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Demystifying ECFA

The Early Harvest List, 3 Years On

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The Early Harvest List, 3 Years On

Source:CW

Exclusive cross-strait trade figures throw doubt on the notion of a free trade agreement whose "benefits outweigh the drawbacks." What are the true results of ECFA?

The Early Harvest List, 3 Years On

By Hsiang-Yi Chang
From CommonWealth Magazine (vol. 546 )

When Taiwan and China inked the cross-strait Economic Cooperation Framework Agreement (ECFA) on June 29, 2010, they also drafted an "early harvest list" covering trade in both goods and services (the latter focusing primarily on the finance industry), which went into effect on January 1, 2011.

At the time the government mounted a propaganda offensive trumpeting the benefits of ECFA, claiming it would have a large-scale impact on economic and trade growth, boost product competitiveness, as well as attract foreign investment and provide domestic employment opportunities. Meanwhile, citing reduced tariffs on 539 items on the early harvest list, far exceeding the 267 items Taiwan had offered to lower tariffs on, Beijing claimed it was "yielding benefits" to Taiwan that would help Taiwan grow a trade surplus with China.

The facts do not bear out those claims.

On the surface, since coming into effect in 2011 Taiwan's exports of items to China on the early harvest list have grown by a sizable 35 percent, outpacing overall growth of exports to China of 6.3 percent. This seems to indicate that ECFA has had a positive impact on boosting the export of Taiwanese products to China.

However, increased sales cannot be equated with improved competitiveness. According to PRC Customs statistics obtained by CommonWealth Magazine through exclusive channels, the market share of the 539 Taiwanese cross-strait export items on the reduced tariffs list has declined in each successive year since ECFA, only showing a slight uptick late last year.

"Among the numerous reasons that the market share of early harvest items has not only failed to climb but has actually dropped include China's own industrial transformation and development of import substitutes. Other factors include competition from other countries' products, and the exchange rate as well," relates Liu Da-Nien, director of the Chung-Hua Institution for Economic Research's Regional Development Study Center. "But the most important one, of course, is whether the products exported are competitive."

The situation is much different among the 267 items Taiwan opened to China on the "early harvest list." Although over the past three years the growth rate of China's exports to Taiwan (25.8 percent) is lower than the overall growth rate of Taiwan's exports to China, the market share of Chinese products in Taiwan has leapt from 24 to 30 percent since ECFA went into effect.

In other words, the critical truth behind all the statistics is that it is an unrealistic illusion to look for China to "yield benefits" to Taiwan via free trade. In the face of intensifying international competition, the lowered tariffs that free trade agreements bring have never been a panacea for "saving exports" or "rescuing the economy."

Surveying the major industries on the early harvest list reveals that the benefits generated by ECFA have fallen far short of the rosy predictions originally anticipated.

Stainless Steel: From Early Harvest to Early Harm

The stainless steel industry, specified on the ECFA early harvest list, has barely survived predatory pricing by China and Korea, forcing Taiwan's Ministry of Finance and Ministry of Economic Affairs to initiate anti-dumping defensive measures early this year.

"Four or five years ago, people said that once ECFA had been signed, tariffs would be lifted on products marketed across the strait, and everyone would 'make out like bandits.' Well, only China has made off with the loot, and we're suffering badly," relates Mr. Tsao, a business owner in the stainless steel industry cluster at the Xiaogang Linhai Industrial Zone in Kaohsiung. Mr. Tsao, in his sixties, points to the stainless steel plants surrounding the China Steel smelting facility and notes, "The stainless steel (raw material) is cut in China and sold over here for 30 percent less, so naturally the downstream buyers are going to buy from them. What can we do about that?"

Mr. Tsao formerly operated a small stainless steel cutting facility, contracting cutting and rough finishing for mid-stream cold rolling mills. His operation managed to get by for over a decade under the vertical integration of large steel plants and competition from his peers.

Once the stainless steel industry was included on the early harvest list, he anticipated a positive turn along with increased exports in cold rolled steel materials, only to be taken by surprise by the massive dumping of Chinese and Korean steel on the Taiwanese market on the strength of their lower costs. Suffering from hemorrhaging losses under the subsequent strain on the local stainless industry, Mr. Tsao was forced to shut down operations last July.

According to industry figures, the import of 300 series cold rolled steel sheets (used in the production of automobile hubcaps, windows, elevators, and assorted mechanical and tool parts) to Taiwan from China and Korea in 2011 and 2012 alone climbed steeply to an average of nearly 100,000 tons per year on the strength of pricing 30 percent lower than the market rate. That volume is equivalent to a full 30 percent of the total output of Taiwan's top two stainless steel manufacturers.

Even the survival of Taiwan's top stainless steel manufacturer was imperiled by the unfair competition.

"A behemoth like Yieh United Steel Corp. (YUSCO, whose operations span mid- and upstream hot rolling and mid-stream cold rolling), with facilities abroad, is able to get by," an industry insider reveals. However, before Taiwan's anti-dumping bill was passed early in the year, a handful of mid-size, publicly listed cold rolling mills – whose capacity utilization rate plummeted at one point below 20 percent – "barely made it back from a tour in hell."

"Early harvest turned out to be early harm. To be honest, it was really unexpected," remarks Tseng Wen Sheng, director-general of the Kaohsiung City Economic Development Bureau. Stainless steel is a key industry in Kaohsiung, leading to expectations of a windfall from ECFA, however only the opposite occurred under the sweeping changes of the international and Chinese steel industries.

Only with increased communication with industry, and thorough prognosis of the state of the industry prior to engaging in trade talks can the likelihood of encountering similar situations in the future be reduced.

Petrochemicals: Marginalized by China Imports

The rapid changes across China's economy and industry, and the example of "early harvest, early harm" in the steel sector, leave many steel industry insiders to angrily suspect that "ECFA (the early harvest list) was reached for naught."

The petrochemical industry, which accounted for the largest export volume among the items on the early harvest list, made profits hand over fist in the past few years. However, in retrospect that seems to have been just the calm before the storm.

This has to do with the "golden goose" that yielded great profit margins for the petrochemical industry over the past several years, a hydrocarbon known as p-Xylene (PX) used as raw material for chemical fibers. Taiwanese manufacturers benefited while China delayed further expansion of its petrochemical industry, due to environmental protests, and was unable to engage in import substitution.

Yet as early as five years ago, China caught up to Taiwan in the production of Pure Terephthalic Acid (PTA), Taiwan's leading petrochemical export to China in the early years. One petrochemical plant after the other, boasting comparable technical sophistication and two to three times the scale of Formosa Plastics' Sixth Naphtha Cracker facility, was rapidly completed and went into production, and Taiwan's sole remaining advantage – quality – became obviated as PTA suffered from being left off the early harvest list, making "Made in Taiwan" no longer China's only option in recent years.

Today, the demand for PX is decreasing, China's petrochemical industry is constantly increasing production capacity, and extra competition is arising from Korea and Japan; consequently, the Taiwanese petrochemical industry, headed by Formosa Chemicals, faces unprecedented crisis.

"Taiwan's petrochemical industry is now at a crossroads between life and death. Do you want this two-trillion Taiwan-dollar industry to continue developing in Taiwan? If you do, then you must obtain more equal trade conditions for Taiwanese businesses," a top executive at Taiwan's leading petrochemical company related worriedly upon learning that cross-strait negotiations on the trade in goods had reached an impasse over petrochemicals.

Agriculture and Fisheries: Politics Driving Economics

Based on the figures alone, the biggest beneficiaries of ECFA to date are the 18 agricultural products China opened up to Taiwan, which some consider the centerpiece of China's "yielding benefits" to Taiwan's farmers.

According to statistics from the Ministry of Finance Customs Administration, exports of the 18 early harvest items to China have grown by 282.4 percent in the three years since the ECFA early harvest list went into effect. Among these, live grouper – which accounts for 70 percent of export volume – is often cited by the government to trumpet the accomplishments of ECFA.

However, actually surveying the situation in Pingdong, where grouper aquaculture has been practiced for a quarter century, one does not see all the businesses benefiting and earning stacks of renminbi as once imagined. Rather, the "grouper kings" with their technology, large scale, political and business connections in China, and established distribution channels, dominate the sector. In the meantime, the average small- or medium-size aquaculture operation, lacking the key technology to open direct channels with China and facing a surplus of competition as operators swarm in looking to profit, is caught in the middle struggling to survive.

From mangoes to oranges, dancing-doll orchids to milkfish, underlying the export of Taiwanese agricultural goods to China is the inequitable competition that has accompanied trade in the wake of the ECFA pact.

"They're the ones turning a profit. The most we get out of it is that it's easier to sell our produce," says Chen Chin-yi, a 50-something fruit farmer from Kukeng in Yunlin County. He and his wife's hands are covered in calluses from the daily chores of planting, pruning, and spraying their grove of orange trees as tall as a person.

"Before an election some time back the agricultural council and councilmen came to tell us how great it would be after the ECFA was signed, how prices would be high, and we could sell unsold surplus to China, so we should support the government," he relates with a snicker. "But it didn't turn out that way. China doesn't come and buy directly from us, but through a middleman. With all the fruit farmers around here, and prices all being about the same, who do you think he (the middleman) buys from? That comes down to relationships, connections, and even bribes in some cases. If I have to make money that way, I'd rather not."

"The truth is, a number of fruit items China imports from Taiwan are really just political orders," says Huang Cheng-ching. The chief officer of Tainan's Yujing District Agriculture Committee, Huang is well versed in the practical workings of cross-strait agricultural trade, having gone over to China numerous times to market Taiwanese mangoes.

Taking the example of oranges, a case of imported oranges sells for the wholesale price of around 35 renminbi in China. Even if oranges were acquired for free at the orchards in Taiwan, such a price would not even cover the cost of shipping to China. However, since China's Taiwan Affairs Office has budgeted subsidies for their wholesalers to purchase oranges from Taiwan, businesses still stand to make a profit. This has in turn led to the illusion of sales growth for oranges and other fruit in the wake of ECFA's passage.

"Do you know where these oranges go after they're exported from Taiwan? The entire lot gets tossed in the sea," says Huang bitterly. For fruit with no actual competitiveness after shipping costs are factored in, Chinese wholesalers are only interested in the profits to be made from their subsidies. What profits are made from the purchase of fruit from Taiwan are skimmed away one cut at a time by local legislators, councilmen, and political operatives with excellent cross-strait political and business ties working through "import-export companies." However, there are no actual benefits for the farmers themselves.

While in China working on behalf of Taiwanese farmers to expand sales across the strait, Huang Cheng-ching has personally encountered a provincial-level official that demanded a payoff of 500,000 renminbi. And in Taiwan, legislators and even gangsters with zero knowledge of agriculture have set up trade companies and approached Huang with orders in hand looking for produce.

"ECFA really only yields profits for agricultural products on the surface. We can do without political orders," Huang states flatly. "Instead, achieving transparent commercial mechanisms, regaining normalcy, and returning the profits to the people through equitable bilateral trade agreements would truly serve the interests of our farmers."

Textiles and Machinery: The Law of the Jungle

Textiles, machinery, and parts and components are on the ECFA early harvest list for tariff reductions. However, after three years of general industry "bullishness," the law of the jungle remains in place, where the strong get stronger and the weak are forced out.

Taiwan's textiles industry exports 70 percent of its production, with China as its largest single market. According to the latest analytical study by the Taiwan Textile Federation, since the ECFA early harvest list went into effect, the highest growth in cross-strait exports from Taiwan has been achieved by major mid-stream vendors where they enjoy a relative technical advantage, such as in products made from cotton blend materials and synthetic fibers, with 35 percent growth over the past three years.

However, looking at midstream and downstream apparel and hosiery manufacturers, inexpensive Chinese-made products imported in vast quantities have occupied a 50 percent share of Taiwan's import market, gravely threatening the existence of Taiwan's smaller players.

Further, the outward flow of Taiwanese textile business has not been stemmed by the ECFA pact. On the contrary, the overall production value of the textile industry (down NT$40 billion), the number of workers (down by 5000), and average production value per worker (down NT$160,000) have all declined in the three years since ECFA went into effect.

Even though Everest Textile, a major maker of functional fabric, is one of the few business to have benefited from the ECFA early harvest list, company president Roger Yeh believes that the only way for businesses remaining in Taiwan to avoid being eliminated is to be self-reliant and resourceful, aggressively develop their own brand, and develop products with special functions.

In the machinery, parts and components industry, the tool sector is widely seen as enjoying Taiwan's biggest competitive advantage. However, it currently faces severe challenges as the PRC has marked tooling machinery as a "sensitive industry" (target industry). While China has aggressively invested in this sector and ramped up production, Taiwan's tooling machinery industry suffered a drop of 23 percent in cross-strait exports last year, compared to an overall drop in tooling machinery exports of 18 percent in 2013.

The international trading environment is changing rapidly, and industries on either side of the strait are gradually moving from a complementary to competitive relationship. From statistical figures to the situation on the ground in the industry, scrutiny of the outcome three years since the ECFA early harvest list took effect reflects the truth that there is no such thing as a free trade agreement "whose benefits outweigh drawbacks," nor is there such a fanciful thing as "unilateral yielding of benefits."

However, looking from the other side, asked by CommonWealth Magazine if they opposed ECFA and subsequent corresponding negotiations, the majority of business operators across all industries agreed they must boldly go forth: "liberalization is the trend internationally; free trade agreements must be signed, but only once an overall strategy and accompanying measures are in place."

Taking on the Trade in Goods

The ECFA early harvest list accounts for less than 10 percent of the entire cross-strait trade volume, whilst the real deal is the trade in goods agreement that touches upon over 7000 individual products. This agreement will even go so far as to shape the new face of cross-strait trade over the next several decades.

Confronted by intense competition from ASEAN countries and Korea, government and industry fret that "if we don't sign (FTAs) today, tomorrow we'll be marginalized." However, examination of the results yielded under the ECFA early harvest list reveal over and over the importance of coming up with comprehensive development plans, and formulating accompanying measures to cope with the impact on small- and medium-size businesses and individual industries prior to entering negotiations.

After decades of fighting on the international scene, Taiwanese businesses do not shrink from competition. However, in ECFA and such future regional FTAs as the Trans Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership, the government should represent domestic industries much better in seeking favorable conditions.

Competitiveness is preferable to charity. Rather than hastily signing slickly packaged free trade agreements that bring only real detriments and no actual benefits, it would be more productive to invest more resources and efforts to thoroughly weigh potential benefits and drawbacks, and coalesce industry consensus.

Free trade agreements should not be subject to the pressures of timetables, but should have a clear direction, an execution plan, and remedial measures in place. Carefully crafted FTAs that steadily and reliably yield results are much better for Taiwan.

Translated from the Chinese by David Toman

Keywords:

好友人數