Taipei, July 24th 2010: The much talked about Economic Framework Cooperation Agreement (ECFA) between Taiwan and China is now a fait accompli. The agreement was signed June 29 during the fifth round of cross-straits negotiations held in Chongqing, China between Taiwan's semi-official Straits Exchange Foundation (SEF) and its Chinese counterpart, the Association for Relations Across the Taiwan Straits (ARATS). A copyright protection agreement establishing a mechanism to reinforce anti-piracy laws was signed at the same time although an investment protection pact and a proposed cross-straits medical cooperation pact have been held over until the sixth round of talks scheduled for later in the year.
Only following signature were the contents of the ECFA revealed and Taiwan's KMT-dominated legislature will only be able to accept or reject the agreement in toto. The government has ruled out any opportunity to review individual clauses. The status of the accord has already come into question as in law it is an agreement signed between two private organizations. Critics have pointed out that this may cause some problems if the agreement is lodged with the World Trade Organization (WTO) (which Taiwan has said it would do) and could be used by China to further erode Taiwan's status by claiming it to be a domestic agreement rather than an FTA, but this has been brushed aside by supporters as a mere technicality. The agreement does provide for establishment of a cross-straits economic commission to be responsible for follow-up negotiations and overall supervision of the agreement and this may go some way towards mitigating concern over this aspect.
In many respects the ECFA follows the Closer Economic Partnership Agreement (CEPA) signed between China and Hong Kong back in 2003. However, one key clause — that pertaining to safeguards, contained in the CEPA, appears to be missing from this latest document. Article 9 of the CEPA states that either side can temporarily suspend tariff reductions in the event that "the implementation of the CEPA causes a sharp increase in the import of [certain] products originating from the other side which has caused or threatened to cause serious injury to the affected side's domestic industry." There is no such clause in the ECFA and therefore no feasible means for Taiwan to suspend imports from China that threaten domestic industries. Taiwan's only recourse would be to the termination clause whereby either side could give written notice of termination of the entire agreement. Only after such notice had been given would Taiwan and China hold negotiations within 30 days to resolve differences and if the parties failed to reach consensus, termination would occur after 180 days. The problem is that such termination would be seen as a political act with dramatic consequences; the reality is that Taiwan must rely on China's goodwill not to undertake dumping or other actions that would damage Taiwan's manufacturing base.
Supporters of the pact are placing much emphasis on the "early harvest" provisions which will be implemented in three phases over the next two years. When the ECFA takes effect, which is expected to be towards the end of this year once both sides have completed their internal procedures, the early harvest lists will allow the 539 items on Taiwan's list, amounting to around US$13.8 billion in exports per year, to receive zero tariff treatment within the next two years, while Chinese exporters will get a reciprocal deal on 267 items representing some US$2.9 billion in exports per year. The real value has yet to be determined. While heavy industrial items such as iron and steel from Taiwan will have easier access to China's market, these are industries which are now being downsized in China and so it suits Beijing to allow entry of these items. On the other hand, high tech items such as flat panels, machine tools and inputs to solar power generation have not been included. China has embarked on an industrial upgrading strategy which will see it in the future competing with Taiwan in these high-end items and their exclusion from the early-harvest list will force Taiwanese companies to shift some of their production to the mainland of China. In short, at first sight it appears that the immediate benefits are slanted in Taiwan's favour while the longer-term benefits accrue to China.
Nevertheless despite the reservations in some quarters, the general mood among economic analysts is upbeat. A number of institutions and think tanks have once again upgraded their economic outlook for Taiwan over the immediate term. The International Monetary Fund (IMF) is now forecasting GDP to grow by 7.7 percent this year (up from the April estimate of 6.5 percent). The local Chung-Hua Institute of Economic Research is now forecasting 6.94 percent (up from 4.99 percent). With early harvest provisions not expected to kick-in until 2011, the immediate reason for better than expected GDP growth is attributed to better than expected export orders (Export orders for June totalled US$34.22 billion and analysts predict orders could reach a record-breaking US$400 billion for the whole year) and improved domestic consumption.
Domestic investment is also recovering. CIER expects domestic investment to increase 15.79 percent for the full year, its highest level since 1992, with private investment expanding 22 percent, compared with a contraction of 19.38 percent last year.
Unemployment, inched up slightly in June to 5.16 percent (seasonally adjusted 5.2 percent) on the strength of new graduates entering the workforce. For the first half of 2010, unemployment averaged 5.47 percent, down 0.26 percentage points compared with the same period last year. Most analysts are forecasting a steady drop in the unemployment rate as the employment generation effects from closer cross-strait ties and the government's various initiatives to attract foreign investment. take hold. The general consensus among the various agencies is that the jobless rate will fall below five percent by the end of the year.
Barring unforeseen events, the general expectation is that now that China has the deal it has been wanting with Taiwan, the pressure will be lifted for a period to win over Taiwanese hearts and minds and ensure the re-election of President Ma Ying-jeou and his KMT administration in 2012. While both sides have emphasized that the EFCA is an economic agreement, the political ramifications are evident for all to see. Taiwanese vote for the most part with their hip pockets and just as President Ma's popularity plummeted with the onset of the global financial and economic crisis, it could just as easily rebound as the economy recovers – and that appears to be precisely what is happening. Recent telephone polls conducted by the Cabinet Research Office have shown that Ma's overall approval rating now stands at 46.8 percent and that 68.3 percent of voters approve of his efforts to approve cross-straits ties. These numbers need to be seen against the backdrop of another independent survey which showed that 69.9 percent remained against unification with China notwithstanding the signing of the ECFA. This was the highest figure recorded since February 2006. Tellingly, even among government supporters, 60 percent were opposed to unification with China and only 30.6 percent supported unification.
Clearly Mr. Ma and his team remain where they have been for some time now – between a rock and a hard place.
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