Cross-strait relations and implications for Southeast Asia

Posted: January 11, 2011 in China-Taiwan relations, ECFA, Free Trade Agreements, International political economy

Dear readers, I have not been exactly idle during the time span that I neglected this blog from July to December last year.  In this entry, I will share with you a paper I presented at the 12th ASEAN-Taiwan Forum held in Kuala Lumpur, Malaysia last October.
  • The recent signing of the ECFA between China and Taiwan last June 2010 represents the highest point (so far) of rising cross-strait economic relationships.  The ECFA will bind Taiwan’s economy to China to an unprecedented degree and hopefully ease remaining political tensions between the two. Beijing has agreed to give Taipei easier initial market access to 539 items of goods as well as to 11 service sectors (which is almost two times more than what Taiwan has granted to China. Be it in terms of number of items or value, the early harvest list has far surpassed in ratio any similar pact in the world, even in comparison to the China-ASEAN early harvest list.  Could this be interpreted as a sign of China’s greater valuation of Taiwan relative to ASEAN?
  • Nevertheless, the ECFA (as well as other recent developments in China-Taiwan relations) should be analyzed within the context of Taiwan’s long effort to strike balance between taking advantage of China’s explosive economic development (to improve Taiwan’s eroding economic competitive position) and limiting excessive dependence on China (which could then be exploited for political pressure.  While Taiwan is potentially vulnerable, it remains to be seen if China can convert this raw, potential economic influence into effective political leverage.
  • In fact, China has apparently kept cross-strait economic ties apart from political issues.  For as long as Taiwan does not declare independence, then China may be disinclined to actively transform its economic influence into political clout.  In fact, China believes that deepened economic integration with Taiwan can boost the prospects of peaceful unification in the long-run.
  • What could possibly happen is that Taiwanese governments will restrain themselves on the independence issue and keep the status quo.
  • Furthermore, the growing and changing cross-strait relations should also be analyzed for its implications on regional security, especially that of Southeast Asia.  Sompop Manarugsan, a professor of economics at Thailand’s prestigious Chulalongkorn University, said the ECFA initiative will be mutually beneficial to both Taiwan and China, since the two sides’ economies complement rather than compete against each other.  Taiwan, which is not a member of the United Nations and has difficulty maintaining normal relations with the world’s major economies due to Beijing’s opposition, should use its engagement with China as a stepping stone to clinching FTAs with other countries according to Sompop.  Despite the fact that Taiwan plays an important role in global investment, particularly in Southeast Asia, it has difficulty striking any form of economic or trade pact with ASEAN members because of its unique political situation.
  • In a report filed by Aquino (2010), the Philippine meanwhile, feels threatened by closer China-Taiwan relations.

Closer trade relations between Taiwan and mainland China may lure 135 Taiwanese export companies in Philippine economic zones and free ports to move out, threatening local exports, tourism and the jobs of Filipinos based in Taiwan.

In a presentation to the Cabinet on Tuesday, Acting Socioeconomic Planning Secretary Augusto B. Santos said the Philippines could lose foreign direct investments from Taiwan as a result of a looming economic cooperation framework agreement between it and the Chinese mainland.

Taiwanese companies invested $6.51 million in so-called brick and mortar enterprises here that generated jobs for thousands of Filipinos in 2008, before dropping by 80% to $1.34 million in 2009 last year amid the global economic slump. As of January, foreign direct investments from Taiwan posted a net inflow of $430,000.

“Fewer locators will result in [fewer] exports,” Santos told the Cabinet meeting. He also cited a 14.7-percent drop in tourist arrivals from Taiwan last year, as Taiwanese tourists chose to travel to China, which has relaxed travel restrictions on them.

“[Filipino workers] in Taiwan may lose their jobs if more Taiwanese factories move to mainland China,” he added.

Economic corridor
Santos noted that back in 2002, Taiwan proposed a free trade area with the Philippines, which cited the need for consultations first, and that the prevailing sentiment was to go slow on trade liberalization.

Taiwan commissioned a study of the free trade area, but this did not proceed and discussions were suspended.

Santos proposed the revival of the Subic-Clark-Kaohsiung economic corridor proposed by the Philippines as an alternative in 2005, which he said could benefit the Philippines by attracting Taiwanese investments.

“It in turn benefits the Taiwanese by offering an offshore manufacturing base for Taiwan exporters,” Santos said. The corridor, he added, would facilitate trade and the movement of intra-company personnel between Subic and Clark and the export processing zones in Taiwan.

“It will also help develop banking and financial operations that will support trade and investment between the parties.”

Taiwan is the top 7th destination for Filipino workers overseas. In 2008, there were 38,546 new hires and rehires in Taiwan, for a 4% share. There are about 94,055 Filipinos living and working in Taiwan, he said.


Stronger relations

Santos noted that since Taiwan President Ma Ying-jeou came into power in 2008, economic ties between China and Taiwan have strengthened.

Taipei and Beijing have signed three deals so far — the launch of regular flights across the Taiwan Strait, enhancing financial cooperation, and jointly cracking down on crimes and offering mutual judicial assistance.

The parties have also reached a consensus to boost investments by mainland companies on the island. Taiwan’s Ministry of Foreign Affairs announced on May 12 last year that Taiwan would open 99 industries and business lines in the manufacturing, service and infrastructure sectors to Chinese investments.

Santos noted that Taiwan’s export-oriented economy had been badly devastated by the global crisis, and “improving cross-strait economic relations and signing a free trade agreement of sorts is essential for the country’s economic revival.”

“The talks also reflected President Ma’s overall policy of easing tensions with Beijing by focusing on economic issues,” he pointed out.

Santos said Taiwanese companies here are mostly found in the fields of information technology, electronics and software development. “The danger is that with the economic cooperation framework agreement, some Taiwanese plants may move out of the Philippines to China,” he warned.

The deal, which promotes Taiwanese relations with the mainland to avoid marginalization as a result of regional economic integration, is expected to be signed in June. — Norman P. Aquino, GMANews.TV

  • Taiwan may want to reduce the potential economic leverage that China gained through the ECFA by retaining its economic relations and investments with other countries, especially with Southeast Asia.  It is always not a good strategy to “put all your eggs in one basket”—in the China basket, that is.  However, Taiwan’s peculiar status makes it difficult for it to enter into formal economic agreements with the ASEAN member states.  However, there are developments (discussed below) that offer new possibilities for Taiwan.
  • Together with the ECFA, China has an extremely good inventory of economic agreements since it had earlier signed an economic cooperation with ASEAN.  In that sense, China has closed its triangular (and multi-lateral and plurilateral) relationship with Taiwan and ASEAN.
  • In contrast, Taiwan’s triangle is not closed.  While it has ECFA to guide its growing ties with China, it does not have a similar agreement with ASEAN.  In truth, it was the China-ASEAN FTA which pressured Taiwan to negotiate the ECFA with China.  It is the proliferation of Free Trade Agreements being signed around the world that has put Taiwan’s economy at a great disadvantage. Francis Kuo Hsin Liang, Vice Minister of Taiwan’s Ministry of Economic Affairs, says the World Trade Organisation (WTO) now puts the number of FTAs at 240. For Taiwan, it is the ASEAN+1 FTA, signed by China and effective January 1, 2010, that poses the immediate threat. “If we ship to China, we will have to pay 10 per cent duty, when, for exporters from Malaysia, Singapore or Vietnam, there is no duty,” says Liang. “For many of our computer manufacturers, profit margins are very slim, so five per cent can make or break, but at 10 per cent, we are losing.”
  • Can Taiwan use ECFA to improve its economic position in Southeast Asia? That may be a naïve question given that ECFA supposedly governs cross-strait relationships only.  However, it may be useful to inquire into the spill-over and unintended effects of ECFA that may benefit Taiwan.
  • Does China (or even Taiwan) gain leverage over Southeast Asia because of ECFA?  Will the Philippines’ fears—that Taiwanese investments pull out of the region and move to China—be realized?  Can China parley this potential economic clout to pressure fellow claimants in the South China dispute?  With its enhanced power/leverage inventory vis-à-vis Southeast Asia, will China now abandon or modify its ‘soft power’ approach?  Will the agreement make Taiwan a more formidable competitor (to ASEAN) in the lucrative China market?  That seems to be the opinion of Taiwan’s chief ECFA negotiator Chairman Chiang Pin-kung of the Taipei-based Straits Exchange Foundation (SEF).
  • Will ECFA not benefit, as liberal IR theory would claim, other nations including ASEAN states?  Victoria Jen believes “the ECFA is more than just the beginning of a new chapter on cross-strait development.” It also presents an opportunity for businesses in Southeast Asia. Singapore-based Oceanus Group for instance, got listed on the Taiwan Stock Exchange last year. Oceanus Executive Chairman Ng Cher Yew, he says the listing will allow Oceanus to take advantage of the preferential treatments China offers to Taiwan exclusively under the ECFA. That includes greater access to the Chinese market and its capital.  Singapore has recently expressed its intention to negotiate a similar (to ECFA) trade deal with Taiwan under the framework of the World Trade Organization. This marks a big step forward for Taiwan to finally break out of its diplomatic isolation as Japan and other Southeast Asian countries are likely to follow suit.
  • Singapore’s initiatives reveal innovative diplomatic responses to the competitive challenge posed by ECFA.  They are indications that Taiwan’s unique diplomatic status will not be a barrier to deeper economic integration between East Asia and Southeast Asia.
  • It could be the case that the other ASEAN member states are simply watching and waiting what will happen to the Singapore initiatives vis-à-vis Taiwan before they decide on their own moves.  Following Singapore’s announcement in August 2010, some other countries also informally expressed interest in the possibility of a trade agreement with Taiwan.  Beijing’s statement that it “understands Taiwan’s need to establish economic relations with other governments” and that ECFA would “help find a way to link the cross strait economy to regional economic cooperation and in the process open expansion space for Taiwan’s economy” may be interpreted by third parties that China will not oppose such agreements with Taiwan.  A precondition seems to be that as third party must first have an ECA with China before negotiating one with Taiwan (Lim; Hsu 2010—remarks during Q & A).  Singapore has an existing ECA with China and its initiatives with respect to Taiwan may lead to a Singapore model that could guide other ASEAN states.
  • Conclusions
  1. ECFA offers win- and lose possibilities both for Taiwan and Southeast Asia (esp. ASEAN).  If the expectations of liberal IR theory would come to pass, then good results will be bundled; that is, greater economic integration will lead to lessening tensions between China and Taiwan.  Such outcomes will also have positive economic and political impacts on Southeast Asia.
  2. On the other hand, if ECFA turns out to be a mixed carrot-and-stick instrument of China, then the asymmetrically weaker parties (such as Taiwan and ASEAN, particularly the Philippines, CMLV, and Indonesia) will be at the shorter end of the bargain, as predicted by realist IR theory.
  3. ECFA offers indirect possibilities for Taiwan to enter into economic agreements with ASEAN governments.   However,  the Transpacific Strategic Economic Partnership Agreement (TPP) offers more direct opportunities.  TPP Art. 20.6 stipulates that TPP is open to accession by any APEC economy or other State, on terms to be agreed between the Parties.

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