Taiwan challenge to Korea, Japan

For Asia Times Online

Brought about by the recent signing of the Economic Cooperation Framework Agreement (ECFA) between Taipei and Beijing is an unfavorable position for South Korea and Japan. Through ample tariff exceptions and reductions, Taiwanese companies are to enjoy considerable advantages on the huge Chinese market compared to their Korean and Japanese counterparts. Due to still sluggish demand from US and EU, the issue has been becoming even weightier.

Since a high percentage of Korean and a considerable share of Japanese exports to China overlap with Taiwan’s, Tokyo and Seoul are afraid of losing the edge.

As Korean businessmen are scrambling to pressure their government to sign its own free trade agreement (FTA) with China, Japanese companies now start seeing Taiwan as a handy short cut to the Chinese market. The formula is simple: the Japanese side establishes joint-ventures in Taiwan, produces on the island and enjoys the same preferential treatment in China as fully-owned Taiwanese companies do.

Japanese companies from sectors as various as international trade, consumer electronics, semiconductors, optoelectronics, solar cells, machine tools and comics and e-books have reportedly been seeking to get a foothold in Taiwan with the objective of getting easier access to the Chinese market. Although there are a number of ways Japanese companies could use to take advantage of Taiwan’s new positioning under the ECFA, the establishment of joint-ventures is the most promising. With the help of those, Japanese businesses will be able to benefit from the ECFA just like any pure Taiwanese company as soon as the ECFA comes into force in January 2011. By contrast, for a fully Japanese-owned venture that operates from Taiwan, it would take at least three years until it’s allowed to penetrate the Chinese market.

Apart from the tariff exceptions and reductions Japanese companies strive to take advantage of, there are a handful of other reasons that make Taiwan a plausible choice to become an even closer trading ally for Japan as it has already previously been. The recent labor protests at Japanese-owned factories on the mainland cast doubts among the Japanese whether China, the so-called factory of the world, in future will continue being a good choice for Japanese investments. A significant rise in Chinese labor costs is expected. As another considerable aspect, China’s widespread anti-Japanese resentment frightens Japanese expatriates and their families residing on the mainland. Since Japanese companies doing business abroad employ significantly more home-country nationals than do US and European firms, issues like the increase of crimes such as robbery, stealing and swindling cases and the unbearable air pollution in China’s cities are likely to make Japanese businessmen to appreciate Taiwan’s Japan-friendliness and relatively safe living environment. Last but not least, there’s the perception that Taiwan’s bureaucracy is far less prone to corruption that China’s. Transparency International’s 2009 Corruption Index puts Taiwan on 37th place, well ahead of China’s unflattering 79th.

When it comes to the ‘who-with-whom’ in East Asia, scholars point out that from a trader’s perspective, it’s a wise move for Japan to team up with Taiwan. “South Korea is Japan’s first and foremost trade rival, not Taiwan”, Liou To-hai, Professor of Diplomacy at Taiwan’s National Chenchi University and Director of the Center for WTO Studies, says in an interview with Asia Times Online. “By establishing joint-ventures with Taiwanese companies, Japan gains advantages in competing with South Korea.”

From a security-strategic point of view, however, it’s a different story. South Korea and Japan – the US’s main military allies in the region- should work on a Japan-Korea FTA first before thinking of negotiating on bilateral pacts with others, so Liou. However, there is a hindrance as he explains: “The main obstacle a Japan-Korea FTA faces is Korea’s trade deficit with Japan.”

Observers attribute the deficit that has been surging rapidly since 2004 to imports of high tech parts for Korea’s manufacturing sector as well as to increasing tourism to Japan.

China replaced the US as Japan’s biggest export destination in 2008, and Korea’s as early as in 2006. In 2002, the leaders of China, Japan and Korea agreed on undertaking non-governmental academic research on setting up a regional free trade zone. In-depth studies dragged on from 2003 to 2009, and when China and Taiwan began negotiating on the ECFA, the China-Japan-Korea trade talks took a backseat in the list of Beijing’s priorities.

After the signing of ECFA, the absence of a FTA between Korea and China is believed to hurt Korean businesses in particular since even before the signing of ECFA, fourteen of Korea’s twenty key export items have already faced competition from Taiwanese goods, so the Korea International Trade Association (KITA).

No wonder that Korean president Lee Myung-bak has been coming under pressure from his country’s business groups since shortly before the ECFA was signed. The demands from various corners of Korea’s economic landscape come in unison: The negative impact from the China-Taiwan ECFA must be minimized by signing a Korea-China FTA as soon as possible. This, however, is a complex task, given the fact that a proposal to establish a US-Korea FTA keeps sticking in the US Congress over sensitive issues in the auto sector. According to Professor Liou To-hai, President Lee Myung-bak’s hands are tied because the issues of China-Korea FTA and US-Korean FTA are related. “Although Lee is nervous and eager to sign an FTA with China, he couldn’t possibly do so before the US-Korea FTA has been approved since otherwise he would hurt his country’s strategically vital relation with the US”, so Liou.

It’s left to be seen which means competing businesses of Korea and Japan will chose to apply to make the race into the Chinese market, a market that has been enjoying an 8 to 9% growth rate. Many Japanese entrepreneurs, however, have apparently made up their minds. They decided not to wait for their government hammering out favorable deals with China. To the Japanese businessmen, the Taiwan-Japan joint-venture concept is the most promising option. Liou To-hai tells of an opinion which recently has been rather commonly expressed by the Japanese media. “Japanese commentators recommend Japan to sign an FTA with Taiwan and the US first before start negotiating with Beijing”, so Liou.

 

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