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Sep 13

Ma’s ECFA – a win-win policy or selling out local business?

Written by Raj on Sunday, September 13th, 2009 at 5:06 pm
Filed under:General | Tags:, ,
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Given the recent post on the verdict in former Taiwanese President Chen Shui-Bian’s case, I thought another topic on Taiwan would be a good idea. The proposed China-Taiwan Economic Cooperation Framework Agreement is a key piece of legislation for Taiwan’s future and therefore worthy of discussion.

A question I’ve increasingly asked myself is whether this is a win-win agreement for Taiwan as the KMT and other Pan-Blues would have it, or actually win-win for a handful of big companies and lose-lose for smaller, local businesses. AFP have an article on the ECFA and its potential impact on this part of Taiwanese industry.

Fear in Taiwan as trade pact with China looms

Jimmy Wang’s tiles can compete with the best brands of Europe, but that is of little use to the Taiwanese manufacturer since the most lethal challenge he faces comes from China.

Wang beams with pride as he shows off his ceramic plant in the small coastal town of Kuanyin, an hour’s drive from Taipei, and its Italian-made equipment bought for 500 million Taiwan dollars (15.2 million US dollars).

But when the 50-year-old president of Hiland Ceramic Co. thinks about the threat from the mainland, just 160 kilometres (100 miles) away, he sighs. “I’m not afraid of competition. But I’m concerned about unfair competition,” he says.

Wang is among a growing number of small entrepreneurs on the island fearing what will happen to their businesses once the Beijing-friendly government signs an Economic Cooperation Framework Agreement, or ECFA, with China. Critics fear that the ECFA, a scaled-down trade pact, will open the floodgates for a deluge of cheap Chinese imports, wiping out low-tech industries such as Wang’s.

China’s competitive labour is often cited as key, but there are other factors behind the mainland’s export juggernaut.

One example: Taiwan’s tile makers are required to use natural gas, a relatively clean energy source, to meet strict environmental laws, but their Chinese rivals use coal, which is more polluting but six times cheaper. There are around 50 ceramic plants in Taiwan, and few are safe if the ECFA becomes a reality.

“At least half of the domestic ceramic plants may have to be shut down if China dumps cheap products here,” said Yu Teh-er, the chief secretary at the Taiwan Association of Ceramic Industry.

Despite protests from the pro-independence opposition Democratic Progressive Party and some local industries, the administration under President Ma Ying-jeou insists the trade pact is necessary. Without it, officials argue, Taiwan will not be able to compete on fair terms in China — the island’s leading overseas market.

The 10-member Association of Southeast Asian Nations is scheduled to forge a free trade agreement with China in 2010, while Taiwan’s two major competitors — Japan and South Korea — may sign a similar agreement with China in 2015. If the free trade agreements take effect as scheduled, companies from the 12 countries will be able to sell their products in China without paying tariffs, making action a necessity, Taiwan authorities argue.

“Without measures of our own, Taiwan would be in an extremely unfavourable position on the Chinese market,” said a study from the quasi-official think tank Chung-Hua Institution for Economic Research.

According to customs figures, Taiwan’s exports to China, including Hong Kong, totalled 92.6 billion US dollars in 2008, accounting for 38 percent of the island’s shipments. Taiwan enjoyed a surplus of 60 billion dollars in the trade with its leading business partner. Were it not for China, Taiwan would have had a deficit of more than 40 billion dollars last year.

But apart from economic considerations, Taiwan’s ties with China also have a political aspect, since Beijing sees the island as part of its territory awaiting unification, by force if necessary. “The confrontation over sovereignty between Taiwan and China makes ECFA highly political and controversial even if it does not refer to sovereignty directly,” said Tung Chen-yuan, a cross-strait economy expert at Taipei’s National Chengchi University.

But for many businessmen the most jarring aspect is neither the economic fears nor the political worries — but a feeling that the government does not really care about their plight.

“We have not been approached by responsible government officials to hear our concerns even though the government has said ECFA may be signed early next year,” said Wang, the tile maker.

The apparent lack of consultation seems in line with its attempts to “convince” people of the need for an ECFA, such as by portraying its opponents as ill-informed hicks and its supporters as modern, internationally-aware, highly-educated types. If you really care what people think, you don’t adopt a “four legs good, two legs bad” approach to the strengths and weaknesses of a key policy like the ECFA.

What happens to small/medium business is important for future Taiwanese employment, as they have neither the ability nor probably the desire to move their offices and factories to China to take advantage of lower costs there. Big business, however, will be far more tempted to do that. Whilst an ECFA may boost the profits of larger companies in Taiwan, it may not lower Taiwanese unemployment, even causing it to rise.

There’s also the question of whether it is in Taiwan’s long-term interests to become even more economically bound to China, without the ability to sign FTAs with other countries (as there’s no guarantee China could/would let Taiwan export its goods using China’s FTAs).

This is an academic exercise until the terms of the agreement are decided, but the way things are going it will only fuel suspicion that the proposed agreement is designed to make money for businessmen well connected to the KMT and not benefit the majority of Taiwanese.

I know we have some people here from/with connections to Taiwan, so please let’s have your views.


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8 Responses to “Ma’s ECFA – a win-win policy or selling out local business?”

  1. Nimrod Says:

    Frankly I think the opponents of this in Taiwan are wrong, if not on economic grounds then on political grounds. If China has any political motives at all behind this (whatever the amount), it will be to ensure Taiwan benefits disproportionally from this pact. It is said that without the mainland’s favorable treatment of Hong Kong, it will have been losing its competitive edge even faster especially after the Asian financial crisis of 1997, had China not stepped in then.

  2. sids Says:

    To answer your question “This is an academic exercise until the terms of the agreement are decided, but the way things are going it will only fuel suspicion that the proposed agreement is designed to make money for businessmen well connected to the KMT and not benefit the majority of Taiwanese.”

    I think your article is abit confusing this quote come after the another quote from the article i will post below.

    “According to customs figures, Taiwan’s exports to China, including Hong Kong, totalled 92.6 billion US dollars in 2008, accounting for 38 percent of the island’s shipments. Taiwan enjoyed a surplus of 60 billion dollars in the trade with its leading business partner. Were it not for China, Taiwan would have had a deficit of more than 40 billion dollars last year.”

    This quote appear a paragraph before the quote i posted above

    ““Without measures of our own, Taiwan would be in an extremely unfavourable position on the Chinese market,” said a study from the quasi-official think tank Chung-Hua Institution for Economic Research.”

    I dont get it, Taiwan already have a surplus of 60billion exporting to HK and China in 2008 without them Taiwan would have 40 billion deficit. So before the ECFA agreement, Taiwan company is already competing with the chinese and HK company favourably in Chinese market. With the ECFA reach between Taiwan and China how can “a study from the quasi-official think tank Chung-Hua Institution for Economic Research” come to a conclusion that will be detrimental to Taiwanese company since their wont be a tarriff exporting to China thus can make their product even more cheaper and competitve in China?

    I also want know how an article like this can come to conclusion on exporting with just using one small industries as an example. In the article it never mention how important the tiles industry is to Taiwan their, GDP ratio and never explain which industries will be worse effected by ECFA and which industries will have the most gain. It doesnt even throw in number is the gain will outweight the loses when ECFA is reach.

    Raj also dont be so naive, most of the government in power will use its power to favour the industries they like. It doesnt matter if they are KMT, CCP, DDP, democrats, republicans they are all the same, slave to the lobbyist.

  3. Raj Says:

    Nimrod

    That’s an interesting point about Hong Kong. The only thing there is that in 1997 Hong Kong had already been returned to Chinese control. The situation with Taiwan is different given it isn’t under Beijing’s control.

    ++++

    sids

    At the moment Taiwanese business has the safety-net of import controls. There are some things that Taiwan exports that China will buy regards of any import controls it has (unless they became punitive, in which case Chinese consumers and business would lose out). Whereas there are cheaper items that are made in China that currently aren’t sold in Taiwan for whatever reason. The concern is that with the ECFA, those cheaper items will hollow-out the corresponding domestic industries.

    Erm, I think you might be confused. The Chung-Hua think tank was supporting the ECFA.

    I doubt that the tiles industry is being claimed to be the cornerstone of the Taiwanese economy. It’s an example of concerns from domestic industry.

    Did the DPP enter into any international economic agreements that benefited some industries and hurt others? I don’t believe so, but feel free to correct me if they did. I’m not so cynical to believe everyone is the same, but even if they were it still wouldn’t make it right.

    Personally I’m still undecided on the ECFA. I can see benefits and disadvantages to it. That’s why I’d like to hear from Jerry in particular.

  4. hzzz Says:

    The situation described here is hardly unique to Taiwan. The debate over pros and cons of Globalization and Outsourcing have been going on for years now in the US. You can easily google and find articles like this one (http://www.businessweek.com/2000/00_17/b3678003.htm) which sum up the major points.

    Personally I think the question is whether you believe in capitalism. If you do, then you would accept the fact that companies which cannot effectively compete should fold and make room for companies which can. If you don’t, then you may argue for stronger protectionism. Most of the economists out there are against protectionism for good reasons.

    Edit*- By the way I am not sure how this sort of trade agreement is any different than say, the Go South policy which Chen reintroduced during his term except that Ma pushed for stronger trading partnerships with China while Chen pushed for stronger trading partnerships with South East Asian nations.

  5. Allen Says:

    @Raj – good topic.

    @hzzz #4,

    I agree – the debate in Taiwan is not unique and is similar to those in all economies that are trying to integrate with / adjust to the rise of the Mainland Chinese economy.

    In the whole, I believe the opportunities for closer integration far outweigh the risks.

    Also – we Taiwanese have worked hard for the last 4-5 decades to be where we are today (even though we did get a lot of American help). Yes – mainland Chinese will probably turn out to be as hardworking as we have been, but we are not afraid of a little healthy competition from our compatriots across the strait. Closer integration will only make all of us that much better off in the long run…

    (P.S. yes, in principle, I do believe strongly in competition and market economies; although I also believe the government can play a strong role in strategic planning)…

  6. S.K. Cheung Says:

    To Raj:
    ultimately, the devil will be in the details. The consternation seems reminiscent of the hand-wringing that went on before the North American Free Trade Agreement was signed. The arguments (from a Canadian perspective) were similar back then: why would Canada worry about better access to US markets when Canada was a net exporter to the US? Realistically, some industries will lose out (probably on both sides of the strait). And in certain industries where the competition appears potentially unfair, I’m sure tariffs can still be negotiated to level the playing field (as occurs with softwood between Canada and the US).

  7. sids Says:

    Raj- The point i try to make was that the article was meaningless. The author spend the whole article on one company in one industry to highlight is ECFA good for Taiwanese small/medium enterprises. Free trade is never a win-win in every single industry between two country. There will be winner and loser from both side, the win-win situation they describe is proabably economy as a whole has benefited from it.

    Also if you ever think that when government in power dont have certain company they favour is naive, business will always has connection within the government. You still dont know how powerful is lobbyist from big company, they always will have a big invisible influence on government policy that affect their industry. To just point the finger at KMT is unfair, because every government will do the same, the grey area of democracy.

  8. Steve Says:

    I agree with sids. Much of this depends on the industry. For instance, in my old field of semiconductors, the allowance of three direct routes made putting a fab in China considerably less profitable than before, because it’s a capital intensive (rather than labor intensive) industry that doesn’t play as well to China’s strengths. China also has utility problems in terms of water and electrical supply which gives Taiwan manufacturers another advantage. The reason for putting fabs in China originally was to supply the China market, not to export those chips overseas. With a FTA, Taiwan gains another advantage in keeping production at home.

    China has advantages in labor rates and a well educated workforce. Their disadvantages lie in workforce experience for higher tech industries and lack of IP enforcement. China also has another huge advantage that contributes directly to the bottom line and that is in their lack of enforcement of environmental laws and safety rules. This is where it gets tricky.

    When low cost manufacturing comes into play, much of a company’s overhead goes towards things like medical insurance, safe working conditions, OSHA compliance, quality control procedures, food purity issues, etc. Those factors are beyond the actual labor rate differences. As the world’s major manufacturing center, China’s pollution rates have increased dramatically while the loss of manufacturing in other more advanced countries has decreased as a result. China says (and rightly so) that they should not be compared on a 1:1 basis with western countries since they are accumulating the pollution of products being used by those countries. This is the Catch-22, since if the manufacturing was taking place in those developing countries, the pollution generated would be considerably less. So China’s strength is also its weakness. If the non-labor playing field was leveled, China would lose much of its competitive edge.

    That’s the worry in Taiwan. Will light industries and agriculture be wiped out because they are playing under different rules? They don’t have the advantages that industries like semiconductor manufacturing have, but operate under the same liabilities. That’s why I agree with sids in that some industries will benefit while others will suffer. sids is also correct that big business has closer ties to the KMT while light manufacturing and agriculture are closer to the DPP. They’re the ones that face the greatest threat under any agreement so they’re the most concerned.

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