As Asia builds economic ties, Taiwan sidelined by China

Taiwan watches as Asian neighbors ink trade deals, lower tarrifs, and get access to Chinese loans for growth.

Looking out over towering stacks of containers and hulking freighters here, the problem is far from evident.

But this bustling port – once one of the world's busiest – is in sharp decline.

By the port's own calculations, it's now fallen off the list of the world's top 10 – down to No. 12, from No. 3 just a decade ago, a ranking that should become official later this month.

That's not because Kaohsiung Port isn't growing. It's because China's ports are growing much faster.

"In the last decade, several new ports have been established in the mainland, with annual growth rates of 40 percent," says Shieh Ming-hui, director-general of the Kaohsiung Harbor Bureau. "Our port's growth rate is about 4 percent per year. That's the main reason for this phenomenon."

Kaohsiung Port's decline is a symptom of a far more serious problem for this island-nation: Amid China's dramatic rise, Taiwan is being economically sidelined.

But it's not just that this onetime economic "tiger" now can't compete head-on with China in ports and other areas. Due to Beijing's political pressure, Taiwan is also the odd-man out amid the trend of Asian economic integration.

Taiwan watches from the wings

China sees self-ruled Taiwan as part of its territory. It forcefully objects to any nation signing pacts with Taiwan that would confer on it the status of statehood.

Taiwan was able to join the World Trade Organization in 2001, a day after China. But it joined as a "separate customs territory" – not a nation.

Since then, Taiwan has watched fretfully from the wings as Asian neighbors lower tariffs, ink trade pacts, and schmooze at regional conferences.

It was left out of China's trade pact with the Association of Southeast Asian Nations (ASEAN), which will create the world's largest free trade area (encompassing some 2 billion people) and eliminate tariffs on most goods by next year.

This weekend, China announced a $10 billion ASEAN-China infrastructure investment cooperation fund, plus another $15 billion in credit to ASEAN nations, designed to help them out of the global economic doldrums – with Taiwan again shut out.

Meanwhile, South Korea has signed its own trade pact with ASEAN, and is in talks with the United States and the European Union. Taiwan has tried but failed to interest those parties in trade talks.

Trade pact with China?

This has left many Taiwanese deeply uneasy about their economic future. Taiwan has seen its per capita GDP ($18,300) stagnate as peers like South Korea ($19,600) out-race it.

Most Taiwanese expect that their island's economic fortunes will be increasingly tied to China's. For them, the debate isn't about whether to integrate with the giant next door, it's about what the terms will be.

"Everyone wants to make sure Taiwan isn't marginalized," says Kung Ming-hsin, vice president of the Taiwan Institute of Economic Research. "But we disagree on how to do that."

The current government under President Ma Ying-jeou thinks boosting trade with China is the answer. Mr. Ma has ruled out political unification, but is aggressively pursuing closer economic links. Under Ma, Taiwan inked deals on cross-strait shipping and air and tourism links last year, binding Kaohsiung and other ports more closely to their Chinese counterparts. (Before, all ships had to pass through Hong Kong or another third location).

Now Ma is pushing a trade pact with China, called the Economic Cooperation Framework Agreement. The pact would scrap tariffs on some goods like petrochemicals, as a possible first step toward a broader cross-strait free trade agreement.

The government argues that such a deal could add nearly 1.4 percent to Taiwan's gross domestic product. And it says other countries won't consider free-trade deals with Taiwan unless the island first lowers cross-strait trade barriers – thanks to Chinese pressure, and multinational firms' own preferences.

"They won't move [on trade pacts] before we reach an agreement with China," says vice foreign minister Andrew Hsia, at a recent forum in Taipei.

But the opposition is crying foul. It, too, backs closer cross-strait economic ties, but warns about the risks of playing into China's unification strategy – by which a "one-China market" paves the way for political union.

Ma's embrace of the "one China" principle is what has allowed cross-strait talks to shift into high gear, they note. The pro-independence opposition rejects that principle as a dangerous concession.

It also wants the details of any cross-strait trade pact made public and subject to referendum. "The government needs to tell its people what is the political price made for this deal," the party wrote in a recent newsletter.

Back at the port, pragmatic optimism

From the vantage of balmy Kaohsiung Port, though, the whole debate seems distant. The port, along with Taiwanese shipping firms, has already steamed ahead with a pragmatic, "If you can't beat 'em, join 'em" strategy.

For Mr. Shieh, cooperating – not competing – with China will help revive this once-mighty port. He says direct shipping links will boost the port's trans-shipment business.

"For a long time our government put restraints on our business, so Kaohsiung didn't benefit from China's rise," said Shieh. "But last year the government removed those limitations, so we can compete more fairly with other international ports."

Kaohsiung Port is reaching out to Chinese counterparts on investments and new shipping routes. Shieh hopes to combine China's production muscle with the edge that Kaohsiung Port still holds in logistics, port infrastructure, and value-added services.

And he thinks a trade pact will bring benefits, too. "We hope for more positive developments in the Taiwan Strait," says Shieh. "It will be good for both sides' people, shipping companies, and business."

Shieh strikes an optimistic note. But even he acknowledges that Kaohsiung Port's global heyday – and by extension, Taiwan's heyday as an export powerhouse – is likely gone for good.

"We probably can't make it back into the top three," says Shieh. "Our goal is to rejoin the top 10."