One China, Two Accessions

On January 1 2002, Taiwan ended its 11-year quest for accession to the World Trade Organization.  Coupled with China's accession, Taiwan's accession should provide some synergies and opportunities for companies that have operations in the Greater China market.  It is not clear, however, that all of this potential will be realized.  Cross-strait politics may yet interfere with the realization of the Greater China benefits that should arise from China and Taiwan being members of the WTO.  The opportunities still remain, however, if these issues can be resolved.

Taiwan's WTO Accession

By joining the WTO, Taiwan has attained one very important political goal: membership in a major international organization in which it can claim some level of equality with China. Statehood is not required for WTO accession, and Taiwan has joined as the separate customs territory of Taiwan, Penghu, Kinmen and Matsu, with a WTO name of “Chinese-Taipei”.  Taiwan was able to fend off efforts by China to have the WTO add “of China” to its “customs territory” designation, and the WTO is an organization that operates by consensus meaning every member has a potentially equal voice.  Except in certain limited areas, however, the most significant and important reforms in Taiwan's economy are not being driven by Taiwan's WTO accession package.  Taiwan is in the process of reforming its financial industry, as well as passing and amending laws to facilitate mergers and acquisitions among a whole variety of enterprises, and virtually none of this legislative and regulatory acitvity is related to WTO accession.
 
Cross-strait Issues

When looked at in conjunction with China's accession package, however, Taiwan's accession packages is extremely important to cross-strait trade and business operations.  The nearly simultaneous entry of both China and Taiwan into the WTO should create opportunities for companies that have operations on both sides of the Taiwan Strait.  Chief among those opportunities should be the direct cross-strait transportation of goods and people, the so-called “three links”.  While the establishment of such links is not strictly required by the WTO, there seems to be little point in permitting a substantial increase in the categories of goods that can be exported from China to Taiwan without also providing for the direct transportation of such goods between the two territories.  Given the number of Taiwanese companies that have substantial investments in China, and the number of Chinese jobs created by these investments, the same would also seem to be true of the direct cross-strait transportation of people. 

The “three links” issue has a history, however, of being held hostage to cross-strait politics and rhetoric.   While there is some basis for believing that this issue could be resolved through WTO procedures, China has made it clear that cross-strait trade issues are an internal matter and therefore not subject to resolution through the WTO.  In the meantime, the absence of direct links continues to have a deleterious effect on the cost structures of companies that operate on both sides of the strait.  Companies that use Taiwan as their Greater China headquarters (which includes both Taiwanese and foreign companies) are forced to either bear the cost of the two man-days of downtime, which each cross-strait trip requires, or bear the high costs of maintaining expatriate managers in China.  This is no more beneficial to the Chinese economy than it is to the Taiwanese economy, as it also discourages such companies from training local managers in China.

The good news is that Taiwan's Mainland Affairs Council has recently announced that Taiwan will permit the flow of additional categories of Chinese goods into Taiwan.  With the exception of 100 items that are deemed by Taiwan to be related to national security, national defence and military preparedness, Taiwan has undertaken to phase in the import of all Chinese industrial products over a four-year period starting on February 15.  Imports of agricultural products from China appear to be more controversial, and it is possible that Taiwan may try to invoke WTO “surge” protections in certain instances.  Given China's insistence that all cross-strait trade is internal trade, however,  it is unlikely that any backsliding by Taiwan on Chinese goods will wind up being resolved through the WTO's Dispute Resolution Agreement.  The first liberalization on the import of industrial goods is expected to become effective on February 15.

Quite apart from WTO commitments, Taiwan has recently liberalized regulations that apply to China investments by Taiwanese companies.  For those industries in which investment has been liberalized, Taiwan has introduced a more streamlined reporting application process and has lifted the US$50 million limit.  These changes represent an end to the “go slow, no haste” policy that has governed cross-strait investments in the past.

Taiwan is also set to allow Chinese investment in certain service industries in Taiwan this year, including the transportation, hotel, restaurant, hospitality, advertising, construction and sports industries. These changes in investment regulations, the increased flow of goods between Taiwan and China, and the lower tariffs on such goods should create some interesting operational structuring (or restructuring) possibilities for companies investing in Greater China.  Perhaps the increased levels of Taiwan investment that will result from this new policy, and the increased levels of Chinese investment in Taiwan, will help to convince the governments on both sides of the strait that trade cooperation and direct links are the best way forward for Greater China.

Conclusion

Taiwan's WTO accession, when coupled with China's WTO accession, should have positive implications for the development of the Greater China economy, making Greater China an attractive and competitive environment for both Taiwanese and foreign investors.  It is not clear, however, that the benefits will be realized in the near term, as cross-strait political issues prevent direct transportation of goods and services across the Taiwan Strait.  Recent policy changes in Taiwan that could result in an increased level of Taiwanese investment in China, and increased levels of Chinese investment in Taiwan, may have a positive impact on this apparent stalemate.

By William Bryson
Jones Day Reavis & Pogue, Taipei