U.S.-China Economic and Security Review Commission:

Taiwan-China: Recent Economic, Political, and Military Developments
across the Strait, and Implications for the United States

(Washington, D.C., March 18, 2010)

Testimony by Rupert Hammond-Chambers

Committee: Describe the Current Status of, and Trends in, Cross-Strait Trade and Investment
Hammond-Chambers: Cross-Strait trade discussions are currently dominated by the ongoing negotiations of the Economic Cooperation Framework Agreement (ECFA) between Taiwan and China. The ECFA is a Free Trade Agreement (FTA) designed to normalize and then liberalize the bilateral commercial relationship.

Upon his inauguration in May 2008, Taiwan’s President Ma Ying-jeou undertook a decisive policy of engagement with China. Ma has focused on certain areas, such as direct transportation and mail links, to highlight the change in atmosphere and the increase in substantive talks between the two sides.

Since May 2008, the two sides have consummated numerous bilateral agreements. The agreements have been negotiated under the auspices of the Straits Exchange Foundation (SEF) on the Taiwan side and the Association for Relations Across the Taiwan Strait (ARATS) on the Chinese side, and negotiations have ranged from commercial matters to logistics, law enforcement, and tourism. Just in the past week, Taiwan and China have consummated an agreement on banking, which will allow for limited Chinese investments in Taiwan financial institutions and vice-versa

In early 2009, Taiwan’s Petrochemical Industry Association challenged the Ministry of Economic Affairs (MOEA) to explain how the Ma government would address the impending challenge of the ASEAN plus 1 trade agreement with China – implemented on January 1, 2010 – and the zero tariffs that ASEAN petrochemical producers would then enjoy in the China market. This more parochial aspect of the ASEAN plus 1 agreement began to acutely focus minds in Taiwan on the need to address the increasingly irregular nature of Taiwan’s trade relationship with China, Taiwan’s largest trading partner. At the end of February 2009, President Ma announced that Taiwan would seek an ECFA with China that would at first normalize the trade relationship and then liberalize it.

The requirement to normalize Taiwan’s trade relationship stems from legacy trade barriers put in place as far back as 1949 when Chiang Kai-shek’s Nationalists fled the mainland. Chinese goods from within 2244 product categories have long been banned from being imported into Taiwan, and China has placed a priority on having those barriers lifted. As a presidential candidate, President Ma promised that he would not be removing any of the agricultural bans – numbering about 800 of the total list – and that commitment remains in place. Therefore, in the normalization phase of ECFA we can expect that Taiwan will agree to remove the import bans for approximately 1500 categories.

The liberalization phase is initially focused on what Taiwan typically refers to as the “early harvest”. The term refers to the product categories which stand to benefit most from preferential market access, and includes textiles, petrochemicals, auto parts, and machine tools. The Chinese are focused on opening Taiwan up to investment, and want Taipei to consider providing access to property, equities, and other investment instruments. Taiwan is not reflexively opposed to domestic Chinese investment, but it is unlikely that China will receive blanket investment access to Taiwan.

At the 5th round of SEF-ARATS talks, tentatively scheduled for May/June 2010, both sides are focused on the goal of consummating the ECFA. The consummated deal will contain three main components: the framework agreement, the early harvest agreement, and a timetable for the projected negotiation and completion of as yet unaddressed industry sectors. This approach is modeled on the ASEAN plus 1 agreement.

Lastly, Taiwan has recently undertaken several unilateral changes in its investment policies toward China in the semiconductor and Liquid Crystal Display (LCD) flat panel (TVs and monitors) sectors, where China investment guidelines for Taiwan companies had expired way back in December 2005. These recent changes were made under heavy pressure from Taiwan industry, which had been seeing its interests on the mainland marginalized year-on-year, given an inability to directly compete there. The changes also came about in reaction to the investment decisions of Taiwan’s principal technology competitors and partners – the Korean government recently granted several of their largest LCD manufacturers licenses to invest in China. In the semiconductor realm, Intel’s investment in a high-tech 300mm plant in the northern Chinese port of Dalian dropped the technology barrier for investments in China. With the decision to allow Intel to go ahead with the plant, the U.S. government signaled that it no longer had insurmountable security concerns over U.S. investments at that level of technology.

Taiwan’s long-standing reluctance to allow its semiconductor and LCD industries competitive access to China has several root causes. First, it is entirely reasonable to credit Taiwan with looking to U.S. security concerns – and its own, of course – over providing China with access to high-technology research and production capabilities. In addition, Taiwan has concerns over companies potentially moving large chunks of production over to China if the door is opened too wide. This latter point has less credibility, given China’s appalling intellectual property rights record and the unwillingness of Taiwan’s top tech companies to risk their competitive edge. Taiwan Semiconductor Manufacturing Company (TSMC) recently triumphed in a California court against China’s Semiconductor Manufacturing International Corporation (SMIC) for IPR theft. The case cost the Chinese company over US$1 billion, and looks to have ultimately resulted in TSMC owning up to 10% of the business. It is a cautionary tale for all Taiwan businesses intent on doing business in China, as most of them do not have TSMC’s muscle when it comes to fighting such battles.

With the new rules for tech investments, Taiwan’s semiconductor and LCD industries are beginning to further expand their presence in China. But the Taiwan government remains very much in charge of the process, and they have a reactive – not proactive – approach to liberalization.

Overall, Taiwan and China have taken a three-pronged approach to cross-Strait engagements.
1) Incorporating these types of unilateral actions taken by Taipei.
2) Individual accords struck on issues such as tourism and logistics, agreed upon in an ad hoc manner or signed at SEF-ARATS meetings.
3) The ECFA, which will provide a platform for broader economic normalization and then liberalization.

Committee: What is Taiwan’s Position in the World Trade Organization (WTO)?
Hammond-Chambers: Taiwan is a full member of the World Trade Organization (WTO), where it is listed as the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei). Taiwan has been a member of the WTO since 1 January 2002.

On July 15, 2009, Taiwan became the 41st full member of the Agreement on Government Procurement (GPA) under the WTO. The GPA is designed to bring competition to domestic government procurement markets – for signatory countries – through the implementation of laws and regulations that create transparency and a level playing field.

Committee: Assess How the Recently Implemented China-ASEAN Free Trade Agreement Might Affect Taiwan
Hammond-Chambers: Asia is on a course of rapid integration through bilateral and multilateral trade agreements. Initially, many analysts and officials cast aspersions on the viability of these agreements, which were viewed as lacking both substance and ambition. This initial analysis is proving wrong, with the Asian Development Bank, among others, tracking the increasing gains that the agreements are reaping for their signatories. The process is also having the added effect of accelerating China’s emergence as a dominant Asian power, as it is using its economic muscle to draw its Asian neighbors deeper into its embrace.

The United States sits on the outside looking in. In the absence of a comprehensive trade liberalization policy, we have no Asia policy that can compete with the region’s appetite for increased trade flows, foreign direct investment, and the associated rise in prosperity. This outsider’s perspective is shared by Taiwan, although their lack of participation is not self-inflicted.

As discussed above, it was the China-ASEAN FTA accord on petrochemicals that highlighted for Taiwan the requirement to counter the agreement – with the proposed solution being Taiwan’s own market access agreement with China. ECFA now provides a platform for trade normalization, but it will also provide improved access to the Chinese market. There is a possibility – indeed a probability – that Taiwan will gain better access to parts of China’s market than what is offered by the ASEAN accord, with agricultural goods being an excellent example.

Lastly, ASEAN is also a pivotal trading partner for Taiwan. As you will note below, Taiwan has a strong requirement to turn the momentum of the ECFA with China into a Chinese willingness to drop its objections to additional Taiwan FTAs – or whatever its free trade accords end up being called. An ECFA with China can only be the first step in Taiwan’s competitiveness plan. Other components must include significant domestic economic reform, infrastructure investment, and free trade agreements with its other main trading partners – like the United States, Japan, ASEAN, and the EU.

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