asean and apec

III. Regional Trading ArrangementsC. Commentary

III.C.12 East Asian Economic Integration and Taiwanby Johnny Chi-Chen Chiang

Trading Arrangementsin the

Pacific Rim

ASEAN

and

APEC

Compiled and Editedby

Paul Davidson

Release 2006-7

Issued December 2006

Oceana Publications

F:\BOOKS06\Davidson\TP.vpWednesday, December 06, 2006 5:12:50 PM

Color profile: DisabledComposite Default screen

Information contained in this work has been obtained by Oceana Publications

from sources believed to be reliable. However, neither the Publisher nor its au-

thors guarantee the accuracy or completeness of any information published

herein, and neither the Publisher nor its authors shall be responsible for any er-

rors, omissions or damages arising from the use of this information. This work is

published with the understanding that the Publisher and its authors are supplying

information, but are not attempting to render legal or other professional services.

If such services are required, the assistance of an appropriate professional should

be sought.

You may order this or any other Oxford University Press publication by visit-

ing the Oxford University Press and Oceana websites at www.oup.com and

www.oceanalaw.com respectively.

ISBN-13: 978-0-379-00855-5 (looseleaf : alk. paper)

ISBN-10: 0-379-00855-6 (looseleaf : alk. paper)

© 2006 Oxford University Press, Inc.

All rights reserved. No part of this publication may be reproduced or transmitted

in any form or by any means, electronic or mechanical, including photocopy, re-

cording, xerography, or any information storage and retrieval system, without

permission in writing from the publisher.

Manufactured in the United States of America on acid-free paper.

F:\BOOKS06\Davidson\CIP.VPTuesday, December 05, 2006 3:53:51 PM


Document III.C.12

EAST ASIAN ECONOMIC INTEGRATION AND TAIWAN

Johnny Chi-Chen Chiang

Assistant Professor

Department of Political Science

Soochow University, Taiwan

I. Introduction

Compared to other regions like Western Europe and North America, East Asia is

hardly defined as an economic region. Even so, since the mid-1980s East Asia has

been experiencing “regionalization” or “market-driven” regional integration. As

Peng points out, regional integration in East Asia has been achieved by “informal

means such as regional production networks, ethnic business networks and subre-

gional economic zones.”1 The private sector, technological changes, and market

forces unleashed by policy initiatives in fact play the crucial role in the process of

this deepening integration. More particular, most significant liberalization efforts

in East Asia have been unilateral, which is contrasted to what is termed “regional-

ism,” the formal institutionalization of regional integration.2

However, there are clear signs that this dynamism is changing. Owing to such ma-

jor factors as the 1997 Asian financial crisis, the success of NAFTA, the expansion

of the EU, the gridlock in WTO talks, deepening of economic interdependence,

and the rise of China,3 the Asian governments indeed have embarked on “institu-

tional” cooperation or integration in a variety of forms to support market-driven

economic integration. In other words, East Asian economic integration is increas-

ingly driven by formal institutional agreements, in particular free trade agreements

(FTAs), which are also shaping the future of the region. Various kinds of

ASEAN+X FTAs (such as ASEAN+1, ASEAN+3, or ASEAN+6) as well as a

number of bilateral FTAs have been proposed, signed or under negotiation. Re-

gional financial cooperation based on ASEAN+3 countries is still ongoing. More

importantly, the East Asian Summit has been launched in 2005.

In short, East Asian economic integration based on intergovernmental cooperation

or institutional arrangements is rapidly evolving. However, it is worth noting that

Taiwan, as part of geographic East Asia as well as with great economic exchanges

1 Dajin Peng, “The Changing Nature of East Asia as an Economic Region,” Pacific Affairs 73,no. 2 (Summer 2000): 171.

2 Asian Development Bank (ADB), Asian Development Outlook 2006 (Hong Kong: ADB, 2006),275.

3 Josef T. Yap, “Economic Integration and Regional Cooperation in East Asia: A PragmaticView,” PIDS Discussion Paper Series, no. 2005-32 (December 2005): 1-2; Lamberte, “AnOverview of Economic Cooperation and Integration in Asia,” 13-14.

F:\BOOKS06\Davidson\2006-07\III.C.12.vpThursday, December 07, 2006 12:40:22 PM


with East Asian countries, has continued to be excluded from the current wave of

East Asian economic integration. Thus, as an outsider, how does Taiwan perceive

the emerging economic integration in East Asia? How would/could Taiwan

respond?

II. Emergence of East Asian Economic Integration

In response to the first wave of regionalism, South Korea proposed to form an Asian

Common Market in 1970 and Japan also suggested constructing an Asian Network in

1988.4 Even so, East Asia did not achieve its formal economic integration at that

time. Only Southeast Asian countries jointly formed the ASEAN in 1967 to deal

with the Cold War. With the end of the Cold War, the other wave of regionalism or

regional integration became full of zip. In 1990, Malaysian Premier Mahathir

Mohamad embarked East Asian economic integration by proposing an East Asian

Economic Group (EAEG) ; however, the idea was suppressed by the United States

and overshadowed by the rapid development of APEC. Mahathir’s idea eventually

brought forth the East Asian Economic Caucus (EAEC), which became a

sub-grouping of APEC. Because of the unsuccessful campaign, ASEAN countries

started to place a greater emphasis on trade and economic integration within the

ASEAN. In 1992, ASEAN countries decided to push for an ASEAN Free Trade

Area (AFTA) and ascertain the initiative of Common Effective Preferential Tariff

(CEPT).5 In short, regional economic integration in East Asia had not set out up to

this point.

A turning point of East Asian economic integration occurred in 1995-96 when

ASEAN invited Japan, China, and Korea to plan the first Asia-Europe Meeting

(ASEM) together. In 1996, leaders of ASEAN, Japan, China, and Korea represent-

ing Asia took part in the first Asia-Europe Meeting, which indeed provided

ASEAN+3 a starting point. This turning point also transformed East Asian Eco-

nomic Caucus into ASEAN+3 setting. More important is that the occurrence of

1997-98 Asian Financial Crisis forced East Asian countries to realize the eco-

nomic interdependence and vulnerabilities in the region. The idea of ASEAN+3

economic cooperation was further enhanced and placed into concrete actions.

Since this, the summit of ASEAN+3 has become a regular gathering.

The 1998 ASEAN+3 Summit held in Viet Nam not only stressed the financial cri-

sis, but also promoted regional economic cooperation and integration. In the Sum-

mit, the East Asia Vision Group was proposed to form to plan a roadmap for East

Asian regional integration. In 1999, the ASEAN+3 Summit declared a Joint State-

ment on East Asia Cooperation on areas of trade and investment, monetary and fi-

2 ASEAN & APEC

4 Richard Stubbs, “ASEAN Plus Three: Emerging East Asian Regionalism?” Asian Survey 42,no. 3 (2002): 441.

5 To achieve AFTA, the five founding members of ASEAN (Thailand, the Philippines, Indonesia,Malaysia, and Singapore) and Brunei, all had nearly reached the goal of reducing all tariffs tobelow 5% by 2002. New members, Viet Nam, Laos, Burma, and Cambodia pledged to reach thegoal by 2006, 2008, 2008, and 2010 respectively.



nancial issues, human resource development, science and technology,

socio-culture, politics and security. A series of ministerial meetings in different ar-

eas were also set to begin. Starting from the 1999 summit, Japan, China, and Korea

have also begun to utilize the summit as a channel of dialogue and negotiation.6

To further enhance East Asian economic integration, the idea of forming a formal in-stitution to bring together Southeast Asia and Northeast Asia surfaced during the 2000ASEAN+3 Summit. The initiative of developing an East Asia Free Trade Area(EAFTA) was incorporated in the agenda, whereas financial cooperation issue re-ceived great attention from participants. The Chiang Mai Initiative was initiated topromote the cooperative mechanism of currency swap. The purpose of the Initiativewas to prevent regional financial crisis from happening again and craft a basis forAsian financial cooperation.7 Based upon ASEAN Swap Arrangement and BilateralSwap Arrangements (BSAs) among ASEAN plus Three members, the Chiang Mai

Initiative has reached a total swap size of US$ 75.0 billion by May 2006, almost dou-bled from a year ago.8 In addition to the Chiang Mai Initiative, members ofASEAN+3 started to extend financial cooperation by initiating Asian bond agree-ments. An Asian Bond Fund was issued in June 2003.

Following the idea proposed in 2000, the 2001 ASEAN+3 Summit held in Brunei

issued a report, Towards an East Asian Community, to call for the establishment of

East Asia Free Trade Area on the basis of ASEAN+3 cooperation.9 Rather than

launching the negotiation of the ASEAN+3 FTA, however, “ASEAN+1” kind of

FTAs began to rapidly develop. In the 2001 summit, China and ASEAN countries

reached an agreement to create an ASEAN-China Free Trade Area in a decade.10

In 2002, China and ASEAN formerly signed the “Framework Agreement on Com-

prehensive Economic Cooperation between ASEAN and China,”11 and planned to

create a free trade area that includes 1.7 billion people and US$ 2,000 billion GDP.

In order to implement this agreement, China started an Early Harvest Programme

in January 2004.12 Furthermore, in 2004 China and ASEAN signed the free trade

agreement on goods that plans to reduce tariffs of normal goods below 5% by

2010.13

EAST ASIAN ECONOMIC INTEGRATION & TAIWAN 3

6 ASEAN, “Joint Statement on East Asia Cooperation.” http://www.aseansec.org/5469.htm,TAPR Document I.B.9.e.

7 John Ravenhill, “A Three Bloc World? The New East Asian Regionalism,” International Rela-

tions of the Asia-Pacific 2, no. 2 (2002): 186-87.

8 Japan Ministry of Finance, http://www.mof.go.jp/english/if/regional_financial_coopera-tion.htm#CMI

9 East Asia Vision Group (EAVG), Towards an East Asian Community: Region of Peace, Pros-

perity and Progress, (ASEAN, 2001), 3.

10 See documents at TAPR III.B.2a.

11 TAPR Document III.B.2.a.1.

12 The purpose was to eliminate trade barriers for ASEAN’s exports of agricultural and industrialproducts before the effectiveness of FTA.

13 TAPR Document III.B.2.a.1.2.



Influenced by the ASEAN plus China agreement, Japan raised an idea of strengthen-

ing economic cooperation with ASEAN in 2002. Both jointly declared the compre-

hensive economic partnership in November of the same year. In 2003, ASEAN and

Japan signed the “Framework for Comprehensive Economic Partnership between

ASEAN and Japan”14 as a start for a potential ASEAN-Japan FTA. Since 2005 Ja-

pan and ASEAN have started official negotiations on an economic partnership

agreement (EPA) and sought to complete the negotiations in 2007.

Reluctant to be left behind from up-and-coming East Asian economic cooperation,

in 2004 Korea and ASEAN issued a “Joint Declaration on Comprehensive Coop-

eration Partnership between the ASEAN and the Republic of Korea (ROK)”.15 The

relevant negotiations regarding ASEAN-Korea FTA have been undertaken since

the early 2005. The “Framework Agreement on Comprehensive Economic Coop-

eration Among the Governments of the Member Countries of the ASEAN and the

ROK”16 was signed in the Ninth ASEAN-ROK Summit of December 2005 in

Kuala Lumpur. They plan to finish negotiations by 2007 and launch the

ASEAN-Korea FTA in 2009.

Responding to the rise of formal economic integration in East Asia and moving to-

ward the vision of East Asian Community, the 2004 ASEAN+3 Summit decided to

pursue the evolution of the ASEAN+3 Summit into an East Asian Summit (EAS)

as proposed by the East Asia Study Group (EASG). In December 2005, the first

East Asia Summit was held with the attendance of ASEAN+3 members and the ad-

dition of Australia, India, and New Zealand in Malaysia and the “Kuala Lumpur

Declaration”17 was issued accordingly. The Declaration defines the purpose of the

East Asia Summit is to strengthen cooperation among members so as to seek peace

and prosperity and to play a major role in community building. In addition, the

East Asia Summit will be an open, transparent and outward-looking forum, held

on a regular basis.

In addition to ASEAN plus Three or plus One arrangements, East Asian econo-

mies have initiated, negotiated or signed numerous bilateral agreements like FTAs

(see Table 1). All in all, even though East Asian countries were hardly to conduct

any economic integration through intergovernmental agreements or institutions in

the past, the informal integration has been very active via geographical relations

and industrial correlations.18 But, with economic globalization, the effect of finan-

cial crisis, the growing status of the East Asian economy, and the rise of Chinese

economy, East Asia has transformed into a dynamic and diversified economic re-

gion. The past informal integration system could no longer be able to handle the

demand from regional economic development and stabilization. Different inter-

4 ASEAN & APEC

14 TAPR Document III.B.2.e.2c.

15 TAPR Document III.B.2.h.1.

16 TAPR Document III.B.2.h.1a.

17 TAPR Document I.B.3.1.

18 Peng, “The Changing Nature of East Asia as an Economic Region,”177-78.



governmental initiatives and programs of economic integration in East Asia thus

continue to emerge. Certainly whether those plans will succeed is still unknown,

but East Asian regional economic integration has begun to evolve.

III. Taiwan’s Role in The East Asian Economy

Since the 1980s, Taiwan has been playing a very crucial role in the process of East Asian

regionalization. In particular, its economic relations with other East Asian economies have

been increasingly closer and dynamic, while Taiwan continues to increase trade and invest

in the region. In term of trade, though Taiwan was used to depending on the US market,

since 2000, China (including Hong Kong) has replaced the US as Taiwan’s largest export

market, receiving 37.8% of Taiwan’s total exports in 2005. More importantly, East Asian

countries including China, Japan, and ASEAN members, have become Taiwan’s major

trading partners and accounted for more than 50% of Taiwan’s total exports (as Figure 1

shows). Figure 2 not only shows increasing intra-regional trade of East Asia, but also indi-

cates that Taiwan’s share of East Asian intra-regional trade has been growing. In addition,

as Figure 3 indicates, Taiwan’s trade within East Asia has expanded much more rapidly

than intraregional trade as a whole. In other words, East Asian region has all the more be-

come Taiwan’s primary trading region. For example, ten of Taiwan’s top 20 trading part-

ners in the past five years are located in East Asia (Table 2).

In addition to the growth of trade flow, the trading pattern between Taiwan and East

Asian economies tends to move toward intra-industry trade. For instance, in terms of ex-

port composition, more than 50% of Taiwan’s export to ASEAN belongs to intermedi-

ate goods. As intra-regional trade with East Asia increases, Taiwan foreign direct

investment (FDI) towards East Asian countries has increased in both the number of

cases and the amount of the investment. Up to March 2006, the number of cases of FDI

from Taiwan toward main ASEAN countries has reached 8,028 and the amount of Tai-

wan’s direct investment in main ASEAN countries has accumulated to nearly US$ 48

billion (Table 3). Together with Taiwan’s direct investment in China (more than

US$50 billion19), Taiwan in fact plays a very critical role for the East Asian econ-

omy in the realm of FDI. In some East Asian countries like Thailand, Malaysia,

Vietnam, and Cambodia, Taiwan even serves as the first, second or third largest

FDI provider for them (Table 3).

As such, it is very clear that Taiwan’s role in the East Asian economy is crucial and

indispensable. Without doubt, the East Asian region has become more and more

important to Taiwan’s economy as well. In this context, static and dynamic effects

(such as trade or investment creation and diversion) caused by increasing institu-

tional economic integration in East Asia may affect Taiwan’s role in many ways.

In particular if Taiwan continues to be excluded from relevant FTAs in the region,

Taiwan’s role in the East Asian economy would be affected negatively. The worst

scenario could be being marginalized or replaced. In this regard, increasingly vari-


19 The published data is the amount approved by Taiwan government. Non-registered amount isdifficult to measure. Please refer to “Cross-strait Statistics,” Straits Business Monthly, no 175(July 2006): 54.



ous potential economic and non-economic impacts have been perceived by Tai-

wan. To counter negative impacts as well as raise prospects, Taiwan has been

brewing new ideas and embarking on some initiatives.

IV. Taiwan’s Perspectives and Responses

In October 2001, Taiwan indicated that it would pursue bilateral FTAs after for-

mally joining the WTO.20 In the following month, the US, Japan, Singapore, and

New Zealand were announced by Taiwan as its most preferred candidates for ini-

tial FTA partners.21 Right around Taipei’s announcement, the US was planning to

hold bilateral talks with Taiwan on signing an FTA. Meanwhile, Taiwan and Sin-

gapore touched on the issue of signing an FTA between each other during the 2001

APEC Leaders’ Summit in Shanghai.22 Taipei and Tokyo also exchanged views on

signing such an accord and civic groups in both countries were entrusted to study

the feasibility of an FTA.23 In other words, Taiwan seemed to be making a promis-

ing start in pursuing bilateral FTAs.

In 2002, the US International Trade Commission (USITC) even finished a study

that assessed US-Taiwan FTA prospects in general and sectors of interest in partic-

ular.24 Around this time, a feasibility study of the Taiwan-Singapore FTA was con-

ducted. Informal discussions between Taiwan and New Zealand were undertaken

on a future bilateral FTA. Moreover, Taiwan and Panama announced their plans to

commence bilateral FTA negotiations later in 2002.

However, things began to change significantly as Beijing intended to constrain

Taipei’s FTA approaches. In June 2002, China’s foreign trade Minister Shi

Guangsheng expressed Beijing’s serious concerns by saying that “The countries

6 ASEAN & APEC

20 “Gov’t Plans post-WTO Talks on Free Trade Agreements,” The Taiwan Economic News, Oct.1, 2001, http://news.cens.com/php/getnews.php?file=/archive/d/200110/01/004-1.html&key=FTA+task+force&smethod=1&wholeword=on&lang=&fuzzy=&id=

21 “Gov’t Sets up Task Force for Free Trade Agreements,” The Taiwan Economic News, Nov. 14,2001, http://news1.cens.com/cgi-bin/getnews?cat=1&file=/archive/c/200111/14/005-1.html&dir=/archive/daily/200111/14/fd1.html

22 “Taiwan to Finish Feasibility Study on FTA With Singapore by Year End,” The Taiwan Eco-

nomic News, March 19, 2002, http://news.cens.com/php/getnews.php?file=/ar-chive/c/200203/19/032-1.html&key=FTA+with+singapore&smethod=1&wholeword=on&lang=&fuzzy=&id=

23 “Taiwan, Japan may Sign Free Trade Pact within 2 Years: JETRO Head,” The Taiwan Eco-

nomic News, June 13, 2002, http://news.cens.com/php/getnews.php?file=/ar-chive/c/200206/13/033-1.html&key=FTA+with+Japan&smethod=1&wholeword=on&lang=&fuzzy=&id=

24 As Tkacik suggests, “Signing an FTA with Taiwan would benefit both sides. For the UnitedStates, it could mean as much as $500 million a year in increased U.S. farm exports to Taiwan, asubstantial increase in U.S. automobile exports, and an expanded market for American financialservices. For Taiwan, it would certainly help its high-tech sector, which began recovering fromits poor performance in early 2002. But there are significant issues that must be addressed aswell.” See John J. Tkacik, Jr., “Why the Time Is Right for a Free Trade Agreement with Tai-wan,” The Heritage Foundation (June 3, 2002), http://www.heritage.org/Research/TradeandForeignAid/BG1557.cfm



which have established diplomatic ties with China must observe the one-China

principle while developing economic and trade relations with Taiwan.” “If such

countries sign free trade agreement with the Taiwan authorities, they are bound to

bring political trouble to themselves.”25 Under the circumstances, Singapore

brought up the new precondition that the negotiations and the FTA to be signed

with Taiwan should be carried out under the “one China” principle.26 In October

2002, under Beijing’s pressure Japanese Foreign Minister Yoriko Kawaguchi said,

‘’We are currently conducting research on a private-sector basis, but we are not

considering reaching an international promise with Taiwan,’’27 reiterating Japan’s

view that signing an FTA with Taiwan would be difficult.

Against the backdrop of increasing political pressure from Beijing, Taiwan’s ap-

proach to bilateral FTAs is getting limited. Instead of forming FTAs with its major

trade partners, Taiwan thus far has only been able to sign FTAs with its diplomatic

allies including Panama, Guatemala, and Nicaragua. In contrast, such core East

Asian states as China, Japan, Singapore, Thailand, and Australia have made re-

markable progress in forming FTAs. More importantly, with the establishment of

the ASEAN+China FTA, East Asian economic integration based on different

kinds of ASEAN+X FTAs is emerging so rapidly that Taiwan as an outsider may

suffer in the future. In this context, what are Taiwan’s perspectives and how would

Taiwan respond?

Complex Political-Economic Impacts

As theories suggests, FTAs bring about static and dynamic effects and trading

partners who do not participate in FTAs will be hurt. Different simulation results

nearly all indicate that Taiwan as an outsider from East Asian economic integra-

tion will suffer from negative economic impacts in the future. Nevertheless, given

that FTAs are formal and inter-governmental agreements, for trading partners like

Taiwan with contested statehood, 28the impacts resulting from the current wave of

FTAs will be more political-economic in nature. Especially under Chinese politi-

cal pressure, the impact caused by the exclusion of Taiwan is thus not just eco-

nomic but also political.

More importantly, in the era of market-driven regionalization, Taiwanese firms

were well integrated into the region’s international business network. But, with the

marked increase of international economic agreements like the emergence of bilat-

eral FTAs after the 1997-98 financial crisis, Taiwan as a contested state indeed has


25 “FTA with Taiwan Means Political Trouble: Official,” People’s Daily, June 21, 2002,http://english.people.com.cn/200206/21/eng20020621_98285.shtml

26 “Singapore Wants ‘One China’ Principle in FTA Talks with Taiwan,” The Taiwan Economic

News, June 30, 2003, http://news.cens.com/php/getnews.php?file=/archive/c/200306/30/003-1.html&key=FTA+with+singapore&smethod=1&wholeword=on& lang=&fuzzy=&id=

27 “China Strongly Opposes FTA between Japan, Taiwan,” http://www.findarticles.com/p/arti-cles/mi_m0WDP/is_2002_Oct_21/ai_94331568

28 Christopher M. Dent, “Taiwan and the New Regional Political Economy of East Asia,” The

China Quarterly 182, (June 2005): 406.



less and less diplomatic space to manage its foreign economic relations. This in

turn disadvantages Taiwan in both economic and political terms.

That is, if viewed dynamically, the impacts of emerging East Asian economic inte-

gration on Taiwan in the long run will be beyond trade to include issues like FDI

shifting, trade facilitation, comparative or competitive advantages, foreign rela-

tions, and so on. Moreover, as Taiwan all the more becomes a major FDI provider,

preferential treatments provided by various FTAs in the region would further in-

crease Taiwan’s outward FDI in those participating partners, especially China,

where Taiwanese firms can produce “local content” products enjoying lower trade

barriers.29 However, increasing dependence on China is not what the state in Tai-

wan expects to see. In the view of policymakers in Taiwan, this integration will

make Taiwan more vulnerable to Beijing’s political pressure as long as Taiwan

constantly faces a military threat and zero-sum political competition from China.

Economically, Taipei also worries about the hollowing-out of Taiwan’s industrial

base, capital, technology, skills, or human capital, if Taiwanese capital and enter-

prises continue heavily investing in China.30 In other words, Taiwan’s own lack of

FTA progress could further deepen its economic dependence on China, which in

turn would pose a number of economic and national security dilemmas for

Taiwan.

Besides, given its little chance to be included in East Asian economic integration,

Taiwan’s comparative and competitive advantages could be challenged by China,

Japan and particularly Korea. According to the index of revealed comparative ad-

vantage (RCA) shown in the Table 4, Taiwan enjoys similar export competitive-

ness with Korea in textile, clothing, electric/electronic, ferrous metals and metal

products in both world and ASEAN markets. In terms of export similarity, Taiwan

and Korea export highly similar products to ASEAN market in electronic, machin-

ery, and metal sectors.31 As well, 53.68% of Taiwan’s export to ASEAN and

52.49% of Korea’s export to ASEAN are trade in intermediate goods.32 The per-

centages are higher than those of China (44.3%) and Japan (50.1%).33 In short,

rather than China or Japan, in fact Korea is the strongest competitor for Taiwan in

foreign trade and in the region.

In this context, competition from Korea would be challenging for Taiwan. Yet,

more challenging is that the shift of comparative and competitive advantages

might further push Taiwan’s FDI toward China to avoid the trade diversion caused

8 ASEAN & APEC

29 Dent, “Taiwan and the New Regional Political Economy of East Asia,” 402.

30 That is why Taipei in the past had long tried to slow the rapid expansion of commercial tiesacross the Taiwan Strait by maintaining a ban on direct commercial links in trade, transport, andcommunication with China, as well as insisting on a patience-over-haste investment policy.

31 Nai-Fong Kuo, Ji-Chou, Wen-Hsiu Fang and Mei-Hsiu Chen, “The Impact of New East AsiaEconomic Integration on Taiwan,” Review of Taiwan Economics 10, no. 4 (March 2005): 24.

32 Based on 2003 data from TIER, intermediate goods B here refers to no required process beforeusing.

33 Ibid.



by such arrangements as the ASEAN+3 FTA.34 And this again would bring on

economic and political dilemmas for Taiwan.

Apart from these perceived static and dynamic economic effects, more immediate

or even more serious impacts of being excluded from East Asian economic inte-

gration on Taiwan are essentially political, diplomatic, and psychological. This is

because each FTA takes time to establish and its effects may change as time

passes. But, political, diplomatic, and psychological impacts caused by such

ASEAN+X FTAs are more direct and pressing for Taiwan. As a contested state,

Taiwan is used to having very limited political space in the international commu-

nity. Due to China’s political pressure, the current wave of FTAs doesn’t provide

Taiwan more international space and economic benefits. FTAs instead have be-

come China’s instrument to further isolate Taiwan internationally. Expectation

that Taiwan would be marginalized while FTAs in the region are emerging thus

occurs. In this context, even though real economic effects of FTAs in East Asia

may take place ten years later, the psychological expectation would have harmed

Taiwan’s economy immediately.

Countering Negative Impacts and Enhancing Prospects

As an outsider, Taipei has been increasingly aware of how FTAs in East Asia have

the potential to marginalize Taiwan both economically and politically. To save its

interest and enhance its prospects in the current wave of economic integration,

Taiwan is continuing to approach potential FTA partners whereas China keeps in-

sisting that Taiwan is not a country (or sovereign state) so that it can’t sign any

FTA with other countries. Instead of following the earlier approach, Taiwan re-

cently adopted a more clandestine and indirect approach to achieve its FTA objec-

tives.35 The approach involves pursuing FTAs with diplomatic allies, new “Go

South” initiative, and support for the multilateral trading system.

In theory, it would be somewhat illogical for Taiwan to form FTAs with its diplo-

matic allies such as Panama, Guatemala, and Nicaragua rather than major trade

partners like Japan and the US. Under Beijing’s pressure, however, it is perhaps

the only way for Taiwan to successfully sign FTAs. Taiwan has already signed

FTAs with Panama, Guatemala, and Nicaragua. Negotiations with El Salvador and

Honduras are undergoing and expected to conclude in 2006.36 Indeed, forming

FTAs with its allies in Central and South America is not just symbolic for Taiwan.

It serves some strategic values for Taiwan’s FTA objectives. On the one hand, they

are good “practice swing” FTA partners that enrich Taipei’s experience in negoti-


34 Dent, “Taiwan and the New Regional Political Economy of East Asia,” 401-402.

35 Dent, “Taiwan and the New Regional Political Economy of East Asia,” 398.

36 “Taiwan Seeks Support from US Business,” Taiwan News, July 25, 2006,http://www.taiwannews.com.tw/etn/news_content.php?id=134700&lang=eng_news&cate_img=logo_taiwan&cate_rss=TAIWAN_eng



ating such agreements and playing as a wanted FTA partner.37 On the other hand,

they provide Taiwan a beachhead or detour to access American regional integra-

tion like the United States-Dominican Republic-Central America Free Trade

Agreement (DR-CAFTA)38 and NAFTA.

At the same time, Taiwan is trying very hard to diversify its outward investment to

avoid likely increased investment in China pushed by emerging East Asian eco-

nomic integration. In so doing, Taipei has launched a new “Go South”39 policy to

encourage Taiwanese firms to invest not only in Southeast Asia but also, in South

Asia, particularly India. The result is still unclear, but the will of the government to

diversify Taiwan’s outward investment and ease the harm of being excluded from

FTAs in East Asia is quite clear. Furthermore, to counter negative effects resulting

from regional integration in East Asia, Taiwan has been very supportive to and pro

the multilateral trading system. Given the difficulty in forming FTAs with pre-

ferred partners as well as acceding to ASEAN+X FTAs, multilateral liberalization

via the WTO, which Taiwan successfully joined in 2002, has become the most fa-

vored approach for Taiwan in promoting free trade. Essentially Taiwan hopes that

the conclusion of the WTO Doha Round negotiation could to a certain extent

counter or minimize the negative impact of being excluded from FTAs in East

Asia. Unfortunately, the idea may become farfetched as the WTO decided to sus-

pend the Doha Round negotiation indefinitely in July 2006.

However, all these things don’t mean that Taiwan has given up forming FTAs with

its preferred partners like the US and Japan. Rather, the FTA with the US is in-

creasingly regarded by Taiwan as the most wanted and urgent. This is because

signing an FTA with the US would be very crucial for diminishing Taiwan’s pre-

dicament of contested statehood and China’s opposition. As a consequence, the

FTA with the US may enhance Taiwan’s prospects in signing bilateral FTAs and

joining such arrangements as ASEAN+X FTAs (in addition to securing access to

US market). So, until today, Taiwan is still making efforts to step up support for

the earlier signing of an FTA between Taiwan and the US.40

Facing the China Factor

Although several detours have been adopted by Taipei to achieve its FTA objec-

tives, the effects are still uncertain. Besides taking detours, should Taipei directly

remove the main obstacle—Chinese opposition—on its way to forming FTAs nor-

10 ASEAN & APEC

37 Dent, “Taiwan and the New Regional Political Economy of East Asia, 403.

38 DR-CAFTA is a comprehensive trade agreement among Costa Rica, the Dominican Republic,El Salvador, Guatemala, Honduras, Nicaragua, and the United States.

39 In order to avoid economic dependence on China, in 1994 Taipei launched its “Southward” (GoSouth or Sudpolitik) policy to channel Taiwanese investment to Southeast Asia. The policymainly focused on encouraging and persuading Taiwan’s enterprises to invest in SoutheastAsian countries by providing numerous preferential treatments. Please see Samuel C.Y. Ku,“The Political Economy of Taiwan’s Relations with Southeast Asia: The ‘Southward Policy’,”Contemporary Southeast Asia 17, no. 3(1995): 282-97.

40 “Taiwan Seeks Support from US Business,” Taiwan News, July 25, 2006.



mally? Effectively dealing with the China factor and cross-Strait relations thus has

been increasingly proposed to avoid being an outcast and thus marginalized in the

process of East Asian regional integration. For instance, to establish a cross-Strait

common market has long been initiated by Vincent Siew, the former prime minis-

ter of Taiwan and current Chairman of the Cross-Straits Common Market Founda-

tion. Siew further argues that this could be accomplished first by establishing

direct transport links between Taiwan and China.41 Based on Siew’s concept, the

KMT, the opposition party in Taiwan, proposed a cross-Strait FTA across the Tai-

wan Strait in 2005, while its former Chairman, Lian Chan, visited China. Deputy

US Trade Representative Karan Bhatia during his recent visit to Taiwan also made

a point that Taipei’s priority should be working to remove cross-Strait economic

restrictions while arguing that it was not the right time to initiate free-trade talks

between Washington and Taipei.42 Similarly, as the chance for an FTA with the

US any time soon appears small, the Taiwan American Chamber of Commerce

(AmCham) stresses the need for direct cross-Strait links to any FTA since the links

with China are essential to get US business support for a US-Taiwan FTA.43 More

importantly, Beijing itself even raised the idea of forming an FTA between Taiwan

and China in November 2003 as China had just signed its Closer Economic Part-

nership Arrangement (CEPA) with Hong Kong and Macao, respectively, earlier

that year. Basically, CEPAs between China and Hong Kong or China and Macao

are modern FTAs in nature, but the key point is that the principle of “one country,

two systems” is embedded as a precondition, which is not acceptable to Taipei.

Under the circumstances, what effects the scenario of a China-Taiwan FTA or di-

rect commercial links in trade, communication, and transport will bring about be-

comes a very contested issue for Taiwan. As empirical simulations show, a

Taiwan-China (including Hong Kong) FTA would be beneficial to both sides of

the Taiwan Strait in terms of trade and GDP growth; which might in turn weaken

negative impacts of ASEAN+X FTAs on Taiwan.44 But, the return for Taiwan in

this case is less than that of Taiwan having an FTA with ASEAN. Also, a Tai-

wan-China FTA may generate somewhat significant negative impact on nonmem-

bers such as ASEAN states, Korea, Japan, and even the US.45

On the other hand, three links could diminish the negative impacts of an

ASEAN+China FTA on Taiwan, but the estimated result is very limited (about

0.005% of GDP growth). Certainly, there must be other dynamic effects that could

not be predicted empirically but might benefit Taiwan in this case. Compared with

other scenarios, however, integrating Taiwan into the ASEAN+3 FTA would still


41 Vincent Siew, “A Cross-Straits Common Market,” http://www.crossstrait.org/version3/in-dex.html

42 “Looking beyond the US for trade,” Taipei Times, May 29, 2006, 8.

43 “AmCham sees little chance for FTA,” Taipei Times, June 11, 2006, 3.

44 Kun-Ming Chen, Ji Chou, and Nai-Fong Kuo, “The impact of East Asian Economic Intergrationon Taiwan,” Taiwan Economic Forum (Oct. 2004): 63, 66.

45 Ibid.



benefit Taiwan more than a China-Taiwan FTA would.46 In this sense, other than

accepting “one country, two systems” to form an FTA with China, Taiwan chooses

to improve direct commercial links across the Taiwan Strait as much as possible.

After all, based on political-economic calculation, being part of ASEAN+X FTAs

is the best scenario for Taiwan. An FTA between Taiwan and China neither repre-

sents integration with ASEAN nor replaces the effects of Taiwan joining East

Asian economic integration.

V. Conclusion

Since the 1997-98 Asian financial crisis, important new developments in East

Asian economic relations have occurred. In particular, the Asian governments

have embarked on “institutional” cooperation or integration to support mar-

ket-driven economic integration. More and more formal institutional trade agree-

ments, in particular FTAs, have been formed and proposed. Various FTAs that

incorporate all the major economies of East Asia expect Taiwan either have been

proposed, are under negotiation or in force, which are going to shape the future of

the region.

As theories suggest, Taiwan, as an outsider of FTAs in East Asia, would be af-

fected negatively. Under Beijing’s political pressure, Taipei has been increasingly

aware of how non-participation in the process of emerging FTAs has the potential

to marginalize Taiwan in both geoeconomical and geopolitical terms. Gradually

various potential economic and non-economic impacts have been perceived by

Taiwan. While Taiwan has adopted such approaches as pursuing FTAs with diplo-

matic allies, renewing the “Go South” policy, and supporting the multilateral trad-

ing system, their effectiveness for countering the negative impacts from

ASEAN+X FTAs is still uncertain. Although facing the China factor and remov-

ing China’sopposition have been argued to be the ultimate solution, rather than ac-

cepting “one country, two systems” to form an FTA with China, what Taiwan can

do is to improve direct commercial links across the Taiwan Strait as much as possi-

ble. Certainly, improving economic relations or integration between Taiwan and

China would benefit Taiwan’s economy to a certain extent; however, it still won’t

achieve the same result as Taiwan’s joining East Asian economic integration

normally.

Under the circumstances, in addition to those adopted indirect approaches, Taiwan

should think further to maintain and improve its economic integration with East

Asia given its limitation on forming FTAs with preferred trade partners. First of

all, to keep its importance and enhance long-term interest in the East Asian politi-

cal economy, Taiwan could consider negotiating free trade with ASEAN countries

by focusing on respective substantive issues contributing to FTAs, such as tariff

reduction, market access, investment, facilitation, dispute settlement, and techni-

cal cooperation. In other words, other than negotiating FTAs, Taiwan and ASEAN

countries could liberalize trade sector by sector through bilateral economic ar-

12 ASEAN & APEC

46 Ibid.



rangements. Furthermore, Taiwan could unilaterally provide market access in

some sectors or industries in which it enjoys comparative advantage. For

lesser-developed East Asian states such as Indonesia, Vietnam and Cambodia,

Taiwan could even offer generous developmental cooperation provisions in pro-

posed trade liberalization agreements.47 In that case, certain effects of preferential

trade agreements would still occur between Taiwan and ASEAN states given the

difficulty in achieving their FTAs. This kind of arrangement would thus provide

Taiwan with some sort of engagement with the region’s intensifying regionalism

and help undermine Taiwan’s worry of being marginalized in the process of

ASEAN+X FTAs.

In addition, with the emergence of ASEAN+X FTAs, there is a growing cognitive

consensus in developing a more formalized East Asian Community through policy

coordination and cooperation. The prospect of this heightens the imperative for

Taiwan not only to pursue bilateral FTAs, but also to engage in building an East

Asian FTA or East Asian Community. In this regard, Taipei should at least en-

deavor to secure some form of quasi-membership in ASEAN+X arrangements or

East Asia Summit, such as observer status.48

As indicated above, supporting WTO multilateral trade liberalization is crucial forTaiwan in this context. Meanwhile, given the standstill of current WTO negotiations,Taiwan, as a full member in APEC, has to fully support the APEC process. Eventhough emerging East Asian regionalism may bring challenges to APEC, it is unlikelyto replace APEC in the foreseen future. As the sole inter-governmental policy cooper-ation mechanism in the Asia Pacific, APEC still has its advantages and attractions re-gardless of its many problems waiting to be resolved. Compared with those emergingEast Asian regional arrangements, APEC is much more experienced in organizationaloperation as well as dealing with regional issues such as trade facilitation, economicand technical cooperation, and security. As an outcast in East Asian economic integra-tion, it is in Taiwan’s interest to revitalize APEC. In particular, working with otherAPEC members to achieve the Bogor Goals49 in time would alleviate Taiwan’spressure and negative impacts caused by ASEAN+X FTAs.

Last but not least, cross-Strait ties are still the key for Taiwan’s future role in the EastAsian economy. An FTA across the Taiwan Strait might not be foreseeable in the shortrun; however, any improvement of cross-Strait relations would certainly contribute toTaiwan’s role in the region. To normalize economic relations, including direct commer-cial links between China and Taiwan, would be the necessary step to take. Undoubtedlythe improvement still may not allow Taiwan to form FTAs as it wants. Yet, it could atleast lessen the loss from been left behind East Asian regional integration.




49 These goals adopted by Leaders at their 1994 meeting in Bogor, Indonesia expect achieve “freeand open trade and investment in the Asia-Pacific by 2010 for industrialised economies and2020 for developing economies.” APEC official website, http://www.apecsec.org.sg/con-tent/apec/about_apec.html



Table 1: Major FTAs in East Asia

Singed or Effective Proposed or Under Negotiation

Bangkok Agreement Japan– Thailand EPA

ASEAN Free Trade Area Japan–Korea FTA

Japan–Singapore EPA Korea–ASEAN FTA

China–ASEAN FTA Japan–ASEAN EPA

China–Hong Kong CEPA Japan–Indonesia EPA

China–Macau CEPA Japan–China-Korea FTA

Korea–Singapore FTA East Asian FTA

Japan–Malaysia EPA China–Korea FTA

Japan–Philippines EPA Australia–Malaysia FTA

Thailand–India Framework Agreement Australia–China FTA

ASEAN–India Framework Agreement India–China

Australia–New Zealand Closer EconomicRelations (CER) Trade Agreement

India–Japan

Singapore–India Comprehensive EconomicCooperation Agreement (CECA)

India–Korea

India–Malaysia

India–Indonesia

Source: Compiled from different resources.

14 ASEAN & APEC



Fig

ure

1:

Taiw

an

’sE

xp

ort

Geo

gra

ph

y

Source:

Taiw

an

Insti

tute

of

Econom

icR

esearch

(TIE

R)


10.3

23.7

23.2

24.2

26.6

25.4

23.5

22.5

20.5

18.0

16.2

15.2

13.3

12.7

13.5

15.1

16.1

17.2

22.3

29.2

34.3

37.2

11.0

11.8

11.8

9.5

8.4

9.8

11.2

10.4

9.2

8.3

7.6

8.7

9.4

9.3

9.2

7.6

8.4

8.5

8.6

8.5

8.4

9.5

10.3

10.5

10.9

11.3

13.1

12.4

11.8

11.8

9.9

9.7

9.1

28.7

31.4

32.1

32.2

29.3

28.0

27.8

24.5

22.7

21.3

20.4

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

US

Ch

ina

Japan

AS

EA

N5

EU

5

Oth

er

Fig

ure

2:

Ta

iwa

n’s

Sh

are

of

Ea

stA

sia

nIn

tra

-reg

ion

al

Tra

de

Source:

Sheng-C

heng

Hu,“

Taiw

an

’sR

ole

inR

egio

nal

Cooperati

on,”

presenta

tion

at

the

19th

Pacif

icE

conom

icC

om

munit

ySem

inar:

Outl

ook

of

FT

As

inth

eA

sia

-Pacif

ic,N

ov.30,2004,T

aip

ei.

16 ASEAN & APEC

Tai

wan

'sS

hare

of

Eas

tA

sian

Intr

a-re

giona

lT

rade

20

25

30

35

40

45

50

55

60

1980

1983

1986

1989

1992

1995

1998

2001

%

12345678910

Per

cent

age

Poi

nts

Fig

ure

3:

Ind

exof

Intr

a-r

egio

nal

Tra

de

Rati

on

s

Note

:T

he

index

for

Tai

wan

isdef

ined

asth

era

tio

of

Tai

wan

’sin

trar

egio

nal

trad

ew

ithin

Eas

tA

sia

toth

ere

gio

n’s

tota

ltr

ade,

bas

edon

1980=

100.S

ourc

e:S

hen

g-C

hen

gH

u,

“Tai

wan

’sR

ole

inR

egio

nal

Cooper

atio

n,”

pre

senta

tion

atth

e19th

Pac

ific

Eco

nom

icC

om

munit

yS

emin

ar:O

utl

ook

of

FT

As

inth

eA

sia-

Pac

ific

,N

ov.30,2004,T

aipei

.Ta-

ble

2:

Taiw

an

’sT

OP

20

Tra

din

gP

art

ner

s,2000-

200

5


Ind

exo

fIn

tra

-reg

ion

al

Tra

de

Ra

tios

(198

0=

100

)

90

10

0

11

0

12

0

13

0

14

0

15

0

16

0

17

0

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

%

Eas

tA

sia

(13)

EU

(15

)

NA

FT

A

TA

IWA

N

Ta

ble

2:

Ta

iwa

n’s

TO

P2

0T

rad

ing

Pa

rtn

ers,

20

0-2

00

5

Tra

ding

Par

tner

sT

otal

Tra

deE

xpor

tIm

port

Ran

king

Pro

port

ion

(%)

Ran

king

Pro

port

ion

(%)

Ran

king

Pro

port

ion

(%)

JAP

AN

116

.887

48.

91

25.5

69

UN

ITE

DS

TA

TE

S2

16.7

652

18.8

932

14.4

52

HO

NG

KO

NG

310

.855

119

.579

161.

372

CH

INA

410

.474

312

.67

38.

086

KO

RE

A,R

EP

UB

LIC

OF

54.

781

62.

919

46.

805

SIN

GA

PO

RE

63.

315

53.

614

82.

991

GE

RM

AN

Y7

3.28

97

2.88

95

3.72

4

MA

LAY

SIA

82.

871

92.

318

63.

472

PH

ILIP

PIN

ES

92.

119

111.

932

112.

321

NE

TH

ER

LAN

DS

102.

18

2.87

171.

264

TH

AIL

AN

D11

1.81

121.

812

121.

807

AU

ST

RA

LIA

121.

807

141.

238

92.

425

IND

ON

ES

IA13

1.72

315

1.14

210

2.35

5

UN

ITE

DK

ING

DO

M14

1.70

610

2.22

218

1.14

4

SA

UD

IAR

AB

IA15

1.57

134

0.25

47

3.00

2

OT

HE

R16

1.23

219

0.89

913

1.59

4

FR

AN

CE

171.

143

180.

899

151.

407

VIE

TN

AM

181.

083

131.

741

330.

368

CA

NA

DA

190.

947

161.

073

220.

81

ITA

LY20

0.94

217

0.98

521

0.89

5

Source:

Bureau

of

Foreig

nT

rade,M

inis

try

of

Econom

icA

ffair

s,T

aiw

an

18 ASEAN & APEC

Table 3: Taiwan Investment in Southeast Asia, 1959-March 2006

(US$Million)

Countries Accumulated Cases AccumulatedAmount

Rank

Thailand 1,830 11,680.10 3

Malaysia 2,119 9,648.33 3

Philippines N.A 1,335.98 6

Indonesia 1,113 13,835.42 6

Singapore 426 2,832.13 N.A

Vietnam 1,466 7,909.74 1

Cambodia 191 529.12 3

Total 8,028 47,730.72

Source: Department of Investment Service, Ministry of Economic Affairs,

Taiwan Note: Rank means Taiwan’s rank in specific country’s FDI.




Tab

le4:

Com

pari

son

of

Rev

eale

dC

om

para

tive

Ad

van

tage

(RC

A),

2005

RC

Ato

ward

the

Worl

dR

CA

tow

ard

AS

EA

N

Countr

ies

Taiw

an

Kore

aC

hin

aJa

pan

Taiw

an

Kore

aC

hin

aJa

pan

Wood,P

aper

and

All

ied

Pro

duct

0.5

46

0.3

89

1.0

03

0.1

81

0.9

97

0.8

13

0.6

08

0.5

07

Food

Pro

duct

0.2

63

0.8

10

0.5

55

0.1

23

0.3

04

0.5

65

0.6

86

0.1

81

Tex

tile

Pro

duct

2.7

82

2.9

00

2.6

87

0.6

91

4.4

65

3.4

76

2.6

00

0.6

22

Wea

ring

and

Lea

ther

Pro

duct

0.6

48

0.8

76

5.4

29

0.0

44

1.9

42

2.1

54

3.7

73

0.1

14

Pet

role

um

,C

oal

Pro

duct

0.3

28

1.7

12

0.5

65

0.1

52

0.3

29

1.0

94

3.4

49

0.0

77

Chem

ical

,R

ubber

,P

last

icP

roduct

1.0

34

1.0

07

0.5

98

0.9

12

1.3

69

1.4

34

0.9

31

1.0

15

Ener

gy

and

Min

eral

s0.0

04

0.0

05

0.2

47

0.0

06

0.0

11

0.0

22

0.3

25

0.0

16

Fer

rous

Met

als

and

Met

alP

roduct

1.1

26

1.0

36

0.7

41

0.9

83

1.2

93

1.3

49

1.0

92

1.6

47

wid

ctlp

arE

lect

ric

and

Ele

ctro

nic

pro

duct

3.1

82

2.2

94

1.4

64

1.7

79

1.4

63

1.3

85

1.1

55

1.2

10

Mac

hin

ery

and

Equip

men

t1.0

04

0.7

35

0.9

51

1.7

71

1.0

39

0.6

93

0.9

70

1.7

91

Moto

rV

ehic

les

and

par

ts,

Tra

nsp

ort

Equip

men

t0.3

32

1.3

01

0.1

99

2.0

50

0.4

01

1.0

59

0.8

43

1.7

99

Source:

Adapte

dfr

om

TIE

Rdata

based

on

the

GT

AP

6.0

(2005).

20 ASEAN & APEC

BLANK.prnUNTITLED.VPFriday, April 01, 2005 9:33:22 AM


asean and apec

Documents