By Jens Kastner
A nightmare came true for Taiwan on May 2: the mainland's Xinhua news agency reported that Beijing will formally begin negotiations on a free-trade agreement (FTA) with South Korea, the island's arch rival in trade. South Korea's Ministry of Foreign Affairs and Trade said Monday that the talks will start on May 14.
As Taiwanese manufacturers, who compete head-to-head with their Korean counterparts in electronics, steel, machinery, petrochemicals, plastics and textiles, rely much on the edge Beijing lets them have over foreign competitors in the mainland, any concession given by to the Koreans will make Taipei one head shorter at the cross-strait negotiation tables.
Seoul has numerous FTAs, the most important being one with the European Union and the United States-Korea Free Trade Agreement (KORUS), which came into effect in March. Taiwan, by comparison, beyond its trade agreement with the mainland, has FTAs with the handful of nations with which it has diplomatic relations, accounting only for a tiny part of the island's annual exports.
The Economic Cooperation Framework Agreement (ECFA) the Taiwanese signed with Beijing in 2010 eliminated tariffs on 557 items under the "early harvest list", giving the island's exporters some advantages over the Koreans and Japanese in China. Follow-up talks on the ECFA have yet to be concluded.
Taiwanese President Ma Ying-jeou recently mentioned a two-year timeline to sort out tariff reductions or exemptions for a further 5,000 items, among other crucial issues, but Taipei now has good reason to fear that Seoul is faster. As China is both sides' largest trading partner, Beijing effectively fired the starter's gun to a negotiation race by saying that two years are also realistic for the completion of the Sino-Korea FTA.
"The inauguration of Sino-Korea FTA negotiations has put Taiwan under tremendous pressure," said Liou To-hai, director of the National Chengchi University's Center for WTO Studies, in Taipei.
"Should South Korea sign an FTA with China ahead of Taiwan and China completing agreements on trade in goods, trade in service and investment, all the dividend that Taiwan has gained from ECFA's early harvest program could be neutralized."
The cross-strait agreements Liou referred to are stalled by a long list of obstacles, mostly related to opposition by Taiwan's mainland-wary political parties and public sentiment, as well as Beijing's insistence on avoiding any hint on Taiwanese statehood.
According to Liou, a Sino-Korea pact threatens to divert trade and investment away from Taiwan.
"Sectors South Korea and Taiwan compete fiercely in both in China and world markets, such as semiconductors, mobile phones and digital TVs, are not on the early harvest list", he said. "If tariff on those items produced in South Korea were exempted due to the Sino-Korea FTA, Taiwanese manufacturers would lose their price competitiveness."
This would force Taiwanese investors in the mainland to stop importing key components from their home island and instead purchase them from local mainland firms, causing Taiwan's trade surplus with China to decline significantly, Liou said.
Foreign direct investment (FDI) in Taiwan would also be affected. Since the signing of the ECFA, Japanese companies have used Taiwan as a gateway into the Chinese market, but this phenomenon could come to an untimely end, as "Japan is likely to shift its investment to South Korea," Liou said.
Trade volume between Taiwan and the mainland reached about US$160 billion last year, while that between South Korea and mainland China was $245.6 billion. If the FTA comes into being, two-way trade is expected to reach $300 billion by 2015.
A Sino-Korea FTA will likely cover goods, services, intellectual property rights and investment, and reportedly even sensitive areas such as Korea's agricultural sector and China's petrochemical, electronics and machinery industries won't be taboo at the negotiation table.
Seoul agrees in principle on the need for a trilateral China-Japan-Korea FTA, which eventually could pave the way to an "ASEAN plus Three" trade pact. While Taiwan will obviously be marginalized under such scenarios, the diplomatic isolation Beijing has been enforcing upon the island is hardly the only factor that leaves Taiwanese exporters increasingly at the mercy of the Chinese market.
Ronald A Edwards, an expert on China's political economy and professor at Tamkang University in Taipei, pointed out that at least as large a part of the dilemma is self-made and ironically also by Taiwan's anti-unification political opposition.
"If Taiwan continues to send US products back and pull US goods off the shelf, it will send a signal to other countries," Edwards said, referring to an old trade spat Taiwan has with the US over the ban on imports of the food additive ractopamine. Mad cow disease affecting US beef is also an issue. The issues led to recent controversy in Taiwan after the ruling Kuomintang wanted to scrap the ban on ractopamine for the sake of trade liberalization.
"If the Taiwanese cannot manage their trade relation with their most important political supporter and number two trading partner, other countries may think twice about entering into trade pacts with them," Edwards said.
Hu Sheng-Cheng, an economist at Academia Sinica and former minister of the Cabinet-level Council for Economic Planning and Development, said Taiwan's exporters of electronic and technology products might not be too seriously affected by a Sino-Korea trade pact because they are somewhat cushioned by the WTO's Information Technology Agreement.
Traditional industries, such as machinery, petrochemicals, plastics and textiles, will be more affected, and as those employ the most people, and so political pressure on Taipei through the negotiations on a Sino-Korea FTA will be even greater. That in turn, puts Taipei ever tighter on Beijing's leash, according to Hu.
"Talks on the Sino-Korea FTA will affect the follow-up ECFA negotiations. Beijing will lever the talks with Seoul to force Taipei into making concessions on ECFA and even to compromise on political issues."
It is a hallmark of the secretive cross-strait talks that their outcome is unpredictable, said Hu, but if Taipei behaves obediently, the completion of the ECFA at Korea's expense could come about more sudden.
Taiwan's anti-unification opposition suspects President Ma will very soon publicly acknowledge Beijing's "One China principle". "Ma's inauguration speech on May 20 and Beijing's reaction to it will provide clues," Hu said.
Ma's usual mantra is that the mainland and Taiwan "belong to China and that China is the Republic of China" (not the Communist-led People's Republic of China). This might be moderated to say that the mainland and Taiwan "both belong to China" or "the Chinese nation", or he might not refer to his three "nos": no independence, no unification, no war - his line in his first inauguration speech.
If, as the DPP worries, he skips the three "nos" and reference to the "Republic of China" this time, the negotiations on the ECFA may move faster than Sino-Korean FTA, Hu believes.
Jens Kastner is a Taipei-based journalist.