Chapter I Introduction
I.1. Background and Research Motivation
For three decades the core of cross-strait relations has centered around economic integration. Taiwanese foreign direct investment (FDI), initially intended for export-manufacturing, has found itself evermore intended for domestic Chinese consumer goods and services. The development of China’s middle class since its post-2000 economic boom has created an insatiable demand for consumer goods and services that mainland-owned firms simply cannot meet. As a result, Taiwanese manufacturing ventures have become more and more China-oriented. China’s traditional role as a global factory has been important for continued Taiwanese growth and Taiwanese manufacturers have found a cheap source of labor and an expanding market for their products. Taiwanese investments in manufacturing are building up China’s indigenous manufacturing sophistication, bringing China’s more developed industry sectors up the value chain. While Chinese industry has found a model for growth and stability, many economists realize this has been at the expense of Taiwanese industrial hollowing out. In recent years, as China has developed, a shift has occurred in the cross-strait trade model caused by active policy implementation and passive market forces, resulting in a new trade dependency orientation. The economies of Taiwan and China, particularly the provinces of Fujian and Guangdong, are becoming more and more integrated. Taiwan has been struggling for over a decade to revitalize its stalled economy, and China has been one reliable regional market that Taiwanese firms have found themselves able to count on for growth. In its pursuit to prevent any perception of de jure Taiwanese independence China has followed a policy that constricts Taiwan’s ability to pursue bilateral trade agreements in the greater global market, effectively forcing reliance upon the mainland for engagement in international economic activities.
Cross-strait economic integration was formalized with the 2010 signing of the
Economic Cooperation Framework Agreement (ECFA). ECFA is based on an earlier trade agreement between Hong Kong and China and is meant to facilitate trade within the context of China’s “One Country, Two Systems” (OCTS) policy, and is a formal arrangement that has
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removed trade and investment barriers between the two parties. China has sought to implement a model such as ECFA for years, and found success with former Taiwanese President Ma Ying-jeou (2008-2016) who saw ECFA as a means to facilitate greater cross-strait trade, a tool for releasing Taiwan from China’s constricting pressure on global market participation, and an assurance that Taiwan would be able to engage in its own bilateral international free trade agreements (FTAs). The initial ECFA framework has been followed up by several additional trade agreements. For all the benefits of ECFA, Taiwan is further placing itself in an evermore asymmetric integration with the mainland and will have to face down many of the same domestic barriers that China’s provincial economies experience.
Taiwan also has to contend with the uncontrollable nature of its own primary economic actors, Taiwanese investors living on the mainland known as the taishang (台商). Chinese authorities actively pursue incentive policies aimed at coaxing greater participation of taishang in the Chinese market. The push and pull of market mechanisms that entice development are not making it any easier for the Taiwanese to steer themselves away from the current path toward disadvantageous interdependence. Chinese policy attempts to coax Taiwan into a path dependency heavily connected with investment incentives in Fujian and Guangdong. Despite the semi-incentivized, semi-forced nature of Taiwan-China integration, a great number of factors have been ignored which could prove unsustainable or even resource-exhausting, including the unusually high levels of protectionism existing among Chinese provinces.
As Taiwan continues to trade with China it is finding itself less and less in a position of economic security as it enters the integrated market, particularly as China’s provinces continue to match their industrial sectors with that of the island. China’s most advanced provinces are turning into Taiwan’s competitors rather than partners, and as Taiwan is pulled further into China’s “Common China Market” it will begin to experience the same phenomena that have created high levels of protectionism amongst the mainland’s provinces. Protectionism in the People’s Republic of China develops in order to remain competitive in the global market.
Purpose of research
Taiwan and China now exist in the era of ECFA, and in the wake of its establishment there are many trends that must be evaluated in order to determine the short-term and long-term impacts that ECFA will have on the economies of China and Taiwan. This thesis will identify the
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benefits and and disadvantages of integration under the first few years of ECFA and determine whether or not the cross-strait economic interdependence trend can overcome potential trade impediments. It will also determine whether further integration is possible without reducing any party’s ability to project itself.
The problem this thesis seeks to address is whether or not both parties are moving toward a sustainable and beneficial economic policy. The World Bank has predicted that for the 2016-2018 period the Asia-Pacific region’s average growth rate will decelerate to 6.2 per cent from its 2016 6.5 per cent rate.1 This 6.2 per cent growth rate can be used as a benchmark for identifying whether or not economic integration is helping the economies concerned exceed this figure, or whether it is allowing economic growth to decelerate at a greater level. In short this it asks: Is further integration between Taiwan and China beneficial from an economic standpoint, and would the economies of Taiwan and China be able to integrate successfully?
Contributing to the academic body
The amount of literature available on China’s reforms, decentralization, national
development initiatives, and domestic trade barriers is vast. Equally voluminous is the amount of writings in recent years on ECFA, and cross-strait integration. What is missing, however, and what this paper seeks to contribute to the field, is an analysis of the feasibility of cross-strait integration in light of the behavior of Taiwan’s and China’s economic actors, in particular how China’s domestic provincial-level trade barriers will exert influence on Taiwan’s willingness to trade with the provinces now that ECFA has brought the island’s economy into the seemingly dysfunctional economic fold.
The next sections will identify the themes already explored by scholars on this subject, and followed by an explanation of the hypothesis, its measurements and the methodology of how this research has been conducted before exploring the data and trends.
1 See The World Bank, “Global Economic Prospects: Divergences and Risks,” 2016.