ECFA: A Shot in the Arm for Taiwan's Economy

With the signing of the Economic Cooperation Framework Agreement (ECFA) with mainland China, Taiwan has secured an advantageous position for accessing the huge Chinese market-a position which can rejuvenate the island's economy.

The agreement contains an "early-harvest" list of 539 Taiwanese products--priority items for market opening-that will be able to enter the Chinese market tariff-free starting between 2011 and 2013. A total of US$13.84 billion worth of these products were exported to China in 2009, accounting for 16.1% of all shipments to that market. The list covers agricultural products, petrochemicals, machinery, auto parts, textiles, electronics, light industrial products, metallurgical products, medical equipment, instruments, and gauges.

Exemption from import tariffs is critical for many of these products to avoid the impact of similar preferences that are afforded ASEAN (Association of Southeast Asian Nations) products by the "ASEAN plus one (China)" free trade agreement, which took effect on Jan. 1 this year. The tariff exemption is also essential if Taiwan is to escape the impact of the inclusion of Korea and Japan in the free trade agreement, which is likely to happen in one or two years.

Taiwan-made petrochemical products turn out to be the biggest beneficiary on the early-harvest list, with 88 items, including polypropylene (PP) and polystyrene (PS), having an export value of US$5.944 billion a year, 43% of the total export value of all products on the list.

Machinery is another major beneficiary sector. Despite the initial opposition of the Chinese side, many numerically controlled (NC) machine tools, such as lathes and grinding machines, managed to hit the list at the last moment.

The access to the Chinese market provided by ECFA will do much to revitalize numerous traditional industries in Taiwan, which are made up mainly of small and medium enterprises. The Ministry of Economic Affairs (MOEA) estimates that the early harvest list will directly benefit some 23,000 SMEs with a total employment of 426,000 and exports to China of some US$2.77 billion a year.

Along with ECFA, Taiwan and China will also sign an agreement on intellectual-property protection. This will reinforce the effect of market access by attracting foreign investment to Taiwan for the purpose of tapping the Chinese market.

The early-harvest list will also pry open the Chinese service market to Taiwanese enterprises. China will open its markets to Taiwanese enterprises engaged in 11 types of services, including finance, hospitals, accounting and auditing, conference services, and computer services.

China agrees to give super-WTO (World Trade Organization) treatment to Taiwanese banks, which will be able to upgrade their representative offices in the mainland to branches or wholly owned subsidiary banks one year after their establishment. Two years after their establishment or one year after turning a profit, the branches or subsidiaries will be able to engage in renminbi businesses. In addition, they will be able to extend loans to Taiwanese-invested enterprises in China one year after their establishment, so long as they can turn in a profit that year.

Taiwanese firms will also be given access to the insurance and securities/futures markets in China under easier conditions than now. At present, Taiwanese insurance firms have to set up rep offices in China first and then wait two years before upgrading them to branches, in addition to being required to have over US$5 billion of capital and 30 years of business history.

Taiwanese investors will be able to set up wholly owned hospitals in Hainan, Fujian, Guangdong, and Jiangsu provinces, as well as the city of Shanghai. At present they are allowed to invest in hospitals in China only in the form of joint ventures, with their ownership capped at 70%.