Taiwan, China Negotiating a Landmark Free-Trade Agreement

By Ariana Eunjung Cha

Washington Post Foreign Service
Saturday, February 21, 2009; Page A09

BEIJING, Feb. 20 -- Taiwan and China are negotiating a wide-ranging free-trade agreement that represents an important step toward the possibility of unification of the longtime adversaries.

The Comprehensive Economic Cooperation Agreement would allow the free flow of goods, services and capital across the Taiwan Strait at a time when the economies of the mainland and the democratic self-ruled island are increasingly interdependent. While Taiwanese groups have tried to play down the political implications of the economic pact, those on the mainland are already talking about the eventual union of the two.

Li Fei, deputy director of the Taiwan Studies Center at Xiamen University on the mainland, said the agreement would be a significant milestone in gradually warming relations between the antagonists. "It's a start toward full cross-strait economic integration and a necessary condition for marching forward toward final unification," Li said.

Taiwan and China have been governed separately since 1949, when Nationalist forces fled the communist takeover. China insists that Taiwan has and always will be an inseparable extension of the mainland, while Taiwan has maintained that it is a self-governing

The United States, under the 1979 Taiwan Relations Act, has pledged to defend the island if China launches a military attack, but the nature of that commitment is vague. The U.S. sale of military equipment to Taiwan has long angered China, which has more than 1,000 missiles pointed toward the island. Analysts are paying careful attention to Chinese statements and maneuvers that involve the missile program for indications of a genuine easing of tensions.

Taiwanese President Ma Ying-jeou took office in May on a platform of improved relations with China, which was a turnabout from his predecessor, Chen Shui-bian, a strong backer of Taiwan's independence who routinely provoked China and irritated the United States.

Ma quickly delivered on his campaign promises: beginning regularly scheduled direct flights for passengers, shipments and mail between China and Taiwan and committing to high-level talks with counterparts on the mainland every six months. Although many business and industry groups in Taiwan have enthusiastically backed Ma's approach, it has drawn passionate criticism from opposition parties and some scholars.

Kenneth Lin, an economics professor at National Taiwan University, said the agreement would be tantamount to "de facto unification" despite its name. Hong Tsai-lung, an associate research fellow at the Taiwan Institute of Economic Research, describes the agreement as "a rose with thorns" that "will deepen Taiwan's dependence on China."

In an interview with the Taipei Times published Friday, Ma seemed to imply that the agreement is a certainty, but he hesitated to respond directly to questions about whether signing it would be tantamount to acknowledging that Taiwan belongs to China.

"As to how the international community perceives the issue, it depends on the stances of different countries," Ma said. "Some countries agree with us, and our allies won't think Taiwan becomes part of communist China when it signs an agreement."

Pressed by the reporter, Ma responded: "We will take economic measures to solve economic problems with less politics and ideology. So far we have not seen any attempts by communist China to force Taiwan to do things we cannot accept, and we wouldn't have to accept it if they did so."

While Ma and other officials have spoken in recent days as if the agreement is a done deal, Hsu Chun-fang, a spokeswoman for the Bureau of Foreign Trade in Taiwan's Ministry of Economic Affairs, was more cautious in a telephone interview.

"It's hard to say when it will come out. Currently, there are a lot of opposing voices in Taiwan. Since Taiwan is a democratic and free country, the government cannot step further before people making consensus," Hsu said.

Despite the political antagonism between Taiwan and China, their economies have become increasingly entwined over the years, and until recently, most of the money flowed to the mainland. Taiwanese businesses now own large numbers of factories in China's manufacturing centers. Until Ma's more relaxed regulations, people were sometimes forced to take elaborate measures to conduct business across the strait. For example, a traveler could not fly directly from Shanghai to Taipei, a flight of a little more than an hour. Instead, travelers had to switch planes in Hong Kong, doubling their travel time.

But with Taiwan's economy in recession -- its gross domestic product shrank a record 8.36 percent in the last quarter of 2008 -- Ma's administration is hoping that investment from the mainland may provide a boost. In addition, with China set to begin a free-trade agreement with the 10 members of the Association of Southeast Asian Nations in 2010, Taiwan is under pressure not to be left out.

"Taiwan needs the help of the mainland," said Sun Shengliang, director of the economic studies center of the Institute of Taiwan Studies at the Chinese Academy of Social Sciences. "If the agreement can be signed, it will bring bigger benefit to Taiwan than to the mainland."

Tsai Lien-sheng, secretary general of the Chinese National Federation of Industries, a trade group in Taiwan, said that if Taiwan does not sign a free-trade agreement with the mainland, "we are going to be marginalized." Although Taiwan and China in recent years dropped most discriminatory tariffs on each other's exports, industry groups believe that eliminating such barriers entirely would be in the best interest of both, especially since China has already signed similar agreements with Taiwan's neighbors and competitors in Asia.

"We cannot compete with paying a much higher duty when other countries have agreed to much lower or zero duties," Tsai said. "The exports of Taiwan will be harmed severely, and foreign capital will be less interested in investing in Taiwan."

Hsieh Jun-hsiung, executive manager of the Petrochemical Industry Association of Taiwan, pointed out that Taiwan now sells about half its petrochemical products to the mainland. China imposes a tariff of about 6.5 percent on imports of petrochemical products from Taiwan and a 6 percent tariff on those from South Korea. But South Korea's tariff will soon be eliminated, putting Taiwanese s companies at a disadvantage.

"The sooner, the better. We just sent an urgent letter to the government to push them to do it quicker," Hsieh said. "Our requirement is quite simple: Right now our treatment is unequal compared with other countries. We need equal treatment. If Taiwan keeps the status quo on this, about half of our products will be unsellable soon."

Researchers Liu Liu and Zhang Jie contributed to this report.