Thursday, January 20, 2011

In Taiwan, an old-fashioned globalization debate

Analysis: A proposed Taiwan-China trade deal would mean cheaper stuff for consumers, but might also wipe out low-end local industries.

Global Post, May 23, 2010

TAINAN and LINKOU, Taiwan —
Cabdriver Chang doesn't like the deal.

Weaving through traffic in the balmy, temple-studded southern city of Tainan, he lets loose on why a proposed Taiwan-China trade deal — the Economic Cooperation Framework Agreement (ECFA) — is bad for Taiwan.

Taiwanese will lose jobs, he says. Taiwan's president is "selling out" the island. And Taiwan firms can't compete with the dirt-cheap "China price" made possible by low-wage labor.

"Take these, for example," he said, tugging on the worn, dark gray pair of pants he was wearing. "These pants are made in China, and I bought them for just NT$200 (about $7). The same kind made in Taiwan will cost you NT$1,000."

Asked about the apparent contradiction of railing against cheap Chinese imports while wearing a cheap pair of Chinese-made pants, he just laughed.

So goes the ambivalence of a globalized age. Trade deals like ECFA promise cheaper stuff for consumers in wealthier countries like Taiwan or the U.S. But wages for most workers in such countries are likely to stagnate, and some in low-end industries will lose their jobs.

Nowhere are feelings more mixed than in today's Taiwan, where the government is negotiating a deal that would bind the island more tightly than any other country in the world to China's behemoth economy.

Taiwan has the added anxiety of negotiating with a rising political and military force that has vowed to one day absorb the self-ruled island, by force if need be.

But, to a surprising degree, the debate on ECFA in Taiwan is shaping up as a classic — if more pointed — argument on the pros and cons of globalization, mirroring similar conversations from Brazil to Botswana.

In a late-April TV debate with the pro-ECFA president, anti-ECFA opposition leader Tsai Ying-wen barely talked about politics, focusing instead on economics. ECFA will worsen income inequality, mostly benefit big conglomerates and put many Taiwanese out of work, she said, as the two sides commit to scrapping most tariffs over the next decade.

"You're talking about the first two or three years," Tsai told Taiwan president Ma Ying-jeou, chiding him for low-balling potential job losses. "But in the next seven or eight years we have to eliminate most tariffs. How many people will be affected then?"

Ma, for his part, said Taiwan's trade with China, the island's chief export market, will "definitely" increase after the deal and that he would not allow Taiwan's sovereignty to be hurt. He accused Tsai's party of fear-mongering, saying it was "exaggerating the negative effects" of the deal.

Interviews with business bosses, workers, government officials and locals here illustrate why trade deals like ECFA create so much anxiety and uncertainty. The gains are often intangible, spread economy-wide and over long stretches of time, and so don't mean much in day-to-day terms to the average "Chou."

The threat is much easier to grasp. Cheap Chinese stuff could overwhelm the island, putting Taiwan firms out of business and hundreds of thousands of workers on the streets, the deal's opponents say.

"We can't compete"

Such are the fears of hand-made shoemakers, clustered in the Tainan area in southern Taiwan, and in the north around the capital Taipei.

Over tea at the Taiwan-made Footwear Development Association's office in Tainan, association chairman Yang Rong-de and local industry official Chiu Fu-yin said ECFA will put their business in peril.

Right now, they said, Taiwan's small firms can still make money selling hand-made shoes, because a high tariff of more than 40 percent on Chinese-made shoes makes them sell for roughly the same price as Taiwan-made shoes.

But if ECFA is passed, that tariff protection could come tumbling down, and consumers like cabdriver Chang would buy Chinese instead.

Footwear industry spokesman Yang said Taiwan's entry into the World Trade Organization in 2002 wiped out a third of the jobs in the island's hand-made shoe industry. Another half of the remaining employees could be out of work if tariffs on Chinese imports are scrapped, he said.

Such workers are typically less-educated and don't have the specialized skills needed to thrive in a globalized world. Many will likely end up in low-end service sector jobs, or unemployed.

In a worst-case scenario, Yang and Chiu said they might have to move their businesses to China or elsewhere. Both are preparing to hand off the business to their sons; neither wants to see their sons leave to set up shop abroad.

"If ECFA is signed, our factories will move to Vietnam or other countries because their workers are cheaper than ours," said Yang. "Signing ECFA will hurt our next generation."

The blow might not be immediate, they acknowledge. Taiwan's current tariff on imported Chinese shoes will run through 2012, they said, and they may be able to extend it another five years. They say they need to buy at least that much time to adjust to the China threat. By then, they hope, Chinese wages and materials costs will have risen enough to create a more level playing field.

Currently, workers in a hand-made shoe factory near Tainan make above $630 a month; their Chinese counterparts across the Taiwan Strait make less than half that, said shoemakers.

"If the tariff on Chinese shoes went to zero today, it would be 'game over' for us — we'd be finished," said Chiu, chairman of the Yifeng Leather Company in Tainan. "We can't compete."

The government has already identified shoes as one of 17 traditional industries likely to be harmed by ECFA. It's set aside a $3-billion, 10-year fund to help such firms upgrade, but Yang and Chiu just don't believe they'll see any of that money.

An edge for machinery makers?

Nearly two hours north by high-speed rail, H.H. Huang presides over a sprawling machinery business that should benefit from the trade deal.

His firm, Dees Hydraulic, is headquartered in an industrial zone in Linkou, a suburban wasteland of cracked pavements, glass shards, jumbled shop fronts, traffic jams and wandering packs of wild dogs.

Dee's makes massive hydraulic presses for factories, mostly car factories stamping out car body parts with robot workers on mammoth assembly lines.

He exports 90 percent of his machines, half of that to China, transporting them by road to the port of Keelung from there to the world. He can't fly them out because some of his machines are heavier than an airplane, he says.

Right now, machines like his face tariffs of 6 to 9 percent in China. If ECFA is signed, those tariffs could be scrapped, making his products more competitive in what's now the world's No. 1 machinery market.

He's not worried about competition from Chinese companies, because Taiwan has a very small market for such machines, and firms like his are far ahead of their Chinese counterparts in technology and know-how.

But Dees Hydraulic doesn't fit the neat narrative of a firm that will gain from ECFA. Huang says he already has a factory in China focused on the Chinese market, and there his main competition is a Chinese firm, Tianjin Forge.

Huang says he's more likely to take advantage of ECFA by making lower-tech presses in China at his factory there, then exporting them tariff-free back to Taiwan for more value-added, before re-exporting them to markets in the Europe and the U.S. But even then, he said, "For my company, actually the effect of ECFA won't be very big."

Most of his staff are highly skilled engineers whose jobs are safe as long as Taiwan maintains an edge in their industry. Indeed, skills like theirs are at a premium in a globalized age, which helps account for the widening income gap between high-end and low-end workers worldwide.

Asked if he'd boost payrolls after the trade deal and its increased business, Huang said no. "It's not necessary to hire more people," he said. "What we need is to improve the skills of the people we have."

He said the Taiwan government hadn't done a good job explaining ECFA, and should work harder to build national consensus before signing the deal. "The government shouldn't be in such a rush," he said.

Dees Hydraulic illustrates how economists' tidy arguments and eye-catching graphs often have little bearing on any specific company's business decisions. Trade deals like ECFA are just one small factor among many.

For the machinery and machine tool industries, the value of the Korean currency, the won, is a far bigger concern than Chinese tariffs, said Wang Cheng-ching, president of the Taiwan Association of Machinery Industry.

That's because sector-wide, Taiwan machine firms' main competition is South Korea. Over the last two years, the Korean won has depreciated by almost 40 percent, says Wang, essentially giving their products a 40 percent pricing advantage over their Taiwan competitors in key markets like China.

That's given the Koreans such an edge that they nudged past Taiwan exporters last year to grab the fifth-largest share of the global market for machine tools (at $2.6 billion by production value), relegating Taiwan to sixth place (at $2.4 billion).

He says his association asked the Taiwan government for help but was told nothing can be done. "The currency change is terrible," said Wang. "For Taiwan, it's very difficult. Everybody's worried about it."

Still, Wang backs ECFA as a way to normalize economic ties with China and says it will be a long-term boost for his industry, especially if Taiwan can move on to sign similar deals with other key markets.

Faced with Korean currency games, they can use any help they can get.

Enter the experts

Deals like ECFA always look good on paper — or on PowerPoint. And most economists have never met a trade deal they didn't like.

The principle of comparative advantage — the theoretical bedrock of globalization — will unerringly show overall gains to the economy through such trade. Open bilateral trade plays to each country's respective strengths, the theory goes.

So it is with ECFA, where the winners are expected to be Taiwan's capital-intensive industries such as machinery, and China's labor-intensive industries, such as handmade leather shoes.

"China has a huge market and Taiwan has a relatively strong industrial base," said Taipei-based Standard Chartered economist Tony Phoo. "So more cross-strait trade and investment flows will be positive for both China and Taiwan's economy."

Researchers at Taiwan's Chunghua Institution for Economic Research prepared a study for the government showing that cross-strait trade liberalization could add 1.65 percent to 1.72 percent to Taiwan's GDP, create a net of 260,000 jobs and lure nearly $9 billion in new foreign direct investment in the seven years after the deal is inked.

Of course, such economic models say nothing about how such goodies are distributed within a country. Taiwan's opposition echoes a frequently made argument that, more often than not, the gains will go mostly to large corporations, padding top executives' salaries and shareholders' dividend checks. A small number of highly skilled workers benefits, too.

The vast majority of workers, by contrast, don't usually notice much change after a trade deal — except cheaper imported consumer goods on store shelves, and the possibility of being pink-slipped if they're unfortunate enough to work in an uncompetitive industry.

Even some investment bankers caution that the benefits of ECFA, if it's signed, may not be immediate. Negotiations are reportedly bogged down over what to include in a so-called "early harvest" list of industries to see the first tariff cuts. China and Taiwan are still gunning for a late-June deadline.

But that means ECFA could well end up being mostly technical agreements — on "rules of origin," dispute settlement and the like — with harder tariff reduction talks scheduled for later on most items.

"In the longterm it should be very beneficial, it will remove a lot of obstacles," said Tay Her Lim, of investment bank CLSA, about the deal.

"But like any fundamental change, it will take time, and ECFA is just the first step," said Lim. "ECFA is just a small little piece of the puzzle."

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