China Trade Pact Draws Taiwan Into Economic Embrace

June 29 (Bloomberg) -- Taiwan is due to sign its first trade treaty with China today, strengthening commercial ties with the fastest-growing major economy and the island’s biggest trading partner and investment destination.

The accord to be signed in the Chinese city of Chongqing, former headquarters of Taiwan’s ruling Kuomintang when they fought the Japanese from 1937 to 1945, shows how much relations with the mainland have warmed since Taiwanese president Ma Ying- jeou took office in May 2008. China has viewed the island as a renegade province since the Kuomintang fled there after losing to Mao Zedong’s Communists in the nation’s civil war in 1949.

“This would not be imaginable two or three years ago,” Carl Chien, senior country officer at JPMorgan Chase & Co. said by telephone in Taipei. “The mere fact that the two governments are signing some kind of treaty is already a record-breaking thing.”

China set aside its claims over Taiwan to negotiate the Economic Cooperation Framework Agreement, betting that ever- tighter economic integration will achieve what six decades of military threats did not. For Taiwan, the deal restores the island’s competitiveness in the world’s third-biggest economy and may pave the way for agreements with other trading partners.

China will cut tariffs on 539 items from Taiwan valued at $13.8 billion, or about 16 percent of the island’s 2009 exports to the mainland, Zheng Lizhong, vice chairman of the Association for Relations Across the Taiwan Straits, said last week. Taiwan will cut tariffs on 267 items from China worth $2.86 billion, or about 10.5 percent of the country’s shipments to Taiwan in 2009.

Chinese Visitors

Since Ma took office, direct air, shipping and postal links have been established. In the first five months of this year, 70,445 Chinese visited Taiwan, 70 percent more than in the corresponding period a year earlier, according to Taiwan Tourism Bureau numbers.

Taiwan’s benchmark stock index gained 17 percent in the past year as Ma pushed for the trade pact with China. That outpaced the 13 percent advance by the MSCI Asia Pacific Index. The Taiex rose 0.7 percent to 7554.78 points as of 9.01 a.m. in Taipei.

Taiwan is keen to reach the trade deal with China in order to secure for its companies the same preferential treatment the mainland now offers 10 Southeast Asian countries.

In January, a separate trade accord took effect between China and the Association of Southeast Asian Nations, lowering tariffs on two-way trade. Similar deals for China with Japan and South Korea are under discussion.

“It’s vital for us economically, it’s a matter of life and death,” said Philip Yang, a professor of political science at National Taiwan University in Taipei. “If we sign we won’t be in a disadvantageous position with Asean and Korea, our major economic rivals in China.”

Omissions

Still, the proposed trade pact doesn’t include items some Taiwanese companies had wanted, such as tariff cuts for polyvinyl chloride, or PVC, one of the island’s top exports, and easing restrictions in the semiconductor industry.

“The detailed items haven’t been disclosed,” Lee Chih- tsuen, chairman of Formosa Plastics Corp, Taiwan’s biggest polyvinyl chloride maker, told shareholders on June 25. “We aren’t satisfied, but it is acceptable.”

Under the pact, China will open up 11 service sectors such as banking, insurance, hospitals and accounting, while Taiwan agreed to offer wider access in seven areas, including banking and movies, the two sides said.

“China is incorporating Taiwan into its supply chain and Taiwan’s economy will become part of China’s economy, and that is the biggest worry for Taiwan people,” Tsai Ing-wen, chairwoman of the opposition Democratic Progressive Party, said at a rally by more than 30,000 people on June 26 to protest the accord.

Trade Booms

Trade with the mainland, Taiwan’s largest export market, rose 68 percent in the first four months of 2010 compared with same period last year, and Taiwan investment rose 44.7 percent, China’s Tang Wei, head of Taiwan, Hong Kong and Macao affairs at China’s Ministry of Commerce said on June 13. China and Hong Kong accounted for 43 percent of Taiwan’s exports, according to data from the island’s Ministry of Finance.

Under the deal, tariff reductions on items including petrochemicals, auto parts, textiles and machinery will be implemented in three stages over two years, by which time tariffs will be brought to zero.

A trade agreement with China is also vital to Taiwan as it seeks similar accords with other regional trading partners.

The agreement will “ease the concerns of most of the countries in the world and start to bring Taiwan back to a normal position in establishing FTA relationships with its important trading partner countries,” J.T. Wang, chairman of Acer Inc., the world’s largest notebook computer supplier, said in an e-mailed reply to questions.