Should Taiwan put all its egg in China’s basket?

    Posted on: 2010-06-07 (台灣) 出版

Should Taiwan put all its egg in China’s basket?

On the European home ground, the EU has contributed to economic development, peace and democracy. However, there are several reasons why the upcoming historic trade agreement between Taiwan and China cannot be compared with the EU. Unlike Europe’s cooperation, the relationship between China and Taiwan is like quicksand because Taiwan’s democracy is not recognized as a sovereign state and exposed to China’s claim to sovereignty over the island state.

By Michael Danielsen, Chairman of Taiwan Corner ®

First Published in the Danish national newspaper Politiken as an international comment on June 7. 2010

On the European home ground, the EU has contributed to economic development, peace and democracy. However, there are several reasons why the upcoming historic trade agreement between Taiwan and China cannot be compared with the EU. Unlike Europe’s cooperation, the relationship between China and Taiwan is like quicksand because Taiwan’s democracy is not recognized as a sovereign state and exposed to China’s claim to sovereignty over the island state. Actually, China demands that its sovereignty claim becomes the basis of the trade agreement. As a consequence, this agreement can have far reaching consequences for peace between the parties, Taiwan’s sovereignty and domestic divisions in Taiwan.

The trade agreement may be seen as a Taiwanese rescue strategy addressing the island state’s exclusion from FTAs, both within Asia and between for example the EU and Taiwan’s competitors South Korea and Singapore. China is blocking Taiwan’s participation in FTAs, and economic calculations show that the isolation damages Taiwan’s economy.

The direct objective of the trade agreement is therefore to break Taiwan’s isolation by first achieving free trade with China on a wide range of products under the same conditions as in Asia’s new major free trade area between ASEAN and China.

The specific content of the agreement has never been published, but it will probably include a normalization of trade under the WTO which they have never completed even though both are members. In addition, agriculture will probably be excluded because Chinese agriculture is deeply unpopular in Taiwan, and Taiwan will without delay get reduced tariffs on for example petrochemicals, textiles and machine parts.

Taiwan’s government wants to go beyond trade liberalization and include coordination of trade and industrial policies which leads to a deeper integration. If the agreement is used wisely, Taiwanese firms may be lifted out of their role as subcontractors and may increasingly avoid labor-intensive industries, and instead promote their own brands and start exporting Taiwan’s service industry.

Taiwan business people are motivated because they experience growing challenges from competing Chinese companies and from new labor laws in China. Previously, Taiwanese businessmen received benefits because they functioned as a bridge between Taiwan and China, but these communication channels have increasingly been entrusted to the political level.

Economic-wise, China gains modestly from the trade agreement. China’s main interest appears to be primarily political by making Taiwan economically dependent on China. They have already concluded 12 agreements which have significant political benefits for China. The agreements give access to investment at Taiwan’s stock exchange, in construction projects and in several industries in Taiwan. In addition, China’s strategy is supported by direct flights between Taiwan and China, Chinese students entering Taiwanese universities and Chinese tourism in Taiwan.

China’s political strategy is clear from its insistence that the agreement shall be concluded under China’s one-China policy which dictates China’s sovereignty over Taiwan. Taiwanese President Ma tries to escape this issue by referring to China as specified in the island’s constitution as ‘Republic of China’ (Taiwan’s official name). Therefore, the agreement is politically explosive in Taiwan, and President Ma has been criticized for undermining Taiwan’s sovereignty. The argument is that by using the one-China framework, the whole agreement may not fit into the WTO which could otherwise maintain Taiwan’s current independent trade position.

Taiwan’s economic integration with China grew historically from 2000-2008 during the former DPP government and 40% of the exports go to China. Taiwan is economically relatively small compared to China and this forces Taiwan to focus on broader trade agreements if the island state wants to avoid a growing dependence on China.
Taiwan can break the dependence by concluding FTAs with U.S., Japan and EU. However, the trade agreement gives no guarantees to conclude FTAs with other countries. Although the trade agreement puts pressure on China, China will probably only permit Taiwan to enter FTAs with countries which have signed a FTA with China already. This excludes a lucrative agreement with the EU.

The debate about the trade agreement is heated in Taiwan. In addition to the sovereignty issue, the opposition party DPP has criticized the agreement for allowing imports of cheap Chinese goods that damage the local industry, increase unemployment and inequality. Also, the opposition have criticized the government’s secrecy regarding the content of the agreement.

President Ma’s popularity is very low and his nationalist party, KMT, lost the local elections in December and has only won three parliamentary seats in 11 by-elections. The opposition seems to have caught the attention from the population as approximate 50% of the population do not want the agreement to be signed, 67% do not know what it is about, and only 3.9% believe that the agreement will ultimately benefit ordinary citizens. The DPP and the other opposition party TSU (Taiwan Solidarity Union) want a referendum, which 64% support, but it has not been allowed.

Several observers question if the trade agreement can create peace. They point out that Taiwan’s political elite is deeply divided about Taiwan’s future. Taiwan’s two major political parties do not share the same ultimate goal: the DPP is working for independence, while the KMT supports unification with China and will use the trade agreement as a precursor to a “Cross Strait” market between Taiwan and China. The trade agreement will thus increase the divide in Taiwan.

In addition, the trade agreement does not change the fundamentals in the conflict between Taiwan and China, namely, that China will not allow Taiwan genuine international recognition, and that Taiwan’s democracy prevents a Taiwanese government from giving China sovereignty over Taiwan. The agreement is therefore politically explosive.