Caution in Taiwan as China trade pact sealed - Analysis

TAIPEI, June 25, 2010 (AFP) - Taiwan says a new trade deal with China is a "milestone" but analysts warn the pact is no economic panacea and will only give Beijing more political clout over the breakaway island.

The two sides have agreed on a list of industries that will benefit first from the deal, known as the Economic Cooperation Framework Agreement (ECFA), which is due to be signed in China on Tuesday.

"It's a milestone in cross-strait economic exchanges and a big step forward but it's doesn't cover everything yet," said Taiwan's top negotiator Chiang Pin-kung.

The agreement is widely hailed as the most sweeping economic agreement between the two sides since they split after a civil war in 1949, and also a boost to Taiwan's Beijing-friendly president, Ma Ying-jeou.

"ECFA is a major accomplishment for Ma's government and it will transform Taiwan's economy in the long term," said Philip Hsu, a professor at National Taiwan University's Center for China Studies.

Ma argues that Taiwan's economic future lies in seizing upon the opportunities offered by the far larger hinterland of mainland China, with annual two-way trade now worth 87 billion dollars and growing fast.

But opponents argue that stronger competition from China will cost jobs and the accord will make the island more dependent on the mainland.

Taiwan and China have been governed separately since the civil war ended but Beijing considers the island part of its territory and has vowed to get it back, by force if necessary.

Taiwan's main opposition party, the Democratic Progressive Party (DPP), which favours formal independence from the mainland, has vowed to rally 100,000 people on Saturday to protest against the pact.

"China is hoping that it can have more political influence by boosting Taiwan's economic reliance on the mainland, but the realisation of such hope hinges on a host of factors," Hsu said.

The deal will confer preferential tariffs on 539 Taiwanese products from petrochemicals and auto parts to machinery, representing 16 percent of the island's total export value to China.

A small number of products that at present receive an import tariff of five percent or less will get immediate relief, while for the rest the tariff will gradually fall to zero over the next two years.

About 267 Chinese items, or 10.5 percent of China's export value to Taiwan, will be placed on the "early harvest" list enjoying zero or falling tariffs.

President Ma's administration says the pact will create 260,000 jobs and boost economic growth by up to 1.7 percentage points.

The more cautious Chinese side has warned against expecting too much from ECFA.

"We have agreed to gradually reduce and remove trade and investment barriers ... so we can draw on each other's strength," Zheng Lizhong, the head of China's delegation, said after negotiators agreed the package on Thursday.

"However, it can't solve all the problems at once," he said.

The pact will ease restrictions on Taiwanese banks and insurance companies hoping to set up subsidiaries in China, in a step that could boost cross-strait financial integration.

It also will help the island's regional integration. Along with North Korea, Taiwan is the only Asian economy standing on the sidelines while the rest of the region has spun a web of free-trade agreements.

"It is urgent for Taiwan to sign ECFA so it won't be marginalised in the region and Taiwan can have a level playing field to compete with other countries in China," said Hsu of National Taiwan University.

However, economists said the immediate impact of ECFA on Taiwan's economy was likely to be limited.

"We believe Taiwan firms and businesses are unlikely to substantially increase capital expenditure immediately after the signing of the proposed bilateral trade pact," said Tony Phoo, an economist at Standard Chartered Bank.