Taiwan tries its luck with free-trade zones
By Jens Kastner
TAIPEI - In the coming months, Taiwan will start up six ''Free Economic Pilot Zones'', their purpose to attract foreign capital to the investment-starved island and also to familiarize a protectionist public with the concept of free trade, of increasing importance to the island at a time when rival South Korea has recently established free-trade agreements (FTAs) with key export markets.
Under a plan unveiled by the government in late March, reforms will liberalize investment in the manufacturing and services sectors, the movement of goods and services, the flow of capital, movement of labor, and the transfer of technology. Tariffs will be scrapped for imported goods intended for processing, tax
incentives will be given and land provided on generous conditions. Arguably one of the most important aspects of the strategy is that mainland Chinese investors will be allowed to take advantage of the changes.
''Under the World Trade Organization [WTO] rules, Taiwan must grant all this to China anyway, but it got away with denying it, as Beijing fears that international arbitration would imply Taiwanese statehood,'' said Chen In-Chin, a professor at Taiwan's National Central University's Graduate Institute of Law and Government. ''But with these new zones, the Ma government found a way to give due WTO treatment to the Chinese.''
According to the UN Conference on Trade and Development 2012 World Investment Report, foreign direct investment (FDI) inflows into Taiwan amounted to US$1.96 billion in 2011, putting Taiwan in the second-lowest place worldwide, ranking above only Angola.
In 2010, Taipei and Beijing signed the cross-strait Economic Cooperation Framework Agreement (ECFA), on which high hopes were placed, but as Taiwan's domestic political climate forbade meaningful opening to Chinese capital, it did not bring in much of an increase in FDI nor did it help Taiwanese exporters as anticipated.
What makes matters worse is that Korea's FTAs with US and EU have been implemented, the Korean won has depreciated faster than the New Taiwan dollar, and Taiwan's China-imposed isolation hinders the island from signing its own FTAs. Meanwhile, powerful domestic lobbies become extremely agitated whenever the Kuomintang (KMT) government of President Ma Ying-jeou merely hints at allowing in competing foreign goods or services, as seen last year when Ma allowed the import of US beef containing the food additive ractopamine.
In 2010, during the run-up to mayoral elections in Kaohsiung, Taiwan's second-largest city and opposition stronghold, the KMT flashed for the first time the idea of creating ''Free Economic Pilot Zones''. Originally planned was one such zone located at Kaohsiung port, providing well-paid jobs to the opposition-leaning population there, thereby swaying their electoral behavior.
It did not work out as KMT strategists had hoped that time, but later US President Barack Obama began promoting the Trans-Pacific Partnership (TPP), a multilateral FTA of Pacific-Rim countries that Ma wants Taiwan to be part of by 2020. The US has tied all Taiwanese hopes for TPP membership to the elimination of Taiwan's WTO-conflicting trade barriers against US products and services, making it clear that if the island does not do what South Korea did to achieve the Korea-US FTA (KORUS), Ma's TPP ambitions would lead nowhere.
As President Ma does not have the political heft of Korea's former president Lee Myung-bak in making the whole country fit for free trade, the zones are the limited response he is making. The initial locations are carefully planned - five at the island's major ports and one at Taiwan's biggest international airport. After special legislation is passed, more zones will appear, with the planned new law entitling every local government in Taiwan to apply to create similar zones.
According to the government's thinking, the Taiwanese population will by then accept such unfamiliar sights as foreign and Chinese white-collar workers bringing with them their families, US trucks on Taiwan's highways and last but not least, Chinese goods entering the island only to leave it with the label ''Made in Taiwan'' tagged on them.
''The zones won't work out as spectacularly as the government envisions, but a certain standard will be achieved,'' said Chen.
According to Chen, the key question will be how they will compete with similar zones in the region. South Korea has set up the Incheon Free Economic Zone, which largely failed to become a gateway for foreign investment because China's own Tianjin Port Free Trade Zone is more attractive. In Taiwan's case, the mainland's Pingtan Comprehensive Pilot Zone in Fujian Province is just across the Taiwan Strait and prove to be a stronger magnet than anything the island offers.
Sources familiar with the desires of the international investment community, who wished not to be named, told Asia Times Online that they expect the Free Economic Pilot Zones to have only a marginal impact on the investment climate in Taiwan. According to them, the zones will have incentives that make it more desirable than a regular approach to Taiwan investment but not so much so as to divert attention away from similar zones elsewhere in the region.
They point out that Deputy Minister of the Ministry of Economic Affairs Francis Liang has recently noted that investment by companies ''would require the government’s permission to avoid any negative impact on local industries'', and that this strongly suggests that meaningful trade liberalization is not in store, with or without the zones.
''Do the zones help Taiwan compete against Korea? Do they improve Taiwan's competitive position? Yes, but on the margins. They are not a game changer,'' one of the sources said.
Jens Kastner is a Taipei-based journalist.
(Copyright 2013 Asia Times Online (Holdings) Ltd. All rights reserved. Please contact us about sales, syndication and republishing.)
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