Although the Economic Cooperation Framework Agreement (ECFA) between Taiwan and China has been signed, related domestic and international legal procedures are still to come. The agreement has to be reviewed and approved by the legislature before it comes into force, then both the text and content need to be officially ratified before it can be implemented. After all this, an assessment must also be made as to whether the ECFA conforms to WTO standards and specifications.
There is no precedent for the WTO overruling a regional trade agreement. However, there are some unconventional aspects to the ECFA in terms of how it was put together and signed, and it will probably attract attention because of the importance of Taiwan and China in international trade. Whether or not the ECFA will prove to be an exception and whether other trade partners will raise objections remains to be seen.
Perhaps the most important unconventional aspect is the failure to include an explicit timetable for lifting tariffs. All the ECFA does is offers the rather non-committal assurance that it will happen “in good time.” This seems to run counter to Article 24 of the General Agreement on Tariffs and Trade (GATT) — predecessor of the WTO and the legal basis for the trade of goods under the ECFA — which states that there should be a program and timetable in place for tariff reductions. Such agreements are required to state clearly that within a given period of time, say 10 years, they will provide for the liberalization of a certain number or category of goods.
There is a specific legal term to refer to the amount and category of goods involved and that is “substantially all the trade.” The ECFA uses a different phrase in Chinese that can be translated as “a substantial majority of the trade.” In practice, there should be little difference between the two, because if both signatories genuinely approach the agreement in the spirit in which it was intended they are likely to work towards applying it to 80 or even 90 percent and more of bilateral trade, by volume or specific items involved. Officials have been singing the praises of the economic effect the ECFA will have, so it would make little sense for them to try and stifle the scale of the liberalization. Strangely, that is what seems to be happening.
A report by the Inter-American Development Bank (IDB), an authority on free-trade agreements (FTA), says developed countries that signed FTAs had implemented tariff exemptions for 95 percent of their traded goods by the 10th year of signing. The figure for developing country signatories was only slightly less at 89 percent. 94 percent of these goods were industrial products, compared to the smaller, but still significant, figure of 70 percent for agricultural products.
There are also very important policy reasons that both the GATT and WTO require FTAs to liberalize substantially all trade.
Raising the threshold simply cuts down on the number of FTAs signed, especially by countries that are not committed to the idea of free trade. If countries enter into agreements they claim to be FTAs that are actually an attempt to reduce tariffs on a small set of goods, that would have an adverse impact on the efficacy of later multilateral negotiations between other countries.
Economist Jagdish Bhagwati even likened preferential trade agreements such as FTAs to termites, in his book Termites in the Trading System: How Preferential Agreements Undermine Free Trade. Apparently, this free-trade advocate believes strongly in the WTO’s brand of trade multilateralism. It is a little odd, then, that WTO Director-General Pascal Lamy praised a bilateral FTA like the ECFA. Presumably, his comments are to be taken in the context of the rather unique circumstances in this case, namely the specific relationship between the two signatories. It might also be because of the fact that the recent proliferation of FTAs has caused a headache for WTO-sponsored multilateralism.
As far as FTA signatory countries are concerned, the requirement to liberalize trade on substantially all of trade reinforces the economic benefits of the agreement, for two reasons.
First, it results in trade creation, where the consequent reduction in prices of goods leads to increased trade between signatories. This is a positive effect. On the other hand, it also leads to trade diversion, where the importing of goods from a previously more efficient third country becomes more expensive than from the other signatory country, thus diverting trade from the former to the latter. This is a negative effect.
Generally speaking, human and political factors guide the hand of negotiating teams when dealing with potential trading partners. This means they tend to concentrate on tariff exemptions for goods that will lead to trade diversion rather than trade creation.
In the case of the ECFA, from Taiwan’s perspective, trade creation entails substitution of one country’s goods for the other which, while good for trade, will lead to protests in the countries concerned.
Trade diversion, on the other hand, will be manifested as Taiwanese goods become cheaper and therefore replace, imports from countries like Japan and South Korea in China, or in Chinese goods replacing ASEAN imports in Taiwan. In these cases, there will be no dissenting voices from politicians in either Taiwan or China, since it will simply be a case of one foreign importer nation replacing another.
If the FTA covers substantially all trade — tariff exemptions on over 90 percent of goods — there will be less room for human factors or political agendas influencing negotiations.
Honigmann Hong is an assistant professor in the China studies program at National Tsing Hua University.
TRANSLATED BY PAUL COOPER
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