China-Taiwan: Trade Agreement - The Economist

China and Taiwan - The ties that bind?
The Economist, July 1st, 2010

Worries in Taiwan that economic interdependence will succeed for China where sabre-rattling failed

Taipei - CHANTING opposition to unification with China, tens of thousands of protesters massed on June 26th outside the office in Taipei of Taiwan’s president, Ma Ying-jeou of the Nationalist party, or Kuomintang (KMT). Their target was the Economic Co-operation Framework Agreement (ECFA), one of the most significant agreements between China and Taiwan since 1949, when the Communists routed the KMT in the civil war. One placard, with a doctored image of Mr Ma kissing the cheek of China’s president, Hu Jintao, scolded: “Don’t embrace the enemy.”

The main opposition Democratic Progressive Party (DPP) said 100,000 demonstrators took part; the police estimated just 32,000. The DPP denounces the agreement as a threat to jobs on Taiwan. Worse, the independence-leaning party complains, it could be a step on the way to Taiwan’s eventual incorporation into China.

Both warnings are overblown. But Taiwan is entering a lengthy season of frantic politics in which a nuanced debate about trade will be an early casualty. In November mayoral elections will be held in Taiwan’s five key municipalities. The DPP is hoping for a boost as it prepares for parliamentary and presidential polls in 2012.

Taiwan’s government says the ECFA, signed on June 29th in Chongqing, the KMT’s old civil-war headquarters, will prevent Taiwan’s economic marginalisation. Because of Chinese pressure, Taiwan has been excluded from a recent spate of free-trade agreements (FTAs). This has worried the government, especially since an FTA between China and the ten-member Association of South-East Asian Nations (ASEAN) came into effect this year.

China’s prime minister, Wen Jiabao, has promised that Taiwan, which enjoys a big trade surplus with China (see chart), will “benefit more” from the ECFA than the mainland. Indeed, over the next two years China will lower tariffs for 539 categories of imports, worth $13.8 billion a year, and open 11 service categories, including banking (see article). To appease an important lobby, the deal includes 18 farming and fishery categories, with no reciprocal liberalisation in Taiwan. Overall, Taiwan will lift tariffs for only 267 categories of imports from China, worth $2.9 billion.

Mr Ma hopes the pact will demonstrate the benefits of his pragmatism in dealings with China. Unlike his predecessor, the DPP’s Chen Shui-bian (now in jail for corruption), he has not trumpeted Taiwan’s separate identity. Rather, the KMT has reached agreements allowing scheduled flights across the strait and Chinese tourists to visit Taiwan.

The DPP portrays the pact as a Trojan horse. Its leader, Tsai Ing-wen, has rejected the government’s assertion that there will be a net employment gain of 260,000. In a rare televised debate with Mr Ma, she said 5m jobs in Taiwan would be adversely “affected” by the pact. A DPP spokeswoman, Hsieh Huai-hui, says her party fears the ECFA will “strengthen interdependence”. China, she says, will use it as a stepping stone toward political integration.

The DPP gained some ammunition in early June when a Chinese spokesman gave a seemingly negative response to Mr Ma’s oft-stated hope that the ECFA might encourage other countries to sign FTAs with Taiwan. They have hitherto held back so as not to upset China. The Chinese spokesman’s remarks, though not explicitly ruling out such FTAs, drew a rare rebuke from Mr Ma’s government.

A government committee’s rejection of proposals for a referendum on the ECFA has also galvanised opposition. China recoils at any hint of a plebiscite in Taiwan, fearing one might one day be used to justify a formal declaration of independence or to block reunification. Mr Ma has denied opposing an ECFA referendum, but the DPP suggests the committee’s decision reflected Chinese pressure on the KMT.

The DPP can still get thousands of people onto the streets, but it has struggled to expand its support beyond 30-40% of the electorate. It also lacks a convincing challenger to Mr Ma in the 2012 elections. Many analysts believe that Su Tseng-chang, its candidate in the Taipei mayoral election later this year, would do better than Ms Tsai. Mr Su is unlikely to win in Taipei, a KMT stronghold. But an honourable defeat might boost his presidential hopes.

Devising a strategy for dealing with China will be hard for the DPP. Harping on about the ECFA may not go down well with voters if the risks the DPP stresses do not materialise. The government predicts GDP will grow by more than 6% this year after contracting by nearly 2% in 2009. Merchandise exports to China, which account for almost 30% of Taiwan’s total, have been helping to power this recovery.

China’s backing for Mr Ma is clear. It studiously avoided any criticism of Taiwan itself when America approved $6.4 billion-worth of arms sales to the island in January. But for all its efforts to show goodwill, it has made no attempt to scale down its military deployments on the coast facing the island, where its missile build-up continues. A defence-ministry official in Taipei points to a map of the island and sweeps his arm around to its east to show where, in the past year or so, Chinese naval forces have begun to extend their war-gaming reach. China is still, he says, a “clear and present danger”. Greed for China’s market is good for the KMT’s electoral prospects; but fear of its long-term intentions can still boost the DPP.

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