Discuss Restarting ECFA Calmly
Economic Daily News Editorial, June 30, 2023
With the 2024 presidential and legislative elections approaching, campaigns have shifted their focus back to significant economic and financial issues—whether to restart negotiations on the Cross-Strait Economic Cooperation Framework Agreement (ECFA), including cross-strait agreements on trade in services and trade in goods. After Ko Wen-je, former Taipei mayor and presidential candidate of the Taiwan People’s Party (TPP) raised this issue, it triggered a siege from the ruling Democratic Progressive Party (DPP), with Kuomintang (KMT) presidential candidate Hou Yu-ih also voicing his opinions, intensifying the battle. Many Taiwanese are not clear about the relationship between ECFA, trade in goods, and trade in services, nor do they understand how it is related to Taiwan's economy. When they hear the DPP say that the ECFA will lock the economy into the "One China" framework, allowing 4 million white-collar jobs to be taken by people from mainland China, naturally, they have become extremely worried. However, is this really the situation? Let's calmly analyze the services trade pact.
After 2000, the promotion of trade liberalization by the World Trade Organization (WTO) faced obstacles, leading to a surge in the popularity of Free Trade Agreements (FTAs) among countries. Mutually beneficial negotiations took place, aiming to eliminate tariffs on all goods and open up highly regulated service trade and investment. Currently, most countries in East Asia have FTAs in place, allowing for tariff-free trade of goods and significant market access in services. Taiwan, North Korea, and Mongolia are the few exceptions where FTAs are scarce. Taiwan's export growth momentum over the past 20 years has also fallen behind in East Asia, although this fact remains unknown to most people.
Among international FTAs, except for the agreement between the Association of Southeast Asian Nations (ASEAN) and China, most are comprehensive agreements encompassing both goods and services trade, and they are signed as a single package. Since these agreements are the result of bargaining, they are subject to a "package vote" rather than a clause-by-clause vote. The current ECFA between Taiwan and mainland China is only a "framework agreement" with an attached "early harvest list" that covers only 5 percent of Taiwan's export items and a minimal number of service industries. Trade in goods and services constitutes the main content of the ECFA. However, the service trade agreement has been signed but put on hold in the Legislature, and the negotiations for trade in goods have not even started, thus putting Taiwan at an increasingly competitive disadvantage in the mainland market.
The political confrontation between Taiwan and mainland China, coupled with China's suppression, has hindered Taiwan from signing more FTAs. As a result, only the high-tech electronics industry in Taiwan has experienced a surge in demand due to international demand, especially after joining the Information Technology Agreement (ITA) and enjoying tariff exemptions. Other manufacturing industries still face tariff barriers, along with high labor costs, leading to a significant outflow or contraction. This has resulted in a distorted and fragile development of the manufacturing sector, making it more sensitive to global economic cycles.
The services sector faces even greater challenges. Previously, both sides had opened up relatively labor-intensive service industries to each other, such as wholesale and retail, and catering. However, industries requiring professional skills, high salaries, and high profitability, such as banking, securities, insurance, accounting, design, law, consulting, healthcare, education, and e-commerce, are subject to strict regulations and face difficulties in entering the market on a large scale. Only through a service trade agreement can they open up their markets to each other and obtain "market access."
The competition in Taiwan's service industry is fierce. The number of small and medium-sized enterprises (SMEs) in the service sector has rapidly increased from 1 million in 2013 before the “Sunflower Movement” to 1.2 million in 2021. In just one year in 2021, there were 100,000 new SMEs established in the service industry. These enterprises operate on small scales, making it difficult for them to invest in equipment for digital transformation. As a result, their productivity is low, and the failure rate is extremely high, leading to slow wage growth.
In 2013, the average monthly salary in the wholesale and retail industry lagged behind the manufacturing industry by NT$3,000 (about US$96), and by 2022, it had widened to NT$8,000 (about US$257). Recently, Hsieh Chang-tai, an academician at the Academia Sinica and professor of the University of Chicago's Booth School of Business, indicated that the problem lies in the average small scale of the service industry, which lacks the ability to invest in research and development and equipment improvement, thus hindering productivity and wage improvement. If Taiwan signs a trade in services agreement with the mainland, then it can enter the mainland Chinese market, expand its scale, and have the ability to research, innovate, and invest in equipment. This would lead to rapid improvements in productivity and wages.
However, the FTA must have “mutual” market openness. The ruling DPP has always “guarded” the relatively vulnerable in economic policies and intends to “detach” from China. They loudly proclaim that the services trade pact will lead to a large number of mainland Chinese enterprises flooding Taiwan with low wages, resulting in a significant amount of unemployment. In reality, Taiwan has already opened up half of its service market, including wholesale and retail industries, but there are not many mainland enterprises daring to invest because they find it difficult to compete with Taiwan and end up empty-handed. In fact, as long as the “Service Trade Agreement 2.0” is accompanied by national security measures and “quantity control” to limit the number of mainland Chinese people coming to Taiwan, it can fundamentally address the gaps in the previous iteration and reassure the public.
When promoting the services trade pact back then, the KMT was overconfident due to the victory on ECFA and failed to learn from Europe and the United States to let some ”transparency” into the ”black box” and “communicate” with the general public. As a result, insufficient communication eventually triggered the Sunflower Movement in 2014 and put the agreement on hold. To restart the service trade agreement, comprehensive planning, supporting measures, and a government with execution capabilities are needed to persuade the public's support. Taiwan's service industry cannot continue to lag behind, the Service Trade Agreement 2.0 is worth discussing with calm rather than non-stop hostility.