Taiwan trade in spotlight as mainland China fires timely warning ahead of election with barriers probe

Mainland China’s Ministry of Commerce announced details of the investigation last month, hours after the pro-independence Democratic Progressive Party (DPP) had confirmed current vice-president Lai Ching-te as its 2024 presidential candidate, with incumbent Tsai Ing-wen set to conclude her second and final term in May.

The probe could be concluded by mid-October, according to the Ministry of Commerce, but “under special circumstances” could be extended until January 12 – the day before the presidential election is due to take place.

Despite years of pushing for greater economic codependence through trade, the trade surplus Taiwan has enjoyed from its economic sweeteners are “policies to favour Taiwan”, as Beijing sees boosting closer economic ties as a critical step in paving the way for a political union.

Beijing views the self-ruled island as a breakaway province that needs to be reunited with the mainland – by force if necessary. It insists on a one-China principle when dealing with the European Union, the United States and other countries, and repeatedly threatens actions against moves towards independence. The DPP has refused to accept the one-China principle since Tsai came to power, but has stopped short from declaring independence.

Exports from mainland China to Taiwan reached US$84 billion last year, up slightly from US$82.5 billion in 2021, according to data from the Bureau of Foreign Trade in Taipei.

Taiwan – mainland China’s sixth largest trading partner according to official data in 2022 – exported US$185.92 billion the other way last year, down slightly from US$188.91 billion in 2021.

“When it comes to unfair trade, we can send things over [to China] tax free, but they can’t do [the same] in Taiwan,” said Danny Ho, an economist and chief executive of the DMI energy consulting firm in Taiwan.

Taiwan has, Ho added, been wary of letting in too many mainland Chinese products at the risk of competing with local goods on price.

Cross-strait relations have plunged to a new low, marked by mainland China’s military exercises in the Taiwan Strait after Tsai’s transit stop in the United States in early April, when she met US House Speaker Kevin McCarthy.

Cancellation of the ECFA bilateral trade pact would undo a landmark gesture of goodwill that Beijing signed in 2010 with then-president Ma Ying-jeou – the Kuomintang (KMT) politician who was succeeded by Tsai in 2016 – in hopes it would liberalise markets and augur stronger relations.

The trade pact includes an 806-item “early harvest” list of tariff cuts, with Beijing agreeing to cut import duties on 539 items and Taiwan reducing its tariffs on 267.

“If [Beijing] find trade to be unfair, they could call off the early harvest list,” said Huang Kwei-bo, an associate professor of diplomacy at the National Chengchi University in Taipei.

“That would be really bad for Taiwan. The intent would be to let voters know the Democratic Progressive Party can’t handle cross-strait relations.”

Hi-tech goods, a staple of Taiwan’s US$830 billion economy, are not on the list, but Foxconn Technology founder Terry Gou has said he hopes mainland China’s probe will not sacrifice the ECFA.

Taiwan-based Foxconn is the world’s largest assembler of consumer electronics and operates 12 factories in mainland China.

Some 2,460 items from mainland China, though, are still banned from entering Taiwan, including 830 agricultural products ranging from garlic, red beans, bananas, potatoes and onions. Taiwan has also imposed restrictions on 788 other items.

Exporters in mainland China can request a review if importing any of the items is seen to be “neither a risk to national security nor would create a bad impact on relevant [local] industries”, according to Taiwan’s Bureau of Foreign Trade.

Instead of cancelling the ECFA, Beijing could demand changes to parts of the trade deal that cover what it perceives as barriers to Taiwan-bound exports of textiles, mineral-metal chemicals and farm goods, analysts said.

Mainland officials, as another alternative, might also cut off shipments of the same goods from Taiwan, they added.

Beijing also banned Taiwanese pineapples, apples, citrus fruits and seafood in 2021 and 2022, citing regulatory discrepancies and food safety problems.

But despite the bans, Taiwan’s Foreign Trade Bureau statistics showed an overall increased reliance on the mainland Chinese market.

Taiwan’s exports to mainland China grew by 23 per cent in the first 10 years of the ECFA framework, bureau statistics showed, compared to just an 11 per cent increase in Taiwan’s worldwide exports over the same period.

However, data from mainland China’s General Administration of Customs showed a downward trend in trade in the past year, as well as a drop in mutual dependence on the goods subject to the probe.

Mainland China also appears to be importing less from Taiwan, with shipments having dropped by 2.9 per cent in November compared to a year earlier, before plunging by 30.9 per cent in January and February, and by 28 per cent in March.

The total import value of agricultural products – ranging from meat to fruits and vegetables – from Taiwan to mainland China dropped by 53.5 per cent from 2018 to 2022, according to General Administration of Customs figures.

The drop was most significant from 2021 to 2022, when the agricultural import value plunged by 48.8 per cent.

Textile trade dropped by 39.2 per cent from 2018 to 2022, mainland customs data showed, while the total import value of mineral-metal chemicals from Taiwan shrunk by 19.1 per cent during the same period.

Chiu Tai-san, minister of Taiwan’s Mainland Affairs Council, told legislators last month that the government was open to “consultations” on the 2,455 items under investigation.

Chiu added that the Ministry of Economic Affairs was studying the impact of any potential cancellation of the ECFA.

“We’re always doing some kind of review,” he said.

Analysts in Taiwan expect the government to cooperate with the probe until the end of the year, if needed, but without opening the market further to mainland Chinese products.

Any market opening made during the presidential campaign “could be misconstrued”, said Raymond Wu, president and chief executive of the Taipei-based e-telligence Research and Consulting Group.

The probe is a “strategy” to bring Taiwan back to the negotiation table, said Hu Jin-li, a professor with the Institute of Business and Management at the National Yang Ming Chiao Tung University in Taipei.

A mainland-based Taiwanese businessman, who asked not to be named due to the sensitivity of the matter, believes Beijing wants Taiwan’s businesses to pressure the government.

“It is a signal to warn us of the importance of the mainland market and keep us working on improving cross-strait relations, ” he said.

Mainland officials might call off the investigation if they think simply launching has let Taiwanese people know that Beijing can cut off trade under the ruling party’s leadership, said Denny Roy, a senior fellow at the East-West Centre think tank in Hawaii.

“A stronger step would be to restrict trade on some items, but also announce those restrictions would go away if the party in power in Taiwan accepted one China,” he said

Li Fei, a professor in economics at Xiamen University, said the level of mainland China’s moves following the investigation would depend on “how the situation develops”.

This could, he added, come after the extended end date of the investigation on the eve of the presidential election.

“It would depend on Taiwan’s response, and how the situation develops. There would be sanctions anyway, but they could be taken one step at a time, so there could be room for more sanctions to be added when needed,” he said.

Li added that it is not in mainland China’s interest to suspend the trade deal given its weight when signed in 2010 when ties were more upbeat.

“At least I don’t see an interest in having that cancelled right now,” Li said.