Taiwan challenge to Korea, Japan (By Jens Kastner )

TAIPEI – The recent signing of the Economic Cooperation Framework Agreement (ECFA) between Taipei and Beijing has put South Korea and Japan in an unfavorable position. Through tariff exceptions and reductions, Taiwanese businesses are to enjoy more advantages in the huge mainland market compared with their Korean and Japanese counterparts.

The issue has become more prominent due to still sluggish demand from United States and European Union markets. Since a high percentage of Korean and a considerable share of Japanese exports to China overlap with those from Taiwan, Tokyo
and Seoul are afraid of losing their competitive edge.

As Korean businessmen are pressuring their government to sign its own free-trade agreement (FTA) with China, Japanese companies see Taiwan as a short-cut to the mainland Chinese market. The formula is simple: the Japanese side establishes joint ventures in Taiwan to produce goods on the island and thus enjoys the same preferential treatment in China as fully owned Taiwanese companies.

Japanese companies from sectors as various as consumer electronics, semiconductors, optoelectronics, solar cells, machine tools, comics and e-books have reportedly been seeking to get a foothold in Taiwan with the objective of getting easier access to the Chinese mainland market.

Although there are a number of ways Japanese companies could take advantage of Taiwan’s new position under the ECFA, the establishment of joint ventures is the most promising. With the help of these, Japanese businesses will be able to benefit from the ECFA just like any native Taiwanese company as soon as the ECFA comes into force in January 2011. By contrast, it would take at least three years before a fully Japanese-owned venture that operates from Taiwan would be allowed to penetrate the mainland market.

Apart from the tariff exceptions and reductions Japanese companies strive to take advantage of, there are other reasons that make Taiwan a closer trading ally for Japan than it has been. Recent labor protests at Japanese-invested factories on the mainland cast increased doubts among the Japanese whether China, the so-called factory of the world, will continue being a good choice for Japanese investments. A significant rise in Chinese labor costs is expected. Widespread anti-Japanese resentment in the mainland also frightens Japanese expatriates and their families residing there, while living conditions and other social factors can make Taiwan appear more appealing.

Last but not least, Taiwan’s bureaucracy is seen as far less prone to corruption than China’s. Transparency International’s 2009 Corruption Index puts Taiwan in 37th place, well ahead of China’s ranking of 79.

Japanese businesses establishing links in Taiwan may also help them to compete better with their Korean counterparts.

“South Korea is Japan’s first and foremost trade rival, not Taiwan,” Liou To-hai, professor of diplomacy at Taiwan’s National Chenchi University and Director of the Center for WTO Studies, told Asia Times Online. “By establishing joint ventures with Taiwanese companies, Japan gains advantages in competing with South Korea.”

Viewed from a security angle, however, the picture is different. South Korea and Japan – the US’s main military allies in the region – should work on a Japan-Korea FTA first before thinking of negotiating on bilateral pacts with others, said Liou. One hindrance is the trade imbalance between the two countries. “The main obstacle a Japan-Korea FTA faces is Korea’s trade deficit with Japan,” Liou said.

The deficit that has been growing rapidly since 2004 due to imports of high-technology parts for Korea’s manufacturing sector and increased tourism to Japan.

China replaced the US as Japan’s biggest export destination in 2008, two years after becoming the top destination for Korean goods.

The leaders of China, Japan and Korea agreed in 2002 on undertaking non-governmental academic research on setting up a regional free trade zone. In-depth studies dragged on until 2009, and when China and Taiwan began negotiating on the ECFA, the China-Japan-Korea trade talks fell back as a priority for Beijing.

After the signing of ECFA, the absence of an FTA between Korea and China is believed to be hurting Korean businesses in particular since 14 of Korea’s 20 key export items already faced competition from Taiwanese goods, according to the Korea International Trade Association.

South Korean President Lee Myung-bak has been coming under pressure from his country’s business groups to remedy the situation since shortly before the ECFA was signed. The demands from various corners of Korea’s economic landscape come in unison: The negative impact from the China-Taiwan ECFA must be minimized by signing a Korea-China FTA as soon as possible.

This, however, is a complex task, given that a proposal to establish a US-Korea FTA keeps sticking in the US Congress over sensitive issues in the auto sector.

According to Liou, President Lee’s hands are tied because the issues of a China-Korea FTA and the US-Korean FTA are related. “Although Lee is nervous and eager to sign an FTA with China, he couldn’t possibly do so before the US-Korea FTA has been approved, since otherwise he would hurt his country’s strategically vital relation with the US,” said Liou.

In Japan, at least, many companies have decided not to wait for their government to hammer out favorable deals with China. To the Japanese businessmen, the Taiwan-Japan joint-venture concept is the most promising option and are finding support in the media.

“Japanese commentators recommend that Japan sign an FTA with Taiwan and the US first, before they start negotiating with Beijing,” he said.

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