All’s Fair in Love, Trade and FTAs

If China's promise to Hong Kong -- that the latter's systems would remain unchanged for 50 years after the handover to Chinese rule in 1997 -- amounts to "divide and rule," then the strategy applied to Taiwan should be "combine and rule," which means achieving political integration through economic integration.

Early this month, Beijing signed a Closer Economic Partnership Arrangement, a kind of free-trade agreement (FTA), with Hong Kong. Wang Zaixi (王在希), deputy director of the Taiwan Affairs Office of China's State Council, said recently that the two sides of the Taiwan Strait can follow the WTO's regulations to further improve their economic cooperation mechanisms. He also said the two sides should sign a free-trade agreement as soon as possible.

In light of analysis of Wang's statements, what he referred seemed to be a free-trade agreement under the WTO structure, even though he suggested Hong Kong and Taiwan were analogous. Although think tanks and acade-mics in Taiwan and China have long proposed similar ideas, this is the first time that one has come from a Chinese government agency. I am afraid we will miss the fine print if we simply gloss over his statements as China's "united front" tactic.

His proposal is really not well-intentioned. When Taiwan was actively looking for FTA partners last July, China's Minister of Foreign Trade and Economic Cooperation Shi Guangsheng (石廣生) bluntly warned that signing FTAs with Taiwan would amount to interfering in China's internal affairs and signing such a deal would incur consequences. He also said bilateral free-trade agreements are only signed between countries but that Taiwan is not a country.

According to WTO regulations, members of the global-trade body can sign FTAs with each other as long as they follow relevant procedures and conform to the requirements.

Not surprisingly, China's warnings had the effect of isolating Taiwan and caused politics to override legal principles. The countries that were evaluating the possibility of entering into FTAs with Taiwan, including New Zealand and Singapore, decided to retreat. Japan also adopted a more conservative attitude. Even in the US, now there are only a handful of Congress members calling for an FTA with Taipei.

Executive branches or trade offices, which are really in charge of the matter, cited Taiwan's poor protection of intellectual-property rights as a shield. However, the people with discerning eyes can tell that this is only a superficial excuse. In reality, they are all haunted by the "China factor."

All this is no surprise. But as a proverb goes, "the devil is in the details." What is more important is how to read between the lines to facilitate the government's response.

There is no mention of the "one China" principle in Wang's statements. He even reiterated that "economy and trade should be placed first." If we take his words literally, China seems to have calmed the rhetoric it has consistently used since its WTO accession -- that China will not have economic interactions with Taiwan under the WTO structure until the "one China" problem is settled.

His words do carry positive significance at a time when Taiwan and China are politically hostile but are experiencing more and more economic exchanges that require some sort of cooperation mechanisms.

This does not mean that China's proposal is logically flawless. Two forces can strengthen regional economic integration, ie, market-driven forces and those institutional integration.

Market-driven integration means reduced transport costs or the natural division of labor in industries leading to expansion or changes in economic territories. Institutional integration aims at harmonizing trading systems or removing man-made trade obstacles.

Taiwan and China are fervently working on market-driven integration, but there is plenty of room to develop institutional integration, such as direct transportation links.

If we skip the direct-links issue in considering an FTA with China, this leap in logic would not work in real life. Pragmatically, what is most needed now is a lower-level trade and investment guarantee framework agreement, not an inclusive and comprehensive bilateral FTA.

China's entry to the WTO was secured with its promise to open up its market in large measures by 2006. To invite more and deeper "bilateral relations," we can anticipate quite a few preparatory agreements being reached before then so as to make arrangements with FTA partners. China's recent effort to sign the Closer Economic Partnership Arrangement with Hong Kong can be understood in this light.

On a deeper level, China is strengthening its economic alliance with neighboring countries to establish strategic trade relations and obtain regional political and economic interests. In the framework agreement it signed with ASEAN last year, both parties planned to establish an FTA within 10 years.

In this situation, Taiwan can take advantage of the opportunity to propose an East Asia free-trade area, a larger structure which is also promoted by Japan and Singapore. Or, we can promote "ASEAN plus five" to challenge China or put its sincerity to the test.