葛洛奇

No such thing as a free trade

TAIWAN and China will sign an outline free-trade deal on June 29th that seems likely to herald the biggest change in cross-strait relations in 60 years. The proposed Economic Cooperation Framework Agreement (ECFA), which calls for cuts on 539 categories of Taiwanese exports to China over the next two years with scope for more to follow, is the cornerstone of the China-friendly policies of Taiwan’s president, Ma Ying-jeou. It is also a red rag to the pro-independence opposition, which sees it as part of China’s strategy for unification with Taiwan.

Mr Ma’s main hope is that the pact will start to redress Taiwan’s exclusion from the world’s 272-odd free trade agreements, the product of Chinese pressure. A trade deal between China and the Association of Southeast Asian Nations (ASEAN) took effect in January, and the Taiwanese exports included in the ECFA are from some of the industries most threatened by that deal. Mr Ma also hopes that the ECFA will encourage other countries to sign similar pacts with Taiwan; he has his sights set next on an agreement with ASEAN.

But the opposition certainly has reason to be suspicious. While Taiwanese negotiators did not get everything they asked for—PVC and polyethylene, important Taiwanese exports, were left out after months of wrangling—the terms of the deal still seem remarkably sweet for Taiwan. The 539 categories of Taiwanese exports are worth $13.8 billion, while Taiwan in turn will reduce tariffs for only 267 categories of Chinese exports, worth $2.9 billion. What is more, China has gone beyond its World Trade Organisation (WTO) requirements by dropping tariffs on various Taiwanese agricultural and fishing products, and Chinese negotiators said they would never push Taiwan to return the favour. 

Taiwan also seems to do well out of the services part of the ECFA. Among the Chinese concessions will be to let Taiwanese banks in China start doing business in renminbi within two years of opening their branches, as against three years under the WTO rules that apply to most foreign banks. This is similar to the deal China offered Hong Kong banks under a 2004 trade agreement—perhaps a little too similar for Mr Ma’s political comfort, given that Hong Kong is officially part of China. Finally, the two sides will also sign an agreement on intellectual-property rights, which will help Taiwanese firms, a rich source of patents as well as Mandarin-language entertainment and high-grade varieties of fruit, to battle piracy on the mainland.

China’s largesse is clearly political. It has learned that sabre-rattling, such as it employed in 1996 by launching ballistic missiles over the island, only encourage Taiwanese voters to choose pro-independence politicians. Now it is trying economic sweeteners instead. It hopes that these will prompt voters to choose Mr Ma’s Kuomintang in the 2012 presidential election rather than the independence-leaning Democratic Progressive Party (DPP).

So Mr Ma must now prove that the ECFA will indeed help Taiwan sign free-trade pacts with other countries, or else risk a public backlash. Much here depends on what Taiwan calls itself in these agreements. “Republic of Taiwan” would please the voters but infuriate China; “Taiwan, Province of China” would do the reverse. Mr Ma has talked of a possible compromise: Taiwan’s WTO moniker, “The Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu”. The DPP claims that China will use its clout to block other Taiwanese free-trade deals no matter the nomenclature. When asked about it on June 24th, Zheng Lizhong, who led China’s talks, appeared to duck the question.

Mr Ma must also ensure that the ECFA can deliver the economic goods. He said this week that the island, which suffered greatly in the financial crisis, had 13.3% GDP growth in the first quarter of 2010, its fastest in 32 years. But although unemployment has fallen, his popularity is still slumping. Structural unemployment remains a problem and the gap between the rich and poor is widening. Economic success has not trickled down to many Taiwanese, and for them the ECFA is an abstract idea of frighteningly radical engagement with China.

Mr Ma will have to show more economic progress before the municipal elections due on November 27th. These will set the tone for the 2012 presidential election. And the DPP is ready for a fight.

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