Taiwan Struggles in China's Trade Grip

The Washington Times

Wednesday, April 2, 2014

page B-04

Taiwan struggles in China’s trade grip

Islanders fear trade in services pact with Beijing will swallow their economy

By John J. Tkacik

One of the most peculiar exercises of democracy in history has been unfolding over the past two weeks in Taiwan — a country known for its quirky politics.

Thousands of demonstrators took over the Taiwanese parliament building on March 18 to forestall the ruling party from passing a trade-in-services agreement with China that threatens to integrate the island’s economy with China’s. They are still there.

It is peculiar for three reasons: First, it’s the first time in democratic Asia that a parliament building has been taken over by peaceful protesters without a coup, junta or tank in sight. Second, the demonstrators have the tacit approval of most parliamentarians themselves. Third, the U.S. State Department seems to be enjoying the spectacle.

The department’s official spokesman noted in a routine diplomatic briefing, “Well, we certainly support Taiwan’s vibrant democracy, which allows for this kind of robust political dialogue on a range of issues,” not a typical U.S. reaction to a mob takeover of a functioning legislative process.

The Taiwanese activists also learned useful lessons from Ukraine. Taiwan is America’s 11th-largest trading partner and sixth-largest market for U.S. farm goods. Taiwan’s economy is on the verge of being absorbed by China’s and is now struggling to avoid that fate.

There are similarities with Ukraine, where protesters are struggling to avoid being absorbed by Russia and to strengthen ties with the democracies of the European Union.

Poor Ukraine only ranks as No. 70 on the list of U.S. trading partners. Russia, in fact, is Ukraine’s largest market, but strong pro-Russian politicians maneuvered to forestall a European embrace by scuttling a EU partnership with a hammerlock dependence on Russia. The results in Ukraine, however, have not been pretty.

Likewise, strong pro-China political forces in Taiwan seek to lock the longtime pro-American island into China’s economic sphere and sever its security relationships with the United States and democratic Asia. Like Ukrainian voters, most of Taiwan’s voters — about 70 percent — think their country is already far too entwined with a giant neighbor. Huge popular sentiment in Taiwan supports the demonstrators and opposes the unionists.

Today’s Taiwanese are far more aware of the lack of support they have in Washington than Ukrainians are. That hasn’t deterred them, though, from thinking of ways to avoid joining Hong Kong and Macau as just another “special administrative region” of China.

“When Taiwan’s vocally pro-China ruling Chinese Nationalist Party tried to ram a new Trade in Services Agreement with China through Taiwan’s parliament on March 17, even the Nationalist Party’s own legislators had second thoughts. Alas, they were under strict legislative whip discipline and did not dare vote ‘no.’” The only way left to derail the agreement was to short-circuit the parliamentary process entirely.

The Trade in Services Agreement will not benefit Taiwan’s services exports. Instead, there is a potential that it will be used by China as a backdoor into the U.S. market unless rules of origin are very tight. The integration of the Taiwanese and Chinese economies may make it more complicated for Taiwan to achieve workable new free-trade agreements with its Pacific partners, not less.

Taiwan literally is a “nation of shopkeepers.” About 2.4 million of its 6 million workers are employed in Taiwan’s 1 million shops and services. Taiwan’s domestic services sector is diffuse and varied; local retail, printing, e-commerce, logistics, mass transport, taxis, even undertakers, are in vibrant and dynamic competition. China’s services sector is far more centralized, and restricted by government regulation and licensing.

In general, Taiwanese businesses already have far more access to China’s services sectors than any other foreign investors. Of course, Taiwanese investors in China do not have the same protections from arbitrary law enforcement, regulations and contract disputes as investors from other countries, which have embassies. Chinese investors in Taiwan’s services would be functioning in a modern democracy with an established rule of law and contracts.

Most of the agreement’s market openings are restricted to Fujian province and are conditional. For example, Taiwanese undertakers are banned from cremation services in China, where 99 percent of all funerals involve cremation. Yet Taiwan’s market openings for Chinese investors are countrywide and unconditional.

Taiwanese also calculate that their ability to penetrate China’s financial services market under the agreement would be greatly restricted, with little prospect of influencing reforms in China’s financial sector. Taiwan’s banking institutions are smaller, diffused and too competitive among themselves to have any structural impact in China.

By contrast, China’s financial institutions are all centrally controlled and have vastly more capital. The agreement affords Chinese banks and institutions up to 20 percent ownership in Taiwan counterparts and thus effective control. It is impossible for any Taiwan institution to take effective control of any Chinese counterpart.

Small retail businesses face a similar potential for being swamped. The investment threshold of $200,000 brings with it a potential of bringing in 21 new immigrants from China — three employees and up to seven family members per worker.

In a broad demographic sense, China can absorb unlimited Taiwan immigration, but Taiwan cannot absorb unlimited Chinese migration. Nor can Taiwan’s retail sector absorb unlimited competition. Unlike other foreign investors in Taiwan, Chinese investors do not have to renounce Chinese citizenship to be naturalized as Taiwanese voters in Taiwan.

Taiwan’s voters see few if any real advantages of the Trade in Services Agreement to Taiwan’s overall economy over what Taiwanese businesses already enjoy in China. There are no new investment guarantees, no new arbitration advantages, no new dispute-settlement mechanisms.

No doubt the agreement fulfills a Taipei government goal of further integrating Taiwan’s economy with China’s and enhancing China’s already massive influence in Taiwan’s economy.

Like Ukrainians’ view of their Russian economic partnership, most Taiwanese see the agreement as a strategic move on the way to Taiwan’s political union with its biggest economic counterpart.

Unlike Ukrainians, Taiwanese have parried the maneuver cleverly. Legislators, including the speaker of Taiwan’s parliament, have acquiesced in a physical takeover of the country’s Legislative Yuan by demonstrators — mostly students and young activists — on the eve of the agreement vote. Anxious parliamentarians worried about voters, but under a strict party whip, now seem content to let the demonstrations delay the vote indefinitely.

Most Taiwanese hope they will get enough moral support from Washington, Tokyo, Canberra, Ottawa and Brussels to persuade the ruling Nationalist Party to rethink the Trade in Services Agreement. It is a move they judge will not draw backlash from Beijing.

The Obama administration’s Ukraine policy has been a horrible failure for Washington and the Western democracies. But it seems that the State Department has learned its lesson. With a little bit of encouragement for Taiwan’s people, the United States may be able to preserve Taiwan as an important trading partner separate from China. Without it, Taiwan will eventually disappear as an independent entity in democratic Asia.