On Monday, Chinese and South Korean leaders agreed to a “substantial conclusion” for a free trade agreement (FTA) between the two East Asian economies. The arrangement, which took 14 rounds of negotiations over two and a half years, still needs to be drafted into an actual agreement after technical consultation, and then be approved by the respective legislatures.
According to The Korea Herald, the deal was agreed to during last week’s Asia Pacific Economic Cooperation (APEC) leaders summit in Beijing. The two sides agreed to keep tariffs on rice, a major agricultural product, and automobiles, off the deal. Tariffs on LCD monitors, a large part of Korean export, are expected to stay the same for 10 years before being cut.
Over the next two decades, the two countries are expected to lift tariffs on more than 90% of the trade in goods, including 70 percent of farm and fisheries goods, as well as online commerce and government purchasing.
Woo Tae-hee, South Korea’s chief negotiator, said that the agreement is focused on small and medium-sized business opportunities for clothing, leisure goods, cosmetics, and electronics, instead of matured markets such as steel and petrochemicals. Petrochemical tariffs will be reduced by 2-6% over 10 years.
According to Reuters, since China and South Korea normalized diplomatic relations in 1992 (while ending relations with Taiwan), bilateral trade grew from $6.38 billion in 1992 to $228.92 billion in 2013, a 36-fold increase.
The FTA with South Korea is China’s ninth bilateral FTA, and China is hoping to sign another FTA with Australia by the end of this year. Regionally, China has a free trade agreement with the Southeast Asian economies of ASEAN, and is pushing for a pan-Asia free trade arrangement called the Regional Comprehensive Economic Partnership (RCEP). The RCEP is seen as a counterweight to the US-led Trans-Pacific Partnership (TPP). Unlike other Asian Pacific nations, South Korea has expressed more interest in RCEP compared to the TPP.
The news of the deal sent shockwaves throughout Taiwan, whose economy has long depended on export markets. Taiwan draws many parallels with South Korea, with both countries achieving the so-called Asian economic miracle through export manufacturing in the last century, and then becoming crucial to the global electronics supply-chain. China is also currently both countries’ largest trading partner.
Understandably, Taiwan sees South Korea as a direct competitor, but as large South Korean brands such as Samsung and Hyundai become global brands in recent years, Taiwan’s industry has looked to South Korea with a mix of envy and anxiety. Industry leaders have long urged trade liberalization, especially with China, as the solution to competing with South Korea.
However, as recent student movements in Taiwan have shown, many people, especially the younger population, are skeptical of such policies. Taiwan’s KMT administration has been promoting trade liberalization with China as its central policy, but an agreement in services has been stalled by student protesters occupying the legislature in March and April.
After the news of the China-Korea FTA broke, Taiwan’s Ministry of Economic Affairs responded that the deal will cause a 0.5% decrease in Taiwan’s GDP and 1.34% decrease in total exports, and that 62.7% of South Korea’s trade is applicable for free trade, compared to Taiwan’s 9.68%. The ministry warned that the impact to Taiwan’s economic competitiveness will be detrimental, and Taiwan will need to conclude free trade agreements with China as soon as possible.
President Ma Ying-jeou has also come out heavily criticizing the opposition DPP for misleading the public and obstructing passage of the trade agreements with China. Industry leaders such as Lee Chih-chun (李志村), president of petrochemical giant Formosa Plastics, warned that the average college graduate wage of NT$22,000 a month could fall to NT$15,000 a month. Hsu Sheng-hsiung (許勝雄), the head of the Chinese National Federation of Industries, called for lowering the minimum wage to allow businesses to remain competitive.
Critics of free trade and closer economic ties with China have argued back, pointing out that the agreement’s effects will not be felt immediately. Tung Tzu-Hsien (童子賢), the founder of electronics company ASUS, wrote in Taiwan’s Commonwealth Magazine that since Taiwan and China are both members of the Information Technology Agreement (ITA) under the World Trade Organization (WTO), most of electronics already enjoy low to zero tariffs. He argued that quality and innovation are ultimately more important than lowering costs through FTAs. Other opponents such as Lai Chung-chiang (賴中強), a long time critic of Ma’s China trade policies and an organizer of the Sunflower Movement, said the government and corporate interests have teamed together to fabricate statistics meant to intimidate and spread fear.
According to venture capitalist and Brookings Institute visiting fellow JoAnn Fan, while FTAs deal primarily with tariff reduction, its negotiations often reflect geopolitical balance of power. “It is important that Taiwan steps up its efforts in engaging in FTAs so not to be ‘crowded out’ since Taiwan is an integral part of the global value chain. Nevertheless, Taiwan’s own competitiveness in product innovation, quality and service remains to be the main driver for growth, with or without FTAs,” Fan said.
Meanwhile, analysts in Seoul have said the deal would have only a limited direct boost to bilateral trade or economic growth. According to the BBC, free trade supporting Korean media said that the deal with China excluded 10% of items, compared to 0.1% for FTA with the US and 0.4% with Europe. Left-leaning newspapers worry about Korea’s economy becoming overly reliant on China’s, and called on the government to assist farmers. Most newspapers, however, called on industries to develop higher value-added goods and services to compete with China.