Taiwan, China sign historic trade pact

Chen Yunlin (R), Chairman of China's Association for Relations Across the Taiwan Straits (ARATS), shakes hands with Taiwan's Straits Exchange Foundation (SEF) Chairman P.K. Chiang during a cross strait meeting for the economic cooperation framework agreement (ECFA), in Chongqing June 29, 2010.

CHONGQING, China (Reuters) - China and Taiwan signed a historic deal on Tuesday to boost trade after decades of hostility, which Beijing hopes will lure the island neighbour into its embrace.

The strongest ever tie-up between self-ruled Taiwan and China, which claims sovereignty over the island, will slash tariffs on about 800 items and and ease financial sector rules.

Their economic cooperation framework agreement (ECFA), heavily favours Taiwan as economic powerhouse China uses it to dangle sweeteners to nudge Taipei towards political unification.

The ECFA also puts Taiwan with few free trade pacts to its name on the global map by allowing its firms access to huge markets in China, already its top export destination. It could raise Taiwan's 2010 GDP past 6 percent, according to June forecasts, up from an official 4.72 percent prediction.

Tuesday's signing in a hall packed with officials follows talks that opened in 2008 under China-friendly Taiwan President Ma Ying-jeou after 60 years of antagonism that had brought the two to the brink of war.

"I think target for President Ma would be to get the thousand plus missiles aimed at Taiwan off the coast...and to do it in a way that demonstrates he is capable of bringing peace and security to the people of Taiwan," said David Zweig, a China scholar at Hong Kong University of Science and Technology.

Negotiators inked the deal in Chongqing, a Chinese industrial city that was once the wartime capital for Taiwan's ruling party when it governed China before losing to Mao Zedong's Communists and fleeing to Taiwan where it set up a rival government.

The pact will cut tariffs to zero within two years on 539 Taiwan export items worth $13.84 billion bound for China versus only 267 valued at $2.86 billion headed the other way.

But the euphoria could start to fade quickly as the two move into much tougher rounds of negotiations. The pact covers only the easiest 800 of potentially thousands of items targeted for tariff cuts in years ahead.

"It's still a beginning stage of negotiations and needs to become more precise and expanded," said Huang Ching-Hsun, chairman of the Taiwan Business Association in Chongqing.

The next round could start later this year as Taiwan pushes China to lower tariffs on the island's most prized exports, such as PVC plastics and high-tech items. Beijing is seen resisting to protect its own industries.

But tensions could rise again as the items from Taiwan's top industries looming on the agenda for future tariff talks compete too closely with industries China wants to develop.

If Beijing plays tough, an outcry at home could make the Taiwan government may pull back. Opposition would be particularly loud if the ECFA itself creates well short of the 260,000 Taiwan jobs expected or fails to lift the island's GDP.

Taiwan also hopes Beijing will let the ECFA lead the island to free trade agreements with other major economies, such as Japan and the United States. Beijing has said it would forbid those FTAs because Taiwan lacks sovereignty.

"Signing ECFA is just a start," said Grace Lin, spokeswoman for Mega Financial, Taiwan's No.1 government-run listed financial holding company. "We're very happy it's been signed. It's beneficial to the financial industry. For securities, we place our hopes on future talks."

(Additional reporting by Argin Chang in Chongqing, Ki Joon Kwon in Beijing and Rachel Lee in Taipei; writing by Ralph Jennings; Editing by Sanjeev Miglani)