by Chinese opposition and political differences. This has led Taiwan's export-dependent economy to become increasingly cut off from the network of trade agreements that have proliferated over the past decade, giving Taiwan's regional rivals a competitive advantage that could harm the island's long-term growth prospects, they argue.

In particular, an agreement that will eliminate most tariffs between South Korea and the European Union that is set to take effect July 1 will likely harm Taiwan, as its exports to the EU in industries such as plastics, auto parts and machinery will continue to be subjected to tariffs ranging from 16% to 55%, the Taiwan External Trade Council warned Wednesday.

"Taiwan's major competitor is South Korea; almost 70% of Taiwan exports to Europe overlap with South Korea. This will bring tremendous pressure on Taiwan's businesses," said Chen-yuan Tung, professor at National Chengchi University's Graduate Institute of Development Studies. If Korea's trade agreement with the U.S.—which was originally crafted in April 2007 but has yet to gain approval—passes, the pressure will be even higher, he added.
As WSJ notes, many analysts said at the time that signing ECFA would enable FTAs with other nations, especially the US, Japan, and the EU. So far only Singapore has shown interest.

Another issue that we were told ECFA would help with was foreign investment. Here are the percentage changes in approved cases of foreign direct investment for 2008, 2009, and 2010: -46.4%, -41.8%, -20.6%(DGBAS). Granted, we took a beating from the world financial crisis but in the first quarter of 2011 it fell another 34%. Clearly an ugly pattern is forming. No doubt China, a much better place for investment at the moment, is attracting much of the capital that might have been invested in Taiwan, true both of foreign capital and capital that Taiwanese themselves have parked overseas.

Tung Chen-yuan (童振源) has had a couple of commentaries in the Taipei Times recently on Taiwan's economy. I have omitted some of Tung's piece where the numbers are decontextualized and lack concrete meaning. However, some of it is quite good. In his most recent one, he remarks:
It is worth noting that almost a year after the ECFA was signed, the early effects are far less impressive than expected.

First, Taiwan has only completed a joint study with Singapore into the signing of an FTA. It seems unlikely that such an agreement will be signed between the two countries in the near future, let alone with other Southeast Asian countries.

Even if Singapore and Taiwan were to sign an FTA, that would be of little significance to Taiwan’s economy as a whole, since trade between the two only makes up 3.6 percent of Taiwan’s foreign trade.
Tung also asserts:
Fifth, following the implementation of the ECFA, Taiwanese investment in China continued to grow rapidly. In 2008, Taiwanese businesspeople invested US$10.69 billion in China, an increase of 128 percent. In 2009, the figure was US$7.14 billion, 33 percent less than the year before because of the impact of the international financial crisis.

Last year, investment increased by US$12.23 billion, an 102 percent increase. In the first quarter this year, Taiwanese investment in China continued its rapid increase, growing by 65.4 percent, or US$3.71 billion, although Taiwanese foreign investment has declined by 4.8 percent.

Sixth, following the implementation of the ECFA, Taiwanese capital has continued to flow out of the country. During the three years of Ma’s presidency, a net average of US$20 billion of international capital has flowed out of Taiwan annually, much more than the US$13.2 billion that flowed out of Taiwan every year under the DPP administration.
Little investment is flowing in from China; moreover, speculative investment from Chinese in properties in the Taipei Basin has no effect on the island's standard of living.

As we come up to the elections in January it will be interesting to see whether and how the DPP makes use of ECFA's failures to live up to any of its constantly shifting rationales (the economy recovered fine without ECFA). It will also be interesting to see how much the Ma gov't will give away to Singapore if it can get the FTA in prior to the election.
Don't miss the comments below! And check out my blog and its sidebars for events, links to previous posts and picture posts, and scores of links to other Taiwan blogs and forums! Delenda est, baby.


Dixteel said...

Well...anyone who actually believed Ma government and thought otherwise is probably a fool.

This is not the end of the world for Taiwan, but now what really worries me is if this post trend is reversible. China has increasing leverage while Taiwan's life blood gets drained continuously.

Hopefully DPP has a good new strategy and policy ready, and younger generation and the private sectors are ready for the coming challenges.

Anonymous said...

The FTAs South Korea has been signing or will sign are very damaging to Taiwan, and does not contribute to global economic welfare. It simply gives South Korea unfairly displaces similarly competitive goods from Taiwan due to duties and taxes. The US must recognize this and understand that an FTA with Korea means harming an important ally in Taiwan.

Normally, you'd only do this kind of displacing FTA if you wanted a stick--sign an FTA with me, or else, I'm going to sign with your competitor--but Taiwan in this case, is 100% willing to sign with the US! The US needs to think much harder about the ramifications of what it's doing in Asia. Or else this could be the domino that pushes Taiwan firmly into the embrace of China.

Anonymous said...

So what happens if the DPP get in and China uses there international clout to even further marginalize Taiwan, which is likely? What solution is there for that?

Despite the KMT doing a relatively poor job, they still remain the best choice in 2012 because China are willing to deal with them. They may not be so willing to deal with a DPP govt and that would see Taiwan's position go backward.

Is it fair? No. Is it just? No. But it is reality and Taiwan needs to realize that.

Anonymous said...


Anonymous said...

"The US must recognize this and understand that an FTA with Korea means harming an important ally in Taiwan."

Huh, its as if you think America needs Taiwan more than Taiwan needs America.

Taiwan is full of idiots who think America should provide jobs, green cards, university education, a great export market, etc., without Taiwan doing anything in return.

Taiwan ought to have had 0% tariffs for American goods and allowed American investments in cable, banking, etc. long ago. Like 1980 not 2011.

Seriously, if you want Americans to defend your country, maybe having a few more branches of Citbank wouldn't kill you?

Taiwan can have a virtual FTA with America tomorrow...just say "no duties on American products" and its done. The US duties on Taiwan products are not very high anyways.

Dixteel said...

Anon, unfortunately you need 2 coins to make a sound in this case. One cannot ask the US or EU not to sign FTAs with other countries. I think the fact is simply that South Korean government seems more decisive and competent in terms of negotiating and global positioning.

South Korea does have the problem of too much ties between extremely powerful conglomerates and the government, but KMT also has this type of problems (favoring large corporations or upstream national monopoly). Both are not good IMO. However, the difference is that the corporations of SK lead them toward Globalization, while the corporations of Taiwan lead us toward Sinolization. Therefore, now SK gains superior positions globally.

Anonymous said...

"Huh, its as if you think America needs Taiwan more than Taiwan needs America."

The US foreign policy is not going to be described well by "America's needs". War in Afghanistan? War in Iraq? Annual donation of $3 billion dollars to Israel's military?

Though we're not always so good at it and the schemes of the State Department often get in the way, we stand for democratic ideals around the world. Taiwan is a maturing democracy in East Asia that is not overly nationalistic and not hostile to outsiders. It is multi-ethnic, and unlike Korea or Israel, does not find a single ideological cultural identity as a part of its political identity.

But even beyond our ideals, it will be a great loss strategically for Taiwan to significantly move into alignment with China. China is four times the size of the US, growing rapidly, and harbors great military ambitions. Do we really want to just give up on Taiwan so easily?

Anonymous said...

HAHAHA... Citibank... paragon of American Virtue:

Yes, because Taiwan's housing prices are too low. We need subprime loans too!