20100308 ECFA will be a dud without FTAs

ECFA will be a dud without FTAs

By Chao Wen-heng 趙文衡
Monday, Mar 08, 2010, Page 8

‘If China signed an ECFA with Taiwan but prevented Taiwan from signing FTAs with other countries then the relationship engendered in the agreement would be a sort of colonial-type protectionism.’

Those who advocate signing a cross-strait economic cooperation framework agreement (ECFA) with China believe that it will strengthen economic competition and promote free trade. Based on this, ECFA supporters believe they have the moral high ground relative to their opponents, whom they view as protectionists. But this theory holds true only under certain conditions.

If China continues to obstruct the signing of free-trade agreements (FTAs) between Taiwan and other countries, then an ECFA will not only fail to promote free trade, but actually spark a revival of protectionism. It could even cause unequal relations in cross-strait trade. Under such circumstances, even if an ECFA were to be signed, it would lack legitimacy and its effectiveness would be uncertain.

If, after an ECFA is signed, China continued to obstruct FTAs between Taiwan and other countries, the ECFA would give Chinese products unique preferential treatment in Taiwan’s market. Imports from other countries would be subject to higher tariffs and Chinese products would be protected by differential duties. In such a situation it would be difficult for products from other countries to compete with those from China in the Taiwanese market. That, clearly, would be a form of protectionism. It would distort market mechanisms and cause inefficiencies.

It is generally recognized that if the signatories to an FTA fail to open their markets to other competitors then the FTA will not just fail to promote free trade, but will act as a protectionist measure. Anne Krueger, an eminent US economist and expert on trade, points out that free trade relations in the form of an FTA cannot be allowed to obstruct access for other competitive producers from around the world, otherwise it will be a form of protectionism.

Thus, signing an ECFA that does not include a condition specifying that China must stop preventing Taiwan from entering into FTAs with other countries would be nothing more than a protectionist action.

This means that ECFA proponents do not have the moral high ground after all. Former Japanese finance minister Shoichi Nakagawa called protectionism “an absolute evil.” From that point of view, such an ECFA would be “an absolute evil.”

This scenario is one where one country seeks to remove obstacles to trade with another country, but at the same time obstructs free trade relations between that country and others. It forces the second country to protect the first country’s products in its domestic market.

Such an arrangement is a rare thing in today’s world, but was common in the days of colonialism. Protectionist relations of this kind were seen within the British Empire, between Spain and its territories in South and Central America and the Caribbean, and in Taiwan when it was a Japanese colony.

In all these cases, the suzerain power sought to maintain exclusive access to its colonies for its own products, and to ensure its own access to cheap resources through the use of differential duties.

If China signed an ECFA with Taiwan but prevented Taiwan from signing FTAs with other countries then the relationship engendered in the agreement would be a sort of colonial-type protectionism. In fact, it could be seen as even worse than colonial protectionism.

Even though colonies were forced to purchase goods produced by the suzerain state, the suzerain country also gave protection in its domestic market to goods produced in its colonies. In that sense, it was a mutually advantageous relationship.

The kind of protectionism generated by an ECFA, as described above, would entail only one-sided protection of Chinese products in Taiwan’s market. As China and other countries continued to cut trade tariffs between them, Taiwanese products would enjoy no protection in the Chinese market.

They would still face stiff competition from other countries’ goods. Clearly, an unequal trade relationship such as this is one that even a colony would not accept.

Protected by the terms of such an agreement, Chinese goods could flood into Taiwan’s market. On the other hand, it is possible that Taiwanese goods, under restrictions imposed by China, may only be exported to China. Worse, they would face fierce competition in the Chinese market as more and more countries enjoyed the benefits of preferential duties. Business would become more and more difficult for Taiwanese firms. Such a development would provoke strong doubts among Taiwanese people as to the legitimacy of this unequal relationship.

This kind of unequal relationship would result from a combination of the ECFA and the exercise of China’s power. Signing an ECFA is a necessary condition for such a relationship to come about. It is, therefore, no exaggeration to call an ECFA of that sort an unequal treaty.

If, after signing the ECFA, China continued to obstruct FTAs between Taiwan and other countries, the ECFA would lose its legitimacy and its effectiveness would be uncertain. Let us not forget that Taiwan is a democracy in which political power can pass from one party to another. An agreement lacking in legitimacy would not be able to withstand the doubts and denials of opposition parties.

The ECFA would also become a source of cross-strait disputes. Thus, in order to ensure that any agreement can be sustained in the long term and to avoid later complications, both China and Taiwan should consider the future and voice their concerns without reservation during the course of ECFA negotiations

The text of the agreement should explicitly resolve the issue of obstruction of future FTAs between Taiwan and other countries. Only then can the ECFA continue to exist following a rotation of government power in Taiwan.

Chao Wen-heng is an associate research fellow at the Taiwan Institute of Economic Research.