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China-S. Korea FTA to Severely Impact Taiwan's Industries

Nov 14, 2014 | By Judy Li

Mainland China and South Korea reached a consensus on a free trade agreement (FTA) at the recent 22nd Asia-Pacific Economic Cooperation (APEC) summit in Beijing. The agreement, which is expected to be inked by the end of this year and become effective in 2016, will have a heavy impact on Taiwanese industries including iron and steel, machine tools, automobiles, and LCD panels, which have a combined annual production value of US$$38.6 billion.

Economics Minister Woody T.J. Duh indicates that if the FTA between China and South Korea becomes effective, it will reduce Taiwan's GDP by 0.5% or US$8.9 billion and the island's exports by 1.34%. Duh notes that South Korea is one of Taiwan's strongest trade rivals and that 77% of the goods manufactured by the two overlap, resulting in steep competition in both quality and price.

South Korea has become an increasingly serious threat to Taiwan in recent years as it has explored the market in China. Taiwan has continued to negotiate with China on trade-in-services and trade-in-goods agreements following the signing of the cross-strait Economic Cooperation Framework Agreement (ECFA) in June 2010, but the follow-up talks have often been interrupted by the resistance of the opposition party and anti-China advocators and groups in Taiwan, notably the violent protests mounted by college students in March of this year.

Vice Economics Minister S. C. Cho notes that the coverage rate of South Korea's trade with China will expand to 62.6% with the signing of the FTA, far higher than Taiwan's existing coverage of 9.68%. Currently Japan's FTA coverage rate is 18.21% and Singapore's is 76.42%. If FTA talks currently under way are successful, South Korea's coverage will grow to 83.39%, Japan's to 71.24%, and Singapore's to 87.25%.

Citing an estimate by the government-backed Industrial Technology Research Institute (ITRI), Cho says that Taiwan may face a loss of NT$260-650 billion (US$8.67-21.67 billion) in international trade if its talk with China on trade in goods are not completed within three to five years, since the FTA between China and South Korea will lower tariffs on about 90% of the products traded between the two sides.

K. Y. Liang, chairman of Yuanta-Polaris Research Institute, worries that South Korea's FTA with China will be an even heavier blow to Taiwan than its FTAs with the U.S. and EU. Statistics compiled by the United Nations Conference on Trade and Development (UNCTAD) show that South Korea's trade complementarity index with China stood at 0.51 in 2012, a little higher than the 0.5 points with the U.S. and 0.49points with the EU.

South Korea's FTA with EU became effective in July 2011; 38 months before that Taiwan recorded a growth of 5.5% in exports to Europe, 1.5 percentage points higher than S. Korea's growth, but after the FTA Taiwan's exports to Europe declined by 1.9%. In March 2012 South Korea's FTA with the U.S. took effect; 30 months before that Taiwan's exports to the U.S. experienced a growth of 18.1%, just 0.4 percentage points lower than the growth in Korean exports, but after South Korea's FTA took effect Taiwan's exports to the U.S. dropped by 2.1% and the Taiwan-Korea gap in exports to the U.S. expanded to 6.3 percentage points.

Currently the average tariffs on Taiwan's chemicals, basic metals and related products, and machines and electric machinery exported to mainland China are 6.5%, 7.3%, and 8.3%, respectively; those on plastic and rubber products, optical instruments, textile items, and transport vehicles are at even higher, at 9.4%, 9.9%, 11.4% and 13.1%, respectively.

Exports of all of these products will be affected by South Korea's FTA with China, since 70.7% of Taiwan's exported optical instruments are shipped there, along with 51.7% of ITS chemicals, almost 40% of its of electrical machinery and plastic & rubber products, and close to 30% of its machinery.

According to statistics from the International Trade Center (ITC), a subsidiary of the World Trade Organization (WTO), Taiwan ranked 18th among 235 economies in 2013 in terms of commodity imports, and the same in exports among 234 economies. The former ranking was down two places and the latter four places from 2001.

Taiwan's industry leaders urge the government to break through all difficulties to expedite talks with China on both trade-in-goods and trade-in-services agreements; otherwise, many of Taiwan's industries will lose their advantage in competition with South Korea in China and other markets.

The industry leaders believe that weakened competitiveness will lead to shrinking industries and affect perhaps a million workers once the FTA between South Korea and China takes effect. (JL)

Impact of the South Korea-China FTA on Taiwan's Industries
Tariffs imposed by China (%)
Estimated export value to be taken over by S. Korea (US$M)
Iron and steel
Machine tools
LCD panels
Source: MOEA

FTAa & Other Trade Pacts Signed /To be Signed by Major Asian Economies

South Korea

No. of economies
Ratio of trading value (%)
No. of economies
Ratio of trading value (%)
No. of economies
Ratio of trading value (%)
No. of economies
Ratio of trading value (%)
50 (12 FTA)
15 (13 FTA)
60 (22 FTA)
8 (7 FTA)
47 (9 FTA)
15 (13 FTA)
32 (21 FTA)
8 (7 FTA)
Source: MOEA      

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