Welcomed in some circles, cursed in others, China and Taiwan’s new trade agreement is a major milestone in cross-Strait relations, regardless of how it’s viewed. After about five months of formal talks, the Economic Cooperation Framework Agreement (ECFA) was signed on June 29 in Chongqing, China, committing the two countries to tariff reductions on manufactured goods and improved access to a range of services in both markets. But this is no run-of-the-mill free trade agreement (FTA), note many experts. It’s considered an important turning point in China-Taiwan relations since civil war that erupted in the 40th last century drove the sides apart.


ECFA is the fruit of the efforts of Ma Ying-jeou, Taiwan’s China-friendly president, to improve cross-Strait ties, and China’s policy makers, who have been seeking to stabilize relations with the island it sees as a breakaway province through the “carrot” of economic enticements.  A key part of the agreement is the so-called “early harvest” list of sectors, which will undergo the first tariff cuts and serve as a guide for further trade liberalization.


Notably, the list is tilted heavily in Taiwan’s favor; indeed Chinese officials have publicly stated they want to “give an advantage” to Taiwan in ECFA talks. Once ECFA is ratified by Taiwan’s legislature (expected by late summer) and the agreement gets under way next year, tariffs will be reduced on 539 Taiwanese exports to China, compared with 267 Chinese exports to Taiwan. The reason for Beijing’s generosity, according to a number of experts, is that its policy makers are using ECFA for political gain.


Taipei, meanwhile, wants the economic boost above all else. “China gives economic concessions to Taiwan, while Taiwan gives political concessions to China,” is the way Tung Chen-yuan, a former official in Taiwan’s previous pro-independence government, sees it. “These are the rules of the game.”


To be sure, ECFA’s implications go far beyond the economic sphere. “ECFA is not just an economic cooperation pact between Taiwan and China,” adds Liou To-hai a professor of diplomacy at Taiwan’s National Chengchi University. “It has a lot of political and strategic importance.”


In No Hurry


For China, the agreement’s importance will be proven if it manages to blunt Taiwan’s independence movement and lay the foundation for the eventual cross-Strait unification, experts say. But China experts insist that their country is primarily concerned now with the “peaceful development” of cross-Strait relations and will not push Taiwan into political dialogue before both countries are ready.


There are doubts that ECFA alone can achieve so much. “Maybe signing ECFA can create better conditions or a better environment for the two sides to begin political talks, but it will not directly lead to political issues,” asserts Li Peng, assistant director of the Taiwan Research Institute at China’s Xiamen University. “The political issues are very complicated, and will take a long time to tackle. That economic talks can lead to political talks is just not that simple.”


President Ma has gone on record saying that he knows that China has a unification agenda. In his view, however, ECFA is in Taiwan’s economic interests and the East Asian island has not ceded any de facto sovereignty by signing the agreement.


He also is downplaying the political risks highlighted by Taiwan’s pro-independence opposition, saying the island’s 23 million people should be more self-confident about their negotiating strength. Repeatedly vowing to protect their political autonomy, he says he will not enter unification talks and will only enter political dialogue with Beijing if China withdraws the estimated 1,300 missiles it has amassed on the coast opposite Taiwan. “The mainland side has indicated there was no rush to move into political issues,” he said at a press conference in June. All told, Ma sees ECFA as the crowning achievement of his first term, a vindication of his non-confrontational policy toward China, and a good start to his 2012 re-election plans.


The economic benefits of ECFA is what the island should be training its attention, he says. Taiwan is recovering from the global economic downturn relatively well — its exports grew 49% in the first six months of 2010 to US$132 billion (though lower than in the first half of 2008). The International Monetary Fund recently forecast that Taiwan’s 2010 GDP will grow 7.7%.


But the president also stresses that it’s not a cure-all for Taiwan’s economic challenges. That means the agreement won’t necessarily end Taiwan’s marginalization from the rest of East Asia’s current economic integration. Taiwan has sought trade deals with Singapore and a few other trading partners in the region, only to have them scotched under diplomatic pressure from China. (China objects to Taiwan signing formal trade deals, which appear to give the island the status of statehood.)


The only FTAs Taiwan has signed have been with five small diplomatic allies in Central America, which account for only 1% of Taiwan’s total trade, according to Standard Chartered Bank. China is by far Taiwan’s most important market, accounting for 41% of its exports. The average tariff on those goods is 9%, notes the bank.


Even before ECFA. trade has boomed between the two sides in recent years, with two-way annual trade now totaling more than US$100 billion, compared with US$30 billion in 2003, according to Standard Chartered Bank, with the majority of goods (about US$84 billion last year) flowing from Taiwan to China. But many sectors still have high tariffs or other barriers, and others are still closed to cross-Strait trade and investment.


Meanwhile, China has closed other FTAs that leave Taiwan out in the cold, such as the one with Association of South East Asian Nations (ASEAN) bloc to give its 10 members lower- or no-tariff access to Chinese markets. With ECFA, Taiwan hopes to turn that around and perhaps even be more competitive with the likes of Japan and South Korea in the booming domestic China market.


Reaping the Harvest


As with any trade deal, ECFA will benefit some, trip up others. The winners in Taiwan will be in capital-intensive sectors, like petrochemicals, machinery and machine tools. These sectors will experience early harvest tariff reductions, increasing the competitiveness of their products in China.


The likely losers of cross-Strait further trade liberalization are Taiwan’s labor-intensive, traditional industries, such as hand-made shoes, towels and ceramics. Taiwan’s government has identified 17 sectors as being vulnerable to cheaper Chinese imports, which may be granted low- or zero-tariff under ECFA. Taiwan’s farmers are also concerned, since FTAs can lead to broader liberalization, which often includes agricultural products.


The first stage of ECFA, however, has avoided liberalizing Taiwan’s 17 sectors. Taiwan’s government has also promised not to allow Chinese agricultural imports to enter into the agreement, although there is some debate about whether by signing ECFA, it has committed itself in principle to such liberalization in the long term. Omitting vulnerable sectors and agriculture from ECFA was seen as part of China’s effort to “give an advantage” to Taiwan.


Taiwan services will also benefit from ECFA, especially banks. ECFA includes provisions that provide Taiwanese banks a “shortcut” to doing retail business in yuan, or renminbi, on the mainland, essentially giving them preferential treatment over non-Chinese banks. Taiwan financial institutions have long sought access to the mainland banking market and ECFA should help them do so.


Most experts see Taiwan’s economy benefiting from ECFA. A study commissioned by Taiwan’s government calculated that it would add between 1.65% and 1.72% to its GDP. The study also estimated that the ECFA could attract US$8.9 billion in new foreign direct investment in the next seven years and create up to 263,000 jobs. Another study by economists at the Peterson Institute for International Economics in Washington, D.C. estimated that ECFA would add 4.5% to Taiwan’s GDP by 2020.


Perilous Politics?


Polls suggest that the majority of Taiwanese like ECFA. Data collected in May by the Election Study Center of National Chengchi University found more than 60% of Taiwanese are for ECFA, compared with 37% who are opposed.


The Taiwanese who are against it fall primarily into the pro-independence camp. They believe ECFA is perilous politically because it could downgrade Taiwan’s autonomy. Economically, they say it will benefit Taiwan’s conglomerates the most, while hurting small and mid-sized businesses, leaving thousands of Taiwanese in traditional industries under threat of losing their jobs.


Critics also haven’t been impressed with the overall negotiation and approval process. They say it has lacked transparency and Ma’s party is ramming the ratification through the legislature without enough deliberation. Also, they criticize a national review committee for blocking two attempts to put ECFA to an island-wide referendum. A small group of opponents is currently working on a third attempt.


But Ma’s party, the Kuomintang, has a majority in the legislature, while the opposition’s 33 seats (out of 113) cannot stop ECFA’s ratification — expected in August — in an up-or-down vote. And on balance most Taiwanese support Ma’s plan to seek closer economic ties and more stable relations with China while maintaining Taiwan’s de facto political independence. In terms of economics, most Taiwanese reckon that better business ties with China will help the island prosper.


However, Taiwan’s relationship with China is polarizing. Some 30% of the electorate is deeply suspicious of China and sees it more as a political and military threat than an economic ally. Meanwhile, Taiwanese identity is stronger than ever. According to the most recent survey run by the Election Study Center, a record 53% say they are “Taiwanese,” compared with 18% when the poll began in 1992. Meanwhile, 40% today say they are “both Taiwanese and Chinese” and just 4% say they are “Chinese.”


Of Security and Survival


There are other factors at play with ECFA. “Economics are very important to our security and survival,” asserts Wang Kao-chen, a security expert at Taiwan’s Tamkang University. “The strengthening of economic relations will help reduce military pressure from China’s side, and the goodwill will help to reduce tensions across the Strait.”


What’s more, ECFA sends a strong signal to investors, both domestic and foreign, that Taiwan is now committed to normalizing cross-Strait economic ties. Ma has touted ECFA as a stepping stone to deals with trading partners in the region and beyond. Such agreements would depend on China’s willingness to let them go ahead without political interference. Various Chinese officials, including President Hu Jintao, have recently made veiled suggestions that they would not block the deals, but experts are unsure about the full extent of Beijing’s generosity. “Chinese officials have not publicly rejected this idea and that’s progress in my view,” says Liu Fu-kuo, a cross-Strait expert at Taiwan’s National Chengchi University.


Most experts reckon China would allow Taiwan to sign FTAs with countries that have already have agreements with China. And if Taiwan’s pro-independence party returns to power, all bets are off on what China’s attitude will be.


Likely trade partners for Taiwan include Singapore, Indonesia and Malaysia. Singapore would be the easiest for Taiwan to have an FTA because one has been sitting on a shelf for nearly 10 years now following pressure from Beijing. Agreements with other countries would likely have a very limited scope since agricultural liberalization would be a sticking point for Taiwan.


Meanwhile, ECFA’s signing has attracted attention from Japan and South Korea, which are concerned that it may leave them at a disadvantage in China as a result. Both countries are expected to accelerate trade talks with China, either on bilateral agreements or as part of the framework known as “ASEAN plus three” — that is, the Southeast Asia association’s 10 members as well as Japan, South Korea and China.


What’s clear now, hope many experts, is that ECFA is the beginning of the end of a rocky relationship. “Having this kind of trade agreement between China and Taiwan will remove a lot of obstacles,” says Tay Her Lim, an analyst at brokerage house CLSA in Taipei. “This is the key thing ECFA is helping to do. But like any fundamental change, it will take time. This is only the first step, there will be a lot of steps.”