China draws Taiwan into trade embrace
Historic pact will open more doors for Taiwan while increasing China's clout over it

Malminderjit Singh

(SINGAPORE) In their boldest step yet towards reconciliation, Taiwan and China signed a historic trade pact yesterday, 60 years after the civil war that drove them apart.

The Economic Cooperation Framework Agreement (ECFA) - hailed by both sides as a milestone and a commercial imperative - was signed by senior delegates in the southwest Chinese city of Chongqing, in Sichuan province. With this, China will see Taiwan's economy lean more heavily on its own. Taiwan, which relies heavily on exports and cannot afford to be marginalised, will see more doors opening to it.

China is cutting duties on 539 Taiwanese goods valued at US $13.8 billion, or about 16 per cent of imports from the island last year, reported Bloomberg. Taiwan, on the other hand, will lower tariffs on 267 items from China worth US $2.86 billion, or about 10.5 per cent of the country's shipments to Taiwan in 2009. Tariffs will be cut over two years in three stages to zero.

In addition, China agreed to open its markets to Taiwan in 11 service sectors such as banking, securities, insurance, hospitals and accounting, while Taiwan agreed to offer wider access in seven areas, including banking and movies, the two sides said. They also signed an agreement on intellectual property rights protection.

The sweeping agreement is a major political triumph for Taiwan President Ma Ying-jeou, who has been pursuing a Beijing- friendly policy after assuming power in 2008. He will get huge mileage from the pact, which could create more than 260,000 jobs in Taiwan and boost economic growth by 1.65-1.72 percentage points annually.

Taiwan companies have invested an estimated US $150 billion in the mainland since 1991.

But it is the evolving East Asian economic architecture that has prompted Mr Ma and his administration to court Beijing aggressively. While China signed free trade agreements (FTAs) with Asean as well as Japan and South Korea, political blocks continued to isolate Taiwan from any such formal trade agreements. Taipei recognised that it had to move quickly to get a foot into this East Asian economic grouping or risk being marginalised. This agreement with China represents a seal of approval from Beijing and will send a green signal to the international community to pursue formal trade and economic engagement with Taipei.

The agreement also represents a political masterstroke by Beijing. 'Taiwan will become more dependent on mainland policies, markets and business connections for its economic development,' said James Sung, a political scientist at City University of Hong Kong. 'Taiwan, whether it is the KMT or the opposition regime, will have to think about the economic benefits it enjoys when it comes to making political decisions.'

Many outside Taiwan's Beijing-friendly government, especially members of the anti-China opposition, insist it is also a significant and potentially dangerous political step for the island, which has ruled itself since 1949. Thousands of protesters marched through Taipei last weekend, including grim-faced former president Lee Teng-hui, who said the deal would 'hurt Taiwan', reported AFP.

But these negative sentiments may be short-lived, particularly as the deal opens Taiwan's doors to increased trade and economic relations with the region. 'The biggest beneficiary of the ECFA will be Taiwan,' Li Mingjiang, assistant professor at the S Rajaratnam School of International Studies, told BT. Dr Li explained that through this agreement, China may allow Taiwan to sign trade agreements with and within Asean. 'Countries like Vietnam, and to some extent Philippines, will benefit most as it will be easier for formal Taiwanese investments to flow into these developing countries,' added Dr Li.

These formal links will boost Taiwanese industrial and investor presence in the region. 'Although on an official level, none of the Asean countries recognised Taiwan as a sovereign, Taiwanese businesses never stopped to come here informally,' said Joseph Tan, director, Asian chief economist at Credit Suisse.

For Taiwan, where exports are equivalent to about two-thirds of its economy, there are potential gains that these formal trade and economic links may bring. The pact may increase its dependence on China while letting it spread its wings elsewhere.