Understanding the Controversy of ECFA Ernest CHU, March 2016

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1 Understanding the Controversy of ECFA, March 2016 Given the history of cross-strait relations since the mid-twentieth century, establishing any cross-strait policies almost always guarantees controversy; the Economic Co-operation Framework Agreement (ECFA) is no exception. Though intended by then-president Ma Yingjeou to cover only economic issues without touching issues related to politics or sovereignty, 1 the consequent debates involved social and political issues characteristic of Taiwan s domestic politics. This paper seeks to understand the debates surrounding ECFA through four dimensions: efficacy, equity, security and implementation. Efficacy Ma justified the implementation of ECFA with two objectives: 2 to prevent Taiwan from being marginalised in the international arena by China; and to boost industrial competitiveness and bring economic growth to Taiwan. Hong and Yang (2011) argue that economic benefits of ECFA for Taiwan would be limited if it did not result in PTAs with countries other than China, and that China had little incentives to allow this. However, their argument is based on economic benefits to China generated by ECFA, and ignores China s political motivations. Taiwan has since concluded PTAs with other countries such as New Zealand and Singapore, but these countries represent only a small portion of Taiwan's trade. 3 It seems, therefore, that China is implicitly allowing Taiwan more freedom to conduct international negotiations; to what extent this is due to ECFA and whether China will allow Taiwan to negotiate PTAs with more significant trading partners, however, remain unknown. Whether ECFA is a boon for Taiwan s economy is even more contentious an issue. Although various economic models have suggested that ECFA will bring long-term prosperity to Taiwan, 4 these models do not capture all the variables which affect cross-strait trade. 5 Chen et al. (2011) also conclude that Taiwan s investment-induced exports cause Taiwan industries to be more focussed on upstream production, which may increase their vulnerability (due to the bullwhip effect, for example) 6 and offset gains from trade creation. Furthermore, initial economic analyses by Sung (2013) and Tung and Yeh (2014) suggest that the positive economic impact of ECFA has so far been limited. Although this may be, in part, due to the 2011 economic crisis and China s recent slowdown, the opposition remains to be convinced of the efficacy of ECFA. 7 Finally, the rise of civic nationalism in Taiwan characterises the salience of civic values such as equity, democracy and autonomy. 8 Economic growth per se cannot satiate the desires to uphold such values. Hence, we turn to the socio-political controversies of ECFA. 1 Hong and Yang 2011, p Chou 2010, pp. 6-11; Hong and Yang 2011, pp Tung and Yeh Chen, Liu and Wen 2011, pp ; Rosen and Wang 2011, Ch. 2 5 Chou 2010, p. 16; Chen, Liu and Wen 2011, p. 109; Hong and Yang 2011, p Hong and Yang Lee 2014; Tung Shen and Wu 2008, pp

2 Equity Underlying Taiwan s class politics is the proliferation of income inequality since the early 2000 s, 9 coinciding with the first wave of cross-strait economic liberalisation. Critics of ECFA thus relate liberalisation to inequality and unemployment. For example, ECFA is thought to be hurting workers in Taiwan s agriculture sector. 10 This is in contrast to Rosen and Wang s (2011) model, which predicts a positive impact of ECFA on most agricultural products (p. 88). Moreover, some attest that ECFA may provide the agriculture sector a rare chance of sophistication, refinement and internationalization. 11 However, these analyses omit the impact of ECFA on labour: growth in the agriculture sector may entail more capital-intensive production and/or the lowering of wages, both which worsen unemployment and inequality. Similarly, in the technology sector, production in Taiwan has gradually shifted to China to reduce costs. 12 This mirrors the principle underlying the neo-gramscian transnational trade bloc, whereby Taiwanese capital has greater mobility than labour. As a result, capitalists gain and labourers suffer from the integration, and inequality is exacerbated. Moreover, although various government estimates claim that ECFA creates more jobs on aggregate, 13 they do not take into account the inter-sector mobility of labour low-skilled labour, especially, would find it difficult to transition to jobs which require higher levels of human capital. The Services Trade Agreement (STA) further fuelled concerns over equity. Taiwan s service sector accounts for around 60% of the workforce, 14 70% of Taiwan s GDP and are mostly SMEs. 15 Many believe that STA will only benefit entrepreneurs of large companies by allowing them to benefit from economies of scale, 16 thus endangering the SMEs in Taiwan which had contributed to Taiwan s predominantly middle-income society. The negative impact of STA may possibly be worse if one accounts for the existing inequality between high-end and lowend services industries, 17 as the STA liberalises more low-end than high-end industries. 18 Security At the heart of the controversy lies national security issues, as desires for autonomy and selfdetermination have arisen during the past two decades. Firstly, there are concerns that ECFA worsens asymmetric interdependence between Taiwan and China and endangers Taiwan s autonomy. Since the signing of ECFA, Taiwan s market share in the early harvest sectors in China have decreased. 19 Also, a lack of PTAs between Taiwan and other major trading countries further favours China, as Taiwan becomes a spoke of the China hub, 20 fuelling demands 9 Zheng 2013, p Ibid., p As cited in Sheng and Lan 2014, p Chen et al. 2011; Rosen and Wang 2011, pp Hong and Yang 2011, pp Zheng 2013, p Fan Hong and Yang 2011, p. 89; Zheng 2013, p Zheng 2013, pp Annex I, Cross-Strait Services Trade Agreement, ECFA 19 Lin 2016, p Chow 2009; Hong and Yang, p. 89 2

3 for Taiwan to secure membership in the TPP. 21 Proponents of ECFA, conversely, take a more neoliberalist approach and welcome ECFA as a means of avoiding military conflict with China. 22 The debates also focus on the issue of technology leaking to China, as a result of investmentinduced trade in the technology sectors. 23 Critics of ECFA believe that liberalisation would enable China to outcompete Taiwan economically [and] militarily. 24 This point, however, is intensely contested. Some argue that China s technological sectors are no longer dependent on Taiwan s, or even that Taiwan s sectors could remain ahead through integration with China s, 25 strengthening Taiwan s national security. The STA, especially the liberalisation of the financial sector, is seen also as a threat to Taiwan s security. Although the STA is more restrictive to the financial sector than any other sectors, 26 it nevertheless may ease the flow of capital from China to Taiwan. The largest Chinese banks are state-owned, with multiple times the capital of Taiwanese banks. 27 Conversely, Taiwanese banks are smaller, under more intense competition with thinner margins, and lack international presence. 28 The gross imbalances between the two countries in a security-sensitive sector, hence, promulgates fears that Chinese banks can easily overwhelm Taiwan s finance sector and exert a high degree of influence, if the sector becomes fully liberalised. Implementation The implementation process of ECFA is as significant as its content. Given the complexity of cross-strait relations and the inherent controversy associated with ECFA, its signing should have been carefully considered. Instead, Ma, whose KMT party dominated both the Executive and Legislative Yuans, sped through the process with little public consultation or accountability. Worse, Ma chose to prioritise the liberalisation of trade in services instead of instituting a dispute settlement mechanism, 29 which would arguably have been more conducive to fairness by mediating cross-strait trade relations. He also rejected a line-by-line review of the controversial STA, leading to further controversies, even among KMT members. 30 The implementation process itself thus became controversial, especially among Taiwanese who value democracy, transparency and participation in political processes. It is therefore unsurprising that this culminated into the Sunflower Movement in 2014, in which mainly students, but also other interest groups, participated to protest not only the content of ECFA, but also to protect fundamental Taiwanese values which they deemed the government to have violated in the enactment process of ECFA and STA Huang Lin 2016, p Chen et al Lin 2016, p Chou 2010, p. 15; Lin 2016, p. 194; Sheng and Lan 2014, p Annex I, Cross-Strait Services Trade Agreement, ECFA 27 Lin 2016, p Lin 2013, p Lin 2016, p Ibid., p Lin

4 Conclusion ECFA came at a time when Taiwan s economy was weak, and was promoted as a means to balance cross-strait economic liberalisation with Taiwan s socio-political interests. Scepticism regarding the efficacy of ECFA underpinned its controversy. With the economic benefits of ECFA unclear, people debated the negative impacts of ECFA, especially STA, on other national interests, which include both the domestic dimension of equity and international dimension of security. Given the intensity of the debates, the government s decision to hasten the full enactment of ECFA only exacerbated the opposing voices, making ECFA even more controversial. The controversy of ECFA, therefore, highlights the importance of considering the intricacies of policy-making and the complex linkages between economic, political and social values in domestic and international contexts. 4

5 References Chen, Shin-Horng, Meng-chun Liu, and Pei-Chang Wen The ECFA and Its Expected Effect on Cross-Strait Trade and Investment: A Taiwanese perspective. China Economic Journal 4(2-3): Chou, Chi-An A Two-Edged Sword: The Economic Cooperation Framework Agreement between the Republic of China and the People s Republic of China. BYU International Law and Management Review 6(2):1-20. Chow, Peter C. Y Why Be a Mere Spoke of a Future China Hub? Taipei Times, November 5. Retrieved March 8, 2016( Fan, JoAnn The Economics of the Cross-Strait Services Agreement. The Diplomat, April 18. Retrieved March 8, 2016( Hong, Tsai-Lung, and Chih-Hai Yang The Economic Cooperation Framework Agreement between China and Taiwan: Understanding Its Economics and Politics. Asian Economic Papers 10(3): Huang, Tien-lin TPP Must Come before China Deals. Taipei Times, February 19. Retrieved March 8, 2016( Lee, Hsin-fang ECFA Benefited Trade Little: Ministries. Taipei Times, August 17. Retrieved March 8, 2016( Lin, Hong-Jen Abraham Trends for Future Integration of Commercial Banking between Taiwan and China after the ECFA Pp in Economic Integration Across the Taiwan Strait: Global Perspectives, edited by P.C.Y. Chow. Cheltenham, UK: Edward Elgar. Lin, Syaru Shirley Sunflowers and Umbrellas: Government Responses to Student-led Protests in Taiwan and Hong Kong. Asan Forum, December 10. Retrieved March 1, 2016( Lin, Syaru Shirley Taiwan s China Dilemma: Contested Identities and Multiple Interests in Taiwan s Cross-Strait Economic Policy. Palo Alto, CA: Stanford University Press. Rosen, Daniel H., and Zhi Wang The Implications of China-Taiwan Economic Liberalization. Washington, DC: Peterson Institute for International Economics. Shen, Shiau-Chi, and Naiteh Wu Ethnic and Civic Nationalisms: Two Roads to the Formation of a Taiwanese Nation. In One China Dilemma, edited by P.C.Y. Chow. New York, NY: Palgrave Macmillan. Sheng, Tzu-Chun, and Shu-Hui Lan Is Economic Cooperation Framework Agreement the Threshold of Sustainable Development for Taiwan s Industries? International Journal of Economics and Finance 6(6): Sung, Yun-Wing A Comparison between the CEPA and the ECFA. Pp in Economic Integration across the Taiwan Strait: Global Perspectives, edited by P.C.Y. Chow. Cheltenham, UK: Edward Elgar. Tung, Chen-Yuan ECFA Bringing Only Limited Benefits. Taipei Times, May 19. Retrieved, March 8, 2016( Tung, Chen-Yuan, and Jason Yeh Development of a Cross-Strait Economic Framework Agreement. The Chinese Economy 47(3): Zheng, Zhenqing Taiwan s Wealth Gap and the Evolution of Electoral Politics after the 2008 Global Financial Crisis. Asian Survey 53(5):

Dr. CHEN Chien-Hsun List of Publications: Articles in Refereed Journals:

Dr. CHEN Chien-Hsun List of Publications: Articles in Refereed Journals: Factors Influencing China s Exports with a Spatial Econometric Model, (with Kuang-Hann Chao and Chao-Cheng Mai) The International