Catching Up in the Race for Trade

For Taiwan Review 

Taiwan is looking to bilateral agreements to boost its role as a regional trade hub.

On July 10 this year, Taiwan and New Zealand signed an economic cooperation agreement, making New Zealand the first country without formal diplomatic relations with Taiwan to link its economy in such a way. Given that two-way trade between the two economies stood at a relatively humble US$1.21 billion in 2012, according to government figures, the Agreement between New Zealand and the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu on Economic Cooperation (ANZTEC) is unlikely to become an economic game changer, but it has far-reaching significance for Taiwan in terms of symbolism.

The pact is a very important positive indicator, says Hilary Walsh, the Economy, Finance and Trade manager at Euromonitor International, a London-based market intelligence firm. Taiwan is in a difficult position as it is formally recognized by comparatively few countries in the world, she points out, and as such, the fact that Taipei managed to secure an economic cooperation agreement with Wellington is a huge step for the island, both economically and politically. Moreover, the country faces competition not only from South Korea, but also from Association of Southeast Asian Nations (ASEAN) members who are in the process of establishing a European Union-style economic bloc, so the Republic of China (ROC) government is rightly reacting by taking unprecedented measures to liberalize trade and boost economic growth, Walsh says. “In the first half of 2013, Taiwan has taken several definitive, concrete steps toward creating a role for itself as an important trade hub in Southeast Asia,” she says.

Serious about Trade

Like Walsh, most observers agree that ANZTEC will open the door to such status once it is implemented, pending legislative approval in both Taipei and Wellington, not least because it signals that Taiwan is serious about trade liberalization. Taiwan relies on exports of goods and services for more than 70 percent of nominal gross domestic product, but is excluded from all large-scale economic integration agreements currently under negotiation in the Asia-Pacific region, although it does have free trade agreements (FTA) in place with several of the countries with which it enjoys formal diplomatic relations, such as El Salvador and Panama.

Given the signs that a similar agreement with Singapore might follow before long, the days of Taiwan’s precarious outsider role in regional trade mechanisms indeed seem numbered. “Trade agreements with New Zealand and Singapore are not [going] to make or break the Taiwanese economy one way or the other, but they are important markers for future free trade agreements,” says Sean King, senior vice president of Park Strategies, a New York-based lobbying firm that until recently worked for the ROC government. “It shows that Taiwan is for real on the world trade stage, and it rewards the Ma government’s policy of focusing on substance over style when it comes to these crucial issues.”

King maintains that ROC President Ma Ying-jeou’s (馬英九) policy direction has relieved cross-strait tension and paved the way to forging economic links between Taiwan and its trade partners. “And after all, it is trading and integrating with the world that has real benefits for Taiwan’s people,” King says.

Taiwan’s main opposition party, the Democratic Progressive Party (DPP), is also supportive. Auguring that legislation related to ANZTEC will pass relatively smoothly in the ROC’s Legislative Yuan, the DPP was quick to welcome the signing of the pact.

The process leading to ANZTEC began in October 2011 when the two countries’ respective trade offices in Taipei and Wellington each agreed to undertake independent feasibility studies on a bilateral economic cooperation agreement. They subsequently moved on to joint studies and started formal negotiations in May 2012. The chair of the ANZTEC talks on Taiwan’s side was Elliot Charng (常以立), the head of the Taipei Economic and Cultural Office in New Zealand, while for the New Zealand side it was Stephen Payton, director of the New Zealand Commerce and Industry Office in Taipei. Negotiations proceeded relatively quickly, says Payton, who described cooperation with the ROC’s agencies as uncomplicated.

Under the pact, which is expected to take effect at the beginning of 2014, Taiwan will remove tariffs on 99.88 percent of New Zealand’s goods, and New Zealand will do the same for 100 percent of goods from Taiwan, over a 12-year period. Taiwan’s main imports from New Zealand to be affected by ANZTEC are all agricultural—most prominently milk, meat, fruit, cheese and wine—so the deal has not been popular with some members of Taiwan’s husbandry and dairy industries. There has been little controversy about ANZTEC on the New Zealand side, Payton says, where the main imports from Taiwan affected by the new pact are petrochemicals, semiconductors, stainless steel, electronic components, plastics and precision machinery. “We have long had a bipartisan approach to trade agreements because a country like us with export dependency needs liberalized markets,” he says. “In New Zealand, this is well understood across the political spectrum, media and public.”

Beyond Traditional Pacts

Although New Zealand has been active in forging bilateral and regional trade agreements, ANZTEC is something special, Payton says. He notes that the pact with Taiwan goes well beyond a trade agreement in the traditional sense, as it incorporates items that are normally negotiated separately, for example, agreements on air transportation services and film and television co-productions. In addition, there are provisions to encourage interaction between Taiwan’s and New Zealand’s indigenous peoples, a measure thought to be a first for a trade agreement.

“There has been a history of New Zealand companies investing mainly in joint venture arrangements in Taiwan; ANZTEC is the first opportunity to clarify the rules about how investment proposals are dealt with in both economies,” Payton says. In addition, “Taiwanese companies developing global strategies around food will seek to secure a steady supply of New Zealand’s agricultural products, which are high-quality, safe and now, through ANZTEC, more competitive,” he says.

Farming representatives in Taiwan have expressed worries about the impact of ANZTEC and similar agreements in the future, despite measures aimed at cushioning the effect on local farmers. Tariffs on 479 agricultural imports from New Zealand will be reduced to zero only incrementally over the next 12 years, for instance, while the government has budgeted NT$9.4 billion (US$313 million) for a fund to help affected farmers. Lee Wu-chung (李武忠), who goes by the name Du Yu (杜宇) in his role as chief executive officer of the Chen-Li Task Force for Agricultural Reform, says one has to understand that ANZTEC means Taiwan will open its doors wide to “an agricultural superpower” that possesses the best quality control and cold processing technologies in the world. Chen-Li is a nongovernmental organization comprising farming experts, scholars and civil servants who are committed to agricultural reform in Taiwan. “Because most Taiwanese farmers are small farmers, their tolerance and ability to adapt is limited. We must ask ourselves how ANZTEC will affect their survival,” Du says.

The task force leader also questions the common wisdom that local farmers will suffer only a negligible impact from the agreement as the two countries’ main exports are highly complementary. Taiwan produces little beef, mutton, deer antler velvet, apples and wine, and no kiwifruit (the latter accounts for more than 70 percent of Taiwan’s fruit imports from New Zealand), and farming seasons in the southern hemisphere, where New Zealand is located, are the reverse of Taiwan’s. “Despite complementarity with local agricultural products, the domestic consumer market for agricultural products is limited; these New Zealand products are likely to take an increasingly large share of the market once the import tax exemptions for them take effect,” he says. In other words, Taiwanese consumers buy only so much fruit and meat, and as soon as the price for New Zealand products drops—analysts expect by between five and 10 percent—they will swap Taiwanese mangoes, wax apples and tilapia for New Zealand kiwifruit and lamb chops.

The deal with New Zealand comes on the heels of a controversial decision to resume US beef imports in 2012, a move that allowed the resumption of long-stalled trade talks between the two countries, but which local livestock operators perceived as endangering their livelihoods. Farmers worry that the government will continue to make compromises on agricultural issues in future trade negotiations, Du says.

There is little doubt that such negotiations are important for Taiwan, however, according to Liou To-hai (劉德海), director of National Chengchi University’s Center for World Trade Organization Studies. The academic maintains that Taiwan’s drive for economic integration must not be sacrificed for the welfare of the agriculture or any other particular industry. Instead, the issue needs an enormous amount of policy fine-tuning for the good of society as a whole. In Liou’s eyes, South Korea poses an immediate and grave trade risk to Taiwan, as that country has FTAs in place with nine economic entities, including major trade powers ASEAN, the European Union, India and the United States.

Liou says that Taiwan is in a fierce race with South Korea to conclude a trade agreement with mainland China (an agreement on trade in goods for Taiwan, and an FTA for South Korea). In September this year, mainland China announced that it had completed preliminary negotiations with South Korea on a bilateral FTA. As Taiwan and South Korea are keen competitors in a large number of exports to mainland China, tariff-free status for South Korean goods could crowd out Taiwanese products in the mainland Chinese market. For Taiwan, an agreement on trade in goods would complete the cross-strait Economic Cooperation Framework Agreement (ECFA) signed in 2010. “If Taiwan were to secure the agreement on trade in goods with [mainland] China before a South Korea-China FTA comes into being, 60 percent of South Korean exports to [mainland] China will be affected, including 14 key Korean-made items competing against those of Taiwanese origin in the [mainland] Chinese market, such as semiconductors, parts and components for their manufacture, LCD panels and petrochemicals; but if it’s the other way around and Seoul homes in on a South Korea-China FTA first, Taiwanese companies would suffer dearly, as they still cannot enjoy the tariff-free treatment because none of these key items is covered by ECFA’s early harvest list,” he says. The so-called early harvest list refers to selected products that enjoy a reduction or elimination of tariffs in cross-strait trade ahead of ECFA’s completion.

According to Liou, ANZTEC is a small step toward Taiwan’s integration into the important economic mechanism of ASEAN plus 6, the six comprising both mainland China and New Zealand, as well as Australia, India, Japan, and South Korea. More importantly, it is a very good sign that neither mainland Chinese officials nor commentaries run by state-run media in mainland China have indicated that Beijing takes a negative stance on ANZTEC’s signing, he says.

More to Come

The trade deal with New Zealand is likely to assist the conclusion of an economic partnership with Singapore, Liou says, adding that such an agreement “has been under negotiation since early 2011 and according to [ROC] officials is nearly ready. And because all ASEAN countries are watching how the Taiwan-Singapore talks go, we will have a chance to sign similar FTAs with other ASEAN members.” Singapore effectively functions as ASEAN’s opinion leader, he says, noting that of all the FTAs the ASEAN bloc as a whole has inked so far, Singapore was the association’s first member to sign a bilateral FTA with the respective counterpart. “So Singapore is a very important indicator of whether Taiwan can effectively become the fourth member to ASEAN plus 3 [the three being mainland China, Japan and South Korea], which is the essential driving force of Asian economic integration,” he says.

A majority of South Korean media commentary suggests that the most effective way to counterbalance increasing Taiwanese exports to mainland China would be to conclude a South Korea-China FTA at an early date, Liou says, which indicates that it is high time for Taiwan to act. “[South Korean] President Park Geun-hye has just visited China to actually narrow the gap between the two countries in terms of signing an FTA,” he says. “Talks go very fast, so the two could reach an agreement by the end of the year.”

Euromonitor’s Walsh is upbeat on Taiwan’s trade prospects in the near term. “Taiwan’s real output growth slowed in 2012 to 1.3 percent from 4.1 percent in 2011 and 10.8 percent in 2010 due to depressed demand from Japan, its largest trading partner, and the rest of the developed world; however, as the [ROC] government works at extending Taiwan’s role in global trade, Euromonitor International is forecasting real growth in Taiwan to accelerate to 3.0 percent and 3.9 percent in 2013 and 2014 respectively,” she says.

Influential people in the United States seem to share that confidence, given that Taiwan now appears more willing to compromise. The American Chamber of Commerce reported that it had found just such an attitude during its annual visits with high-ranking officials and influential academics in Washington D.C. conducted in September this year. “In general, we found a much more positive atmosphere toward Taiwan this time compared to the past few years,” AmCham chairman Alan Eusden said in a media release. Eusden led the 20-member delegation. “The fact that the dispute over US beef imports has been largely resolved and the Trade and Investment Framework Agreement process rejuvenated has made a big difference in attitudes toward Taiwan,” he said.

Walsh says that while some of Taiwan’s trade agreement plans appear more important politically than economically at present, that will not always be the case. “In the medium to long term the economic benefits will become clearer, and the real winners will be Taiwanese businesses and consumers as the country becomes more integrated with the global economy,” she says.

______________________________
Jens Kastner is a freelance journalist based in Taipei.

Copyright © 2013 by Jens Kastner

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