To prevent the Asian integration taking place under ASEAN+N from marginalizing Taiwan, the government early this year proposed signing a cross-strait Economic Cooperation Framework Agreement (ECFA) with mainland China. The complexity of this agreement and the unrelenting domestic opposition to it have resulted in much of the debate becoming oversimplified. What are the pros and cons of such an agreement for the textiles industry?

"I'm not worried that next year's integration of ASEAN+1 (China) will result in Taiwanese exports of textiles to ASEAN or mainland China being displaced by products from firms within ASEAN for tariff-related reasons," says Cheng Kai-fang, deputy director of the Taiwan Textile Research Institute's Department of Industrial Information and Services. Cheng argues that an analysis of each party's export and trade figures from recent years supports his position.

First, Taiwan's exports of textile products to mainland China consist largely (about 65%) of fabrics, whereas ASEAN's primary textile export to the mainland is chemical fiber. The two products are distinct, so integration is unlikely to have an impact. Taiwan's textile exports to ASEAN also consist primarily (72%) of fabrics, whereas the mainland's textile exports to ASEAN are largely (more than 50%) knitted garments and cotton. Again, there is little overlap and should be little displacement.

Second, tariffs have been falling steadily since the ASEAN plus China free trade zone came into force in 2005 and are slated to reach zero in 2010. If decreasing tariffs and rising trade were going to displace Taiwanese exports, the effects should have already been apparent. However, when you look at the trade numbers for the last five years, Taiwan's exports to ASEAN have continued to grow both for textiles and in total. Taiwan's exports to China have also increased in four of the last five years, the only exception to that trend being in 2008, when the global financial crisis caused exports to fall (see Table 1).Nonetheless, the industry is not very optimistic.

2012 a turning point?

"I predict that there will be a clear decline in Taiwanese fabric exports in 2012," says C.H. Hung, CEO of Eclat Textile Company. Hong says that the orders won't shift to other producers immediately when the tariffs drop to zero next year. Instead, international buyers will spend a year or two trying out products from elsewhere. Their main concern is quality. Mainland China and Thailand make pretty good fabric, and he believes that they'll be able to poach orders from Taiwan if they can deliver products of reliable quality.

The general consensus is that trade within the massive 1.8-billion person ASEAN plus China free trade area will increase markedly as a result of tariff reductions, and Taiwan's exports may be displaced. However, although exports may fall by a total of US$500 million from the beginning of tariff reductions to the zero-tariff point, given that the textile industry exports about US$5 billion annually to mainland China and ASEAN, the proportion is not all that high.

On the other hand, ASEAN plus Korea may pose a greater threat to Taiwan. Despite the smaller size of the Korean market, fabrics are a key export for its textile makers, thus their product mix overlaps much more closely with that of Taiwanese makers.

Chiu Sheng-fu, director of the Department of Industry Information and Services at the Taiwan Textile Research Institute (TTRI), says that there's little difference between Korea's knitted and woven fabrics and Taiwan's and that Korea is adept at poaching business from competitors. The ASEAN plus Korea agreement, which only came into force and began lowering tariffs in 2007, hasn't had much impact on trade yet. But when integration is completed in 2010, tariffs on 90% of the goods traded between the two will drop to zero from levels previously around 10%, and Taiwan's exports of textiles to ASEAN will necessarily suffer badly.

What are we to do if Taiwan continues to be shut out of ASEAN+N as the latter continues to expand and integrate into what are becoming East Asia's most important economic entities?

Which hurts worse?

As everyone knows, it's China that's keeping Taiwan from participating in ASEAN+N. The Ma administration has pushed the ECFA with mainland China since shortly after taking office, and hopes to use this agreement to gain access to ASEAN. While this is undoubtedly a pragmatic move, it has not alleviated concerns over our dependence on mainland China or about the mainland's efforts to use economic measures to "reunify" Taiwan. The debate continues to rage in Taiwan, with proponents and opponents each having their own rationales. Setting aside the complex political and social dimensions, the question is: if we sign the ECFA and it succeeds in eliminating tariffs on and lowering the price of Taiwanese exports to mainland China, how much will our exports grow?

In the case of the textile industry, the TTRI's Cheng Kai-fang says that the agreement will have little effect on exports to the mainland of upstream Taiwanese textile products like yarn and chemical fiber because tariffs on these products are currently only 0-5%. He argues that midstream fabrics and finished garments, for which tariffs are 10% and 12-15%, respectively, will feel the effects more strongly. Mainland importers that resell these products abroad have almost all of these tariffs offset by tariff rebates totaling some US$500 million that are intended to encourage exports. However, those who import Taiwanese fabrics and garments for sale in the mainland market will likely increase their purchases of Taiwanese fabrics because they won't be paying any tariffs when they do so. What percentage of Taiwan's textile exports to China is for the domestic market, and what percentage is for reexport? In truth, the government is uncertain. TTRI's most conservative estimate (based on historical data on the effect of price fluctuations on the export ratio) suggests that signing the ECFA will increase Taiwanese exports by 25%, by about US$500 million per annum.

"But don't forget, free trade is a two-way proposition," says Cheng. "If we sign the ECFA, mainland textile products are likely to pour into Taiwan." He says that the Industrial Development Bureau currently considers four segments of the domestic textile industry to be vulnerable: towels, socks, bed linens, and underwear. If trade is liberalized, these manufacturers will need to upgrade or transform if they are to have a chance to resist the onslaught of inexpensive, well made products from mainland China. Some research institutes estimate that Taiwanese firms could lose more than US$100 million in sales, or about 20% of the market, to their mainland rivals.

Hidden obstacles

While the ECFA certainly seems as if it would boost Taiwan's external trade, Academics argue that you must also account for the crucially important hidden costs, things like certificates of origin (see "What are rules of origin?" on next page) and other non-tariff barriers.

2004's Closer Economic Partnership Arrangement (CEPA) between Hong Kong and mainland China is a good example. Hong Kong expected the agreement to greatly increase its exports to the mainland, but ended up gaining nothing because mainland provinces and municipalities levied tariffs of up to 17% on them.

There is also the question of whether mainland China can be trusted to keep its promises," says Cheng. She mentions mainland China's implementation of recent cross-strait agreements on agricultural products, and notes that while the mainland nominally liberalized imports, it used claims about the failure to pass quarantine inspections to cut the volume of oranges from Taiwan.

"Non-tariff barriers to trade might be hidden in the ECFA," says Cheng, who also notes that these kinds of games aren't unique to mainland China. The US-South Korea free trade agreement, for example, allows Korea to export goods to the US free of tariffs, but also requires that they contain a certain percentage of American-made components. This provides indirect protection of the US's domestic industries.

The TTRI's Chiu says the government is rolling out measures to address ECFA's impact on smaller, more vulnerable firms. These include incentivizing corporate upgrades and transformations by waiving the 30% charge that the government used to levy on firms seeking institutional assistance in developing new products and technologies, or obtaining market access.

Seizing the moment

Chiu mentions Taiwan's small- and medium-sized towel makers as an example, noting that many made low-cost towels for ceremonial uses, and utilized funeral homes as a distribution channel. In recent years, TTRI has been encouraging these firms to develop higher value products, in particular the imported hand towels, bath towels, and bath mats used by Taiwan's hotels and motels. Recognizing that hotel towel specifications vary and large machines are expensive, TTRI has purchased a heavy loom that it is allowing firms to use free of charge for development purposes. It is also helping them build websites and develop new sales techniques.

TTRI is also providing the already strong sock industry with technical assistance on items like sweat-wicking and odor-resistant specialty yarns that greatly increase the value-added of socks.

"Signing the ECFA to grow our markets and trade would benefit the economy in general," says Lin Chu-chia, a professor in the Department of Economics at National Chengchi University. "But it will do so at the expense of a small number of people." Lin says that the key policy question is how to maximize the benefits while minimizing negative effects.

In addition, since it's not yet clear whether the ECFA will liberalize trade in services, it is difficult to estimate the agreement's effect on capital, personnel, and technology flows. With many businesses believing that it will have a profound impact on these areas, a key issue in upcoming cross-strait negotiations will be the question of how to preserve Taiwan's technological dominance.

Explanation of Terms What are rules of origin?

Rules of origin are the rules by which free trade agreements determine whether imports and exports enjoy preferential tariff rates. They exist to prevent nations not party to the agreement from disguising their goods as member-nation goods to take advantage of preferential tariffs.

Under the ASEAN plus China free trade arrangement, a firm that wants to enjoy preferential tariff rates when, for example, selling a garment manufactured in Thailand to China must apply to the competent authorities for a certificate of origin (COO). The COO certifies that 30-40% of the item's production and processing costs (including materials, technologies, labor, rent, and distribution) were incurred within the territory of an ASEAN member. But the certification process is expensive. The time spent on it, and the number and complexity of the documents required, generate administrative costs that increase the price of certified goods by 10-25%, so exports have been reluctant to apply for certificates.

Taiwan textile exports to mainland China and ASEAN

                                                                                                                                                                        unit: US$ million

Impact on various industrial exports of Taiwan's exclusion from East Asian regional integration

                                                                                                                                                                                                                        unit: US$ million