Asie.Visions 51
______________________________________________________________________
New Economic Development
Opportunities for Taiwan
in the Post-ECFA Era
__________________________________________________________________
Da-Nien Liu
Hui-Tzu Shih
April 2012
.
Center for Asian Studies
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D-N Liu & H-T Shih / Taiwan post-ECFA
Executive Summary
The main aim of this paper is to analyze the new opportunities for
Taiwan’s ongoing economic development in the era following the
signing of the Economic Cooperation Framework Agreement (ECFA)
between Taiwan and China. The paper begins with an analysis of the
pattern of “cross-strait” trade between Taiwan and China. This
reveals that, although Taiwan’s exports to China have continued to
grow over the past few years, the share of China’s total imports from
Taiwan has fallen. However, if Taiwan can succeed in leveraging
ECFA to develop the Chinese market more effectively, this would
reduce the competitive pressure to which Taiwan is exposed, and
enable Taiwanese companies to steal a march on their major
competitors. The overall impact on Taiwan’s economic development
would thus be positive.
The paper then goes on to analyze the benefits that ECFA will
bring to Taiwan. This analysis suggests that implementation of full
trade liberalization under the ECFA framework would benefit the
Taiwanese economy as a whole. Evaluation of the effects on trade of
the ECFA Early Harvest List (EHL) items, implementation of which
began on January 1, 2011, indicates that there has been significant
growth in Taiwanese exports to China in the 539 items included in the
EHL. ECFA is thus already starting to bear fruit.
Besides the trade-related effects, this paper also analyzes the
transformation in industrial collaboration that ECFA may be expected
to stimulate in the future. Currently, both Taiwan and China find
themselves at a crossroads, with their respective economies
undergoing a process of dramatic transformation. This situation
creates scope for cross-strait industrial collaboration. Taiwan and
China should endeavor to grasp this opportunity, exploiting crossstrait industrial collaboration as a means of invigorating their
economies.
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Contents
INTRODUCTION ................................................................................... 4
MAJOR TRENDS IN THE DEVELOPMENT OF CROSS-STRAIT ECONOMIC
AND TRADING LINKS ........................................................................... 6
Overview of Cross-Strait Trade ................................................................. 6
The Competition that Taiwan Faces in the Chinese Market ...................... 9
EVALUATION OF THE IMPACT OF THE ECFA ON TAIWAN ..................... 16
The Overall Economic Impact of ECFA on Taiwan ................................. 16
Current Benefits from ECFA .................................................................... 24
ECFA AND CROSS-STRAIT INDUSTRIAL COLLABORATION .................. 30
Background .............................................................................................. 30
The Outlook for Cross-Strait Industrial Collaboration .............................. 31
CONCLUSIONS .................................................................................. 37
REFERENCES ................................................................................... 39
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D-N Liu & H-T Shih / Taiwan post-ECFA
Introduction
There is currently a pronounced global trend toward ever more free
trade agreements (FTAs), a trend that is particularly marked in the
East Asia region (Whalley, 2008). Taiwan’s diplomatic isolation has in
the past led to it being excluded from forming FTAs with other
countries. To avoid becoming marginalized, Taiwan has continued to
work toward the negotiation of FTAs with other countries; however,
given that China is Taiwan’s largest export market, the signing of the
Economic Cooperation Framework Agreement (ECFA) between
Taiwan and China could reasonably be expected to have a positive
impact on Taiwan’s ongoing industrial and economic development.
The formal signing of the ECFA agreement took place in June
2010. Fundamentally speaking, ECFA is a framework agreement; 1
while implementation of the “Early Harvest” items has already begun,
in other areas further negotiations will need to be completed. Six
working groups have been established (covering the six key areas of
trade in goods, trade in services, investment agreement, dispute
settlement, customs cooperation, and industrial cooperation); formal
negotiations in these areas began in 2011. The most concrete
benefits from the ECFA agreement so far are embodied in the Early
Harvest list. While the number of service industries covered by the list
is relatively small, with regard to agricultural and industrial products,
China has agreed to open up its markets to Taiwan with respect to
539 product items (of which 18 are agricultural). In 2009, China’s total
imports of these items from Taiwan came to US$13.84 billion, and
they accounted for 16.1% of Taiwan’s total exports to China. The
Early Harvest list also includes 267 product items where Taiwan is
reducing its import duty rates for imports of these items from China.
As of 2009, China’s exports of these items to Taiwan totaled US$2.92
1
Broadly speaking, FTAs can be achieved in one of two different ways. The first
method is to implement the FTA in a single step; in these cases, the FTA does not
formally come into effect until agreement has been reached on all issues.
Examples of this type of agreement include the FTAs signed by the US, the
European Union and Japan. The second approach is that of gradual, stage-bystage implementation. Under this model, countries first sign a Framework
Agreement that outlines the main content of the FTA, then sign individual
agreements on specific issues. Examples of this type are China-ASEAN FTA and
Korea-ASEAN FTA.
Da-Nien Liu is a Research Fellow in the International Division of the Chung-Hua
Institution for Economic Research. Hui-Tzu Shih is a Research Fellow in the
Mainland China Division of the Chung-Hua Institution for Economic Research.
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D-N Liu & H-T Shih / Taiwan post-ECFA
billion, and they accounted for 10.8% of China’s total exports to
Taiwan. It can be seen from these figures that, on the whole, the
Early Harvest list has been more beneficial to Taiwan than to China.
Beyond noting this initial impact, the objective of this paper is
to examine the new opportunities for Taiwan’s ongoing economic
development in the wake of the ECFA.
The first section of the paper analyzes recent trends in the
development of “cross-strait” (that is, across the Taiwan Strait
between mainland China and Taiwan) economic and trading links.
These trends make clear just how important China has become as an
export market for Taiwan. This section also analyzes Taiwan’s main
competitor nations in the China market, and the tariff barriers that
Taiwanese exports face in China, with the aim of gaining a clearer
understanding of the competitive pressures on Taiwanese exports to
the China market.
The second section of the paper uses quantitative modeling
techniques to analyze the impact on Taiwan of its being prevented
from participating fully in the process of East Asian regional economic
integration. This section also includes a preliminary appraisal of the
benefits to Taiwan of the ECFA Early Harvest list, and of the
importance of ECFA to Taiwan from a global and regional economic
integration perspective.
The third section analyzes how Taiwan can leverage ECFA to
promote cross-strait industrial collaboration. The fourth section
presents the paper’s conclusions.
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Major Trends in the Development
of Cross-Strait Economic
and Trading Links
Overview of Cross-Strait Trade
Before analyzing cross-strait trade, it is useful to have an
understanding of the trade structure of Taiwan. As Table 1-1
illustrates, China is the largest export market for Taiwan, accounting
for 40.87% of Taiwan’s total exports. ASEAN ranks second, with a
share of 15.42% in 2010. These two markets account for close to
60% of total exports from Taiwan. Japan is the largest import source,
with 20.70% of Taiwan’s total imports, followed by China (14.89%),
ASEAN (11.50%), United States (10.09%) and EU (8.49%).
Therefore, from the perspective of trade destination, Taiwan imports
are more diversified than its exports.
Furthermore, there has been steady growth in the volume of
cross-strait trade between Taiwan and China; the increase in
Taiwanese exports to China is particularly marked. As shown in Table
1-2, since 2000, the average annual growth rate in Taiwanese
exports to China has been 38.8% (if exports to Hong Kong are
included, the growth rate is somewhat lower, at 13%). The total value
of Taiwanese exports to China in 2010 was US$72.6 billion,
representing 27.7% of Taiwan’s total exports; if Hong Kong is
included, the total was US$10.71 billion, accounting for 40.9% of
Taiwan’s total exports.
As regards Taiwan’s imports from China, because Taiwan
continues to restrict imports of some categories of Chinese goods,
the rate of growth has been relatively slow. 2 In 2010, China
accounted for only 14.3% of Taiwan’s imports (14.9% if imports from
Hong Kong are included).
As Taiwan’s exports to China far exceed Taiwan’s imports
from China, Taiwan runs a large trade surplus with respect to China.
In 2010, Taiwan posted a trade surplus of US$36.7 billion (US$69.6
2
For reasons of economic protection and national security, Taiwan has prohibited the
import of a variety of products from China. Currently Taiwan prohibits over 2,000
products.
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D-N Liu & H-T Shih / Taiwan post-ECFA
billion if Hong Kong is included). This figure was 6.8 times the size of
Taiwan’s overall trade surplus. It can thus be seen that, not only are
trading relations between Taiwan and China extremely close, but
China makes a very strong contribution to Taiwan’s exports and its
trade surplus. The strengthening of cross-strait trading links brought
about by the signing of the ECFA agreement should thus have a
pronounced positive impact on Taiwan’s export performance and
overall economic development.
Table 1-1 Structure of Exports and Imports by Destination (2010):
Taiwan
Exports
Value
($ bn)
China
Imports
Value
($ bn)
Share (%)
Share (%)
1,070.89
40.87
Japan
521.15
20.70
ASEAN
403.95
15.42
China
375.04
14.89
United States
303.66
11.59
ASEAN
289.52
11.50
EU
268.23
10.24
United States
254.09
10.09
Japan
169.58
6.47
EU
213.67
8.49
Others
403.87
15.41
Others
864.47
34.33
2,620.17
100.00
Total
2,517.94
100.00
Total
Source: Taiwan customs data
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Table 1-2 “Cross-strait” Import-Export Trade between Taiwan and China
Units: US$ millions; Percentage
Taiwan's Exports to China
Year
Taiwan’s
Total
Exports
Value
Value
(incl.
Hong
Kong)
Taiwan’s Imports from China
Taiwan’s
Total
Share of
Imports
Share
Total (incl.
of
Hong
Total
Kong)
Value
Value
(incl.
Hong
Kong)
Taiwan’s
Overall
Share of
Trade
Total
Surplus
Share
(incl.
of Total
Hong
Kong)
Taiwan’s Trade
Surplus with Respect
to China
Value
Value
(incl.
Hong
Kong)
2000
147,583
4,195
35,379
2.84
23.97
139,769
6,212
8,395
4.44
6.01
7,814
-2,017
26,984
2001
122,409
4,727
31,585
3.86
25.80
107,160
5,897
7,745
5.50
7.23
15,249
-1,170
23,840
2002
130,554
9,945
40,781
7.62
31.24
112,814
7,967
9,710
7.06
8.61
17,740
1,977
31,071
2003
144,058 21,399
49,730 14.85
34.52
127,506
10,983
12,712
8.61
9.97
16,552
10,416
37,019
2004
174,350 34,082
63,961 19.55
36.69
168,715
16,762
18,866
9.93
11.18
5,635
17,320
45,095
2005
188,963 40,783
71,431 21.58
37.80
181,743
19,945
21,833
10.97
12.01
7,220
20,838
49,597
2006
213,004 48,315
81,858 22.68
38.43
202,038
24,567
26,229
12.16
12.98
10,966
23,748
55,629
2007
234,710 58,430
92,618 24.89
39.46
218,648
27,854
29,485
12.74
13.49
16,062
30,577
63,133
2008
243,233 62,998
92,622 25.90
38.08
239,666
31,177
32,526
13.01
13.57
3,567
31,821
60,096
2009
193,815 50,919
77,716 26.27
40.10
174,071
24,347
25,393
13.99
14.59
19,744
26,572
52,323
2010
262,017 72,642
107,089 27.72
40.87
251,794
35,947
37,504
14.28
14.89
10,223
36,695
69,585
Source: Taiwan customs data
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The Competition that Taiwan Faces in the
Chinese Market
As can be seen from the data presented in Table 1-2, the Chinese
market is extremely important for Taiwan. In particular, following the
establishment of the ASEAN-China Free Trade Area in 2003, 3
Taiwanese products have to face more intense competition from
ASEAN products in China. If, in the future, a larger free trade zone
takes shape that integrates ASEAN, China, Japan and South Korea,
Taiwanese products will face more serious competition from
Japanese and South Korean goods in the Chinese market. The
following section analyzes the tariff barriers and competitive threats
that Taiwanese products face in China, with the aim of demonstrating
just how important ECFA is to Taiwan.
Table 1-3 shows China’s main sources of imports. As can be
seen, Taiwan is China’s third largest source of imports, behind Japan
and South Korea (and also behind ASEAN, if the figures for the
individual ASEAN nations are combined). Overall, Taiwanese
products do not appear to be particularly competitive in the Chinese
market. The share of China’s total imports accounted for by imports
from Taiwan has actually fallen, from around 10–11% in the period
prior to 2007, to 8.3% in 2010. This decline is partly attributable to the
rise in international oil prices, which has caused the price of imports
falling under the HS26 and HS27 4 tariff code chapters to increase; as
Taiwan does not enjoy any significant export advantage with respect
to these products, its share of China’s total imports has fallen.
However, even if we allow for this by eliminating the HS26 and HS27
tariff code products from the calculations (see Table 1-4), there is still
a decline of 2.04 percentage points in Taiwan’s share of China’s total
imports. Clearly, the competitiveness of Taiwanese products in the
Chinese market is being eroded.
By contrast, there has been relatively little change in the
competitiveness of ASEAN products in the Chinese market. If
products falling under the HS26 and HS27 tariff code chapters are left
out of the calculations, then ASEAN’s share of China’s total imports
has fallen only very slightly, from 12.1% in 2007 to 11.7% in 2010.
This suggests that the ASEAN-China Free Trade Area agreement
has already had a negative impact on Taiwan. One can easily
imagine the impact that the formation in the future of an “ASEAN Plus
Three” free trade grouping would have on Taiwan’s exports to China,
3
4
The tariff liberalization of ASEAN-China FTA started in 2003 and completed in
2010.
HS26 refers to Chapter 26 of Harmonized Commodity Description and Coding
System (HS). The main products are various ores. The major products of HS27 are
mineral fuels, mineral oils and related products.
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D-N Liu & H-T Shih / Taiwan post-ECFA
given the higher tariff barriers that Taiwanese products would face
(Gu, 2008).
A listing of the 10 two-digit HS code categories that account
for the largest shares of Taiwan’s exports to China is presented in
Table 1-5. It can readily be seen that Taiwanese products face a
challenging situation in the Chinese market. Of the 10 product
categories, HS54 (manmade filaments) is the only category in which
Taiwan holds a higher share of the Chinese market than ASEAN,
Japan or South Korea, and even here the competitive threat from
Japan and South Korea should not be underestimated; if, in the
future, these two countries are able to benefit from preferential tariff
rates in this product category (China’s average MFN tariff rate for the
HS54 category is 6.9%), they could pose a severe danger to
Taiwanese manufacturers.
In the other nine product categories, Taiwan’s share of the
Chinese market is lower than the shares held by ASEAN, Japan and
South Korea, demonstrating that, although these products are major
Taiwanese export items, Taiwan does not enjoy an absolute
advantage with respect to these products in the Chinese market. The
relative competitiveness of Taiwanese exports to China in these
product categories in the event of an “ASEAN Plus Three” grouping
taking shape would be even lower.
To develop a more detailed picture of the competitive pressure
that Taiwanese export products face in the Chinese market, we can
break down the 10 largest Taiwanese export items into six-digit HS
codes, as shown in Table 1-6. As can be seen, of the 10 product
items, there are six product items where China’s MFN tariff rate is
zero, so that FTAs have no impact. Five of these items fall under the
HS85 tariff code chapter (electromechanical products), and one falls
under the HS84 chapter (electronic products). In the case of the
remaining four product items, Taiwan faces a severe competitive
threat from Japan and South Korea.
In the case of LCD panels, which is Taiwan’s second largest
export to China, Taiwan’s share of the Chinese market is
approximately six percentage points lower than South Korea’s. In
terephthalic acid, Taiwan’s seventh largest export product, Taiwan’s
share of the Chinese market is eight percentage points lower than
South Korea’s. In the case of acrylonitrile butadiene styrene (ABS)
copolymers, Taiwan’s market share in China is far higher than
Japan’s, and 13 percentage points higher than South Korea’s, so
there is no immediate cause for concern here. Taiwan is more
competitive than South Korea in LCD devices, but Japan is only five
percentage points behind Taiwan. For all of these products, the
average tariff rate in China is 6.5% or higher, so if, in the future,
Japanese and South Korean manufacturers can benefit from
preferential tariff rates when exporting to China, this would constitute
a serious threat to Taiwan’s exports. This was one of the main
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D-N Liu & H-T Shih / Taiwan post-ECFA
reasons why it was so important for Taiwan to sign the ECFA
agreement with China as soon as possible.
China’s relatively high tariffs and huge domestic market have
made negotiating an FTA with China a priority for many countries
(Antkiewicz & Whalley, 2004). If Taiwan can complete the ECFA
follow-up negotiations with China relating to trade in goods, trade in
services, investment agreements, etc. as soon as possible, then not
only will this help to offset the competitive threat from Southeast
Asian goods in the Chinese market, but Taiwan will benefit from
preferential tariffs in the Chinese market at an earlier point in time
than either Japan or South Korea. This would enhance the
competitiveness of Taiwanese exports to the Chinese market, and
benefit both Taiwanese industry and the Taiwanese economy as a
whole.
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Table 1-3 China’s Main Sources of Imports
Units: US$ millions; Percentage
Notes:
1. Indicates sales from bonded zones in China (mainly export-processing zones) to Chinese domestic market.
2. “ASEAN 5” includes Thailand, Malaysia, the Philippines, Indonesia and Singapore.
3. “ASEAN10” includes Thailand, Malaysia, the Philippines, Indonesia, Singapore, Brunei, Vietnam, Myanmar, Laos, and Cambodia.
Source: World Trade Atlas (WTA) database
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Table 1-4 China’s Main Sources of Imports (excluding products falling under Tariff Code Chapters HS26 and HS27)
Sources: US$ millions; Percentage
Notes:
“ASEAN 5” includes Thailand, Malaysia, the Philippines, Indonesia and Singapore.
“ASEAN10” includes Thailand, Malaysia, the Philippines, Indonesia, Singapore, Brunei, Vietnam, Myanmar, Laos, and Cambodia.
Source: World Trade Atlas (WTA) database, and Chinese customs data
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Table 1-5 Competitiveness of Taiwanese Products in the Chinese Market in 2010 (using two-digit HS codes)
Units: US$ millions; %
Source: World Trade Atlas (WTA) database, and Chinese customs data
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Table 1-6 Competitiveness of Taiwanese Products in the Chinese Market in 2010 (using six-digit HS codes)
Units: US$ millions; Percentage
Source: World Trade Atlas (WTA) database, and Chinese customs data
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Evaluation of the Impact
of the ECFA on Taiwan
China is Taiwan’s largest export market, and its second largest
source of imports. It accounts for the largest share of Taiwan’s trade
surplus, and the largest share of Taiwan’s overseas investment. As
the Chinese economy has grown, China has gradually been
transformed from “factory of the world” into one of the world’s most
important markets. The Economic Collaboration Framework
Agreement (ECFA) that Taiwan signed with China in June 2010 thus
represents a major step forward in terms of giving Taiwan the
opportunity to participate more fully in the process of regional
economic integration. So what economic benefits is ECFA creating
for Taiwan? What will be the impact on Taiwan of the “Early Harvest
Program” of ECFA, 5 implementation of which began on January 1,
2011? These are the questions that will be addressed in this section
of the paper.
The Overall Economic Impact of the ECFA
on Taiwan
The Global Trade Analysis Project (GTAP) model is a multi-nation
quantitative analysis tool that is widely used when seeking to evaluate
the economic benefits of free trade agreements (FTAs) (Hertel,
1997). The version of the GTAP database used in this study is
Version 7, which was released toward the end of 2008. In terms of
sectoral analysis, this study undertakes evaluation using the original
57 sectors defined by GTAP. As regards the countries and regions
examined, the study focuses on those countries and regions that are
of particular significance with regard to the ECFA agreement between
Taiwan and China (Table 2-1).
Every model has its limitations. To ensure that modeling using
GTAP is as realistic as possible, before modeling commences it is
usually necessary to perform data validation. In this study, base
period adjustment is implemented with respect to those Asian region
FTAs that have already been signed and put into effect; adjustments
5
The Early Harvest Program refers to reduction in tariffs on some products prior to
entering into a full-fledged free trade agreement.
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D-N Liu & H-T Shih / Taiwan post-ECFA
are also made to allow for the tariff reductions to which Taiwan and
China committed themselves when they acceded to the WTO, and for
the additional tariff reductions resulting from the liberalization and
normalization of cross-strait trade between Taiwan and China. The
study then goes on to implement modeling, using a model that
assumes full normalization and liberalization of trade between Taiwan
and China, so as to analyze the impact of ECFA on Taiwanese
industry and the Taiwanese economy as a whole.
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Table 2-1 Industry Sectors and Country/Region Classification
(GTAP Version 7)
Source: GTAP 7 Database documentation
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The Impact on Real GDP
As can be seen from the modeling results presented in Table 2-2, the
normalization and liberalization of cross-strait trade between Taiwan
and China would benefit Taiwan’s real GDP, import volume, trade
surplus, terms of trade, and social wellbeing. The dynamic effects of
capital accumulation are generally greater than the static effects; this
is because, in the static model, factor endowments in individual
regions are fixed, whereas the dynamic model allows for the
possibility of new investment that increases the amount of capital
available to manufacturers, a scenario that bears a closer
resemblance to reality. Using dynamic modeling that allows for the
inflow of new capital, Taiwan’s real GDP will grow 1.83% after trade
normalization.
The Impact on Total Imports and Total Exports
The impact of the normalization and liberalization of cross-strait
economic and trading links on Taiwan’s foreign trade is shown in
Table 2-2. As can be seen, Taiwan’s exports would grow by 5.13%,
while imports would increase by 7.26%. In fact the FTAs that Taiwan
has signed in the past were all signed with countries with which
Taiwan does very little trade 6 (less than 0.1% of Taiwan’s total foreign
trade, in all cases), so the economic benefits were insignificant. It is
not surprising that, given the close cross-strait trade relationship, the
liberalization will increase bilateral trade substantially.
The Impact on Terms of Trade
As regards the impact on terms of trade, given that China currently
imposes far higher tariffs than Taiwan on most product categories,
the negative impact of tariff adjustment on China’s terms of trade will
be much greater than the negative impact on Taiwan’s terms of trade.
Adding to this the fact that China is more dependent on Taiwanese
imports than vice versa, it can be seen that, overall, as a result of
bilateral trade liberalization, Taiwan’s terms of trade will improve,
while China’s will worsen.
6
Before ECFA Taiwan signed FTAs with Panama, Guatemala, Nicaragua, Honduras
and EI Salvador.
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Table 2-2 The Macroeconomic Impact on Taiwan
of Cross-Strait Trade Liberalization
Static
Dynamic
Trade normalization
Economic and trade
normalization
Trade liberalization
Trade normalization
Lifting of restrictions on trade in Lifting of restrictions on trade in
industrial and agricultural
goods
industrial and agricultural
goods
Elimination of all tariffs on
Elimination of all tariffs on
industrial and agricultural
goods
industrial and agricultural
goods
Change in GDP (%)
0.353
1.830
Change in total exports (%)
3.576
5.128
Change in total imports (%)
6.149
7.256
Change in terms of trade (%)
1.595
1.375
4,403.6
7,947.9
713.7
1,677.3
Change in social wellbeing
(US$ millions)
Change in trade surplus
(US$ millions)
Source: GTAP 7 database, and the current study
The Impact on Social Wellbeing
The rise in real GDP and the improvement in Taiwan’s terms of trade
following bilateral trade liberalization would lead to an enhancement
of social wellbeing 7 in Taiwan. Using static modeling, its social
wellbeing would increase by US$4,404 million; with dynamic
modeling, its social wellbeing would rise by US$7,948 million.
7
The social wellbeing effect as used in the GTAP model employs the equivalent
variation concept to measure change in the level of wellbeing. In the model used in
this study, the following factors are considered to effect changes in social
wellbeing: (1) the allocation effect; (2) the terms of trade effect; (3) the investmentsaving effect. Allocation effect refers to the efficient industry-wise allocation of
scarce resources to produce the optimal combination of outputs. The terms of trade
(ToT) effect refers to the relative movement in prices of countries’ exports and
imports. The ToT effect increases with a relative increase in the price of exports as
compared to that of imports. ToT changes occur as producers and consumers
adjust their purchasing and sale patterns in response to a policy change. Finally,
the investment-savings effect refers to impacts of changes in the price of
investment (capital goods) and savings.
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D-N Liu & H-T Shih / Taiwan post-ECFA
The Impact on the Trade Surplus
Following the liberalization of cross-strait trade, Taiwan’s trade
surplus can be expected to rise. With static modeling, the trade
surplus will grow by US$714 million; with dynamic modeling, the
increase rises to US$1,677 million. The reason for this increase is
that the liberalization of cross-strait trade improves Taiwan’s terms of
trade.
The Impact on the Production and Export Structure
of Taiwanese Industry
Modeling of the changes to the production and export structure of
Taiwanese industry shows that, regardless of whether static or
dynamic modeling is used, the changes will be less pronounced in the
agricultural sector than in the manufacturing sector; this is mainly due
to the fact that the volume of trade between Taiwan and China in
agricultural products (and processed agricultural products) is not
particularly high.
In the manufacturing sector, the liberalization of cross-strait
trade will benefit the production and exports of Taiwan’s chemical,
rubber and plastic products industry, machinery and equipment (not
elsewhere classified - NEC) industry, textile industry, and ferrous
metals industry. The chemical, rubber and plastics industry and textile
industry – which have suffered most from the ASEAN-China FTA –
will see the largest rise in output (Table 2-3).
Why will Taiwan’s machinery, plastics, textile and ferrous
metals industries see such a pronounced rise in their output and
exports following the liberalization of cross-strait trade? This is
because these industries are already characterized by a high level of
export competitiveness, and China is their main export market,
accounting for 47.71% of the total exports of the Taiwanese chemical,
rubber and plastics industry, 49.42% of the total exports of the
machinery industry, 48.06% of the total exports of the ferrous metals
industry, and 33.51% of the total exports of the textile industry. In
addition, these are all industries where China had previously been
imposing higher tariff rates than Taiwan, so the liberalization of crossstrait trade will boost demand for their products in China, thereby
contributing to higher output.
Although the overall output and exports of Taiwanese industry
as a whole will rise, trade liberalization will have a negative impact on
some less competitive industries. Modeling results indicate that the
electronic equipment, transportation equipment (NEC), wood
products, and manufactures (NEC) industries will experience the
largest decline in output and exports. The appearance of the
electronic equipment industry in this group may seem surprising. The
main reason for this is that the model assumes full employment and
fixed-factor endowments, and that, while the electronic equipment
industry is one of Taiwan’s more competitive industries in terms of
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D-N Liu & H-T Shih / Taiwan post-ECFA
export performance, tariff rates for electronic equipment products are
already low in both China and Taiwan (0.58% in China, compared to
0.71% in Taiwan). The benefits of cross-strait trade liberalization to
Taiwan’s electronic equipment industry will thus be limited. Added to
this is the fact that increased demand in China for the products of
Taiwan’s chemical, rubber and plastic products, machinery and
equipment (NEC), textile, and ferrous metals industries will cause
production resources to flow toward these industries, at the expense
of the electronic equipment industry. However, with dynamic
modeling, allowing for capital accumulation trends, it can be assumed
that the electronic equipment industry should still have significant
amounts of spare capital available, so the negative impact on output
will actually be less than the static model suggests.
The main reason why the Taiwanese wood products,
transportation equipment (NEC) and manufactures (NEC) industries
will experience a contraction in output and exports following the
liberalization of cross-strait trade is that these are industries where
Taiwan lacks competitiveness compared to China, and where the
resources available were limited to begin with. The ECFA agreement
offers little in the way of direct benefits to these industries, and will
cause resources to flow toward other industries where higher profits
can be made. As a result, while these industries will see an increase
in exports to China, shortage of resources and inability to compete
effectively against their Chinese rivals will result in a situation where
higher exports to China come at the expense of exports to other
countries, leading to a fall in overall production and exports.
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Table 2-3 The Impact of Cross-Strait Trade Liberalization on the
Production Value and Exports of Taiwanese Industry
Impact on the Production Value of
Taiwanese Industry
Impact on the Exports of Taiwanese
Industry
Static modeling
Dynamic modeling Static modeling
Dynamic modeling
Trade normalization
Trade normalization Trade normalization Trade normalization
Trade liberalization Trade liberalization Trade liberalization
Trade liberalization
leading to reduction leading to reduction leading to reduction
leading to reduction of
of tariffs on all
of tariffs on all
of tariffs on all
tariffs on all industrial
industrial and
industrial and
industrial and
and agricultural goods
agricultural goods agricultural goods agricultural goods
Change in Change in Change in Change in
Change in Change in Change in Change in
production production production production
exports
exports
exports
exports
volume
volume
volume
volume
Total
1.911 14,571.50
2.9 29,598.6
3.659 8,783.40
5.227 11,389.3
Industries that will benefit
Chemical,
rubber and
plastic
products
13.14 8,655.10
14.75 8,822.80
21.36 6,547.90
22.84 6,362.80
Machinery
and
equipment
(NEC)
12.97 8,528.90
14.28 8,539.50
18.03 8,443.30
19.271 8,214.80
Textiles
14.58 2,834.90
16.11 2,845.40
18.46 2,392.80
19.98 2,355.60
Ferrous
metals
6.23 1,805.50
7.98 2,098.80
10.08
11.85
724.70
776.10
Industries that will suffer
Electronic
equipment
-9.3 -10,838.9
-7.197 -7,577.6
-9.95 -8,938.6
-7.886 -6,402.0
Transport
equipment
(NEC)
-4.296
-298.8
-3.436
-217.5
-5.71
-206.5
-5.037
-165.9
Wood
products
-4.454
-133.8
-3.783
-103.3
-6.193
-129.3
-5.706
-108.5
Manufactu
res (NEC)
-1.821
-98.6
-0.777
-38.3
-1.53
-53.5
-0.67
-21.3
Source: GTAP 7 database, and the current study
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Current Benefits from ECFA
Trade benefits from the Early Harvest list
ECFA is a framework agreement; the only items on which tariffs have
been reduced so far are those included in the Early Harvest list.
Observation of the export performance of the products included in this
list will therefore be needed before any conclusions can be reached
regarding the trade effects of the ECFA agreement. As shown in
Table 2-4, implementation of tariff reductions with respect to the Early
Harvest items began on January 1, 2011. Over the first four months
of 2011, Taiwan’s total exports to China came to US$40,492 million,
representing a growth rate of 13.3%. However, exports of the Early
Harvest items totaled US$6,800 million, representing a growth rate of
19.1%, which suggests that the tariff reductions implemented under
the ECFA Early Harvest provisions have already started to produce
results.
Between 2007 and April 2010, Taiwan’s total exports to China
grew by 7.1%, far higher than the growth rate for the Early Harvest
items, which was just 2.0%. Given these figures, the fact that the
export growth rate for the Early Harvest items in the first quarter of
2011 was higher than the overall export growth rate is even clearer
evidence that the Early Harvest provisions have had major benefits in
terms of Taiwan’s export performance.
If we divide the 539 products items on the Early Harvest list
into seven categories – (1) Petrochemical products; (2) Machinery
and components thereof; (3) Textiles; (4) Transportation equipment;
(5) Agricultural products; (6) 50 products that are mainly produced by
small and medium-size enterprises (SMEs); (7) Other products – we
can see that, during the period January–April 2011, each of these
product categories posted a higher export growth rate than during the
same period in 2007, 2008, 2009 or 2010. The Early Harvest tariff
reductions have thus had a beneficial effect on exports of all of these
product categories.
In point of fact, the petrochemical products category was the
only one of the seven product categories that posted positive average
export growth (with a growth rate of 14.7%) during the period
January–April in the years 2007, 2008, 2009 and 2010; for all of the
other product categories, the export growth rate was negative. The
Early Harvest tariff reductions have thus helped to mitigate the impact
of other FTAs, helping Taiwanese companies to boost their market
share in the Chinese market.
Table 2-4 shows the growth rates for the individual Early
Harvest product categories. As can be seen, the machinery category
posted the best export performance; its average export growth rate
during the period from 2007 to April 2010 was –9.1%, but this rose to
an impressive 68.4% in the first four months of 2011. The agricultural
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D-N Liu & H-T Shih / Taiwan post-ECFA
products category was in second place, with an export growth rate of
40.07% in the first four months of 2011, compared to an average
growth rate of –1.01% for 2007 to April 2010. The export performance
of the transportation equipment category was also quite respectable,
with an export growth rate of 25.9% in January–April 2011, compared
to an average growth rate of –12.3% for 2007 to April 2010. The
same was true for the textile product category, with an export growth
rate of 16.2% in the first four months of 2011, compared to an
average growth rate of –4.5% for 2007 to April 2010.
The “50 SME products” category also posted respectable
export growth. These are all products in which Taiwan lacks
competitive advantage; nevertheless, with the new preferential tariff
rates granted by China, exports in this category rose by 15.3% in the
first four months of 2011, compared to an average growth rate of –
8.4% for 2007 to April 2010.
Table 2-4 Export Performance of Taiwanese Early Harvest Product
Categories in the Chinese Market, January–April 2011
Units: US$ millions; Percentage
China’s
Imports
from
Taiwan
Early Harvest items
import value
As Share
of Total
Trade
Volume
(EHP
Share)
Market
Share
Jan–
April
2011
Growth Average
Growth
Rate
Rate
Jan–
2007–
April
2010
2011
6,800.09
16.79%
12.14%
19.14%
1.98%
40,492.63
100.00%
7.43%
13.31%
7.11%
Petrochemical products 3,085.64
7.62%
16.59%
Machinery and
components thereof
893.03
2.21%
7.25%
68.41%
-9.08%
Textiles
606.78
1.50%
18.54%
16.24%
-4.50%
77.83
0.19%
2.23%
25.93% -12.30%
4.95
0.01%
0.64%
40.07%
-1.01%
2,131.85
5.26%
12.14%
8.46%
-4.33%
26.69
0.07%
5.09%
15.26%
-8.36%
Total imports
Transportation vehicles
Agricultural products
Other products
50 “SME products”
Source: World Trade Analyzer, and Chinese customs data
25
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17.57% 14.74%
Investment benefits
Since the signing of the ECFA agreement, foreign companies
(particularly Japanese) have begun to demonstrate significantly more
enthusiasm for investing in Taiwan. For example, leading Japanese
optical film manufacturer Toray announced that it would be
establishing a new factory in Taiwan in May 2011; Furukawa Electric
signed an MoU on investment in Taiwan with Taiwan’s Ministry of
Economic Affairs (MoEA) in early October 2011; other leading
Japanese companies such as Sony, Mitsubishi, TDK and NEC are
also discussing new investment projects in Taiwan. According to
statistics compiled by Taiwan’s Investment Commission, the total
amount of approved inward investment by Japanese companies in
August 2011 was nearly US$100 million. 8 This was the highest
single-month total for Japan for some years, and higher than the
monthly total of approved investment from either the U.S. or Europe.
In addition, U.S. firm Super Micro (the world’s fourth largest server
manufacturer) has confirmed that it will be establishing a technology
campus and operations center in Taiwan, providing further evidence
that ECFA has boosted foreign companies’ enthusiasm for investing
in Taiwan. In point of fact, it is not only foreign companies that are
being attracted to invest in Taiwan by the benefits that ECFA has
brought and by Taiwan’s first-class investment environment; there
has also been a steady increase in investment in Taiwan by
Taiwanese businesspeople who had previously been operating
overseas. As of the end of 2011, this type of “return investment” by
Taiwanese businesspeople had risen to NT$46.9 billion. 9
Other benefits that ECFA may bring for Taiwan
“Building global linkages and participating in global economic
integration” is the core element in the Taiwanese government’s
foreign trade policy, and the signing of the ECFA agreement with
China constitutes the most important aspect of this policy. So just
what benefits does ECFA offer for Taiwan? Five key points need to
be considered:
Providing a way round the deadlock in the WTO trade
negotiations
When Taiwan joined the World Trade Organization (WTO) in 2002, it
was originally anticipated that, besides helping to create a level
playing field for economic competition with other countries, WTO
membership would also bring benefits in terms of multilateral market
opening, thereby helping Taiwan to strengthen its export
performance. Unfortunately, the WTO trade negotiations have stalled,
8
Compiled from Monthly Report of Investment Commission, Ministry of Economic
Affairs, Taiwan.
9
Press Report Jan 2012, Department of Investment Services, Ministry of Economic
Affairs, Taiwan.
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D-N Liu & H-T Shih / Taiwan post-ECFA
with the Doha Round of talks having effectively ground to a halt, and
overall Taiwan has seen little economic benefit from WTO
membership. Given that there is no real prospect of a breakthrough in
the near future, Taiwan has little choice but to explore opportunities
for bilateral FTAs.
Preventing Taiwan from becoming marginalized
The deadlock in the WTO trade negotiations has led to a situation
where more attention is being paid to regional economic integration.
Countries around the world are exploring possibilities for the
formation of regional free trade zones, involving tariff reduction and
market opening. The most impressive achievements in this regard
over the past few years have been seen in Asia. Besides a steady
broadening and deepening of the extent of integration within ASEAN,
China, Japan, South Korea, India, and the individual ASEAN member
states have been working actively to promote regional economic
integration. 10 This increasingly rapid process of integration within Asia
is strengthening the economic linkages between countries; Taiwan’s
exclusion from the process constitutes a serious danger for Taiwan
(Liu, 2008).
The main benefit deriving from regional trade agreements is
the trade creation effect (Viner, 1950). This means that, when
deciding which countries to negotiate a regional FTA with, priority
must be given to one’s main export markets. Currently, there is still no
academic consensus (based on the empirical research carried out in
this area) as to whether the trade creation or trade diversion effect is
the most significant aspect of regional FTAs (Lee, Park & Shin, 2008).
Nor is there consensus as to whether the relationship between
regionalism and multilateralism is mutually complementary or
mutually exclusive. However, given that other countries around the
world are already focusing on regional integration, and that Taiwan
has been excluded from this process, while at the same time the
multilateral trade negotiations within the WTO framework have
stalled, it is clear that Taiwan cannot expect to simultaneously enjoy
the benefits of both multilateral and regional integration, but must
instead give priority to regional integration, even if this means
accepting the negative aspects of regionalism. There is thus a clear,
objective need for Taiwan to participate actively in the process of
regional economic integration. Given the objective realities with which
Taiwan is faced, it naturally needs to give priority to bringing about
economic integration with China, which constitutes both Taiwan’s
main export market and the main source of its trade surplus. The
preferential tariff rates and access to service sector markets that
ECFA will provide will help to boost Taiwan’s exports to China and
enhance the competitiveness of Taiwanese industry. ECFA will also
contribute to the regularization of cross-strait trade between Taiwan
10
For example, from 2001 to 2010, China, Japan and Korea signed 9, 10 and 6 FTAs
respectively.
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D-N Liu & H-T Shih / Taiwan post-ECFA
and China, by helping to eliminate the non-tariff barriers that
Taiwanese goods face in the Chinese market, This will further
strengthen the competitiveness of Taiwan’s industries and contribute
to overall social wellbeing.
Helping to give Taiwan more freedom of action
in the economic sphere
In the past, when relations between Taiwan and China were more
strained, many countries were reluctant to consider signing an FTA
with Taiwan because they were concerned about China’s reaction.
China is Taiwan’s largest export market; not only will the signing of
the ECFA agreement help Taiwan to expand its foreign trade, it will
also make other countries more willing to consider negotiating FTAs
with Taiwan.
In fact, over the past few years Taiwan has been working
actively to participate more fully in the process of regional economic
integration, and seeking (through a variety of channels) to negotiate
FTAs with its major trading partners. However, because of Taiwan’s
diplomatic isolation and other countries’ unwillingness to offend China
at a time when relations between Taiwan and China were still tense,
only limited results were achieved. Some countries made it quite plain
that they would not even consider negotiating an FTA with Taiwan
until there was an improvement in relations between Taiwan and
China. It can therefore be anticipated that the signing of the ECFA
agreement will facilitate Taiwan’s participation in the wider process of
regional integration.
Developing the Chinese domestic market
Given the likelihood that the Chinese economy will continue to grow
strongly, Taiwan will need to try to take advantage of the
opportunities presented by China’s transformation from “factory to the
world” into “market to the world.” ECFA is the chief means by which
Taiwan can achieve this goal. Besides tariff reductions, other matters
– such as investment-related issues, trade facilitation, intellectual
property rights, industrial exchange and technical collaboration – can
also be brought within the scope of the ECFA negotiations. ECFA can
help to strengthen cross-strait industrial collaboration, stimulate
technology exchange, and contribute to the formation of strategic
alliances, while also enabling Taiwanese business enterprises to
enjoy a higher level of protection when operating in China. Taiwanese
firms can thus leverage ECFA to develop the Chinese market. If
Taiwan can complete the ECFA negotiations before its main
competitor nations sign FTAs with China, it should be able to benefit
from a significant trade substitution effect.
Building Taiwan into a major Asia-Pacific operations
and logistics hub
In the past, the Taiwanese government has always sought to
leverage Taiwan’s advantageous geographical location and strong
industrial foundations, so as to build Taiwan into an important AsiaPacific (or even global) operations and logistics hub; however,
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D-N Liu & H-T Shih / Taiwan post-ECFA
success in this endeavor has been elusive. One major factor has
been the restrictions on economic and trading links between Taiwan
and China, and the strained relations between the two countries.
Since the administration of President Ma Ying-jeou took office in
Taiwan, relations have improved, and the restrictions on cross-strait
economic and trading activity have been greatly relaxed. This should
help to create new opportunities for Taiwan within the Asia-Pacific
region.
However, while the normalization of cross-strait economic and
trading links is already contributing to the development of cross-strait
trade, further liberalization is needed to enhance Taiwan’s
competitiveness within the region, so that both Taiwanese companies
and multinational corporations can come to view Taiwan as an ideal
location for “moving into China and developing global markets.” The
signing of the ECFA agreement with China is a key factor in this
regard. Besides the market opening aspect of ECFA, putting crossstrait trade and investment on a more systematic and transparent
footing will make the flow of goods, people and capital between
Taiwan and China smoother and more convenient. ECFA will thus
make a significant contribution toward building Taiwan into an AsiaPacific operations and logistics hub.
In the last few years, Taiwan’s exports to China have grown
faster than exports to any other country. Besides the increase in the
absolute value of exports to China, China’s share of Taiwan’s total
exports has also grown steadily, as has Taiwan’s trade surplus with
respect to China. The contribution that the Chinese market makes to
Taiwan’s economy should not be underestimated. In future, the ECFA
agreement could bring even greater export growth and economic
benefits.
To summarize, ECFA represents the main achievement so far
in the improvement of cross-strait relations. Whether or not Taiwan
and China succeed in building closer economic and trade interaction
in the future will depend largely on how the ongoing ECFA
negotiations proceed, and on the detailed content of the resulting
agreements. Both sides will need to make a concerted effort.
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ECFA and Cross-Strait Industrial
Collaboration
Background
The initial ECFA agreement has already taken effect, and
implementation of the Early Harvest tariff reductions and servicesector market opening provisions has begun, but further negotiations
are underway. The Cross-strait Economic Cooperation Committee,
established under the ECFA framework, will play an important role in
the hammering out of detailed ECFA content in the future. Six
working groups have been established under the committee, to
handle matters relating to trade in goods, trade in services, dispute
resolution, investment, customs collaboration, and industrial
collaboration. The trade in goods and trade in services working
groups will focus mainly on bilateral market opening; the dispute
resolution working group will seek to create a systematic platform for
the resolution of trade disputes. Customs collaboration is a key
measure for promoting trade facilitation, while the emphasis in the
investment field will be on promoting cross-strait investment and
putting investment safeguards in place.
The Cross-strait Economic Cooperation Committee also has a
working group for industrial collaboration issues. Traditionally, trade
liberalization relating to trade in goods and services has been the
core aspect of FTAs, but if Taiwan and China expect ECFA to
contribute to industrial upgrading and transformation, then in reality it
is industrial collaboration that should be the main focus of the ongoing
negotiations. This will require a clear definition of what is meant by
“industrial collaboration,” so as to achieve maximum benefit from the
market opening with respect to trade in goods and services, and
create a win-win situation for both parties.
Examination of the FTAs that have been signed in other parts
of the world in recent years shows that the importance attached to
industrial collaboration (sometimes referred to as “economic
collaboration”) has been rising steadily. Within the East Asia region,
most of the FTAs signed by the region’s major economic powers –
Japan, South Korea, and China – include a chapter dedicated to
industrial collaboration, with the aim of fostering cooperation in
particular industries or sectors. There is considerable flexibility and
variation as to the content of these provisions, but usually the first
priority is to establish mechanisms for dialog, along with putting in
30
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D-N Liu & H-T Shih / Taiwan post-ECFA
place a platform for communication and the exchange of information
that can serve as a foundation for further strengthening of
collaboration. This is because putting the state-level groundwork in
place first makes it possible to provide a more complete picture of the
current state of industrial development and of major trends in key
aspects of industrial policy, thereby helping to ensure that business
enterprises have access to comprehensive, accurate information that
can provide a solid basis for collaboration.
Once this platform has been put in place, one can then move
on to identify specific industries and fields where there is potential for
collaboration. In particular, given the rising price of energy in recent
years, the development of energy-related industries is likely to be a
major focus of collaboration. Besides industry-specific collaboration,
there is also the question of function-specific collaboration (e.g.
collaboration on R&D, joint formulation of standards, etc.). If the
scope of industrial collaboration can be planned properly, there is the
potential for further deepening of industrial linkage.
The Outlook for Cross-Strait Industrial
Collaboration
The Taiwanese perspective
In the past, industrial collaboration between Taiwan and China mainly
took the form of cooperation between individual private-sector firms.
Over time, a complex cross-strait division of labor has been
established. Although the process of industrialization has been
underway for a longer period in Taiwan than in China, and although
Taiwan has significant sources of competitive advantage that China
lacks, Taiwan is handicapped by the relatively small size of its
domestic market, which has led to development bottlenecks. If
Taiwan can exploit the opportunities for cross-strait industrial
collaboration, it can benefit from the large size of the Chinese market,
which should bring significantly enhanced development potential.
Given the unstable nature of cross-strait relations in the past, and the
resulting lack of a sound systemic and legal framework for cross-strait
collaboration, the level of development that has been achieved in this
area already is quite impressive. In the future, with enhanced official
contacts under the ECFA framework, it should be possible to maintain
and build on these achievements; this is an issue of the utmost
importance.
From Taiwan’s point of view, in the past Taiwanese firms were
able to leverage China’s low-cost production resources by
undertaking processing operations in China, with the finished
products then being exported to other countries. This business model
had the side-effect of helping China to integrate itself more closely
into the world economy, and China became an important part of the
globalized production network. Today, with production costs in China
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D-N Liu & H-T Shih / Taiwan post-ECFA
rising, Taiwanese business enterprises need to rethink their
approach, and the form taken by cross-strait industrial collaboration
will need to be adjusted.
From the Taiwanese perspective, three key issues need to be
taken into account when considering industrial collaboration with
China:
Developing the Chinese domestic market
In the past, Taiwanese business enterprises mainly viewed China as
a production location, reflecting China’s status as “factory to the
world.” However, as China’s economic power has grown and its
income levels have risen, China’s role as a “market to the world” has
become steadily more important. Taiwan needs to adjust proactively
to this new situation. In the future, the ECFA negotiations need to
focus not only on tariff reductions, but also on bringing about the
opening of service-sector markets in China. ECFA represents an
opportunity to expand the role that China plays for Taiwan from that
of manufacturing base to a market for the Taiwanese service sector.
Leveraging the huge size of the Chinese market can help the
Taiwanese service sector to enhance its competitiveness.
Developing Taiwanese brands
Although some Taiwanese-owned business enterprises have built up
strong brands in China, these brands have usually not been powerful
enough to compete effectively against leading international brands.
Taiwan should leverage the opportunities provided by industrial
collaboration within the ECFA framework to change the model in
which Taiwanese firms interact with the global economy as a whole,
with a shift in emphasis away from contract manufacturing toward
brand development. In the past, Taiwan has relied heavily on OEM
and ODM 11 contract manufacturing, whereby Taiwanese firms
integrated their operations with those of leading international brands,
with individual Taiwanese enterprises being responsible for just one
link in the supply chain. The advantage of this model was that it
enabled Taiwanese companies to focus on manufacturing, leveraging
Taiwan’s high-quality manpower and strong managerial capabilities to
gain maximum benefit from the cost advantages that Taiwanese firms
enjoyed. The disadvantage was that it was difficult for Taiwanese
enterprises to build up their technological capabilities; individual
industries often relied heavily on foreign technology and foreign
equipment suppliers, and there was a tendency to invest too little in
innovation and R&D. This resulted in low levels of value-added and
generally low profit margins. Furthermore, any fall in demand
11
An original equipment manufacturer, or OEM, manufactures products or
components that are purchased by a company and retailed under that purchasing
company’s brand name. An original design manufacturer (ODM) is a company that
designs and manufactures a product that is specified and eventually branded by
another firm for sale.
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D-N Liu & H-T Shih / Taiwan post-ECFA
experienced by the leading international manufacturers could directly
threaten the survival of Taiwanese manufacturing firms.
The move away from contract manufacturing toward brand
development can help Taiwan to develop an economy with more
“depth.” This will require more than just technology upgrading; it
necessitates a revolution in attitudes, and particularly a shift away
from imitation toward innovation, from manufacturing toward
marketing, and from “being integrated” to “integrating.” It will also
involve moving away from the “business to business” (B2B)
collaborative relationships that are dominant in contract
manufacturing toward the “business to consumer” relationship that is
more characteristic of successful brand development, and from a
“cost down” mindset toward an emphasis on “value up.” These are all
issues that Taiwan needs to think carefully about.
Developing emerging industries
One of the reasons why Taiwan has in the past been so badly
affected by downturns in the global economy is its failure to diversify
– specifically, its excessive reliance on the IT and electronics
industry. In the future, Taiwan should take advantage of the changes
taking place in global markets to actively develop new types of
product and a new generation of industries. Ever since Taiwan’s IT
and electronics industry reached the peak of its development, Taiwan
has been on the lookout for new industries that drive continued
economic growth, but so far the results achieved have been very
limited. In the future, Taiwan should make maximum use of the
opportunities for collaboration presented by the ECFA agreement to
develop the alternative energy sector, biotechnology and other
emerging industries, so as to help Taiwanese industry as a whole to
diversify.
China’s perspective
It is now over 30 years since the process of liberalization and reform
began in China, and during this time China has racked up some
impressive achievements. However, the strategy of “allowing some to
get rich first” has created a situation of severely unbalanced
development, with major disparities in the levels of development
achieved in coastal regions and inland regions, urban areas and rural
areas, and industry and agriculture. As a result, there has been a shift
in Chinese government policy toward achieving more balanced
development. At the same time, China is already responding to the
globalization of competition and the growing shortage of resources by
working actively to transform its industrial structure and develop new
industries. Achieving balanced development and transforming the
industrial structure are now the two main pillars of China’s economic
policy. The promotion of cross-strait industrial collaboration in the
future will need to take this into account.
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D-N Liu & H-T Shih / Taiwan post-ECFA
China’s drive to develop Western China, as part of its efforts
to achieve more balanced economic development
China’s Twelfth Five-Year Plan emphasizes the development of the
interior of China (as opposed to the coastal regions). In the future,
one of the key aspects of cross-strait industrial collaboration will be
the question of how to make effective use of the extensive resources
available in the Chinese interior to create value and jobs. For
example, Taiwanese electronics manufacturers have begun to
expand their China-based operations from the coastal regions of
China into the inland regions to the west, mainly in response to rising
production costs in the coastal areas. The key question is how this
westward movement can be leveraged to strengthen the integration
of cross-strait supply chains to create a win-win situation for both
Taiwan and China. From China’s point of view, this would also help to
create jobs in Western and Central China, stimulate economic
growth, and help to combat some of the social problems that are
emerging (such as grandparents raising children). 12
Opportunities for collaboration in emerging industries
In China’s coastal regions, average per capita income has already
risen past the US$10,000 mark, and the regional economy is being
transformed. These areas are no longer suitable for use as
production locations for export-oriented processing operations, and
there is a clear need to think in terms of developing new industries.
One possible avenue for promoting cross-strait industrial
collaboration would be to make use of the “Seven New Strategic
Industries” (new-generation information technology, high-end
equipment manufacturing, alternative-fuel cars, alternative energy,
environmental and energy-saving technologies, biotechnology, and
advanced materials) component of China’s Twelfth Five-Year Plan,
together with the existing infrastructure and human resources of
China’s coastal regions. This could be done by linking them with
Taiwan’s “Six Key Emerging Industries” (high-end agriculture, the
cultural and creative industries, tourism, medicine and healthcare,
green energy, and biotechnology).
Overall objectives
The overall goals for future cross-strait collaboration in this area may
be summarized as follows:
Promoting industrial upgrading in both countries
Currently, industrial development in both Taiwan and China is heavily
oriented toward contract manufacturing. The first priority in crossstrait industrial collaboration must therefore be to upgrade the overall
12
There are many families in Western and Central China where grandparents raise
their grandchildren.. This is because there are insufficient employment
opportunities in those areas, and parents have to work in coastal areas to make a
living. As a result, children have to be taken care of by their grandparents, which
may cause inter-generational problems.
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D-N Liu & H-T Shih / Taiwan post-ECFA
level of collaboration in terms of the value chain, while helping
“traditional industries” in both countries to upgrade and transform
themselves. The second priority should be to promote collaboration in
new fields, such as service-sector innovation, in emerging industries
(such as those relating to energy, resources and environmental
protection, as well as biotechnology), and in information and
communications technology (ICT), so as stimulate cross-strait
industrial development over the long term.
Cross-strait collaboration on the development of world-class
brands
The developing of strong, competitive brands is a shared goal of
Taiwan and China. There is significant potential for the two countries
to collaborate on the development of international, world-class brands
in light of their respective needs and sources of comparative
advantage (in terms of technology, resources, etc.). The signing of
the ECFA agreement will make it much easier for Taiwan and China
to implement an effective cross-strait division of labor in industry, and
to leverage China’s large domestic market as a seed-bed for the
cultivation of new brands that can then go on to expand into global
markets.
Creating new jobs
Cross-strait industrial collaboration has an important role to play in
stimulating the creation of new jobs. Currently, both Taiwan and
China are experiencing stubbornly high levels of unemployment;
cross-strait collaboration has the potential to make a significant
contribution toward boosting employment in both countries.
To summarize, ECFA is the key mechanism for promoting
closer cross-strait economic and trading links, and it also constitutes
an important platform for economic collaboration. The scope of the
ECFA negotiations must not be limited to tariff reduction and market
opening; the main emphasis should be on “industrial collaboration” in
a broad sense. Both Taiwan and China need to transform the models
of economic development they have been following up to now. An
effective cross-strait division of labor between them would make a
major contribution toward the economic development of both
countries. There is room for cooperation in brand development,
emerging industries, the service sector, investment, etc. In all of these
areas, collaboration will be heavily dependent on the effective
exploitation of China’s huge domestic market, which can provide
significant new opportunities for Taiwan.
As a rule, industrial collaboration within an FTA framework is
focused on the manufacturing sector, including such areas as
technology transfer, cross-licensing, mutual recognition, human
resources cultivation and training, etc. If the industrial collaboration
carried out under the umbrella of ECFA is expanded to include the
service industries, this would create an innovative new model for
other countries to follow when negotiating their own FTAs. Particularly
with respect to collaboration in emerging service industries, since
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there is no significant competition between Taiwan and China in
these areas, and since the successful development of new service
industries will benefit ordinary citizens without posing a threat to
vested interests, there should be relatively little opposition to
collaboration in these areas, and the potential for significant benefits.
While ECFA will help Taiwan’s more competitive industries to
grow their exports, this will inevitably be a short-term effect. It is only
by making full use of the partnership relationships that can be
established through industrial collaboration that Taiwan can maintain
an advantageous position in bilateral trade with China over the long
term. In the service sector in particular, success or failure is
determined not so much by production costs as by service content
and service quality. The service model that can be built through
cross-strait industrial collaboration will have unique “cross-strait”
characteristics – particularly in cultural terms – that cannot easily be
replicated by any FTA that China might sign with another country.
More importantly, collaboration on emerging service industries can
contribute to a broadening of the overall scope of cross-strait
industrial collaboration.
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Conclusions
The main purpose of this study has been to analyze the economic
development opportunities for Taiwan in the post-ECFA era. The
paper begins by examining the current state of trading relations
between Taiwan and China. This analysis shows that, while Taiwan’s
exports to China have continued to grow over the past few years, the
share of China’s total imports coming from Taiwan has been falling. If,
in the future, Taiwan can succeed in leveraging ECFA to develop the
Chinese domestic market, not only will this help to reduce the
intensity of competition to which Taiwanese exporters are exposed, it
will also enable Taiwanese companies to gain first-mover advantage
with respect to their Japanese and South Korean rivals. This would
benefit Taiwan’s ongoing economic development.
The paper then goes on to examine the benefits that ECFA
will bring to Taiwan, concluding that full liberalization under the ECFA
framework will create significant benefits for the Taiwanese economy
as a whole. Evaluation of the impact of the ECFA Early Harvest
provisions, implementation of which began on January 1, 2011,
shows that there has been pronounced growth in Taiwan’s exports to
China of the 539 Early Harvest items.
Besides the trade benefits, the study also seeks to analyze the
potential for the use of industrial collaboration within the ECFA
framework to bring about a transformation of the Taiwanese and
Chinese economies. Both Taiwan and China have achieved
impressive economic development, but today both countries find
themselves at a crossroads, where they are faced with the need to
transform their economies. There is thus immense scope for crossstrait industrial collaboration. Taiwan is faced with the challenge of
moving away from contract manufacturing toward brand
development, while China needs to transform itself from “factory to
the world” into “market to the world,” and switch from an exportoriented development model toward a new model where growth is
driven by domestic demand. Instead of focusing on overall GDP
growth, China needs to concentrate on raising per capita income
levels, and on achieving a more equitable distribution of wealth.
Given the changes that have been taking place, ECFA
unquestionably has a vital role to play as a catalyst for further crossstrait economic transformation. Besides the market opening aspect of
ECFA, there is also the question of how to make effective use of
industrial collaboration to drive the growth and transformation of
Taiwanese and Chinese industry; this is arguably an even more
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D-N Liu & H-T Shih / Taiwan post-ECFA
important goal. The past few years have seen the growth of a tightly
knit cross-strait production network and division of labor; there is also
a high level of agreement between Taiwan and China regarding the
emerging industries that will be important in the future. There is thus
considerable scope for cross-strait industrial collaboration with
respect to both existing industries and emerging industries. The
countries with which China and Taiwan have signed FTAs in the past
have mainly been countries with which they have only limited
industrial interaction, so the industrial collaboration provisions of
these FTAs were of only secondary importance. The situation with
ECFA is very different. Both sides should seek to take full advantage
of this opportunity to use industrial collaboration to instill renewed
vigor into their respective economies.
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References
In Chinese
Liu Danien (2008), “The impact of regional integration in Asia
and China”, Report prepared for the Ministry of Economic Affairs,
Industrial Development Bureau, Taipei: Institute of Economic
Research.
Gu Yinghua (2008), “After the entry into force of the China –
ASEAN Free Trade Agreement: Impact on Taiwan's industrial
Strategies”, report prepared for the Ministry of Economic Affairs,
Industrial Development Bureau, Taipei: Institute of Economic
Research.
In English
Antkiewicz, A. and Whalley, J. (2004), “China’s New Regional
Trade Agreements”, The World Economy, 28 (10), pp. 1539-1557.
Hertel T.W. (1997), Global Trade Analysis: Modeling and
Applications, Cambridge. University Press: New York.
Lee, J., Park, I. and Shin, K. (2008), “Proliferating Regional
Trade Arrangements: Why and Whither?”, The World Economy,
31(12), pp. 1525-1557.
Viner, J. (1950), The Customs Union Issue, New York:
Carnegie Endowment for International Peace.
Whalley, J. (2008), “Recent Regional Agreements: Why So
Many, Why So Much Variance in Form, Why Coming So Fast, and
Where Are They Headed?”, The World Economy, 31 (4), pp. 517-532
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