1. Negotiations
2. China-Taiwan

Cross-Strait matrix: The Economic Cooperation Framework Agreement

China Brief (Jamestown Foundation) | May 27, 2009

Cross-Strait Matrix: The Economic Cooperation Framework Agreement

By: Terry Cooke

Against the backdrop of the reeling global economy, Taiwan-China rapprochement has shown steady and, at times, dramatic progress. The Economic Cooperation Framework Agreement (ECFA) put forward by Taiwan’s Kuomintang (KMT) administration under President Ma Ying-jeou is being used by Taipei and Beijing as the main harness for moving bilateral relations forward. Goodwill between top officials from the KMT and the Chinese Communist Party (CCP) at the three official meetings and other side trips notwithstanding, the possibility of reaching a formal agreement in 2009 or later depends on complex bilateral (i.e. China and Taiwan), triangular (i.e. China, Taiwan and the United State), multilateral (e.g. ASEAN, WTO), and even global forces (e.g. the global recession and the G-20 response). A review of the ECFA’s original and current forms helps explain why Beijing has so far been receptive to the plan, and why the Ma administration has been keen on pushing the initiative. Analysis of the main ’matrix’ factors-bilateral, triangular, multilateral and global-surrounding the plan is central to understanding the outcome of April’s ground-breaking meeting as well as anticipating how the process is likely to unfold in the run-up to the next formal meeting this fall.

ECFA: The Context

Discussion of the EFCA (which was originally called the Comprehensive Economic Cooperation Agreement or CECA) began in late February 2009. Only scant mention of the plan had surfaced during Ma Ying-jeou’s electoral campaign leading up to the Taiwanese presidential election in February 2008. Following Ma’s inauguration, the issue went dormant publicly as the new administration focused, during the spring of 2008, on resuscitating the process of high-level cross-Strait dialogue between the KMT and CCP that had been closed off during the Democratic Progressive Party (DPP) administration on Taiwan; then on achieving a series of transport and other ’direct link’ break-throughs during formal talks in June 2008; and finally on advancing a cross-Strait memorandum of understanding for financial cooperation during the high-level talks between Taiwan’s former Vice-President and KMT Chairman Lien Chan and China’s President Hu Jintao at the Asia-Pacific Economic Cooperation (APEC) meeting in Peru in November 2008 (eTaiwan News, Nov 21, 2008). Although the CECA proposal only emerged in mature form in March 2009, ECFA had clear and identifiable antecedents: 1) the creation in 2000 of the Cross-Strait Common Market Foundation by the current Taiwanese vice-president, Vincent Siew, following his loss in Taiwan’s 2000 Presidential election to Chen Shui-bian; 2) the formal accession of China and Taiwan to the World Trade Organization in December 2001; and 3) the signing of the China and Hong Kong closer economic partnership arrangement (CEPA) in June 2003.

Each of these antecedents gave a clear imprint to the plan that Ma Ying-jeou alluded to during his campaign and began rolling out after the advent of the new lunar year in February 2009. The Cross-Strait Common Market Foundation concept originally developed by Siew derived its inspiration from the early EU model, focusing on trade, tariff reduction, and tariff harmonization as early steps in a process leading eventually to a common currency, shared institutions, and elimination of border controls [1]. The common market referent provided the two sides with a neutral and successful thought-model that the KMT leadership and Beijing could appeal to during a series of party-to-party talks undertaken in 2005. Similarly, the joint accession of China and Taiwan to the WTO in 2001 provided an enforceable multilateral framework to which all future trade arrangements-either bilaterally between China and Taiwan or separately with other trading partners in the region and the world-would have to adhere to. Finally, the CEPA signed by China and Hong Kong gave Taiwan a model that could be studied and emulated with respect to its WTO-consistent trade-enhancements, notwithstanding the fact that the agreement was, and remains, anathema politically because of concerns in Taiwan over the agreement’s effect on Taiwanese sovereignty.

The Cross-Strait Perspective

Nourished by these tap-roots, the ECFA concept sprouted again dramatically in early 2009 as the global economy continued to worsen. In mid-February, attention in Taiwan galvanized around the CECA concept after local press reported the Taiwanese National Security Council’s Secretary General, Su Chi, as stating that the government had decided to sign a CECA with China (CNA, Feb 14). Major industry associations immediately voiced support for the initiative, even before anti-China sentiment in Taiwan’s fractious democracy could organize to oppose the initiative. Yiin Chi-min, the minister of economic affairs, and President Ma then began an energetic campaign of pitching the concept to the Taiwanese public-presenting it as ‘inevitable’ and a virtual fait accompli, as a process that could be wrapped up by mid-year, as something that could add nearly 1.4 percent to Taiwan’s GDP, and as a boon to Taiwan’s efforts to forge free trade agreements (FTAs) with ASEAN, the United States and others.

During March and April, public debate over the concept led to various adjustments of these ‘pitch points.’ First, the CECA name was jettisoned as being too reminiscent of China’s CEPA with Hong Kong. Given Beijing’s sovereignty over the Hong Kong Special Administrative Region (SAR), the concern was that a similarly named trade agreement would erode Taipei’s posture of vigorously contested sovereignty vis-à-vis Beijing. Next, admission was made that the democratic nature of Taiwanese society required more public airing of the concept and a greater degree of consensus-building before the concept would be ripe for finalization in an agreement with Beijing. Accordingly, the timeframe for concluding the agreement with China has now lengthened. Following the model of the Financial Cooperation Agreement (which was discussed informally in the 2nd round in November 2008 and formally concluded in the 3rd round in April 2009), the ECFA is being staged for informal levels of discussion at the 4th round of the process, which is slated to take place at the end of 2009 (United Daily News [Taiwan], May 27).

The ‘Triangular Perspective’ with the United States

In trade, as well as in political matters, the triangular relationship between Taiwan, China and the United States has an important bearing on the tenor of cross-Strait developments between Taiwan and China. This reflects two key facts: 1) the United States has been the primary destination market for large-scale manufacturing investment by Taiwanese entrepreneurs in the mainland; and 2) the United States has been the dominant political-military force maintaining the ‘status quo’ balance across the Taiwan Strait. Yet, with regard to the ECFA, the United States has been at pains to step back and to encourage the development of the CECA/ECFA process on its own bilateral merits. This fits in with broad U.S. regional policy goals of supporting cross-Strait commercial engagement and economic integration as means for promoting regional prosperity and stability. The ECFA proposal and the cross-Strait cooperative dialogue process more generally are both seen in Washington as practical mechanisms for advancing those goals.

Likewise, the United States has been careful to keep the focus of the discussion about ECFA’s benefits to the direct bilateral pay-off for Taiwan and China and not to countenance wishful thinking in Taiwan that an ECFA with China would open a ‘backdoor’ to concluding a FTA with the United States. In the waning years of the Bush Administration, Taiwan pushed actively for entry into FTA negotiations with the United States. Taiwan’s strategic focus on a FTA with the United States was designed to offset the marginalization continually forced upon it by Beijing as China completed a flurry of trade deals with ASEAN and other trade partners excluding Taiwan. In Taipei’s thinking, a trade deal with the United States would not only bring some direct benefits to its robust trading relationship with the United States, it would more importantly provide cover for ASEAN and other potential trade agreements to strike their own deals openly with Taiwan. From the U.S. standpoint, however, existing obstacles must first be removed for there to be any possibility of entering into negotiations for a U.S.-Taiwan FTA. First, the United States has long required thresholds of progress by Taiwan in the existing U.S.-Taiwan Trade and Investment Framework (TIFA) talks as a precondition to considering a possible U.S.-Taiwan FTA. Those thresholds have not yet been met with respect to certain intellectual property right protections and various sector-specific issues. More fundamentally, the global economic crisis and the transition in the United States to a new Democratic administration in the executive branch have added new uncertainties to the FTA roadmap for Taiwan. Politically, President Barack Obama does not yet have fast-track trade negotiating authority from Congress. Economically, the global downturn has prompted closer scrutiny by the U.S. government of all such trade deals.

The Multilateral Perspective

With the Doha process stagnant, there has been a pronounced tendency for regional and bilateral deals to proliferate and fill the void. This tendency has been especially evident in Asia, with China acting as the ’belle of the ball.’ The China-ASEAN FTA is the most notable of many trade agreements forged recently by Beijing. Taiwan, by contrast, appears to be the wallflower in China’s dance with regional trade partners. Taiwan’s predicament largely stems from its lack of U.N. membership as well as the deterrent effect of Beijing’s long-standing effort to marginalize Taiwan’s international space, which is a cause of considerable local anxiety and frequent press commentary. For most of 2008, Taiwan continued to pin its hopes on the possibility of entering into FTA trade talks with United States as a way of reassuring potential trade partners in the region through U.S. ’legitimization.’ As 2008 ended, however, the Ma administration’s approval rating began to reflect the country’s deteriorating economic indicators. Accordingly, external factors-including the current stasis in the Doha round, proliferation in regional trade deals from which Taiwan is excluded, and the uncertainty concerning the future priorities of the Obama administration during its transition-stoked the coal beneath the ECFA. The ECFA undertaking, with roots as far back as 2000, and carefully cultivated by the KMT leadership during its pair of trips to the mainland in 2005-began to blossom this spring because Taipei recognized an acute need to boost its economic competitiveness and because Beijing had given the KMT assurances through the existing cooperative dialogue process. In fact, Beijing’s posture of dropping opposition to Taiwan gaining observer status at the World Health Assembly (WHA) improves this particular cross-Strait dynamic considerably. On the one hand, China gains recognition-amid concerns of a swine flu pandemic-for showing responsibility as a global stakeholder, overdue as such a gesture may be. At the same time, anxiety in Taiwan over its international marginalization is relieved to some extent while providing a political boost to President Ma’s policy of cross-Strait engagement.

Conclusion: The Global Perspective

The Ma administration presided over one of the country’s largest drops in economic growth prospects, which was severely dented by successive months of year-on-year drops in exports close to 50 percent. The EFCA represents its best near-term option for reviving the economy. For China, whose preoccupation with ’split-ists’ has shifted to Tibet since Chen Shui-bian and the DPP’s departure from power, the EFCA promises two benefits worth pursuing: 1) a closer economic embrace with ’Taiwan compatriots’; and 2) enhancing international perception of China as a responsible economic ’stakeholder’ in the region. For the United States-the vital triangular partner to cross-Strait stability-the EFCA is broadly in line with the longstanding policy of encouraging cross-strait commercial engagement.

It perhaps required the shock of an economic downturn to position Taiwan and China for the next level of mutual engagement and economic integration. While joint entry into the WTO was immeasurably important to both parties as a confidence-building measure, Geneva has not served as an arena to directly advance bilateral rapprochement. While economic integration has proceeded apace to meld the two countries’ IT sectors into a nearly seamless global supply chain, integration of many other sectors (such as agriculture, tourism, transportation, energy, petrochemicals, and advanced semiconductors) has been impeded by political opposition and various national security concerns.

While the global financial crisis may have pushed Taiwan and China significantly closer in their economic relationship, neither party should ignore the key ‘lessons learned’ from the crisis. The deliberate ECFA process seems to be structured on a shared recognition that cross-Strait economic integration needs to be pursued in a measured and balanced fashion, not as a pell-mell rush. The staged scheduling of the ECFA as first an informal topic and then a formal topic at successive rounds of the high-level cooperative dialogue process is largely designed to allow time for public opinion in Taiwan to recognize the need for, and to help shape the final form of, this outcome. In the final analysis, the ECFA appears to represent a recognition in both Taipei and Beijing that they need to work together to co-manage the impact of the global economic crisis by adding previously-insulated sectors of their respective economies to the cross-Strait grid.