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Taiwan on Sunday announced a monumental trade deal with China that will boost the island's exports and shift its economy toward China-centric policies.
The Economic Cooperation Framework Agreement (ECFA) will reduce tariffs on 500 products exported from Taiwan to China and 200 products shipped from China to Taiwan including car parts and machinery. It will also open the door for Taiwan to be included in future free trade agreements that China previously prevented because it viewed Taiwan as a rebellious province.
"Signing the ECFA is a route that Taiwan must take and it is a milestone, " Liu Bih-rong, a political science professor at Soochow University in Taipei, told Bloomberg. "It signifies how the relationship between the two sides has recovered and, more importantly, it will pave the way for more free-trade agreements and benefits. "
The agreement's details still need to be ironed out and should be finalized by early July at the latest.
China accounts for 40% of Taiwan's export market. The deal is expected to boost Taiwan's annual economic growth by 1.65%--1.72%, create more than 260,000 jobs, and attract over $8.9 billion in foreign direct investment over the next seven years, according to a Taiwanese government study.
Taiwan's stocks hit a three-week high on the news Monday. The Taiex Index rose 1.2% and the local dollar rose 0.3% against the U.S. dollar.
Taiwan has avoided opportunities to tighten ties to the mainland after splitting off from Communist forces in the 1949 Chinese civil war. But when President Ma Ying-jeou took office just over two years ago he brought with him a China-centric approach to economic relations. The ousted Democratic Progressive Party (DPP) had spent eight years distancing Taiwan from China, afraid that close ties would result in China enforcing too much control over the island.
Ma continues to assert that a warmer relationship with China is necessary to keep a thriving, competitive Taiwan economy.
"We can handle diplomatic isolation, but economic isolation is fatal, " Ma said in a recent news conference. "Trade is Taiwan's lifeblood. Without trade, Taiwan cannot subsist. "
Beijing blocked prior trade agreements Taiwan sought to establish with other countries, but officials hope the ECFA will change that policy.
"First, we need good relations with mainland China, " Wang Cheng-chin, president of the Taiwan Association of Machinery Industry, told The New York Times. "Then, after signing E.C.F.A., we can talk with Southeast Asia, the E.U. and other countries. "
Despite political opposition, analysts view this as a turning point for Taiwan's economy and a signal that a future cooperative relationship is possible.
"It's a very, very critical stage in cross-strait relations. Both sides will undergo a very big change, especially in social integration, " Sung Kuo-chen, a research fellow at the National Chengchi University in Taipei, told the BBC.
Since Ma stepped in to the presidential role, the two nations have increased access to each other's banks, securities and insurance industries, and resumed direct shipping, air and postal links. In December they reached new agreements in fishing, agriculture and industrial goods.
The DPP still opposes a closer China-Taiwan bond and has planned an ECFA protest on June 26. Critics think the deal won't be as beneficial to Taiwan as the government is promising and will make the island too economically dependent upon China.
Economic reliance on China has been a growing theme in Asia. Over the past ten years there has been a shift in Asian export-driven economies from shipping mainly to the United States to shipping mostly to China. China's continued economic growth has boosted the economies of Asian nations like South Korea and Singapore.
Taiwan and North Korea are the only regional economies without trade agreements with China and Asean, the Associated of Southeast Asian Nations. Asean includes Singapore, Thailand, Indonesia, Malaysia, Vietnam, Myanmar, Laos, Cambodia, the Philippines and Brunei.
After the ECFA is finalized, Taiwan wants to open similar agreements with Asean countries and eventually the larger economies of Japan and the United States. It also hopes to compete against regional threats like South Korea, which has been able to sign agreements with other nations while China kept Taiwan isolated.
"We expected more deregulation in cross-strait investments and given the slowdown in Europe and the U.S., Taiwan will need to rely more on China, " Dexter Hsu, a JPMorgan Chase & Co. (NYSE: JPM) analyst in Taipei, told Bloomberg.
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