ECFA and its Implications forRegional Economic Integration

Zhao Hong

East Asian Institute, NUS

Dec. 17, 2009Taipei, Taiwan

I. Review of cross-Strait economic relations

II. The rise of ECFA and its significance

III. Implications on economic integration with Southeast Asia

IV. Conclusions

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I. Review of cross-Strait economic relations

1. Economic development of Mainland and Taiwan

In the past decades, Mainland and Taiwan have made great achievements in their economic development. In 2008, Mainland’s GDP was 4,300 US$ billion, being the third largest economy in the world; Taiwan’s GDP was 400 US$ billion, being the 26th in the world

In terms of GDP per capita, Taiwan’s was 17,100 US$, Mainland’s was $3,100

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GDP growth of Mainland and Taiwan(US$ billion, 1979-2008)

GDP Per capita of mainland and Taiwan(US$, 1979-2008)

In terms of GDP growth rate, Mainland’s has been better than that of Taiwan

GDP growth rate of Mainland and Taiwan (%, 1996-2009)

cross-Strait trade relations

In 2008, the value of Taiwan’s exports to Mainland was US$ 100 billion, while the value of imports was $33 billion

Taiwan’s trade balance with Mainland(1983-2008, US$ billion)

In 2002, Mainland surpassed US to become Taiwan’s largest trade partner

Taiwan’s trade direction (1983-2008, US$ billion)

Cross-Strait investment relations

In 2008 and this year, Taiwan’s outward investment to the rest of the world decreased, but its investment to Mainland still increased dramatically, accounting for over 70% of its total outward investment

Taiwan’s investment to Mainland (1991-2008, US$ billion)

Percentage of Taiwan’s investment to Mainland (1991-2008, %)

Regional distribution of Taiwan’s investment in Mainland (1991-2008, %)

Sectoral distribution of Taiwan’s investment in Mainland (1991-2008, %)

2. New development of cross-Strait relations

The past year has witnessed the most rapid improvement in cross-Strait relationship in decades. Cross-Strait relationship has taken a dramatic turn since Mr. Ma took office in May 2008

In less than a year, the two sides have held three rounds of talks, the fourth round talk is scheduled to be held on 22 this month

Alongside the talks are concrete steps to normalize and to improve economic relations. The two sides have also reached a consensus on to boost investment by mainland companies in the island

Such initiatives are important to normalize cross-strait economic relations, and it is expected that economic relations across the Strait will continue to improve

II. The rise of ECFA and its significance

In early 2008, Taipei proposed to discuss the possibility of signing ECFA with Mainland

The main idea of ECFA “is to promote relations with the Mainland to avoid marginalization as a result of regional economic integration, to promote normalization of economic relations with the Mainland, and to bolster internationalization of Taiwan’s economic relations”

There is no doubt that given the rapid growth in cross-Strait trade, investment and tourism, both sides are positioned to benefit from further institutionalization of their economic and trade relations

For instance, the signing of ECFA can set clearer rules for normalizing cross-strait economic relations so that enterprises from both sides can operate in a more stable and predictable environment

Apart from economic win-win across the Strait, the political argument is equally convincing

Taiwan's security will be better served by making its economy even more valuable to the mainland. In other words, if the ECFA is going to produce its expected results, it will make the mainland and Taiwan a stakeholder in each other's economy, thereby providing greater incentive for both sides to maintain peace and stability across the Taiwan Strait

III. Implications on economic integration with Southeast Asia

Regional economic integration in East Asia is a development trend. Actually regional markets in Asia present greater opportunities for Taiwan, especially some emerging economies

For example, from 2002 – 2008, export shares of China (including Hong Kong) and ASEAN 6 in Taiwan’s total exports increased from 10% and 9.8% to 40% and 15% respectively, while that of US and Europe had decreased from 18.6% and 15% to 12% and 11.7% respectively

For the mainland, it has continued to intensify its comprehensive relations with Southeast Asia

On 16 August 2009, China fulfilled its promise by signing the ASEAN-China Investment Agreement with a US$15 billion loan to assist ASEAN countries in the upgrading of transport and telecommunications infrastructures

This means China is likely to become the largest foreign investor in Southeast Asia in the near future

Over the last decade, for some political reasons, Taiwan is feeling increasingly marginalized and excluded from East Asia’s move towards regional integration

Since Mr. Ma took office, Taiwan’s relations with Southeast Asia have turned a new page. If a diplomatic truce is to continue across the strait, the mainland is likely to further reduce its diplomatic hostility with Taiwan, thus respecting Taiwan’s foreign moves in Southeast Asia and giving Taiwan substantial room to strengthen its relations with countries in the region

Since Mainland now accounts for over 40% of Taiwan’s trade and over 70% of Taiwan’s overseas investment, by signing an ECFA with Mainland, Taiwan will indirectly benefit from China’s FTAs with its trading partners. “Once an ECFA is signed, the threat of marginalization by the ASEAN + 1 can be relieved”

Should Taiwan successfully conclude the ECFA in 2010, Taiwan would be eligible to reach bilateral agreements with individual ASEAN countries on the establishment of FTA and greatly enhance its economic cooperation with ASEAN countries

Taiwan can initiate some specific cooperative projects as a means to participate in the regional integration process. For instance, ASEAN views the food security issue very seriously as its members are struggling to make efficient use of lands and natural resources

Taiwan is well-known for its ability to develop agriculture and is very strong in orchid growing and fish farming. It can utilize this ability to co-develop agriculture with ASEAN countries, and strengthen its international competitiveness in agriculture and other related industries. Thus Taiwan can speed up its integration with this dynamic region

Apart from economic cooperation, Taiwan may also have opportunities to cooperate with ASEAN countries on regional affairs, such as civil services, legal services

It could also expand cooperation with ASEAN countries on the management of non-traditional security issues, such as environmental protection, transnational crimes, illegal drugs, human trafficking, money laundering, and piracy in public seas

IV. Conclusions

In the past decades, cross-Strait economic relations have achieved great progress. The signing of an ECFA will not only further improve cross-Strait relations, but also will have significant long-term regional implications

. For Taiwan, ECFA will help reduce risks of cross-Strait hostility, and cross-Strait relations are more likely to enjoy a higher level of stability and prosperity in the long run

This in turn will increase Taiwan’s economic outlook and promote its competitiveness to attract more FDI from multinationals

With improved economic relations with the mainland, Taiwan could better take part in the process of economic integration in East Asia

The new development of cross-Strait economic relations is also in in line with the interests of Southeast Asian countries, as it will create a stable and peaceful international environment for economic development in East Asia

This is conducive to better economic integration and closer coordination in this region, thus greatly contributing to the on-forming of East Asian economic community

Thank You!