Taiwan Today

Aiming to normalize its economic and trade relations with mainland China and play a larger role in regional economic integration, Taiwan signed the Economic Cooperation Framework Agreement (ECFA) with mainland China in June 2010. While including an early harvest list, ECFA, as the name indicates, is a framework agreement that focuses on structures and objectives in preparation for later negotiations on specific issues. One such follow-up treaty is the Cross-Strait Trade in Services Agreement, which the Taipei-based Straits Exchange Foundation (SEF) and the Beijing-based Association for Relations Across the Taiwan Straits (ARATS) signed in Shanghai in June this year at their ninth round of high-level talks.

The signing of the service pact marks the first free trade agreement concluded between the two sides. SEF Chairman Lin Join-sane (林中森) notes that the agreement is mutually beneficial, as it facilitates a favorable environment for cross-strait investment, trade, economic liberalization and market development, while at the same time creating job opportunities and providing a positive impetus for negotiations on future agreements. “The commitment of both sides to mutually beneficial cross-strait economic and trade relations is represented by a respect for the differences in each other’s regulations, industry development and overall economic scales,” Lin said after the signing.

The concluded agreement includes four chapters and 24 articles that stipulate basic service trade principles, rights and obligations, as well as relevant working mechanisms for both sides. The two sides will hold an annual meeting to review the implementation of the pact, and there is also an emergency negotiation mechanism that gives industry representatives from each side the right to demand negotiations and seek solutions if the agreement negatively affects businesses in their sector.

The recent accord comprises 80 service sectors in mainland China and 64 sectors in Taiwan. Of the 64 service categories in the pact that Taiwan has agreed to open up to mainland China, 27 have been gradually liberalized since 2009. The sectors include construction, commerce, culture, entertainment, the environment, finance, health, sports, telecommunications, tourism and transportation. Restrictions on shareholding, the scope of business activities and recruitment of employees were agreed upon for the various sectors.

According to the SEF, mainland China is to open most of the agreed service sectors to at least the same degree as specified under the rules of the World Trade Organization (WTO)—of which both Taipei and Beijing are members—as well as those under the Closer Economic Partnership Arrangement signed between Hong Kong and mainland China in 2003. In some cases, the extent of liberalization is expected to surpass those guidelines. Mainland China, for example, will allow Taiwanese e-commerce companies operating in Fujian province to own up to a 55-percent stake in e-businesses there, exceeding the commitment it has made to WTO members. Mainland China also plans to allow websites set up by Taiwanese companies in Fujian to be accessed by residents all over mainland China, lifting the restriction limiting their business to Fujian only.

In regard to medical services, mainland China will allow Taiwan operators to establish wholly owned hospitals in all of its provincial capitals and municipalities. ECFA’s early-harvest list allowed Taiwan businesses to establish wholly owned hospitals only in Shanghai City and Fujian, Guangdong, Hainan and Jiangsu provinces. Taiwan will also receive favorable treatment in cultural and creative industries, transportation, telecommunications and most of the other sectors mainland China is to open up. “The cross-strait trade in services pact will help extend the reach of local businesses in the mainland Chinese market,” says Wang Yu-chi (王郁琦), minister of the Mainland Affairs Council (MAC). “Under these favorable terms, Taiwanese businesspeople hold an advantage over foreign competitors in mainland China.”

The service trade agreement will further open up the two sides’ financial services industries to investment, a move that is expected to allow capital markets on both sides of the Taiwan Strait to complement each other and improve competitiveness. Taiwan’s financial industry will have preferential treatment covering banking, securities and futures, and insurance. For instance, Taiwanese financial institutions will be allowed to take a majority shareholder position in jointly owned fund management firms.

In 2012, the service industry accounted for nearly 70 percent of Taiwan’s gross domestic product of US$474 billion, and the number of employees in the sector accounted for close to 60 percent of Taiwan’s total employed population of 10.8 million. Some 98 percent of firms in the local sector are small and medium-sized enterprises, according to the Ministry of Economic Affairs (MOEA).

Wang Jiann-chyuan (王健全), vice president of the Chung-Hua Institution for Economic Research (CIER), a Taipei-based, government-funded think tank, says that signing the service trade pact is good news for Taiwan as it will facilitate the nation’s efforts to export its services. “Taiwan’s manufacturing industry doesn’t have a high profit margin and is replaceable,” he says. “What Taiwan needs to think about is whether it has the ability to be a service exporter and how to achieve that goal.”

Jang Show-ling (鄭秀玲), chairwoman of National Taiwan University’s (NTU) Department of Economics, says that while the agreement may help large enterprises break into new markets, it will also take investment, talent and know-how away from locally based service providers. But the most serious problem, as she sees it, is that the pact will create an oversupply in the sectors Taiwan is to open. “Traditional and small-sized operations, which form the main part of Taiwan’s service sector, only have limited resources,” Jang says. “They’re likely to be forced out of the market if they have to compete against large mainland Chinese enterprises that have all the resources.” The government should undertake a thorough evaluation to determine which industries are best suited for such competition, she says, a move that would mean suspending and renegotiating the pact.

“The bottom line is that the benefits of free trade won’t be enjoyed by everyone, and the wealth gap will keep widening because of the system,” says Kenneth Lin (林向愷), a professor at NTU’s Department of Economics. “[In these circumstances], engaging in a free-trade system is questionable.”

Free E-speech?

There are also concerns about the possible social impact of the accord, such as the potential for Beijing to use mainland China’s economic clout to erode free speech in Taiwan, disrupt the Taiwanese market or create a monopsony. Mainland Chinese companies that are backed by Beijing would have the capacity to disrupt the Taiwanese market without the pressure of generating profits, for example. Moreover, the mainland Chinese government already scrutinizes what Taiwanese e-commerce providers publish in both countries, requiring such firms to comply with strict rules on political subjects, for example, before agreeing to issue content provider licenses. “It could, therefore, have a negative impact on Taiwan’s freedom of speech when more and more Taiwanese companies have to self-censor their web content at home in order to do business there,” Lin says.

So far, much of the criticism about local businesses being affected is familiar, as the arguments are largely the same as those made following the signing of ECFA. Trade information since that agreement was signed seems to undermine the validity of those fears, however. For example, the government set aside a 10-year, NT$95.2 billion (US$3.1 billion) budget for the purpose of helping affected businesses or industries after ECFA was signed in 2010. According to the MOEA, there have only been two applications for such aid, but both have been rejected because they were not industries included in ECFA’s early harvest list. Simply put, no local business has suffered a loss because of ECFA, said Cho Shih-chao (卓士昭), vice minister of economic affairs, at a forum on the trade in services agreement in June this year.

In fact, a major reason for many of the concerns surrounding the new pact is the lack of transparency about its contents prior to the two sides inking the document. According to a survey conducted by the opposition Democratic Progressive Party in early July—about three weeks after the agreement was signed—only 21 percent of firms in the study were aware that their sectors had been included in the pact. When interviewed by a local news website, Wang Yu-chi admitted that the government had not communicated enough with industry, the legislature and the public before signing the pact, but stressed that the deal favors Taiwan. “The government put forth its best efforts to secure greater access to the mainland Chinese market for Taiwanese businesspeople, as well as set stringent requirements on mainland Chinese investment coming into Taiwan,” he says.

Citing the printing industry as an example, Wang Yu-chi notes that mainland Chinese businesses are barred from opening new firms in Taiwan, and that they can obtain only a limited percentage of shares in existing companies, preventing them from gaining a majority share. Taiwanese businesspeople, on the other hand, can take part in a very large market by setting up wholly owned printing houses in mainland China.

The MAC minister says there has been much misinformation circulating about the content of the new agreement. In the traditional Chinese medicine (TCM) sector, for example, local operators have been quick to voice their concerns. Chu Pu-lin (朱溥霖), chairman of the National Union of Chinese Medicine Associations of the ROC, says that about 90 percent of the ingredients and materials used in traditional herbal medicine are imported from mainland China. If Taiwan opens up the TCM sector, mainland Chinese companies, which control the supplies at the source and have much lower labor and marketing costs, would dominate the local market. “Taiwanese traditional Chinese medicine companies will be forced to hand over their business to mainland China,” he says.

The new agreement, however, does not touch on the TCM industry. While the services pact does open up certain food and non-food retailing to mainland Chinese companies, processing or retailing of TCM products remains closed. Meanwhile, the wholesale TCM market in Taiwan has been open since 2009, but only four mainland Chinese companies have applied to set up local operations since then. Two of those firms have been approved, with one already conducting business.

SEF Deputy Secretary-General Ma Shaw-chang (馬紹章) believes that many of the misunderstandings can be clarified easily, such as concern over the potential loss of jobs in Taiwan. Depending on the size of the investment, Taiwan will issue up to seven work permits for investors, managerial staff and experts for each mainland Chinese company. “Mainland Chinese investors need to hire local workers to operate,” he says. “It means that these mainland Chinese companies create jobs rather than take them away.” In fact, as of May this year, mainland Chinese-invested companies in Taiwan employed 216 managers and technical personnel from across the strait, while providing 6,671 jobs to local workers. Ma points out that compared with mainland China, Taiwan’s service industry operates in a small, saturated market. The new pact, therefore, creates not only opportunities for Taiwanese businesses, but also a market for its talent, he says.

Relying on Local Expertise

Not all local businesses are afraid of increased competition. The local food and beverage industry, which already operates in a liberalized and highly competitive market, is a good example. “Our competitive edge lies in our experienced, professional staff, who know local tastes and constantly seek improvements in order to provide better products,” says Lin Gang-li (林岡立), general manager of EZ.KON, a local restaurant chain with 24 branches throughout Taiwan. “Mainland Chinese operators may invest a large amount of capital, but money isn’t a decisive factor in this trade and doesn’t guarantee success,” he says.

To explain the details and opportunities of the services pact more clearly, the government conducted a series of forums with service operators in the weeks following the signing of the agreement. President Ma Ying-jeou (馬英九) has also addressed the issue on several occasions, noting that the new pact will contribute to the future development of Taiwan’s service industry in mainland China and ultimately pave the way for local service industry operators to go global. The president says that the accord could also be of assistance to Taiwan in its efforts to join the Trans-Pacific Partnership and the Regional Comprehensive Economic Partnership, two proposed agreements that would help Taiwan play a larger role in regional economic integration.

President Ma points out that the government has taken measures to help businesses, industries and workers that might be affected by trade liberalization. In the meantime, he has reassured business operators that there is no need to be afraid of new competition because Taiwan has a competitive advantage in many service sectors. The movie industry is a good example. The Ministry of Culture says that between December 2010 and the end of 2012, 20 Chinese films hit the local market generating US$800,000 at the box office in Taiwan, while the 21 Taiwanese movies shown at cinemas in mainland China generated US$100 million in tickets sales there. ECFA allows an unlimited number of films from Taiwan into mainland China. There is a cap of 10 mainland Chinese films per year allowed into Taiwan, although the new services agreement would increase the quota to 15 movies annually.

On July 14 this year, the MOEA and CIER released a report on the likely impact of the recent service agreement on the nation’s economy. The pact is expected to raise Taiwan’s gross domestic product by between 0.025 and 0.034 percentage points in its first year, as well as create up to 11,923 jobs, which would see employment rise by between 0.15 and 0.16 percent. The limited macroeconomic benefits are due to the low number of sectors that will be fully opened up, according to the report. Exports in services to mainland China are expected to increase by US$402 million, while investment into Taiwan will grow by US$92 million, the report states.

The service agreement will enter into effect after domestic procedures on both sides have been completed. In Taiwan, the pact was quickly approved by the Cabinet, but a number of legislators, including some from the ruling party, voiced concerns about its contents.

Trade agreements involve give and take. The Cross-Strait Trade in Services Agreement, while helping extend the reach of local businesses toward the mainland Chinese market and benefiting Taiwanese businesspeople based in mainland China, will also open up part of the Taiwanese market. This, however, is nothing new to local businesses, as since Taiwan’s accession to the WTO in 2002 and the signing of ECFA, they have already demonstrated impressive ability to compete in a liberalized market.

Write to Jim Hwang at cyhuang03@mofa.gov.tw