Taiwan trade pact vital for growth
By Dan Steinbock
As Taipei was about to move ahead with its new service trade agreement with China, the island's legislature was occupied by demonstrators who oppose the deal. The stakes are high.
The governing party Kuomintang (KMT) supports the pact, which would lower barriers for both Taiwan and China to each other's service sectors. Previously, lawmakers had agreed to a detailed review of the pact.
On Monday, March 17, KMT lawmaker Chang Ching-chung announced that the trade agreement should be sent to the legislative floor in full. The opposition Democratic Progressive
Party (DPP), which claimed it had a deal with the KMT for an itemized review, protested the decision.
A day later, hundreds of students, who have opposed the pact since last fall, stormed Taiwan's legislative chambers and barricaded themselves inside. They oppose the KMT's efforts to approve a trade deal with China and seek a full review. On Saturday, the demonstrators said they would escalate their protests after President Ma Ying-jeou declined to meet with them.
On Sunday, President Ma said that Taiwan needs to pass the trade pact with China for the sake of its economy, and called on protesters who have occupied parliament in protest to respect democracy and leave. Setting the procedural issues of Taiwan's legislature aside, what is the economic role of the proposed trade deal?
Potential trade deal benefits
From the bilateral perspective, the Cross-Straits Service Trade Agreement is a major follow-up of the Economic Cooperation Framework Agreement (ECFA). The EFCA has sought to reduce tariffs and commercial barriers between the two sides. It has been seen as the most significant bilateral agreement since the two sides split after the Chinese Civil War in 1949.
In turn, the Cross-Strait Service Trade Agreement would open Taiwanese industries to Chinese investment, while the mainland would open industries to Taiwanese investment.
The Service Agreement is vital because it allows Taiwan to broaden and deepen its economic relationship with China, including the expansion of Taiwanese businesses in the mainland. Conversely, the timing is strategic. Today, Chinese foreign direct investment is going abroad and actively seeking new destinations in Asia.
Second, what makes the deal particularly important to both sides is that it represents more advanced sectors. The ECFA focuses on goods, while the new agreement stresses services. The former are critical in the early stages of economic development, whereas the latter are vital in the more advanced stages of development.
Consequently, the Service Agreement will foster Taiwan's efforts to move higher in the value-added chain, while supporting the mainland's efforts to move from cost-efficiencies toward innovation-driven competitiveness.
Third, Taiwan's own growth model relies critically on export-led growth. As a result, the Service Agreement is critical to protect Taiwan's current sources of competitive advantage and to build new sources of advantage.
Fourth, a steady progress in economic integration is vital because it usually fosters security and prosperity. In the past few years, the bilateral China-Taiwan relations have been more steady and stable than before.
Fifth, both sides agreed that the pact will not apply to any governmental measures affecting natural persons seeking access to the employment market of either party, nor will it apply to measures regarding citizenship, residence or employment on a permanent basis.
Finally, a trade pact with China is not just a deal with the mainland. It also paves way to further integration with other proximate nations in the region, which is critical to Taiwan's future.
Regional integration vital to Taiwan
As the multilateral free trade talks linger, free trade agreements (FTAs) - which are really preferential trade agreements - have taken off in several continents. Since the global crisis of 2008/9, we have also seen the relative decline of global economic integration, and the relative increase of regional economic integration.
In the past, Taiwan's rapid growth relied on globalization. Today, it must thrive with regionalization. In order to sustain its existing strategic strengths, Taiwan should broaden and deepen its economic relationships with both advanced and emerging economies, including with China.
In the US, growth rate will at best exceed 2%. In Europe, growth will linger at 0.5-1.5% for years to come. In Japan, massive reforms have taken off, but at the expense of soaring debt burden and fiscal consolidation, which will accelerate with consumption tax hike in April.
In the coming years, China will no longer enjoy double-digit growth, but according to most indicators it continues to have potential for 6-7% growth for some time to come. In the near- and medium-term future, then, much of the global growth momentum will be driven by China and emerging Asia. Taiwan must play a role in that integration.
Even the largest economies, including those of the United States and China, are not self-sufficient. Even more importantly, these trends are not decelerating, but accelerating, especially in Asia. The intensified regional integration is reflected by the ongoing talks over the US-led Trans-Pacific Partnership (TPP), and the Regional Comprehensive Economic Partnership (RCEP), which also includes China, as well as the integration of the Association of Southeast Asian Nations.
In addition to these regional trade blocs, talks continue over bilateral free trade and investment agreements between the US and Europe, China and the US, European Union and China, China and various Asian nations, and so on.
Due to historical legacies, Taiwan has been relatively insulated for decades. What the country needs is more integration, not less. That will foster peace and security in the region, which, in turn, will boost growth and prosperity in Taiwan.
High living standards need sustained growth
In the postwar era, Taiwan was one of the most successful of the East Asian tiger economies, which managed to catch up with living standards of the US, Western Europe and Japan in a single generation.
The timing of the trade turmoil is particularly unfortunate. After half a decade of muddling through and lingering stagnation in most world regions, Taiwan's export-led economy is finally positioned to benefit from gradual improvement in global demand.
If, however, Taiwan turned its back to the trade deal, further regional integration and global growth, its large current account surplus would decrease, while the need for external financing would increase. During the next emerging market turmoil, the Taiwan New Dollar would no longer be protected by the markets; it would be swept by the sell-off.
What Taipei needs is a national political consensus that will allow an economic pro-growth path. Such a path will fall apart without political support. Conversely, a political consensus without adequate growth will result in deceleration over time. In both cases, such a path requires trade pacts with China and emerging Asia.
Dr Dan Steinbock is the research director of international business at the India, China and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, please visit ww.differencegroup.net.