Taiwan's Suppliers Take Sigh of Relief After Sino-South-Korean FTA Shows Limited Leeway

Taiwan's manufacturers of petrochemicals, liquid-crystal displays, automobiles and machine tools can take a sigh of relief after learning the free trade agreement (FTA) China and South Korea initialed on February 25 does not offer as much leeway for trade and duty-reduction as had been expected by observers and other interested parties.

Originally Taiwan's petrochemical manufacturers had expected China would agree to waive import duties on South Korea-made polyvinylchloride (PVC) and polyethylene (PE) in the short term. But actually the initialed agreement states that China will maintain the rates after cutting the rate from the current 6.5 percent to 4.2 percent for PVC and 6 percent for PE over 5 years. But duties on polystyrene (PS) and acrylonitrile butadiene styrene (ABS) will be waived in 20 years.

According to Industrial Development Bureau (IDB) of Taiwan's Ministry of Economic Affairs (MOEA), an estimated US$1-1.71 billion of Taiwan-made petrochemicals will displaced by South Korean products once the duty reductions will have been completed as per the agreement.

While Taiwan's petrochemical manufacturers estimate their loss due to the agreement could be less than NT$100 billion (US$3.22 billion), they are uncertain of the full brunt of the agreement but believe such impact to hit in the long term.

As for LCD, China, one of the world's most important markets for the panels, will not change the duties over the first eight years once the agreement becomes effective but will reduce such rates to zero in the next two years thereafter.

However, AU Optronics Corp., and Innolux Corp., reportedly Taiwan's top two LCD makers, suggest the Taiwan government to accelerate the talks with China to include the island's LCD sector in the Cross-Strait Agreement on Trade in Goods, which is based on the Economic Cooperation Framework Agreement (CEFA) signed by both in 2010.

As for South Korean cars, China only agrees to cut duties to 22.5 percent in five years on new cars but excluding car parts from tariff reductions. Taiwan's car-parts makers say that even the minor reduction would bring serious impact because many of their products already qualify for fast-tracked duty-free status in the ECFA not to mention that many of them make the products in China.

Neither will the South Korean machine-tool industry benefit much from the initialed agreement because only few types of machines will see import tariff rates reduced by 30 percent in five years or to zero in 20 years.

Eric Chou, chairman of the Taiwan Machine Tool & Accessory Builders' Association, points out that South Korean machine tool makers are no match for Taiwan without tariff advantages. The true archrivals are Japanese high-end manufacturers, whose superior products, coupled with the recently devalued Japanes yen, ring bells of threat to Taiwan's machine tool makers.

The MOEA predicts the Sino-South-Korean agreement to take effect January 1, 2016 without hitting Taiwan as hard as originally expected. The ministry initially thought the agreement would cause a loss of around NT$650 billion (US$20.96 billion) to Taiwan's exports to China, but now will reassess the potential impact on Taiwan's industry to come up with a new evaluation in a month.

(KL)