Global Policy Forum

Taiwan is expected to sign a free trade agreement with China soon that could significantly change its relationship with its former rival.

It might bring about an unprecedented closeness between the two sides, which separated at the end of the Chinese civil war in 1949.

The Economic Co-operation Framework Agreement (ECFA), which the Taiwanese government hopes to sign in June, aims to reduce or eliminate tariffs on exports.

It would also eventually lift trade restrictions and open each side's markets to the other in unprecedented ways.

Big businesses in Taiwan, such as banks, petrochemical companies, and hi-tech firms seeking greater access to China's market, are expected to benefit.

But labour-intensive industries, such as towel and shoe makers, are likely to suffer due to competition from cheaper Chinese goods.

Chinese banks would be able to open branches here in Taiwan and China would be able to invest in Taiwan's property and stock markets, as well as many business sectors.

'Critical stage'

The trade deal will make the two sides more closely interlinked than ever.

"It's a very, very critical stage in cross-Strait relations. Both sides will undergo a very big change, especially in social integration," said Sung Kuo-chen, a research fellow specialising in Taiwan-China relations at the National Chengchi University in Taipei.

President Ma Ying-jeou and the ruling Kuomintang party believe the agreement is crucial for Taiwan's survival.

Despite previous government restrictions, in recent years, China has become Taiwan's biggest trade partner, export market and investment destination.

Mr Ma says the ECFA will open doors to trade agreements with other countries

Two-way trade exceeds $100bn (£69bn) a year. Around 40% of Taiwan's exports go to China. Taiwanese investments in China have reached $200bn (£139bn).

The trade agreement is therefore needed to protect Taiwanese companies' interests as well as competitiveness, supporters say.

If Taiwan's companies cannot enjoy tariff-free trade with China, Taiwan will lose out, because China has signed - or will soon sign - FTAs with its other trade partners, they say.

"We can handle diplomatic isolation, but economic isolation is fatal," Mr Ma told a news conference recently, referring to Taiwan's inability to join the United Nations or sign free-trade deals with other countries because of objections from China.

After Taiwan signed with Beijing, Mr Ma said, it would be able to negotiate trade deals with others.

But it's no surprise the main opposition Democratic Progressive Party (DPP) and many ordinary people are worried about the deal.

Too dependent?

Negotiations on FTAs can be controversial, but this one is especially so because a peace treaty has never been signed between the two sides since they split in 1949 when the Kuomintang lost a civil war to the Communists and fled to the island, located only 180km off China's coast.

China still has more than 1,000 missiles targeting Taiwan to warn it against declaring formal independence.

And Beijing has not renounced the use of force to eventually unite with the island it considers one of its provinces.

Opponents have argued that the trade deal would not only hurt Taiwan's workers and industries by allowing a flood of cheaper Chinese products; it could harm Taiwan's sovereignty by making the island too economically dependent on, and politically vulnerable to, China.

Some critics have warned it is the first step to annexation of Taiwan by China.

"What you are doing now will leave Taiwan's future generations unable to say no to China," the DPP's chairwoman Tsai Ing-wen wrote in an open letter to Mr Ma last week.

Several protests against the deal have been organised by the DPP, including a sit-in to mark this week's second anniversary of President Ma taking office.

Taiwanese people are torn on the issue. Surveys have shown while about 40% favour the ECFA, about 30% do not, and another 30% are undecided.

"If we sign with China, we probably won't die. If we don't sign, Taiwan's economy will die," a resident of Taichung City said amid a protest in December by tens of thousands of people.

His comment reflects the views of many Taiwanese - that Taiwan has no better choice.

Some see the trade deal as the lesser of two evils.

Others fear that closer ties with China could also have an impact on Taiwan's democratic way of life.

Businesses with big stakes in China and sectors benefiting from Chinese investments could pressure the government to bow to Beijing.

'Taiwan's lifeblood'

Closer ties with China might also make Taiwan's hope of being recognised as a country less likely, but Mr Ma has insisted the agreement has nothing to do with unification.

"We will spare no effort to defend the sovereignty of the Republic of China (Taiwan) and the dignity of Taiwan," Mr Ma pledged during a recent televised debate with Ms Tsai.

"We are of course aware of the political ambitions of mainland China toward us during this period, but we cannot let this make us afraid, pull back or avoid trying to move forward," he said.

"We have confidence in Taiwan, in Taiwan businesses and in Taiwan's democracy.

"Trade is Taiwan's lifeblood. Without trade, Taiwan cannot subsist," Mr Ma added.

He has pledged to take a gradual approach to tariff reductions on sensitive products and to set aside $3bn (£2.1bn) over the next 10 years to help industries and workers vulnerable to Chinese competition, but has insisted the deal would result in more jobs created than lost.

The opposition has demanded that such an important issue that could affect Taiwan's society and politics, not just economy, be decided by a referendum.

However, it faces difficulties trying to block the deal, with Taiwan's strict requirements for referendums and the opposition's minority seats in the legislature.