Taiwan Approves Historic Trade Deal With China

Source: Wall Street Journal By Joy C. Shaw and J.R. Wu and Ting-I Tsai

TAIPEI—Taiwan's legislature Tuesday approved a wide-ranging trade pact with China, removing the final hurdle to a historic accord that has stirred controversy on the island but will reduce tariffs on hundreds of products on both sides of the Taiwan Strait and deepen economic ties between the one-time enemies.

The legislature was widely expected to approve the Economic Cooperation Framework Agreement even as opposition Taiwanese lawmakers lobbied against the pact, which they said China will use to ultimately reach its political aim of reunifying Taiwan with mainland China.

The approval came as Taiwan Tuesday urged the U.S. to sell it upgraded military jets and submarines, in response to a Pentagon report that concluded China's arms buildup is giving it a wider military advantage over the island.

"We hope the U.S. can soon approve the sales of defensive weapons in accordance with the Taiwan Relations Act, including F16 C/Ds and diesel submarines," said Yu Sy-tue, spokesman for Taiwan's Ministry of National Defense.

The Taiwan Relations Act, passed by the U.S. Congress in 1979, requires the U.S. to provide the island with "arms of a defensive character".

The Legislative Yuan, Taiwan's parliament, is dominated by the China-friendly Kuomintang Party. The approval of the ECFA--carried by a live television broadcast of the vote--comes after representatives of China and Taiwan signed the accord on June 29.

Taiwan government think tank Chung-hua Institution for Economic Research earlier said that once the pact is fully implemented it could raise Taiwan's economic growth by 1.65 to 1.72 percentage points. It also expects the trade pact to generate 257,000-263,000 new jobs in Taiwan.

Taiwan's economy recovered from the global financial crisis with year-on-year growth in the first quarter this year reaching a 32-year high, but the momentum is slowing amid uncertainties about the strength of the global recovery. The export-oriented economy's gross domestic product in the second quarter is expected to expand 10.5% from a year earlier, easing from the first quarter's 13.3% pace, according to a Dow Jones Newswires economists' poll.

Taiwan's main opposition Democratic Progressive Party has also criticized the trade pact, saying it will take away jobs of low-income people, and that the KMT-led government's negotiation with China has not been transparent enough.

"Economically, ECFA benefits only a minority--those big corporations--while most general public and laborers would fare worse," DPP lawmaker Gao Jyh-peng said after the vote. Mr. Gao reiterated that the wide-ranging trade pact will make Taiwan dependent on China.

"In the future it will lead in the direction of reunification," Mr. Gao said.

China is Taiwan's largest trading partner, its largest investment destination, and now also home to a growing number of Taiwanese people.

After decades of hostility, the trade agreement comes after several years of increasing economic ties between Taiwan and China, removing many of the remaining barriers to cross-strait trade and investment. Nonetheless, China hasn't ruled out the use of force to reunite Taiwan with the Chinese mainland. The two sides split in 1949 after a civil war.

Taiwan President Ma Ying-jeou has said ECFA will help the island integrate more with the regional economy, arguing the deal will make it easier for Taiwan to sign free-trade agreements with other countries, which have been afraid of riling China.

Since Mr. Ma came to power in 2008, Taiwan and China have launched direct transport and postal links and boosted the number of Chinese tourists coming to Taiwan.

Taiwanese firms are eyeing the opportunities.

Chinatrust Financial Holding Co. President Daniel Wu said last week that his firm is looking for a partner in China to help expand its mainland business, while SinoPac Securities, a unit of SinoPac Financial Holdings Co., this week agreed to sign an intent to cooperate on business information exchange with China's Guosen Securities Co.

Industrial Bank of Taiwan Monday said its recent decision to sell its asset management unit to a subsidiary of Taishin Financial Holding Co. will allow it to focus on its core business and planned expansion into China. IBT said it wants to set up a representative office in the Chinese municipality of Tianjin and a financial leasing company in the region around Shanghai, as well as look for a suitable strategic partner for cooperation in the investment trust and securities business.

However, regulatory hurdles remain in Taiwan and China before financial institutions on both sides will be able to directly invest in each other.

Under ECFA, China agreed to open 11 service sectors to Taiwan companies, such as banking, accounting, aircraft maintenance, insurance and hospitals.

China will allow Taiwan banks operating on the mainland to conduct business in its local currency, the yuan, after they have established a branch in China for two years. It will conditionally allow the China branches of Taiwan banks to apply to offer yuan loans to China-based Taiwan companies, though banking regulators in China and Taiwan aren't yet considering allowing banks from the two sides to invest in each other.

Also under the trade pact, China will reduce tariffs on 539 Taiwanese goods worth $13.83 billion, accounting for around 16.1% of the island's China-bound exports, while Taiwan will reduce tariffs on 267 Chinese goods worth $2.86 billion, accounting for 10.5% of Chinese exports to Taiwan.

For both sides, tariffs on the affected goods will drop to 10% or lower in the first year, 5% or lower in the second year, and zero in the third year, from as high as 15% now.