One week later, Beijing began targeting petrochemical products from Taiwan. Effective 1 January 2024, preferential ECFA (the cross-strait Economic Cooperation Framework Agreement) tariff rates for a dozen products, including propylene and paraxylene, will no longer apply.

China seeking “dramatic tension” a month before election

Yen Huai-Shing, research fellow and senior deputy executive director at the Chung-Hua Institution for Economic Research’s Taiwan WTO and RTA Center, offered her breakdown of the move, saying that to some degree China seeks to use opinion poll outcomes to interfere in Taiwan’s elections. She noted that the announcement was perhaps timed one month prior to the election in the calculation that it would cause “maximum dramatic tension.”

Yen estimates that China will be formulating its next move over the coming 30 days, signaling which candidate it views as more suited to communicate with Beijing and bring the trade barrier controversy to a peaceful conclusion.

Indeed, Taiwan Affairs Office spokesperson, Zhu Fenglian, issued a press release after China’s announcement of the PRC’s moves targeting petrochemical products. In it, she noted that both sides could negotiate on the foundation of the “1992 consensus” to resolve assorted economic and trade issues. This made clear that the political foundation remains the precondition for discussions.

Deliberate choice of industries with “biggest bang for the buck”

Why did Beijing strike petrochemicals first?

An informed observer familiar with cross-strait economic and trade affairs offered that China's move against the petrochemical industry was calculated to select an option from the ECFA “early harvest” list that would have “the least impact but make the most noise." In other words, it delivers the most bang for the buck in terms of public perception.

Approximately 40 percent of Taiwan’s petrochemical industry exports by total value go to China and Hong Kong. The chief competitors to Taiwan’s domestic petrochemical industry are Japan and South Korea, both of whom have joined the RCEP (Regional Comprehensive Economic Partnership Agreement) together with China.

Mihn Tsai, executive director of the Petrochemical Industry Association of Taiwan, stated that losing preferential tariffs under the Economic Cooperation Framework Agreement (ECFA) would leave the Taiwanese petrochemical industry facing a triple threat, simultaneously contending with competition from Japanese, South Korean, and Chinese businesses.

Under this scenario, "the Formosa Plastics Group will be the most affected," explained a senior petrochemical industry insider. Among the initial 12-item product list, propylene and butadiene are upstream raw materials, with propylene being predominantly sold to China, and the primary exporter being the Formosa Petrochemical Corporation (FPC).

Previously leveraging preferential tariffs, FPC shipped raw materials from its Mailiao plant to its own Ningbo plant in China for further processing into plastic products such as propylene, polyethylene, and acrylonitrile butadiene styrene (ABS).

This time, China is targeting raw materials; partly due to local petrochemical industry overcapacity, Formosa Plastics is considered one of the Chinese domestic petrochemical industry’s competitors. With the cancellation of preferential tariffs, if FPC chooses to continue exporting raw materials from Taiwan to China, it will inevitably squeeze profit margins, ultimately reducing the competitiveness of its products.

Separating Taiwanese businesses and government

“China is consciously narrowing the scope of the blow,” he said. Beijing is targeting large enterprises with better adaptive capabilities this time, and thus small and medium-sized businesses have not yet felt the impact.

KGI Securities research points out that Formosa Petrochemicals’ Ningbo plant has considerable capacity that can be internally modulated within the conglomerate’s operations.

The biggest hubbub, however, is related to manufacturing material for public opinion over elections in Taiwan. "This is equivalent to separating Taiwanese businesses from the Taiwanese government," he noted.

Will the next wave target machinery and textiles?

Similar circumstances have occurred in the machinery industry. China accounts for 23.5 percent of the Taiwanese machinery industry’s market. However, as the scope of the ECFA early harvest tariff retractions is limited, Taiwan Association of Machinery Industry (TAMI) secretary-general, Hsu Wen-tung, asserts that ECFA will have only minimal impact on the machinery industry, although it will affect individual businesses.

These enterprises, having lost the tariff preferences under the Economic Cooperation Framework Agreement (ECFA) early harvest terms, will now face an average tariff of about 8%, impacting their market share in mainland China. It was noted that machine tools constitute the largest category in the early harvest list of the ECFA, although the export value to the mainland is relatively small, around $200 million.

However, Liu Da-Nien, Director of the Regional Development Research Center at the Chung-Hua Institution for Economic Research, still anticipates that China's retaliatory measures will be rolled out gradually and may extend to various industries depending on the situation.

The Chinese National Federation of Industries also points out that if China continues to cancel existing tariff preferences for Taiwanese exports such as machinery and textiles to China, it will pose a significant impact on the large workforce involved in Taiwan's conventional industries. Therefore, it recommends that the government assist in accelerating the global expansion of Taiwanese businesses while establishing negotiation channels and communications with the PRC.

China not expected to completely terminate ECFA

After a series of moves, will Beijing truly completely terminate the Economic Cooperation Framework Agreement (ECFA)? Scholars believe the likelihood of that outcome is low.

Liu Da-Nien, familiar with the ECFA provisions, pointed out that Article 16 of the ECFA agreement stipulates termination terms, allowing either party to terminate the agreement by notifying the other party in writing after 180 days. "If China wants to terminate ECFA, it doesn't need to go through a long process; it just needs to follow Article 16," he noted.

Chinese scholars also agree with this assessment. Bao Chengke, deputy director of the Shanghai East Asia Institute, noted that given the Democratic Progressive Party (DPP)’s reticence to express gratitude to China for its “favorable concessions,” some Chinese scholars advocate terminating "favorable policies towards Taiwan." However, considering the substantial benefits of cross-strait trade, from a macro perspective, Beijing has no intention of severing bilateral economic and trade relations.

Bao stated that after the ECFA, the Cross-Strait Goods Trade Agreement has not been signed, and currently, no communication channels are open between the two sides. "Cross-strait economic and trade relations have remained mired in an unresolved state." Consequently, the PRC is raising questions, urging Taiwanese authorities to adjust the "imbalanced" trade relationship.

Observers familiar with cross-strait economic and trade matters also note that breaking off its commitment to ECFA does not align with China's "integration and development" strategy for Taiwan. Moreover, in November, Wang Huning, Chairman of the National Committee of the Chinese People's Political Consultative Conference, advocated strengthening economic, trade, and cultural exchanges at a cross-strait entrepreneurs summit in Nanjing, stating "Economics is the umbilical cord of cross-strait relations; how could it be severed?"

China Needs Taiwan to "Replace Trade with Investment"

Wang believes that as China's industries mature, while facing current economic weakness, they increasingly need Taiwan's investment. Therefore, the current stance towards Taiwanese companies is to "replace trade with investment."

This perspective can be gleaned from Zhang Shihong, Director of the Taiwan Affairs Office Economic Bureau, who, in October, suggested considering Guangxi for the restructuring of Taiwanese companies when discussing an anti-dumping investigation into Taiwan's petrochemical products.

The origin of this dispute lies in the unresolved “Most Favored Nation treatment" controversy between the two sides since joining the World Trade Organization (WTO) more than 20 years ago. Taiwan’s Ministry of Economic Affairs (MOEA) has repeatedly urged China to return to the WTO mechanism to resolve the dispute, but China has consistently been unwilling to internationalize the Taiwan issue. Currently, no bilateral negotiation platform exists between the two sides.

Regardless of the results of next year's presidential election in Taiwan, adjusting the cross-strait economic and trade structure is a challenge the new government must face.

"Even if the Kuomintang comes to power, it will have to confront the structural changes in Taiwan's economic and trade relations; this is unavoidable," he said.

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Have you read?

• The Early Harvest List, 3 Years On
• Taiwan stock market surpasses Hong Kong: true meaning?
• 60% of Taiwan CEOs fear outbreak of war

Translated by David Toman
Uploaded by Ian Huang