Trade Resources Policy & Opinion Signing of FTA Between China and Korea Offers a Choice for Taiwan

Signing of FTA Between China and Korea Offers a Choice for Taiwan

The signing of a free trade agreement (FTA) between China and Korea is expected to result in a structural change in trade patterns between the two counties. The FTA and its consequences thus offer a rare moment for Taiwan to review its trade and industrial development policies.

While Korea is expected to be able to reduce US$5.44 billion a year in tariff payments for commodities importing into China under the FTA, China appears to have made no concessions to lower its tariff rates for a number of goods that it has been developing eagerly, which include iron and steel products, LCD panels, petrochemical products and automobiles.

On the other hand, the Korea government has also enlisted as many as 610 agricultural products under its tariff protection, including rice, peppers, garlics, onions, apples and pears. And Korea only promised to slash its tariffs for China-made pickled vegetables to 18% from the current 20%.

The degree of protection shows that China and Korea are still standing firm on respective positions to protect their own industries and agricultural products.

However, according to media reports in Korea, the two countries did reach a series of agreements in the service, investment, financial, telecommunications and e-commerce sectors, among others.

Korea has also required China to open its service market to Korea's concerns such as those in litigation services, construction engineering and entertainment.

Korea's demand indicates that the Korea government is not aiming to replace the role being played by Taiwan's makers in the supply chain in China, nor trying to marginalize Taiwan's trade with China.

Studies conducted by Korea indicate that exports of Korea's processing goods to China have been affected by the rising production capacity for intermediate materials and capital goods in China.

For example, exports of Korea-made intermediate materials and capital goods totaled US$33.5 billion and US$22.5 billion, respectively, in the first nine months of 2014, decreasing 2.1% and 7.2% from a year earlier. Exports of intermediate materials and capital goods currently account for 53% of Korea's total shipments to China.

The decline in Korea's shipments of intermediate materials and capital goods to China is not a temporary phenomenon but rather resulting from ongoing changes of trade structure between China and Korea.

Statistics show that China's imports of consumer goods totaled US$190.3 billion in 2013, increasing 10.1% from a year earlier, which was higher than a 6.8% increase for total imports recorded in the year.

However, the ratio of Korea's consumer goods to China's total imports of consumer goods was lower than those of the US and other European countries.

As a result, in order to reverse its declining exports of intermediate and capital goods, Korea will try to optimize the FTA to ramp up shipments of its smart household appliances, medical equipment, cosmetic surgery products, jewelry, high-profile sedans, high-fashion apparels, and even financial products and e-commerce business to China.

During this transition period, Korea may revise its trade policy and begin to import intermediate materials from China - a strategy which will counter Taiwan's export-oriented approach.

By the same token, the rising production capacity in China will also make Taiwan-based makers unable to compete effectively with rivals in China if Taiwan continues to uphold its strategy of selling intermediate materials and components to China over the long term.

It is obviously that instead of pursuing the goal of being the world's top OEM maker and being able to roll out the top-quality intermediate products, Taiwan should actively foster its service industry and brand operators to foray into the China market.

This is a choice for Taiwan and a turning point for the rise or fall of Taiwan's economy and industries.

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Commentary: Signing of FTA between China and Korea offers a choice for Taiwan