After a 10-month effort, the US and South Korea signed a free-trade agreement (FTA) on April 2. If ratified by the US Congress and South Korea's National Assembly, the bilateral agreement is expected to go into effect in 2009. Although rice is excluded from the list of FTA items, the deal will eliminate 95 percent of customs duties within three years of its implementation, and all such duties within 10 years.
According to optimistic estimates, the FTA will bolster South Korea's GDP by 2 percent, increase its exports to the US by US$10 billion and increase foreign direct investment (FDI) in South Korea by US$40.4 billion. The Korea Institute for International Economic Policy (KIEP) even estimates that the agreement will boost South Korea's economic growth to 7 percent per year in the next seven to 10 years, clearly bringing new momentum to South Korea's economic growth.
In contrast to South Korea's optimistic economic outlook, Taiwan has been thrown into despondency. In addition to seeing South Korea's economy take off and increasing the gap in economic development that is certain to be the result, Taiwan also has to bear the practical losses resulting from such an agreement. According to the "FTA Alarm" Web site, the South Korean-US FTA will have the greatest impact on Taiwan of all the agreements signed in the world thus far.
Current estimates predict Taiwan will suffer trade losses to the tune of US$2 billion -- about 5 percent of Taiwan's total exports. In other words, a fifth of South Korea's increased exports to the US may be taken from Taiwan's current exports to the US.
From an investment perspective, the increase in South Korea's FDI inflows of US$40.4 billion is far greater than the US$10 billion trade increase. This implies an even greater change in investment direction, and that investments from US high-technology firms will flow to South Korea. If we add the agreement on strengthened technological cooperation that is part of the FTA, it would be easy to envisage a technological alliance between the two countries. In future, Taiwan's high-technology firms may suffer a double loss -- both markets and technology.
The effects of this shift of trade and investment will have an equally serious impact on Japan. The signing of the FTA has caused Japan to actively seek ways to re-enter into FTA negotiations with South Korea. Chinese Premier Wen Jiabao (
Unfortunately, an FTA between any of these three countries -- Japan, China and South Korea -- would be very detrimental to Taiwan's foreign trade relations. If these three nations were to successfully sign FTAs with one another -- or even with the US -- Taiwan would become marginalized. Although Japanese and Chinese foreign trade relations may suffer as a result of the agreement between South Korea and the US, they can make up for those losses by signing their own FTA with either South Korea or the US. Since Taiwan would be unlikely to be able to sign such an agreement, it would suffer most from this trend. The impact and consequences of the South Korean-US agreement will be the biggest ever challenge to Taiwan's foreign trade.
One may wonder whether the US, while actively seeking an FTA with South Korea, considered the damage to Taiwan's economy and trade. Taiwan is a faithful ally of the US, and the US should therefore give cautious consideration to the impact of such an agreement on Taiwan and treat it in a fair manner by also signing an FTA with Taiwan.
While we work to make this dream come true, I suggest the government consider how Taiwan should respond to a worst-case scenario. Many years ago, I suggested that the government lower taxes to make up for the loss in price competitiveness suffered by Taiwan's companies as a result of the impact of FTAs between other nations. This approach, however, is only partially effective, because no policy can make up for the economic integration that follows the signing of an FTA.
The other option is to strengthen innovation ability. The government must, however, understand that without the help of an FTA the resources required to promote innovative abilities will diminish and it may become difficult to prevent a brain drain. The promotion of innovative abilities requires a huge effort.
The impact of FTAs on Taiwan is multi-faceted, and the agreement between South Korea and the US will highlight the gravity of this problem. Resolving the FTA issue requires the government to consider every economic aspect. It must coordinate tax reform, policies to promote innovation and new cross-strait policies to find a way to resolve or minimize the problems caused by FTAs.
Chao Wen-heng is an associate research fellow at the Taiwan Institute of Economic Research and holds a doctorate in international politics and economics from the University of Maryland.
Translated by Lin Ya-ti
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