Thu, Jun 30, 2005 page8

• On trade, look east instead of west

  • By Hwan C.Lin林環牆
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  More than a month ago, Chinese Nationalist Party (KMT) Chairman Lien Chan (連戰) launched his so-called "ice-breaking tour" of China. Lien met with Chinese President Hu Jintao (胡景濤) on April 29 and then issued a joint communique, stressing their desire to establish a "cross-strait common market" and push for across-the-board economic cooperation between the two sides of the Taiwan Strait. In the communique, the two parties did not forget to reiterate their common opposition to Taiwanese independence.

  The idea of a cross-strait common market is not new at all. It has already been trumpeted by proponents including KMT Vice Chairman Vincent Siew (蕭萬長). These proponents are either those who crave to see an eventual political integration between Taiwan and China or those who naively mistake the emerging China market for an easy path to an ever-flourishing Taiwanese economy.

  In contrast to that widely circulating common-market idea, the proposed US-Taiwan free trade agreement (FTA) has not sparked as much attention. Taiwan's government proposed to enter into such an FTA with the US in 2002, the same year as its successful accession to the WTO, which came after an unnecessarily prolonged 12-year negotiation process thanks to China's political objections.

  For an industrialized economy like Taiwan, economic development helps people enhance their standard of living and quality of life through the creation of domestic high-wage job opportunities, rather than pursuit of foreign low-wage workers. But high-wage jobs will never be created without domestic investment in education, research and development (R&D), and social infrastructure. Overseas investment by itself, be it in the form of either foreign direct investment (FDI) or short-term portfolio investment, cannot create -- and can even destroy -- high-wage jobs for domestic residents, in spite of potential efficiency gains in the short run. That points to a need for a balance between internal and external investment -- a balance that must be struck through government policy.

  The cross-strait common market Lien recently proposed would further integrate Taiwan into a developing Chinese economy abundant in cheap labor. This would further encourage the already massive outflow of Taiwan's FDI to China and its low-wage workers, while making no contribution to the creation of high-wage jobs at home. Taiwan would also run the risk of seeing its historical links to the US, Japan and other developed economies weaken.

  Taiwan's officially-approved China-bound FDI last year totaled US$7 billion, or 2.3 percent of Taiwan's GDP. This massive amount of China-bound investment is about the same amount as Taiwan's aggregate R&D investment, of which 60 percent comes from private sources and 40 percent comes from the government. It also dwarfed Taiwan's FDI to developed countries as a whole.

  This is "China fever." It's alarming that Taiwan's domestic resources have been rushing to meet China's development needs rather than nurturing long-term economic growth potential at home.

  Taiwan is playing catch-up in the global technology race. It cannot overlook the fact that just a few rich countries account for most of the world's creation of new technology. The G7 countries (the US, Japan, Germany, France, the UK, Canada and Italy) together account of more than 80 percent of the world's R&D spending.

  From empirical studies, international technology diffusion is very much localized. Only those economies that have invested enough domestically in R&D are competent to exploit external benefits from the developed world's innovations, and thereby help themselves climb up the technology ladder.

  It is time to refocus Taiwanese investment away from a China-centric economic approach and back toward the developed world and Taiwan itself. A US-Taiwan FTA should be looked at within this strategic context.

  It is true that trade barriers between Taiwan and the US are modest, and that the direct benefits of further trade liberalization via an FTA must therefore also be modest. However, its strategic implications go beyond the economic dimension.

  First, the US is a member of the North American Free Trade Agreement and is working with six Central American countries toward a free trade agreement called CAFTA (Central American Free Trade Agreement). An FTA between Taiwan and the US could serve as a gateway to extending Taiwan's economic outreach into Central America.

  Second, a US-Taiwan FTA could serve as a platform for further development of a variety of mechanisms that channel Taiwan's venture capital and human capital into international R&D cooperation with the US and other advanced countries.

  Third, a US-Taiwan FTA could provide a shield against Beijing's political clout and spur so-called "competitive liberalization" in East Asia by encouraging countries including Japan and ASEAN members to enter into FTAs with Taiwan. Taiwan could therefore mitigate the risk of being marginalized by China's plan to push an "ASEAN plus three" free trade area (the three being China, Japan and South Korea) -- a bloc that would deliberately exclude Taiwan and the US.

  Last but not the least, a US-Taiwan FTA could help Taiwan prosper economically. This would enable Taiwan to better contribute to regional stability and prosperity.

  A US-Taiwan FTA is thus a win-win strategy from both an economic and political perspective. US-Singapore and US-Australia FTAs have already been concluded. Why does Washington hesitate to deal with Taipei to strike a US-Taiwan FTA?

  Hwan C. Lin is a research fellow of the Taiwan Public Policy Council, a US think tank, and an associate professor of economics of the University of North Carolina at Charlotte.
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