Taiwan, China sign trade pact, but euphoria may fade

CHONGQING, China Tue Jun 29, 2010 5:21pm IST

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CHONGQING, China (Reuters) - China and Taiwan signed a landmark trade deal on Tuesday that could boost trade already worth $100 billion and ease political ties between the export-reliant island and the world's third-largest economy.

The Economic Cooperation Framework Agreement (ECFA), which has triggered protests by the opposition in Taiwan fearful of Chinese moves to unify with the self-ruled island, cuts tariffs on 800 products and opens up service industries, giving a major boost to around $100 billion in annual two-way trade.

But it covers only the easiest of potentially thousands of items targeted for tariff cuts in years ahead and euphoria could fade quickly as the two move to much tougher negotiations.

Taiwan believes the ECFA will open the door to free trade agreements with major economies like Japan and the United States. Beijing had encouraged that hope before saying last month it would try to block FTAs because Taiwan lacks sovereignty.

The biggest deal in 60 years between the political rivals was signed in Chongqing, the hilly, foggy wartime capital of China for the Kuomintang (KMT) party, which now rules Taiwan after losing a civil war to Mao Zedong's Communists in 1949.

"This agreement not only influences the development of the economies on both sides of the Straits, it is also a new milestone for them," said Chiang Pin-kung, the chairman of Taiwan's Straits Exchange Foundation.

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GRAPHIC on two-way trade between China and Taiwan, click here

Tuesday's signing stems from 2008 talks launched by Taiwan President Ma Ying-jeou, reversing 60 years of antagonism. China has considered Taiwan a renegade province since the end of the Chinese civil war in 1949 and inists on unification, by force if necessary.

Bringing the two sides closer together would be a major achievement for Chinese President Hu Jintao, who is due to step down after the Communist Party selects a new top leader in 2012.

The Taiwanese "have very limited expectations over ECFA, but keeping the process going is important for them ... Ultimately the Chinese have a political agenda behind which is not shared by the Ma administration," said Steve Tsang, a China-Taiwan relations expert at St Anthony's College, Oxford University.

"As part of a long-term strategy it is part of the process of embracing Taiwan and making Taiwan closer within the orbit of China, and therefore reducing the scope of pro-independence people in Taiwan to push for an independence agenda."

The pact will cut tariffs to zero within two years on 539 Taiwanese export items, worth $13.84 billion, versus only 267 valued at $2.86 billion headed from China to Taiwan.

That could help lift Taiwan 2010 GDP growth past 6 percent, private forecasts show. The official target is 4.72 percent.

Still, Taiwan's stock and currency markets lost ground in late trade despite stronger starts on Tuesday.

"People in the market have talked about the ECFA for a while and after the two sides signed the deal, we thought the effect from this positive factor came to an end," said Tom Tang, a vice president at Masterlink Investment Advisory.

Exports from Taiwan's top industries, such as PVC plastics and high-tech goods, compete closely with industries China wants to develop, making those negotiations much more difficult.

A second agreement would increase intellectual property right protection, which Chiang said was important for Taiwanese high-tech investment in China.

On Saturday, thousands of Taiwanese rallied against the deal in Taipei, but their opposition is not expected to prevent it.

Opposition could get louder if the ECFA fails to create the promised 260,000 jobs in Taiwan or bring an economic payoff.

(Additional reporting by Argin Chang in Chongqing and Baker Li in Taipei; Writing by Ralph Jennings; Editing by Nick Macfie)

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