China, Taiwan pull back on talks to cut import tariffs

Taipei and Beijing are slowing negotiations on a massive tariff-cutting agreement following protests in the Taiwanese capital over closer economic ties with a political rival, potentially hurting the island’s competitiveness against other Asian exporters.

The two sides finished their 10th round of talks earlier this month on a deal conceived in 2010 to cut tariffs on up to 5,000 categories of goods shipped between Taiwan and the mainland, its top trading partner.

Negotiations have slowed to avoid riling the Taiwanese public before presidential elections in January next year,  to let Beijing reconsider the impact on mainland industries and to make room for Beijing’s pursuit of separate deals with Japan and South Korea, analysts say.

“The key question is whether the negotiations on both sides are continuing and whether they’ve sent any clear signs, any certainty, as to whether both want to move forward,” said Tony Phoo, an economist at Standard Chartered in Taipei.

A diluted or delayed tariff-cutting deal would hurt Taiwan as its exporters lag Japan, South Korea and members of the Association of Southeast Asian Nations in access to the massive mainland market.

Taiwan had originally proposed that its agreement with the mainland cover automotive parts, display panels, machine tools and petrochemicals, all crucial to the island’s US$500 billion  economy, where exports make up about 30 per cent. Mainland-Taiwan trade last year totalled US$130 billion.

“These are important industries supporting Taiwan exports, and tariff reduction could address concerns over competition with South Korean counterparts for China market share,” said Iris Fan,  economist with  Singapore market research firm Forecast.  

The two sides have already dropped tariffs on 1,100 categories of goods.

But Beijing might keep chemicals and electronic items off the bargaining table in order to close manufacturing trade deficits with Taiwan, Fan said. “China might be more sensitive to offering generous tariff cuts in those areas in order to protect its domestic firms,” she said.

The mainland had weighted earlier agreements in Taiwan’s favour to be seen as supporting its economic development, a gambit towards its goal of eventual political unification.

Beijing is also less keen this time because of popular opposition in Taiwan highlighted by the March 2014 occupation of parliament by protesters who demanded more oversight of all deals with the mainland, which claims sovereignty over the self-ruled island. The two sides have signed 21 deals since 2008, when they agreed to set aside political differences to build trust through economic ties.

Those occupying the Taiwanese parliament initially demanded a halt to the ratification of a services trade liberalisation pact with the mainland, and the parliament has shelved its stamp of approval indefinitely.

Negotiators signed that deal in 2013 to open 144 service sector categories, which was expected to be a boon to Taiwan’s financial, healthcare and tourism industries.

The trade-in-goods agreement, born out of an economic cooperation framework agreement signed in 2010, may at least have to wait for the services pact to clear.

“Because of the delay in ratifying the services agreement, they have postponed further negotiations on goods that could expand the number of line items that can be traded tariff free,” said Wai Ho Leong, regional economist with Barclays in Singapore.

Taiwanese officials will not say how many categories or which ones they hope to include in the agreement. But talks have slowed and the trade-in-goods agreement might be signed next year,  said David Hsu, spokesman for Taiwan’s Bureau of Foreign Trade.

“The speed of our negotiations might not be what we had wanted,” he said. “We’re still optimistic, but it might be that both sides decide to hold back some items.”

But Taiwan’s anti-Beijing opposition party may win the presidency next year, freezing ties with the mainland until the two sides figure out new ways to work together.

Taiwanese President Ma Ying-jeou has sounded the alarm about Taiwan’s trade relations after Seoul and Beijing announced last year they would sign their own free-trade agreement. This year, the mainland, South Korea and Japan have finished four rounds of talks on a separate three-way trade-liberalisation deal.  

Taiwan would push the mainland for tariff measures stronger than those offered South Korea, the island government’s Taiwan Today news website said.

Taiwanese exporters with mainland clients are happy for now to see any progress.

“Our guess is that through the elections and year’s end things will get tougher politically,” said Todd Yeh, chief executive of mobile phone component  maker TeamChem. Per-kilo mainland customs duties on TeamChem’s shipments had quadrupled since last year, he said, speculating that the mainland was hinting that its economic goodwill was on hold.  

Some exporters are watching other trade-related pacts. As a member of the World Trade Organisation’s Information Technology Agreement, for example, Taiwan can export hi-tech hardware from an increasing number of categories to the other 79 member countries or regions, including the mainland.

Taiwan has also applied for membership of the mainland-led Asian Infrastructure Investment Bank. If Taiwan is admitted, local contractors would gain access to power, transportation and urban development projects around Asia.

But lowering barriers to the mainland for core Taiwan industries such as car parts, machine tools and petrochemicals requires the two-way agreement. Taiwan Today calls those sectors, as well as display panels, “at risk” industries.

“The China-Japan-South Korea FTA will be confirmed for signing in mid-year and of course that will put pressure on Taiwan’s exports or on its own trade deal, possibly meaning they get left behind,” said Andrew Tsai, an economist with KGI Securities in Taipei.

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