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Taiwan: China, Inc.’s Newest Subsidiary?

Tuesday, June 8, 2010

Taiwan is about to deepen economic ties with China. With good reason, critics worry they’re constructing a one-way bridge.

When Ma Ying-jeou was campaigning for president of Taiwan in the spring of 2008, he made it clear that he would seek closer ties with China, especially economic ties. He justified that policy on the grounds that Taiwan’s economic performance could be enhanced by loosening restrictions on doing business with China. A number of those restrictions—such as having direct flights between the island and the mainland—have been lifted. Now, Ma’s government is headed toward completing an economic cooperation framework agreement (ECFA) with China, intended to reduce trade barriers between the two countries and generally liberalize economic relations.

The Taiwanese government argues that a failure to sign an agreement would put Taiwan at a severe competitive disadvantage because China has signed free-trade agreements (FTAs) with other countries in the region, with the most important—the ASEAN-China Free Trade Area (ACFTA)—coming into effect this past January (it encompasses the ten member states of the Association of Southeast Asian Nations and will create the largest free-trade area in the world in terms of population and the third-largest in terms of GDP.) An additional hope in Taipei is that an agreement with the mainland will give Taiwan an advantage over the likes of Japan and South Korea in further penetrating the Chinese market, strengthening Taiwan’s position in the international supply chain.

It is unlikely Taiwan will be able to secure a FTA with anyone of importance without Beijing giving it its nod.

Taiwan’s opposition party, the Democratic Progressive Party (DPP), is worried that an ECFA with China will lead Taiwan’s much smaller economy to be virtually swallowed up by the growing economic behemoth across the Taiwan Strait, leading to a slow but inevitable diminution of Taiwan’s independence. Some also worry that this quasi-free trade agreement will further decrease the manufacturing sector in Taiwan, lead top managers, engineers, and scientists to move to the mainland, and generally accelerate capital flow from Taiwan to China. ECFA may be a bridge to the mainland, but its opponents worry it will be mostly a one-way bridge.

The Ma administration’s response has been that its first course of action after signing such an ECFA will be to start FTA negotiations with other countries, such as Japan, to ensure Taiwan’s own economic posture is not so constricted that it becomes a subsidiary of China, Inc.

Or so that was the plan. But last week China’s foreign ministry spokesman answered the following to this question from a press conference:

Q: The Mainland and Taiwan are expected to sign the Economic Cooperation Framework Agreement (ECFA) shortly, which Taiwan hopes will facilitate its free trade agreements with other countries. What is the Mainland's attitude?

A: We do not object to non-governmental economic and trade exchanges between Taiwan and countries having diplomatic relations with China, but we firmly oppose any forms of official contact with Taiwan (emphasis added).

Of course, Taiwan, as a member of the World Trade Organization (WTO), has the right in principle to sign an FTA with any country it wants. But, in practice, given the deference shown these days to China by virtually every country in the world—including the United States—it is unlikely Taiwan will be able to secure a FTA with anyone of importance without Beijing giving its nod. Hence, if China resolutely denies Taiwan that option, Beijing will, as one Taiwanese official pointedly put it, be “putting a foot on the throat” of Taiwan.

The United States could easily sign a FTA with Taiwan, which would, in turn, open the doors for other countries to do likewise.

It will be interesting to see how the Obama administration responds. The fact is the United States could easily sign a FTA with Taiwan, which would, in turn, open the doors for other countries to do likewise. Taipei would jump at the chance, and there are good reasons—economic and strategic—for Washington to do so. If the Obama administration is interested in supporting the Ma administration’s efforts to normalize relations between Taiwan and China, keeping the citizens of Taiwan from feeling even further isolated is imperative. Failing that, one can expect many in Taiwan to assume (wrongly or not) that American policy is to allow China to slowly but inevitably gain a dominant say over Taiwan’s future. Undoubtedly, China will complain (and loudly) if the United States and Taiwan sign an FTA. But the complaining will eventually subside, particularly since Beijing will not have a leg to stand on when it comes to denying Taipei its WTO privileges.

Unfortunately, expecting the administration to change its stripes at this point seems pretty hopeless. It remains in neutral when it comes to ratifying already-signed FTAs with South Korea and Columbia, and its approach to China remains one of appeasing China on most fronts in the hope that its leaders will someday, somehow help the United States and its allies address the problem states of Iran and North Korea.

The DPP may at times appear paranoid when it comes to assessing the motives behind the Ma administration’s efforts to increase economic ties with the mainland. However, if an ECFA is signed and there is no real change in the state of Taiwan’s economic relations with other states, through either signed FTAs or a dramatic unilateral liberalization of Taiwan’s own economy, then that paranoia will almost certainly grow—and not without some foundation. As Golda Meir once famously said to Henry Kissinger, “Even paranoids have enemies.”

Gary Schmitt is director of AEI’s Program on Advanced Strategic Studies.

FURTHER READING: Schmitt and Philipp Tomio reviewed international Afghanistan policy in “Germany Puts Up Its Dukes?” and Michael Mazza discussed China in “Red Menace?” Schmitt also examined “The Big Squeeze” on American defense spending, and deplored the Obama administration’s “Kowtowing to China.”

Image by Rob Green/Bergman Group.

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