Taiwan risks a China trade pact backlash

Tens of thousands of Taiwanese students have occupied the debating chamber of the country’s parliament for the 21st day, demanding the government scrap or renegotiate a service trade agreement with mainland China that is largely in favour of Taiwan.

If Prime Minister Tony Abbott could extract a similar concession from the Chinese, he would be hailed as hero back at home. It is understood that Australian diplomats have privately communicated their bewilderment about the students’ action to the Taiwanese mission here.

So what is the fuss about the service trade agreement between Taiwan and mainland China? The service pact is part of the so-called Economic Cooperation Framework Agreement (ECFA) signed between Taiwan and mainland China, which is designed to foster closer economic relations across the Taiwan Straits.

Under the agreement, China would open 80 service sectors to Taiwan while the island country would liberalise 64 sectors. Of these, 27 sectors such as car rentals and Chinese medicine wholesales are already subject to competition from China. The magnitude of openness for the remaining newly opened sectors is less than 10 per cent.

“The pact is supposed to give Taiwan more favourable access to the mainland Chinese market than other World Trade Organisation members, with none of the local sectors opened beyond WTO standards,” says Marcella Chow of Bank of America Merrill Lynch.

There are many misconceptions around the service agreement and it seems most of the student protestors don’t even know what the actual content of the agreement is. Some protesters are playing the proverbial fear card and saying the agreement would lead to a massive influx of cheap Chinese labourers.

In fact, the agreement does not allow Chinese labourers to work in Taiwan and it only permits mainland Chinese investors to bring in a maximum of seven staff members if their investment threshold exceeds US$ 700,000. Chinese companies are also not permitted to hire regular employees from the mainland.

Bank of America Merrill Lynch says the claim that the agreement will result in large-scale unemployment is also false and that Chinese investment actually created close to 10,000 jobs and only brought in 264 managers. In fact, even if Taiwan opens up its labour market, it is not even clear if mainland graduates want to work in Taiwan. Their starting salaries are similar and Chinese get paid more bonuses than Taiwanese, according to a human resources survey.

So why are they protesting against a largely concessional agreement from China? The real answer is they are protesting against closer economic integration with China and they’re fearful of an eventual take-over by an increasingly powerful and resurgent China.

The balance of power across the Taiwan Straits is decisively shifting in favour of China, economically, militarily as well as politically. Influential American international relations expert John Mearsheimer argued recently that Taiwan’s days as a de facto independent state are numbered which has sparked heated discussion in Taiwan.

Domestically, Taiwanese society has been fighting a civil war over its identify since the 1990s when the pro-independence president Lee Teng-Hui came into power after decades-long military rule by the exile Nationalist party. Back in the early 1990s, a majority of Taiwanese saw themselves as Chinese and the island state as the “free China” versus the “Red China” across the straits.

In 1996, only 24.1 per cent of Taiwanese saw themselves as Taiwanese and the number soared to 52.6 per cent in 2010, according to polls conducted by the National Chengchi University. The decline in Chinese identity is both due to heavy-handed political pressure from Beijing as well as the Democratic Progress Party’s relentless campaign to purge Taiwan of its Chinese roots.

The results have been a deeply divided society between the so-called Waishengren, mainlanders who fled to Taiwan after the 1949 Chinese civil, and Bensgengren, Chinese migrants to Taiwan prior to the civil war. Taiwan has been trapped in a self-destructive dilemma, says Professor Zhang Yazhong from the National University of Taiwan in a column in the Financial Times.

The students are not protesting against the service agreement per se but rather against a closer relationship with mainland China. The pro-independent opposition party Democratic Progress Party is adding fuel to an already dire situation.

Taiwan cannot afford to trip up on this important economic agreement – one that anyone else would kill for. The consequences could be dire for the island nation of 23 million people if the agreement is derailed.

It can only start free trade agreement negotiations with other countries, such as the Transpacific Partnership (TPP) or Regional Comprehensive Economic Partnership (RCEP), after finishing the negotiations with China. So the delay in completing the service trade agreement will harm Taiwan’s competitiveness as its rivals such as South Korea get a head start.

For example, South Korea just signed a free trade agreement with Canada last month and more importantly just concluded the 10^th round of FTA negotiations with China. Bank of America Merrill Lynch expects Taiwan’s GDP growth rate to fall from 2.9 per cent to 2.4 per cent if lawmakers fail to pass the service agreement.

President Ma Ying-Jeou has warned of the dire consequences for Taiwan’s export economy if the service trade agreement is derailed. “If the service trade agreement is not ratified or if it has be renegotiated, it could have serious consequences and be detrimental to Taiwan’s interests,” he told The Economist.