Taiwan is entering a busy season for international negotiations.

Aside from negotiating memorandums of understanding on financial supervisory cooperation and an economic cooperation framework agreement (ECFA) with China, Taiwan will also participate in the Asia Pacific Economic Conference leaders' summit in Singapore in mid-November and a conference on climate change in Copenhagen in December.

Clearly, however, the most critical of these initiatives is the ECFA, which is intended to reduce tariff barriers, liberalize investment, spur economic cooperation, and systematize trade between Taiwan and China.

The ECFA has been sold as having boundless promise. But once it is signed, can it automatically solve Taiwan's economic problems into the foreseeable future as advertised? And is Taiwan giving any broader thought to its global economic and trade policies beyond the economic cooperation deal with China?

The government argues that after signing the trade deal, Taiwan's GDP will rise an estimated 1.7 percentage points and create a net gain of about 260,000 jobs, expecting that approximately 340,000 new jobs will be added compared to 80,000 lost. But ECFA opponents have presented their own estimates and believe job losses will be much higher, with 120,000 people ending up out of work.

"The current models available use static trade volumes to derive their estimates and cannot fundamentally account for dynamic trade and the even more important impact of investment diversion,"says Taiwan Institute of Economic Research (TIER) associate research fellow Wen-heng Chao, an expert on free trade.

Chao firmly believes that investment diversion will have a devastating impact on Taiwan, arguing that once an ECFA is signed, large companies may stay put, but small- and medium-sized enterprises (SMEs) will move offshore in droves.

SME Exodus Looms

At present, sales at many SMEs are relatively evenly divided between domestic and foreign markets, leaving them reluctant to move to China for fear of losing market share in Taiwan because of tariff barriers and other constraints. But once an ECFA is signed, products made in China will be able to enter Taiwan's market duty-free. And after China forms a free trade zone with the Association of Southeast Asian Nations (ASEAN) at the beginning of 2010, Taiwanese manufacturers in China will have a greater competitive footing relative to ASEAN products. This may prove an irresistible incentive for Taiwan's SMEs to emigrate across the Strait en masse.

The machinery and equipment sector is a prime example. Domestic sales account for about 45 percent of the sector's revenues, while exports account for the balance. Of the exports, 31 percent go to China and another 16 percent are shipped to ASEAN countries. At present, Taiwanese exporters face import duties on shipments to both markets.

That will not change if Taiwan does not sign an ECFA with China. But if an economic cooperation agreement is reached, these manufacturers will almost surely relocate to China because of the intense pricing pressure they would otherwise face in Taiwan from Chinese producers and Taiwanese companies that have already set up shop across the Taiwan Strait. If they don't move to China, their products will also continue to face tariff barriers in the ASEAN market.

Thus, once a trade deal is signed, it would appear that the best – and only – choice of Taiwanese machinery and equipment suppliers will be to relocate to China.

Frank Pan, the president of Kaohsiung County-based Siquar Hardware Ind., warns that after the trade deal is signed, Taiwan's tooling and machinery industry will be "fundamentally uprooted."

"Companies will be able to relocate and avoid marginalization, but workers will be marginalized,"argues TIER's Chao. The exodus of Taiwan's SMEs, he says, will accelerate the hollowing out of Taiwan's industrial base and exacerbate unemployment, but the number of jobs that will be lost to the offshore exodus cannot be calculated ahead of time by any of the models used to assess the impact of a trade deal with China.

In evaluating whether ECFA can really solve Taiwan's economic problems, the Closer Economic Partnership Arrangement (CEPA) between China and Hong Kong may provide some insight. 

Hong Kong Wealthier, Hongkongers Poorer

President Ma Ying-jeou, Premier Wu Den-yih, Mainland Affairs Council chairwoman Shin-yuan Lai and other ECFA proponents have all stressed that Taiwan is not Hong Kong and that an ECFA would not be identical to the CEPA. But it cannot be denied that Taiwan's economic plight, characterized by a severe economic slump and high unemployment, is similar to that of Hong Kong six years ago when it signed the partnership arrangement with China.

At the time, CEPA was like a shot in the arm that helped return Hong Kong's economy to prosperity. The special administrative region became the place of choice for Chinese tourists to buy brand-name goods and the gateway for investors with liquidity to chase China's rapid economic growth. The IPOs of Chinese state-run banks on the Hong Kong stock exchange attracted more than a trillion New Taiwan dollars in retail orders. Even Taiwanese companies were lured by this huge influx of hot money and decided to go public there. Hong Kong chief executive Donald Tsang declared in 2007 on the 10th anniversary of Hong Kong's return to China that Hong Kong economy was the strongest it had been in 20 years.

Yet the economic prosperity propelled by the influx of speculative investment has not improved the livelihoods of all of Hong Kong's people, and the gap between rich and poor has widened considerably since the signing of the cooperation arrangement.

According to Hong Kong government statistics, median household income has fallen 1.4 percent over the past 10 years. The bottom 10 percent of income earners in Hong Kong have not seen their wages go up over the past decade, and individuals in middle income brackets have seen their salaries rise by a mere 6 percent in nominal terms over the same period but actually decline in real terms. (Table 1)

The income of Hong Kong's top earners, on the other hand, has risen 20 percent. A recent United Nations report and Hong Kong statistics both indicate that Hong Kong has the widest income gap in Asia, and its poverty rate is now 18 percent, the highest level over the past decade.

Taxi drivers are the most sensitive to drops in income. Ten years ago, a Hong Kong taxi driver could make HK$20,000 a month, but that has now shrunk to HK$12,000 for the hardest working of drivers.

Though income has remained flat, basic expenses such as food, clothing, housing and transportation have all soared, driven higher by the influx of speculative funds. For the average wage earner, that means life is harder and buying a house next to impossible. Hong Kong's home ownership rate is just below 60 percent, a level that has remained relatively steady over the past decade.

"Hong Kong society has two classes of people. One group is doing very well. The other was better off 15 years ago than it is today,"contends Christine Loh, chief executive officer of the independent nonprofit Hong Kong think tank Civic Exchange, a hint of sarcasm in her voice.

Does Taiwan Have an Asia Policy?

Life is difficult not just for Hong Kong's lowest wage earners, many of whom have to "head north"to eke out a living across the border. Even well educated elites have been forced to target China in pursuit of a career.

A university graduate named Hugo aspired to work in Hong Kong's financial sector, which has been the biggest beneficiary of CEPA. But unable to find a job at home, he eventually landed a job in the Investment Division of a bank across the border in Shenzhen. He is paid the same as his mainland Chinese colleagues but must also foot the bill for room and board.

CEPA, indeed, generated an influx of speculative investment in Hong Kong, but was unable to solve the special administrative region's fundamental economic problems, and any trade deal Taiwan signs with China should likewise not be expected to address the country's problems on its own.

"It's not that ECFA cannot be signed, but rather that Taiwan needs an international approach even more,"says former Mainland Affairs Council vice chairman Chen-yuan Tung, who now teaches at National Chengchi University. Otherwise, he argues, South Korea's diversified global strategy will leave Taiwan far behind.

At present, however, only China seems to exist in the eyes of the Ma Ying-jeou administration.

Stanley Loh, the head of the Singapore Trade Office in Taipei and Singapore's top envoy to Taiwan, senses that recently most of Taiwan's top government officials have devoted most of their attention to cross-Taiwan Strait affairs, while ignoring relations with other countries.

"This should be the most opportune time for Taiwan to develop relations with the outside world, but it feels as if the world has only one country left, and that's China,"Loh says in describing the thinking of Taiwanese government officials.

Ministry of Economic Affairs officials, who are responsible for promoting Taiwan's trade abroad, admit privately that most of the government's resources are being devoted to trade negotiations with China, and, as a result, efforts to expand trade relations with other countries have been put aside.

In other words, aside from focusing on China, Taiwan's trade policy has not provided the country's people with diversified imagination and vision. In contrast, one of Taiwan's major competitors, South Korea, has capitalized on East Asia's growth through a few important free trade agreements. Its third quarter GDP growth was 2.9 percent, the highest in seven years. 

South Korea the New East Asian Leader?

In 2006, South Korea signed an agreement with ASEAN on trade in goods under the framework agreement on comprehensive economic cooperation, and it signed a free trade agreement with the United States a year later. It further inked a Comprehensive Economic Partnership Agreement with India in August this year and a free trade deal with the European Union in October.

Thus, South Korea's free trade zone now encompasses Europe, the United States, and Asia. Its main free trade partners include Taiwan's second, third and fourth largest export markets (ASEAN, the United States and the European Union, respectively), putting major competitive pressure on Taiwan. (Table 2)

When it came to China, however, South Korea put off signing a deal with Beijing mainly over worries about such a pact's impact on the country's employment and domestic market.

TIER research fellow Yang Chia-yen says the most obvious impact of South Korea's free trade agreements with the U.S. and Europe is that they have accelerated progress in the country's domestic legal environment and in conforming to international norms. Compared to the "Chaiwan"strategy adopted by Taiwan's government and enterprises, South Korea's diversified development strategy is worth considering.

Pondering the competition between South Korea and Taiwan, Yang warns: "If things go on like this, who will gain the edge and who will lose it, who will decline and who will grow – I'm afraid the answer will be brutal."

Formal negotiations on an economic cooperation agreement between Taiwan and China will soon begin, and because of a potential deal's scope and consequences, they could be the most important negotiations between the two sides in the 60 years since the People's Republic of China was founded. Taiwan's destiny stands to be rewritten from this point on.

Is China's Consent Needed for Relations with Others?

"The key is whether or not Taiwan will be able to participate in East Asian economic integration after ECFA is signed. Based on the current situation, we have to assume that Taiwan will continue to be suppressed and remain missing from the race to sign international free trade agreements, leaving Taiwan marginalized. If that's the case, the exodus of domestic enterprises abroad will accelerate rather than slow down,"TIER's Chao contends.

To date, China has not explicitly stated that it would no longer block Taiwan from signing trade pacts with other countries – as is the case today – after an ECFA is signed.

Chen Deming, China's minister of commerce, revealed at a private gathering not long ago: "There's no way Taiwan's signing of trade pacts with other countries will come without any conditions. There must be certain arrangements."As to what those "arrangements"and "conditions"should be, Chen did not elaborate.

Taiwan's participation in the international community and the bitterness Taiwan's people feel over being isolated internationally are the most difficult yet most critical issues that need to be resolved. If cross-strait economic integration between the two sides proceeds without a hitch after signing ECFA, but China still continues to block Taiwan's signing of free trade deals with other countries, it will be hard for relations to continue moving forward.

With the ECFA negotiations soon to begin, Taiwan's government will make every effort to reach a deal. But the government must also clearly tell Taiwan's people what other broad and assertive trade strategies await after the controversial trade deal is signed.

Translated from the Chinese by Luke Sabatier