1

What Lessons from the What Lessons from the EU Model for a Taiwan – EU Model for a Taiwan –

China Free Trade China Free Trade AgreementAgreement

Der-Chin HorngDer-Chin Horng

Institute of European and American Studies, Institute of European and American Studies, Academia SinicaAcademia Sinica

2

ContentsContents

AbstractAbstract

I. I. European Integration: Background andEuropean Integration: Background and

SignificanceSignificance

II. II. Main Features and Challenges of the EU Main Features and Challenges of the EU ModelModel

III. Opportunities of the EU Model for III. Opportunities of the EU Model for Taiwan-China Economic RelationsTaiwan-China Economic Relations

ⅣⅣ. The Roadmap of a Taiwan – China Free . The Roadmap of a Taiwan – China Free Trade Agreement from the EU ModelTrade Agreement from the EU Model

V. ConclusionsV. Conclusions

3

The EU ModelThe EU Model

The European Union (EU) is one The European Union (EU) is one of the most successful examples of the most successful examples of regional economic integration. of regional economic integration. What are the main features of What are the main features of EU integration model? What is EU integration model? What is the meaning and significance of the meaning and significance of the EU model for other regional the EU model for other regional economic integration processes?economic integration processes?

4

Core Issues of this PaperCore Issues of this Paper

This paper will examine both the This paper will examine both the opportunities and challenges the EU opportunities and challenges the EU model presents for Taiwan–China model presents for Taiwan–China economic relations. economic relations.

What lessons can be drawn from the EU What lessons can be drawn from the EU model for a Taiwan – China free trade model for a Taiwan – China free trade agreement? agreement?

Will a FTA provide China and Taiwan with Will a FTA provide China and Taiwan with a way towards long-term peace, prosperity a way towards long-term peace, prosperity and stability in the cross-Strait relations? and stability in the cross-Strait relations?

5

I. European Integration: I. European Integration: Background and Background and

Significance Significance 1.1. 19521952 ECSC established by Treaty of PaECSC established by Treaty of Pa

ris, ris, came into force on 25 Jcame into force on 25 July, signed by uly, signed by the Six: Francthe Six: France, Germany, Italy, e, Germany, Italy, Belgium, Belgium, Netherlands, Luxembourg.Netherlands, Luxembourg.

2.2. 19581958 EEC and Euratom Treaties came EEC and Euratom Treaties came into into force on 1 January force on 1 January

3.3. 19931993 The TEU enters into force on 1 The TEU enters into force on 1 November.November.

6

The European UnionThe European Union

The original EEC Treaty aimed primariThe original EEC Treaty aimed primarily at promoting economic and trade exly at promoting economic and trade expansion within a common market. pansion within a common market.

The name “European Union” was forThe name “European Union” was formally adopted in the TEU.mally adopted in the TEU.

The EU has developed from a sectoral The EU has developed from a sectoral common market to the European econcommon market to the European economic and monetary union (EMU).omic and monetary union (EMU).

7

Regional Trade Agreements (RRegional Trade Agreements (RTAs)TAs)

In terms of their scope and In terms of their scope and depth, there are five types of depth, there are five types of RTAs: RTAs:

1.1. Free trade areasFree trade areas2.2. Customs unionsCustoms unions3.3. Common marketCommon market4.4. Monetary unionMonetary union5.5. Economic unionEconomic union

8

II. Main Features and II. Main Features and Challenges of the EU ModelChallenges of the EU Model The EU has many faces. The key The EU has many faces. The key

features of the EU are: features of the EU are:

(1) partial sovereignty(1) partial sovereignty

(2) the supranational institutions(2) the supranational institutions

(3) independent financial (3) independent financial resources and resources and budgetbudget

(4) legal personality(4) legal personality

(5) the multi-subjects(5) the multi-subjects

9

(1) partial sovereignty(1) partial sovereignty

The first major innovative The first major innovative feature of the EU, compared feature of the EU, compared with other international with other international organizations is that it organizations is that it includes the transfer partial includes the transfer partial sovereignty to the EU from sovereignty to the EU from its Member States. its Member States.

10

(2) the supranational (2) the supranational institutionsinstitutions

The second feature is that the EU has its owThe second feature is that the EU has its own institutions. The EU’s institutions are the n institutions. The EU’s institutions are the political bodies created by the Treaties to bupolitical bodies created by the Treaties to build a supranational organization. Article 7 of ild a supranational organization. Article 7 of the EC Treaty lists five EU institutions:the EC Treaty lists five EU institutions:

1.1. the European Parliamentthe European Parliament2.2. the Council of the European Unionthe Council of the European Union3.3. the European Commissionthe European Commission4.4. the Court of Justicethe Court of Justice5.5. the Court of Auditorsthe Court of Auditors

11

(3) independent financial (3) independent financial resources and budgetresources and budget

The third feature is the EU’s own finThe third feature is the EU’s own financial resources. There are currently ancial resources. There are currently four types of own resources: four types of own resources:

1.1. agricultural duties and sugar levies;agricultural duties and sugar levies;2.2. customs duties; customs duties; 3.3. the VAT resources; and the VAT resources; and 4.4. the resource based on gross nationathe resource based on gross nationa

l income.l income.

12

(4) legal personality(4) legal personality

The fourth feature is the legal personality of tThe fourth feature is the legal personality of the EU. Legal personality means that the EU cahe EU. Legal personality means that the EU can exercise legal rights and assume legal duties n exercise legal rights and assume legal duties over the whole range of matters that the EC Trover the whole range of matters that the EC Treaty and the EU Constitution assign to it. eaty and the EU Constitution assign to it.

Legal personality also signifies the EU’s capaLegal personality also signifies the EU’s capacity to possess rights and duties in internationcity to possess rights and duties in international law, particularly the right to enter into agreal law, particularly the right to enter into agreements, the ability to be a party to dispute settements, the ability to be a party to dispute settlement proceedings, and the capacity to claim lement proceedings, and the capacity to claim or be liable for damages.or be liable for damages.

13

(5) the multi-subjects(5) the multi-subjects The fifth feature is the EU has multi-The fifth feature is the EU has multi-

subjects including EU institutions, subjects including EU institutions, Member States, and European citizen. In Member States, and European citizen. In addition to national citizenship, an addition to national citizenship, an individual also has European citizenship. individual also has European citizenship. This gives citizens a deeper and more This gives citizens a deeper and more tangible sense of belonging to the EU. tangible sense of belonging to the EU.

The EU model of European integration is The EU model of European integration is thereby developing a deepening and thereby developing a deepening and widening grass-roots based European widening grass-roots based European citizenry. citizenry.

14

Special Features of the EU Special Features of the EU Model (1)Model (1)

All these five features are All these five features are necessary for the EU to fulfill necessary for the EU to fulfill the tasks laid down in the the tasks laid down in the Treaties. The success of the Treaties. The success of the EU owes a lot to these EU owes a lot to these special features through special features through which it works.which it works.

15

Special Features of the EU Special Features of the EU Model (2)Model (2)

Special because the EU is not a federation likes Special because the EU is not a federation likes the United States. It only possesses the partial the United States. It only possesses the partial sovereignty transferred by its Member States.sovereignty transferred by its Member States.

Nor is the EU simply an international Nor is the EU simply an international organization for intergovernmental organization for intergovernmental cooperation, like the United Nations. Its power cooperation, like the United Nations. Its power and functions are much beyond international and functions are much beyond international organization.organization.

It is unique and can be seen as a It is unique and can be seen as a sui generissui generis supranational organization in the international supranational organization in the international system.system.

16

III. Opportunities of the EU III. Opportunities of the EU Model for Taiwan-China Model for Taiwan-China

Economic RelationsEconomic Relations Special experiences which will be difficult fSpecial experiences which will be difficult f

or other RTAs to copy and present challengor other RTAs to copy and present challenges for cross-Strait economic relations to repes for cross-Strait economic relations to replicate the resulting features. However, the Elicate the resulting features. However, the EU model also contains common experiences U model also contains common experiences which present opportunities for other RTAs.which present opportunities for other RTAs.

Common experiences possess general charaCommon experiences possess general characters that may provide learning opportuniticters that may provide learning opportunities for other RTAs, perhaps even in Taiwan-es for other RTAs, perhaps even in Taiwan-China economic relations. China economic relations.

17

Common Experiences: Common Experiences: (1) The Peaceful Approach (1) The Peaceful Approach

Common experiences of the EU Common experiences of the EU model mainly cover the model mainly cover the objectives, strategies and results objectives, strategies and results of EU integration. The general of EU integration. The general objectives of EU integration are objectives of EU integration are to pursue European political to pursue European political peace, economic prosperity and peace, economic prosperity and social stability. social stability.

18

The Objectives of the EUThe Objectives of the EU

The ECSC is founded upon a The ECSC is founded upon a common market, common common market, common objectives and common objectives and common institutions. Its tasks are to institutions. Its tasks are to expand economic production, to expand economic production, to raise the living standard and to raise the living standard and to promote the European peace. promote the European peace.

19

(2) The Step-by-Step (2) The Step-by-Step ApproachApproach

The second common experience The second common experience is about the gradual approach fois about the gradual approach for EU integration. The EU integrar EU integration. The EU integration has marched from sectoral stion has marched from sectoral steel and coal common market, tteel and coal common market, to full common market, and then o full common market, and then to EMU. to EMU.

20

(3) The Functional (3) The Functional ApproachApproach

The third common experience concerns The third common experience concerns the functional approach for EU the functional approach for EU integration. The functional approach integration. The functional approach gave the first clear and hard impetus for gave the first clear and hard impetus for EU integration. EU integration.

Member States may also avoid Member States may also avoid controversies in political area and focus controversies in political area and focus on economic benefits of integration. on economic benefits of integration. Economic benefit is the most important Economic benefit is the most important factor for Member States to get internal factor for Member States to get internal support for EU integration. support for EU integration.

21

ⅣⅣ. The Roadmap of a Taiwan – . The Roadmap of a Taiwan – China Free Trade Agreement China Free Trade Agreement

from the EU Modelfrom the EU ModelA. Three Scenarios in Taiwan-A. Three Scenarios in Taiwan-

China Trade Relations (1)China Trade Relations (1) There are three main scenarios for There are three main scenarios for

Taiwan–China trade relations including: Taiwan–China trade relations including:

1.1. Status quo rival relationsStatus quo rival relations

2.2. Normal relations under the WTONormal relations under the WTO

3.3. Cooperative relations in the futureCooperative relations in the future

22

A. Three Scenarios in A. Three Scenarios in Taiwan-China Trade Taiwan-China Trade

Relations (2)Relations (2) The status quo in cross-Strait The status quo in cross-Strait

relations is a condition of rivalry. relations is a condition of rivalry. Most-favored-nation (MFN) Most-favored-nation (MFN)

treatment to each other will treatment to each other will represent normal relations.represent normal relations.

The FTA will be a cooperative The FTA will be a cooperative relationship.relationship.

23

The Status Quo under the The Status Quo under the WTOWTO

China and Taiwan became members of the China and Taiwan became members of the WTO in November 2001 and January 2002 WTO in November 2001 and January 2002 respectively. However, Taiwan retains many respectively. However, Taiwan retains many restrictive measures against the importation restrictive measures against the importation of Chinese products on some 2,200 tariff lines.of Chinese products on some 2,200 tariff lines.

Cross-Strait trade is only permitted by Cross-Strait trade is only permitted by indirect shipment through a third port, usually indirect shipment through a third port, usually Hong Kong. On the other hand, China remains Hong Kong. On the other hand, China remains reluctant to conduct official negotiations on an reluctant to conduct official negotiations on an equal footing with Taiwan, even under the equal footing with Taiwan, even under the WTO.WTO.

24

The EU Experience for the The EU Experience for the Status QuoStatus Quo

From the EU experience, the From the EU experience, the process for a Taiwan–China FTA process for a Taiwan–China FTA should be strongly driven by should be strongly driven by political will from governments political will from governments on both sides. The first step is to on both sides. The first step is to re-open official talks to change re-open official talks to change the status quo/rival relations the status quo/rival relations between China and Taiwan. between China and Taiwan.

25

The EU & the Cross-Strait The EU & the Cross-Strait RelationsRelations

The EU believes that consultation The EU believes that consultation will be an effective means to will be an effective means to resolve the cross-Strait question. resolve the cross-Strait question. With respect to cross-Strait With respect to cross-Strait relations, the EU supports the relations, the EU supports the peaceful resolution of differences peaceful resolution of differences between China and Taiwan, between China and Taiwan, rejecting the use or threat of force. rejecting the use or threat of force.

26

The Second Scenario: The Second Scenario: The Normal Relations under The Normal Relations under

the WTOthe WTO The second scenario is the The second scenario is the

normalization of relations for Taiwan normalization of relations for Taiwan and China under the WTO. That is, and China under the WTO. That is, both sides conducting trade without both sides conducting trade without discrimination, which is a foundational discrimination, which is a foundational principle of the WTO: WTO members principle of the WTO: WTO members should not discriminate between its should not discriminate between its trading partners, but rather should trading partners, but rather should give all MFN status. give all MFN status.

27

The Third Scenario: The The Third Scenario: The FTA (1)FTA (1)

The third scenario is the cooperative The third scenario is the cooperative relation with a FTA between cross-relation with a FTA between cross-Strait entities. Both Taiwan and Strait entities. Both Taiwan and China set the FTA as one of their China set the FTA as one of their trade policy priorities after their trade policy priorities after their WTO accession. The FTA goes WTO accession. The FTA goes beyond the normal MFN to a beyond the normal MFN to a cooperative relation between the cooperative relation between the contracting parties under the WTO. contracting parties under the WTO.

28

The Third Scenario: The The Third Scenario: The FTA (2)FTA (2)

From the gradual approach of EU From the gradual approach of EU experience, the FTA will be more experience, the FTA will be more feasible for cross-Strait economic feasible for cross-Strait economic integration. Article 24 of the GATT integration. Article 24 of the GATT and Article 5 of the GATS contain and Article 5 of the GATS contain provisions for WTO members to provisions for WTO members to engage in regional economic engage in regional economic integration. integration.

29

The Third Scenario: The The Third Scenario: The FTA (3)FTA (3)

The FTA is the lowest type of regional The FTA is the lowest type of regional economic integration. It will be more economic integration. It will be more practical than jumping to a customs upractical than jumping to a customs union or common market. The EU modnion or common market. The EU model is based on a step-by-step approach fel is based on a step-by-step approach from sectoral coal and steel cooperatiorom sectoral coal and steel cooperation, to a common market. n, to a common market.

30

The Third Scenario: The The Third Scenario: The FTA (4)FTA (4)

Based on the experiences of EU Treaties, Based on the experiences of EU Treaties, the peace statement may be inserted in the peace statement may be inserted in the preamble of Taiwan-China FTA. More the preamble of Taiwan-China FTA. More precisely, a peace clause may be precisely, a peace clause may be contained in the FTA. contained in the FTA.

If the FTA were effectively and If the FTA were effectively and successfully implemented, these peace successfully implemented, these peace statement or peace clause may be served statement or peace clause may be served as an interim peaceful agreement to as an interim peaceful agreement to cross-Strait. cross-Strait.

31

The Third Scenario: The The Third Scenario: The FTA (5)FTA (5)

A peace provision in the FTA will also reduce A peace provision in the FTA will also reduce political opposition from China to conclude a political opposition from China to conclude a formal peace agreement with Taiwan due to formal peace agreement with Taiwan due to one China policy.one China policy.

Ultimately, a FTA between Taiwan and China Ultimately, a FTA between Taiwan and China may have spill-over effects for more secure may have spill-over effects for more secure peace and security in cross-Strait relations. peace and security in cross-Strait relations.

As such, a FTA may be seen as a strategy of As such, a FTA may be seen as a strategy of peaceful experimentation, perhaps leading to peaceful experimentation, perhaps leading to “peaceful change and quiet revolution” in “peaceful change and quiet revolution” in China and/or “integration or unification in China and/or “integration or unification in installments” towards a Chinese Community or installments” towards a Chinese Community or Chinese Union. Chinese Union.

32

B. Challenges of the Cross-B. Challenges of the Cross-Strait FTAStrait FTA

There are many challenges faced by There are many challenges faced by Taiwan and China for a cross-Strait Taiwan and China for a cross-Strait FTA. Attention particularly should be FTA. Attention particularly should be paid to: paid to:

(1) the name of the FTA; (1) the name of the FTA;

(2) equality of the parties and (2) equality of the parties and

(3) dispute settlement among (3) dispute settlement among others.others.

33

(1) the name of the FTA (1) the name of the FTA (1)(1)

Most FTAs are concluded in the name of an “agrMost FTAs are concluded in the name of an “agreement” between contracting parties. However, eement” between contracting parties. However, agreements are usually reached between sovereiagreements are usually reached between sovereign states and have great diplomatic significance. gn states and have great diplomatic significance.

Therefore, the first FTA for both China and Hong Therefore, the first FTA for both China and Hong Kong – CEPA is in the name of “Arrangement.” Kong – CEPA is in the name of “Arrangement.” The national name, “China” also was replaced The national name, “China” also was replaced by the name of “Mainland” in the CEPA. These by the name of “Mainland” in the CEPA. These designations avoided an impression of equality bdesignations avoided an impression of equality between China and Hong Kong in the internationaetween China and Hong Kong in the international trading system. l trading system.

34

(1) the name of the FTA (1) the name of the FTA (2)(2)

The CEPA model of “Mainland and The CEPA model of “Mainland and Taiwan”, or the commonly used names of Taiwan”, or the commonly used names of “cross-Strait” FTA or “Chinese” FTA all “cross-Strait” FTA or “Chinese” FTA all may be considered as a second-best may be considered as a second-best choice for both sides. choice for both sides.

From the practical and functional From the practical and functional experiences of EU model, no matter experiences of EU model, no matter what’s in a name regarding the China – what’s in a name regarding the China – Taiwan FTA, it represents the Taiwan FTA, it represents the cooperation between the two sides and cooperation between the two sides and also has legal meaning in the WTO. also has legal meaning in the WTO.

35

(2) equality of the parties (2) equality of the parties (1)(1)

The second challenge is about equality of The second challenge is about equality of the contracting parties in the cross-Strait the contracting parties in the cross-Strait FTA. FTA.

The equality of membership is a key The equality of membership is a key constitutional principle in the EU. constitutional principle in the EU. Regardless of the size of population, Regardless of the size of population, territory, economic strength and political territory, economic strength and political power, Member States are treated power, Member States are treated equality upon their EU accession. They equality upon their EU accession. They also enjoy a veto in some policy areas, also enjoy a veto in some policy areas, which are vital to their national interests. which are vital to their national interests.

36

(2) equality of the parties (2) equality of the parties (2)(2)

The equality of membership is also a principle The equality of membership is also a principle for the WTO. Membership in the WTO is based for the WTO. Membership in the WTO is based on the concept of separate customs territory. on the concept of separate customs territory. Taiwan is a full membership in the WTO and Taiwan is a full membership in the WTO and should enjoy equality in the WTO. should enjoy equality in the WTO.

The equality of membership in the WTO does The equality of membership in the WTO does not necessarily lead to diplomatic recognition not necessarily lead to diplomatic recognition or political equality between Taiwan and other or political equality between Taiwan and other WTO’s members.WTO’s members.

Therefore, the equality of the parties in the Therefore, the equality of the parties in the cross-Strait FTA should not be objected by cross-Strait FTA should not be objected by China. This is a precondition for Taiwan to China. This is a precondition for Taiwan to cooperate with China.cooperate with China.

37

(3) dispute settlement(3) dispute settlement

The third challenge is the dispute settlThe third challenge is the dispute settlement mechanism in the cross-Strait Fement mechanism in the cross-Strait FTA. Most FTAs incorporate provisions TA. Most FTAs incorporate provisions for dispute settlement. for dispute settlement.

If the EU experience is followed, an inIf the EU experience is followed, an independent body for dispute settlement dependent body for dispute settlement will be one of the crucial arrangementwill be one of the crucial arrangements in the cross-Strait FTA. s in the cross-Strait FTA.

38

The EU Model for The EU Model for ChallengesChallenges

To resolve the above mentioned challenges will To resolve the above mentioned challenges will not be easy due to a shortage of mutual trust in not be easy due to a shortage of mutual trust in cross-Strait relations over the last five decades. cross-Strait relations over the last five decades.

The EU model, based on the cooperation of The EU model, based on the cooperation of Franco-German axis, could provide some Franco-German axis, could provide some models for the implementation of a cross-Strait models for the implementation of a cross-Strait FTA. FTA.

If traditionally hostile countries such as France If traditionally hostile countries such as France and Germany could initiate their cooperation and Germany could initiate their cooperation through functional integration approach, then through functional integration approach, then why could the two side in cross-Strait not learn why could the two side in cross-Strait not learn from them.from them.

39

V. Conclusion (1)V. Conclusion (1)

Taiwan and China could learn from the Taiwan and China could learn from the lessons offered by the EU model to lessons offered by the EU model to change political confrontation, or even to change political confrontation, or even to pursue economic cooperation. pursue economic cooperation.

From the functional and pragmatic From the functional and pragmatic approaches of EU model, the FTA will approaches of EU model, the FTA will provide an opportunity for mutual benefit provide an opportunity for mutual benefit in cross-Strait relations. in cross-Strait relations.

Through the FTA, will Taiwan and China Through the FTA, will Taiwan and China gradually integrate into one economic gradually integrate into one economic union or even one Chinese Union? union or even one Chinese Union?

40

V. Conclusion (2)V. Conclusion (2)

The EU experience also suggests that The EU experience also suggests that European integration has always influenced by European integration has always influenced by political will of its Member States. The process political will of its Member States. The process towards a cross-Strait FTA therefore requires a towards a cross-Strait FTA therefore requires a great political will and a commitment to peace great political will and a commitment to peace and common interests from both Taiwan and and common interests from both Taiwan and China. China.

This process will be a politically difficult This process will be a politically difficult venture for both sides. The success of cross-venture for both sides. The success of cross-Strait FTA, however, will facilitate further Strait FTA, however, will facilitate further economic integration and have the potential to economic integration and have the potential to create a new Chinese Golden Age in the 21st create a new Chinese Golden Age in the 21st century.century.

41

Thanks for your Thanks for your AttentionAttention