China and Taiwan are expected to sign an economic cooperation framework agreement (ECFA), a de facto free trade agreement (FTA), in the southwestern Chinese city of Chongqing later Tuesday.
"The agreement will likely lead to an early reduction of customs on certain items as it includes an early harvest program," the Korea International Trade Association (KITA) said in a press release.
Under the early harvest program, designed to expedite the effects of the envisioned trade agreement, Taiwan demanded an early eradication of tariffs on 500 export items, believed to be worth some US$12 billion, according to KITA.
The removal or reduction of tariffs on Taiwanese exports to China will do "significant damage" to South Korean exports as 14 of South Korea's 20 key export items to China are already competing against Taiwanese goods, it said.
South Korea's 14 items currently account for 60 percent of all its exports to China, or over $61 billion.
"Especially, the price competitiveness of petroleum products, such as organic compounds and plastic products that are in fierce competition with Taiwan may suffer severe damages," KITA said.
The report said the only way to set off the expected damages was to sign an FTA with China.
"The country must minimize the negative impact from the China-Taiwan ECFA by quickly signing a Korea-China FTA as there is a possibility that the enactment of the China-Taiwan ECFA may significantly be delayed," it said.
Japanese media also expressed the concern that the trade deal between China and Taiwan might sting Japanese and S. Korean firms.
Japanese and South Korean corporations that compete with Taiwanese firms in China will likely be hurt by Chinese and Taiwanese moves to mutually lower tariffs, according to a report by Nikkei.
This bilateral pact, which calls for removing tariffs altogether, sets up a framework for the two sides to discuss the realization of free trade. But its effects will be felt soon because the two sides have agreed to first lower tariffs in certain product categories. China has agreed to reduce tariffs in 539 categories, including petrochemicals, machinery, textiles and autoparts.
China and Taiwan plan to release a detailed list of the categories next week. But their negotiators said at Thursday's news conference that the petrochemical products polypropylene and polystyrene are included, as are machine tools.
LCD panels and finished automobiles -- categories in which Japanese and South Korean firms compete against Taiwanese firms -- are not on the list. But if the categories are increased later, Taiwanese firms are sure to gain an edge in the Chinese market.
For example, Taiwan's Hon Hai Precision Industry Co., which makes electronic devices in China for such clients as Apple Inc., would enjoy lower costs when shipping materials from Taiwan to China if tariffs are lowered on a broader range of products.
The framework agreement would offer some benefits to Japanese firms, allowing them to decentralize by setting up factories in both China and Taiwan, for example. In any case, they will need to revise their business strategies in response to closer ties between the two economies.
[English News Team]