How Taiwan is benefiting economically from recent thaw in ties with China

A potential free-trade deal between with Singapore may signal that China has stopped warning other countries against doing deals with Taiwan.

Taiwan announced on Monday it is negotiating a free trade agreement with Singapore – a move that will boost the export-reliant island's economic competitiveness amid a recent thaw in ties with rival China.

Taiwan and Singapore are discussing new channels to strengthen the $13.4 billion from 2009 in two-way trade following feasibility studies last year, an official from the island Economics ministry said. A trade deal is considered almost certain, as the economies of Taiwan and its sixth-largest trading partner Singapore do not directly compete, sparing any thorny protectionism issues.

Singapore-Taiwan talks follow a separate accord signed in June between Taiwan and world economic powerhouse China, which officials in Taipei believe has since stopped warning other countries against signing trade deals with the island.

Beijing had previously forbid its more than 170 diplomatic allies, including the world's biggest economies, from signing free trade agreements (FTAs) that would imply statehood for Taiwan. It has claimed sovereignty over self-ruled Taiwan since the Chinese civil war of the 1940s, but relations began to warm in 2008 after China-friendly Taiwan President Ma Ying-jeou took office.

But now, China hopes to help Taiwan’s economy as a way of luring it eventually toward political unification, political experts say. Singapore, they say, can stay on China’s good side by labeling Taiwan in any FTA as a World Trade Organization member rather than as a nation.

When Taiwan and its largest trading partner, China, agreed in June as part of that détente to slash tariffs on about 800 items, some people on the island worried that the agreement would make the island too dependent on Beijing. Mr. Ma's government said then that the deal would lead to economic tie-ups with other countries, and Singapore is the first example.

"Ma Ying-jeou is showing more proactive achievements in the foreign relations field," says Lin Chong-pin, strategic studies professor at Tamkang University in Taiwan. "But Singapore must have been briefed on this by Beijing. The FTA might set a precedent for others to follow, but the key is in Beijing's hands."

Some of Taiwan's other Asian trading partners, such as Malaysia and the Philippines, have explored FTAs as the China trade deal makes the island more attractive economically. Some have held back to see whether Beijing would protest to Singapore. Officials would not say when Taiwan-Singapore FTA talks might wrap up.

Taiwan's cabinet says it expects gains to the $425 billion-plus economy from the agreement with Singapore, to which it exports high tech goods, machinery, and petrochemical products. Singapore sends IT components the other way.

As Singapore already has minimal tariffs, Taiwan is looking to the trade deal for an opening of its counterpart's strong but restrictive financial sector and a liberalization of medical and professional services, analysts say.

The trade deal also could give Taiwanese firms easier access to other parts of Southeast Asia, where Singapore has a grip now and Taiwanese firms are looking for new inroads, says Wai Ho Leong, regional economist with Barclays Capital in Singapore.

"It's a very important symbol that Taiwan is engaging frontiers beyond China," Mr. Leong says. "Asia matters to Taiwan from a trade perspective, and Singapore is part of that. It paves the way for Taiwan to enter Southeast Asia."