SCENARIOS - Taiwan in the years after the China trade pact

TAIPEI Wed Jun 30, 2010 3:12pm IST

An employee fixes a bicycle, part of the items included in the economic cooperation framework agreement (ECFA), in a bicycle shop in Taipei June 29, 2010. REUTERS/Pichi Chuang

An employee fixes a bicycle, part of the items included in the economic cooperation framework agreement (ECFA), in a bicycle shop in Taipei June 29, 2010.

Credit: Reuters/Pichi Chuang

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TAIPEI (Reuters) - China and Taiwan signed a historic deal this week to boost $100 billion in two-way trade after decades of hostility, easing political ties while securing a place for the export-led island in the world economy.

The economic cooperation framework agreement (ECFA) lowers import tariffs on about 800 items with talks expected on thousands more. China is also hinting it will let Taiwan sign free trade agreements with other world economies.

Those landmark developments stand to change the island's economic and political landscape in years ahead. Here are two scenarios for Taiwan in the next decade:

TAIWAN THE NEW HUB FOR CHINA INVESTMENT

* Probability: most likely

Strong economic ties with China and a benign political environment following the ECFA will allow Taiwan to leverage its geographical position just 160 km (100 miles) away from China and its legal system and transparent business rules unmatched by Beijing to become a business centre for foreign firms working in China.

Taiwan entrepreneurs have 20 years experience investing in China and a similar language and culture, and also a deep knowledge of western business practices. This could draw foreign companies looking for partners to enter the China market to set up in Taiwan, helping the island compete better with Hong Kong and Singapore as a business hub.

"Taiwan will, at the margin, be certainly more attractive to foreign investors given the 'piece of Chinese market action' available for investment in Taiwan," said Vishnu Varathan, an economist with Forecast Ltd in Singapore.

Domestically, reduced tariffs for exports in major world economies if Taiwan signs more trade deals would allow firms to expand and add employees. This could ease the unemployment that could follow an influx of cheaper Chinese goods under ECFA, and lessen the chance of a political backlash in Taiwan.

CONTINUED GLOBAL ISOLATION

* Probability: Less likely

If Taiwan is not able to sign any further trade deals or find new sources of home-grown economic stimulus such as innovation or new industry that attracts demand from major countries, the export-dependent $390 billion economy could start to slow.

Kept out of regional and global trade deals and other forums, a possibility if China objects to further trade deals, the economy could stagnate, unemployment would rise and foreign investment would go elsewhere.

"I personally think the worst case scenario is nothing positive happens out of this and Taiwan continues to be isolated to some extent in terms of the regional economic impacts," said Alan Eusden, chairman of the American Chamber of Commerce in Taipei.

"Our biggest concern is that this does not work and Taiwan ends up being more and more isolated and ends up not being part of regional trading blocs."

Such a situation could hasten a change of government in Taiwan from the China-friendly Nationalist Party to an opposition determined to freeze the ECFA deal. Beijing would call off any further trade talks unless the opposition agreed to unwelcome political preconditions.

In such as case Taiwan's economy may stay on track with existing investments to China but struggle to grow.

For Graphic on Taiwan-China trade and tariff-free plans: here

(Editing by Sugita Katyal)

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