ECFA's Empty Promise and Hollow Threat

8/18/2019 ECFA's Empty Promise and Hollow Threat

1/10

Political Changes in Taiwan

under Ma Ying jeou

Partisan conflict, policy choices, external

constraints and security challenges

Edited y Jean Pierre Cabestan and

Jacques deLisle

I

Routl edge

Taylor Franc Group

LON

DON

ND

N WYORK


2/10

First published 2014

by Routledge

2 Park Square, Milton Park, Abingdon, Oxon 0X l 4 4RN

and by Routledge

7J l Third Avenue, New York, NY 10017

Routledge is an imprint

o

ire Taylor Francis Group an i orma business

0 2014 Jean-Pierre Cabestan and Jacques deLisle

The right

of

he editors to be identified as the authors

of

he editorial

material, and of he autho rs for their individual chapters, has been asserted

in accordance with sections

77

and 78

of

he Copyright, Designs and

Patents Act 1988.

All rights reserved. No part of his book may be reprinted or reproduced or

uti

li

zed in any form

or

by any electronic, mechanical,

or

other means, now

known or hereafter invented, includ ing photocopying and recording, or in

any information storage

or

retrieval system, wi thout permission in writing

from the publishers.

Trademark no tice: Product or corporate names may be trademarks or

registered trademarks, and are used only for identification and explanation

without intent to infringe.

British Libr ary Catalog11ing in Publication ata

A catalogue record for this book is available from the British Library

Library

o

Congress Cotaloging in Publication Data

Political changes in Taiwan under Ma Ying-Jeou : partisanconflict.

policy choices, external constraints and security challenges I edited by

Jean-Pierre Cabestan and Jacques de Lisle.

pages cm. - Routledge research on Taiwan series; 12)

Includes bibliograph ical references and index.

I . Taiwan - Politics and government - 2000- 2 Taiwan - Foreign

relations - 21st century. 3. Taiwan - International status.

4. Ma, Yingjiu.

I

Cabestan, Jean-Pierre. fl deLisle, Jacques

DS799.847.P65 2014

95 l.24905 dc23 2013049225

ISBN:

978

-0-415-74534-5 hbk)

ISBN: 978- 1-315-79795·3 ebk)

Typeset in Ti

mes

New Roman

by Wearset Ltd, Boldon, Tyne and Wear

Printed and bound in the United States

of

Ame rica by Publishers Graphics,

LLC on sustainably sourced paper.


3/10

4 ECFA s empty promise and

hollow threat

Douglas B Fuller

Introduction

The major economic policy proposal for

Ma s

first term was the Economic

Cooperation Framework Agreement (ECFA). For Ma s second term, implemen

tation and possible deepening of ECF A and possible additional trade agreements

within the region are

on

the agenda as the major economic policies for the

remainder

of

his time

in

office. In parallel with the economic policy which Ma

has pursued, his first term witnessed growing concern and unease within Taiwan

over economic inequality, although these concerns were already present under

his predecessor, Chen Shuibian. ECFA as the center-piece

of

Ma s

economic

policy has in part been intended to address these concerns through the idea

of

boosting growth through increased trade. In effect,

Ma s

political sales pitch for

ECF A has been trade gains without losers.

The

DPP has countered by question

ing the overall gains and highlight ing potential losses to affected groups. Within

this political context and given

Taiwan s

lack of a strong tradition

of

economic

liberal ism, ECFA s negotiations and implementation have led to modest amounts

of liberalization, and future liberalization under the second term will also be

modest. Thus, as a promise to promote growth and reduce inequality, ECF A will

likely disappoint. At the same time, as a threat to dislocate large segments

of

the

workforce and radically integrate Taiwan s economy with China s, ECFA will

also likely prove far less scary than its opponents rhetoric would have it

Assessing

ECFA s

impact

on

Taiwan s economy

is

constrained

by

several

factors: (I) ECFA

is

a framework agreement that envisions ongoing rounds of

liberalization. (2) The first round

of

liberalization has been in effect for only a

short period. (3) Disentangling ECFA from ongoing changes and tunnoil in

international markets is a difficult task. Nevertheless, this chapter will address

ECFA as the central economic policy of

Ma s

first and,

so

far, his second term.

Before dealing with difficult analytical problems of the impact of trade liber

a

li

zation, one must emphasize the point t

hat

ECF A is an ongoing and far from

complete process. ECFA stipulates that Taiwan and China will negotiate fo ur

major agreements: merchandise trade, investment protection, service trade, and

trade dispute settlement. Although an early harvest list

of

goods in prelude to a

merchandise trade agreement to be completed

by

2014 was agreed upon (CENS,


4/10

86 D.B.

Fuller

March 2, 2012),' significant expansion of this list was stalled as attention

switched to pursuing liberalization in services where attempted passage of the

trade-in-services agreement in Taiwan's legislature ignited dramatic protests in

the spring

of

2014.

In

addition to the wider political contestation surrounding

ECFA, one

of

the structural reasons the merchandise trade agreement may prove

difficult

is

that it will cover the 5000 items not covered in the early harvest list.

An investment protection accord was reached in early 2013, but its implementa-

tion and impact still lie ahead. Much the same is true of most of the 20 follow-on

agreements that have been reached under ECF A.

The chapter will proceed as follows. The first section will review the facts of

Taiwan's trade with China, manufacturing base and the trend of increasing

inequality as measured

by

the Gini coefficient. The second section will examine

the debate in Taiwan around ECFA and the implementation

of

ECFA. The

claims within this debate will be considered in light

of

the

fac

ts presented

in

the

first section and the actual implementation of ECFA thus far. The conclusion

will argue that neither the solutions to Taiwan's problems of economic inequality

nor the blame for them are to be found in ECFA. Instead, if it seeks to address

the problems of inequality, Taiwan should reconsider its social policies to

address the challenges of being a mature economy.

1 Basic facts

of

Taiw

an s

tr

ade, manufac

turin

g employme

nt

and incr

eas

ing inequality

Taiwan s robust trade surpluses wit

lt

Mainland China

Taiwan enjoyed robust trade surpluses with China for over a decade prior to the

signing of

EC

FA (see Figure 4.1 and Table 4.1). Taiwan's surpluses with

Ch

ina

have become so large that over the past decade they are routinely larger than

(and often more than double)

Ta

iwan's overa

ll

quite robust trade surplus. This

140 . -

Imports

120 · Exports

1

00

'

:

80

Q5

60

>

40

20

··

· ·

Total trad e

Figure 4.1

Ta i

wan s

imports, exports and total trade with PRC mainland.

ECFA s empty promise and hollow

thr

eat

8

Table 4.1 Taiwan s

trade surpluses with Mainland China and the world

Year

1987

1991

199

2

1997

1998

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

MAC estimates o f

Taiwan s trade surplus

with Mainland China

937.6

7,200.3

9,800.5

18,539.9

15

,727.0

19

704.4

23,560.2

27,274.8

32,138.1

36,177.8

38,549.3

46

,230.9

42,586.5

37,587

.2

48,880.0

Source:

Mainland Affairs

Counc

il.

Note

Trade Un i

ts

:Millions ofUSS

Taiwan s trade

surplus

18,695.3

13 ,420.6

9,769.7

9,214.8

7,365.6

18,343.7

22,071.6

22,590.4

13,612.8

15,817.3

2 1,319.1

27,425.4

15,180.9

29,304.1

23,364.

Taiwan s trade surplus with

Mainland China as a percentage

ofTaiwan s global trade surplus

5.02

53.65

10032

201.20

213.52

107.42

106.74

120.74

236.09

228.72

180.82

168.57

280.53

128.27

209

.

21

expanding ratio

of

Taiwan's trade surplus with China over Taiwan's trade

surplus with the world does not actually indicate that Taiwan would run a large

trade deficit were it not for

China s

consumption of

Ta

iwanese goods because

many of Taiwan's exports are directly (e.g., components such semiconductors

and displays)

or

indirectly (e.g., machinery) used in

China s

own exports.

In

other words, Taiwan's growing exports to China in part simply reflect the move

ment of export processing in certain industries, particularly electronics, to China

rather than inherent Chinese demand for

Ta

iwanese goods.

f

such export

processing activities were to move out of China, Taiwan s exports would shift

towards the new export platforms and away from China. Such a scenario looks

more and more likely with the labor scarcity (mingonghuang) evident in China's

major regions

of

export processing and

ev

idence from economists that China has

reached the Lewisian turning point where the supplies

of

rural labor coming into

industry disappear.

Preliminary trade figures for 20 11 suggest that cross-Strait trade slowed sub

stantially in the final

quarter of

the year

as

the Chinese economy cooled down.

However, the early harvest list may have had a positive effect on Taiwan's

exports to China during 2011 because items on the early harvest list increased at

a faster pace during the first

11

months

of

2011 than exports to

Ch

ina overall

(11.32% and 8.66%, respectively) and USS 18 billion out of US l 14 billion

worth

of

exports (CENS January 2, 2012).

The

early harvest list is skewed heavily

in

Taiwan's favor: 557 items from

Taiwan were included in the early harvest list as compared to 267 for China.


5/10

88

D

Fuller

Most of the items have faced declining t

ar

iffs from the start

of

the early

h a r v ~ s

period in January 2011 rather than immediate tariff-free. access t? the other sig

natory s market: 69.7 percent

of

China s early harvest h

st .<

86 items)

b e g ~ n

be shipped duty-free to Taiwan in 2012. No agncultural items are

.on

Chma s

early harvest exports to

Ta

iwan. In contrast, 526 items began to be shipped duty

free from Taiwan to China in 2012.

The main imports from China to

Ta

iwan have been quite consistent o.ver the

past decade. Since 2005, the following eight categories have been c o ~ s 1 s t e

among the top ten imported categories

of

goods:

m i n ~ r

fuels . automouve

pa_ris

organic chemicals, iron and steel, plastics,

o p t 1 ~ a l e q u 1 ~ m e n t e c t n ~ a

machinery and equipment, and machinery and mechanic.al

~ n c e s .

Th: maJor

Taiwanese exports to China have also been quite consistent.

Smee

200::> these

nine categories of goods have been among the top ten export categones: elec

trical machinery and equipment, optical equipment,

p l ~ s t l c s

machmery and

mechanical appliances, organic chemicals, copper and amcles e o ~ iron

steel, mineral fuels, and man-made fibers. The trade c r o s ~ the Strait consists

largely

of

intra-sector

al

trade, but this

n o ~ n o n

is qune. common across

internationa l t rade in contradiction to the pred1c t1ons of classical trade theory.

Furthermore, the goods traded are heavily weighted towards mterrned1atem dus

trial goods. Again, this is not very surprising given that Taiwan and China are

both manufacturing powerhouses.

Myth o

ndustrial hollowing out

Despite the maj

or

downturn

in

2008 to 2009 due

t h ~

global financial

cr

isis,

there is little evidence of industrial hollowing out m Taiwan. Indeed, the abso

lute number

of

people employed

in

manufacturing has grown over the past

decade with minor dips during the two recessions

of

200

I

to 2002 and 2008 to

2009 (Figure 4.2). From a longer term perspective, since manufac.tunng employ

ment peaked at 2.8 million workers in 1987,

it

had been

on

a gentle declme

through 2002 at a trough of 2.572 million workers. Smee 2002, employment has

gradually risen, and surpassed 2.8 million workers

in

2007, 2008,

20 10

and 20 11

3000

2500

2000

1500

1000

500

..

J

'

.

'

.

:f

}.

.._ o o .. • ; ...

II ;

0

2001 2002 2003 2004 2005

2006 2007

2008 2009 2010 201 1

• Total • Foreign o Domestic

Figure 4 2

Manufacturing workers (in thousands) in Taiwan, 2001- 2011.

ECFA s

empty promise and hollow threat

89

when it reached an all-time high of 2.949 million workers. In terms of domestic

manufacturing workers, the 2.8 mi

ll

ion employed in manufacturing

in

1987 has

not yet been surpassed given the significant numbers

of

foreign manufacturing

workers employed since the early 1990s, but the number of domestic manufac

turing workers reached 2.7 mi

ll

ion in 2008 and, after the down-tum in empl

oy

ment in 2009, bounced back to 2.73 million domestic manufacturing workers

in

2011.

Does manufacturing still play the critical, driving role

in

Taiwan s growth that

it

has

in

the past? The evidence in

Fi

gure 4.3 actually suggests that manufactur

ing s contribution

to

growth Jagged far behind the contribution of services in

Taiwan

's

supposed heyday

of

manufacturing in the 1980s and continued

to

do

so

in the 1990s. In the relatively slow growth of the first decade of the twenty-first

centu1y, manufacturing s contribution drew basica

ll

y even with services. This

data suggests not only that Taiwan s manufacturing remains an important driver

of its economy, but also that attributions of he slow-down in growth over the past

decade to the govenunen t s neglect

of

manufacturing and/or manufacturing

oriented industrial policy (e.g., Chu

20

I

l)

are probably misplaced.

Inequality in Taiwan: Gini coefficient over time

Economic inequality has been a pressing concern in

Ta

iwan over the past

decade. There are some legitimate causes for concern. First, Taiwan

's

inequality

of

household income as measured by the Gini coefficien

t

a measure in which a

hi

gher score signifies greater inequality and a score

of I

means absolute

inequality, has increased. Since the low point of 0.277 in 1980, the

Gi

ni coeffi

cient has increased and over the past decade has averaged over 0.34. However,

it

must be noted that ha

lf of

the rise

of

inequality had occurred by the early 1990s

when trade with China was in i

ts

infancy. Thus, cross-Strait trade and economic

integration with China alone cannot account for this dynamic. Second, in com

parison with other advanced economies, Taiwan now ranks higher than the

Q.

Cl

8

6

4

2

0

n .

Agriculture

...o Manufacturing

services

- 2 .. . . .. . .. . .. . . . . .. . . . . . . . . . . r r r r .---,.--,. .-,,-,--,--,--,-..,.-..,.-..,.-..,.--j

1982 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004

2006

2008 2010

Year

Figure 4 3

Gro wth contributions( GDP) by sector.


6/10

90 D 8. Fuller

Organization of Economic Cooperation and Development (OECD) average in

Gi

ni

terms (i.e. Taiwan has greater inequality

than the

OECD average).

3

The

Gini coefficient

for

Taiwan

has

risen faster

than the

OECD average (0.4% per

annum) over the period 1985 to 2008

at

0.5 percent per annum, the same as for

the US.

Thus, it is not surpris

ing

that Taiwan's current international ranking

stands in sharp contrast with Taiwan's relatively robust economic equality in the

early

1980s

. Taiwan's earlier equality wou

ld

have placed it comfortably

in the

top

third of OECD countries

in terms

of equality (low Gini coefficients),

4

a

group which typically consists mainly

of

social democratic European countries.

Taiwan is not alone among the wealthy East Asian economies

to

see th

is

marked

decline in equality. Japan has sunk

to the

bottom third

of

OECD economies (see

Figure 4.4)

in

terms

of

economic equality.

Given the political rhetoric

and pol

icy debates

in

Taiwan, it is important

to

note that

GD

P growth has not preserved equality. Wh ile the two recessions of

2001

and 2009 show Taiwan's growth to

be

somewhat choppy

in re

cent years

(see F

igu re

4.5), one must also acknowledge that Taiwan

has

maintained impres

sive rates of growth for a wealthy economy. From

1991

to 2000, GDP growth

was

6.3

percent and per capi

ta GNP

growth was 5

3 perc

ent (Chu

20

l 1 . From

2001 to 2010, GDP growth averaged 4.2 percent (DGBAS). And yet these

impressive rates of growth

did

not prevent a rise in inequality. Going further

b

ack to the

1980s when inequality started

to in

crease, the grow

th

rates were even

more impressive, with GDP growth averaging 7.6 percent and per capita GNP

growth averaging 6.8 percent (Chu 2011).

James

K Ga lb

raith and

the

University

of

Texas Inequality

Pr

oject have

famously discarded

the

use of

Gin

i coefficients in favor of the Theil index when

making comparisons across groups, regions and

cou

ntri

es.

This chapter uses

the

Gini coefficient because of the available data over time for Taiwan on this

measure. There are, however, additional metrics pointing to rising trends

in

inequality

in

Taiwan. For example,

in

2010 wages

and

salaries hit

an

a

ll

-time

low as

a portion of Taiwan's GDP (China Post, January 9, 2012).

50

40

30

20

1

Figure 4.4 Household Gini across counrries, 2008.

ECF s empty promise

and

hollow threat 91

???

-- -

???

0.35

12

034

10

0.33

8

0.32

6

0.31

4

0.30

2

:

0

0

- 2

1989 199

1 1993 1995 1997 1999 2001 2003 2005 2007 2009

Figure / 5 Gini coefficient and GDP growth

in Ta

iwan, 1989-2009.

ECFA ideas an implementation

The partisan

debate

o

O>

o

c

o

o

Cl.

E

CF:A has

been

front and cen

ter of the Ma administration's economic policy.

Takmg advantage of

the

fact

t_hat

the_ Chinese leadership was much more willing

engage with a KMT admm1strauon than with a DPP one on a number of

issues, Ma's administrati

on

conceived ECFA

as

both a strategy for growth

t ? r o u g ~

deeper economic

ries to

China and a route

to

engaging

in

further t

rade

hberahzauon beyond Ch na-, The DPP has been much more circumspect

in

its

embrace of trade

11berahzauon

across

th

e Strait due

to

the concern that ever

greater

r e l ~ a n c e on

China's market would heighten Taiwan's economic and

in

tum,

secunty vulnerabilities. '

. The debate

betwe_en Ma and

DPP chairperson and soon-to

-b

e presidential can

didate Tsai Ing-wen

in

April

20 I

0 highlighted the partisan divide

and

critical

ideas

about ECF

Ns

a d v ~ n t ~ g e s an? disadvantages . Tsai fanned

the fears

of unemploy

ment_ due to

hber

ah

_

al On whi

le at the same time suggesting that

the

advantages

of

opening up the Chinese market were limited, since both Taiwan

and

China were

WTO signatories. Mu emphasiz

ed

thut

the

trade agreement

with

China

was

needed

because other countries

had

or were going soon

to

have trade agreements with

Chma, and ECFA was a stepping stone for further trade agreements for Taiwan

beyond

one

with ~ h i n a Having recently visited a sma

ll

machinery

firm,

Ma

repeatedly emphasized the advantages for Taiwan's machinery industry. It would

not

do much for Taiwan's

very

large information technology (IT) sector,

due to

the

zero tanffs

on

such

o o ~ s

under the WTO's Information Technology Agree

ment (ITA) to which

both

Taiwan and China are signatories.


7/10

92 D.8. Fuller

At

the

same time, there was a protectionist thread that ran through the debate,

particularly with regard

to

agriculture. Ma

was

careful

to

point ou t that his

administration had protected Taiwan's agriculture and even went so far as

to

argue that what liberalization had occurred in allowing Chinese agriculrural

imports had been done under the Ch

en

administration. Interestingly, Ma actually

conceded in the debates that the liberalization due to

WTO

accession was bigger

than that attributable to ECFA. Although Tsai did not pick up on this point, it

offered a basis

for

arguing that the small ambitions

of

ECFA for liberalization

also

li

mit the economic benefits

of

the agreement.

After ECF A was approved by the Legislative

Yuan

, the DPP refashioned its

policies somewhat

in

the run-up

to

presidential election

in

January 2012. During

the campaign, however, the DPP still wou ld not ru le out a referendum

on

ECFA if

t

took power. The

OPP

also argued

for

dealing with

ECF

A as part

of

rhe WTO.

OPP candidate Tsai emphasized engaging in free trade agreeme

nts

(FTAs) wi th

other countries in the wake of EC FA although she basically ignored the causal link

between

ECF

A and Taiwan's opportunities

to

enter future FT

As

. Jn the DPP's

most

com

prehensive poli

cy

statement of recent years, the Ten-Year Policy Plat

form adopted

in

20 11,

5

the cross-Strait component

of

this platform does acknow

ledge that Taiwan's economy

and

security require engagement with

the

world

and

that cross-Strait trade is a part of that engagement.

The

platform, however, lays the

blame

for

Taiwa n's inequality squarely at the feet

of

China, and sees China's

industrial

and

technological upgrading as occurring at the expense

and

often on

the

backs of Taiwanese firms. The document calls

on

the government to he lp weak

sectors

of

the economy as well as groups

of

people adversely affected by cross

Strait trade. n terms of policies, it calls for pursuit ofFTAs with an arr

ay

of coun

tries and trade associations (USA, Japan, India and ASEAN

.

It calls fo r ECF A

to

be scrutinized and reviewed democratically with the possibility of changing some

of

its contents. The OPP platform emphasizes that the ECFA process and its con

co

mi

tant repons need

to

be undertaken

in

compliance

wi th

the

WTO

framewo

rk.

It calls generally for fair trade across

the

Taiwan

Stra

it, bur it specifically calls

fo

r

access

of

Taiwanese goods to

Ch

inese

mar

kets while protect

in

g Taiwan's weak

industries

and

individuals against

dumpi

ng and other assumed nefarious practices

by Ch ina. t calls for strict scrutiny

of

incoming investment from China

in

terms

of

iden

tifying and vetting the sources behind corporate investments

in

order to make

certain that investments are in economically

useful

activities (presumably a way of

distinguishing desirable types of foreign di rect investment (FOi) from undesirable

ones while eschewing portfolio investment entirely). The platform calls

up

on the

government to

pr

event

Taiwa

n s industries from mov ing entirely to China, and to

encourage research and development, operational headquarters and manufac

tu

r

in

g

bases to rem ain in

Taiwan.

The platform further calls

fo

r a

firewall

between th e

Taiwanese banks operating in China

and

Taiwan's financial system, and for organ

izing Chin ese tourism to Taiwan in a

way

that helps ordinary Taiwanese. The plat-

form also warns that C

hin

ese talents shou ld not be allowed to displace

the

local

workforce. Fina

ll

y, the document stresses that the economic sovereignty of both

sides

of h

e Taiwan Strait needs

to be

protected.

ECFA

s empry promise andhollow threat 93

Similarities.

b e ~ e e n

the _DPP and the KMT on

EC FA

abound, despite the

sometim.es a c n m o n ~ o u s partisan debate. Both sides view ECFA

as

a first step to

e n g ~ g e FTAs with other countries beyond China. The implicit assumption

b ~ h m d

this stress on FTAs is that FTAs will boost Taiwan

s

growth. Ironically,

g1ve.n the stress on FTAs, Taiwan's two major parties share doubts about the

ments

. f r ~

trade across the whole

of

Taiwan's economy. For both, the implicit

~ u m p t t o n is that FTAs can be achieved that will secure market access for

Ta1':an s exports while still protecting cenain sectors within Taiwan from

for

eign

c o m p ~ t

t i o n This view is not the classical liberal stance that the gains

from. trade will be greater than

any

losses so that

noth

ing needs to be done to

1 f y

free trade .Nor is it the more sophisticated stance of contemporary liber

alism .where

pu

bltc

po li

cy mechanisms can help compensate losers

from

free

trade m a manner that still results in the gains from trade offsetting

the

losses

trade and the cost

of

policy offsets . Rather, bo th

th

e K.MT and

DPP

stress

contmued protectionism as at least part

of th

e solution

to

the

po

tential losses

to

some s e ~ t o r s that would come with trade liberalization. Given the Jong his tory of

very active ~ ~ d often qune successful state intervention

in

the economy,

it

is

hardly surpnsmg that hberal solutions

hold

far less ideological sway in Taiwan

than they do m much of the OECD, particularly the Anglophone or

li

beral

market economies.

6

Although the

OPP

accuses the KMT

of

sac

rifi

cing Taiwan's

societal and certam sectoral interests for

the

sake of ECFA, continuities across

th

e OPP and K.MT administrations suggest that Taiwanese governme

nt

s ofwhat

e ~ e r hue.have pursued a policy that mixes neo-mercanrilisl protectionist po licies

wi th

~ o h c t e s

of economic liberalization. Put simply, KMT practice

and

OPP

rhetonc are actually quite closely aligned on this issue.

The partisan differe

nces

over ECF A concern

the

perceiv

ed

benefits and costs

of openness China. The KMT is inclined to see ECFA-fueled growth as a

means

to

solving

th

e problem

of

Taiwan's relatively high economic

in

equali

ty

(at least, relatively high compared to the I980s

7

.

Ma

has

argued that ECFA

: ~ u l d

.help

th

.e very working-class groups the OPP claims bear the brunt

of th

e

nsmg mequabty and would be adversely affec

ted

by ECFA. He

has

emphasized

h o ~ ~ ~ e r s and fishermen, among others, would benefit

from

ECFA (e.g.

Ta1pe1

Times 11 The.KMT also. argues that the wave of

FTAs

'rippling

throug.h

th

e

As1a

-

Pac1fic

will leave Taiwan economica

ll

y isolated and disadvan

taged tf they do not join, and a precondition

to

joining

is

winning China's acqu

i-

e s c e ~ c e t.o such trade agreements via

EC FA

. Of course, the problem wi

th

this

po:

on

ts that it underli

nes

the fact that ECFA may do no

more

t

han

allow

Taiwan

lo

reach again an equal playing field with its competitors. If ECF A opens

the .door lo other FT As for Taiwan, it me re ly preserves market access

on

near

equ.1va lent terms

tha

t Korea and other competitors wi ll soon enjoy due to the

rapid spread

of

tariff-cutting FTAs. This argument undercuts t

he

claim that

ECF A promises major gains in market access for Taiwanese

firm

s.

The

OPP

has

stressed the expected costs of ECFA, particularly in term s of research and devel

opment, and

of

manufacturing moving offshore. The OPP has been skepti

cal

about the prospects that ECFA will help to address economic inequality,

and


8/10

94 D

B

Fuller

down-plays ECFA benefits more generally. Even for areas w ~ t h considerable

upside for Taiwan's economy, such as the liberalization

of

Chinese tounsm to

Taiwan, the DPP's policy platform seeks to sow doubt that the benefits

of

such

tourism will accrue

to

the "average" Taiwanese citizen. . .

The complex reality

of

Taiwan's economy has not been very kmd to the clauns

of either the

DPP

or the KMT. The large amount of integration with Chma

achieved prior to ECFA has not led to industrial hollow.ing out.as the DPP has sug

gested. Nor h

as

it done much

to

lower the levels

of

mequaltty

as

the KMT

h.as

hoped.

As

for

the movement

of

research

and developme?.t

(R&D)

o ~ ~ h o r e

t

here

are some Taiwanese firms that have emphasized a twm towers strategy in

which they place substantial R D resources n

China

(Fuller 2008), even t h ~

largest and most successful

of

the finns embraci?g

this

strate.gy, such as

Ho

n Hat/

Foxconn's array of companies,

sti

ll keep a maJonty

of

their

R D

at home - a

pattern of behavior reflected n U.S. Patent and Trademark

Offi

ce data on the loca-

tion of utility

pa

tent inventors.

8

.

We

do

not yet have data on the effects of

ECFA

as i:s

i ~ p l e m e n 1 o n

has barely begun.

e

rhaps the DPP or KMT positions wi

ll

be usttfied by ~ t u r e

developments. Sti

ll

, there are good reasons to believe tha: the unplementatton

of

ECF

A

is

un likely to validate the fears

of

the DPP or the high hopes of the KMT.

Implementation

o EC

F

The implementation

of

ECFA, as

it

has proceeded thus ar, offers preliminary

answers to two questions that bear on the partisan debate m Taiwan .over ~ C F A

Will ECFA lead to Taiwan opening up its domestic economy to Chinese invest

ment in such a way that provides China with a dangerous amo.unt of

e v e r a g e

over Taiwan? Will ECFA lead

to

substantially higher levels of integranon with

China than has

al

ready occurred over the past decade? The preliminary evidence

suggests a resounding no

to

the firs t question and a qualified

to

the s e c o ~ d

These questions beg an additional question of whether there :-v1ll be enough hb

eralization

to

realize the ECFA 's

fu

ll potential for promoting growth (which

may, or may not, reach the level promised by the Ma a d m i n i ~ t r a t i o n and .others).

The prospects for such liberalization depend both

on

internal Taiwanese

dynamics and external factors. . . . . . . .

The Ma administration has adopted a relattvely tough pos1uon ~ 1 s - a - v 1 s h ~ a

during ECFA negotiations. The early harvest lists were heavily s ~ e w e d

t

Taiwan's favor. The demands of the Ma administration on automobiles. trade

have been heavily one-sided. Taiwan has asked for tariff-free imports

in

~ h e

Mainland of 100,000 Taiwanese-assembled automobiles

retu'.11 ~ o r ~ l l o w m g

1

o

000 Chinese assembled automobiles into Tai

wan.

Desp le all ind1cat1ons that

t h ~ Chinese have generally pursued ECFA for political motivations rather than

economic benefits, this Taiwanese offer (thus

far)

has been rebuffed. As

f o ~

agn

culture, only products that Taiwan does not produce are even u n d ~ r considera

tion for lowered tariffs by Taiwan, while tariff-free access to the Chinese market

is or will soon

be

provided

for

some Taiwanese agricultural products.

9

ECFA s

em

pty promise and

hollow threat

95

Although there would be a legitimate securi ty concern if Chinese firms, par

ticularly those that are state-owned, were allowed

to

invest freely in Taiwan,

Taiwan has tightly restricted Ch inese investment. Chinese firms cannot own con

trolling shares of Taiwanese firms, and they are still barred

from

investing in

strategic manufacturing and service industries. The maximum liberalization

envisioned is 97 percent of all manufacturing sectors and 50 percent of all

service sectors (CENS, April 2, 2012). In

the

near future,

90

percent

of

manufac

turing sectors are to be opened up to Chinese investment, up

from

42 percent

currently (CENS, February 3, 2012). However, the ow nership

is

capped at 10

percent

in

existing finns and 50 percent

in

joint ventures. Wholly Chinese-owned

finns are not allowed. Over the three years during which Chinese investment has

been allowed into Taiwan, through February of 2012 only US$160 million has

been invested (CENS, March 29, 2012).

These measures indicate that Taiwan

is

not opening up to Chinese invest

ments in a way that could provide China with worrisome levels of contr

ol

within

Taiwan' s domestic economy. Scenarios

of

inflows and then, at a moment's

notice, outflows of "hot" equity investments can be discounted because such

portfo lio investments will not

be

allowed. As for direct investments, Chinese

firms will not be able to exercise control over the Taiwanese ventures

in

which

they invest. Minist

ry

of Economic Affairs' (MoEA) Investment Commission

will still vet any such investments. ECFA may possibly lead

to

a dangerous level

of

economic dependence on China, but

it

will not

do

so through a Trojan horse

of

Chinese investments in Taiwan.

In

tenns of integration with China, there are inwa

rd

and outward co nsidera

tions. Along with

its

history

of

export promotion, Taiwan historically tried to

protect the domestic market, albeit increasingly narrower portions

of

it over

time.

Taiwan has continued to use non-tariff barriers that violate the letter and the spirit

of WTO law and the additional Government Procurement Agreement, to which

Taiwan is a signatory, across various sectors since its WTO accession in 2002.

The relevant product areas run the range, from pharmaceuticals and agriculture

to

construction engineering (e.g. Brookings Northeast Asia Commentary,

20

1

2).

With continued security concerns about and investment controls on Chinese

investment, and with certain sectors, such

as

agricu lture, completely

off

limits,

the

liberalization

of

Taiwan's domestic market (inward integration) clearly

has

limits.

Outward liberalization (i.e., opening up

the

Chinese marketplace) shows

greater promise, probably due

to

the fact that the Chinese government seems

to

be motivated by political rather than economic goals. Hence, China has been

willing to allow unilateral openness to more early harvest products from Taiwan

and to begin to allow greater regulatory space for Taiwanese financial finns to

operate

in

China (a

ma

rket that generally remains quite closed, despite China's

commitment

to

open

the

market

by

2006). The Taiwanese Association of

the

Machinery Industry has pressed for further action on reducing tariffs on a wider

range of Taiwanese machinery, and the government has supported that agenda

by

emphasizing the promise which

ECF

A holds for this important Taiwanese


9/10

96

D.B. Fuller

industry. However, almost half of Taiwan's exports to China have been IT ~ ~ o

ucts

which already enter tariff-free to China under the WTO's T

A.

In add111on,

IT

r ~ m i n s

Taiwan's most successful industry. Thus, the lift

from

opening

up

China's markets may be more limited than boosters

of

ECFA have imagined,

given how open China

is to

IT products already.

With this complex set of factors raising doubts about the prospects for actual,

effective liberal ization, there is

reason

to suspect that ECFA-related liberaliza

tio

n

may

not provide the scale

of

a boost

for

Taiwan that the KMT and others have

claimed. What further complicates th is issue

is

the continued liberalization

of

the

East

Asian and Pacific region through other trade agreements. Korea has signed

FT

As with the European Union (EU), the

US

and Associationof South-East Asian

Nations (ASEAN), and started negotiations with

China

in May 2010. There is also

discussion - albeit fairly preliminary -

of

a pos sible trilateral China, Japan and

Korea free trade agreement. And

of

course there is the Trans-Pacific Partnership

(TPP) now being vigorously promoted by the Obama administration.

10

Boosters of

ECFA have claimed tha t it

will

give Taiwan greater access to China s market, but

they have also argued tha t Taiwan needs ECFAjust to maintain a.ccess with

such peer competitors as Korea. The importance

of

he latter scenano s growing

owing to the plethora of trade agreements being signed in Taiwan's neighborhood.

Thus, ECFA and presumably subsequent trade agreements with other economies

that ECFA will make politically possible

will

be valuable simply because they

bring Taiwan back onto equal footing with its competitors in export markets . At

the moment, Taiwan has slightly better access than Korea to China's market, and

Korea has somewhat better access

to

American and European markets. With the

new trade agreements on the horizon, Taiwan and Korea

wi

ll basically be on equal

footing again, especially vis-a-vis China's marketplace. Thus, ECFA

will

likely

not offer Taiwan any medium-term advantage over its competitors in terms

of

better market access to China. Nevertheless, without ECFA, Taiwan s relative

access would likely deteriorate compared to its competitors.

11

One could argue, as Rosen and Wang (2010) have done, that ECFA, together

with the additional free trade agreements,

will

bri

ng

significant gains in enhanced

economic efficiency due to spreading liberalization. They argue that Taiwan s

economy would have net growth above the trend line

of

5.3 percent with ECFA

and 5.7 percent with ECFA, plus joining wider Asian trade regimes such as

ASEAN +China. (Both estimates assume a trend line with Taiwan rejecting

ECF

A.

However, Rosen and Wang explicitly recognize that a substantial portion

of

these gains come from Taiwan removing its trade barriers, many

of

which

Rosen and Wang (2010: 2) note

are

not compliant with the WTO. Given

Taiwan's negotiating stance with China during the

ECFA

process and its I I-year

track record under the WTO, it seems highly unlikely that Taiwan

will

pursue

the type

of

thorough liberalization of its domestic economy that Rosen and

Wang envision. Taiwan simply does not do creative destruction across the whole

of its economy. Therefore, Taiwan is unlikely to enjoy the type of economic

boost from ECFA or ECFA-plus predicted by those ECFA proponents who

assume that ECFA means deep liberalization.

ECFA s empty promise nd hollow threat 97

onclusion

f ECFA or other

types

of

FT As are unlikely

to

relieve the problems

of

inequality, what alternative solutions are there? Some call

for

a return

of

Taiwan's developmental state (Chu 2011), but it is not clear either that state

intervention has been so thoroughly abandoned or that a return to developmen

tal

state policies would be highly effective given the maturity of Taiwan's economy.

The state is still highly active in promoting investment in R D and industry, and

the Council

for

Economic Planni

ng

and Development's (CEPD) Four-Year

Development

Plan

(2009-2012) has encouraged further geographic spread

of

technology-intensive industries through policies

to

set

up

science-based parks in

Changhua Erlin, Yunlin and Tongluo. Taiwan's government is still arguably

effective at providing subsidies and tax breaks for activities with high potential

for

positive spill-overs such as R D (as Kenneth Arrow first advocated

50

years

ago) and

indu

strial investment. The problem is that Taiwan's past developmental

successes mean that Taiwan is now sitting on or close

to

the international tech

nology frontier in many sectors, so there are few obvious sectors

to

promote that

will provide a major boost to Taiwan 's growth. Given this structural fac t, it is

unsurprising that Taiwan has seen some substantial bets go wrong, such as its

biotechnology policies (Wong 2011). Taiwan's state policies

are

still important

and helpful - the support

for

industrial investment has arguably been a key facto r

keeping Taiwan's manufacturing employment surprisingly buoyant - but they

have not maintained Taiwan's economic inequality

at

the low levels of the glory

days of Taiwa n's economic miracle.

Evidence from other advanced economies suggests that large social expendi

tures and arrangements

for

social corporatist structures thro

ug

hout the economy

can be effective in keeping inequality at the levels Taiwan witnessed in the late

1970s and early 1980s (Hall and Soskice 200 I).

As

mentioned earlier in this

chapter, the countries that cluster together as the most equal (according to their

Gini

coefficients)

are

social democratic states in Europe. Taiwan, compared

to

those states, has very low levels of social expenditures - averaging around to 6

percent of GDP in the latter half

of

the last decade. This level

of

expenditure is

half of that of even the U.S., which has a very weak welfare state

in

comparison

to other OECD economies. Since the enactment

of

a national pension in 2007,

there

has

not been a major political push

in

Taiwan to build a more generous and

comprehensive welfare state.

To end on a pessimistic note, strnctural factors do not point to Taiwan build

ing a much more generous welfare state any time soon. Unforrunately

for

Taiwan, a key poli tical basis

of

the high level

of

social expenditures in European

social democratic states appears

to be an

electoral system

of

proportional repres

entation (Iversen and Soskice 2006). Taiwan's level of proportional representa

tion is quite weak. Another factor supporting higher welfare spending in

European social democratic countries is strong representation

of

worker inter

ests. Taiwan does no t have strong and well organized labor unions taking part in

economic decision-making that

cha

racterizes the coordinated market economies


10/10

98 D.B. Fuller

of Hall and

Soskice's varieties

of

capitalism theory, the very

economies

that

exhibit

high

levels

of socio-economic

equality. Class cleavages that might

motivate a

rum

to

more

soc

ial democratic

policies in

Taiwanese

politics also

remain

quite weak. Thus,

from a variety

of

angles, political and social features

are likely to constrain attempts to return to the equality o a Taiwanese economic

miracle

.

Notes

A more positive spin on

1he

length of the negotiations was made by President Ma

when he said in April 2012 1ha1 he expected the negotiations 10 be completed within

two years (Taipei Times, July 4, 2012).

2 The export figures cited by CENS for 2011 are based on China's trade statistics and

appear to

be

much higher than Taiwan's own figures for exports to China.

3 The data used to rank Taiwan in comparison with the OECD countries is supposedly

2008 data, but the Gini coefficient used for Taiwan is 0.304, which is much lower

than the official government figures from Taiwan. f hose were used, Taiwan would

rank in the bouom third in terms

of

equality.

4 II should be noted that the average Gini for the OECD has also moved over the inter

vening decades so that although Taiwan would be in the top th ird for equality accord

ing to the 2008 Gini figures, i t may not be when using the figu res for OECD members

in the 1980s. Even social democratic countries like Sweden have seen their Gini coef

ficients rise somewhat since then. However, Sweden's Gini coefficient today is still

lower than Taiwan's was

al

its most equal and serves to demonstrate that many social

democratic countries have successfully constructed limits to the rise of inequality in

their countries.

5 The Taiwan Affairs Office of the State Council of the PRC wasted no Lime in

denouncing this platfonn as unacceptable ( OPP Leader's Policy Guidelines Unac

ceptable, Xinhua, August 24, 2011).

6 Liberal market economies (LMEs) as defined by Hall and Soskice (2001) are essen

tially those economies that use market mechanisms to structure most of their eco

nomic activities. In Hall and Soskice's classification (2001: 20), the LMEs are in fact

the Anglophone OECD economies: the U.S., U.K., Canada, Australia, Ireland and

ew Zealand.

7 Gold ( 1986: 5) states

1ha1

Taiwan's Gini coefficient was 0.558 in 1953.

8 Hon Hai and affilia1ed companies had the lead inventor for their US PTO utility

patents in China for only 22.8 percent of pa1en1S from 2003 to 2007. The lead inven

tors were almos1 always located in Taiwan. The only large active patenting Taiwanese

firm (

act

ive palenti

ng

defined as firms with

at leas1

one lead patent from China per

annum by 1he USPTO) with anything close to this amount

of

activity was Asia

Optical, with 20.45 percent.

During the first 11 months of201 1, Taiwan's agriculrural exports to China soared 135

percent (CENS, February I, 2012).

10 TPP was originally a free trade agreement between New Zealand, Australia, Brunei,

Chile and Singapore signed in 2005.

11 These concerns may themselves be overstated because regional FTAs in Asia tend to

be relatively hollow (i.e. they offer lillle effec ve rrade liberalization among FTA

members) (Dent 20 I0) and the secto

rs

of greatest concern for Taiwan, such as

machine tools, confront increasingly competitive Chinese firms (Brandt and Thun

2010).

ECFA s empty promise nd hollow threat 99

References

Brandt, L and E. Thun (2010) The Fight for the Middle: Upgrading, Competilion and

Industrial Development in China, World Development, 38( 11): 1555-1574 .

k i n ~ lnstilUlion, G ettin g Beyond Beef in US-Taiwan Relalions, Brookings Norlh

east Asia Commentary, Number 57, 2012.

Chu, Wan-wen (2011) Minzhuhua y jingji fazhan: Taiwan fazhanxing guojia de

buchenggong zhuanxing (Democratization and Economic Developmenl: T he Unsuc

cessful Res1:ucturing of Taiwan Developmen1al State),

Taiwan Shehui Yanji Jikan

(Taiwan Social Research Quarterly), 84: 243-289.

Deni,

C.

(2010) ''Free Trade Agreements

in

the Asia-Pacific a Decade On: Evaluating the

Pas1, Looking to the Future, International Relarions ofrhe Asia-Pacific 10:

201 - 245. •

Fuller, (2008) . The Cross-Strait Economic Rela onship' s Impact on Development

m Taiwan and Chma, Asian Survey, 48(2): 239-264.

Gold, T. ( 1986) Srate nd Society in rhe Taiwan Miracle. Annonk, NY: M.E. Sharpe.

Hall, P.A. and D. Soskice (2001) Varieties

o

Capitalism. Oxford: Oxford University

Press.

Iversen, T. and D. Soskice (2006) Electoral Institutions and the Politics

of

Coali1ions:

Why Some Democracies Re-distribute more than O

th

ers,

American Polirical Science

Review, 100 (2): 165- 181.

Ma Defends ECFA and His Record on Agriculture Policy, Taipei Times, Seplember

1

1,

2011.

Rosen, D.H. and Zhi Wang (2010) Deepe ning China- Taiwan Rela1 ionsthrough the Eco

nomic Cooperation Framework Agreement, Pe1erson llEPolicy BriefPBl0-16 (June).

Wong, Joseph (201 1) Belting on Biotech: lnnovarion

nd

rhe limits

of

Asia s Develop

menral Srate. Ithaca, NY: Cornell University Press.

Documents

ECFA's Empty Promise and Hollow Threat