MACROECONOMICS

• CRYSTAL BALL GAZING:  FLAWS IN THE GLASS

CROSS-STRAIT

• CHAIRMEN HU AND MA EXCHANGE GREETINGS

• TAIWAN CONDEMNS VIOLENCE IN XINJIANG

DOMESTIC

• TYPHOON MORAKOT KILLS AT LEAST 500

• EX-PRESIDENT’S DETENTION EXTENDED, RULING SOON

INTERNATIONAL

• WORLD GAMES  HELD IN KAOSHIUNG

BUSINESS

• BARCODE COMPANY IS FIRST CHINESE INVESTOR

• FTSE DEVELOPED MARKET STATUS STILL IN QUESTION
  
  

By Jane Rickards

MACROECONOMICS

CRYSTAL BALL GAZING:  FLAWS IN THE GLASS

TOPICS is tired of dissecting doom and gloom. So this month we’ll don gypsy shawls instead and gaze into the government’s economic crystal ball – in the form of an analysis from a semi-official think tank on the state of Taiwan’s economy once a free trade pact with China is signed.

President Ma Ying-jeou has insisted that such a pact is vital. Taiwan has only 23 diplomatic allies and the majority of countries decline to sign free trade agreements (FTAs) with Taiwan for fear of incurring Beijing’s wrath. Currently Taiwanese goods face Chinese tariffs of 5% to 15%. Once a free trade agreement between China and the countries belonging to the Association of Southeast Asian Nations (ASEAN) takes effect next year– in an arrangement known as ASEAN+1 – Taiwan will face massive dents to its competitiveness. The situation will be even worse if a proposed ASEAN+3 pact ever takes effect, as it adds Japan and Korea into this emerging free trade bloc.

The government therefore sees the need to negotiate an FTA with China, both to maintain tariff competitiveness in the China market and to increase the likelihood that other countries would also be willing to enter into such pacts with Taiwan. Economics Minister Yiin Chii-ming says that Taipei would like to start negotiating the outline of an agreement – known locally as the Economic Cooperation Framework Agreement or ECFA – with Beijing this October. In the “early harvest” portion of the agreement, Taiwan would push for immediate tariff cuts for industries most likely to be immediately affected by the ASEAN+1 free trade bloc, such as petrochemicals and auto parts. Otherwise, ECFA will merely set the contents for future negotiations on a more detailed FTA, which could take years to complete.

In March, the government commissioned the Chung-Hua Institution for Economic Research (CIER) to begin an analysis of the impact of a completed Taiwan-China FTA. Half a year later, the almost 40-page report was released on July 29. In conducting the analysis, the CIER utilized the Global Trade Analysis Project (GTAP), which as the government notes has been used by many other countries to assess the impact of an FTA. It looked at two different scenarios that the government is considering. President Ma has already promised farmers, a politically sensitive group, that he will maintain bans on the import of around 830 Chinese agricultural products. Currently, some 1,380 industrial products are also prohibited from being imported from China. In the first scenario the CIER considered, these bans remain in place and tariffs on existing agricultural imports are lifted. The boost to GDP once commodity trade is fully liberalized amounts to 1.65%, the CIER said, with exports increasing by 4.87% and imports by 6.95%.

In the second scenario, both agricultural bans and tariffs are retained but trade in all industrial products is fully liberalized. The think tank then found that 1.72% would be added to GDP growth, with exports increasing by 4.99% and imports increasing 7.07%. Moreover, CIER said, the GDP increase would be even greater in both scenarios if services and investment, and not just commodities, are fully liberalized as well. In addition, the study stated, the pact could help Taiwan become more integrated into global supply chains and to attract as much as US$8.9 billion in foreign direct investment within seven years. The study also concluded that there would be net creation of around 260,000 new jobs – a finding that some economists have disputed.

To simplify the GTAP study, the CIER hypothesized a situation of full employment throughout, including the period before Taiwan starts liberalizing its commodity trade. In fact, Taiwan saw record unemployment in June of 5.94%, with 647,000 people out of work. The study also assumed that those who were put out of work by the pact would learn new skills quickly and move on to new jobs straight away. “It really doesn’t work like that in the real world,” says Chen Miao, chief forecaster at the Taiwan Institute of Economic Research. “I don’t think any firm will hire workers immediately, just as soon as the economy starts to pick up. There is at best a time lag, even if there are no structural changes to the economy.” Kenneth Lin, a professor of economics at National Taiwan University agrees, saying the report “does not address the issue of job loss or unemployment.” He and other economists see ECFA as leading to higher unemployment, even if only temporarily, as the labor market slowly adapts to the new situation. In any case, Lin does not see Taiwan’s unemployment as dipping beneath 5%.

CROSS-STRAIT

CHAIRMEN HU AND MA EXCHANGE GREETINGS

In the first public contact between the leaders of Taiwan and China, President Hu Jintao, writing in his capacity as general secretary of the Chinese Communist Party, congratulated Ma Ying-jeou in a telegram for winning the Kuomin-tang (KMT) chairmanship. Ma then responded with a message of thanks. Ma ran uncontested in the KMT chairmanship election in late July, winning about 92.5% of the approximately 300,000 votes cast, with a turnout of 58%, the party said.

Analysts said the exchange of messages was just routine. In recent years, the Chinese Communist Party leader sent congratulatory messages to all newly-elected KMT chairmen, including one from Hu to Ma when the then Taipei City Mayor was elected KMT chairman three years ago. Nevertheless, there was considerable hype in China’s state-run media that Ma’s election could set the stage for a historic meeting between the two leaders in their capacity as party chiefs (meeting as heads of state would be politically unacceptable to China, as it would appear to recognize Taiwan’s sovereignty). Ma, for his part, has ruled out any meeting with Hu for now, saying that the Taiwanese people are split over the issue.

Ma’s election as KMT chairman should help further improve business relations with China as he will be better able to exert control over the KMT-dominated legislature in pushing his cross-Strait agenda through parliament. He will also gain some leverage over Wang Jin-pyng, the speaker of the Legislative Yuan, who depends on the party for his nomination as a legislator-at-large. And he will be better able to rein in KMT honorary chairman Lien Chan and outgoing KMT chairman Wu Poh- hsiung, who had developed their own channels with Beijing through the regular cross-Strait forums held by the KMT and CPP. 

TAIWAN CONDEMNS VIOLENCE IN XINJIANG

The government in early July condemned violence in China’s northwestern city of Urumqi, after Han and Uighur people fought in  one of the worst ethnic clashes in decades. At least 197 people died and more than 1,600 were injured. Premier Liu Chao-shiuan said the bloody riots in the Xinjiang capital deserved the “strongest condemnation,” while Vice Chairman Liu Te-shun of the Mainland Affairs Council said the MAC hoped that China could deal with internal ethnic issues through “peaceful and rational communication.” The incident began when Uighurs in Xinjiang protested the deaths of two members of the minority group during a clash among migrant workers at a factory in south China.

DOMESTIC

TYPHOON MORAKOT KILLS AT LEAST 500

Typhoon Morakot, which means “Emerald” in Thai, proved to be one of the deadliest storms the island has ever experienced. After approaching the island on August 6, its fierce winds and rain caused the worst floods Taiwan has suffered in half a century. By August 21, according to the Ministry of Interior, 163 were confirmed dead with a further 503 listed as missing. President Ma has estimated that the final death toll will be at least 500.

The village of Siaolin in the mountains of Kao-hsiung County met with a particularly tragic fate: a landslide submerged it under mud and rocks, burying hundreds alive. Landslides also wiped out parts of other villages in the southern mountains. In addition, several thousand people were initially stranded on mountaintops due to the flooding and damaged roads and bridges, relying on helicopters flying in horrendous weather conditions to drop them water and other provisions.

The typhoon will also have a serious impact on the economy. Ma warned that third-quarter economic figures would suffer and estimated that agricultural damage as of late August amounted to NT$14.42 billion (US$437 million). Politically, the typhoon left Ma’s credibility in tatters and his government in crisis. The administration was criticized for its slow response to the disaster and for a decision to spurn foreign offers of aid in the early stages. According to an opinion poll conducted by the TVBS news channel, Ma’s approval rating dropped to 16%. In addition, three top officials had offered their resignations, including Defense Minister Chen Chao-min, Cabinet Secretary General Steve Hsieh, and Vice Foreign Minister Andrew Hsia, but any changes were put off until a Cabinet reshuffle planned for early September. TOPICS will report on the typhoon and its aftermath in more detail in its next issue.

EX-PRESIDENT’S DETENTION EXTENDED, RULING SOON

A mid-July ruling by the Taipei District Court extended former president Chen Shui-bian’s incarceration at the Taipei Detention Center for another two months. The court cited several of the reasons used in its previous detention rulings – fears that Chen might collude with witnesses, destroy evidence, or leave the country. Chen, who served two presidential terms between 2000 and 2008, faces a series of corruption charges. He was first put into pre-trial detention in mid-November, and aside from a few weeks release in December, has been jailed for a total of nine months since then, even though he has not yet been convicted of a crime.

Chen’s office appealed the detention ruling from presiding judge Tsai Shou-hsun to the Control Yuan and Taipei District Court, calling it an abuse of power. At his final hearing at the end of July, Chen said his trial has been unfair and the court’s decision to switch judges in December was unconstitutional. A response from prosecutors likened the way the former first family laundered money to the behavior of international criminal money laundering rings. A verdict in Chen’s case is expected to be handed down on September 11. 

INTERNATIONAL

WORLD GAMES  HELD IN KAOSHIUNG

In July, Taiwan hosted a prominent international sporting event for the first time. The eighth World Games – a quadrennial sporting event sanctioned by the Olympics and showcasing some 31 quirky sports, such as surfing, parachuting and female sumo wrestling, that are not contested in the official Olympic Games – was held in the southern port of Kaohsiung with participation from 105 countries. Ma Ying-jeou presided over the event in his capacity as President, causing the Chinese team to boycott the game’s opening and closing ceremonies, both of which drew audiences of about 40,000. Despite performing on home ground before crowds brimming with national pride, Taiwan athletes came in seventh with a grand total of 24 medals. Russia had the most medals with 47, Italy was second with 41, and China was next with 29.

BUSINESS

BARCODE COMPANY IS FIRST CHINESE INVESTOR

Fujian Newland Computer Co., a Chinese barcode service provider, in late July bought a majority stake in a Taiwanese company and became the first Chinese business to get Taiwan government approval for a cross-Strait investment. According to a statement on the Chinese company’s website, Fujian Newland acquired a 58% holding in Taiwan’s Digital Professional Asia Ltd. through a holding company in the Netherlands. The government approved the deal July 28, the statement said. The Taiwan authorities announced at the end of June that investment from China would be permitted in 100 Taiwanese industries and projects.

FTSE DEVELOPED MARKET STATUS STILL IN QUESTION

Taiwan’s stock market might be giving a stellar performance this year compared to other nations, but it still must overcome several obstacles before it can be categorized as a developed market in benchmark indexes, the FTSE Group said. Paul Hoff, FTSE managing director for Asia Pacific, told Bloomberg in a telephone interview that the improvements sought by FTSE for Taiwan included free availability of the local currency and liberalization of rules on stock borrowing and lending. He said Taiwan still has much work to do to achieve developed status in its next review, the outcome of which will be announced in September. The London-based index compiler currently ranks Taiwan as an “advanced emerging” market. It is believed that a higher ranking would help attract some of the more than US$3.5 trillion in international portfolio investments that are benchmarked against FTSE’s indexes.