Taiwan Ready to Sign Free Trade Arrangement With China-1

2010/01/13 | By Philip Liu

With improving Cross-Taiwan Strait relationship, Taiwan is likely to sign the Economic Cooperation Framework Agreement (ECFA) with China in 2010, which is generally seen as the way to safeguard its share in the huge Chinese market or its largest overseas market, as well as the way to expand its share of the ASEAN (Association of Southeast Asian Nations) market, also a major export outlet for Taiwan.

Both Taiwan and China have expressed ample interest to sign the agreement, similar to free trade agreement that will further liberalize mutual markets, with more talks expected to start in early 2010. Signing the agreement is expected to lead to positive consequences for economies in Taiwan and China, confirmed by studies undertaken by both sides.

The ECFA is an extensive agreement that aims to make doing business more attractive for entrepreneurs, investors etc. in Taiwan and China, achieved by generally lowering duties, preventing double-taxation, upholding IP, safeguarding investment, and providing dispute-resolution mechanisms.

The framework allows both parties to agree on further market liberalization, mainly via lower duties or exemption, of sectors with higher urgency, which would realize initial or immediate benefits, with other parts of the agreement to be negotiated in phases. The Taiwanese government is proposing some 500 items for the initial negotiations, including petrochemical, machinery, textile, and finance.

Avoid Being Marginalized

The ECFA is also designed to keep Taiwan from being marginalized in the global market, especially with growing numbers of countries having signed bilateral or multi-party free trade agreements, after seeing little progress in the multi-party trade liberalization talks under the World Trade Organization (WTO) or the Doha Talks. As of the end of October 2009, 266 regional trade agreements/free trade agreements have become effective globally, according to the WTO.

Taiwan's Exports to China

Unit: US$1

	2008/01-2008/08	2009/01-2009/08	Rank	Change (%)
Total	50,437,748,495	32,552,407,602	---	-35.460
Chapter 85 electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles	12,899,477,462	9,697,529,859	1	-24.822
Chapter 90 optical, photographic, cinematographic, measuring, checking, precision, medical or surgical instruments and apparatus; parts and accessories thereof	12,787,120,162	6,557,722,827	2	-48.716
Chapter 39 plastics and articles thereof	4,491,684,137	3,572,029,562	3	-20.475
Chapter 29 organic chemicals	5,160,022,789	3,439,132,598	4	-33.350
Chapter 84 nuclear reactors, boilers machinery and mechanical appliances; parts thereof	3,830,066,349	2,302,816,759	5	-39.875
Chapter 72 iron and steel	1,573,397,550	1,267,767,055	6	-19.425
Chapter 74 copper and articles thereof	1,476,465,356	769,832,962	7	-47.860

Taiwan's Exports to

Vietnam

Unit: US$1

Items	2008/01-2008/08	2009/01-2009/08	Rank	Change (%)
Total	5,873,371,005	3,865,973,211	---	-34.178
Chapter 27 mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes	2,041,007,033	880,082,569	1	-56.880
Chapter 72 iron and steel	517,072,000	452,660,727	2	-12.457
Chapter 39 plastics and articles thereof	434,525,735	315,712,494	3	-27.343
Chapter 84 nuclear reactors, boilers machinery and mechanical appliances; parts thereof	476,947,565	267,565,474	4	-43.900
Chapter 54 man-made filaments	289,803,818	243,685,317	5	-15.914
Chapter 29 organic chemicals	258,554,469	202,513,635	6	-21.675
Chapter 60 knitted or crocheted fabrics	192,159,131	153,957,026	7	-19.880
Chapter 59 impregnated, coated, covered or laminated textile fabrics; textile articles of a kind suitable for industrial use	153,942,678	124,420,993	8	-19.177

Source: Bureau of Foreign Trade, the Ministry of Economic Affairs

As with many other international efforts, Taiwan has been asked by its trade partners to have the blessing of China, likely due to business reasons: The U.S., Japan, South Korea, and Southeast Asia will only sign free trade agreements with Taiwan after one has been inked between China and the island.

Signing the ECFA is seen as quite urgent, since China and ASEAN have signed the "ASEAN plus one (China)" that is to be effective on January 1, 2010, which will result in the formation of a free trade zone for China and ASEAN. ASEAN nations will be able to export 90% of their products to China duty-free, putting Taiwan at a major disadvantage especially in petrochemicals, textiles, and machine tools, all of which will still be subject to 6.5% tariff.

The ECFA will significantly benefit Taiwan's petrochemical and machinery industries by further liberalizing mutual markets in Taiwan and China.

Taiwan exports petrochemicals to China with value topping NT$233 billion (about US$7.3 billion) a year, half of its total production value of NT$470.1 billion (US$14.7 billion), including PVC, PE, PP, PTA, PS, and AN, according to the Petrochemical Industry Association of Taiwan.

China buys some 66% of Taiwan's petrochemical exports, and as much as 80% of PTA and phenol.

The ECFA will also help Taiwan's machinery industry recover lost ground in China, which in 2008 made it tougher for Taiwanese operators by canceling preferential taxes as the 9.7% tariff and 17% value-added taxes.

Taiwan's Exports to India

Unit: US$1

Items	2008/01-2008/08	2009/01-2009/08	Rank	Change (%)
Total	2,232,694,864	1,645,894,623	---	-26.282
Chapter 27 mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes	490,436,536	283,162,194	1	-42.263
Chapter 39 plastics and articles thereof	300,093,837	275,963,284	2	-8.041
Chapter 85 electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles	373,980,141	239,243,974	3	-36.028
Chapter 84 nuclear reactors, boilers machinery and mechanical appliances; parts thereof	324,876,683	228,929,241	4	-29.533
Chapter 29 organic chemicals	232,795,208	175,562,744	5	-24.585
Chapter 72 iron and steel	112,695,926	79,107,646	6	-29.804

Source: Bureau of Foreign Trade, the Ministry of Economic

Affairs

Do or Die

Such canceling of preferential taxes effectively sapped Taiwan's exports to China, a major overseas market, in 2008, lowering its market share rankings the first time ever to third place, behind Germany. Exports of Taiwan-made machinery to China plunged 40% year-on-year in the first eight months of 2009, when its overall export declined 35.5%, the result of a combination of the canceling of the favorable taxes, global meltdown, and steep depreciation of the Korean won. S.C. Hsu, chairman of Taiwan Association of Machinery Industry, remarks that it's do or die, for making available again the preferential taxes with the ECFA is critical for Taiwan's machinery makers to survive the harsh market in China.

The ECFA is also ringing bells of better days for Taiwan's car-making sector, one plagued by sagging new car sales amid the global recession, with China for Taiwan-based automakers seen as important as the USA for the likes of Toyota, Honda and Nissan in the 1980s, while Taiwan's auto parts makers can also look forward to tapping China's fast growing auto market, which demands some 10 million cars a year. Insiders believe that the ECFA would also drive global automakers to reinvest in Taiwan, building a production system tapping the merits of locally-available specialized skills, supplies and talents, or what is commonly referred to as "division of labor."

The ECFA can also help Taiwan capitalize on the thriving trade between China and ASEAN, to be spurred by the formation of a huge trade zone among the parties after Jan. 1, 2010. ASEAN is already China's fourth-largest trade partner, with two-way trade topping US$231 billion in 2008, compared with US$100 billion in 2004, mainly made possible by the gradual removal of trade barriers over the years.

Such promising outlook has driven many Taiwanese enterprises to set up operations in Guangxi Province, southeastern China bordering Vietnam, as entry into the ASEAN market. Taiwanese investments in Guangxi has been growing annually at 35% since 2005, with the officially-approved amount topping US$4.6 billion and that actually invested reaching US$2.5 billion, according to official Chinese statistics.

Lite-On Group, a major Taiwanese IT (information technology) maker, for instance, has invested US$30 million in the province for producing optoelectronic products, with sales estimated at US$100 million in 2009, and plans to sink extra US$25 million to expand its capacity. It is taking part in the construction of a pilot base for LED (light-emitting diode) lighting industry and energy conservation/carbon abatement technology in the coastal area of Guangxi.

p>Taiwan's Exports to Brazil

Unit: US$1

Items	2008/01-2008/08	2009/01-2009/08	Rank	Change (%)
Total	1,815,316,452	826,415,997	---	-54.475
Chapter 85 electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles	520,127,963	220,918,840	1	-57.526
Chapter 84 nuclear reactors, boilers machinery and mechanical appliances; parts thereof	259,643,076	123,740,499	2	-52.342
Chapter 27 mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes	474,370,718	122,419,378	3	-74.193
Chapter 39 plastics and articles thereof	143,742,967	118,238,140	4	-17.743
Chapter 54 man-made filaments	73,033,096	53,873,897	5	-26.234
Chapter 72 iron and steel	82,139,924	34,650,804	6	-57.815

Source: Bureau of Foreign Trade, the Ministry of Economic

Affairs

Taiwan's Exports to Mexico

Unit: US$1

Items	2008/01-2008/08	2009/01-2009/08	Rank	Change (%)
Total	1,323,653,508	620,709,977	---	-53.106
Chapter 85 electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts and accessories of such articles	744,687,540	227,285,140	1	-69.479
Chapter 84 nuclear reactors, boilers machinery and mechanical appliances; parts thereof	94,910,457	62,789,978	2	-33.843
Chapter 39 plastics and articles thereof	58,726,660	50,635,589	3	-13.778
Chapter 54 man-made filaments	36,760,518	39,356,449	4	7.062
Chapter 72 iron and steel	44,779,717	38,923,246	5	-13.078
Chapter 87 vehicles other than railway or tramway rolling-stock, and parts and accessories thereof	82,581,498	35,452,334	6	-57.070

Source: Bureau of Foreign Trade, the Ministry of Economic

Affairs

Formosa Epitaxy Inc., under Tatung Group, is joining hands with a Taiwanese construction company to develop an LED industrial park for US$300 million in Nanning City of Guangxi, in cooperation with the city government. The Chinese National Federation of Industries (in Taiwan) has signed an agreement with the municipal government for establishing a petrochemical industrial zone in Qinzhou, Guangxi.