Thu, Mar 19, 2009 page8

• ‘Six cents’ on a trade agreement with China

  • By Peter Chow 周鉅原
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  On the controversial issue of the proposed economic cooperation framework agreement (ECFA) with China, I would like to offer my “six cents.”

  One, the status of signatory, not the title of the agreement:

  The government claims the trade pact is for business, not politics. Anybody with an undergraduate level understanding of international law can see that is not true. Whatever the title is, the most important issue is the status of the signatory. What is the exact status of Taiwan in signing a trade pact with China? Is it “Chinese, Taipei,” “Separate Customs Territory of Taiwan,” “the Republic of China,” “Taiwan” or “Taiwan (Taipei), China”? How will it erode Taiwan’s de facto independence? Leaders must be sure not to trade off Taiwan’s de facto independence for probable economic benefit as I wrote earlier (“ECFA poses three likely outcomes for Taiwan,” March 5, page 8).

  Two, transparency and democratic procedures:

  Any trade pact must be transparent, open to the public and approved by democratic procedures. In view of the polarization on the issue and its deep impact on the livelihood of Taiwanese people, Taipei needs to handle the proposed trade pact with more delicate tactics. To ratify the Maastricht Treaty, many members of the EU held a referendum before they joined, as did Brazil and Bolivia on ratifying the Free Trade Area of the Americas.

  Given that opinion in Taiwan is divided, a referendum would not only consolidate Taiwan’s democratization and demonstrate its sovereignty to the world community, it would also offer Taipei a bargaining chip as indicated in my fourth point below.

  Three, objective cost-benefit analyses:

  Free trade is a two-way street. Any trade pact is a “give and take” with gains in some sectors and losses in others. Leaders must not exaggerate the potential gains and hide the losses as they try to sell the ECFA to the public. An objective cost-benefit analysis on the pact is a “must.”

  Four, bargaining leverage and negotiation strategy:

  The party that is more eager to reach an agreement with the other side is more likely to make concessions and gain less from the deal, while the one in the driver’s seat of the negotiation is likely to gain the most. Taipei needs to objectively assess all the positive and negative aspects of the emerging trade blocs under ASEAN Plus One and ASEAN Plus Three.

  Meanwhile, Taiwan can use the above-mentioned referendum procedure as a bargaining chip in its negotiation with Beijing while Beijing’s National People’s Congress acts as a rubber stamp, thus depriving Beijing from using this tactic.

  Five, don’t underestimate the externalities:

  Forty percent or more of Taiwan’s exports are destined for China, and Taiwan has already had an asymmetric trade dependency on the Chinese market without any formal trade pact. With the ECFA, Taiwan’s trade with and investment in China will accelerate. That is an intrinsic or hidden cost for Taiwan. In addition to its vulnerability of relying on a single market — putting all eggs in one basket — domestic income and labor employment will be significantly affected. The “factor price equalization” theory dictates that more of Taiwan’s investments would shift to China and wage rates in Taiwan would drop to become similar to those in China.

  Six, the compensation principle and remedy policy:

  Freer trade will result in a winner and loser. For the aggregate national interest, the total gains from freer trade must be greater than the total loss. The government needs to have a set of “remedy policies” to compensate those industries that will suffer from freer trade.

  Peter Chow is professor of economics at the City University of New York.
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