Taiwan’s Protest against Trade Agreement with China: Political or Economic Issue?

Since the Cross-Strait Service Trade Agreement was carelessly passed in Legislative Yuan in Taiwan, thousands of Taiwanese people disappointed and occupied legislative Yuan, hoping that President Ma can withdraw this agreement and publish a related law to regulate the process of trade agreement. In April 10th, after President Ma promise to reexamine the agreement and publish regulation of trade agreement, the protesters lived in Legislative Yuan started to retreat.

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Resource: CNN

Cross-Strait Service Trade Agreement is an extension of Economic Cooperation Framework Agreement (ECFA) which was signed in 2010 and planed to gradually lowering the tariff of trade and limits of service industry. As China has become the largest export country and occupied 40% of international trade of Taiwan, Taiwanese government believes that strengthen the trading policy with China is significant to economic growth of Taiwan. They also concerned that China, South Korea, and Japan would join ASEAN, which would lower the competitiveness of Taiwanese goods toward these countries.

The tax of trading fabrics, petroleum, machines, and automobile accessories has been lowered since ECFA was announced in 2010. Protesters claimed that the volume of trading was triggered while the price was shocked by overwhelming quantity of Chinese goods, leading to the decrease in producers’ welfare in Taiwan.

The service trade agreement is mainly about:

1. Lowering the regulation of investing in hospital, logistic, Chinese medicine, publishing, sightseeing industry.

2. Lowering the regulation of banking system.

3. Lowering the regulation of investment immigration.

Obviously, opening market is good for increasing capital and trade, and leads to GDP growth. But why so many Taiwanese object to this agreement?

It seems that Taiwan benefits more from the agreement since China will decrease 80 categories of tariff while Taiwan will decrease 64 of them. However, after further research of these categories, I believe that the number of category is not sufficient to judge because it only depends on how you define those items. Besides, most tariffs of those items in China are still way higher than Taiwan under the agreement.

Advocators may argue that the service sectors in Taiwan are stronger, such as restaurant and hair industry, and Taiwanese can benefit a lot from them. I believe that is true, but not for all the condition. In China, there’s an example that the Chinese and Taiwanese cooperated department store came into law issue because Chinese board members suddenly sued their Taiwanese partner and used their relationship to imprison Taiwanese board members. In fact, not only Taiwanese enterprise but also global firms confront several issues when entering Chinese market. Otherwise, Chinese corporations are more economic of scale while most of Taiwanese companies are small. Taiwanese company may face the merger and outflow of human and knowledge resource because Chinese firms can pay more. Although China and Taiwan should not abandon the opportunity to widen their business cooperation due to several events, we still need to concern more about the fact that Taiwan is a small open economy, while China is more capital abundant and not very transparent to foreign investors.

Most Protesters are aware of political attempt by Chinese government and afraid that Taiwan may be the next Hong Kong. They believe that the lowering limit of Chinese investment and immigration may lead to launching price of real estate, higher cost of health care system, and lowering national security.

Taiwanese want a more strong connection to the world trading system and step on this goal by linking to the rising Chinese economy. As the trend of opening market continues, Taiwan is hard to avoid opening the market. Cross-Strait Service Trade Agreement should lead to the growth of Taiwanese economy for a while, but in the long run, economic growth is questionable.

The main issue is that Taiwan’s economic has been too reliable on export to China. Most of Taiwan’s export to China is IT product, which mainly comes from the intra industry trade. That is, Taiwanese invest factories in China to produce the final product and import component from Taiwan. This horizontal integration causes the trade substitution effect and trade creation effect. The substitution effect causes the decrease in Taiwan’s export to China when China can produce the same product as Taiwan. The creation effect causes the increase in export of Taiwan because factories in China need to import components from Taiwan. The OEM industry was strong and mainstream in Taiwan but facing lowering margin and strong competition from Korea and China. Taiwanese need to consider about transferring their industry and focusing on global market more.

Reference:

1. http://nccur.lib.nccu.edu.tw/bitstream/140.119/23201/1/930611_1%5B1%5D.pdf

2. http://www.cier.edu.tw/mp.asp?mp=1

3. http://www.ecfa.org.tw/SerciveTradeAgreement1.aspx

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