new economic development opportunities for taiwan in the post

______________________________________________________________________

New Economic Development Opportunities for Taiwan

in the Post-ECFA Era

__________________________________________________________________

Da-Nien Liu

Hui-Tzu Shih

April 2012

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AAssiiee..VViissiioonnss 5511

Center for Asian Studies

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D-N Liu & H-T Shih / Taiwan post-ECFA

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Executive Summary

The main aim of this paper is to analyze the new opportunities for Taiwan’s ongoing economic development in the era following the signing of the Economic Cooperation Framework Agreement (ECFA) between Taiwan and China. The paper begins with an analysis of the pattern of “cross-strait” trade between Taiwan and China. This reveals that, although Taiwan’s exports to China have continued to grow over the past few years, the share of China’s total imports from Taiwan has fallen. However, if Taiwan can succeed in leveraging ECFA to develop the Chinese market more effectively, this would reduce the competitive pressure to which Taiwan is exposed, and enable Taiwanese companies to steal a march on their major competitors. The overall impact on Taiwan’s economic development would thus be positive.

The paper then goes on to analyze the benefits that ECFA will bring to Taiwan. This analysis suggests that implementation of full trade liberalization under the ECFA framework would benefit the Taiwanese economy as a whole. Evaluation of the effects on trade of the ECFA Early Harvest List (EHL) items, implementation of which began on January 1, 2011, indicates that there has been significant growth in Taiwanese exports to China in the 539 items included in the EHL. ECFA is thus already starting to bear fruit.

Besides the trade-related effects, this paper also analyzes the transformation in industrial collaboration that ECFA may be expected to stimulate in the future. Currently, both Taiwan and China find themselves at a crossroads, with their respective economies undergoing a process of dramatic transformation. This situation creates scope for cross-strait industrial collaboration. Taiwan and China should endeavor to grasp this opportunity, exploiting cross-strait industrial collaboration as a means of invigorating their economies.

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Contents

INTRODUCTION ................................................................................... 4

MAJOR TRENDS IN THE DEVELOPMENT OF CROSS-STRAIT ECONOMIC AND TRADING LINKS ........................................................................... 6

Overview of Cross-Strait Trade ................................................................. 6 The Competition that Taiwan Faces in the Chinese Market ...................... 9

EVALUATION OF THE IMPACT OF THE ECFA ON TAIWAN ..................... 16 The Overall Economic Impact of ECFA on Taiwan ................................. 16 Current Benefits from ECFA .................................................................... 24

ECFA AND CROSS-STRAIT INDUSTRIAL COLLABORATION .................. 30 Background .............................................................................................. 30 The Outlook for Cross-Strait Industrial Collaboration .............................. 31

CONCLUSIONS .................................................................................. 37

REFERENCES ................................................................................... 39


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Introduction

There is currently a pronounced global trend toward ever more free trade agreements (FTAs), a trend that is particularly marked in the East Asia region (Whalley, 2008). Taiwan’s diplomatic isolation has in the past led to it being excluded from forming FTAs with other countries. To avoid becoming marginalized, Taiwan has continued to work toward the negotiation of FTAs with other countries; however, given that China is Taiwan’s largest export market, the signing of the Economic Cooperation Framework Agreement (ECFA) between Taiwan and China could reasonably be expected to have a positive impact on Taiwan’s ongoing industrial and economic development.

The formal signing of the ECFA agreement took place in June 2010. Fundamentally speaking, ECFA is a framework agreement;1

1 Broadly speaking, FTAs can be achieved in one of two different ways. The first

method is to implement the FTA in a single step; in these cases, the FTA does not formally come into effect until agreement has been reached on all issues. Examples of this type of agreement include the FTAs signed by the US, the European Union and Japan. The second approach is that of gradual, stage-by-stage implementation. Under this model, countries first sign a Framework Agreement that outlines the main content of the FTA, then sign individual agreements on specific issues. Examples of this type are China-ASEAN FTA and Korea-ASEAN FTA.

while implementation of the “Early Harvest” items has already begun, in other areas further negotiations will need to be completed. Six working groups have been established (covering the six key areas of trade in goods, trade in services, investment agreement, dispute settlement, customs cooperation, and industrial cooperation); formal negotiations in these areas began in 2011. The most concrete benefits from the ECFA agreement so far are embodied in the Early Harvest list. While the number of service industries covered by the list is relatively small, with regard to agricultural and industrial products, China has agreed to open up its markets to Taiwan with respect to 539 product items (of which 18 are agricultural). In 2009, China’s total imports of these items from Taiwan came to US$13.84 billion, and they accounted for 16.1% of Taiwan’s total exports to China. The Early Harvest list also includes 267 product items where Taiwan is reducing its import duty rates for imports of these items from China. As of 2009, China’s exports of these items to Taiwan totaled US$2.92

Da-Nien Liu is a Research Fellow in the International Division of the Chung-Hua

Institution for Economic Research. Hui-Tzu Shih is a Research Fellow in the Mainland China Division of the Chung-Hua Institution for Economic Research.


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billion, and they accounted for 10.8% of China’s total exports to Taiwan. It can be seen from these figures that, on the whole, the Early Harvest list has been more beneficial to Taiwan than to China.

Beyond noting this initial impact, the objective of this paper is to examine the new opportunities for Taiwan’s ongoing economic development in the wake of the ECFA.

The first section of the paper analyzes recent trends in the development of “cross-strait” (that is, across the Taiwan Strait between mainland China and Taiwan) economic and trading links. These trends make clear just how important China has become as an export market for Taiwan. This section also analyzes Taiwan’s main competitor nations in the China market, and the tariff barriers that Taiwanese exports face in China, with the aim of gaining a clearer understanding of the competitive pressures on Taiwanese exports to the China market.

The second section of the paper uses quantitative modeling techniques to analyze the impact on Taiwan of its being prevented from participating fully in the process of East Asian regional economic integration. This section also includes a preliminary appraisal of the benefits to Taiwan of the ECFA Early Harvest list, and of the importance of ECFA to Taiwan from a global and regional economic integration perspective.

The third section analyzes how Taiwan can leverage ECFA to promote cross-strait industrial collaboration. The fourth section presents the paper’s conclusions.

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Major Trends in the Development of Cross-Strait Economic and Trading Links

Overview of Cross-Strait Trade

Before analyzing cross-strait trade, it is useful to have an understanding of the trade structure of Taiwan. As Table 1-1 illustrates, China is the largest export market for Taiwan, accounting for 40.87% of Taiwan’s total exports. ASEAN ranks second, with a share of 15.42% in 2010. These two markets account for close to 60% of total exports from Taiwan. Japan is the largest import source, with 20.70% of Taiwan’s total imports, followed by China (14.89%), ASEAN (11.50%), United States (10.09%) and EU (8.49%). Therefore, from the perspective of trade destination, Taiwan imports are more diversified than its exports.

Furthermore, there has been steady growth in the volume of cross-strait trade between Taiwan and China; the increase in Taiwanese exports to China is particularly marked. As shown in Table 1-2, since 2000, the average annual growth rate in Taiwanese exports to China has been 38.8% (if exports to Hong Kong are included, the growth rate is somewhat lower, at 13%). The total value of Taiwanese exports to China in 2010 was US$72.6 billion, representing 27.7% of Taiwan’s total exports; if Hong Kong is included, the total was US$10.71 billion, accounting for 40.9% of Taiwan’s total exports.

As regards Taiwan’s imports from China, because Taiwan continues to restrict imports of some categories of Chinese goods, the rate of growth has been relatively slow.2

As Taiwan’s exports to China far exceed Taiwan’s imports from China, Taiwan runs a large trade surplus with respect to China. In 2010, Taiwan posted a trade surplus of US$36.7 billion (US$69.6

In 2010, China accounted for only 14.3% of Taiwan’s imports (14.9% if imports from Hong Kong are included).

2 For reasons of economic protection and national security, Taiwan has prohibited the

import of a variety of products from China. Currently Taiwan prohibits over 2,000 products.


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billion if Hong Kong is included). This figure was 6.8 times the size of Taiwan’s overall trade surplus. It can thus be seen that, not only are trading relations between Taiwan and China extremely close, but China makes a very strong contribution to Taiwan’s exports and its trade surplus. The strengthening of cross-strait trading links brought about by the signing of the ECFA agreement should thus have a pronounced positive impact on Taiwan’s export performance and overall economic development.

Table 1-1 Structure of Exports and Imports by Destination (2010): Taiwan

Exports Imports

Value ($ bn) Share (%) Value

($ bn) Share (%)

China 1,070.89 40.87 Japan 521.15 20.70

ASEAN 403.95 15.42 China 375.04 14.89

United States 303.66 11.59 ASEAN 289.52 11.50

EU 268.23 10.24 United States 254.09 10.09

Japan 169.58 6.47 EU 213.67 8.49

Others 403.87 15.41 Others 864.47 34.33

Total 2,620.17 100.00 Total 2,517.94 100.00

Source: Taiwan customs data

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Table 1-2 “Cross-strait” Import-Export Trade between Taiwan and China

Units: US$ millions; Percentage

Year Taiwan’s

Total Exports

Taiwan's Exports to China

Taiwan’s Total

Imports

Taiwan’s Imports from China

Taiwan’s Overall Trade

Surplus

Taiwan’s Trade Surplus with Respect

to China

Value Value (incl. Hong Kong)

Share of

Total

Share of Total (incl.

Hong Kong)


Share of Total

Share of Total (incl. Hong Kong)


2000 147,583 4,195 35,379 2.84 23.97 139,769 6,212 8,395 4.44 6.01 7,814 -2,017 26,984

2001 122,409 4,727 31,585 3.86 25.80 107,160 5,897 7,745 5.50 7.23 15,249 -1,170 23,840

2002 130,554 9,945 40,781 7.62 31.24 112,814 7,967 9,710 7.06 8.61 17,740 1,977 31,071

2003 144,058 21,399 49,730 14.85 34.52 127,506 10,983 12,712 8.61 9.97 16,552 10,416 37,019

2004 174,350 34,082 63,961 19.55 36.69 168,715 16,762 18,866 9.93 11.18 5,635 17,320 45,095

2005 188,963 40,783 71,431 21.58 37.80 181,743 19,945 21,833 10.97 12.01 7,220 20,838 49,597

2006 213,004 48,315 81,858 22.68 38.43 202,038 24,567 26,229 12.16 12.98 10,966 23,748 55,629

2007 234,710 58,430 92,618 24.89 39.46 218,648 27,854 29,485 12.74 13.49 16,062 30,577 63,133

2008 243,233 62,998 92,622 25.90 38.08 239,666 31,177 32,526 13.01 13.57 3,567 31,821 60,096

2009 193,815 50,919 77,716 26.27 40.10 174,071 24,347 25,393 13.99 14.59 19,744 26,572 52,323

2010 262,017 72,642 107,089 27.72 40.87 251,794 35,947 37,504 14.28 14.89 10,223 36,695 69,585

Source: Taiwan customs data

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The Competition that Taiwan Faces in the Chinese Market

As can be seen from the data presented in Table 1-2, the Chinese market is extremely important for Taiwan. In particular, following the establishment of the ASEAN-China Free Trade Area in 2003,3

Table 1-3 shows China’s main sources of imports. As can be seen, Taiwan is China’s third largest source of imports, behind Japan and South Korea (and also behind ASEAN, if the figures for the individual ASEAN nations are combined). Overall, Taiwanese products do not appear to be particularly competitive in the Chinese market. The share of China’s total imports accounted for by imports from Taiwan has actually fallen, from around 10–11% in the period prior to 2007, to 8.3% in 2010. This decline is partly attributable to the rise in international oil prices, which has caused the price of imports falling under the HS26 and HS27

Taiwanese products have to face more intense competition from ASEAN products in China. If, in the future, a larger free trade zone takes shape that integrates ASEAN, China, Japan and South Korea, Taiwanese products will face more serious competition from Japanese and South Korean goods in the Chinese market. The following section analyzes the tariff barriers and competitive threats that Taiwanese products face in China, with the aim of demonstrating just how important ECFA is to Taiwan.

4

By contrast, there has been relatively little change in the competitiveness of ASEAN products in the Chinese market. If products falling under the HS26 and HS27 tariff code chapters are left out of the calculations, then ASEAN’s share of China’s total imports has fallen only very slightly, from 12.1% in 2007 to 11.7% in 2010. This suggests that the ASEAN-China Free Trade Area agreement has already had a negative impact on Taiwan. One can easily imagine the impact that the formation in the future of an “ASEAN Plus Three” free trade grouping would have on Taiwan’s exports to China,

tariff code chapters to increase; as Taiwan does not enjoy any significant export advantage with respect to these products, its share of China’s total imports has fallen. However, even if we allow for this by eliminating the HS26 and HS27 tariff code products from the calculations (see Table 1-4), there is still a decline of 2.04 percentage points in Taiwan’s share of China’s total imports. Clearly, the competitiveness of Taiwanese products in the Chinese market is being eroded.

3 The tariff liberalization of ASEAN-China FTA started in 2003 and completed in

2010. 4 HS26 refers to Chapter 26 of Harmonized Commodity Description and Coding

System (HS). The main products are various ores. The major products of HS27 are mineral fuels, mineral oils and related products.


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given the higher tariff barriers that Taiwanese products would face (Gu, 2008).

A listing of the 10 two-digit HS code categories that account for the largest shares of Taiwan’s exports to China is presented in Table 1-5. It can readily be seen that Taiwanese products face a challenging situation in the Chinese market. Of the 10 product categories, HS54 (manmade filaments) is the only category in which Taiwan holds a higher share of the Chinese market than ASEAN, Japan or South Korea, and even here the competitive threat from Japan and South Korea should not be underestimated; if, in the future, these two countries are able to benefit from preferential tariff rates in this product category (China’s average MFN tariff rate for the HS54 category is 6.9%), they could pose a severe danger to Taiwanese manufacturers.

In the other nine product categories, Taiwan’s share of the Chinese market is lower than the shares held by ASEAN, Japan and South Korea, demonstrating that, although these products are major Taiwanese export items, Taiwan does not enjoy an absolute advantage with respect to these products in the Chinese market. The relative competitiveness of Taiwanese exports to China in these product categories in the event of an “ASEAN Plus Three” grouping taking shape would be even lower.

To develop a more detailed picture of the competitive pressure that Taiwanese export products face in the Chinese market, we can break down the 10 largest Taiwanese export items into six-digit HS codes, as shown in Table 1-6. As can be seen, of the 10 product items, there are six product items where China’s MFN tariff rate is zero, so that FTAs have no impact. Five of these items fall under the HS85 tariff code chapter (electromechanical products), and one falls under the HS84 chapter (electronic products). In the case of the remaining four product items, Taiwan faces a severe competitive threat from Japan and South Korea.

In the case of LCD panels, which is Taiwan’s second largest export to China, Taiwan’s share of the Chinese market is approximately six percentage points lower than South Korea’s. In terephthalic acid, Taiwan’s seventh largest export product, Taiwan’s share of the Chinese market is eight percentage points lower than South Korea’s. In the case of acrylonitrile butadiene styrene (ABS) copolymers, Taiwan’s market share in China is far higher than Japan’s, and 13 percentage points higher than South Korea’s, so there is no immediate cause for concern here. Taiwan is more competitive than South Korea in LCD devices, but Japan is only five percentage points behind Taiwan. For all of these products, the average tariff rate in China is 6.5% or higher, so if, in the future, Japanese and South Korean manufacturers can benefit from preferential tariff rates when exporting to China, this would constitute a serious threat to Taiwan’s exports. This was one of the main


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reasons why it was so important for Taiwan to sign the ECFA agreement with China as soon as possible.

China’s relatively high tariffs and huge domestic market have made negotiating an FTA with China a priority for many countries (Antkiewicz & Whalley, 2004). If Taiwan can complete the ECFA follow-up negotiations with China relating to trade in goods, trade in services, investment agreements, etc. as soon as possible, then not only will this help to offset the competitive threat from Southeast Asian goods in the Chinese market, but Taiwan will benefit from preferential tariffs in the Chinese market at an earlier point in time than either Japan or South Korea. This would enhance the competitiveness of Taiwanese exports to the Chinese market, and benefit both Taiwanese industry and the Taiwanese economy as a whole.

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Table 1-3 China’s Main Sources of Imports


Notes:

1. Indicates sales from bonded zones in China (mainly export-processing zones) to Chinese domestic market. 2. “ASEAN 5” includes Thailand, Malaysia, the Philippines, Indonesia and Singapore. 3. “ASEAN10” includes Thailand, Malaysia, the Philippines, Indonesia, Singapore, Brunei, Vietnam, Myanmar, Laos, and Cambodia.

Source: World Trade Atlas (WTA) database

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Table 1-4 China’s Main Sources of Imports (excluding products falling under Tariff Code Chapters HS26 and HS27)

Sources: US$ millions; Percentage

Notes: “ASEAN 5” includes Thailand, Malaysia, the Philippines, Indonesia and Singapore. “ASEAN10” includes Thailand, Malaysia, the Philippines, Indonesia, Singapore, Brunei, Vietnam, Myanmar, Laos, and Cambodia.

Source: World Trade Atlas (WTA) database, and Chinese customs data

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Table 1-5 Competitiveness of Taiwanese Products in the Chinese Market in 2010 (using two-digit HS codes)

Units: US$ millions; %


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Table 1-6 Competitiveness of Taiwanese Products in the Chinese Market in 2010 (using six-digit HS codes)



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Evaluation of the Impact of the ECFA on Taiwan

China is Taiwan’s largest export market, and its second largest source of imports. It accounts for the largest share of Taiwan’s trade surplus, and the largest share of Taiwan’s overseas investment. As the Chinese economy has grown, China has gradually been transformed from “factory of the world” into one of the world’s most important markets. The Economic Collaboration Framework Agreement (ECFA) that Taiwan signed with China in June 2010 thus represents a major step forward in terms of giving Taiwan the opportunity to participate more fully in the process of regional economic integration. So what economic benefits is ECFA creating for Taiwan? What will be the impact on Taiwan of the “Early Harvest Program” of ECFA,5

The Overall Economic Impact of the ECFA on Taiwan

implementation of which began on January 1, 2011? These are the questions that will be addressed in this section of the paper.

The Global Trade Analysis Project (GTAP) model is a multi-nation quantitative analysis tool that is widely used when seeking to evaluate the economic benefits of free trade agreements (FTAs) (Hertel, 1997). The version of the GTAP database used in this study is Version 7, which was released toward the end of 2008. In terms of sectoral analysis, this study undertakes evaluation using the original 57 sectors defined by GTAP. As regards the countries and regions examined, the study focuses on those countries and regions that are of particular significance with regard to the ECFA agreement between Taiwan and China (Table 2-1).

Every model has its limitations. To ensure that modeling using GTAP is as realistic as possible, before modeling commences it is usually necessary to perform data validation. In this study, base period adjustment is implemented with respect to those Asian region FTAs that have already been signed and put into effect; adjustments

5 The Early Harvest Program refers to reduction in tariffs on some products prior to

entering into a full-fledged free trade agreement.


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are also made to allow for the tariff reductions to which Taiwan and China committed themselves when they acceded to the WTO, and for the additional tariff reductions resulting from the liberalization and normalization of cross-strait trade between Taiwan and China. The study then goes on to implement modeling, using a model that assumes full normalization and liberalization of trade between Taiwan and China, so as to analyze the impact of ECFA on Taiwanese industry and the Taiwanese economy as a whole.

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Table 2-1 Industry Sectors and Country/Region Classification (GTAP Version 7)

Source: GTAP 7 Database documentation

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The Impact on Real GDP As can be seen from the modeling results presented in Table 2-2, the normalization and liberalization of cross-strait trade between Taiwan and China would benefit Taiwan’s real GDP, import volume, trade surplus, terms of trade, and social wellbeing. The dynamic effects of capital accumulation are generally greater than the static effects; this is because, in the static model, factor endowments in individual regions are fixed, whereas the dynamic model allows for the possibility of new investment that increases the amount of capital available to manufacturers, a scenario that bears a closer resemblance to reality. Using dynamic modeling that allows for the inflow of new capital, Taiwan’s real GDP will grow 1.83% after trade normalization.

The Impact on Total Imports and Total Exports The impact of the normalization and liberalization of cross-strait economic and trading links on Taiwan’s foreign trade is shown in Table 2-2. As can be seen, Taiwan’s exports would grow by 5.13%, while imports would increase by 7.26%. In fact the FTAs that Taiwan has signed in the past were all signed with countries with which Taiwan does very little trade6

The Impact on Terms of Trade

(less than 0.1% of Taiwan’s total foreign trade, in all cases), so the economic benefits were insignificant. It is not surprising that, given the close cross-strait trade relationship, the liberalization will increase bilateral trade substantially.

As regards the impact on terms of trade, given that China currently imposes far higher tariffs than Taiwan on most product categories, the negative impact of tariff adjustment on China’s terms of trade will be much greater than the negative impact on Taiwan’s terms of trade. Adding to this the fact that China is more dependent on Taiwanese imports than vice versa, it can be seen that, overall, as a result of bilateral trade liberalization, Taiwan’s terms of trade will improve, while China’s will worsen.

6 Before ECFA Taiwan signed FTAs with Panama, Guatemala, Nicaragua, Honduras

and EI Salvador.

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Table 2-2 The Macroeconomic Impact on Taiwan of Cross-Strait Trade Liberalization

Static Dynamic

Economic and trade normalization

Trade normalization Trade normalization

Lifting of restrictions on trade in

industrial and agricultural goods

Lifting of restrictions on trade in


Trade liberalization Elimination of all tariffs on


Elimination of all tariffs on


Change in GDP (%) 0.353 1.830

Change in total exports (%) 3.576 5.128

Change in total imports (%) 6.149 7.256

Change in terms of trade (%) 1.595 1.375

Change in social wellbeing

(US$ millions) 4,403.6 7,947.9

Change in trade surplus

(US$ millions) 713.7 1,677.3

Source: GTAP 7 database, and the current study

The Impact on Social Wellbeing The rise in real GDP and the improvement in Taiwan’s terms of trade following bilateral trade liberalization would lead to an enhancement of social wellbeing7

7 The social wellbeing effect as used in the GTAP model employs the equivalent

variation concept to measure change in the level of wellbeing. In the model used in this study, the following factors are considered to effect changes in social wellbeing: (1) the allocation effect; (2) the terms of trade effect; (3) the investment-saving effect. Allocation effect refers to the efficient industry-wise allocation of scarce resources to produce the optimal combination of outputs. The terms of trade (ToT) effect refers to the relative movement in prices of countries’ exports and imports. The ToT effect increases with a relative increase in the price of exports as compared to that of imports. ToT changes occur as producers and consumers adjust their purchasing and sale patterns in response to a policy change. Finally, the investment-savings effect refers to impacts of changes in the price of investment (capital goods) and savings.

in Taiwan. Using static modeling, its social wellbeing would increase by US$4,404 million; with dynamic modeling, its social wellbeing would rise by US$7,948 million.


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The Impact on the Trade Surplus Following the liberalization of cross-strait trade, Taiwan’s trade surplus can be expected to rise. With static modeling, the trade surplus will grow by US$714 million; with dynamic modeling, the increase rises to US$1,677 million. The reason for this increase is that the liberalization of cross-strait trade improves Taiwan’s terms of trade.

The Impact on the Production and Export Structure of Taiwanese Industry Modeling of the changes to the production and export structure of Taiwanese industry shows that, regardless of whether static or dynamic modeling is used, the changes will be less pronounced in the agricultural sector than in the manufacturing sector; this is mainly due to the fact that the volume of trade between Taiwan and China in agricultural products (and processed agricultural products) is not particularly high.

In the manufacturing sector, the liberalization of cross-strait trade will benefit the production and exports of Taiwan’s chemical, rubber and plastic products industry, machinery and equipment (not elsewhere classified - NEC) industry, textile industry, and ferrous metals industry. The chemical, rubber and plastics industry and textile industry – which have suffered most from the ASEAN-China FTA – will see the largest rise in output (Table 2-3).

Why will Taiwan’s machinery, plastics, textile and ferrous metals industries see such a pronounced rise in their output and exports following the liberalization of cross-strait trade? This is because these industries are already characterized by a high level of export competitiveness, and China is their main export market, accounting for 47.71% of the total exports of the Taiwanese chemical, rubber and plastics industry, 49.42% of the total exports of the machinery industry, 48.06% of the total exports of the ferrous metals industry, and 33.51% of the total exports of the textile industry. In addition, these are all industries where China had previously been imposing higher tariff rates than Taiwan, so the liberalization of cross-strait trade will boost demand for their products in China, thereby contributing to higher output.

Although the overall output and exports of Taiwanese industry as a whole will rise, trade liberalization will have a negative impact on some less competitive industries. Modeling results indicate that the electronic equipment, transportation equipment (NEC), wood products, and manufactures (NEC) industries will experience the largest decline in output and exports. The appearance of the electronic equipment industry in this group may seem surprising. The main reason for this is that the model assumes full employment and fixed-factor endowments, and that, while the electronic equipment industry is one of Taiwan’s more competitive industries in terms of


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export performance, tariff rates for electronic equipment products are already low in both China and Taiwan (0.58% in China, compared to 0.71% in Taiwan). The benefits of cross-strait trade liberalization to Taiwan’s electronic equipment industry will thus be limited. Added to this is the fact that increased demand in China for the products of Taiwan’s chemical, rubber and plastic products, machinery and equipment (NEC), textile, and ferrous metals industries will cause production resources to flow toward these industries, at the expense of the electronic equipment industry. However, with dynamic modeling, allowing for capital accumulation trends, it can be assumed that the electronic equipment industry should still have significant amounts of spare capital available, so the negative impact on output will actually be less than the static model suggests.

The main reason why the Taiwanese wood products, transportation equipment (NEC) and manufactures (NEC) industries will experience a contraction in output and exports following the liberalization of cross-strait trade is that these are industries where Taiwan lacks competitiveness compared to China, and where the resources available were limited to begin with. The ECFA agreement offers little in the way of direct benefits to these industries, and will cause resources to flow toward other industries where higher profits can be made. As a result, while these industries will see an increase in exports to China, shortage of resources and inability to compete effectively against their Chinese rivals will result in a situation where higher exports to China come at the expense of exports to other countries, leading to a fall in overall production and exports.

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Table 2-3 The Impact of Cross-Strait Trade Liberalization on the Production Value and Exports of Taiwanese Industry

Impact on the Production Value of Taiwanese Industry

Impact on the Exports of Taiwanese Industry

Static modeling Dynamic modeling Static modeling Dynamic modeling

Trade normalization Trade normalization Trade normalization Trade normalization

Trade liberalization leading to reduction of tariffs on all industrial and agricultural goods




Total

Change in production volume

Change in production

volume



Change in exports

Change in exports

Change in exports

Change in exports

1.911 14,571.50 2.9 29,598.6 3.659 8,783.40 5.227 11,389.3

Industries that will benefit

Chemical, rubber and plastic products

13.14 8,655.10 14.75 8,822.80 21.36 6,547.90 22.84 6,362.80

Machinery and equipment (NEC)

12.97 8,528.90 14.28 8,539.50 18.03 8,443.30 19.271 8,214.80

Textiles 14.58 2,834.90 16.11 2,845.40 18.46 2,392.80 19.98 2,355.60

Ferrous metals 6.23 1,805.50 7.98 2,098.80 10.08 724.70 11.85 776.10

Industries that will suffer

Electronic equipment -9.3 -10,838.9 -7.197 -7,577.6 -9.95 -8,938.6 -7.886 -6,402.0

Transport equipment (NEC)

-4.296 -298.8 -3.436 -217.5 -5.71 -206.5 -5.037 -165.9

Wood products -4.454 -133.8 -3.783 -103.3 -6.193 -129.3 -5.706 -108.5

Manufactures (NEC) -1.821 -98.6 -0.777 -38.3 -1.53 -53.5 -0.67 -21.3

Source: GTAP 7 database, and the current study

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Current Benefits from ECFA

Trade benefits from the Early Harvest list ECFA is a framework agreement; the only items on which tariffs have been reduced so far are those included in the Early Harvest list. Observation of the export performance of the products included in this list will therefore be needed before any conclusions can be reached regarding the trade effects of the ECFA agreement. As shown in Table 2-4, implementation of tariff reductions with respect to the Early Harvest items began on January 1, 2011. Over the first four months of 2011, Taiwan’s total exports to China came to US$40,492 million, representing a growth rate of 13.3%. However, exports of the Early Harvest items totaled US$6,800 million, representing a growth rate of 19.1%, which suggests that the tariff reductions implemented under the ECFA Early Harvest provisions have already started to produce results.

Between 2007 and April 2010, Taiwan’s total exports to China grew by 7.1%, far higher than the growth rate for the Early Harvest items, which was just 2.0%. Given these figures, the fact that the export growth rate for the Early Harvest items in the first quarter of 2011 was higher than the overall export growth rate is even clearer evidence that the Early Harvest provisions have had major benefits in terms of Taiwan’s export performance.

If we divide the 539 products items on the Early Harvest list into seven categories – (1) Petrochemical products; (2) Machinery and components thereof; (3) Textiles; (4) Transportation equipment; (5) Agricultural products; (6) 50 products that are mainly produced by small and medium-size enterprises (SMEs); (7) Other products – we can see that, during the period January–April 2011, each of these product categories posted a higher export growth rate than during the same period in 2007, 2008, 2009 or 2010. The Early Harvest tariff reductions have thus had a beneficial effect on exports of all of these product categories.

In point of fact, the petrochemical products category was the only one of the seven product categories that posted positive average export growth (with a growth rate of 14.7%) during the period January–April in the years 2007, 2008, 2009 and 2010; for all of the other product categories, the export growth rate was negative. The Early Harvest tariff reductions have thus helped to mitigate the impact of other FTAs, helping Taiwanese companies to boost their market share in the Chinese market.

Table 2-4 shows the growth rates for the individual Early Harvest product categories. As can be seen, the machinery category posted the best export performance; its average export growth rate during the period from 2007 to April 2010 was –9.1%, but this rose to an impressive 68.4% in the first four months of 2011. The agricultural


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products category was in second place, with an export growth rate of 40.07% in the first four months of 2011, compared to an average growth rate of –1.01% for 2007 to April 2010. The export performance of the transportation equipment category was also quite respectable, with an export growth rate of 25.9% in January–April 2011, compared to an average growth rate of –12.3% for 2007 to April 2010. The same was true for the textile product category, with an export growth rate of 16.2% in the first four months of 2011, compared to an average growth rate of –4.5% for 2007 to April 2010.

The “50 SME products” category also posted respectable export growth. These are all products in which Taiwan lacks competitive advantage; nevertheless, with the new preferential tariff rates granted by China, exports in this category rose by 15.3% in the first four months of 2011, compared to an average growth rate of –8.4% for 2007 to April 2010.

Table 2-4 Export Performance of Taiwanese Early Harvest Product Categories in the Chinese Market, January–April 2011


China’s Imports

from Taiwan

As Share of Total Trade

Volume (EHP

Share)

Market Share Jan–April 2011

Growth Rate Jan–April 2011

Average Growth

Rate 2007–2010

Early Harvest items import value 6,800.09 16.79% 12.14% 19.14% 1.98%

Total imports 40,492.63 100.00% 7.43% 13.31% 7.11%

Petrochemical products 3,085.64 7.62% 16.59% 17.57% 14.74%

Machinery and components thereof 893.03 2.21% 7.25% 68.41% -9.08%

Textiles 606.78 1.50% 18.54% 16.24% -4.50%

Transportation vehicles 77.83 0.19% 2.23% 25.93% -12.30%

Agricultural products 4.95 0.01% 0.64% 40.07% -1.01%

Other products 2,131.85 5.26% 12.14% 8.46% -4.33%

50 “SME products” 26.69 0.07% 5.09% 15.26% -8.36%

Source: World Trade Analyzer, and Chinese customs data

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Investment benefits Since the signing of the ECFA agreement, foreign companies (particularly Japanese) have begun to demonstrate significantly more enthusiasm for investing in Taiwan. For example, leading Japanese optical film manufacturer Toray announced that it would be establishing a new factory in Taiwan in May 2011; Furukawa Electric signed an MoU on investment in Taiwan with Taiwan’s Ministry of Economic Affairs (MoEA) in early October 2011; other leading Japanese companies such as Sony, Mitsubishi, TDK and NEC are also discussing new investment projects in Taiwan. According to statistics compiled by Taiwan’s Investment Commission, the total amount of approved inward investment by Japanese companies in August 2011 was nearly US$100 million.8 This was the highest single-month total for Japan for some years, and higher than the monthly total of approved investment from either the U.S. or Europe. In addition, U.S. firm Super Micro (the world’s fourth largest server manufacturer) has confirmed that it will be establishing a technology campus and operations center in Taiwan, providing further evidence that ECFA has boosted foreign companies’ enthusiasm for investing in Taiwan. In point of fact, it is not only foreign companies that are being attracted to invest in Taiwan by the benefits that ECFA has brought and by Taiwan’s first-class investment environment; there has also been a steady increase in investment in Taiwan by Taiwanese businesspeople who had previously been operating overseas. As of the end of 2011, this type of “return investment” by Taiwanese businesspeople had risen to NT$46.9 billion.9

Other benefits that ECFA may bring for Taiwan

“Building global linkages and participating in global economic integration” is the core element in the Taiwanese government’s foreign trade policy, and the signing of the ECFA agreement with China constitutes the most important aspect of this policy. So just what benefits does ECFA offer for Taiwan? Five key points need to be considered:

Providing a way round the deadlock in the WTO trade negotiations

When Taiwan joined the World Trade Organization (WTO) in 2002, it was originally anticipated that, besides helping to create a level playing field for economic competition with other countries, WTO membership would also bring benefits in terms of multilateral market opening, thereby helping Taiwan to strengthen its export performance. Unfortunately, the WTO trade negotiations have stalled,

8 Compiled from Monthly Report of Investment Commission, Ministry of Economic Affairs, Taiwan. 9 Press Report Jan 2012, Department of Investment Services, Ministry of Economic Affairs, Taiwan.


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with the Doha Round of talks having effectively ground to a halt, and overall Taiwan has seen little economic benefit from WTO membership. Given that there is no real prospect of a breakthrough in the near future, Taiwan has little choice but to explore opportunities for bilateral FTAs.

Preventing Taiwan from becoming marginalized The deadlock in the WTO trade negotiations has led to a situation where more attention is being paid to regional economic integration. Countries around the world are exploring possibilities for the formation of regional free trade zones, involving tariff reduction and market opening. The most impressive achievements in this regard over the past few years have been seen in Asia. Besides a steady broadening and deepening of the extent of integration within ASEAN, China, Japan, South Korea, India, and the individual ASEAN member states have been working actively to promote regional economic integration.10

The main benefit deriving from regional trade agreements is the trade creation effect (Viner, 1950). This means that, when deciding which countries to negotiate a regional FTA with, priority must be given to one’s main export markets. Currently, there is still no academic consensus (based on the empirical research carried out in this area) as to whether the trade creation or trade diversion effect is the most significant aspect of regional FTAs (Lee, Park & Shin, 2008). Nor is there consensus as to whether the relationship between regionalism and multilateralism is mutually complementary or mutually exclusive. However, given that other countries around the world are already focusing on regional integration, and that Taiwan has been excluded from this process, while at the same time the multilateral trade negotiations within the WTO framework have stalled, it is clear that Taiwan cannot expect to simultaneously enjoy the benefits of both multilateral and regional integration, but must instead give priority to regional integration, even if this means accepting the negative aspects of regionalism. There is thus a clear, objective need for Taiwan to participate actively in the process of regional economic integration. Given the objective realities with which Taiwan is faced, it naturally needs to give priority to bringing about economic integration with China, which constitutes both Taiwan’s main export market and the main source of its trade surplus. The preferential tariff rates and access to service sector markets that ECFA will provide will help to boost Taiwan’s exports to China and enhance the competitiveness of Taiwanese industry. ECFA will also contribute to the regularization of cross-strait trade between Taiwan

This increasingly rapid process of integration within Asia is strengthening the economic linkages between countries; Taiwan’s exclusion from the process constitutes a serious danger for Taiwan (Liu, 2008).

10 For example, from 2001 to 2010, China, Japan and Korea signed 9, 10 and 6 FTAs

respectively.


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and China, by helping to eliminate the non-tariff barriers that Taiwanese goods face in the Chinese market, This will further strengthen the competitiveness of Taiwan’s industries and contribute to overall social wellbeing.

Helping to give Taiwan more freedom of action in the economic sphere

In the past, when relations between Taiwan and China were more strained, many countries were reluctant to consider signing an FTA with Taiwan because they were concerned about China’s reaction. China is Taiwan’s largest export market; not only will the signing of the ECFA agreement help Taiwan to expand its foreign trade, it will also make other countries more willing to consider negotiating FTAs with Taiwan.

In fact, over the past few years Taiwan has been working actively to participate more fully in the process of regional economic integration, and seeking (through a variety of channels) to negotiate FTAs with its major trading partners. However, because of Taiwan’s diplomatic isolation and other countries’ unwillingness to offend China at a time when relations between Taiwan and China were still tense, only limited results were achieved. Some countries made it quite plain that they would not even consider negotiating an FTA with Taiwan until there was an improvement in relations between Taiwan and China. It can therefore be anticipated that the signing of the ECFA agreement will facilitate Taiwan’s participation in the wider process of regional integration.

Developing the Chinese domestic market Given the likelihood that the Chinese economy will continue to grow strongly, Taiwan will need to try to take advantage of the opportunities presented by China’s transformation from “factory to the world” into “market to the world.” ECFA is the chief means by which Taiwan can achieve this goal. Besides tariff reductions, other matters – such as investment-related issues, trade facilitation, intellectual property rights, industrial exchange and technical collaboration – can also be brought within the scope of the ECFA negotiations. ECFA can help to strengthen cross-strait industrial collaboration, stimulate technology exchange, and contribute to the formation of strategic alliances, while also enabling Taiwanese business enterprises to enjoy a higher level of protection when operating in China. Taiwanese firms can thus leverage ECFA to develop the Chinese market. If Taiwan can complete the ECFA negotiations before its main competitor nations sign FTAs with China, it should be able to benefit from a significant trade substitution effect.

Building Taiwan into a major Asia-Pacific operations and logistics hub

In the past, the Taiwanese government has always sought to leverage Taiwan’s advantageous geographical location and strong industrial foundations, so as to build Taiwan into an important Asia-Pacific (or even global) operations and logistics hub; however,


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success in this endeavor has been elusive. One major factor has been the restrictions on economic and trading links between Taiwan and China, and the strained relations between the two countries. Since the administration of President Ma Ying-jeou took office in Taiwan, relations have improved, and the restrictions on cross-strait economic and trading activity have been greatly relaxed. This should help to create new opportunities for Taiwan within the Asia-Pacific region.

However, while the normalization of cross-strait economic and trading links is already contributing to the development of cross-strait trade, further liberalization is needed to enhance Taiwan’s competitiveness within the region, so that both Taiwanese companies and multinational corporations can come to view Taiwan as an ideal location for “moving into China and developing global markets.” The signing of the ECFA agreement with China is a key factor in this regard. Besides the market opening aspect of ECFA, putting cross-strait trade and investment on a more systematic and transparent footing will make the flow of goods, people and capital between Taiwan and China smoother and more convenient. ECFA will thus make a significant contribution toward building Taiwan into an Asia-Pacific operations and logistics hub.

In the last few years, Taiwan’s exports to China have grown faster than exports to any other country. Besides the increase in the absolute value of exports to China, China’s share of Taiwan’s total exports has also grown steadily, as has Taiwan’s trade surplus with respect to China. The contribution that the Chinese market makes to Taiwan’s economy should not be underestimated. In future, the ECFA agreement could bring even greater export growth and economic benefits.

To summarize, ECFA represents the main achievement so far in the improvement of cross-strait relations. Whether or not Taiwan and China succeed in building closer economic and trade interaction in the future will depend largely on how the ongoing ECFA negotiations proceed, and on the detailed content of the resulting agreements. Both sides will need to make a concerted effort.

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ECFA and Cross-Strait Industrial Collaboration

Background

The initial ECFA agreement has already taken effect, and implementation of the Early Harvest tariff reductions and service-sector market opening provisions has begun, but further negotiations are underway. The Cross-strait Economic Cooperation Committee, established under the ECFA framework, will play an important role in the hammering out of detailed ECFA content in the future. Six working groups have been established under the committee, to handle matters relating to trade in goods, trade in services, dispute resolution, investment, customs collaboration, and industrial collaboration. The trade in goods and trade in services working groups will focus mainly on bilateral market opening; the dispute resolution working group will seek to create a systematic platform for the resolution of trade disputes. Customs collaboration is a key measure for promoting trade facilitation, while the emphasis in the investment field will be on promoting cross-strait investment and putting investment safeguards in place.

The Cross-strait Economic Cooperation Committee also has a working group for industrial collaboration issues. Traditionally, trade liberalization relating to trade in goods and services has been the core aspect of FTAs, but if Taiwan and China expect ECFA to contribute to industrial upgrading and transformation, then in reality it is industrial collaboration that should be the main focus of the ongoing negotiations. This will require a clear definition of what is meant by “industrial collaboration,” so as to achieve maximum benefit from the market opening with respect to trade in goods and services, and create a win-win situation for both parties.

Examination of the FTAs that have been signed in other parts of the world in recent years shows that the importance attached to industrial collaboration (sometimes referred to as “economic collaboration”) has been rising steadily. Within the East Asia region, most of the FTAs signed by the region’s major economic powers – Japan, South Korea, and China – include a chapter dedicated to industrial collaboration, with the aim of fostering cooperation in particular industries or sectors. There is considerable flexibility and variation as to the content of these provisions, but usually the first priority is to establish mechanisms for dialog, along with putting in


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place a platform for communication and the exchange of information that can serve as a foundation for further strengthening of collaboration. This is because putting the state-level groundwork in place first makes it possible to provide a more complete picture of the current state of industrial development and of major trends in key aspects of industrial policy, thereby helping to ensure that business enterprises have access to comprehensive, accurate information that can provide a solid basis for collaboration.

Once this platform has been put in place, one can then move on to identify specific industries and fields where there is potential for collaboration. In particular, given the rising price of energy in recent years, the development of energy-related industries is likely to be a major focus of collaboration. Besides industry-specific collaboration, there is also the question of function-specific collaboration (e.g. collaboration on R&D, joint formulation of standards, etc.). If the scope of industrial collaboration can be planned properly, there is the potential for further deepening of industrial linkage.

The Outlook for Cross-Strait Industrial Collaboration

The Taiwanese perspective In the past, industrial collaboration between Taiwan and China mainly took the form of cooperation between individual private-sector firms. Over time, a complex cross-strait division of labor has been established. Although the process of industrialization has been underway for a longer period in Taiwan than in China, and although Taiwan has significant sources of competitive advantage that China lacks, Taiwan is handicapped by the relatively small size of its domestic market, which has led to development bottlenecks. If Taiwan can exploit the opportunities for cross-strait industrial collaboration, it can benefit from the large size of the Chinese market, which should bring significantly enhanced development potential. Given the unstable nature of cross-strait relations in the past, and the resulting lack of a sound systemic and legal framework for cross-strait collaboration, the level of development that has been achieved in this area already is quite impressive. In the future, with enhanced official contacts under the ECFA framework, it should be possible to maintain and build on these achievements; this is an issue of the utmost importance.

From Taiwan’s point of view, in the past Taiwanese firms were able to leverage China’s low-cost production resources by undertaking processing operations in China, with the finished products then being exported to other countries. This business model had the side-effect of helping China to integrate itself more closely into the world economy, and China became an important part of the globalized production network. Today, with production costs in China


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rising, Taiwanese business enterprises need to rethink their approach, and the form taken by cross-strait industrial collaboration will need to be adjusted.

From the Taiwanese perspective, three key issues need to be taken into account when considering industrial collaboration with China:

Developing the Chinese domestic market In the past, Taiwanese business enterprises mainly viewed China as a production location, reflecting China’s status as “factory to the world.” However, as China’s economic power has grown and its income levels have risen, China’s role as a “market to the world” has become steadily more important. Taiwan needs to adjust proactively to this new situation. In the future, the ECFA negotiations need to focus not only on tariff reductions, but also on bringing about the opening of service-sector markets in China. ECFA represents an opportunity to expand the role that China plays for Taiwan from that of manufacturing base to a market for the Taiwanese service sector. Leveraging the huge size of the Chinese market can help the Taiwanese service sector to enhance its competitiveness.

Developing Taiwanese brands Although some Taiwanese-owned business enterprises have built up strong brands in China, these brands have usually not been powerful enough to compete effectively against leading international brands. Taiwan should leverage the opportunities provided by industrial collaboration within the ECFA framework to change the model in which Taiwanese firms interact with the global economy as a whole, with a shift in emphasis away from contract manufacturing toward brand development. In the past, Taiwan has relied heavily on OEM and ODM11

11 An original equipment manufacturer, or OEM, manufactures products or

components that are purchased by a company and retailed under that purchasing company’s brand name. An original design manufacturer (ODM) is a company that designs and manufactures a product that is specified and eventually branded by another firm for sale.

contract manufacturing, whereby Taiwanese firms integrated their operations with those of leading international brands, with individual Taiwanese enterprises being responsible for just one link in the supply chain. The advantage of this model was that it enabled Taiwanese companies to focus on manufacturing, leveraging Taiwan’s high-quality manpower and strong managerial capabilities to gain maximum benefit from the cost advantages that Taiwanese firms enjoyed. The disadvantage was that it was difficult for Taiwanese enterprises to build up their technological capabilities; individual industries often relied heavily on foreign technology and foreign equipment suppliers, and there was a tendency to invest too little in innovation and R&D. This resulted in low levels of value-added and generally low profit margins. Furthermore, any fall in demand


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experienced by the leading international manufacturers could directly threaten the survival of Taiwanese manufacturing firms.

The move away from contract manufacturing toward brand development can help Taiwan to develop an economy with more “depth.” This will require more than just technology upgrading; it necessitates a revolution in attitudes, and particularly a shift away from imitation toward innovation, from manufacturing toward marketing, and from “being integrated” to “integrating.” It will also involve moving away from the “business to business” (B2B) collaborative relationships that are dominant in contract manufacturing toward the “business to consumer” relationship that is more characteristic of successful brand development, and from a “cost down” mindset toward an emphasis on “value up.” These are all issues that Taiwan needs to think carefully about.

Developing emerging industries One of the reasons why Taiwan has in the past been so badly affected by downturns in the global economy is its failure to diversify – specifically, its excessive reliance on the IT and electronics industry. In the future, Taiwan should take advantage of the changes taking place in global markets to actively develop new types of product and a new generation of industries. Ever since Taiwan’s IT and electronics industry reached the peak of its development, Taiwan has been on the lookout for new industries that drive continued economic growth, but so far the results achieved have been very limited. In the future, Taiwan should make maximum use of the opportunities for collaboration presented by the ECFA agreement to develop the alternative energy sector, biotechnology and other emerging industries, so as to help Taiwanese industry as a whole to diversify.

China’s perspective It is now over 30 years since the process of liberalization and reform began in China, and during this time China has racked up some impressive achievements. However, the strategy of “allowing some to get rich first” has created a situation of severely unbalanced development, with major disparities in the levels of development achieved in coastal regions and inland regions, urban areas and rural areas, and industry and agriculture. As a result, there has been a shift in Chinese government policy toward achieving more balanced development. At the same time, China is already responding to the globalization of competition and the growing shortage of resources by working actively to transform its industrial structure and develop new industries. Achieving balanced development and transforming the industrial structure are now the two main pillars of China’s economic policy. The promotion of cross-strait industrial collaboration in the future will need to take this into account.


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China’s drive to develop Western China, as part of its efforts to achieve more balanced economic development

China’s Twelfth Five-Year Plan emphasizes the development of the interior of China (as opposed to the coastal regions). In the future, one of the key aspects of cross-strait industrial collaboration will be the question of how to make effective use of the extensive resources available in the Chinese interior to create value and jobs. For example, Taiwanese electronics manufacturers have begun to expand their China-based operations from the coastal regions of China into the inland regions to the west, mainly in response to rising production costs in the coastal areas. The key question is how this westward movement can be leveraged to strengthen the integration of cross-strait supply chains to create a win-win situation for both Taiwan and China. From China’s point of view, this would also help to create jobs in Western and Central China, stimulate economic growth, and help to combat some of the social problems that are emerging (such as grandparents raising children).12

Opportunities for collaboration in emerging industries

In China’s coastal regions, average per capita income has already risen past the US$10,000 mark, and the regional economy is being transformed. These areas are no longer suitable for use as production locations for export-oriented processing operations, and there is a clear need to think in terms of developing new industries. One possible avenue for promoting cross-strait industrial collaboration would be to make use of the “Seven New Strategic Industries” (new-generation information technology, high-end equipment manufacturing, alternative-fuel cars, alternative energy, environmental and energy-saving technologies, biotechnology, and advanced materials) component of China’s Twelfth Five-Year Plan, together with the existing infrastructure and human resources of China’s coastal regions. This could be done by linking them with Taiwan’s “Six Key Emerging Industries” (high-end agriculture, the cultural and creative industries, tourism, medicine and healthcare, green energy, and biotechnology).

Overall objectives The overall goals for future cross-strait collaboration in this area may be summarized as follows:

Promoting industrial upgrading in both countries Currently, industrial development in both Taiwan and China is heavily oriented toward contract manufacturing. The first priority in cross-strait industrial collaboration must therefore be to upgrade the overall

12 There are many families in Western and Central China where grandparents raise

their grandchildren.. This is because there are insufficient employment opportunities in those areas, and parents have to work in coastal areas to make a living. As a result, children have to be taken care of by their grandparents, which may cause inter-generational problems.


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level of collaboration in terms of the value chain, while helping “traditional industries” in both countries to upgrade and transform themselves. The second priority should be to promote collaboration in new fields, such as service-sector innovation, in emerging industries (such as those relating to energy, resources and environmental protection, as well as biotechnology), and in information and communications technology (ICT), so as stimulate cross-strait industrial development over the long term.

Cross-strait collaboration on the development of world-class brands

The developing of strong, competitive brands is a shared goal of Taiwan and China. There is significant potential for the two countries to collaborate on the development of international, world-class brands in light of their respective needs and sources of comparative advantage (in terms of technology, resources, etc.). The signing of the ECFA agreement will make it much easier for Taiwan and China to implement an effective cross-strait division of labor in industry, and to leverage China’s large domestic market as a seed-bed for the cultivation of new brands that can then go on to expand into global markets.

Creating new jobs Cross-strait industrial collaboration has an important role to play in stimulating the creation of new jobs. Currently, both Taiwan and China are experiencing stubbornly high levels of unemployment; cross-strait collaboration has the potential to make a significant contribution toward boosting employment in both countries.

To summarize, ECFA is the key mechanism for promoting closer cross-strait economic and trading links, and it also constitutes an important platform for economic collaboration. The scope of the ECFA negotiations must not be limited to tariff reduction and market opening; the main emphasis should be on “industrial collaboration” in a broad sense. Both Taiwan and China need to transform the models of economic development they have been following up to now. An effective cross-strait division of labor between them would make a major contribution toward the economic development of both countries. There is room for cooperation in brand development, emerging industries, the service sector, investment, etc. In all of these areas, collaboration will be heavily dependent on the effective exploitation of China’s huge domestic market, which can provide significant new opportunities for Taiwan.

As a rule, industrial collaboration within an FTA framework is focused on the manufacturing sector, including such areas as technology transfer, cross-licensing, mutual recognition, human resources cultivation and training, etc. If the industrial collaboration carried out under the umbrella of ECFA is expanded to include the service industries, this would create an innovative new model for other countries to follow when negotiating their own FTAs. Particularly with respect to collaboration in emerging service industries, since


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there is no significant competition between Taiwan and China in these areas, and since the successful development of new service industries will benefit ordinary citizens without posing a threat to vested interests, there should be relatively little opposition to collaboration in these areas, and the potential for significant benefits.

While ECFA will help Taiwan’s more competitive industries to grow their exports, this will inevitably be a short-term effect. It is only by making full use of the partnership relationships that can be established through industrial collaboration that Taiwan can maintain an advantageous position in bilateral trade with China over the long term. In the service sector in particular, success or failure is determined not so much by production costs as by service content and service quality. The service model that can be built through cross-strait industrial collaboration will have unique “cross-strait” characteristics – particularly in cultural terms – that cannot easily be replicated by any FTA that China might sign with another country. More importantly, collaboration on emerging service industries can contribute to a broadening of the overall scope of cross-strait industrial collaboration.

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Conclusions

The main purpose of this study has been to analyze the economic development opportunities for Taiwan in the post-ECFA era. The paper begins by examining the current state of trading relations between Taiwan and China. This analysis shows that, while Taiwan’s exports to China have continued to grow over the past few years, the share of China’s total imports coming from Taiwan has been falling. If, in the future, Taiwan can succeed in leveraging ECFA to develop the Chinese domestic market, not only will this help to reduce the intensity of competition to which Taiwanese exporters are exposed, it will also enable Taiwanese companies to gain first-mover advantage with respect to their Japanese and South Korean rivals. This would benefit Taiwan’s ongoing economic development.

The paper then goes on to examine the benefits that ECFA will bring to Taiwan, concluding that full liberalization under the ECFA framework will create significant benefits for the Taiwanese economy as a whole. Evaluation of the impact of the ECFA Early Harvest provisions, implementation of which began on January 1, 2011, shows that there has been pronounced growth in Taiwan’s exports to China of the 539 Early Harvest items.

Besides the trade benefits, the study also seeks to analyze the potential for the use of industrial collaboration within the ECFA framework to bring about a transformation of the Taiwanese and Chinese economies. Both Taiwan and China have achieved impressive economic development, but today both countries find themselves at a crossroads, where they are faced with the need to transform their economies. There is thus immense scope for cross-strait industrial collaboration. Taiwan is faced with the challenge of moving away from contract manufacturing toward brand development, while China needs to transform itself from “factory to the world” into “market to the world,” and switch from an export-oriented development model toward a new model where growth is driven by domestic demand. Instead of focusing on overall GDP growth, China needs to concentrate on raising per capita income levels, and on achieving a more equitable distribution of wealth.

Given the changes that have been taking place, ECFA unquestionably has a vital role to play as a catalyst for further cross-strait economic transformation. Besides the market opening aspect of ECFA, there is also the question of how to make effective use of industrial collaboration to drive the growth and transformation of Taiwanese and Chinese industry; this is arguably an even more


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important goal. The past few years have seen the growth of a tightly knit cross-strait production network and division of labor; there is also a high level of agreement between Taiwan and China regarding the emerging industries that will be important in the future. There is thus considerable scope for cross-strait industrial collaboration with respect to both existing industries and emerging industries. The countries with which China and Taiwan have signed FTAs in the past have mainly been countries with which they have only limited industrial interaction, so the industrial collaboration provisions of these FTAs were of only secondary importance. The situation with ECFA is very different. Both sides should seek to take full advantage of this opportunity to use industrial collaboration to instill renewed vigor into their respective economies.

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References

In Chinese

Liu Danien (2008), “The impact of regional integration in Asia and China”, Report prepared for the Ministry of Economic Affairs, Industrial Development Bureau, Taipei: Institute of Economic Research.

Gu Yinghua (2008), “After the entry into force of the China – ASEAN Free Trade Agreement: Impact on Taiwan's industrial Strategies”, report prepared for the Ministry of Economic Affairs, Industrial Development Bureau, Taipei: Institute of Economic Research.

In English

Antkiewicz, A. and Whalley, J. (2004), “China’s New Regional Trade Agreements”, The World Economy, 28 (10), pp. 1539-1557.

Hertel T.W. (1997), Global Trade Analysis: Modeling and Applications, Cambridge. University Press: New York.

Lee, J., Park, I. and Shin, K. (2008), “Proliferating Regional Trade Arrangements: Why and Whither?”, The World Economy, 31(12), pp. 1525-1557.

Viner, J. (1950), The Customs Union Issue, New York: Carnegie Endowment for International Peace.

Whalley, J. (2008), “Recent Regional Agreements: Why So Many, Why So Much Variance in Form, Why Coming So Fast, and Where Are They Headed?”, The World Economy, 31 (4), pp. 517-532

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