js2355.con:Cross-Taiwan Straits Economic Relations and the ECFA_图文

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Cross-Taiwan Straits Economic Relations and the ECFA 1 5 7

Despite hostile political relations and the absence of direct transporta-

tion links, economic ties between the two sides of the Taiwan Straits
have grown enormously over the past three decades since China initi-

ated its economic "reform and opening-up" policy in 1979. Taiwan
first lifted the ban on cross-Straits exchanges in the private sector in 1987.6 By 1 9 8 9 , t o tal i ndirect trade across the Straits was only

US$3.9 billion. T h ereafter, however, cross-Straits trade rapidly increased to US$25.8 billion in 1999; and by 2002, the year when Taiwan was admitted into the WTO, according to Taiwan's Mainland Affairs Council (MAC), cross-Straits trade had reached a total amount of US$37.4 billion. More importantly, China, which took 25.3% of Taiwan's total exports, replaced the US as Taiwan's largest
export market for the first time in 2002. In 2004, the total amount of

cross-Straits trade rose to US$62 billion — a 16-fold increase in just a decade and a half. By 2006, cross-Straits trade jumped further to US$88.1 billion with a trade surplus of US$38.5 billion in favor of Taiwan, more than double the figure for 1999 (US$16.8 billion). On the other hand, Taiwan's export dependency on China has also increased &om 20.3% in 2001 to 27.3% in 2005 to over 40% today. According to the WTO, China serves as an export platform for the rest of Asia, especially Taiwan. China imports massive amounts of
raw materials and intermediary components from the rest of Asia and

beyond, and exports the finished products to the global markets (notably, the US market). With such a trade pattern, China suffers
huge trade deficits with Asian countries while maintaining an enor-

mous trade surplus with the US. Taiwan is the biggest beneficiary of
such a trade pattern of China; in fact, Taiwan is China's largest source

of trade deficits, followed by South Korea and Japan. These three
East Asian countries export c o mponents t o C h i na, w h ere t h ey

are assembled and then exported to t h e international market. By manufacturing in China through direct investment for exporting


Li ou To-hai

e lsewhere, t h e t h r e e c o u n t r i e s h a v e a c t u a ll y t u r n e d t h e i r t r a d e

surpluses with the US and the European Union (EU) into those of China's.
Further analysis shows that m o s t T a i w anese enterprises pursue a

division of labor with C h i na. China, with its cheap labor and huge market, functions as a primary production base; while Taiwan serves as a hub for taking orders, conducting advanced research and development (RBcD), carrying out m arketing activities, and monitoring financial operations. In 2006, 45% of Taiwanese firms followed this mode of operation. In terms of sectors, 77% of information technolo gy (IT ) an d c o m m u n i cation i n d u stries are operating i n s uch a fashion, followed by th e electric engineering sector (57%) and the precision machinery sector (47%). For example, Taiwan's Chi Mei Electronics Co. I.td. has an integrated set of division of labor among
i ts factories across the T a iwan S t r aits. It s f a ct o ries in T a i w a n ar e i n

charge of producing liquid crystal display (LCD) panels; while its fact ories in N i n gb o an d N a n hai i n C h i n a are responsible for l i q u i d crystal modules (I.CMs), the latter half of th e t h i n -film t r ansistor liquid crystal display ( TFT L C D ) p r o d u c t io n p r o cess, w hi c h requires intensive use of labor. As labor costs in China are much lower, such an arrangement makes perfect sense fax the Taiwanese company. This pattern of o p eration reduces production costs, alleviates the problem of insufficient labor and higher labor costs in Taiwan, and also allows the company to make full use of its production capacity. lt is i m p o r t ant t o n o t e t h a t T a iwan has made a considerable contribution to China's global trade expansion. With a trade smplus of US$177.4 billion, China's foreign trade volume totaled US$1.76 trillion in 2006 — an. increase of 74/o from that in 2005. Guangdong, Jiangsu and Shanghai combined — w h ich happen to be th e major
l ocations o f T a i w a n ese i n v estm en t i n t h e m a i n l a n d — a c c o u n t e d

for 59% of th e m ainland's total t r ade volume. M o r eover, 92% of China's notebook c o m p u ter exports are pr o d uced by T a iwanese enterprises in China. C ross-Straits trade reached its climax of U S $ 1 3 0.2 b i l l ion i n 2 007, accounting fo r 2 7 . 9 % of T a iwan's t o tal t r ade . I n 2 0 0 7 , Taiwan's top ten export products to China — which represented 87%

Cross-Taiwan Straits Economic Relations and the ECFA


of Taiwan's total exports to C h in a — w er e electrical and c omponents, o p t i cal i n st r u m e nt s an d p a r ts, p l astics and p r o d u c t s thereof, mechanical appliances and parts, organic chemicals, iron and steel, copper and p r o d u cts th ereof, synthetic fabrics, miscellaneous c hemicals, and mineral fuels; while Taiwan's top ten im p or t p r o d u c t s from C h in a w ere electrical equipment an d c o m p o n ents, mechanical appliances and parts, iro n an d s t eel, o p t i cal in strum ents and p a r t s,

e quipmen t

mineral fuels, organic chemicals, plastics and products thereof, miscellaneous chemicals, copper and p r o d u cts thereof, and stones, lime a nd cement . C u r r e n t ly , C h i n a i s T a i w a n' s l a r gest exp or t I n a r k e t , l argest trading p a r t ner an d l a r gest source of t r ad e surplus, and i t s s econd-largest source o f i m p o r t s a f t e r Japan; whereas Taiwan is

China's fourth-largest trading partner and second-largest source of
i mports next t o J apan. Taiwan's total exports in 2 0 0 9 a m o u n ted t o

US$203.7 billion while its imports reached US$174.66 billion, with a record trade o f US$29.04 billion. The record surplus was largely due to a record annual drop in imports by 27.4% or US$65.79 billion in 2 0 09, as compared with an annual decline of 20.3% in


exports. Taiwan's annual exports to

C h i n a and H o n g K o n g e x p eri-

enced a decline of 15.9% in 2009.
With r e g ard t o T a i w anese investment i n C h i n a , C h i n a q u i c k ly a scended t o t h e t o p o f t h e l i s t o f m a j o r r e c i p i e nt s o f T a i w a n ' s foreign investment after investment in Ch ina by Taiwanese businesses

w as legalized in 19 92. Between 1991 and 20 02, th e amount o f
g overnment -appr ove d T a i w a n ese i n v e stm en t i n Ch i na t ot a l e d US$27.3 billion, Inaking the mainland the top destination for investment b y T a i w a n ese co m p a nies. M a n y ' T a iw anese m a n u f actur ers, r anging fro m l a b o r -intensive industries to el ectronic an d I T i n d u s tries, have set up f a ctories in C h i n a t o t a k e advantage of it s cheap labor and lo w o v e rhead costs. Many o f t h ese manufacturers receive their orders in Taiwan, pro duce their go ods in C h i na, and then ship the fjnished products directly from th eir factories in China to overseas buyers. This kind of int egrated operational mode of Taiwanese enter-

prises in China — called "Chaivvan" by South Korean nevvspapersis regarded as a major threat to South K o r ean companies, particularly those in the IT sector.


t. iov To-hai

According to Taiwan's Investment Commission of the Ministry
of Economic A f f a irs ( MOEA) , T a i w anese investment i n C h i n a reached US$3.85 billion in 2002, one year after China's accession to the WTO — a n i n c rease of 38.60% from th e previous year. Since
t hen, C h i n a h a s e m e r g e d a s t h e m o s t p op u l a r d e s t i n a t i o n f o r

Taiwan's outbound i n vestment. I n 2 0 0 5 , T aiwan's investment in China accounted f o r 7 1 . 4 % o f i t s t o t a l o u t b o u n d i n v e stment (US$8.45 bi lli o n) . I n 2 0 0 6 , m a i nly because the Chen Shui-bian administration was forced to l if t t h e ban o n T a iwanese mainland i nvestment in the hi gh-tech sector, Taiwanese investment in C h i n a increased by 27.22% from th e p r evious year with t h e t o tal stock r eaching U S $ 7. 6 b i l l i on , w h i c h d o u b le d t h a t o f 2 0 0 2 . O f a l l the approved cases of investment in China, the largest 6ve were all in t he high-tech sector, including Powerchip Semiconductor C o r p . , Promos Technologies, H o n g hai P r ecision M a c hinery, A d vanced Semiconductor Engineering I nc. and G l o bal Advanced Packaging Technologies. I n 2 0 0 7, 996 cases of Taiwanese investment in China with a total amount of US$10 billion were approved.
T here are at l e ast t h re e f eatures of' crass-Straits econo mi c r e l a -

tions over th e p ast decade. Firstly, the T aiwanese government's mainland China policy has been lagging behind the actu.al trend of t he business activities of' Taiwanese enterprises in C h i na. T hi s is mainly because the Taiwanese g ecame very c o n c ern ed about the mass exodus of Taiwanese businesses to the mainland and Taiwan's growing trade dependence on China. As a consequence, in the face of rising pressure of the bu.siness comrnu.nity, the Taiwanese government has had to adjust its mainland China policy from time to time to reflect the reality. W a r y of the mounting economic dependence on China, the KMT government under President Lee Teng-hui adopted a "go south" policy (southbound policy ) in 1994 to encour-

overnment b

age Taiwanese enterprises to invest in Southeast Asian countr ies, in an

attempt to diversify investment risks and reduce Taiwan's economic dependence on China. I n 1 9 9 6 , th e Lee Teng-hui administration announced a "be patient, go slow" policy on Taiwanese investment in China. After the DPP defeated the KMT in the presidential elections in March 2 0 00 , th e C hen Shui-bian administration i n t r o d uced a

Cross-Taiwan Straits Economic Relations and the ECFA


mare liberal policy af "praactive liberalization with effective management" on Taiwanese investment in China in August 2001. However, in the context af Taiwan's further marginalization in the region following the signing of a free trade agreement (FTA) between China
a nd the Association of So u t heast Asian N a t i a n s (ASFAN) as well as d eteriorating p o l i t ical r elations across the Straits , Pr e s i d en t C h e n

Shui-bian reintroduced the so-called new "ga seuth" policy in July
2 002 w i t h t h e a i m a f u r g i n g T a i w a n ese en t er p r ises t a i n v est i n S eutheast Asian c o u n t r ies p lu s N e w Z e a l and , A u s t r alia an d I n d i a

(other than China ) sa as ta reduce the risk of cancentrating too much investment in China. But with m are than 65% af Taiwan's foreign
investment g o in g t a C h i n a i n t h e f r rst qu arter a f 2 0 0 4 , t h e second round of th e " g o so u th " p o l icy did no t w o r k w el l ei ther . Pr e s i d ent C hen t he n h a d t o s h i f t h i s m a i n l an d C h i n a i n v e stm en t p o l i c y t o


managementa nd effective opening"


e a rly 2 0 06 . T h e

change was aimed at t i g h t ening co n t ra l e n T a i w anese investment in China. Obviously, this policy went against the calls of the T aiwanese b usiness commu n it y f e r f u r t h e r l i b e r alizatien o f t h e g a v e r n m e n t ' s

mainland China policy.
S econdly, th e sect or s o f T a i w a n ese investmen t i n C h i n a h a v e

evolved from traditional labor-intensive industries to technalogyintensive industries, with a heavy concentration en th e electronic and electric app l i ance i n d u s t r ies i n t h e l a s t f e w y e a rs, especially a f t er China's entry into the W T O . D u r i n g th e early years, Taiwan's investment in China focused an the livelihead in d u stries; but aker the early 2000s, there was a growing focus an the electronic and electric applia nce in d u st r ies. I n . 2 0 0 6 , investment in C h i n a w en t t o to r e x ample, 3 4 .4% of T a i w an's t o t al t h e e l ectroruc carnponent m a n ufactur-

ing sector (e.g. computers, communication devices, audio and video equipment ). As a result, the changed structure of Taiwanese investment in C h i n a was accomparued by i n c reasing exports af u p s tream e lectronic parts fram T a iwan t a t h e m a i nland. I n t h e m e antime, th e g eographical l o c a t i on s e f T a i w a n ese i n v e stm en t i n Ch i n a a l s o c hanged, with a gradual expansien &om th e Pearl River D e lta ta t h e Yangtze River Delta. M o r eover, large Taiwanese companies that were

listed in Taiwan.'s stock market g r adually replaced individuals or

1 S2 Liau Te-hai

small-medium enterprises (SMEs) as the major Taiwanese investors in
C hina. C o n s equently, th e s iz e an d a m o u n t o f i n v e s t m en t p r o j e c t s

s ubstantially in creased. I n A u g u st 2 0 0 7 , f o r e x a mple, H o n g h ai Precision Co., which is Taiwan's largest corporation in th e private sector, decided to pursue 12 investment projects in China with a total amount of US$406 million. The Longhua factory in Shenzhen is the flagship enterprise of Honghai, which altogether has 18 factories with more than 350,000 employees. According to a 2009 survey on investm.ent and risk in China by the Taiwan Electrical and E l ectronic M a n u facturers' Association (TEEMA), the Yangtze River Delta is the region. most favored by Taiwanese investors, followed by the Bohai coastal region. Among the 22 cities on the TEEM A' s list of highly recommended cities for investment, 14 cities (63.6%) are in the Yangtze River Delta; those cities include Suzhou-Kunshan, Nanjing-Jiangning, Wuxi-Jiangyin, H ongzhou, N i n g b o , Z h e n j iang, N a n chang, Yangzhou an d t h e Suzhou Industrial Zone, among others. Only four cities (18.1o/o) in t he Bohai coastal region — i n c l u d i n g Qingdao, Dalian, TianjinBinhai and Beijing-Yizhuang — are highly recommended. What is worth noting is that, while the Pearl River Delta u.sed to be the most
attractive region for T a iw anese investors in the 19 9 0s, no cities in thi s

region are highly recommended by the TEEMA . A s i m i lar survey in 2007 by the T E EM A a lso showed that the Shanghai metropolitan area, including S u z ho u a ncl K u n shan, i.s viewecl by T a i w anese investors as the best place to invest in China. No wonder more than 500,000 Taiwanese immigrants have settled down in th e Shanghai metropolitan area. By and large, Taiwanese businesses are clu.stered in the Yangtze River Delta area in eastern China and the Pearl River Delta region in sou.them China. Thirdly, the m o t i ves for T aiwanese investment in C h i n a have changed. In the past, Taiwanese investment in C h ina was primarily drawn by the cheap and readily available land and labor. But today,
T aiwanese in v estm en t i s m o t i v a t e d b y t h e p o t e n t i a l o f t h e l a r g e


Chinese consumer market. In the eyes of Taiwanese investors, China has become the largest market for their products instead of the largest factory for their products. The 2009 T E EM A survey indicated that

Crass-Taiwan Straits Ecanomic Reiatians and the ECFA 1 6 3

the marketing strategy of Taiwanese investors in ChIna has shifted

from that of an original equipment manufacturer (OEM) to own branding and manufacturing (OBM) , w ith a stress on creating their
own brands. Another new trend mentioned by the T E E M A i s t h at more and more Taiwanese entrepreneurs are paying attention to the demands of the Chinese market.

By the end of June 2007, Taiwan had invested a cumulative amount of US$44.6 billion in the mainland, representing 6.2/0 of
the total investment China had received from overseas. According t o the g o v ernment's data, T a iwan's accumulated i nvestment i n

China grew 3.8 times between 2000 and 2008, reaching a total of
US$70 b i llion. H o w e ver, most observers believe that the o f ficial 6gures greatly underestimate the actual level of Taiwanese investment in the mainland. Due to th e sensitive nature of cross-Straits investm ent, a l a rge part o f T a i w anese investment has come t o C h i n a through a t h i rd. port. 1f c apital o f T a i wan o r i gin t ha t h a s been invested in China through shell companies in ports of convenience such as the Bahamas is included, Taiwanese companies have actually invested an estimated total of US $150 billion in China over the past

20 years, while Chinese companies have invested US$38 million in
Taiwan since the end of June 2009, according to the data of Taiwan's Straits Exchange Foundation.

l.2 Negative

I mpli c a t i o n s

With C h i n a's accession to th e W T O i n D e c e m ber 2 0 0 1 , T a iwanese e nterprises in C h i n a h ave b een f acing a g r o w i n g n u m b e r o f c h a l -

lenges. Under its WTO commitment, China has increasingly opened
up its m arket, r educed tariffs and l i f ted th e ba n o n f o r e ig n i n v estment; but by d o in g so, the m arket share of Taiwanese enterprises in

China has declined, dropping from 12.5/0 in 1994 to l l / 0 in 2006,
t he lowest r ate i n i mports f ro m 1 3 y e a rs. I n 2 0 0 6 , t h e g r o w t h r a t e o f C h i n a ' s T a i w a n w a s 1 6 . 7 /0, w h ich w a s l o w e r t h a n t h o s e o f

S outh K o r ea, t h e U S a n d G e r m any. C o nsequ.ently, i n 2 0 0 7 South Korea replaced Taiwan as China's second-largest source of
i mports, while T aiwan was relegated to t h i r d p l ace . A cc o r d i n g t o


Li e u To-hai

t he statistics o f

t h e C h i n a C u s t o m s , T a i w a n' s sh are i n C h i n a ' s r e c ord lo w o f 8 . 3 % in t h e 6 r st e i g h t

i mport m a r ket d r o p ped t o a months of 2009.

This trend is partly due to th e fact that Taiwanese companies in China have b een i n c r easingly p u r c h asing ra w m a t e r i als an.d key c omponents f r o m l o c a l s u p p l i er s w h i l e r e d u c in g i m p o r t s f r o m Taiwan. Taiwan's exports to C h ina are mainly driven by Taiwanesei nvested ent erprises in t h e m a i n l a nd , w h i c h i m p o r t n e e de d r a w materials and crucial parts from Taiwan. The declining market share of Taiwanese products in China reveals that Taiwanese enterprises in the mainland now t en d t o o b t ain raw m aterials and key parts from local suppliers rather than from T a iwan as a result of th e in creasing localization o f t h e i r o p e r a t i o ns. T h e l o c a l i z ation. of T a i w a neseinvested enterprises in the mainland is reRected not only in the rapid increase of local procurement of raw m aterials, unfinished products and machinery, but also in the ri.sing prevalence of hiring local managers instead of T a i w anese managers. Taiwan's declining share in the Chinese market is also partly due to the growi n gly fierce competition t h a t T a i w a n ese co m p anies are f a cin g f r o m J a p a nese and S outh K o r ean c o m p anies over si m i lar e x p or t p r o d u c t s l ik e i n t e g rated c i r c ui t a n d L C D d e v i c es, w h e r eby T a i w a n i s l o s i n g i t s comparative advantage. Furthermore, China has adopted a series of new economic policy measures since 2007 i n o r d e r t o a c celerate its d o m estic in d u strial restructuring and improve its competitiveness, such as the removal of d uty-free impo rts and o f e x p or t t a r if f r e bates, the in t r o d u ction o f business income tax law (March. 2007) and the implementation of the new Ic lbor Colt v Nct Act (1 January 2008). These new policy measures of China have brought additional costs to and growing pressure o n Taiwanese enterprises in C h i na, particularly th e SM E s i n t r a d i t ional sectors like t extiles, furni t ur e and p o l l u t in g i n d u stries. Th e r emoval of d u t y -&ee imports in 2 00 0 d ealt a serious blow t o t h o s e T aiwanese enterprises that w er e h e avily d e p endent o n i m p o r t e d equipment . T ai w a n ese-invested companies in C h in a also suffered from the removal of export tariff rebates, which. had long been criticized by th e U S an d t h e E U f o r u n f ai r t r ade practices. H o w ever,

Cross-Taiwan Straits Ecanamic Relatians and the ECFA


while the export t ariff r ebates for m ost energy-inefficient and h i g h ly p ollutin g s e ct or s w er e r e m o v ed , m o r e e x p o r t t a r i f f r e b a tes w e r e

offered to high-tech industries, which in fact had the effect of helping
to restructure China's domestic industries. In line with the shift in development paradigm from a focus on quantitative expansion to an emphasis on qualitative growth, social equality and sustainability, Ch i n a 's new 2 008 Lu b ot Contract Act

requires China-based companies to sign labor contracts with their employees; otherwise, they are to double their employees' monthly wage. Companies also need to give laid-off employees a


one-month severance pay for each year of their employment, or a half-month pay for those who have worked for six months. Moreover, companies need to cap the standard work week at 40 hours and overtime at 36 hours per month. These new requirements greatly increase

the personnel costs of Taiwanese firms operating in China, because
many of them have traditionally signed a one-year contract with their employees and did not offer any severance pay if the employee was let go when the contract expired. The rapidly changing investment environment in China has posed a dilemma for T aiwanese businesses in China. I n p a r ticular, those Taiwanese investors who have factories in the traditional sectors in China are now u n der t r emendous pressure to either withdraw or upgrade their production facilities to a high-tech level. T a i w a nese investors in other sectors are also subject to changes in both the international environment and. China's domestic environment (such as the

appreciation of the Renminbi ), looking for strategies to survive.
Since China's accession to t h e W T O i n 2 0 0 1 , t h e r e h ave b e en

increasing trade frictions both in number and scope between China and its trading partners, especi.ally the US and the EU. As a result,
China has emerged as th e n u m be r o n e v i c tim o f a n t i - d u m ping charges. F u r thermore, given its huge trade surpluses with the West, C hina has been under constant pressure by the U S and the E U appreciate the Renminbi. to

These developments, especially the appreciation of the Renminbi, have brought negative implications for Taiwanese enterprises operati ng in C h i n a . T h o se T a iwanese companies that ar e i n v olved i n

1SS Lieu Te-hai

export-oriented processing production in light and electronic industries have been h u r t h ave suffered f r o m m o s t . M a n y T a i w anese-invested enterprises in t h e a p p r e ci atio n o f t h e R e n m i n b i , w h i c h h a s

Guangdong and Fujian in the textiles, garment and footwear sectors brought them declining pro6ts and as well as loss of orders to their rivals in ASEAN countries (such as Vietnam, Thailand and Indonesia ). There is no exception for Taiwanese electronic companies in Suzhou ; t h eir p ro flt s h ave become mor e m e a ger in r e cent

c omp e t i t i v e n e s s

years due to the appreciation of the Renminbi. A n o t h er challenge is the shortage of labor and the ensuing increasing labor costs in China.
Speciflcally, those engaged in t r a d i t i o nal m a n ufacturing i n d u stries in

Dongguan and Shenzhen in southern Guangdong Province are most likely to be affected by the shortage of labor. This will chive many
small Taiwanese investors to relocate their business operations. I n light o f t h e w o r sening i n vestment envir o n m en t i n C h i n a , t h e

2007 TE EM A

s u rvey showed that i nvestment risk in C h in a had.

increased over th e p r e v i ous tw o y e ars. T h u s , th e s u r vey su ggested

that Taiwanese enterprises should not consider China alone, but look
for other locations for investment to d i versify their risks. Vietnam was recommended as the best alternative for investment outside China; its

ranking as a Taiwanese-favored location for future investment surged &om loath place in the 2007 TEEMA survey to 5th and 6th places in the 2008 and 2009 T E EM A s u rveys, respectively. Among the ten trends of Taiwanese investment in China, the 2009 TEEM A survey
noticed that T a iw anese entrepreneurs now t en d t o c o n s ider shiftin g their investment to o t her count ries in Southeast Asia and In d ia, given

the rising Asian regionalism as reflected by the spread of PTAs in the region.
In addition to n ew c hallenges in the wake of Chi n a 's WTO a c c es-

sion, Taiwan continues to face old but ever-increasing challenges,
such as the hollow ing ou t o f it s industries a s w el l as the loss of mar-

kets, jobs and talent to China due to China's cheap labor and huge
market. Taiwan is very concerned about its hollow in g o ut , as its manu facturin g i n d u s t r ies h ave b een i n c r e asingly r e l o c ated a c r oss t h e Straits to mainland C h in a over the past decade. For example, Taiwan

has been replaced by Chi.na as the world's number three producer of

Cross-Taiwan Straits Economic Relations and the ECFA


personal computers.

M or e o v er, many white-collar Taiwanese have

been recruited to work in China as managers, civil pilots, skilled laborers and now even professors. Against this background, more
than I xnillion Taiwanese have migrated to China permanently, most

of whom are business people, managers, technical experts and their family members. M e t ropolitan Shanghai alone h a s a bsorbed
m ore t h a n h a l f a m i l l i o n T a i w a nese, w h il e w e l l o v e r 6 0 / o o f

high-tech exports from China are manufactured by Taiwaneseinvested companies.

Ignoring the importance of external economi.c ties in the 2 l s t cen.tury, th e C h e n S h u i - bian a d m i nistration c o nsistently p u rsued a mainland China policy that was designed for doxnestic pelitical con-

siderations by inciting an anti-China sentixnent and promoting Taiwanese identity and Taiwan independence. However, this policy
o rientation o f C h e n S h u i - bian i n advextently played int o C h i n a ' s As a r e sult,

hands, as Beijing engineexed a Sino-US condominium on. the basis of
their common interests ef anti-Taiwan independence. the DP P l ost its ruling party status to its rival, the IGVIT, m a inly

because the well-being of the Taiwanese people was hurt by Chen Shui-bian's politically oriented economic policy and poor economic performance. Unlike Chen Shui-bian, President Ma Ying-jeou, understanding
t he importance o f e c o n o mics in t h e p o s t - C ol d W a r p e r io d a n d C h i n a fo r i t s economic the increasing dependence of T a iwan o n

prosperity, h a s redefined cross-Straits relations from an economic perspective. He is convinced that mainland policy and foreign policy
cannot be dealt with separately, and that relations with China should

be treated as the nation's first priority. President Ma has proposed a
diplomatic truce with C h i na , su g g e sting to f r eeze relations with

t hose countries maintaining diplomatic ties with Taiwan. In t h e meantime, President Ma has pledged not to seek Taiwan's independence but to w or k t o w ard im proving relations with C h i n a. "At the


Li a u Ta-hai

present stage, any radical political choice, whether it be un i fication or indepenclence, would t r i g ger serious confrontation and t u r b u l ence,"

President Ma reiterated in lhis 2010 New Year's aclclress. "I insist on
maintaining the situation of 'n o u n i f ication, no i n d ependence and no u se of force' to p r o m o t e c r oss-Straits exchanges and cooperation . . . f or peaceful development i n t h e T a i wan Straits," lhe said. S i n c eh e

took office in May 2008, President Ma has actively improved relations with China, particularly economic relations. He has decided to
n ormalize crass-Straits economic r e l ations and t o economic situation for b ot h sides. c r e ate a w i n - w i n

Against this background, th e f i rst m eeting b etween C hiang Pin-kung, Chairman of Taiwan's Straits Exchange Foundation (SEF),
a nd Chen Y u n l i n , C h a i r m a n o f C h i n a ' s A s sociation f o r R e l a t i o n s

Across the Taiwan Straits (ARATS), was held in Beijing in June 2008,
o ne month after Presiclent M a' s inauguration. Tlhis was the first for m all. meeting between th e tw o s i des since 19 99 , an d i t i n i t i ated t h e i nstitutionalized n egotiations between T aiwan an d C h i n a . T h e f i r st

Chiang — Chen talks led to agreements on weekend charter flights and
tourism. T o f a c i l i t at e e c o n o m i c r e l a t i on s a c ross th e S t r a i ts, M a ' s g overnment also l egalized R e n m i n b i e x c h anges in 'Taiwan's b ank s and liked the lban on cross-Straits stock investment in June 2008.

In November 2008, ARATS Chairman Chen Yunlin paid a milestone visit to T a iw an. Ch en's visit markecl the first meeting b e tween the SEF chairman and the A R AT S chairman in T a iwan as well as the i nstitutionalization o f SEF — ARATS consultations. Chiang and C h e n signed fom a g r eements on d i r ect air t r ansport, d i r ect sea transport,

postal cooperation and food safety, opemng a new phase of peaceful
d evelopment an d s t a ble i n t e ractions i n c r o ss-Straits relations. T h e " three links" w ere tlhen inaugurated in th e ensuing m o n t h . Direct s hipping m e ans t hat v essels crossing th e T a i w a n S t r aits n o l o n g e r

have to m ake a d e t ou r vi a I s h igaki o r H o n g K o n g a s b e f ore,
thus rectucing th e t i m e o f e ach v o y age by 1 6 — 27 hours and saving

shipping costs by 1530%. Adding the savings in visa charges for the
t hird t e r r i t o r y , t h e c o s t o f e a c h v o y ag e i s r e d u ced b y U S $9,364

(NT$300,000), which enables shipping companies to save a total of around US$37.4 million (NT$1.2 billion) a year. The realization of

Cross-Taiwan Straits Economic Relations and the ECFA ll 69

d irect cross-Straits air and sea transport is a key step forward in t h e normalization of cross-Straits relations. At the same time, it can help raise Taiwan's strategic position in East Asia and even the Asia-Pacific region, strengthen T aiwan's overall co mpetitiveness, and b o l ster Taiwan's connection with th e international market. After the establishment of direct air and sea transportation links across the Straits, Taiwan wiEI. be able to serve as an operation base for access to the markets of mainland China and Southeast Asia and, therefore, attract more investment by transnational corporations in 'Taiwan. Subsequently, in Nanjing in A p ril 2 0 09 , SEF Chairman Chiang and ARATS Chairman Chen signed three more agreements on opening regular flights and boosting financial and judiciary cooperation, together with a consensus on allowing mainland companies to invest in Taiwan. Moreover, a memorandum of understandmg (MOU) on f inancial supervision was sealed in N o v e m ber 2 0 0 9 . T h e M O U would facilitate cross-Straits financial cooperation in t h e b anking, securities and insurance sectors. Under the MOU , w h ich was enacted on 16 January 2010, Taiwan's financial institutions are granted the status of foreign mvestors and are allowed to enter the Chinese market. Taiwanese banks are expected to establish more branches and offices in the mainland. Currently, the most important event is the signing of the ECFA. The first round of ECFA negotiations started in January 2010, and after several rounds of talks the ECFA was finally signed between Taipei and Beijing on 29 June 2010. More specifically, since the inauguration o f t h e M a Y i n g -j eou administration, economic relations across the Taiwan Straits have grown enormously in dimensions, including transportation, tourism, investment, finance, culture and education. In the sphere of

m ulti p l e

tourism, it is no longer one-way tourism from Taiwan to China, but
rather tourism in both directions. According to the MAC , during the period between July 2008 when Taiwan first opened up to mainland tourists and 31 December 2009, up to 26,488 Chinese tourist groups with a total of 646,783 people visited Taiwan. With daily individual spending e stimated a t U S $ 2 5 0 , t h e t o u r i st s h av e c o n t r i b u t ed roughly U S $ 1.13 bill ion t o T a i w an's economy, br i n ging b e nefits to local transportation, retail, entertainment and health industries.


Li ou Ta-hoi

If mainland business groups are included, more than 900,000 mainland travelers visited Taiwan in 2009. A s a result, China emerged as
t he second-largest source of fo r eign visitors to T a iwan in 2 0 0 9 , n e x t

only to Japan with 972,213 arrivals (including 606,174 tourists ).
l n terms of i n v estment, in vestment Hows have also shifted f r o m one-way movement o f i n v estment f ro m T a i wan t o C h i n a i n t h e p ast

to two-way investment flaws across the Straits. The Ma Ying-jeou
administration has allowed Chinese investment to come to 'Taiwan and, at the same time, is loosening regulations for Taiwanese investment in

China. Taiwan was opened up to Chineseinvestment in July 2008;
and in May 2009, the Minister of Economic Affairs, Yin CEi.-ming, announced that Taiwan would gradually open up 99 industries and
business lines in the manufacturing, service and infrastructure sectors f or C h i n e s e i n v e s t m e nt , f o l l o w i n g a n i nc r e m e n t a l a p p r o ac h o f '

expanding the permitted fields for Chinese investment. In the initial stage, 63 industries in the manufacturing sector have been opened, covering traditional Chinese herbal medicines, automobiles, textiles,
a nd plastic and r u b b er p r o cessing pr o d u cts; how ever, investment i n

industries like silicon. wafers and TFT LCD Rat panels is still prohibited for now. Also opened for Chinese investment are 24 business lines in the service sector, comprising wholesale, retail, tourism and
transport services, plus 11 operations in the in frastructure sector; but contract bu siness is excluded i n o r d e r t o p r o t e c t l o cal co n struction contractors. The government regulations also include a provision that

bans any monopoly or oligopoly investment, as well as investment from companies that have a stake owned by Chinese mili.tary units. If a Chinese investor or company obtains more than 10/o of the stake of
a local business, it w il l b e r e g arded as C h i n ese direct i n vestment i n Taiwan and will th erefore be subject te strict m o n i t o r in g and supervision. These investment l i b eralization m e asures have been w elcom ed

by business leaders, who expect that the move will help bolster cooperation between enterprises across the Taiwan Straits and beef up
t heir i n t e r n a t i o na l c o m p e t i t i v e ness . So fa r , m a i n l a n d i n v e s t o r s h ave funded m or e than 20 p r o j ects in Taiwan wit h a t o tal am o un t o f '

US$5 million since the island was opened up to mainland investment

in July 2008.

Cross-Taiwan Straits Economic Relations and the ECFA 1 7 1

M oreover, w i t h st e a d il y i m p r o v i n g c re ss-Straits r e l a t i o n s a nd gro w in g e c o n e mi c c o o p eration b e t w een t h e t w o s i d es, t h e M a Ying-jeou administration wiJR gradually relax the ban o n h i g h tech investment i n m a i n l and C h i n a t o h e l p T a i w anese companies b enefit fro m t h e m a i n l and's cheap labor an d t h u s m a i n t ain t h e i r competitiveness in th e C h i n ese market. C u r r e n tly, th e T a iw anese government b ars I .C D m a k ers that p r o d uc e p anels larger t han 4 inches from investing in Ch ina. It also limits investment in advanced semiconductor m a n ufacturing and e t h ylene pr o ducti on . H o w e v er, Taiwan wiJH soon lift the ban on. its I.CD and semiconductor companies investing in China, so that Taiwanese makers of flat panels can. set up plants in China before semiconductor manufacturers meet surging demand there as predicted, according to th e M O E A . T a iwan's LC D companies will be allowed to set up factories in China, provided they still keep their primary investment and more advanced technology at home; after ajl, the LC D an d semiconductor sectors are key parts of Taiwan's world-class technology industry, and are an important driver of Taiwan's export-oriented economy. E u t , T a iwan is facing a growing challenge from its archrival, South Korea.. In December 2009, the South Korean government decided to allow Samsung and LG D isplay

to build TPT I.CD fabs in China, which is the fastest-growing LCD
TV market; as a consequence, Taiwanese panel makers led by Taiwan Semiconductor M a n u f acturin g C o . a n d U n i t e d M i c r o e l ectroni cs Corp., the world's largest custofn chip makers, urged the government te allow them to i nvest in more advanced technology in C h i na . In fact, the companies that produce ethylene — a raw material used to make plastic LCD s — h ave greater urgency than chip companies to go to China, because flat panels are a component of consumer electronic pr o d u cts that n eed t o b e assembled and sold w i t h i n t a r g et m arkets. AU O a n d C h i M e i a r e T a i w a n' s b i g g est L C D m a k e r s . Nevertheless, ethylene plants will remain restricted in the next round of policy easing. One of the goals of President Ma in forging closer economic ties with China is to b e est Taiwan's sluggish economy. His efforts have paid off. According to C h i nese offlcials, Chma's purchasing missions to Taiwan notched up deals worth about U S $14 b i l l ion i n t h e fl r st


Li a u To-hai

11 months of 2 009 — a n a m o un t t h at accounted for about 7 .6% of Taiwan's total exports, which stood at U S $183.64 billion in the same

period. Th e m ainland had p l ayed a p o sitive role i n a l l eviating T aiwan's declining expo rt s and o f f setting t h e of the global


economic dow n t u rn . Th e deals involved a range of pr o d u cts such as electronic i n f o r m a t io n e q u i p m e nt , m e c h anical and p e t r o c h em i cal p r o c essed f o o d . I n p roducts, t e x t i l es, agricul t u ral p r o d u c ts, an d c ompanies to b u y

May 2009, Beijing announced that it w o uld encourage mainland
m o r e T a i w anese pr o d u ct s i n o r d e r t o e n h a n c e U n de r s u c h c i r cumstances, 'Taiwan's exports o f 4 6 . 9 %, th e h i g h est year-on-year c ooperation b etween companies across the Taiwan Straits amid t h e economic dow n t u rn .

hit a 14-month high of US$20.03 billion in December 2009, representing a sharp annual g r o wt h increase seen since 1991.

In the area of education, the Ma Ying-jeou administration wants to broaden exchanges between students in Taiwan and China. According to President M a , h i s g overnment w i l l d e f i n itely t ake steps to allow Chinese college students to study in T aiwan and to r ecognize education cr edentials issued by s om e o f C h i n a ' s el it e h i g her e d u cation institutions. Ma has provided three reasons for his policy. Firstly, this policy forms part o f t h e g o vernment's overall China policy and is in conformity with the objective of forging friendly ties with other coun-

tries around the world, including China. Secondly, the youths of
Taiwan and C hm a should learn &o m e ach o t her t o s t rengthen their c ompetitiveness. Thirdly, Chinese students could help to b o ost dw in dling registrations in Taiwan's colleges due to the falling birth r ate in Taiwan. H o w ever, the main aim o f t h e p o l icy is to allow fo r d e eper interactions between young people on both sides of the Straits and to create greater possibilities in bilateral exchanges. I n i t i ally, only 2,000 mainland Chinese students will be admitted to colleges and universities Taiwan for diploma and graduate programs each year, accounting for about 1% of Taiwan's total annual enrollment. National universities can only accept mainland students for g r aduate programs, while private institutions can accept them for any of t h eir p r o grams. On th e o t h er h and, so far many T aiwanese students who h ave chosen to st udy i n C hina are denied equal opp o r t u n it y fo r e m p l o y m ent i n T a i w an. A s

Cross-Taiwan Straits Eeonomie Relations and the ECFA 1 73

Taiwan's Education Mirustry is about to recogruze degrees from 41 Chinese universities, T a i w a nese people with d egrees from those Chinese uni verS..tie will bene6t from the policy. During the period

from 1987 (when Taiwan lifted the ban on t r aveling to m ainland
China) to 2000, around 3,800 Taiwanese students studied in mainland
China. Since 2000, according to the C hinese education authorities, between 1,000 and 2,000 Taiwanese students haveentered higher edu-

cation institutions in the mainland armually. At present, there are about
11,000 Taiwanese students studying in mainland China, excluding those in short-term programs.

Currently, the most significant development in cross-Straits economic relations is the conclusion of the ECFA b etween the two sides. For Taipei, the ECFA is not merely a lang-term mechanism that would allow Taiwan to continuously expand lucrative cross-Straits business opportunities, but also a hope for Taiwan to have more opportunities for participating in regional economic affairs m East Asia so as to

avoid being marginallized and isolated from the ongoing East Asian
e conomic integration. President M a p o i n t s ou t t h a t signing t h e

ECFA with China is aimed at helping Taiwanese to do business and
thus strengthen Taiwan's competitiveness. Through negotiations on

the ECFA, both sides focus on tariff reductions as well as the protection of Taiwanese investment and their intellectual property rights m

China. With respect to tariff reductions, according to Ma Ying-jeou, Taiwan exported about US$100 billion worth of goods to China in
2008 with an average tariff of 9%; while China's shipments to Taiwan were worth about US$30 billion durmg the same period, taxed at an average of 4%. If there were no tariffs, Taiwan could have saved US$9

billion, while China could have saved US$1.3 billion. In addition,
zero tariffs across the Straits woulcl not only bring more m b ound investment from abroad, but also create more than 262,000 jobs in

Taiwan. T a iwan estimates that the ECFA may bolster exports and
boost economic growth by 1.6S — 1.72% annually.

1 74 Liou Ta-hai

Moreover, the ECFA could also serve as a basis by which Taiwan c an negotiate an d e stablish f re e t r ad e a r r angements w it h o t h e r nations. In 2008, Taiwan's exports to China totaled US$99.5 billion (39% of its overall exports ); to ASEAN, US$38.9 billion (15.2%); to

Japan, US$17.5 billion (6.9%); and to South Korea, US$8.7 billion
(3.5%). Altogether, almost 65% of T a iwan's exports went t o E a st Asia. ~ In 2009, Taiwan's exports to Ch ina totaled US $83.6 billion (41.1% of its overall exports ); to ASEAN, US$30.1 billion


to Japan, US$14.5 billion (7.1%); and to South Korea, US$7.3 billion (down 16.1% &om the previous year ). "Di u in g an era in which
economic and tr ade exchanges are increasingly conducted thr o u gh

groupings, if Taipei fails to 6nd a way in, it will 6nd itself with less
and less room to maneuver." Of course, implementation of the ECFA is not an easy task, as it will have a substantial impact on Taiwan, given various factors in Taiwan's domestic as well as external environment. aiwan's traditional, agriculture and labor-intensive sectors are expected to suffer most in the wake of the signing of the ECFA with China. In particular, the agricultural sector was widely regarded as the major stumbling

D omes t i c a l l y , T

block during ECFA negotiations with China. Now that the ECFA has become effective, farmers are concerned about wooding i m p o rts of China's cheap agricultural products. Also, Taiwanese workers are a&aid that opening up the labor market to Chinese workers will undermine their job opportunities, especially workers in the traditional sector. That is why President Ma has promised that the pact would not further liberalize agricultural imports or allow the entry of Chinese workers. At the same time, however, Taiwan has to realistically and practically respond to the changing international environment and consider its economic survival as the top pr iority. International relations and foreign policy behaviors of nation-states in the early 2lst century are showing four major characteristics, which are specifically reHected in international relations in the Asia-Paci6c region. The 6rst characteristic is that the battle6eld of ideological con&ontation has shifted &om the international arena to th e d o mestic stage in the post-Cold War era. This ph enomenon can b e e asily i d entified i n t h e p o l i t i c s of Northeast Asian democratic countries such as Taiwan (between the

Cross-Taiwan Straits Eeariomie Relations arid the ECFA 1 7 5

pan-Green Camp led by the DPP and the pan-Blue Camp headed by the KMT ), South Korea (between liberals under Kim Bae-jung and Reh Moo-hyun and conservatives under Lee Myimg-bak ), and Japan
(between th e ri g h t ist L i b e ral D e m o c ratic P arty a nd t h e l e f t ist Democratic Par ty


The second characteristic of contemporary international relations is that economic interests top a country's national interests yis-uris political and strategic interests. This is largely due to the rising globalization since the Soviet U n i o n's initiation o f e c onomic reform,

dubbed glasNost ("openness") and perestroika ("reform" ), in 1985.
The Soviet Union's decision to adopt the capitalist economic system, after China, signified that the market economy had prevailed ever the command economy. Hence, the world economy has become a truly global market economy and g l obalization is no w i n f u l l s w ing. Consequently, th e g r o w ing i m p o r tance o f e c o nomic a f fairs in international relations has changed the pattern of international interactions. Major powers tend to pursue a policy of engagement directly and preventive diplomacy (hedging strategy) indirectly at the same time. B ur i n g tl he Cold War era, there was virtually no economic i nterdependence between the tw o superpowers, the U S an d t h e Soviet Union. In the post-Cold War era, however, there is a strong and ever-increasing economic interdependence between tlhe major political powers.

Traditional realism emphasizes the high politicsof diplomacy and
the use of force, while downplaying the log politics of economic affairs. Such a realist view contradicts the current reality in which economic interdependence is heavily influencing international politics. According to the liberal perspective, nation-states would rather trade than invade because they can all benefit frem i nternational trade. Primarily due to the increasing economic interdependence, no coun.-

try in the Asia-Pacific region can afford to wage a trade war or trigger
a military conflict. This is particularly true of relations between major powers. Due to strong economic interdependence, China and the US have shown a great deal of restraint when bilateral political frictions occur. Their bilateral relations are further complicated by the coexistence of strategic, political competition as well as economic


Li e u To-hai

interdependence. During tlhe Cold War periad, the nationall. interests of mast countries were monolith in character; that is, economic interests and security interests were identical, with the first priority being given ta strategic considerations. Hawever, this is na longer the case in internatianal relations in th e p a st-Cold War era. N o w adays, the

economic interests of nation-states are carnmanly in conflict witlh
t lheir security i n t erests. japan's relatians wit h C h i n a an d T a i w an' s relatians with China are sahent examples. The third ch aracteristic of cu rrent i n t ernationall. relations is the rising regionalisrn in the world economy. The rising regional integration in Eu r ape, as reflected in the Single ENropeae Act of 1 98 6, is a most illustrative example of rising regionalism in the world economy in th e l at e 1 9 8 0 s . I n r e s p o nse, tlhe U S an d Ca n a da s i g ned t h e Canada — US Free Trade Agreement (CUSFTA) in 1987, which was later expanded to i n c l ude M e x ico t a b e c ome th e N o r t h A m e r i can Free Trade Agreement (NAFTA) m 1994. The Six@le SNropean Act and the CUSFTA alarmed countries in the Asia-Pacific. At that tim e, tlhe US was the largest export market of almost all East Asian countries, and so a discriminated US market would deal a heavy blow to all of them. A f ter all, th e " b l o c ization" o f t h e w o r l d e c onomy means tlhat an individual country is no lo nger the basic unit of competition in the global economy. Against this lbackground, w hen A u stralian Prime M i n i ster Bo lb Hawke and South Korean President Roh Tae-woo proposed to set up an economic foru m i n t h e A sia-Pacific in 1 9 89 , t h eir p r o p osal was immediately a ccepted. T h e A s i a -Pacific E c o n o m i c C o o p e r ation (APEC) fo rum w a s thus established in th e same year. Both T aiwan and China were admitted into the APEC in 1 9 91 . I n th e face of the global financial crisis that started i n 2 0 0 8 , sm all economies cauld hardly survive by tlhemselves, as exemplified by th e I c eland crisis m 2009 and the on going G r eek financial crisis. As such, regional support has become in creasingly crucial for t h e e con o mi c survival of nation-states. With th e r i sing economic r egionalisrn and g l o balizat ion, as Deputy M i n i ster of th e M A C , F u D o n - clheng, pointed ou t , "Taiwan risks being marginalized if it cannot participate. This is why tlhe signing of an ECFA with Ch ina is so urgent at this moment, since

Cross-Taiwan straits Economic Relations and the ECFA 'I 77

it wiH allow Taiwan to co mpete with o t her countries an an equal faating."6~
T he f o u r t h m a j o r c h a r acteristic o f c o n t e m p a r ar y i n t e r n a t i a n a l

relations is the rise of China.

Ch i n a has been the fastest-growing

e conomy over the past 30 years, with an avera.ge annual grow t h major

rate af about 9%. As a consequence, China is naw the second-largest economy in the world, only after the US. China's per capita incame has increased 10 times since 1978. In 2003, China's GDP per capita passed the threshold af US$1,000 and then increased ta US$3,259 in 2008 ; i n j u s t Ave years, it had more than tripled. China's total f oreign trade reached more than US$1.76 trilli.an in 2006, and it s ranking in global trade shot up from the 32nd place in 1979 ta th.e first place in 20 10. China also has the largest foreign reserves (of mare than US $2.2 trillion ) and attracts the largest amount a f f o r ei gn

direct investment (I'DI) in the world.
A minar economy like Taiwan is very vulnerable ta the changing international environment. As the above analysis shows, the four key characteristics of contemporarynternational relations are all strongly i
r elevant t o c r a s s -Straits e c o n o m i c r e l a t i o n s an d T a i w a n ' s p o l i c y aptians. The ecanom i cizatian of i n t e r n atianal relations demonstrates

that the politicization af Taiwan's ecanamic relations with mainland China during the eight years of Chen Shui-bian's presidency did nat
d o anything g oo d t o t h e T a i w anese economy, bu t o n l y u n d e r m i n e d b u siness sector. Aw are of

Taiwan's awn i n t ernational campetitiveness due ta th e clashes af
interests between the g o v ernm en t an d t h e

the crisis, the Ma administration has decided to put ecanamic survival
as the first priority af its mainland China policy and fareign policy.
The rising regianalisrn in the wo rld econ om y is also a reminder to

Taiwan of its vulnerability in th e unpredictable and ever-changing international environment. The ongomg global financial crisis since 2008 has further highlighted the impartance af regional trade groups
and the vulnerability af sm all econo m i es. U n der such circum stances,

Taiwan has to emancipate itself fram b eing m argi.nalized as saon as possible; in particular, since the ASEAN — China I'TA became effect ive an 1 J anuary 2 0 10 , T aiwan risks nat b e ing i n v olved in t h e rapidly rising East Asian economic integration. The Chen Shui-bian


Li e u Te-hai

administration had previously blamed Beijing for isolating Taiwan,
and rushed to sign F TA s w i t h fi v e L a t i n A m e r i can coun t r ies prim a-

rily fo r

d o m estic p o l i tical considerations rather t han e conomic
U n li k e h i s pr edecessor, however, M a Y i n g -jeou r egards


mainland C h in a as key to solving th e c risis of T aiwan's marginalization in the process of regional integration in East Asia. A s President M a h a s i n d i cated, th e E C F A i s n o t a n a t t e mp t t o

lean toward China, but a necessity for the development of Taiwan. Taiwan has so far signed FTAs with five of its diplomatic allies, but
the trade volume w it h t h o se count ries combined m akes up less than

1% of Taiwan's total trade. "We must sign FTAs with our major tradi ng part n ers," said M a . 9 A c c o r d in g t o H u a n g C h a o - j en , t h e r e a l G DP of o t h e r E ast Asian nation s {Taiwan, South Korea and Japan


will decrease by fractions of 1% {average of 0.0143%) due to t h e ASEAN — China FTA; Taiwan will be hit the hardest, while Japan will
suffer the least. Investment in these nations will also decrease by close to 0.4%. Iri addition, these nations will see a 0.2/0 decrease in exports

and a 0.72% clecrease in imports.

Obviously, it is not wise for Taiwan as a minor economy wi t h limited r esources to confront a p o w erful C h i na, as it d i d d u r i n g C h e n Shui-bian's presidency. Instead, Taiwan should pragmatically take
advantage of China's soft diplomacy and build a crass-Straits peaceful coexistence mechanism through economic int eractions. President M a

Ying-jeou.'s mainland China policy — w h ich emphasizes engaging
C hina thr o ug h accelerating cross-Straits economic r elations — i s n o doubt a r at i onal decision, given th e c h aracteristics of co n t em p o rary international relations in the Asia-Pacific, the huge disparity between

Taiwan and China in terms of economic size, and Taiwan's highly
a symmetrical economic d ependence on C h i n a . I n l i g h t o f t h e e n o r mous disparity in p o w er, the Taiwanese government has traditionally been very wary o f T a i w an's economic i n t eractions wit h C h i n a . A s a result, the previous administrations took a conservative, defensive and

passive economic po licy t o w ard C h i na. H o w ever, th e changing

Cross-Taiwan Straits Economic Relations and the ECFA 1 7 9

domestic conditians and, in p a r t i cular, th e ch anging i n t e rnational e nvironment h ave f o r ced th e T a i w anese government t o m a k e i t s mainland China pohcy positive and realistic. 'Ta effectively respond ta the rapidly changing international environment and the challenges of the 21st century, a minor economy like Taiwan needs to act swiftly, decisively and strategically to g rasp tlhe strategic advantage at the right time. It is also essential for the government and the business community ta identify their common interests so as ta more effectively maintain the economy's international competitiveness; the rise of South Korea in tlhe post-1998 Asian. fInancial crisis is the best example. As mentioned earlier, ane of the features af' Taiwan's mainland China policy is that g olicy is always

overnment p

secandary tu the cross-Straits busmess operations of Taiwanese enterp rises. T h e b u s i n ess sector h a s b een t h e d r i v i n g f a r c e b e h i n d crass-Straits economic exchanges and since the late 1980s. Indeed, one of the reasons why the DPP lost its ruling party status was

i nte g r a t i o n

t he failure of tlh.e DPP government ta m eet tlh.e expectations of t h e

Taiwanese business community. The Chen Shui-bian administration
d esigned its mainland C h ina po licy pr imarily on t h e b asis of po l i t i cal and security c o n siderations, w h ich w e r e i n c o n f l ic t w i t h t h e mainland-lbased global operations uf T aiwanese enterprises. By contrast, President M a ' s m a i nland C h i n a p o l icy — w h i c h h a s h elped achieve, for the first t im e in T a iw an's history, twa -way cross-Straits

economic flaws

t a the previous one-way economic flawscompared

is m line with the interests of Taiwanese businesses. The Ma administration's approach ta mainland Chma stresses the concept af " f rrst ecanamics, then politics." Such a strategy ensures t hat Taiwan is unable to d e clare independence and t hat B eijing i s unable to compel reunifrcatian for the time being. The rapid institutionalization of crass-Straits ecanamic and trade exchanges since Ma Ying-jeou taak o f f ice is a positive development i n accordance with President Ma's hope to faun crass-Straits hostility inta a win-win scenario of peace&A coexistence. WhHe the ECFA is an economic deal lby n atrue, it i s essentially a p o l i t ical decision and w i l l h ave pr o f o u n d political impacts. With th e EC PA, the tw o sides will have a win-win framework for a mutually beneficial, peaceful develapment.


Li o u To-hai

It is definitely right for President Ma to p ursue an ECFA with
C hina fa r t h e s ak e o f T a i w a n ' s s u r v i val an d l o n g - t e r m e c o n o m i c interests. H o w ever, as he failed t e m e v e d e cisively and strategically,

he missed the best time to sign the ECFA with China (i.e. the latter

half af'2009 ) . This is p a r tl y b e c ause he was ta a c o n c e r ned a b o u t
damestic opposition led by the DPP, and partlly because Ma insisted on building a domestic consensus ( that is, suppor t & o m m o r e t h a n 60% of the general public ) an the issue. Actually, the best time te conclude the ECFA fer Taiwan was before 1 January 2010, when the ASEAN — China FTA became effective. According to the Chung-Hua Institution for E c a nomic Research (CIER), a Taiwan-based ecanomic th in k t a nk , T a iwan is estimated t a s u f fer a d r o p i n i n d u s t rial

production by US$2.46 billion once the ASEAN — China FTA is materiahzed. Under the ASEAN — China FTA, 90% of the gaods traded
b etween th e A S EA N m e m b e r c o u n t r i e s an d C h i n a ar e t a r i f f - & e e ,

which poses a threat ta Taiwan's major industries (notably, the petrochemical industry ). The ASEAN — China FTA will h ur t T a iwanese
exports to th e area, although t h ose Taiwanese-invested companies in

beth China and Sautheast Asia could benefit fram the tariff reduct ions. VKhat is even worse, once the A SEA N P l u s T h r ee FT A c o m e s

i nta effect i n 2 0 1 2 , T a iwan's in dustrial pr o duction w i l l f al l b y U S$9.99 billion, the CIER estimates. A c c o rding to Darnel D . N . Liu., a research fellow at the CIER, "The longer Taiwan misses this bandwagon o f r e g i onal i n t egratien, t h e m e r e s erious n egative
i mpacts will be an Taiwan's economic development . "

Ideally, President Ma would like to avoid the three-front battll.e he is currently fighting: the apposition &om the DPP and the struggle over the coming presidential and legislative elections in 2012 domestically, a n d p r e ssures from B e ijing an d W ashington externally.
S ino — US relations, w h ic h w e r e q u i t e p l e asant i n t h e l a t t e r h al f a f

2009, began to sour in. early 2010 when the Obama administration
took a series of moves against China's interests; these included selling

arms to Taiwan and meeting with th e T i betan spiritual leader, the
D alai Lama, wh o i s seen by B e i j in g as a separatist seeking t a over-

throw the Chinese rule in Tibet. Taiwan was put in a very awkward. position by the Obama administration's J.ecisien to apprave the arms

Cross-Taiwan Straits Economic Relations and the ECFA 1 8 1

sale to Taiwan in early 2010.

O n t h e ane hand, Ma himself said that

he was ready to accept the offer; but on the other hand, the Ma Yingj eou administration was scheduled to sign th e E CF A w i t h C h i n a i n June 2010, and Beijing's attitude tow ard Washingtan's arms sale to Taiwan had been tou gher than ever. U n der such circumstances, tlh.e u pcoming U S arms sale to Taiwan would be a test for President M a an whether he cauld keep a balance between pu.rchasing US arm.s on the one hand and continuing his efforts ta establish trust and better relations with th e C h i nese leaders on the other. Obviously, Beijing's response would be crucial. As it tu r ned out , C h in a seemed ta blame Washington m or e t han T aipei for t h e U S a rm s sale to T aiwan, and B eijing's willingness to sign th e E C F A w a s n.at affected by th e U S move. I n a n swering q u e stions w it h r e g ar d t o t h e s i g n in g o f t lh.e

ECFA, Zhao Chizheng, Spokesman of the 11th National People' s Congress (NPC), indicated: "Since Premier Wen Jiabaa has already
said that China will make economic concessions to Taiwan, the deleg ates af th e N P C w i l l b e m o r e g e n e r ou s t o T a i w a n. " A n ot he r question is whether M a has a clear priority in hi s mi n d (that is, econ omics first o r s ecurity f rrst, and C h i n a f i rst o r t h e U S f r r st) and w hether h e h a s e n o ug h s t r a t egic sense and s k i ll s t o e s cape t h i s catch-22. It w as very impa r t ant f or T a i wan ta s ign t he E C FA w i t h C h i n a before Beijing started FTA negatiatians with South K o rea and Japan. T aiwan un d erstaod t h a t C h i n a' s d ecision t o s i g n t h e E C F A w i t h Taiwan was primarily driven by political considerations, which mi gh t h ave been distracted by much g reater economic gains that could b e

obtained fram signing FTAs with bigger economies than Taiwan (Eke South Korea and Japan ) . South K o r ea, w h ic h v i ews Taiwan as it s
major co m p et i to r i n t h e g l o b a l m a r k et , has been very c o n c erned about tlhe rapidly expanding cross-Straits economic coaperatian and t he signin g o f t h e E C F A a c r o ss th e T a i wa n S t r aits. A s s u ch , i n October 2009, Seoul dramatically changed its long-held op position ta an FT A w i t h C h i n a an d a g r eed t o a c celerate Sino — Korea FTA n egotiations. Previously, Seoul was worried that a bilateral FTA w i t h China would b r in g a Goad o f i m p o r ted cheap agricultural products from China, hu.rting the nation's already fragile agricultural sector.


ki o u To-hai

Chao Wen-heng, an associate research fellow at the Taiwan Institute ef Ecenomi c R esearch, n e t ed : " A s s o m e S o ut h K e r ean analysts explained, this surprising turnaround was prompted by th e t h reat a cross-Straits ECFA poses to South Korean exports to China, such as LCD d i splay panels." 9 According t e T a i w an's Bureau of F o r eign Trade, the Inarket share of Taiwan-made products in China fell &om 12.9% in 2002 ta a record low of 8 .5% in 2009, while that of South Korea-made pro d u cts went u p f r a m 9 . 7 % t a 1 0 . 2 % i n t h e s am e period. O n e y e ar after petrochemicals were included in th e " e arly harvest" list of the ECFA, the Taiwan Synthetic Resins Manufacturers Association (TSRMA) Chairman F. Y. Hang still had concerns about the progress in signing the trade deal with th e mainland. "If Korea and Japan — T aiman's two b i g gest competitars — sign f ree trade a greements with C h in a ahead af us, C h ina will n e l o n ger need t a place their orders in Taiwan. So there mill be ne roaIn for us ta survive," H o n g s ai d i n a n i n t e r v iew i n F e b r u ar y 2 0 1 0 . C u r r e n t l y, Taiwan's petrochemicall. exports to China are subject to a 6.5% import d uty, which is already higher than th e 5 .5% import d ut y fo r K o r e a and Japan; however, the latter twa w il l b e g r anted zero-duty treatment i.n the Chinese market from 2012 onwards. "If we cannot grab the moment t e secure the market, we are sending ourselves to th e m ortuary," said Hon g . The latest developInent in Japan is also worthy of Taiwan's attention. S i nce Y u ki o H a t o y am a o f t h e D e m o c r a ti c P a rt y b e c am e Prime MUuster in August 2009, Sino-Japanese relations have greatly improved and the signing af a bilateral FTA is gaining m o m entum ; this mill further push South Korea te take a proactive approach ta a Sino — Korea FTA. Taiwan also needs to be alert to the growing possibility of a N o r t h east Asia FTA i n c l u d ing C h i na, South K o rea and Japan. On t h e 1 0 t h a n n i v ersary of t h e ir t r i l a teral cooperation i n October 2009, Japanese Prime M i n i ster H a t oyama — i n a B e i j ing p ress conference jo i n tl y h e l d w i t h S a u t h K o r e a n P r esident L e e Myung-bak and Chinese Premier Wen Jiabao — expressed his hope that a trilateral FTA involving South K o rea, China and Japan mould make progress. He a.isa said that, prior to th e pact, the three countries would need to sign an agreement promotmg investment as early

Cross-Taiwan Straits Economic Relations and the ECFA 1 8 3

as possible in 2010. In February 2010, South Korea announced that it would launch a joint research project later in the year with China and Japan to study th e p ossibility of a. three-way FT A b e t w een the Northeast Asian nations. F u r t h ermore, the finance ministers of South Korea, J apan and Chma had previously agreed in May 2 0 0 6 to make an effort to in troduce a common currency to be used in the Asian r egion, a s p ar t o f economic bloc. t h e e f f o rt s t o c r e ate a p a n -Asian

For China, it was also in Beijing's interests to expedite the canclusion of the ECFA with Taiwan. Beijing's economic concessions to T aiwan t h r o ug h t h e E C P A w ou l d s u b stantially e n h ance t h e

Taiwanese people's feelings of China's sincerity and goodwill, which
would i n t u r n h e l p c h a nge t h eir n e g ative im pression of mainland. China that was shaped by the previous administration and t hus pave the way for further cross-Straits integration m th e fut ure. These canc essions could i n c l ud e al l o w in g T a i w a n t o s i g n P T A s w i t h o t h e r economies in the world; generously a.ccepting the "early harvest" list proposed by Taiwan; naming the items that would be first to benefit from the E C FA ; and g r anting T aiwanese airlines the Fifth F reedom

o f the A i r ( in accordance w i t h t h e I n t e r n a t i o nal A i r T r a n s p o r t Agreement ) , i.e. th e r i gh t t o t a k e o n p a ssengers, mail an d c a r g o
d estined for the territory of another agreeing nation and to put dow n passengers, mail and cargo coming from any such territory. On the one hand, Sheng-cheng Hu, an academician at Academia Sinica and one of Taiwan's leading economists, notes that, although sigrung the E CF A ca n i n crease Taiwan's advantage in th e C h i n ese market, it will render Taiwan more dependent on Ch ina, and overdep endence on C h in a is something w o r t h w o r r y in g a b o ut . O n. t h e other hand, President Ma has attempted to allay public concern over the ECPA b y e m p h a sizing t hat a.n ECFA w o u l d b e a c r u cial lever t hat woul d aElow Taiwan t o s ig n f r ee-trade agreements with o t h e r countries. " M A C Ch a i r w o m a n I . a i S h i n - y uan has also str o n g l y urged Beijing not t o o b struct Taiwan from signing PTAs with o t h er countries. S i m i l arly, Chao Wen-heng indicates that the key point of the ECFA was "to include in the pact a guarantee of Taiwan's right to

sign FTAs. Only if t hat is done will th e ECPA be of b enefit to


Li eu Te-hai M o r eov e r , s i g n in g t h e E C F A

T aiwan's econ o m i c d e v elo p m e n t . "

would demonstrate that China is no l o nger interested in isolating Taiwan from th e i n t ernational community o r o p p osed to T a iwan joining the East Asian economic integration. In d o ing so, n.ot only
w ould c r o ss-Straits relation s mov e t o w a r d a p o s i t iv e f u t u r e i n t h e

long run, but China's leadership in East Asian economic integration would also be consolidated. In fact, a coalition of enterprises that pror notes economic co operation an d i n t e gration across the Straits is th e best way to w e aken th e antii.-China sentiment an d p r o - m d e p endence

movement in Taiwan.
Furthermore, with the ECFA, China can further take advantage of Taiwanese enterprises' managerial and marketing skills and worldwide supply chains. This would no t o nly consolidate China's posit ion in E ast A sia, bu t a lso advance its gl o bal m a r ket an d e x p and i t s

business operations beyond national borders through strengthening
t he co m p e t i t i v e ness of " C h a i w a n " e n t e r p r i ses, i n t r o d u c i n g m o r e

Taiwanese talent into C h i nese companies and outsourcing jobs to
T aiwanese companies in th e m a m l and. W i t h t h e i r st r on g c o n n e cti o n

to the West as well as their with Western customs and ways of doing business, Taiwanese companies can help China obtain more FBI and technologies from the West. Taiwanese enterprises may also
a ssist China in it s ov erseas investment i n t h e W e st, in a d d i t io n t o i t s d omestic economic struct ural adjustment .

f ami l i a r i t y

A major overhaul and upgrading of the Chinese economy is badly n eeded for C h i n a t o s u stain th e spectacular growt h t h a t i t h a s recorded over the past three decades. In t his respect, Taiwan can help China with the development of its high-tech industries. China has relied heavily on th e foreign provision of core technologies in high-tech production; but w it h it s higher level of industrial knowhow, Taiwan can cooperate with China in developing new technolog ies o r o p e r a t i n g s y s t em s an d c r e a t i n g n e w s t y l e s o f h i g h - t e c h i ndustries with " c r a ss-Straits characteristics." A s fo r C h i n a' s cu r r en t e ndeavor to e x p and i t s clomestic d em and an d p r i v ate c o nsum p t i o n ,

Taiwanese companies, while gearing up to penetrate deeper into the
v ast Chinese Inarket, can l en d a h a n d i n u p g r a d in g t h e q u a l it y a n d

functions of various consumer products. Taiwanese companies can also

Cross-Taiwan Straits Economic Relations and the ECFA


help with t h e i n t r o d u c t io n o f a m o d e r n i zed m a r keting an d c r eative distribution m echanism in C h ina to enhance operational efficiency.' ' Internationalh; th e signing o f t h e E C F A w i t h T a i wan has forced T okyo and Seoul i n p a r t i c u lar t o a c celerate their FT A n e g o t i at i o n s w ith C h i na . C h i n ese leaders have actively pushed fo r t h e si gn in g o f FTAs xvith South k o r ea and Japan on several occasions. In D ecember 2 009, th e C h i n ese V ic e P r esident, X i J i n p i n g , m e n t i o n e d t h a t h e would like to see an FTA bet>veen his country and South I( o rea in the n ear futu r e. " A s f o r t h e S i no — Japan FTA, af'ter becom in g C h i n a ' s n e g o t i aAmbassador to Japan, AVang Yi ur ged Japan to l a u nch FT A t ions with C h ina in February 20 0 5 . All in all, the signing of th e E CF A is in th e lo n g - t erm i n t erests of

not just both sides of the Taiwan Straits but also the peoples of East
A sia, as a result o f' stable and p e aceful c r o ss-Straits relations. I t i s e ncouraging t o s e e t h a t t h e E C F A d ivas f>nally signed o n 2 9 J u n e 2 010. T h ere is no d o u b t t h a t t h e n ormaliz e

i mple m e n t a t i o n o f the E CF A i v i l l

c r o s s-Straits e c o n o m i c r e l a t i o n s , a n d pa v e t h e i v a y

for future bilateral political reconciliation as favell as security- and
conf>dence-building measures and mechanisms across the Straits.









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