Singapore trade pact brings Taiwan out of China's economic shadow

The deal inked on Thursday is the latest sign that China is relaxing its traditional opposition to such deals.

Diplomatically isolated Taiwan signed a trade deal Thursday with its fifth biggest trade partner Singapore, its most significant pact to date and a signal that Taipei’s rival China will let it expand a cramped economy through tie-ups with other governments.

The agreement was signed in Singapore after three years of studies and talks is expected to add $701 million to Taiwan’s gross domestic product over 15 years. It's also expected to open doors to partnerships with other countries that had shied away from Taiwan trade pacts fearing reprisals from powerful Beijing.

“Taiwan’s advantage is that it can make another move forward into Southeast Asia, using this deal as a stepping stone,” says Shi Hsiao-chi, economist with SinoPac Securities in Taipei. “Taiwan wants to sign more agreements for sure and as long as China doesn’t interfere we’ll see some substantive progress in the years ahead.”

More trade deals would let Taiwan raise an international profile long squelched by global economic powerhouse China, helping it catch up to Asian industrialized peers such as Japan and South Korea in fast-growing regional economic integration.

China sees Taiwan as part of its territory rather than a nation free to negotiate with other countries and previously asked its more than 170 diplomatic allies to avoid deals with Taiwan. That left the export-reliant island with just five agreements until July, when New Zealand became the first country in the Asia-Pacific region to sign a deal. 

For the past five years Beijing has relaxed its policies to foster stronger ties with with Taiwan after decades of hostilities stemming from the Chinese civil war of the 1940s. The defeated Nationalists fled to Taiwan, which has been governed separately until today. China now hopes to impress Taiwan’s public by helping its economy, part of a push for eventual reunification, analysts say.

One breakthrough came in 2010 when China and Taiwan signed their own economic cooperation pact, including tariff cuts in about 800 sectors.

“As long as Taiwan’s relations abroad don’t imply two Chinas or create a flap over sovereignty, mainland China basically can agree to its trade agreements,” says Kweibo Huang, associate diplomacy professor at National Chengchi University in Taipei.

The pact between Taiwan and Singapore, which logged $28.2 billion in two-way trade last year, will eliminate import tariffs within 15 years on 99 percent of items from the Southeast Asian city-state that counts petrochemical products and pharmaceuticals among its major exports. Singapore contributes to 5 percent of Taiwan’s total foreign trade.

Taiwan gets relatively little from the pact since Singapore is a free port, Mr. Shih of SinoPac says. The government in Taipei expects exports to grow by $782 million and imports by $719 million, feeding into a GDP worth $474 billion last year. The island’s manufacturing sector, the bedrock of its economy and led by high-tech products, would grow by $1.18 billion due to the deal. 

Taiwan will see more rewards as other Asian trading partners lose fear of China and negotiate their own trade deals with Taipei, experts say. Economists say Southeast Asia should lead the trend as countries such as Malaysia, the Philippines and Vietnam have expressed interest.

Deals with major Asian countries would help Taiwan rely less on with China, which including Hong Kong takes 40 percent of its exports. They would also help Taiwan catch up in regional economic integration that has helped Japan, South Korea and the Association of Southeast Asian Nations bloc. Taiwan’s economy, the world's No. 26, is expected to grow 2.3 percent this year versus 6 percent for all of Asia.

Other Asian economies lead Taiwan in trade deals with one another and with Western nations.

“With this (Singapore pact) you get the green light. You know where the limit is,” says George Tsai, political scientist with Chinese Cultural University in Taipei. “Taiwan is going to make other efforts to conclude other agreements with other countries if possible.”