ECFA - Opportunities and Challenges (Newsletter NO. 10)
English key-word:
ECFA - Opportunities and Challenges
specialist:
Researcher:
Daniel D.N. Liu
Report type:
publish date:
201007
Chinese abstract:
The formal signing of the Economic Cooperation Framework Agreement (ECFA) between Taiwan and China, which has been a major focus of attention for some time, took place on June 29, 2010. Although there is still some opposition to ECFA within Taiwan, there is no denying that ECFA will serve as an important foundation for cross-Strait market opening and for the promotion of economic collaboration between Taiwan and China in the future. It also constitutes a significant touchstone in terms of cross-Strait relations between Taiwan and China.
ECFA contains 5 chapters, with a total of 16 articles, as well as 5 annexes. Basically, the agreement can be divided into 6 core elements: early harvest items, trade in goods, trade in services, investment agreement, dispute resolution, and other systemic provisions. The early harvest part covers those aspects of trade in goods and services that will be opened up first. Formal negotiations on the liberalization of trade in goods, trade in services, investment agreement, dispute settlement, etc. will not begin until 6 months after ECFA has come into effect. Assuming that ECFA comes into effect on January 1, 2011, Taiwan and China will need to begin negotiations on these various issues in the first half of 2011.
Currently, the most concrete aspect of ECFA is the early harvest plan. Besides the opening up of a limited number of service industries, in the agricultural and industrial products sector, China will open up its market to Taiwan with respect to 539 product items (including 18 agricultural products); in 2009, China’s imports of these products from Taiwan totaled US$13.84 billion, representing 16.1% of Taiwan’s total exports to China. The early harvest list of products with respect to which Taiwan will be reducing the import duty charged on imports of these products from China includes 267 product items; in 2009, China’s exports of these products to Taiwan came to US$2.92 billion, accounting for 10.8% of China’s total exports to Taiwan. It can thus be seen that, not only is the number of product items for which China is opening up its market higher than the corresponding number for Taiwan, but the percentage of Taiwan’s exports to China for which these products account is also higher than the corresponding percentage of China’s exports to Taiwan, indicating that, overall, the early harvest list is more beneficial to Taiwan.
Broadly speaking, most of the Taiwanese early harvest product items relate to Taiwan’s traditional industries; relatively few of them are the products of Taiwan’s hi-tech industries (mainly because tariffs have already been reduced to zero for the vast majority of hi-tech products). Taiwan’s early harvest product items fall into two main categories. The first category comprises up- and midstream products of relatively capital-intensive traditional industries such as the petrochemical industry, machinery manufacturing, and the textile industry; these are relatively competitive industries with significant exports to China, which were threatened by the FTAs that ASEAN has been negotiating with other countries (including China). Not only will inclusion in the early harvest list help Taiwanese manufacturers of these products to maintain their market share in the China market, it may even help them to take market share away from their Japanese and South Korean competitors. The second category comprises labor-intensive traditional industries such as automobile components and parts, small electrical appliances, apparel and accessories, the footwear and hosiery industry, etc. In the past, China’s high tariff barriers have made it difficult for companies in these industries to export their products to China. Nevertheless, Taiwan enjoys a significant technological advantage in these industries, so their inclusion in the ECFA early harvest list should help manufacturers to raise their market share in China and develop new opportunities.
While the early harvest list will be of more benefit to Taiwan than to China, the fact remains that the products in question account for only a relatively small percentage of Taiwan’s total exports to China. In the future, further negotiations regarding other product areas will be needed if Taiwan is to get the maximum benefit from ECFA. Judging from other countries’ experiences, while the adoption of the kind of model used for ECFA has the advantage of permitting gradual, steady progress, as the range of topics discussed grows more and more complex, the need for effective coordination and integration will rise, increasing the time needed to complete the negotiations and reducing the benefits that ECFA can create; delay of this kind is something that will need to be avoided in future ECFA negotiations.
The global economy as a whole is now starting to recover from the global financial crisis of 2008. Besides working to revitalize their economies, individual countries around the world are starting to work actively to develop medium- and long-term economic development strategies, so that they will be able to compete effectively in international markets in the future. China is currently in the process of formulating its 12th Five-year Plan, while Taiwan is undertaking planning to try to ensure “Ten Golden Years.” For both China and Taiwan, one of the key factors that determines the success or failure of these plans will be how effectively they are able to leverage ECFA to maintain the stable development of cross-Strait ties and put cross-Strait trading links on a more systematic footing.
Taiwan and China have for many years now had close economic and trading ties. Since the process of economic reform began, China has succeeded in building itself into the “factory to the world.” Today, however, China’s more labor-intensive industries are finding it increasingly difficult to survive, as China is gradually being transformed from the “factory to the world” to the “market to the world.” The Chinese government is now focusing less on growing exports and more on stimulating domestic demand as the motor for economic development, and this is putting Taiwan’s ODM/OEM providers under serious pressure. Without question, ECFA represents an “expressway” for cross-Strait trade. Taiwan will be able to leverage ECFA to “hitch a ride” on China’s rapid economic growth and develop the Chinese domestic market, while at the same time developing strong Taiwanese brands. ECFA will lead to a transformation of the division of labor in industry between Taiwan and China, and will bring about a new stage in the process of industrial upgrading. Instead of worrying about where the “market to the world” is located, Taiwan will be able to focus on making effective use of innovation, R&D and marketing to establish a strong position in the China market.
History shows us that while small countries located on the periphery of a larger country may suffer negative effects from the “magnetic” pull of the larger economy, it is still possible for these small countries to achieve high economic growth provided they make the necessary adjustments in their policies. Examples of countries that have got it right include the Netherlands, which serves as an operational hub for many European corporations, and Finland, which has succeeded in developing a major international brand in the shape of Nokia. Other successful examples from within the Asia region include Hong Kong, which has emerged as Asia’s main financial center, and Singapore, one of the world’s most important transshipment centers. Each of these successful examples has its own unique features; ECFA has an important role to play in helping Taiwan to develop its own, brand-new model for achieving economic success.
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