Was Taiwan's economic opening to China a mistake?

Expected rise in trade and investment have not yet materialized, says DBS.

The two countries began strengthening economic ties in 2008 including major tariff reductions implemented under the Economic Cooperation Framework Agreement (ECFA) last year.

But a close look at the numbers suggest that Taiwan-side boosts are slow to come, if at all. What could this mean for economic policy?

Here's more from DBS:

Overall, Taiwan’s exports to China did not outperform the historical trend in 2011, and on the cross-country basis, Taiwanese exporters as a whole have even lost market share on the mainland. This could be partly explained by the shift in China’s import structure.

China’s imports (in nominal terms) have oriented towards commodities in recent years, inflated by higher global commodity prices, and also driven by its strong investment demand. As such, non-commodity exporters such as Taiwan, Japan and Korea have been broadly “squeezed out” in the Chinese market by the commodity-exporting countries like Australia.

On a sectoral level, the positive impact of free trade with China still appears visible. Taiwan’s exports to China of vehicles & transport equipment, and raw materials like stone & cement registered above-trend growth in 2011. However, Taiwan’s exports to China of some key products like plastics & rubber and optical instruments have significantly underperformed, both on the historical basis and cross-country basis.

In summary, there is no strong evidence that Taiwan’s overall trade competitiveness has been boosted by the Economic Cooperation Framework Agreement (ECFA) during the first year of tariff reductions.

The cross border investment flows between Taiwan and China are still asymmetric. Taiwan’s outward direct investment to China has soared further in the past few years. These were largely driven by higher investment in the services industry particularly financial services. Taiwanese banks have been allowed to operate business on the mainland since 2010.

In sharp contrast, Taiwan’s foreign direct investment (FDI) received from China has totaled USD 175mn, since Chinese corporates have been permitted to invest in Taiwan in 2009. This paltry sum was equivalent to a mere 0.5% of Taiwan’s outward investment on the mainland from 2009 to 2011, and no more than 2.0% of the total FDI Taiwan received during the same period.

The benefits from the KMT’s opening policy over the past 3-4 years have not been felt across sectors. On the other hand, there are public complaints against the side-effects of cross-strait opening – speculations in the asset market and surge in housing prices.

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Tags: Taiwan economy, Taiwan-China trade, DBS on Taiwan economy