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2010/03/29 / kslintw

Taiwan Cannot Afford To Sign An ECFA With China Alone

     The current hottest policy debate in Taiwan is on signing an ECFA (Economic Cooperation Framework Agreement) with China. According to Ma administration’s plan, it will sign an ECFA with PRC in June. Despite that Ma administration has promised that it would not open its doors too wide to China, many owners of small- and medium-sized firms, farmers and middle and low income families still feel concern about the potential impacts of ECFA on their business, incomes, and job opportunities, especially, the possibility that Ma administration will be forced to lift the ban on the imports of the some-800 Chinese agricultural products after signing an ECFA with China. To remove this obstacle, Ma administration has sent many high ranking government officials to local areas in the middle and southern parts of Taiwan to promote ECFA. 

    The assessment report published by CIER presented favorable effects on Taiwan’s economy of signing an ECFA with PRC, GDP will increase by 1.6% and two hundred sixty thousands jobs will be created. However, these results were based on two false assumptions and therefore the results cannot be taken too seriously. First, the model used in the report assumes that Taiwan’s economy is always in full employment. And adjustment is not required in moving labor force across sectors. Second, the model makes the assumption that Chinese goods entered into local markets in Taiwan will only compete with the goods exported by Japan, South Korea and ASEAN countries, and therefore no Taiwanese goods will be substituted by imported Chinese goods. Similarly, Taiwanese goods exported to China will only compete with the goods exported by ASEAN countries, Japan and South Korea. As a natural consequence, Taiwan’s exports to China will increase and the imports of Chinese goods will not hurt local manufacturing sectors. In other words, this assumption rules out the possibility of low-cost Chinese products being dumped in Taiwan. Nevertheless, the assessment report admitted that Taiwan will significantly increase its economic dependence on China after signing an ECFA with China.

     More seriously, this report does not address the issue regarding the impact of an ECFA with China on domestic investment. There are two forms of preferential trade arrangement: FTA and the hub-and-spoke framework. If PRC continues to obstruct the signing FTAs between Taiwan and other major countries, then an ECFA with PRC will harm Taiwan’s long-run economic performance for the following reason. After signing an ECFA with China first, Taiwan, ASEAN and PRC will form the hub-and-spoke framework, that is, the preferential trade arrangement exists both between Taiwan and PRC and between ASEAN and China, but there is no preferential trade arrangement between Taiwan and ASEAN. In this situation, suppose that a Taiwanese business firm considers its investment location. If it decides to invest in Taiwan, its goods manufactured in Taiwan can be sold to markets in China without any tariff due to ECFA, but when these goods shipped to ASEAN countries, this firm has to pay tariff. If the same firm moves its investment location from Taiwan to China, then the same goods produced there can be shipped to both Taiwan and ASEAN countries without any tariff simply because of ECFA between Taiwan and PRC and FTA between ASEAN and PRC.

     Even without taking into account that China has a larger market and enjoys much lower labor cost, the choice for the firms which adopted a cost-down strategy is clear: it will choose to invest in PRC. Since there is one-to-one displacement effect between outbound FDI and domestic investment, we would expect that domestic investment and job opportunity in Taiwan will decrease, and the national competitiveness will not be enhanced. That is, contrary to claims made by Ma administration, after signing an ECFA with PRC, Taiwan will encounter another wave of industry moving out to PRC, and it will be marginalized.

    These concerns are fully reflected in the recent opinion polls. The opinion polls have revealed three clear messages on the issue of signing an ECFA with PRC in the past one year. First, the majority of the public in Taiwan have little understanding about what the ECFA is. For example, in March 2009, the TVBS, a cable TV station, polls found that 71 percent of respondents were unclear about the ECFA. The similar results were also found in the polls of the Common Wealth Magazine(CWM, 天下雜誌)in December 2009 even after the government had launched intensive propaganda campaign regarding ECFA on media for eight months. The CWM polls showed that 67 percent of respondents admitted that they knew little about the ECFA.

    Second, most Taiwanese support a referendum on the ECFA. The same TVBS poll found that 48 percent of respondents favored a referendum, while 36 percent did not. The poll results released by The Taiwan Thinktank in June 2009 also showed that 70.6 percent of Taiwanese agreed to hold a referendum on the ECFA. The latest polls by the DPP in March 2010 just confirmed this persistent public support with the approval rate of 66.1 percent.

    Third, the support for signing an ECFA with China declines. According to the official public opinion surveys conducted by the Mainland Affairs Council (MAC) in April 2009, 70 percent of respondents said that an ECFA with PRC was necessary to solve economic and trade problems with China. But the number dropped to 53.6 percent in September 2009 when the same question was asked again in a MAC poll. The shrinking support is even more obvious in other similar polls conducted by various media and institutions. For example, in a poll by the Wealth Magazine (WM, 財訊) in December 2009, only 28.7 percent of the public supported to sign an ECFA with China while 31.5 percent was against it and 39.5 percent had no clear preference. The latest pros and cons of ECFA are 34.9 percent and 45.8 percent, respectively, a poll result released by the DPP in late March 2010.

     Now the message is clear. From Taiwan’s interests, there is no need for Taiwan to rush to sign an ECFA with PRC, and rebalancing its economic and trade relations with other countries is the top priority for Ma administration. Therefore, Taiwan cannot afford to sign an ECFA with China alone. Taiwan must sign FTAs with major advanced countries before signing an ECFA with China.

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