Taiwan to Sign China Pact, Deepening Trade Ties as Relations Thaw Under Ma

Taiwan said it will sign a trade accord with China next week after more than a year of talks, as warming cross-strait relations pave the way for deeper investment ties with the world’s fastest-growing major economy.

The two sides have completed details of an “early harvest” list of items that will be the first to enjoy tariff reductions under the trade agreement, Kao Koong-lian, vice chairman of the Taipei-based Straits Exchange Foundation, said today. A fifth round of cross-strait talks will be held from June 28 to June 30 in the Chinese city of Chongqing, where the trade pact will be signed on June 29.

Taiwan’s benchmark stock index has jumped 19 percent in the past year as President Ma Ying-jeou pushes for an accord with China, its biggest trading partner and No. 1 investment destination. The island, regarded by the mainland a territory that it aims to reunite by force if necessary, is trying to avoid being disadvantaged after a Chinese trade agreement with the Association of Southeast Asian Nations began this year.

The China-Taiwan trade agreement is “clearly the first hurdle that Taiwan has cleared,” said Tony Phoo, a Taipei-based economist for Standard Chartered Plc. Beyond that, Taiwan will need to expand its trade links and sign agreements with other Southeast Asian countries, he said.

Ma abandoned his predecessor’s pro-independence stance after taking office two years ago, seeking to repair ties with China and boost an economy that has been excluded from the 58 regional trade agreements Ma estimates were in place as of 2009.

Initial Agreement

China and Taiwan reached an initial agreement on tariff reductions after talks in Beijing on June 13 on the Economic Cooperation Framework Agreement, or ECFA.

“The signing of the ECFA signifies the door is open and will lead the way for further discussions on trade and cooperation on financial services,” said Cheng Cheng-mount, a Taipei-based economist at Citigroup Inc.

Kao met this morning with his Chinese counterpart, Zheng Lizhong, vice chairman of the Association for Relations Across the Taiwan Straits, to discuss the trade agreement details and to prepare for the meeting next week. The two sides are also scheduled to sign an agreement on intellectual property rights protection.

China will cut tariffs on 539 items from Taiwan worth $13.8 billion, or about 16 percent of Taiwan’s 2009 exports to the mainland, Zheng said today. Taiwan will cut tariffs on 267 items from China worth $2.86 billion, or about 10.5 percent of the country’s shipments to Taiwan in 2009.

Yuan Services

The reductions on items including petrochemicals, auto parts, textiles and machinery will be implemented in three stages over two years, by which time tariffs will be brought to zero, Zheng said.

Taiwanese banks will also be allowed to offer yuan services to the island’s firms in China, Zheng said. The banks must have one year’s experience and be profitable to qualify, he said. Some 26 Chinese banks offered loans of more than 230 billion yuan ($34 billion) to Taiwanese firms last year, Zheng said.

While the tariff cuts would lead to savings for businesses and boost investment “over time,” the bank ruling won’t result in “anything solid until two years later,” Standard Chartered’s Phoo said. “Short-term wise, it’s still very much a preparation stage for Taiwanese banks looking to the Chinese market.”

The opposition Democratic Progressive Party is organizing a rally to protest the accord on June 26, saying the agreement will give the government in Beijing too much clout over Taiwan, and may cost jobs by allowing cheaper Chinese goods to flood the island’s market.

Export Market

China and Hong Kong combined account for about 40 percent of Taiwan’s exports. Taiwanese companies have already invested an estimated $150 billion in China since 1991.

Taiwan and China agreed to boost cooperation in fishing, agriculture and industrial goods at the fourth cross-strait talks in December. In November, they signed three memoranda of understanding to ease access to each other’s banking, securities and insurance industries.

Trade between the mainland and Taiwan increased 68 percent in the first four months of 2010 compared with the same period last year, and Taiwan investment rose 44.7 percent, Tang Wei, head of Taiwan, Hong Kong and Macau affairs at China’s Ministry of Commerce, said this month.

The China-Taiwan trade accord “will set the stage for more capital inflows to Taiwan,” said Wai Ho Leong, a regional economist at Barclays Plc in Singapore. “For a long time, the inflow of funds has very much been one-way from Taiwan to China. A key priority for the Ma administration is regional integration, starting with China.”

To contact the reporter on this story: Janet Ong at jong3@bloomberg.net

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