The latest round of negotiations has expanded the scope of direct passenger and cargo air travel, and set the stage for financial-sector agreements that will enable cross-Strait operations in banking, securities and futures, and insurance. Some observers are cautioning that implementation could still be difficult and gradual, however. Coming up later this year will be discussions on an Economic Cooperation Framework Agreement that Taiwan’s political opposition regards with a great deal of suspicion.

By Jane Rickards

The Taiwan government at the end of April succeeded in signing new economic agreements with China regarding increased air travel and the opening of financial-sector cooperation, and more developments are due to come in the second half of this year. But the need to dismantle almost 60 years of stiff restrictions on cross-Strait connections, and to do it in the face of strong protests from the independence-leaning political opposition, means that the agreements may not be as far-reaching as the business community hopes or as fast to be implemented.

Take the supplementary aviation pact and the landmark financial cooperation agreement inked in Nanjing by Taipei’s chief cross-Strait negotiator Chiang Pin-kung and his counterpart Chen Yunlin.

In a move likely to please harried business executives, the number of direct cross-Strait flights per week will now be increased from 108 to 270. Some of those flights (the number is still unspecified) will continue to be charter flights, while others will be scheduled flights serving the international airports in Taoyuan and Kaohsiung. New northerly and southerly air routes were created to relieve air-traffic congestion, bringing the number of flight paths across the Strait to four. China also added six new destinations, including Harbin and Ningbo, which increases the total number of locations to 27. The pact is due to take effect before the end of June.

But the talks did not go quite as smoothly as Taipei (and perhaps the foreign business community) had hoped. Vice Minister Oliver Yu of the Ministry of Transportation and Communications said over a month ago that Taipei hoped to more than triple the number of weekly cross-Strait flights to 340. A senior official familiar with the negotiations, who spoke on condition of anonymity, hinted to TOPICS in mid-April that the number would not be so high. Beijing was receiving pleas from the Hong Kong government not to expand the cross-Strait air traffic too much, he said, so as to help safeguard the former British colony’s tourism industry. With its 350 round-trip flights a week with Taiwan, Hong Kong currently still accounts for the lion’s share of Taiwan’s China travel (followed by Macau with 250 flights). “Hong Kong is most likely to be the loser after direct scheduled flights begin,” the Taiwan official said.

Following the conclusion of the Nanjing talks, Taiwan’s Mainland Affairs Council (MAC) Vice Minister Fu Don-cheng complained that the number of new flights to Shanghai would still be insufficient to meet demand. According to the supplementary aviation accord, the airlines on each side will be limited to a maximum of 28 round-trip direct flights per week between Taiwan airports and Shanghai. Similarly the number of flights between Taiwan and Beijing for each side’s airlines will be capped at 10 a week, with the same number applying to flights serving Shenzhen. In an angry press statement, opposition Democratic Progressive Party (DPP) chairwoman Tsai Ing-wen charged that the interests of Taiwanese airlines were being sacrificed to protect Macau and Hong Kong carriers and to help carry out Beijing’s policy of encouraging decentralized economic development in China.

Helen Chou, principal consultant and business leader of HRnet (Taiwan) and a co-chair of AmCham’s Greater China Business Committee, notes that Hong Kong has similar concerns about the prospect of opening additional direct cross-Strait cargo flights. The Nanjing accord brought significant progress with regard to cargo flights, increasing the total number of round-trip flights by both sides from 60 per month to 28 each week, with scheduled passenger flights also awarded the right to carry cargo in their holds.

Business executives, while happy to be saving travel time, considered the previous 108 weekly passenger charter flights to be too few to provide the flexibility needed for business schedules. This was particularly true for Taiwan business people headed for destinations other than Shanghai and Beijing. While Taiwanese-invested enterprises are scattered across China, some cities have been getting only one or two flights a week, forcing executives either to stay there for days (especially if they miss a flight) or else travel back via the longer Hong Kong route. “For places like Tianjin, Wuhan, and Qingdao, the effects of the direct links are very limited,” says Cheng Cheng-ping, associate professor of business at Taipei’s Soochow University. It is still not fully clear how much this situation will improve under the new arrangements.

Another item on Taipei’s wish-list that did not materialize from the Nanjing talks is the right for individual cross-Strait flights from Taiwan to serve more than one Chinese city, instead of the strictly point-to-point service that now exists. In an interview with TOPICS in early April, MAC Vice Minister Chao Chien-min spoke of Taiwan’s interest in obtaining those rights. But Chinese airlines wishing to preserve their monopolies pressed Beijing officials to reject that request, according to aviation officials and other sources in Taipei.

In addition, Beijing’s adamant refusal to recognize Taiwan’s (or the Republic of China’s) sovereignty meant there was no possibility of Taipei obtaining “fifth freedom” rights – the ability to carry passengers to further destinations in another country – at the Nanjing talks.

Cross-Strait landing rights for foreign airlines were also not on the agenda at Nanjing due to the same sovereignty issue. But Lin Shinn-der, deputy director general of Taiwan’s Civil Aeronautics Administration, said before the talks that foreign airlines could arrange with Taiwanese carriers to transfer passengers from a Taiwanese flight to an international flight in China. At a recent luncheon meeting of the European Chamber of Commerce in Taipei, Lin also said that Taiwan is negotiating with Beijing in hopes that Chinese visas could be issued in Taiwan to expatriates wishing to take the direct flights (so far Beijing has not given an answer).

Financial links

Then there’s the cross-Strait financial cooperation pact, which was touted as the showpiece of the Nanjing talks. A day after it was inked, the Taipei stock index jumped, becoming the world’s second-best performer that day after Shanghai. Ultimately the agreement will pave the way for Taiwanese banks to set up shop on the mainland, a prospect welcomed by economists. “It will be an important stimulus to advance the service industry and by doing so will make the banking system more efficient,” says Peter Kurz, Taiwan country head for Citi Investment Research. The estimated 100,000 Taiwanese businesses on the mainland need financing but generally find it difficult to get help from Chinese banks. The presence of Taiwanese banks, with their longstanding relationships with the Taiwanese investors, would be of enormous help.

The agreement signed in Nanjing creates a broad regulatory framework covering currency exchange issues, insurance, banking, and securities and futures. The pact, which takes effect before the end of June, calls for both Taiwan and China to work together to maintain financial stability, exchange financial information, and jointly supervise the management of financial and monetary issues.

It also paves the way for the specific supervisory agencies on the two sides responsible for banking, securities/futures, and insurance to engage in detailed follow-up negotiations with their counterparts, culminating in the inking of separate MOUs for those three financial sectors. That would be followed by further negotiations on market entrance by specific institutions. MAC Vice Minister Fu was reported as saying that the MOUs would also be inked by the end of June. But even if this happens, some observers expect Beijing to adopt a cautious and gradual approach, as it did in its treatment of the tourist agreement signed in June last year. Cheng Cheng-ping suggests, for example, that Beijing might give Taiwanese banks the right to take deposits, while imposing restrictions on lending at the initial stage.

The cross-Strait financial cooperation pact also calls for an eventual currency clearance mechanism between the Chinese Yuan and the New Taiwan Dollar. But progress on this is also likely to be slow. The first phase is likely to call for commercial banks to offer cash exchange, with a full currency clearance system remaining somewhere down the road.

In addition to reaching a third agreement on cooperation in crime-fighting, including the repatriation of fugitives, Chiang and Chen also signed a joint declaration stating the intent to open up Taiwan to Chinese investment. “We have made humungous investments in China and it is time for mainland China to reciprocate,” says MAC Vice Minister Chao Chien-min. Local media reports said Chinese investments in Taiwan are expected to be realized by the end of the year at the earliest, as Taiwan has yet to finalize regulations and identify suitable projects. China agreed to encourage its enterprises to make inspection tours here to explore investment opportunities. Sectors expected to be open to Chinese investment include manufacturing, services, infrastructure, and real estate.

Another subject of considerable recent media attention has been the prospect for Taiwan and China to sign an Economic Cooperation Framework Agreement (ECFA), opening the way for an eventual free-trade pact across the Strait. Parts of the ECFA framework will be signed by the end of the year, Chao said, most likely at a fourth round of talks to be held by Chiang and Chen in Taipei. At that time, they are also likely to take up cooperation in the fisheries industry, avoidance of double taxation, inspection and quarantine for agricultural products, and cooperation over joint technical standards and certification.

A spokesman for the Taiwanese delegation to Nanjing said Chiang and Chen agreed to start negotiations on the ECFA issue but did not set a timetable.

The government’s disinclination to talk about ECFA in any detail has sparked widespread suspicions in Taiwan, particularly on the part of the DPP. It is not immediately clear what the ECFA’s contents will be or whether China will receive any political concessions in exchange, but one thing analysts do agree on is that the handling of the issue appears to be the worst public-relations blunder in the short history of the Ma administration.

“So far the government has not explained this very well, and that has created controversy and confusion,” says Tung Chen-yuan, a former MAC vice minister who is now associate professor in the Graduate Institute of Development Studies at National Chengchi University.

Immediately after his 2008 election win, Ma said he wanted to open negotiations with China on a comprehensive agreement regulating cross-Strait economic ties. PRC President Hu Jintao, in a speech in late December, also said he was open to the idea – which was then called a Comprehensive Economic Cooperation Agreement or CECA – as long as it was done within the framework of the “One China principle.” The issue then seemed to be relegated to the back burner, only to reappear suddenly and forcefully in comments from government officials after the Directorate General of Budget, Accounting and Statistics announced a dismal drop in Taiwan’s GDP in late February. The agreement was presented to the public as urgently needed to help assure Taiwan’s economic future, but the idea aroused much negative publicity in Taiwan after a mainland scholar described it to the Washington Post as a major step towards unification.

Making a framework

In spin mode, Ma then changed the name of the proposed pact to the Economic Cooperation Framework Agreement or ECFA. One reason for the name change, analysts said, is that “framework” sounds more tentative and less committed than a full agreement. “A framework has flexibility,” Ma told AmCham’s Hsieh Nien Fan dinner in early March. “If we can’t reach a consensus, we’ll leave [those issues] alone and reach them on something we can.”

But the name change did not fully alleviate suspicions. When the government still failed to offer many details about the contents, the DPP quickly filled the vacuum by raising alarms that the island’s sovereignty would be compromised. “By talking to China about the CECA or the EFCA, we are actually falling into the ‘one China’ trap,” said the DPP’s Tsai Ing-wen. “We want the government to tell us the political price made for this deal.”

Senior officials, such as Vice Minister Chao, insist there will be no political concessions, and many in Taipei regard that assurance as credible. Wu Yu-shan, director of the Institute of Political Science at the Academia Sinica, says Beijing does not want to alienate the Taiwan public and is willing to help boost Ma’s popularity to prevent the DPP from regaining its political strength.

But suspicions continue, spurred by the shortage of information. Currently, the government is soliciting the views of various industries and civic groups, and seeking to gauge public opinion, with the announced intention of using the findings to guide its approach to the agreement. Most recently, the legislature’s economics committee passed draft legislation barring language on the political status of Taiwan and China, such as the “one China principle,” from inclusion in ECFA.

Freer trade is expected to be a key feature. Although the Taiwan government has publicly pledged not to permit an influx of mainland labor nor to fully open up the agricultural sector, it will seek an immediate reduction in tariffs for industries that will be harshly affected by the free trade agreement between China and the ASEAN nations that comes into effect next year. Among those industries are petrochemicals, automotive components, textiles, and heavy machinery, which now face tariffs ranging between 5% and 10%. The government hopes to sign this part of ECFA by the end of the year. It has also promised to protect several industries that will be made vulnerable by free trade across the Strait, including the towel, bedding, and ceramics/porcelain industries. Mechanisms to safeguard them are expected to go into the agreement.

According to the Ministry of Economic Affairs (MOEA), the future agreement might also include trade in services, investment protection, intellectual property rights protection, a defense mechanism that will allow either party to pull out of the agreement, double taxation prevention, and the resolution of business disputes. MOEA notes that both sides are WTO members, and that the cross-Strait agreement will be in the WTO spirit.

There is no timetable for concluding the agreement, MOEA says, and it will be undertaken in a series of stages. First Taiwan and China will undertake separate studies; then they will conduct joint research. After this, they will hold negotiations, leading up to the signing of the agreement. Finally, it will be sent to the Legislative Yuan for approval (or rejection) before it is implemented. Currently, Taipei and Beijing are in the first stage of separate studies. The DPP has called for a national referendum on whether to conclude an ECFA, but the government has ruled this out.

A key reason why the government considers the pact so important is the need to counter the likely economic marginalization that Taiwan would face after a free trade agreement between China and the ASEAN nations (the so-called “ASEAN plus one”) takes effect next year, along with the possibility of later expansion into “ASEAN plus three” by adding Japan and Korea. Ma has warned that the latter could cause Taiwan to lose 110,000 jobs and reduce GDP growth by one percentage point if no action is taken. The DPP’s own studies, Tsai says, have found the employment loss attributable to ASEAN plus three would be under 5,000, whereas ECFA itself would put hundreds of thousands of Taiwanese out of work due to the entrance of cheaper Chinese products into this market.

At the Hsieh Nien Fan banquet, Ma also argued that signing a free trade agreement with China would make it easier for Taiwan to conclude FTAs with other major trading partners, including ASEAN nations, and thereby win a place for itself in these emerging trade blocs. The ASEAN nations currently will not consider trade agreements with Taiwan for fear of antagonizing Beijing. “Foreign countries say you have to deal with China first,” Ma told AmCham.

The DPP and others respond that having an ECFA with China is no guarantee that the other ASEAN countries will follow suit, and that Beijing might wish to keep Taipei isolated in terms of governmental trade connections in order to make Taiwan’s economy more dependent on China’s.

“My answer to that is that the Chinese market warrants an agreement for us on its own, because after all China has one of the largest economies in the world,” retorts the MAC’s Chao. “China absorbs 40% of our exports, so if we don’t do something fast, our market share in China will be taken away by other countries.” He agrees there is no guarantee the ASEAN countries will conclude FTAs with Taiwan. “But my argument is that without ECFA, it’s not going to be possible. With it, we have a chance.”

Tung’s research surveying 1,019 foreign and domestic businesses in Taiwan shows that the biggest impact from Taiwan’s exclusion from East Asian economic integration agreements would most likely be in the area of investment, whereas the impact on actual trade would be negligible. If Taiwan is excluded from such free trade blocs, 35% of those surveyed said they would reduce investment in Taiwan, while if Taiwan is able to participate in the blocs, 72% said they would increase their investment. If economic integration agreements are signed only between Taiwan and China, 41% of the companies surveyed said they would increase their investment in Taiwan. The government hopes that Taiwan’s participation in these regional trade agreements would encourage multinationals to set up regional bases here.

Stiff opposition from the DPP and certain affected industries is likely to retard progress. But Chao stresses the government’s willingness to modify its specific plans for the contents of ECFA “as it builds consensus with the opposition party and various industries.”