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23 Jun 2010

International Economy

ECFA between China & Taiwan: Impact on Thai Trade and Investment (Business Brief No.2855)

The Economic Cooperation Framework Agreement (ECFA) is a trade and investment liberalization program between the governments of the People's Republic of China (Mainland China) and the Republic of China (Taiwan). In the third round of negotiations on June 13, 2010, they discussed an “early harvest” list, including negotiations on tariff reductions for more than 200 items of Chinese exports into Taiwan and 500 items of Taiwanese exports into China which include petrochemical products, machinery and automobile parts. The previous two rounds of negotiations were held in January and April.
The Straits Exchange Foundation (SEF) expects that the ECFA pact will be officially signed during the fifth meeting of the SEF and the Association for Relations Across the Taiwan Straits (ARATS). Although it is uncertain what products will be liberalized, or when the tariff reductions will begin, these negotiations have achieved significant progress. The final agreement will likely affect trade and investment between those two countries and with Thailand in the future.
The ECFA pact will likely help increase trade and investment between China and Taiwan. China's export value to Taiwan and Taiwan's export value to China have increased more than 60 percent YoY in 4M10. This reflects closer trade relation between them. Currently, China is the largest export market for Taiwan. In 2009, Taiwan's export value to China and Hong Kong reached 40 percent of their total export value.
On Taiwan's investments into China in 4M10, their investment value had increased by 44.7 percent YoY. China is now the main investment destination of Taiwan. Chinese IT industry tends to be the most important industrial sector receiving windfall from Taiwan's investment because 90 percent of Taiwan's IT production industry is now based on the mainland. Meanwhile, China's investments into Taiwan have increased, as well. Taiwan has opened up to Chinese investment in local industries that have no connection with their country's security. As a result, Taiwan has experienced considerably higher investment from China since 2H09.
For the impacts of this agreement on Thailand, Thai exports to China and Taiwan may well face tougher competition because they may negotiate for special tariff rates between them, offering bilateral advantages over other trade partners:
- Some major Thai exports to China, such as machinery parts/accessories (HS 8473), as well as polyacetal and other polyethylene materials (HS 3907) may be directly affected by this agreement (if the ECFA pact specifies that China has to slash their tariffs on such Taiwanese products).
- Direct impacts to Thai exports to Taiwan will likely be limited only to some items with export values that are not high, such as air conditioning machines (HS 8415) and motor vehicle parts/accessories (HS 8708).
- Thailand may be affected by some indirect impacts from this agreement, such as that caused by cross-border trade between China and Taiwan where their products will be at an advantage over Thai products (given the same tariff rates) due to shorter shipping distances that facilitate swifter transport and reduce logistic costs.
In addition, Taiwan's investments into Thailand will likely decrease because their production bases may be moved to China, especially if the ECFA pact offers them more attractive trade privileges.
Among Taiwanese investment projects applying for BOI investment promotions in 2009, their service businesses posted the highest investment value, rather than the electric appliance and electronic product projects dominating previously. It is clear that the value Taiwan's investment projects applying for BOI investment promotions were increasing in 2009 and in 4M10, but the types of investments they have largely been involved in have changed. It is possible that Taiwan is moving some productions to other countries. It is expected that the benefits from the ECFA pact will promote Taiwanese proprietors to set up their production base in China.

China's announcement of approving increased Yuan flexibility on May 19, 2010, will unlikely affect Taiwan's investments into China, because the appreciation of the Taiwan Dollar (TWD) will likely be consistent with changes in the Yuan (CNY), or the TWD may be relatively stronger than the Yuan. However, the movements of those two currencies should be monitored because this may be another factor affecting investment between them in the future.

International Economy