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Taiwan's free-trade woes

Fresh talk about a three-way pact between Northeast Asian powerhouses has Taipei worried it will lose out to Seoul.

China japan south korea free trade 2012 05 22Enlarge
(Left to right) South Korean President Lee Myung-bak, China Premier Wen Jiabao and Japanese Prime Minister Yoshihiko Noda pose for photographs at the Great Hall of the People May 13, 2012 in Beijing, China. (Petar Kujundzic-Pool/Getty Images)

TAIPEI, Taiwan — The leaders of Asia’s three largest economies got together over the weekend to talk up a massive trilateral free trade agreement. And as usual, Taiwan, the ugly stepchild of the diplomatic community, wasn’t invited to the party.

It's all talk now, but a three-way pact between China, Japan and South Korea could create a rival to the world's largest free-trade zones in size. As such, it has Taipei more than a little concerned, namely since it could remove any competitive edge the tiny island has against its main rival in Seoul.

The news has Taiwan’s Ministry of Economic Affairs reeling, and is yet another painful reminder of how often this marginalized island finds itself on the outside looking in.

“Once it’s created, it will become the world’s third-largest economic zone behind the US and the European Union,” Chen Ming-shy, deputy director of the Foreign Trade Bureau, said of the potential agreement.

“It will definitely affect our exports because China is our top export market. Japan supplies our hi-tech manufacturing sectors and Korea is our main trade competitor. The competition [with South Korea] is already very severe, particularly in electronics and [information and communications technology].”

According to the World Bank, the combined value in 2011 of overall trade for the three Northeast Asian powerhouses is about $3.25 trillion, or about 20 percent of all world trade. The three countries take in about 51 percent of Taiwan’s exports.

Taipei is concerned that the agreement will do away with the tariffs that allow the island to compete with its main trade rival, South Korea, which ships similar products at similar prices to Taiwan.

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China is Taiwan’s biggest trade partner and largest recipient of its exports. Taiwan is also one of the few countries to record a healthy trade surplus with China.

For its part, South Korea had a 9 percent share of China’s total imports last year. Taiwan’s $89.2 billion in exports, or 21 percent of total exports, was good for a 7 percent market share.

“The biggest concern is South Korean exports to China. It’s still going to take them time to strike a deal because agricultural agreements are so politicized in Asia,” Chen said. “However, all three parties want this to happen, so I think we have about a year before it’s finalized.”

Compounding the problem is a US-South Korea free-trade agreement that came into force March 15. Some analysts estimate the deal wipes out about $2 billion of Taiwan’s annual trade. Seoul has also signed eight free-trade accords with key economies — including the US, the EU, ASEAN and India — accounting for about 35 percent of South Korea’s total trade.

According to the CIA World Fact Book, this island 100 miles of China’s southern coast, ranked as the world’s 24th largest economy in 2011. Taiwan's $325 billion in exports was good for 17th place.

Those are some impressive numbers for a country that made the economic transition from backwater to original member of the Asian Tigers — with very little help from its very few friends.

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If it were a normal country, Taiwan would be more of a contender. It is a regional economic powerhouse, a marquee manufacturer and hi-tech innovator. It is located on strategic shipping lanes. Yet Taipei struggles to sign free-trade agreements, mainly due to Beijing's sway.

As a member of the World Trade Organization, Taiwan should be able to strike free-trade agreements with other countries. But neighbors are wary of offending Beijing, which has prickly relations with Taipei in the best of times. As a matter of course, the budding superpower considers Taiwan a renegade province, vowing to use force if necessary to bring it back into the fold.

The Republic of China — Taiwan’s official moniker since Chiang Kai-sheik’s forces retreated to the island after being routed by Mao Zedong in the late 1940s — only has 23 diplomatic allies. It doesn’t have a seat in the United Nations — or hardly any other organization that matters. And the allies it does have are largely made up of tiny Pacific island nations, failing African states run by shady dictators and Central American Banana Republics.

“We have five deals with our Central American allies. But they are largely cosmetic and combined only account for about 0.2 percent of our total trade,” said Jane Liu, an expert on international trade at Taipei’s National Taiwan University. “The biggest problem was China. That problem has eased slightly, but countries thinking about [free-trade agreements] with Taiwan still have to consider China’s attitude.”

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The easing Liu refers to emerged in 2010, when China and Taiwan inked a landmark trade agreement, the Economic Cooperation Framework Agreement (EFCA).

EFCA had given Taiwan a slight buffer against South Korea in China, providing tariff-free trade on a small list of items. (Meanwhile, the new deal stands to give Seoul a substantial pricing advantage.) Taipei is now looking to go back to the bargaining table to expand EFCA from the current 540 items — about 6 percent of total items traded between the two sides of the Taiwan Strait.

The EFCA has also slightly reduced Taiwan’s international isolation. Singapore and New Zealand have interpreted the agreement’s existence as tacit approval from Beijing that they too could negotiate trade agreements with Taipei.

Taipei also hopes the Singapore and New Zealand deals will give it leverage to enter the Trans-Pacific Partnership Agreement (TPP) — which links the smaller economies of Chile, New Zealand, Brunei and Singapore. The US, Australia, Malaysia, Vietnam and Peru are now negotiating to join the group.

The TPP has been touted by the administration of US President Barack Obama as a counterweight to ASEAN+1, which comprises the Southeast Asian bloc and China. While the US wants to complete a deal this year, analysts say that is unlikely, and new accords such as the trilateral pact being discussed will render TPP irrelevant.

A US-Taiwan deal, the Trade and Investment Framework Agreement, has been bandied about since the 1990s. Talks were suspended in 2007, following a row over US drug-laced beef imports. But insiders say Washington, and the State Department in particular, doesn’t have much appetite to hammer out a deal before Taiwan comes to agreement with other partners.

However, the State Department’s reluctance to ruffle feathers in Beijing, has ruffled those of some Republican heavyweights on Capitol Hill. The Associated Press reported last week that Republican senator and one-time presidential nominee, John McCain, called on the “Obama administration to ramp up its Trans-Pacific Partnership negotiations … and seek a bilateral pact with Taiwan.”

“The bottom line is that America’s long-term strategic and economic success requires an ambitious trade strategy in Asia,” McCain said in the AP report.

Back at home, pressure on President Ma Ying-jeou, just days away from a second-term inauguration, is growing. The opposition was already making noises about impeachment for a string of broken campaign promises and recent policy gaffes.

For his part, Ma has vowed to resolve the beef issue and instructed his cabinet to ramp up ongoing trade talks.

However, according to analysts, it isn’t just real politick that handcuffs the island’s trade aspirations. After entering the World Trade Organization in 2002 — the only relevant acronym Taipei is a member to — the island was slow to open up markets to outside competition, a protectionist policy that is coming back to haunt the sliver of an island.

“Some of our industries are not ready for trade liberalization. They aren’t competitive, and are afraid of opening up. Taiwan was too protectionist in the past,” said Liu. “But that and FTAs [free-trade agreements] should be our top priority. We should be pursuing FTAs as fast as we can.”

Analysts say Taipei needs to relax trade rules or risk continuing to fall behind South Korea. But South Korea has a big lead already and now, with a new deal in the works, some fear it may already be too late.

http://www.globalpost.com/dispatch/news/regions/asia-pacific/120521/taiwan-free-trade-agreement-china-japan-south-korea-economy