TJ Cheng, College of William and Mary Peter CY Chow, City university

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TJ Cheng, College of William and Mary Peter CY Chow, City university
Global Opportunities, Local and Transnational Politics:
Taiwan's Bid for FTAs
T.J. Cheng, College of William and Mary
Peter C.Y. Chow, City university of New York
I. Introduction
I.1. The myth of the FTA and the apprehensions of being marginalized
I.2. The emerging trade blocs in the region
I.3. A Comparison between the TPP and RCEP
I.4. The purpose of this study
II. Hope for the Best: A Double Play
II.1. Domestic politics in prioritizing the TPP vs. RCEP
II. 2. The “China factor” in pursuing the trade pacts
II.3. Sequencing order of applying for the TPP and RCEP
II.4. Bilateral FTAs with dual membership countries first
II.5. Political dividends of FTAs
III. What if Both Doors Remain Shut?
III.1. Multiple bilateral FTAs to reach the near hub-ness
III.2.Looking beyond regional horizon: The Pacific Alliance
IV.
Economic Re-structuring Holds the Key
IV.1. Agricultural sector: an economically weak yet politically strong sector
IIV.2. Service sector: a socio-political complicated sector to be liberalized
IV.3. Three points on industrial restructuring
a. Branding and Enhancing value-added in OEM by functional and processing
upgrading
b. Innovate new production technology
c. Exploit the untapped trade potential: Identifying the niche products in niche
markets
1
I. Introduction
I.1. The myth of the FTA and the apprehensions of being
marginalized
The proliferations of Free Trade Area ( FTA) in Asia since the 1990’s
has generated many webbed trade blocs which were characterized as the
“ Spaghetti bowl” ( Asian noodle bowl) of overlapping trading partners
under different “ rules of origin” in various trade pacts. Chronically
isolated from international community and affected by the “Beijing
factor” in many of its wary trading partners, Taiwan has been blocked
from signing FTAs with many of them. Except for its FTAs with 5 small
economies in Central America which accounted for only 0.2% of its trade
volume in 2010,1 Taiwan became an outlier of the emerging trade blocs
in the Asia Pacific region.2The apprehension of being marginalized in the
trend of economic integration and partisan politics on how to cope with
China amid the drive for globalization have dominated Taiwan’s policy
circles and academia research for decades.
However, the overwhelming concern about being marginalized from
the emerging trade blocs is not totally warranted; FTA benefits are not
always reaped. A survey from Asian Development Bank Institute on the
application of FTAs at the firms’ levels in many countries found that the
percentage of applying the preferential trade rule is only 29 % in Japan,
24.9% in Thailand, 20.8% in Korea, 20% in the Philippines and 17.3% in
Singapore (Kawai and Wignaraja, 2009. P.11). For Taiwan, even the
utilization rate for the “ early harvest product list” under Economic
Cooperation Framework Agreement (ECFA) with China is only about
20% for textile products, and about 50 to 60% in petro-chemical,
machinery/parts and transport equipment in 2012.
1
They are Panama, Nicaragua, El Salvador, Guatemala, and Honduras.
Taiwan signed a trade pact with New Zealand (ANZTEC ) in July 2013. But New Zealand is Taiwan’s 40 th largest
trading partner with two- way trade totaled only $ 1.23 billion in 2012. Nevertheless, the ANZTEC is the first trade
pact with the OECD countries.
2
2
Why have business firms in those countries not fully taken
advantage of FTAs? Because of different rules of origin under various
FTAs, the administrative cost of complying with the local contents
requirement in conformity with the custom valuation is even higher than
preferential rules. Hence, it is even more cost effective for business firms
to apply the “most favored nation” clause under the WTO rather than the
FTAs. Therefore, FTA is not a panacea at all for trade-inhibiting
problems. We seem to be making a “sour grape” argument, but it really
reflects that the transaction cost due to different rules of origin under
various FTAs has undermined their effectiveness on actual trade
performance. This argument also points to the necessity for consolidating
and harmonizing various FTAs into a single framework. Integrating
FTAs into uniform rules of origin is a very daunting task.
Nevertheless, both the government and business enterprises in
Taiwan have been eager to participate in the emerging trade blocs for
both economic and political rationales to be analyzed below.
Psychologically, participation or lack of it affects the incentive of
investment domestically and from abroad.
I.2. The emerging trade blocs in the region
An overall review of the new development in the regional and global
trade environment can be summarized as follows;
a. Trade-investment nexus in Asia Pacific region became prevalent after the
Plaza Accord in 1985 and accelerated after the 1990’s. Since then, trade
in parts and components dominated the trade flows within Asia while
most of their final products are destined to OECD markets, especially the
U.S. In other words, intra-region trade in Asia is engaged more for intraindustry trade whereas that of inter-regional is more on an inter-industry
basis. In general, trade for parts and components is much less distorted by
protection policy than that for final products, thanks to interdependency
among trading countries for the supply and demand for parts and
components in the process of production. Hence, there are more
3
consensuses on liberalization on those sectors which are closely linked
with the global supply chain than any others as reflected in the
Information Technology Agreement (ITA) under the WTO framework. 3
b. The ASEAN has long been adroitly applying the ‘divide and rule’ tactic
to expand the ASEAN-FTA to six economies using the formula of
ASEAN plus 1’s (ASEAN plus China, ASEAN plus Japan, ASEAN plus
Korea, ASEAN plus India, and ASEAN plus Australia as well as New
Zealand) rather than ASEAN plus N. Hence, trade flows within ASEAN
and between ASEAN and those six external economies are liberalized but
not among those six economies outside of the ASEAN. Non-ASEAN
economies thus have lately learned to take action collectively, rather than
individually, viz., China-proposed ASEAN plus three (China, Japan, and
Korea) and Japan-proposed ASEAN plus six (that is, ASEAN plus 3 plus
Australia, India and New Zealand). Combining the ASEAN plus 3 and
the ASEAN plus 6 led to the emerging Regional Comprehensive
Economic Partnership (RCEP).4 Meanwhile, China, Japan and Korea
have launched the trilateral FTAs talk among themselves as well.
c. The U.S. decided to join the four Trans-Pacific Partnership initiating
members (TPP-4) for FTA talk in 2008. TPP-4 enlarged its member
states to become TPP-12 by including Canada, Mexico and Japan, etc.
As a major driver of the TPP talks, the U.S. is de facto extending the
NAFTA to cover the Asia Pacific. Per the U.S. Trade Representative, the
TPP is not meant to exclude China, but the bars for TPP membership are
so high that China’s bid is not just in the offing yet, if it ever comes. By
inviting Japan, one of its most important allies in the region, into the
proposed TPP trade bloc, the U.S. has demonstrated its determination to
empower its ‘pivot to Asia” initiative. Vowed to cover more members
across the Pacific Ocean and liberalize deep by including service sector,
labor and environment standards and regulatory governance on state3
The ITA provides for participants to completely eliminate duties on information technology products covered by
the Agreement. The number of participating members has grown to 70, representing about 97 per cent of world trade
in information technology products. WTO aims to finalize expanded information technology coverage by end July,
2013. From WTO website at: http://www.wto.org/english/tratop_e/inftec_e/inftec_e.htm.
4
RCEP was referred as the “Asian Track” in (Petri et al, 2011).
4
owned enterprises, the TPP will link Asia Pacific with Latin America and
hopes to become the “Gold-standard FTA” in the 21st century. 5
d. The RCEP and the TPP can be a pair of rival trade blocs through the
emerging China-centric and the U.S.-centric hubs with overlapping
spokes. But both could be complementary to the Free Trade Area of Asia
Pacific (FTAAP) if both pursue the ‘open regionalism” principle to entice
more new member states to join in. In fact, both RCEP and TPP are
considered by APEC Business Advisory Committee (ABAC) in 2013 as
the pathways to Free Trade Area of Asia Pacific (FTAAP).6
I.3. A Comparison between the TPP and RCEP
The TPP is proclaimed to be a high quality trade pact, going beyond
tariff reductions on merchandise trade. It is therefore broader than the RCEP
in terms of sector coverage and the degree of trade liberalization.
In general, the impacts of TPP will be only about half as large as those
of the RCEP to its member states because, except for Vietnam, most of the
TPP economies have already relatively lower tariff barriers to start with. In
terms of the impacts on the composition of world exports, the TPP will have
no effect on trade in primary products, but will boost trade in manufactures
by 0.8% and service sector by 1.1%. On the other hand, the RCEP will
increase trade in primary products by 0.4%, manufactures by 2.3% and
service sector by 2.1% from the base line of 2025 ( Petri et al, 2011, Table 9
Effects on the composition of world exports).
Taiwan itself will benefit economically more by joining the RECP
than the TPP. Applying the GTAP 8.1 version of the computable general
equilibrium (CGE) model simulations, Hsu (2012) found that Taiwan’s GDP
will increase by 1.98%, social welfare by $6.2 billion, and exports by $8.8
billion from its baseline if Taiwan joins the TPP-12. But, Taiwan will be
benefitted more by joining the RCEP; its GDP will increase by 4.36%, social
welfare by $11.6 billion and exports by $ 13.4 billion. Arguably, in terms of
5
The TPP is more conducive to the FTAAP by avoiding the risk of “drawing a line down the middle of the Pacific”
in Asian regionalism.
6
The other pathway is the Pacific Alliance to be elaborated in the next section.
5
its political and strategic interest, Taiwan will have collateral benefits from
its membership in the TPP (vs. the RCEP), namely, enhancing her
economic-security nexus with the leading members in the club and further
safeguarding her security. But it is much better if Taiwan can join both
which are not mutually exclusive at all. Political feasibility, to be elaborated
in Section II, would also suggest that Taiwan pursue its membership bids in
both the TPP and the RCEP.
I.4. The purpose of this study
The purpose of this study is to analyze how Taiwan can do to cope with the
rapidly evolving trade environment, why and how it can achieve that goal by
pursuing both the TPP and RCEP, and, if neither agreement comes through,
suggest some policy measures on improving economic structure to adapt to the
new trading environment for further development. The thesis of this paper is
based on the following assumptions;
a. The TPP is very likely to succeed because it is the only trade pact undertaken
by the Obama Administration to ‘return’ to a region of strategic and economic
importance to the U.S. Without the TPP, the U.S. pivotal to Asia will be
undercut substantially if not jeopardized because of the economic-security
nexus (Cheng and Chow, 2013). The TPP has an accession clause which invites
“ like-minded” states of APEC members to join in. Even if it does not fully
implement the “open regionalism" to admit all APEC members as promised, the
TPP will enlarge its members at various stages of its negotiations either before
or after it is completed. Hence, a trade bloc with U.S.-centric hub is likely to
emerge.
b. A China-centric hub is likely to emerge as well. In spite of their territorial
disputes, China, Japan and Korea are negotiating a trilateral FTA (CJK FTA).
China has been pursuing its “good neighborhood” policy through preferential
trade arrangements and has already wrapped its FTA deal with ASEAN
(ASEAN plus China), and has another one with Central Asia (Shanghai Coop),
and will probably get RCEP done to help generate China-centric hub.7
7
For the scenarios of the hub-spoke models in East Asia, see Chow (2013 a).
6
FTAAP
NAFTA
TPP
RCEP
Figure 1: Major trade blocs within the proposed FTAAP

FTAAP includes all 21 APEC countries while excluding India which is a not a member of the
APEC; it includes Russia, Taiwan and Papua New Guinea, which are not members of the either
TPP or RCEP.

Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and Vietnam
have dual membership in the RCEP and TPP.
c. Both the RCEP and the TPP have the incentive to enlarge its membership to
expand its sphere of influence before the completion of the FTAAP. Competitive
trade liberalization will entice more non-member states to join either the TPP or
the RCEP or both.
7
The rest of this paper is organized this way: Section II assesses the strategy
by which Taiwan can maximize its opportunity to join both the TPP and the
RCEP and minimize the odds for facing a trade-off between the two bids.
Section III analyzes an alternative when Taiwan cannot join either club.
Section IV discusses the relevant industrial re-structuring to cope with the new
trading environment. The last section is for summary and conclusion.
II. Hope for the Best: A Double Play
The TPP and the RCEP may or may not be in rivalry. Regardless of the
future relationship of the two pacts, Taiwan may not have the luxury of picking
and choosing. In fact, based on internal and external rationales, Taiwan’s
pursuit of both could help its bids for each.
II.1. Domestic politics on prioritizing the FTA talks
All politics, including political economy of trade, is local. Trade policy
would inevitably involve domestic interest group politics in any democratic
country. Taiwan is no exception. What is unique to Taiwan is that the pursuit of
any FTA is entangled with national identity and partisan politics. While the
government of Kuomintang (KMT), the ruling party in Taiwan today, has
officially announced its interests in pursuing FTAs on all fronts, the Blue camp,
a coalition consisting of the KMT, its affiliates, and their supporters that are not
averse to political association with China in the future, is more enthusiastic
about signing FTAs with China than with the US (Chiang et al, pp.106-107).8
Hence, it may well lead the Blue camp to favor the China-centric RCEP over
the U.S.-centric TPP. But pursuing more agreements with China under the
framework of ECFA has been upsetting most people in the Green camp, a
coalition consisting of the main opposition party, DPP, its affiliates and their
supporters. To this political camp, the ECFA clearly reveals China’s political
intent to draw Taiwan closer into its orbit, as the former continuously packs
economic sweeteners into a series of specific agreements. The Green camp
believes that China, claiming sovereignty on Taiwan, has been enticing
Taiwanese businessmen or Taishangs to become a strong pressure group by
8
In this study, Green camp refers to the supporters of the DPP and Taiwan Solidarity Union (TSU), whereas the
Blue camp refers to those who support the KMT, the People’s First Party and China New Party.
8
which to leverage the KMT government to lean toward China. Moreover, the
Green camp has learned from past elections that China did infiltrate into
Taiwan’s electoral politics by, for example, supporting the presidential
candidate from the ruling party of the KMT in 2012.9 The Green camp is not
totally opposed to liberalizing trade with China, however. What many in this
camp strongly favor is for Taiwan to become part of the TPP before seeing
further cross-strait economic integration which would otherwise affect
Taiwan’s autonomy and their cherished aspiration of a de jure independent
Taiwan.10 The Green camp believes that further cross-strait economic
liberalization can only, in real terms, incorporate Taiwan into the “Western
Economic Zone across the Taiwan Strait” and blend Taiwan into Fujian, as
intended by the Beijing leadership and stipulated in China’s 12th 5-year plan. In
the words of an interviewee in the Chinese authorities, the ECFA “serves as an
effective tool to enhance the formation of a ‘one China’ political identity and to
suppress separatist, independence movements’” (Yuan, 2012.p.7). Given that
the RCEP is a China-centric trade bloc, the Green camp probably prefers the
TPP to the RCEP.
As in any democratic country, interests groups in Taiwan, organized or not,
are likely to face import competition through trade liberalization which could be
a hindrance to any FTA negotiation. Taiwan’s trade with and investment in
China has generated disproportional gains, more to big businesses, less to small
and medium enterprises, and perhaps undesirable income redistribution effects
as well. More KMT constituents have benefitted than DPP’s (if any) from
cross-strait economic integration. Hence, constituents of the two political
camps tend to harbor divergent attitudes on further expansion of the ECFA and
deeper economic integration with China.11 The Green camp has alleged that,
consciously or unconsciously, the China leaning policy undertaken by the
incumbent KMT government is leading to such a stage that it is impossible for
9
During the finals weeks of campaign for presidential election in March 2012, several tycoons who invested in
China stood out to declare their supports on the “92 consensus” –a policy initiated by the KMT administration.
Moreover, the Director of Taiwan Affairs Office, Deng Li-Ching, visited during the period of president election in
2012 and contacted many Taishangs down to county levels. After the election, Deng came to Taiwan to thank those
Taishangs for their supports as well.
10
It is noted that EFCA was signed under the “92 consensus” and “one China, self-interpretation” with Cross Strait
characteristic rather than the WTO framework. The Green camp is not so much against liberalization on trade with
China, but it opposes to trade off Taiwan’s de facto autonomy with plausible economic benefits.
11
Traditionally, the KMT has been in alliance with the big business and high rank professionals whereas the DPP is
more supported by the SMEs, the low-skill labor.
9
any future government to reverse course, thereby dimming the hope for creating
a de jure independent Taiwan. Given income and political effects of economic
liberalization with China, the Green camp would be alienated if the ruling KMT
government prioritizes RCEP over TPP.12
Warranted or not, many in the Blue camp are wary of joining the TPP not
that they necessarily oppose it, but that they thought such an attempt would
antagonize Beijing and jeopardize the next round of negotiation for an
expanded ECFA with China as well as the negotiation for membership in the
RCEP. While the Green camp is wary of asymmetric dependency on China’s
market, the Blue camp does not think that this is a problem at all.13 For them,
the real worry is that someday, China may not want Taiwan to continuously
depend on its market, meaning that Taiwan no longer matters that much to
China politically, and economic incentives to lure Taiwan begin to evaporate.
The Blue camp’s preference of RCEP over the TPP is evidenced by the
incumbent government’s persistent efforts to sign the trade pact in service
sector with China without prior consultation with the enterprises, the industrial
associations in service and even the legislators of its own party.
Other than partisan politics, the civic society groups in Taiwan have been
actively engaged in public (including trade-related) policy debates. Human
rights, labor, environment, and other groups have long advocated that labor and
environment standards be incorporated into public policies. The TPP includes
the labor standard regulations which will fulfill the five principles of the
International Labor Organization whereas the RCEP has not included labor
clauses in its negotiation agenda. The TPP is led by the U.S. which is
undoubtedly a democratic country whereas RCEP is led by China which is an
authoritarian regime. Various civic society groups in Taiwan will be more
enthusiastic about, and lend more support to their government’s participation in,
TPP negotiations than RCEP ones.
II. 2. The “China factor” in pursuing the trade pacts
12
A survey conducted by Chiang et al showed that among those who identify themselves as Taiwanese, 78%
support to sign FTA with the U.S., but only 39% with China. The Blue camp is much in favor of signing FTA with
China than with the U.S. But it was just the opposite in the Green camp. See Chiang et al (2013).
13
A statement made by P.K. Chiang, the chairman of Straits Exchange Foundation Foundation on the signing of the
ECFA in 2010 is “There is nothing wrong (for Taiwan) to depend on China’s market. What matters is that China
does not want Taiwan to depend on its market. ”
10
Externally, the single most formidable hindrance for Taiwan to ink free trade
agreements is the omnipresent “China factor.” That China has minimal tolerance
for Taiwan’s presence in international arena and for other countries’ assistance to
help Taiwan to secure its place in the sun is too self-evident to warrant any
elaboration here. It suffices for us to specify China’s preference order when it
comes to Taiwan’s pursuit of FTAs. China's stand on this issue is as follows: first,
expand ECFA which will further incorporate Taiwan into its orbit economically in
the short term and political in the longer term; 14 second, delay its reply to
Taiwan’s aspiration to join the RCEP, 15 then allow Taiwan to negotiate into RCEP
only after its scheduled completion in 2015 under China's terms ;16 third, prevent
Taiwan from flirting with the TPP by demonizing it as a device to contain China's
economic and political influence, though the U.S. has repeatedly declared it is not,
and if China cannot prevent Taiwan from bidding for TPP's membership, then it
probably will try to draw some red line for the US which is the leading player of
the TPP.
Considering internal and external constraining factors, Taiwan does not
seem to have a path of least resistance, as either pursuit is an uphill battle. It would
then make sense for Taiwan to keep all the door opens, pursuing both the TPP and
the RCEP, and indeed more bilateral FTAs with other economies as well.
II.3. Sequencing order of applying for the TPP and RCEP
Can Taiwan kill the two birds with one stone? Will the two pursuits be
compatible or cross-cutting? First of all, one has to understand that pursing both
the TPP and the RCEP does not necessarily mean Taiwan can officially apply for
both memberships simultaneously; the sequencing order of application is dictated
14
Taiwan’s asymmetric trade dependency on China’s market, unless diversified by multiple trade pacts with its
other major trading partners, would provide China with its leverage to infiltrate Taiwan’s elector politics. Any
political party and politician running for public office cannot antagonize the interest groups benefitted from trade
with and invest in China. It will limit the range of Taiwan’s ultimate political choice in its relation with China.
15
The incumbent ruling party, the Kuomintang (KMT) honorary chairman Wu Bao-Hsiung met with China’s
president Xi Jianping on June 13, 2013, and expressed Taiwan’s aspiration of joining regional economic integration.
Xi replied that it can be incorporated into the Cross Strait negotiation. It raise a great of controversies in partisan
politics because Wu used “one China” framework on Cross Strait relation. Many regarded that the KMT moved
from the “92 consensus” and “ One China, self-interpretation”, which at least intend to sell domestically that is the
Republic of China in its mindset to “ one China” framework under which Taiwan is part of China.
16
Former Minister of Commerce Chen Der-Ming, now the president of the Association for Relations across the
Taiwan Straits announced at the press conference on the 18th party congress of the Chinese Community Party on
November 14, 2014.
11
by the application procedure and membership requirements for the trade pacts. The
following reality check list helps to find a road map for Taiwan’s bids.
1. The TPP has an open admission policy for APEC members that are
interested in joining, 17 whereas the RCEP mainly recruits those
which have already FTA with the ASEAN as a group such as ASEAN
plus Australia, China, India, Korea, Japan and New Zealand. Note that
India is not even a member of the APEC.
2. ASEAN as a group is more interested in consolidating various FTA
plus 1 and, in screening various RCEP applicants, will give priority to
those that already have signed FTAs with the ASEAN. Moreover,
China’s Minister of Commerce declared that the RCEP is not
considering any new applicant until the negotiation is completed as
noted before.
3. There is a double eligibility criterion for any country to join the TPP
which includes the approvals from both individual member state and
the TPP as a group.
The sequencing order of pursuing the TPP and the RCEP probably is
primarily shaped by the external factors of multilateral trade negotiations rather
than domestic policy priorities. Taiwan can only prepare to apply, rather than
apply, for entering the RCEP now, as the door is temporarily shut till the RCEP
agreement is inked in 2015 by the founding members. As a member of APEC
forum, Taiwan’s chance of being invited to the TPP talk is high, and it can be
exploited right away. In 2012, Taiwan was the 11th-largest U.S. trading partner
which was ranked higher than most those countries that the U.S. has signed FTAs,
except for Canada, Korea and Mexico.18 Taiwan was the sixth-largest foreign
holder of U.S. Treasury securities at $199 billion by the end of 2012. Taiwan’s
quest for institutionalizing its trade liberalization with its trade partners in the
region may coincide with U.S. “pivot to Asia”. If the US supports Taiwan’s bid,19
many of the other 11 negotiating parties probably can be persuaded to give Taiwan
17
Colombia’s application for TPP membership was rejected because it is not a member of the APEC.
It is noted that the trade data has does not fully reflect the actual significance of the U.S.-Taiwan trade; U.S.
imports from Taiwan in 2012 were $38.9 billion. However, U.S. export orders placed with Taiwanese firms in that
year were $107.2 billion. The gap is due to the outsourcing and offshore production of Taiwanese firms, especially
in China, see Kan and Morison (2013, p.38).
19
A pending bill in the US House of Representative, the H.R. 419 has a section which recommends that the U.S.
government should invite Taiwan to join the TPP and sign a US-Taiwan FTA.
18
12
a chance, assuming that China is not too ferocious about the tricky moniker issue
(discussed below).
II.4.Bilateral FTAs with dual membership countries first
Given the internal and external political realities, one feasible approach is
for Taiwan to solicit more bilateral FTAs with those countries which have dual
memberships in both the TPP and the RCEP. There are seven countries which
belong to both: Australia, Brunei, Japan, Malaysia, New Zealand, Singapore and
Vietnam. When more and more FTAs are signed with those countries which have
dual memberships in the two blocs, it would be more conducive for Taiwan to join
either or both. Bilateral FTA talks with individual ASEAN members, especially
on the peninsular side of the organization, are something that Taiwan can initiate
without anybody’s approval, though ‘the China factor’ may make it difficult to
conclude these talks.
II.5. Political dividends of FTAs
Wallace (1982) argued that any format of economic integration, be it a
FTA or a custom union, is basically a political establishment. For Taiwan,
FTAs may come with some political dividends, if it can join under a proper
name. Taiwan may be able to present itself as a negotiating party in the TPP
under the name of “Chinese Taipei” (the so-called Asia Development Bank
formula, which is also used in Taiwan’s ascension to the APEC) rather than
the “Custom Territory of Taiwan, Penghu, Kinmen and Matsu” (CTTPKM), which is used in the WTO. The ADB formula, Chinese Taipei,
connotes an official title for a Chinese national government with a capital in
Taipei. The WTO formula is referred to a custom region, an economic
jurisdictional unit that is clearly separate from China’s. China might have
qualms with Taiwan using either formula for the TPP bid. Of the two
formulae, the WTO one appears to be a lesser evil for China, as it denigrates
Taiwan as an economic zone, while the ADB one puts Taiwan more or less
on an equal footing with China. China being an outsider of the TPP
negotiating body, and APEC membership being honored in the TPP talk,
Taiwan stands a good chance defending its “Chinese Taipei” moniker, if it
chooses to use this name.
13
Assuming that Taiwan under the banner of “Chinese Taipei” succeeds
in joining the TPP within the next two years, it will be awkward, if not hard,
for China to prevent Taiwan from using the same name in its application for
admission to the RCEF in 2015. Should China insist that Taiwan use its
WTO name, China could be roundly criticized for inconsistency and
‘snobbishness’ (China would ‘be snubbing’ TPP members, as well as ADB
members), and China would be offending even the Blue camp in Taiwan,
jeopardizing the prospect of further expanding the ECFA, and pushing
Taiwan away from the RCEP and toward the TPP.20
Taiwan’s recent trade pact with New Zealand (ANZTEC) is a good
start because New Zealand has dual membership in TPP and RCEP. The
ongoing negotiation of trade pact with Singapore (ASTEP) is another big
plus when it is completed. Taiwan’s pursuit for bilateral FTAs with those
which have dual memberships in RCEP and TPP will not compromise or
jeopardize its chance to be a negotiating party for either or both the TPP and
the RCEP. On the contrary, it could help to create a window of opportunities
to join both and enables Taiwan to kill two birds with one stone.
III. What if Both Doors Remain Shut?
While Taiwan should hope for the best, it should also prepare for the worst.
The invitation from either the TPP or the RCEP to Taiwan may be slow in coming.
The ‘China factor’ may push political cost of joining either trade pact far beyond
what Taiwan’s domestic partisan politics could bear.21 The worst scenario for
Taiwan is to find insurmountable high entry barriers to the negotiation rooms of
the two trade blocs. If neither the TPP nor the RCEF is beyond the reach of
Taiwan, will Taiwan be continuously marginalized?
20
A survey conducted by Wang in 2011 showed that when asked which name they prefer under PRC's pressure
(which would make the use of either Taiwan or ROC impossible), then 4.6% would find Taiwan, China acceptable,
52.1% for Chinese Taipei, 9.7% could accept either Chinese Taipei or Taiwan, China, 28.5% would accept
neither. See T.Y. Wang et al 2011
21
If China insisted on a full implementation of the ECFA and a political negotiation is need for Taiwan to join its
FTAs with other countries, domestic partisan politics may reverse the negotiation of the next round of ECFA
negotiations because it will polarize the society which has a great majority to remain the “status quo” whatever one
perceives it.
14
The formation of TPP or RCEP may divert trade away from Taiwan if it is
barred from joining the club. A study by Petri et al (2011) shows that trade
diversion effect caused by the TPP to the exclusion of Taiwan would cost Taiwan a
welfare loss of 0.2% of its baseline GDP in 2020. The welfare lost for a Taiwan
excluded from the RCEP would be 0.95%. Should both the TPP and the RCEP
leave Taiwan out in the cold, the combined welfare loss for this orphan would be
1.05% of its baseline GDP (Petri et al, 2011, Table 7), a nightmare figure indeed.22
It should be noted that the model simulation by Petri et al is based on the
assumption that both the TPP and the RCEP are fully established without Taiwan’s
participation and that Taiwan has signed no other bilateral or multilateral FTAs.
The fact that Taiwan has recently signed the ANZTEC with New Zealand, has
been negotiating with Singapore for a FTA (the ASTEP), and may go after FTAs
with those countries with dual membership in the TPP and the RECP means that
the worst scenario projected Petri et al can be avoided.
III.1. Multiple bilateral FTAs to reach the near hub-ness
If Taiwan can sign multiple bilateral FTAs (which can take many formats
and are broadly referred as “economic cooperation agreements” or ECAs) with its
trade partners,23 then the above-mentioned trade diversion effect created by the two
emerging trade blocs can be mitigated. In the hub-spoke model of economic
integration, Baldwin (2004) argued that small economy can reach the status of near
hub-ness by emulating the following three models. The first is the Mexican model
where a small economy not only signs a FTA with large economies (the U.S. and
Canada), but also inks bilateral trade pacts with other small economies in its
neighborhood (Latin American and Caribbean countries). The second is the EFTA
model where small economies outside a sizable and growing trade and economic
bloc (the European Union) set up their own shop (the European Free Trade
Association). The third is the Singapore model where a small economy forges
FTAs with as many trade partners far and near as possible. If both doors to the
22
It is noted that Petri et al (2011) did not include Japan in the TPP in their model simulation because Japan was yet
to decide then. Moreover, one should note that model simulations on the impacts of FTAs are based on the
assumption that the tariff reductions will be fully implemented. Hence, the simulation results could be deviate from
the probable actual performances.
23
Taiwan’s Ministry of Economic Affairs defines an ECA as “an agreement signed by two or more economies for
promotion of trade activities and economic integration with each other by reducing tariffs and fees, as well as by
eliminating other trade barriers for goods and services.” see www.moea.gov.tw.
15
RCEP and the TPP will be slammed to Taiwan, then Taiwan should adopt both the
Mexican and Singaporean models to not only escape marginalization, but also try
to attain a near hub-ness status in the Asia Pacific region (Chow, 2013 a). Like
Singapore, Taiwan certainly has set its eyes on many possible bilateral FTAs. If
excluded from both the TPP and the RCEP, can Taiwan find a large, alternative
trade bloc to mingle with?
III.2.Looking beyond regional horizon: The Pacific Alliance
An emerging trade bloc named the Pacific Alliance which includes
Colombia, Costa Rica, Peru, Chile and Mexico with several observers from Japan,
Canada, New Zealand, Panama, Guatemala and Spain, appears to be a promising
alternative. The five member states of the Pacific Alliance accounted for one half
of export and 36% of total GDP in Latin America. It is the 8th largest trade blocs in
the world, and its total export in 2010 was $445 billion, almost 60% more than
what Mercosur (Southern Cone Common Market), which is the main economic
bloc in Latin America, exported in the same year. The Pacific Alliance, which is
also the third pathway identified by the ABAC (the APEC Business Advisory
Council) toward FTAAP, could be an alternative avenue for Taiwan to break its
increasing isolation from an increasingly integrated East Asian economy. A bit
like the Third Way, the Pacific Alliance does not have a hegemonic member and
seems to be beyond the radar screen of the US or China.
A study by Hsu (2013) showed that the full implementation of the Pacific
Alliance without Taiwan could reduce its GDP by 0.39% to 0.51%, social welfare
by $ 483 million to $ 1360 million under comparative static and dynamic model
simulations respectively. Meanwhile Taiwan’s export will be reduced by $ 514
million to $ 741 million, and its terms of trade will deteriorate by 0.19% to 0.18%
(see the third column on Table 1 below). But if Taiwan can join the Pacific
Alliance, its total GDP will increase by 0.37%, social welfare will increase by $
989 million, export will increase by $419 million, import will increase by $ 801
million and its terms of trade will improve by 0.17% (not shown in Table 1). The
impact of the Pacific Alliance on Taiwan’s economy is too sizable to ignore. One
additional reason to explore the possibility of entering the Pacific Alliance is that
16
Latin American and Caribbean is the home to the last significant bloc of countries
that still maintain formal ties with Taiwan. The opportunity provided by the
Pacific Alliance should be exploited before China seals more investment
commitments and gains more soft power in Central America.24
Table 1: The impacts of major trade pacts on Taiwan’s Economy under
comparative Static ( I) and Dynamic Scenarios ( II)
TPP
RCEP
Pacific Alliance
CJK FTA
TTIP *
Major trade pacts
I
II
I
II
I
II
I
II
I
II
Nominal GDP (%)
-0.54
-0.70
-1.51
-1.90
-0.39
-0.51
-1.27
-1.57
-0.49 -0.65
Social welfare ( $ million)
-832
-2097
-2292
-5536
-483
-1360
-1772
-4316
-585 -1817
Export ($ million)
-784
-1328
-2283
-3571
-514
-741
-1626
-2524
-517 -1006
Import ($ million)
-1538
-1944
-4295
-5313
-942
-1154
-3167
-3867
-1048 -1512
Terms of trade (%)
-0.31
-0.27
-0.89
-0.85
-0.19
-0.18
-0.68
-0.64
-0.21 -0.19
* Trans-atlantic Trade and Investment Partnership
Source: Hsu (2013)
IV.
Economic Re-structuring Holds the Key
Irrespective of which scenario is going to play out, Taiwan should try to
upgrade its industrial structure and enhance its international competitiveness in
the global market. Aimed at “elimination of all exemptions on tariffs,” the TPP
has mandated any potential applicant including Taiwan to reduce their
protective sectors in all industries including agriculture, manufacture and
service sectors. Hence, Taiwan needs to re-adjust its economic structure to be
24
Reportedly, there are, at least, five states have been soliciting diplomatic ties with China.
17
ready for further economic integration. If Taiwan will be left out of major free
trade bloc, it is equally necessary to shake off its remaining protective shell,
overhaul its industrial structure, and improve its competitiveness in all sectors.
IV.1. Agriculture: An economically weak but political strong sector
A brief look at the tariff schedule on imports from the world, TPP-12 nations,
and RCEP nations on Table 2 below showed that Taiwan has high tariff on imports
of vegetable/fruit, fish, meats, milk, sugar, beverage/ tobacco and other agricultural
products. On manufacturing products, wearing apparels and motor vehicles are the
two most protective sectors. 25
Since the TPP negotiations are committed to setting “zero tariff “on all
commodities including agriculture, Taiwan will have to prepare to face up to this
challenge, especially in the area of agricultural imports. One should also realize
that the TPP include three major agricultural exporters in the world; Australia,
New Zealand and the U.S. The issue of “beef and pork’” import from the U.S. had
recently triggered an intensive political battle in Taiwan, and caused a great deal of
tension between Taipei and Washington, and postponed their TIFA (Trade and
Investment Framework Agreement) talks. One can only expect more policy debate
and fights within Taiwan over its agricultural liberalization, as the train of FTA
talks moves on. If the TPP accomplishes its scheduled tariffs reduction on
agriculture without discount, then Taiwan would need to resolve its domestic
obstacles on liberalization of agricultural trade. This is a contentious issue on the
political economy of trade which deserves for a full analysis that is beyond the
scope of this study.
Table 2: Tariff Schedule on Taiwan’s Imports from the world, TPP-12
nations, and RCEP area
sector
1 pdr
2 wht
3 gro
4 vege,fruit
5 osd
6 c_b
From RCEP(%)
Global (%) From TPP12 (%)
0.12
0.00
0.00
6.49
6.50
6.49
1.59
1.60
1.33
17.23
17.16
17.36
3.89
3.88
3.24
0.00
0.00
0.00
25
The tariff rates are the trade-weighted average based on GTAP 8.1. The authors would like to thank Bo-Xian Hsu
for compiling the tariff schedule.
18
7 pfb
8 ocr
9 ctl
10 oap
11 rmk
12 wol
13 frs
14 fish
15 coa
16 oil
17 gas
18 omn
19 cattle
meat
20 other
meat
21 vol
22 milk
23 pcr
24 sugar
25 other food
26beve.tobac.
27 tex
28 wearing
apparel
29 lea
30 lum
31 ppp
32 p_c
33 crp
34 nmm
35 i_s
36 nfm
37 fmp
38 mor.veh
39 otn
40 ele
41 ome
42 omf
0.02
5.70
3.11
5.40
0.00 na
1.39
1.74
15.16
0.00
1.21
0.11
0.30
1.43
0.83
15.74
0.00
1.07
0.00
0.32
0.00
5.63
3.57
3.80
0.00
1.40
0.62
14.77
0.00
1.12
0.00
0.29
15.27
15.56
15.55
19.50
19.82
19.74
2.69
11.19
0.34
10.43
17.68
11.28
7.59
2.33
11.31
0.00
10.95
17.34
11.59
7.72
1.73
11.24
0.00
10.96
17.99
11.37
7.63
11.31
11.28
11.37
4.23
2.19
0.09
2.59
2.96
5.88
0.36
1.01
6.09
12.06
3.90
1.85
3.15
3.43
3.91
2.95
0.09
3.13
2.98
5.94
0.37
1.01
6.02
13.30
3.74
1.94
3.25
3.71
4.56
2.36
0.07
2.75
2.99
5.85
0.33
0.98
6.07
11.38
4.59
1.71
3.14
3.40
19
0.00
5.96
4.21
6.24
Source: calculated from the GTAP version 8.1 by Hsu
IV.2. Service: a socio-political complicated sector for mature economy
There are trade barriers in Taiwan’s service sector as well. In general, the
first wave of development in service sector occurred in the traditional services
which comprised wholesale and retail trade, hotels and restaurants, real estate,
transport, personal services, and public administration. The second wave of
development that occurred at the stage of high income level was dominated by
modern services including information and communication, finance, and
professional business services (Eichengreen and Gupta, 2009).
From Lee and Itakura ( 2013), the tariff equivalents of non-tariff trade
barriers on service sector in Taiwan is as follows; 10.8% in construction and
utilities, 28.8% in trade, 12.6% in sea transport, 25.4% in airport, 26.1% in other
transport, 23.6% in communication, 27.5% in financial services, 29.1% in
government services and 26.7% in other private services.26 The TPP program
includes liberalization of trade in service. Understandably, most of the TPP-12
nations, especially the U.S. and Japan, have a strongly competitive edge on trade in
service. If Taiwan is to participate in the TPP, then it has to prepare well to open its
service sector.
Trade in service involves a) cross border consumption, b) cross border
supply, c) commercial presence where the provider establishes a facility in the
client’s country (i.e., investment and d) the temporary movement of personnel.
Each of these four aspects involves complex socio-cultural factors between the
service providers and consumers, a process that is much complicated than
liberalization of merchandise trade. The trade pact in service that Taiwan recently
signed with China under the umbrella of ECFA is already sparking a massive
policy fight. Ratification of this pact is being put on hold. One can only wonder if
Taiwan will be prepared to liberalize its service industry to face world competition.
A closer look at this sector is in order here.
Regarding the trade pact on service with China, Taiwan does have some
competitive edge on the high end side of service industry where skills matter more
26
For comparison, the figures in the U.S. are 6.8% in trade, sea transport, air transport, other transport and
communication, 7.8% and other private services and 6.3% in government service.
20
than labor cost, but is less competitive on the low end side where labor cost matters
more than skills. The recent service trade pact is a bit biased for Taiwan,
mitigating the cost of liberalization that Taiwan is expected to bear. If future
service trade pacts will be truly symmetric, giving equal treatment to both sides,
those in the high end of service trade will benefit from, whereas the less skilled
will be adversely affected by liberalization of service trade with China.
In terms of political spectrum of the constituents, those owners, managers
and service persons in high end service (engineering service, high tech gadget
testing and packaging, software development, financial product designs and
transactions, fashion and cosmetic marketing, etc) are more in line with the KMT
government for the expansion of ECFA into the service sector, while low end
service people (beauty salons, transportation yeomen, etc) are, in contrast, more
attuned to the Green camp.
Those who oppose the trade pact in service with China are not necessarily
from the Green camp. These opponents are against any further trade liberalization
agreement with China for fear of opening the gate for China’s investors to infiltrate
the Taiwan society, a development that, in the Green camp’s words, would
“generate significant legacies on Taiwanese society”.27 To the opponents, not only
would economic benefits of free trade pact in services accrue to big business and
high skilled employees only, this service agreement, more importantly, would
incur a high socio-political cost.
Moreover, most investment from China are directly or indirectly sourced at
or affiliated with huge state-owned enterprises whereas 99.7% of the 93,500 firms
in Taiwan’s service sector are owned and operated by SMEs.28 China-invested
service firms in Taiwan will be either monopolies or oligopolies whereas those
local SMEs in Taiwan are highly competitive and can easily go out of business.
Asymmetrical industrial organization and market power between the Chinainvested and local enterprises in service industry kept many service firms in
Taiwan wary of and worry about unfair market competition once the door to China
is open.
27
Other arguments against the trade in service are the lack of transparency, no advanced assessment prior to the
negotiation, no prior consultations with the enterprises and industrial association and the legislative branch even
with those belong to the KMT.
28
The total number of business firms in service industry is 93,500. Among them, only 2791 are large scale and the
rest of the 92,809 firms are small scale with an average of employing 4.2 people per firm. In terms of skill intensity,
86% of the firms in service industry are classified as “no knowledge-intensive” industry. Data from Director General
of Budget, Accounting and Statistics at www.dgbas.gov.tw.
21
The socio-political implications of liberalizing trade in service with the U.S.
are quite different from those with China. High skilled services are leery of
Taiwan’s signing on to the TPP, a bloc that includes the U.S., hereby opening up
the floodgate for formidable American high services, while low end services in
Taiwan are nonchalant about such an agreement. Moreover, Taiwanese people
favor American investors more than those from China as the survey by Chiang et
al (2013) indicated. Admitting chain stores of a fast food giant, McDonald
restaurant caused fewer problems than licensing a single Peking duck house from
China. The reason is simple and clear: the U.S. has no interest in claiming
sovereignty on Taiwan but Beijing does. Considering the inevitable resistance from
the interest groups for liberalization in finance, communication and transport
services under the TPP, the government may use the leverage of external forces to
induce more competition abroad through trade liberalization under various FTAs.
Of course, many social remedy policies compensating the disadvantaged groups
are needed to reach the “Pareto Optimum” of trade liberalization.
IV.3. Three points on Industrial Restructuring
Comprehensive study on industrial restructure for globalized trade
liberalization is beyond the scope of this paper. But three major directions are
highly recommended.
a.
First, promote Taiwan’s functions in the global production network
and increase the value-added in the global supply chain.
b.
Second, re-structure production method from OEM (original
equipment manufacturing) to newly innovative production methods
such as the application of the “3 D printing” to manufacturing
sector.
c.
Third, exploit the untapped trade potential by identifying the niche
products in niche markets
IV.3a. Branding and Enhancing value-added in OEM by functional and
processing upgrading 29
Stan Shih’s famous “Smiling Curve” shows the value-added at
various stage of production in ICT (information and communication
29
This section is derived from Chow ( 2013 b)
22
technology) sectors. Since the past decade, there is a significant
development in the flattening out of the “smiling curve” shown in Figure
2 as argued by Chow (2013b). The dots on the right-hand side of the
curve represent those firms with their own brands, as reported on Table 2,
whereas those on the left-hand side are firms such as Acer, TSMC, etc.
which engaged in chip designs.
Figure 2: Breaking Through the Threshold by process and functional upgrading
Source: author (Chow, 2013b)
Table 3: Major brand names from Taiwanese manufactures
Company
Acer
Brand Name
Acer
Products
Notebook PC
23
Asustek
ASUS, ASRock
PC, PC motherboard, ODD, PDA, cellular phone
BenQ
BenQ
Notebook PC, MP3 player, LCD TV
Compal
Palmax, Optorite
Cellular phone, ODD
Elite
-
PC motherboard, mini PC
FIC
Afina
Mini PC
Gigabyte
AXPER
PC motherboard, mini PC, notebook PC, LCD TV
Hon Hai
Foxconn
PC motherboard
hTC
Dopod
PDA
Inventec Appliance
OKWAP
Cellular phone
Mitac
Mio
Smartphone
Quanta
Nu, Gia
ODD, cellular phone, display monitor, LCD TV
Tatung
Elio
MP3 player
TPV
AOC
Display monitor
Sou
rce:
Aut
hor
(Ch
ow,
201
3b )
L
iter
atur
e
on global value-added chain (GVC) suggests that there are two approaches to
moving upward on the smiling curve: process upgrading and functional
upgrading. Humphrey (2004) argued that once firms enter the GVC such as OEM,
suppliers would gain valuable lessons from their partnerships with buyers.
Specifically, they would be able to upgrade product development.
In spite of the threshold on the smiling curve-this may become an obstacle
for advancement, many Taiwanese firms managed to exploit their second mover
advantage by expanding the bottom of the “smiling curve” through advancement in
processing technology and product development. Hence, many Taiwanese firms
made significant progress in processing technology, as reflected by the number of
patents granted by the U.S. In terms of patents per capita, Taiwan was ranked third
in 1997-2001, after only the U.S. and Japan. In 2009, Taiwan held 287 patents per
million people, ranking it first among 139 countries, higher than Japan (279; rank
2) and the U.S. (262; rank 3). Among those patents granted to Taiwan, a great
majority was in processing technology.30
On functional upgrading, one can find that many Taiwanese foundries and
ICT industries have been moving vertically by engaging in the advanced stage of
design and branding. Several firms served both as OEM manufacturers and IC
designers. This tendency would increase the “value- added” on the segmented
Data source from U.S. Patent and Trade Mark office at the website at: http://www.uspto.gov/. But it is noted
that Taiwan still run into trade deficit in terms of trade in technology because much of its patent rights were in
processed technology which could hardly market to foreign firms.
30
24
global production process, and improve the profit margin of Taiwanese enterprises.
Taiwan should transform its role from what is being performed Faxcom to Tobisba
does in Apple’s i-pad.31
On the other hand, the entry barriers of branding are high for most
Taiwanese firms; In addition to the requisites of manufacturing, those barriers
include innovative R&D and marketing channels, which impose their own cultural
barrier as well (W.Chu, 2009).Taiwanese government did not support the branding
of national champions of industry, as what the Korean government did to its
chaebol conglomerates. Nevertheless, some Taiwanese firms such Acer, Asustek,
and BenQ have developed their own brand names, as Table 3 reports. Though the
extent of branding in Taiwan is much smaller than in Korea, which has its chaebol
conglomerates, it demonstrates that Taiwan has followed a non-statist model of
branding development. The progress in chip design, the specialization in wafer
fabrication, and the brands of some firms show that the “smiling curve” has been
flattening out in Taiwan in recent years. Taiwan would need to further increase its
value-added and enhance its profit margin in the global supply chain to slow down
the industrial migration and avoid further hollowing out of its domestic industries
IV.3b. Innovate new production technology
The other way to improve Taiwan’s industrial structure lies in innovation of
production technology. While sector–specific industrial promotion policies
undertaken in the past decades cannot be replicated the new socio-political
environment,32 a more generic method of nurturing technology innovation is highly
doable. One example is for Taiwan to ride the next big wave of 3D printing
industrial revolution, which is based on computer design and additive
manufacturing and which is what the U.S. is betting on to overhaul its economy to
create high value jobs.
The “3D printing” manufacturing technique can grossly reduce the time it
takes from the drawing board to prototype making and testing. It has potential of
revolutionizing the mode of production, transcending the Henry Ford type of large
scale manufacturing of the standardized product, and ushering in an innovative,
diversified, flexible, and diversified type of manufacturing in meeting quickly
31
Faxcom is the largest manufacturing sub-contractor whereas Tobishiba provided many strategic components for
Apple i-pods. The profit margin in the Video i-pod 30 G is only 2% for the Taiwanese firm whereas it is 12% for
Japanese firm. See Dedrick et al ( 2008).
32
For those who are nostalgia about the super performance of industrialization in the past, it is noted that there is a
waning of the “developmental State” after the lift of the Martial Law in 1987. See Chow (2011).
25
changing market demand and satisfying a wide range of consumer references. This
new mode of production is precisely what Taiwanese firms are good at. The 3D
industrial revolution can transform Taiwan's industrial structure and enhance its
position in global production chain to the extent that it can still do well in the
world economy even without the benefits conferred by FTAs. Of course, just like
microwave oven in the kitchen, the “3D printing” production technique can be
complement with but not to substitute the long existing production techniques for
mass production in all manufacturing industries.
While the role of government on industrial policies is highly contentious, its
role to internalize the externality to avoid the “ coordination failure” for multiple
equilibriums along the line of the theory of “Big Push” is highly recommended.
For economic transformation, the government can serve as a coordinator to
transform the economic structure from the conventional OEM to newly innovative
production technologies. Industrial policies using the government-funded
enterprises to support sector-specific development are no longer regarded as
desirable. New approaches to accelerating industrial transformation now center on
“functional” support in R & D and incentives for research institutes to amplify
technology spillover effects. Venture capital, be it private or public or joint, can be
a good vehicle as it can socialize the risk of creating new production technology.
The government in Taiwan has actually begun to use this device to promote the
biotech and biomedical research and product development.
IV.3c. Exploit the untapped trade potential: Identifying the niche products in
niche markets
Another potential big point is for Taiwan to exploit its untapped trade potentials
by identifying yet-to-develop niche products in niche markets. Based on the
TradeSim model which simulated the export performance for Taiwan’s exports,
Chow and Ciuriak (2008) calculated the gap between the actual and the potential
exports from a modified gravity model simulations. Export potentials for Taiwan
were estimated for 15 sectors and 30 major trading partners in the world.33 Export
potentials are interpreted as “potentials within the specified model set-up”.34 They
33
The top 15 sectors were ranked by the current export performances in 2002-2003. Obviously, the four sectors
omitted were mostly in forestry / fishing products, mining/quarrying, petroleum and recycling. See Appendix 1 for
more details.
34
“ The export potential is calculated on the basis of separate regressions for all 19 sectors,
applying equation [1] (the variable ij Geo was only applied to sector P1 and P2).
26
represent the “relative trade potentials”, which are “independent of the absolute
value of exports”. Hence, “highly untapped potential does not imply that this
potential is high in absolute terms but that is high compared to the current export”.
In spite of the caveats, 35 simulation results from TradeSim, in conjunction with a
deeper sector-specific analysis, could capture the trade complementarities between
countries.
Export potentials for Taiwan were estimated for 15 sectors and 30 major trading
partners in the world.36 The results are reported in Appendix I. Relative trade
potential in each sector is ranked into 5 classifications in an ascending order of
trading opportunities:
1. very strong current trade that is above predicted value;
2. strong current trade, that is also above the predicted value;
3. predicted values equal to current values or are low;
X =αi k: +αj k +β0k +β1k D +β2k Tariff +β3k Border i j +β4k Language i j +β 5kConflict i j +β6k Geo i j +ε ( 1)
where:
i : the exporting country
j: the importing country
k: sector
Xijk : trade in sector k from country i to country j
Dij: distance between i and j
Borderij: i and j are neighboring countries (=1) or not (=0)
Tariffijk: bilateral market access measure (for trade from i to j in sector k)
Languageij: bilateral measure of common language
Conflictij: bilateral measure of conflict
ij Geo : bilateral measure of geographical location
ik jk α ;α : multilateral resistance terms in form of fixed effects.
For each exporting country i and importing country j, we calculate the predicted values ijk Xˆ for sector k, i.e.
export potentials are equivalent to the within-sample predictions, which are obtained through separate sector
regressions. As we used fixed effects in the estimation, the application of an ‘a posteriori’ fixed effect Fi (as in
TradeSim2) for the calculation of trade potentials in order to adjust the trade potential from systematic effects is
not necessary. Hence, the trade potential TPijk is simply given by: ijk ijk TP = Xˆ .It is important to notice that the
results obtained represent relative trade potentials, as the gravity specification employed is dependent on the
sample specification. Hence, potentials should be understood as potentials within the specified model set-up, i.e.
within the context of the specified 132 exporting and 154 importing countries, controlling for the variables
included in [5] according to the sector analyzed, and the multilateral resistance terms. Any variation in the model
or sample specification would necessarily entail different results”.
35
Export potentials are limited by the gravity model which is constructed on a general equilibrium model; hence it
does not capture the dynamic effects and cross-industry linkages. Secondly, the model is very sensitive to changes in
the sample due to the inclusion of multilateral resistance terms. Thirdly, the impacts of FDI on export were ignored
due to paucity of bilateral data of FDI and finally, trade complementarity between countries is not sufficiently taken
into account in the gravity model.
36
The top 15 sectors were ranked by the current export performances in 2002-2003. The four omitted sectors
were forestry and fishing products, mining and quarrying, petroleum, and recycling.
27
4. untapped trade potential; and
5. highly untapped trade potential.
In terms of trading partners and considering aggregate trade flows, the main
simulation results are as follows:
 Taiwan has high untapped export potential in Korea, and moderate untapped
potential in Japan, Malaysia and the Philippines.
 Predicted values are either in line with current levels or low for Hong Kong,
Indonesia, Singapore, Thailand and the United States.
 Taiwan has strong current trade above the predicted values for China and
Vietnam.
Taiwan’s strong export performance in China and Vietnam may reflect the
importance of Taiwan’s outward FDI in these destination economies in inducing
exports. TradeSim model has two sets of sample countries where FDI data are
available at aggregate (29 exporting and 165 importing countries) or disaggregate
levels (7 exporting and 65 importing countries). Since the model of simulations for
Taiwan’s export potentials does not belong to either set, the simulation results
reported here may underestimate Taiwan’s trade potential by ignoring the
contribution of its outward FDI on export potentials.
As one can find from those tables in Appendix I, the significant untapped
potential sectors and markets from the simulation can be summed up as follows: In
the U.S. market, Taiwan has relative trade potentials in coke, petroleum and
nuclear fuel, but the absolute potential probably lies in chemicals and chemical
products. Taiwan’s trade potential in Hong Kong barely exists in one (residual)
sector. Malaysia and the Philippines are two promising markets for Taiwan’s
electrical and electronic products. For Japanese markets, there is room for
expansion for Taiwan’s precision machinery, electric and electronic products, and
to a less extent, textile goods. These simulation results help Taiwan to identify
high value destination for its free trade negotiators, and, should no FTA is inked,
the promise land for Taiwanese external trade.
V.Summary and Conclusions
Along with South Korea, Taiwan used to be a super exporter and a most
often cited model of export-led industrialization before the advent of the spaghetti
bowl of FTAs. During the past two decades or so, the two stellar economies seem
to have parted the company, South Korea emerging as a member of the big league
28
in quite a number of mainstay industries (especially electronics, motor vehicles,
and high-end, specialized vessels) and a much sought after partner for free trade
agreements, Taiwan in contrast becoming an almost forgotten player at the risk of
being marginalized, though still doing well in a number of industries (LCD, ICs,
and …).
Thanks to the “competitive trade liberalization’ between the TPP and the
RCEF, Taiwan sees a glimpse of hope of returning to regional FTA blocs, as well
as going for more bilateral FTAs. Given domestic partisan politics and external
harsh reality (the whim of China, an economic power house), this study has
contended that Taiwan cannot afford picking and choosing a regional FTA to join,
but rather is obliged to knock on all doors that may be open to it. Prioritizing
should not be on its menu. With fortuna and the support of TPP members,
especially the U.S., Taiwan may be able to have a double play. But should Taiwan
continue to be excluded from the two emerging free trade blocs, the TPP and the
RCEF, it would not be the end of the world for Taiwan. The Pacific Alliance
could be a good substitute, and an aggressive pursuit of bilateral FTAs can also
keep Taiwan alive and kicking. Whatever scenario is going to unfold, Taiwan
would be doing itself a big favor by overhauling its economic structure, with or
without membership in major regional trade pacts.
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Appendix I:
In the U.S. market, untapped export potential is identified in the following sectors:
Sector
Level of Exports in
Share of Tariff level in
2002-2003 (USD
Taiwan’s the destination
billions)
exports in that
market
sector
Chemicals and
1.2
8.3%
0 to 5%
chemical products
Coke, petroleum
0.1
4.5%
0 to 5%
products and nuclear
fuel
31
As can be seen, while there is relative untapped trade potential in coke, petroleum
products and nuclear fuel, the absolute level of trade potential is small. In
chemical and chemical products, however, the scale of existing trade is sufficiently
large to warrant exploration of whether in reality some market expansion is
possible.
In the Hong Kong market, untapped export potential is identified in only one
sector:
Sector
Level of Exports in
Share of
Tariff level in
2002-2003 (USD
Taiwan’s
the destination
billions)
exports in that
market
sector
Other manufacturing
0.3
8.0%
0 to 5%
Tariffs do not, of course, pose a barrier in the Hong Kong market but the scale of
Taiwan’s exports to Hong Kong in this sector is sufficiently low to excite little
interest.
In the Malaysian market, untapped export potential is identified in only one sector:
Sector
Level of Exports in
Share of
Tariff level in
2002-2003 (USD
Taiwan’s the destination
billions) exports in that
market
sector
Electrical and
electronic
equipment
1.9
2.9%
0 to 5%
This would appear to be one area where Taiwan could explore possibilities to
expand exports through trade promotion.
In the Philippines market, untapped trade potential is identified in:
Sector
Level of Exports in
Share of
Tariff level in
2002-2003 (USD
Taiwan’s
the destination
billions)
exports in that
market
sector
Electrical and
electronic
equipment
0.9
1.3%
0 to 5%
32
Metal and metal
products
0.1
1.0%
0 to 5%
Taiwan faces low tariffs in these two sectors in the Philippines market but the scale
of potential trade expansion would be interesting only in the case of electrical and
electronic equipment.
In the Japanese market, high untapped export potential is identified in three
sectors:
Sector
Level of Exports in
Share of Tariff level in
2002-2003 (USD
Taiwan’s the destination
billions)
exports in that
market
sector
Chemicals and
chemical products
0.9
5.9%
0 to 5%
Precision instruments
0.5
8.0%
0 to 5%
Textiles, clothing and
leather
0.3
2.8%
20 to 25%
The first two sectors face low tariffs from zero to 5% but the
textile/clothing/leather products sector faced relatively high tariffs in the sample
period between 20% and 25%.
In several other Japanese sectors, moderate untapped export potential is identified:
Sector
Level of Exports in
Share of Tariff level in
2002-2003 (USD
Taiwan’s the destination
billions)
exports in that
market
sector
Electrical and
electronic equipment
6.4
9.5%
0 to 5%
Machinery and
equipment
0.6
5.8%
0 to 5%
Rubber and plastic
products
0.4
8.7%
0 to 5%
Motor vehicles and
other transport
equipment
0.4
7.0%
0 to 5%
Wood and wood
products
0.1
10.8%
0 to 5%
Coke, petroleum
products and nuclear
0.1
5.9%
> 50%
33
fuel
In each of these markets, Taiwan faces low tariffs from zero to 5% implying that it
may not have yet fully exploited its trade potential. The scale of trade would point
to electrical and electronic equipment as being the major sector on which to focus.
In the Korean market, three sectors are identified as having high untapped trade
potential:
Sector
Level of Exports in
Share of Tariff level in
2002-2003 (USD
Taiwan’s the destination
billions)
exports in that
market
sector
Chemicals and
chemical products
0.4
2.6%
5 to 10%
Metal and metal
products
0.2
1.7%
5 to 10%
Machinery and
equipment
0.1
1.3%
5 to 10%
In all three sectors, Taiwan faces moderate tariffs from 5% to 10% which could
represent a significant factor in diverting trade away from Taiwan.
Taiwan also has moderate untapped trade potential in several other Korean
markets.
Sector
Level of Exports in
Share of Tariff level in
2002-2003 (USD
Taiwan’s the destination
billions)
exports in that
market
sector
Electrical and
electronic equipment
2.8
4.2%
0 to 5%
Metal and metal
products
0.2
1.7%
5 to 10%
Precision instruments
0.2
3.6%
5 to 10%
Machinery and
equipment
0.1
1.3%
5 to 10%
Rubber and plastic
products
0.04
1.0%
5 to 10%
Food, beverages and
tobacco
0.04
2.4%
35 to 40%
Motor vehicles and
other transport
0.02
0.5%
5 to 10%
34
equipment
Wood and wood
products
0.02
1.5%
5 to 10%
Tariffs are an issue in most of these sectors, especially in the food, beverages and
tobacco
sector in which Taiwanese exporters face tariffs of 350%. The scale of existing trade in electrical and electronic equipment makes this
an important sense on which to focus.
In the Singapore market, five sectors are identified as having untapped trade
potentials:
Sector
Level of Exports in
Share of Tariff level in
2002-2003 (USD
Taiwan’s the destination
billions)
exports in that
market
sector
Chemicals and
chemical products
0.2
1.4%
0 to 5%
Metal and metal
products
0.2
1.5%
0 to 5%
Machinery and
equipment
0.2
1.4%
0 to 5%
Precision instruments
0.1
1.2%
0 to 5%
Motor vehicles and
other transport
equipment
0.1
1.5%
0 to 5%
As can been seen, the scale of trade is low despite low tariffs, implying little in
the way of quantitatively significant gains in these sectors.
35