Free trade zones have little impact

Wednesday, Apr 18, 2007
By Chen Hurng-yu
Taipei Times (Taiwan)

'It can be seen that the free trade zone has had little impact upon Taiwan, at least economically. But just as free trade zones form economic and trade blocs, they form political blocs as well.'

The clustering of East Asian economies into economic associations has become a clear trend, and the overlaps between the member countries of various organizations are now more pronounced, as the APEC, ASEAN plus three and the East Asia Summit demonstrate.

Given that economic powers like the US, Japan and Australia all have their own plans in the region, it is now evident that the growth of different economic groups and the competition between them is becoming increasingly complex.

Six ASEAN members -- the Philippines, Indonesia, Thailand, Malaysia, Singapore and Brunei -- began planning a free trade zone in January 1994, with full implementation scheduled for 2003.

Vietnam, which joined ASEAN in 1995, joined the free trade zone last year. Laos and Myanmar, with their weaker economies, are expected to join the zone next year, while Cambodia is scheduled to do so in 2010.

These organizations and free trade zones, however, have had surprisingly little impact on Taiwan's economy and trade.

Figures show that the nation's trade relations with Southeast Asian countries are becoming ever closer. In 1986, Taiwan's trade with with ASEAN's 10 member countries was about US$3.71 billion, accounting for 5.8 percent of total foreign trade.

By 1993, trade had risen 4.4 times its 1986 value to US$16.41 billion, or about 9.87 of total trade. The figures also show that Taiwan maintained a trade surplus with Southeast Asian countries between 1990 and 1993. The surplus went from US$2.68 billion in 1990 to US$2.46 billion in 1991, US$2.16 billion in 1992 and US$2.38 billion in 1993.

These numbers also show that Taiwan's trade with Southeast Asia increased in line with its investment.

Taiwanese investment in Southeast Asia has been helpful in stimulating exports of raw materials and component parts, instruments and services -- including steel, machinery, oil, electricity, shipping, storage and telecommunications.

Trade relations between those six original free trade zone countries and Taiwan between 1994 and 2003 -- during which the free trade zone was completed -- also play an important role.

In 1994, Taiwan's trade with the countries was US$19.18 billion, or 9.3 percent of Taiwan's total global trade.

Afterward, Taiwan's trade with the countries grew yearly, except for a fall in 1998 because of the regional financial crisis.

But that year also saw a strange development: Because of a large decrease in total global trade, the relative weight of trade with the six ASEAN countries grew, peaking between 1994 and last year, when it accounted for 9.47 percent of all Taiwanese foreign trade.

Taiwan's trade with the six countries may have increased, but this has not necessarily led to a trade surplus. Taiwan ran a trade deficit with the countries for six years between 1998 and 2003, before returning to a surplus in 2004.

One reason for the deficit could be that beginning in 1998, Taiwan's investment in the region fell, which affected trade totals.

Another reason could be that ASEAN countries successfully industrialized, leading to a lower reliance on imports.

With the implementation of the free trade zone in 2003 and the decrease of import duties to 5 percent or less, trade among the six countries naturally increased while outside trade dropped.

This of course affected Taiwan, but beginning in 2004, Taiwan's trade with the six countries continued to increase and returned to a trade surplus.

In other words, the free trade zone did not have a serious impact on Taiwan.

Taiwan's trade with the 10 countries grew, except in 1998. Taiwan also had a trade deficit with ASEAN states between 1998 and 2002, just as it did with the six free trade zone members.

The key factor behind Taiwan's surplus in 2003 was its US$2.22 billion surplus with Vietnam, while its trade deficit with the six free trade members totaled just US$57.5 million. It was Vietnamese trade that offset the deficit and gave Taiwan a surplus.

Between 2004 and last year, more than half of Taiwan's trade surplus with all ASEAN members resulted from its surplus with Vietnam.

Thus, Taiwan's trade relationship with Vietnam became ever more important during those years.

Taiwanese businesses didn't begin large-scale investment in Southeast Asia until 1987. That year, investment in five of the free trade countries -- excluding Brunei -- was about US$416 million. By 1991 it had grown 8.3 times that to peak at US$3.45 billion.

Taiwanese investment in Southeast Asia reached its peak in 1994, when it totaled US$4.95 billion. From that year until 2002, Taiwan's investment in Southeast Asia increased. It rose between 1994 and 1997, then began falling in 1998.

With the exception of 1999, it was less than half of its pre-1997 totals. In 2002, it was a mere US$692.7 million. The main reason for the decrease was the diversion of investment to China.

Taiwan's major target for investment in Southeast Asia since 1998 has been Vietnam.

Because of this increased investment in Vietnam, trade, which is linked to investment, has grown as well.

The rules for the free trade zone stipulate that as long as a company manufactures 40 percent of the components for a product, it can trade with other member countries on a duty-free basis.

As Taiwanese businesses investing in Indonesia and Thailand should receive the same duty-free treatment, why was there so much investment in Vietnam? Mainly because Vietnam is a newly developing area and still enjoys the Generalized System of Preferences, which is spearheaded by the US and EU and is designed to promote economic growth in the developing world.

The program also offers excellent labor resources for employers.

Judging by the various types of investment by Taiwanese companies in Southeast Asia, most goes toward manufacturing industrial products.

These products include machinery and hardware, textiles, electronics, communication electronics, rubber and plastic products, pulp and paper, basic metals, iron and iron products.

All of these are given import duties of 5 percent or less in the free trade zone, and therefore companies and factories producing them hope to break into the free trade zone market. Low import duties are the catalyst that drives the free trade zone.

In 1994, trade among ASEAN nations accounted for 19 percent of their entire foreign trade.

Free trade has had an effect on trade within the group, but not as rapidly as expected. The main difficulties are a weak industrial foundation, products that are too similar or not complementary enough as well as the threat of competition from Chinese products.

Since the implementation of the free trade zone, Taiwan's trade with the countries has steadily increased.

Research from the Taiwan Institute of Economic Research shows that the 1998 financial crisis was a defining moment in Taiwan's trade with Southeast Asia.

Before 1998, Taiwan had a trade surplus with the region, but afterwards it experienced a trade deficit.

This is mainly because ASEAN countries' currencies depreciated following the crisis, which created more favorable trade conditions for them.

Taiwanese industries upgraded as well, naturally creating an international trade division of labor.

The six years of trade deficits Taiwan experienced following the crisis, however, were primarily caused by the drop in Taiwanese investment that began in 1998.

This impacted the total amount of trade and created a deficit for Taiwan.

Another reason for the deficits could be the industrialization of ASEAN countries after 2004 and the resulting need for parts from Taiwan.

The free trade zone has therefore had little impact upon Taiwan, at least economically.

But just as free trade zones form economic and trade blocs, they also form political blocs. Taiwan has more to lose from being excluded from the political aspects of the ASEAN bloc and the developing East Asia Summit than it does economically.

Chen Hurng-yu is a professor at the Graduate Institute of Southeast Asian Studies at Tamkang University.

Translated by Marc Langer