Update on China-Taiwan FTA

Looks like Taiwan and China will be signing an FTA this June according to The Washington Post. I look forward to reading the document, as whatever wording is used to address Beijing and Taipei could possibly be used in a future peace treaty between the two parties.

Besides a warming of relations with Beijing, the FTA will also open doors to similar agreements with other countries, notably Asean members. The United States will want to ink one as well, knowing that Beijing won't protest since it signed one with Taipei first. If I was an American government official, I'd certainly want to get it done within a couple of years to maintain (if not increase) trade and hence American influence in Taiwan. Why do you ask?

Quite simply the China-Taiwan FTA will either maintain or increase Taiwan's dependency on Chinese trade, potentially providing Beijing with additional leverage over the island. The United States may not yet be ready for Taiwan to assume a closer orbit around the mainland, therefore having an FTA with Taipei would at the very least maintain the status quo.

Is that a good policy? Depends on who you ask. However the U.S. government will find it increasingly difficult over time to maintain the status quo, especially considering China's military modernization. The U.S. would be hard pressed to sell F-18s or nuclear submarines to the island, which are fast becoming the most basic armaments in the U.S. military. Economically, China is likely to maintain annual GDP growth over 8% for the next several years and could easily show favoritism to Taiwanese companies in an effort to limit America's options.

I understand that kicking the can is always the preferable policy decision when confronting lose-lose scenarios. However I can't help but wonder if U.S. Taiwan policy will soon face a rather large wall.

Balancing act

As a result of U.S. arms sales to China, the PRC government announced that it would sanction those American companies that participated. Like many others, I was curious to see how this would play out.

Turns out that two weeks ago (when I was sick), China announced that it was going to buy 20 passenger planes from Airbus, the major European aircraft manufacturer. Now on the surface this may seem like a snub to Boeing, but in all actuality it doesn't mean much.

According to Boeing, increase air travel in China will require Chinese airlines to take delivery of 3,800 additional passenger planes by 2028. Airbus is estimating that China will require 3,200 additional aircraft to meet the demand. (The difference between the two is that Boeing assumes Chinese airlines will use smaller aircraft like the 737, while Airbus is betting on larger aircraft equivalent to the 767.) Either way, Chinese airlines will need a lot of planes in the next 18 years.

Precisely because of this huge demand for aircraft, the Chinese airlines nor the Chinese government can play favorites. If the Chinese government were to completely expel Boeing from the Chinese market for passenger aircraft, it would have no choice but to deal with Airbus (which could raise its prices as a result of its major competitor being locked out). That would not be good for Chinese airlines. Not to mention that by hurting Boeing, it hurts the Chinese manufacturers Boeing subcontracts to for the production of aircraft parts.

So far it looks like the sanctions the Chinese government was talking about amount to very little. This could change in the future as Chinese aircraft manufacturers increase in capability and quality, but I expect that not to happen for at least another ten years. While on the surface it looks like China has a lot of weight, this is an example of how little it can do despite its rhetoric.

More sales in the pipeline?

As recently reported, the United States sold arms worth $6.3 billion to Taiwan, the first since the early 1990s when Bush Sr. was in office. However, it seems that there could be another sale in the works if Congress has its way.

Defense News is reporting that Congress may be positioning itself to sell Taiwan additional weapons, specifically F-16 C/Ds that were left out of the recent sale. It's no secret that the bulk of the ROC air force is old and requires spare parts. While I wouldn't be surprised if the "defense industry analyst" was a Lockheed Martin employee (who makes the F-16 aircraft), they raise a fair point that the production line can only be maintained for so long. If it were to close without F-16 C/Ds sold to Taiwan, and if the U.S. wanted to replace ROC aircraft at some point in the future, then it would only be able to sell Taiwan the F-18 manufactured by Boeing.

While Beijing would protest the sale of fighter aircraft to Taiwan regardless of the model, the Chinese leadership would no doubt prefer F-16 C/Ds be sold as opposed to the more advanced F-18. The question is how many aircraft would be sold? Taiwan has requested 66 F-16 C/Ds since 2006, so if Congress gets it way, that amount could be sold. However, does the Obama administration want to take the risk of selling additional weapons to Taiwan at expense of Sino-U.S. relations? That I am not sure about. It could go either way, as Obama may want to stand up to China or use it as a chance to cultivate trust with the PRC. What do you think?

Left out in the cold

With the China-Asean FTA Taiwan is in a bind. The goods it sells to China will be 5-15% more expensive now compared to the Asean members and could result in a significant decline in trade if no solution is found. To put it in perspective, Taiwan enjoys a $67 billion trade surplus with China and its exports to the Chinese market constitute 26% of their total. Let me repeat that. 26% of Taiwan's exports go to China.

What options does Taiwan have to counter the China-Asean FTA? Taiwanese companies could lower their prices accordingly, but that is something they probably don't want to do. The other option is for China and Taiwan to sign an FTA of their own (which could happen this year). Not only would this level the playing field for Taiwan in the Chinese market, but it could also open the door for quasi-FTAs with the Asean members themselves. Beijing has quite a few reasons for implementing an FTA with Taiwan, two major ones being that 1) Taiwanese companies employ lots of Chinese workers and 2) failure to establish one could be a PR disaster for China in Taiwan.

I've made the entire grand strategy available so you can flip through it. The assignment was to write it from the perspective of the government in power, with the expectation that it would be an internal document not seen by the public. I included bits of humor and I think you'll be able to spot them. Please be honest and not claim it as your own work. Use of the bibliography is fine obviously.

A Chinese-led Greater East Asia Co-Prosperity Sphere?

As promised I've done some research on the China-Asean Free Trade Agreement (FTA) that came into effect on January 1, 2010. As it turns out, there are several reasons why it hasn't received much press.

The Financial Times has an excellent overview of the FTA and its implications for the nations that are party to it. Long story short, it'll lower tariffs in all the countries. The FT highlights some winners of the agreement, notably Indonesia and Vietnam who are large exporters of commodities to China. Essentially their goods will be taxed less when shipped to the PRC which means more business for those industries. However, The Economist accurately points out that tariffs between the Asean states and China have been on a declining trend for the past several years, making the FTA even less spectacular.

This is all well and good for China and the Asean members, however, I don't see it impacting trade with the E.U. or the U.S. all that much. Fact of that matter is that western countries are increasing the tariffs levied on Chinese imports as a result of China's currency manipulation and subsidies to various industries.

So the bottom line for my friend Asia is that the FTA received little attention for the following reasons: 1) tariffs have been on the decline prior to the FTA 2) it's only between a select few states and 3) it doesn't impact the major economies in Europe or the United States.

I'll probably put something up later today about how the FTA impacts Taiwan and how I think the Ma government should respond. I wrote a paper last semester about Taiwan's grand strategy and this FTA provided the bulk of of my discussion on Taiwan's economic priorities. Stay tuned!

Busy busy busy

Things are a little busy on my end as next week I'm presenting a paper at Columbia University's graduate student conference on East Asia. Putting the final touches on my presentation and practicing quite a bit so everything goes smoothly.

My research question was whether American arms sales to Taiwan restrain them from developing nuclear weapons. It was a lot of fun researching the issue as I had little knowledge about Taiwan's nuclear weapons program (or civilian for that matter). Turns out the PRC developing nukes was a major motivation for the Nationalists to pursue a nuclear deterrent (along with warming Sino-US relations in the 1970s).

It highlights a major problem in the Sino-US relationship: the arms sales themselves. Beijing considers the island a renegade province and deeply resents American involvement in the matter. However, the United States for decades has acknowledged China's position on Taiwan (not the same as agreeing with it though), yet continues to sell weapons to the ROC all the while saying that the matter of reconciliation/unification is between Beijing and Taipei. Yet as history has shown, if the United States gets too friendly with Beijing, Taiwan gets nervous and resumes its nuclear weapon program. Although at this point in time I wonder how warm relations between China and the US could get considering their current disputes over trade, climate change, and China's growing influence in general.

Google vs. China

I know this old news by today's standard, however I think this story warrants a post.

Essentially Google is threatening to close up shop in China because some GMail accounts were hacked, specifically those of some Chinese activists. This has been a boon for people who already have a bone to pick with China (read anyone who has lost a job as a result of Chinese, American politicians looking to score some points, and those with legitimate human rights concerns). However, I think most of the discussion has focused less on why the Chinese government censors the Internet in the first place.

Article 35 of the Chinese Constitution provides the right of freedom to speech and article 40 provides the freedom and privacy of correspondence to Chinese citizens. However, article 40's caveat is that when it comes to state security, all bets are off. How is state security in China defined? Simply put, broadly. Any mention of independence for Tibet or Taiwan is anathema to the Chinese Communist Party (CCP), as their legitimacy for being in charge is based largely on the fact that they brought an end to the warlordism that existed during the early years of the Republic of China (that now lives on Taiwan). I find this eerily reminiscent when a new dynasty would claim that it had inherited the "mandate of heaven" and was therefore fit to rule. At some point I'll have to do a post on why the CCP isn't that much different from the imperial system that existed until 1911.

Essentially, the Chinese government believes the best way to avoid chaos is to prevent any signs of disunity. Such disunity is embraced by the West, especially in Italy where every province would form its own country if it could. The West prides itself on individual success and identity, traits that go against socialism where society itself as a single unit is held sacred. Consequently censoring the Internet is a way of ensuring that Chinese society remains intact. What about their free market reforms you ask? Well, that's not really capitalism; it's socialism with Chinese characteristics.

As for the topic at hand, I'm not sure where this dispute between Google and China will lead. Google hasn't had much success against Baidu, a homegrown Chinese search engine. Google may figure that China isn't worth the expense and head home. On the other hand, they may be trying to get a better deal for their other ventures such as their new cell phone. What I think is apparent is that Google's line of standing up for the rights of its customers is wonk and has more to do with business concerns. As my father told me growing up, "Let the numbers do the talking." Google is no doubt looking at its numbers.