China Pulls Taiwan Closer With Historic Trade Deal

June 29 (Bloomberg) -- China will cut duties on fuel oil, copper foil and about 500 other Taiwanese goods, underscoring the success of Taiwan President Ma Ying-jeou’s two-year drive for rapprochement between the civil war foes.

While the first trade agreement between the two will bind Taiwan tighter to an economy that is 12 times bigger, some of the island’s top exports were excluded. Makers of polyvinyl chloride, or PVC, such as Formosa Plastics Corp., and AU Optronics Corp., a manufacturer of flat panel displays, will have to wait to get tariff-free access to China, the world’s fastest-growing economy and Taiwan’s No.1 investment destination.

Chiang Pin-kung, head of Taiwan’s Straits Exchange Foundation, and Chinese counterpart Chen Yunlin signed the accord today in Chongqing. The Chinese city is the former headquarters of Taiwan’s ruling Kuomintang, where the failure of talks between Chiang Kai-shek and Mao Zedong’s Communist in 1945 led to civil war, and Chiang’s eventual 1949 retreat to Taiwan.

“Taiwan will become more dependent on mainland policies, markets and business connections for its economic development,” said James Sung, a political scientist at City University of Hong Kong. “Taiwan, whether it is the KMT or the opposition regime, will have to think about the economic benefits it enjoys when it comes to making political decisions.”

China set aside its claim over the island to focus on commercial ties to seal the trade deal. Tensions between the two sides have eased since Ma took office in May 2008, dropping the pro-independence stance of his predecessor and making economic relations with the mainland the priority of his administration.

‘Early Harvest’
The two sides agreed on a so-called early-harvest list of items -- including textiles, machinery, and car parts -- that will be the first to enjoy tariff reductions.

China agreed to cut duties on 539 items from Taiwan valued at $13.8 billion, or about 16 percent of imports from the island last year. Taiwan will lower tariffs on 267 items from China worth $2.86 billion, or about 10.5 percent of the country’s shipments to Taiwan in 2009. Tariffs will be cut over two years in three stages to zero.

More commerce with Taiwan will help China ensure the island’s leaders don’t declare formal independence. The Beijing government has in the past blocked Taiwan from asserting its international identity, including membership in the United Nations and free-trade agreements.

The agreement will “ease the concerns of most of the countries in the world and start to bring Taiwan back to a normal position in establishing FTA relationships with its important trading partner countries,” J.T. Wang, chairman of Acer Inc., the world’s largest notebook computer supplier, said in an e-mailed reply to questions.

Stocks
Taiwan’s benchmark stock index has risen 16 percent in the past year as Ma pushed for the accord with China. Taiwan companies have invested an estimated $150 billion in the mainland since 1991.

“ECFA is good as both sides need a platform so it will be easier to discuss finer details,” said Douglas Hsu, chairman of the Taipei-based Far Eastern Group, with operations including cement, textiles and telephones.

China will also open markets in 11 service sectors such as banking, securities, insurance, hospitals and accounting, while Taiwan agreed to offer wider access in seven areas, including banking and movies, the two sides said. They also signed an agreement on intellectual property rights protection.

Jobs
The trade pact will help create more than 260,000 jobs in Taiwan and boost economic growth by 1.65 to 1.72 percentage points annually, Ma’s administration said, citing research by the Chung-hua Institution for Economic Research. Taiwan plans a 10-year NT$95 billion fund to support industries and workers affected, Premier Wu Den-yih said on Dec. 16.

Ma’s administration has been pushing for the agreement with the mainland to avoid export-dependent Taiwan from being disadvantaged after a Chinese deal with the Association of Southeast Asian Nations began this year, lowering tariffs on two-way trade. Similar agreements for China with Japan and South Korea are under discussion.

“The success of Ma’s administration is inexorably tied to the success of its efforts to improve cross-strait relations, particularly through deepening economic ties with China,” Nicholas Teo, head of research at CLSA Asia-Pacific said.

Exports are equivalent to about two-thirds of Taiwan’s economy. In the first five months of this year, shipments to China and Hong Kong combined made up 43.3 percent of Taiwan’s exports. China’s $4.3 trillion economy dwarfs Taiwan’s, where gross domestic product was $355 billion last year.

Chinese Visitors
Since Ma took office, direct air, shipping and postal links have been established, and China opened its first official tourism office in Taiwan last month. Chinese visitors to Taiwan may surpass those from Japan for the first time as relaxed rules spur travel to an island off limits to mainlanders for 60 years.

In the first five months of this year, 70,445 Chinese visited Taiwan, 70 percent more than in the corresponding period a year earlier, according to Taiwan Tourism Bureau numbers.
China and Taiwan will discuss medical issues and investment protection at a sixth round of cross-strait talks to be held by the end of the year, Chiang said.