The market share of European Union (EU) in Taiwan’s total exports has been declining in the last decade, although the volume of exports from Taiwan to EU has increased slightly. Concurrently, exports from EU to Taiwan have been declining in terms of both the share and the volume. This trend suggests that economic integration in East Asia, which has been driven by market forces up to this point, has weakened the bilateral trade relationship between EU and Taiwan.
Looking at the trade structure, we found that Taiwan’s exports to EU were concentrated in five categories, namely HS84 (electronics, primarily IT related products), HS85 (machinery), HS87 (transport equipment), HS73 (steel products), HS90 (precision instruments, mainly photo-electronic products). In 2004-2006, 81.22% of Taiwanese exports fell into theses five categories. Likewise, EU exports to Taiwan were concentrated in seven categories, including HS84, HS85, HS87, HS90 which overlap with Taiwan’s exports, and HS72 (steel), HS29 (chemicals), HS30 (pharmaceutical products). In 2004-2006, 64.52% of EU exports fell into these seven categories. This pattern indicates that bilateral trade was concentrated in a few categories and there was substantial intra-industry trade in the areas of machinery, IT and photo-electronic products.
In terms of trade barriers, EU exports generally face higher customs duties in Taiwan than the duties faced by Taiwanese exports in EU. As of 2006, 19.1% of EU exports to Taiwan were subject to a customs duty of 5% or higher. In comparison, only 9.97% of Taiwan exports to EU were subject to a customs duty of 5% or higher. Furthermore, 4.82% of EU exports were subject to a customs duty of 20% or higher (mainly automobiles), whereas the counterparts for Taiwan exports was only 0.01%. This clearly indicates that trade barriers were higher in Taiwan. In spite of higher trade barriers, major European exports in Taiwan enjoyed higher market shares than Taiwan’s exports in EU. This suggests that there were more competitors for Taiwanese products in EU than the competitors for EU products in Taiwan. The fact that EU faces higher trade barriers and a smaller number of competitors in Taiwan suggests that a bilateral free trade agreement would benefit EU more than Taiwan.
In terms of foreign direct investment (FDI), EU has invested much more in Taiwan than Taiwan’s investment in EU. By the end of 2007, the cumulative amount of FDI by European companies in Taiwan was 24.049 billion US dollars, much higher than 2.475billion US dollars that Taiwan has invested in EU. In fact, most of Taiwanese FDI has occurred in recent years as a response to the enlargement of EU. Among EU investments in Taiwan, there were slightly more manufacturing (57.29%) than service (42.7%) activities. However, manufacturing investment mostly took place in the past; while in recent years, it was mainly service investment. Among the manufacturing investments, electronic components accounted for the most part (29.8% of total FDI). Among the service investments, finance and insurance account for the majority (27.43% of total FDI). Major European financial institutions such as ABN AMRO, BNP, ING, Deutsche Bank, UBS, are all active players in Taiwan’s financial market today. Bilateral arrangement in the area of investment can further encourage FDI in service sectors.
We have also reviewed the non-tariff trade barriers pointed out by the Taiwanese business community and European Charmer of Commerce in Taipei (ECCT). We found a large degree of overlapping of barriers on both sides. The overlapped areas include customs administration, trade facilitation, technical barriers to trade, sanitary and phytosanitary (SPS) measures. Bilateral cooperation in these areas can quickly remove the barriers to trade in agricultural as well as industrial goods. For example, traders on both sides complain that industrial standards and the certification procedures for conformation constitute a significant barrier to trade. Some kind of arrangement to enable mutual recognition of conformity (MRA) will greatly reduce the costs of trade. In the area of professional services, both sides complain about the procedural restrictions on the movement of natural persons. This can also be relaxed through bilateral agreements.
Certain issues that ECCT has raised are unique to Taiwan. This includes the pricing formula that Taiwan’s health care authority has adopted to regulate the prices of pharmaceutical products, government procurement, and the restrictions on imports or investments from China. These issues are more complex and probably can not be fully resolved by a function-based bilateral agreement. They have to be incorporated in a more comprehensive bilateral agreement such as free trade agreement (FTA) or trade and investment framework agreement (TIFA).
In conclusion, although the average tariffs are already at low levels on both sides, there are still a number of commodities which can benefit substantially from the elimination of tariffs, and EU stands to benefit more than Taiwan. In the area of investment, a bilateral investment agreement (BIA) can further facilitate FDI, especially in the service sectors where services can be extended across the Taiwan Strait. Functional agreements in the areas of customs administration, trade facilitation, technical barriers to trade, SPS, among others, are also desirable. However, it takes a more comprehensive bilateral agreement such as FTA or TIFA to deal with special issues like government procurement and trade with China.