China’s suspension of preferential tariffs on some Taiwanese petrochemical products was a wake-up call for the government and businesses with significant exposure to the Chinese market. The government and manufacturers should step up efforts to diversify export markets and to expand offerings of high-value-added products to brace for further economic pressure from Beijing.
China on Thursday last week announced that it would suspend tariff cuts on imports of 12 Taiwanese petrochemical products, including propylene and paraxylene, from Monday next week, saying it had determined that Taiwan had put up trade barriers in contravention of WTO rules and the Economic Cooperation Framework Agreement (ECFA), a trade deal signed in 2010.
The punitive action would not deal a serious blow to the petrochemical sector or the economy, as the affected items account for a meager proportion of exports, the Ministry of Economic Affairs said. Last year, local petrochemical companies exported US$2.5 billion worth of those items, compared with the nation’s total exports of US$479.52 billion.
Local petrochemical firms are to face import tariffs of 1 to 10 percent on those 12 products, while 88 percent of the targeted items would be taxed at 1 or 2 percent, the ministry said.
China’s removal of the preferential tariffs was politically motivated ahead of the presidential and legislative elections on Jan. 13, it said, adding that Taiwan would seek to settle trade disputes at the WTO.
However, the Petrochemical Industry Association of Taiwan is concerned that Beijing’s move could put local suppliers at a disadvantage as competitors in other parts of the region have free-trade agreements with China, which could send ripples through the supply chain. The Taipei-based association is worried that Beijing could extend punitive actions to more items and more sectors.
The textile, machine tool and steel sectors would bear the brunt if China cancels the ECFA, given their reliance on the Chinese market. China is the second-biggest export destination for local machine tool producers, lagging just behind the US. About US$6.32 billion of machine tools were exported to China in the first 11 months of this year, accounting for 23.5 percent of total machine tool exports, Ministry of Finance data showed.
Further economic coercion from China could imperil Taiwan’s economic expansion and employment. About 521 items from the petrochemical, machine tool, textile and transportation sectors enjoy preferential import tariffs in China.
Taiwanese companies have been slow in diversifying to other markets and other manufacturing sites, given China’s lower tariffs and cost-effective manufacturing environment. If Beijing cancels more preferential tariffs, it could trigger a new wave of local manufacturers moving their operations to nations with preferential tax status, ultimately leading to a higher unemployment rate in Taiwan. That is one of the worst-case scenarios.
The ministry said it plans to allocate NT$18 billion (US$578.03 million) to help petrochemical exporters upgrade their products or to explore new foreign markets to reduce their reliance on China, but that funding would not solve the issue. A thorough, long-term solution should be put in place. That could include an examination into Taiwanese companies’ reliance on China and pursuing alternative markets, which could lead to the whole supply chain being reshaped.
The government should help local businesses to remove tariff barriers when entering new markets, such as southeastern Asian nations and India.
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