Monday, October 10, 2016

Prospect of New Southbound Policy

Darson Chiu

The so called “new southbound policy” has been stressed by the president Tsai, Ing-wen as one of the nation’s very important policies for the near future. The current ruling party Democratic Progressive Party released the policy’s preliminary scope and framework at its central standing committee meeting in April of 2016. However, the policy was announced in 2015 when the outcome of presidential election was still unknown. “The new southbound policy is Taiwan’s new outward-oriented economic strategic plan that puts people at its core, and the government would be pushing bilateral interaction and cooperation of human resources, industries, investments, education, culture, tourism and agriculture between Taiwan, ASEAN and South Asian nations to build a new partnership.”

Also, a new southbound policy office was set up and started operating in June, 2016.  Accordingly, the office will be a task force whose staff members will come from the Presidential Office or other government agencies, either on special assignments or on loan. Therefore, the office will be in charge of coordinating efforts between different government agencies and putting forward with the policy.

A more specific approach of fulfilling the policy goals is by offering more relaxed visa-entry privileges to tourists from member states of the ASEAN to promote closer relations between ASEAN countries and Taiwan. For example: a measure approved by the government earlier this month allows citizens of Thailand and Brunei visa-free access to Taiwan starting August 1. And the measure will be implemented on a trial basis for a year. The Executive Yuan announced that the move would extend a policy already in place for ASEAN states like Malaysia and Singapore to other Southeast Asian countries.[1]

Recently, the Ministry of Economic Affairs laid out three major approaches that the government intends to take to move the policy forward. First, to promote trade, the government will sponsor more business matching events and set up more distribution outlets for Taiwanese businesses in ASEAN. Second, to push forward industry cooperation, the ministry intends to sign more memorandums of understanding with ASEAN countries. Third, to help the investment in ASEAN countries, locals will be recruited to facilitate Taiwanese investment in the region. And students from Southeast Asia studying in Taiwan are potential candidates in this "strategic partner exchange" program.

Why has the Tsai administration been planning for such policy? Almost forty percent of Taiwan’s exports heading for China. It has been believed by some that it would be too risky by solely relying on one single market. And they have argued that Taiwan needs to diversify its exports to different destinations. It seems everything is just perfect for launching a new southbound policy at the stage of time when the Chinese economy is slowing down. The ASEAN economic community has come in effect since 31 December of 2015. And India has been doing great recently. Therefore, the “do not place all eggs in one basket” theory has been implemented.

Although the head of the office announced in public on 12th July, 2016 saying the new southbound policy is not about giving up the market of mainland China. On the contrary, it will try to explore the opportunity for both China and Taiwan to jointly working closely together in Southeast Asia. He further distinguished the difference between the original and new southbound policies. The old policy was looking for cost down, and the new policy is looking for added value. The old policy targeted at less expensive land and labors, whereas the new policy is about mutual exchange by also welcoming ASEAN tourists to visit Taiwan and ASEAN investors to invest in Taiwan.

Regarding the prospect (the feasibility and challenges) associated with the new policy, it’s a fact that all eyes will be on ASEAN, and it is right to pay greater attention to ASEAN. In terms of economic size, none of the 10 ASEAN members is considered as significant. However, the aggregate estimated GDP of all 10 members in 2015 stood at US$ 2,454 billion making ASEAN the 6th largest economy in the entire world.  In addition, the total population as of October 2015 stood at 628.72 million indicating a market with great potential.

By referring to the economic outlook of ASEAN from 2016 to 2020 conducted by EIU, we can see that internal demand will actually contribute more to its future growth rather than external demand. In the next 5 years, contribution from private consumption to growth will stand at 2.88%, and contribution from fixed investment to GDP growth will be around 1.78%. Contribution from government consumption is 0.6%, whereas the net exports will provide negative contribution of minus 0.18% to ASEAN’s overall growth. That means ASEAN is different from the Southeast Asia we thought we were very familiar with in the past. 

In the future, ASEAN is on the demand side rather than the supply side, whereas it is crucial information for outsiders. Targeting at private consumption and fixed investment would be more adequate business decisions. Therefore, the new southbound policy looking at mutual exchange is correct.

However, we need to note that the new policy is different from the old policy, because it is more difficult to implement. Before the year of 2000, Southeast Asia did not launch any free trade agreement. Taiwanese firms invested in Southeast Asia could import parts and components from enabling firms located in Taiwan. As a result, the old southbound policy did help Taiwan’s exports and GDP growth to a certain extent. However, the situation is very different now. 

Since 2001, ASEAN has signed FTAs with its trading partners including China, Japan, South Korea, Australia, New Zealand, and India. In addition, ASEAN has been negotiating the RCEP with those partners, and the trade pact is scheduled to be concluded by the end of this year. Furthermore, some ASEAN members like Vietnam involved in TPP, and it was already concluded in October last year waiting to be ratified. The rules of origin would require items traded in the FTA area manufactured with components, intermediate goods, also from the FTA area. Otherwise, there’s no tariff-reduction benefit. In that case, Taiwanese investors operating in Southeast Asia will have no incentive to import parts and components from Taiwan. So the new southbound policy will not help pick up Taiwan’s economic growth like the old policy used to do.

Consequently, the sufficient condition to have a successful southbound policy is to work under the umbrella of ASEAN plus Taiwan FTA at least. Of course, the best option is for Taiwan to join the second wave of RCEP or TPP negotiation.

(Dr. Darson Chiu is the Director General of CTPECC.)

[1] In addition, citizens from Cambodia, Indonesia, the Philippines, Vietnam, Myanmar, and Laos who have received visas to Australia, Canada, the Schengen area, Japan, New Zealand, South Korea, the United Kingdom, or the United States over the past 10 years will also be allowed to enter Taiwan visa-free after registering online.

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