Taiwan, China to sign historic trade deal

China and Taiwan will sign a historic deal on Tuesday to give a major boost to trade after decades of hostility.

The euphoria, though, could start to fade quickly once the two move into the next, much tougher round of negotiations.

The tariff-slashing economic cooperation framework agreement (ECFA) to be signed in China follows 60 years of antagonism that has brought the two brink of war. 

The pact, talks on which began in 2008 under China-friendly Taiwan president Ma Ying-jeou, covers only the easiest 800 of thousands of items targeted for eventual tariff cuts to lift $100 billion annual two-way trade.

The next round could start as soon as December, when Taiwan will push its economic powerhouse neighbour to lower tariffs on the island's most prized exports, such as PVC plastics and high-tech items. Beijing is seen resisting to protect its own industries.

Future talks, also covering sensitive Taiwan-made autos and machine tools, will make up what Ma has described as a "post-ECFA era," crucial to an island with almost no free trade deals as China marginalises it internationally.

"The main course is still to come," he said.

The pact will cut tariffs to zero on 539 Taiwan export items worth $13.84 billion bound for China versus only 267 valued at $2.86 billion headed the other way.

Exporters will do cheaper business in China, already Taiwan's biggest trade partner and top investment destination, as the tariffs disappear two years after the deal signing in Chongqing, a former wartime capital for Taiwan's ruling Nationalists.

Analysts say Beijing wants the trade deal less for its economic benefits than as a way to charm Taiwan into political reunification with China. China has claimed self-ruled Taiwan since the Nationalists fled there in 1949 after losing the Chinese civil war. 

Wooing Taiwan would be a major achievement for Chinese President Hu Jintao, who is due to step down after his Communist Party selects a new top leader in 2012. 

But tensions could rise again as the items from Taiwan's top industries looming on the agenda for future tariff talks compete too closely with industries China wants to develop.

"Taiwan will put out all options and see what China says," said David Cohen, director of Asian economic forecasting with Action Economics in Singapore.

China may also try to push farm products on Taiwan despite farmer opposition, the island government said.

If Beijing plays tough, an outcry at home could make the Taiwan government may pull back. Opposition would be particularly loud if the ECFA itself creates well short of the 260,000 Taiwan jobs expected or fails to lift the island's GDP by a forecast 1.7%.

Taiwan also hopes Beijing will let the ECFA lead the island to free trade agreements with other major economies, such as Japan and the United States. Beijing has said it would forbid those FTAs because Taiwan lacks sovereignty.

"ECFA is about breaking the log jam which will allow Taiwan to go out into the world," said Steve Tsang, a China-Taiwan relations expert at St Anthony's College, Oxford University.

Friction over tariffs or FTAs could hurt China talks and push them onto the 2012 presidential election agenda.

"The general consensus is that China will not allow talks to break down," said Joseph Cheng, political scientist at City University of Hong Kong.