By David Silverman Staff Writer February 28, 2010

The Economic Cooperation Framework Agreement (ECFA) is a vehicle for trade liberalization and economic normalization between mainland China and Taiwan. It is impossible however to consider the effects of a China-Taiwan trade agreement without acknowledging potential political implications.

According to Xinhua, China’s official state news agency, the basic content of the pact (currently under negotiation) would include market access for commodity and service trade, Rules of Origin, early harvest program, trade remedy, dispute settlement, investment and economic cooperation.

At an event held at the Center for National Policy on the 17th of November, 2009, Daniel Rosen, a visiting fellow at the Peterson Institute for International Economics, and Rupert Hammond-Chambers, President of the US-Taiwan Business Council, discussed potential economic and political effects of the ECFA. Rosen stressed that Taiwan’s GDP would grow an additional 3.7 to 5.1 percent by 2020 with the proposed agreement. Intriguingly, China would only achieve nominal growth.

Why then is China so interested in signing a trade agreement that is overwhelmingly advantageous to Taiwan, its political opponent?

According to Hammond-Chambers, a unification with Taiwan is China’s “overarching goal and all policies that they pursue in respect to Taiwan are channeled in that direction. And that goes for ECFA too.”

During his time in office, Taiwanese President Ma Ying-jeou has sought to improve economic ties with the mainland without sacrificing Taiwan’s de facto independence. The ECFA is the latest and most ambitious effort of President Ma’s administration to improve relations with China and place Taiwan’s economy in a position to compete globally. Taiwan had sought a free-trade agreement with the Association of Southeast Asian Nations (ASEAN), to which China objected and prevented the agreement from happening. This is a significant moment for the development of Taiwanese cross-strait policy.

Some fear ECFA is a Trojan horse made to merge Taiwan’s economy to China. Exports account for 70 percent of Taiwan’s economy, of which China absorbs nearly one-third. Increasing Taiwan’s cross-strait economic dependence even further, may lead to political concessions and increase the possibility of unification. However, an economically strong, globally competitive Taiwan is able to resist Beijing’s political strength.

Taiwan has globally competitive petrochemical, information technology, and banking industries, among others. For these industries to grow and for Taiwan to develop economically and independent of China, Taiwan must access foreign markets. Here is Taiwan’s conundrum.

China’s approval of a potential Taiwan-ASEAN free-trade agreement demonstrates that China is indeed East Asia’s economic lynchpin – capable of leveraging its own economic and political power against Taiwan’s trade interlocutors, other Asian nations. For this reason, Taiwan has called for new free-trade discussions with the United States.

The United States has recently increased pressure on Beijing in the form of a proposed arms sale to Taiwan, supporting Google in its recent spat with China, calling for Internet freedom, and the ever present, but recently reiterated complaint of the Yuan’s peg to the dollar. Beginning U.S.-Taiwan free-trade negotiations would continue to pressure Beijing, and address the lack of U.S. economic presence in the region. A U.S.-Taiwan free-trade agreement might encourage other ASEAN nations to negotiate similar agreements.

With or without China’s blessing, Taiwan should pursue free-trade agreements wherever possible. Opening up to wider trade and investment opportunities benefits domestic companies, giving them the opportunity to expand into foreign nations. This would inject Taiwan into an increasingly economically interdependent region. Should China prove coercive or aggressive, nations with which Taiwan has trade agreements would have an economic interest in easing cross-strait tensions resolved peacefully. Additionally, increasing the direct economic linkages supposed by the ECFA would also increase the marginal cost of Chinese belligerence – this too seems to favor Taiwan.

Signing the ECFA with China does not guarantee China’s approval of future East Asian-Taiwanese economic agreements. Rather, it might be in China’s interest to continue to dissuade other nations from forming agreements with Taiwan so that China maintains its control over Taiwan’s economy. By taking this path, China can prevent external economic-based political support from forming, and further escalation of cross-strait tensions.

For Taiwan, consideration of the ECFA must go beyond mere extra dollars and increased GDP.

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