CEPD's Free Economic Demonstration Zone is like a never-ending bad play

By Chen Po-chih, Honorary President, Taiwan Thinktank

April 2013

It's been four years since our government first brought up the ideas of a Free Economic Demonstration Zone (FEDZ) and a Special Zone (SZ). Before now, the leadership has circled the wagons and was unable to explain what is special about FEDZ or SZ, their roles and functions, and the nature of their necessity. In recent announcements, however, the government has begun to hint that an expansion of existing Free Trade Zones (FTZs) is in the offing, and that given new functions, FTZs today may be the FEDZs of tomorrow. Figuratively speaking, does this sound like after years of pie-sketching, the government is now taking our old pie and offering it back to us as new pie? The fact that the government is not re-inventing a new pie is actually not such bad news because if the government were to flesh out a new pie willy-nilly, it might give us a poisonous one—while crafting the policy, the government zigzagged capriciously and explored radical ideas that could have baleful consequences for our country—that said, I sincerely hope the final pie will not be baked with toxic substances.
The primary reason for the government’s failure to adequately implement this policy is not purely executive incompetence; rather, it is the erroneousness of the policy’s target and the names themselves. If the government’s policy had, after careful consideration, been deemed both necessary and economically feasible, it could have been justifiably brought forward. However, it is foolhardy to spend so much time planning and, in the end, be incapable of providing a satisfactory outcome. The strategy for the Free Economic Demonstration Zone (FEZ) appears to be one of first developing a fancy slogan, then reweaving the content of previous policy. Furthermore, the zone’s designation is simply a recycled title. Therefore, the FEZ not only lacks a concrete and feasible policy plan, but even its raison d'être is woefully ambiguous.
The driving force behind Ma's concept of the SZ is the creation of an open-door policy to China. To achieve this goal, the Ma administration came up with several slogans in the process.
First, in his 2007 election campaign, Mr. Ma proposed the "Cross-Straight Common Market" (CSCM) initiative, which was criticized as being unwitty, because in order for a single market to function, the signatory country must allow freedom of labor mobility; but as we all know, freedom for Chinese labor to enter Taiwan was prohibited. Hence, the "Cross-Straight Common Market" was not feasible (see http://www.cw.com.tw/article/article.action?id=33145).
Even though Ma's campaign team disputed the guest labor requirement, in the end, they succumbed to the political reality and recognized the infeasibility of the initiative.
Following the failed CSCM initiative, Ma's team came out with a new policy, new slogan— a Free Trade Area of Taiwan (FTAT). The rationale behind FTAT was that good faith shall spawn reciprocity; so the team proposed a one-sided FTAT to all countries. The policy opponent opined that according to international regulatory system, absent of a full-fledged Trade Agreement, the one-sided open trade strategy is ineffective in stimulating return (see http://www.cw.com.tw/article/article.action?id=33213).
As a political posture, Ma's team struck back against criticism and accused the criticizer of disparaging the campaign until such time when Mr. Ma is elected into the office. Once in power, Ma's kitchen cabinet deems it unwise to put political muscle behind the foolish supposition. Therefore, the administration moved on to yet another policy, another slogan-SETZ (Special Economic and Trade Zone), which was later superseded by FEDZ (Free Economic Demonstration Zone).
The constant flip-flop and zigzag on policy outcrop the executive incompetence and lack of understanding as to what should be the purpose for the policy. So, shortly after the FTAT was proposed, some people, obfuscated by the proposal, uttered aloud, "increase domestic-guest worker ratio", others, "apply a double wage standard". These so-called "special privileges"—worker ratio, wage deferential—were scrutinized; and eventually the administration had to declare that there will only be one labor condition, no privilege in the trade zone. The loss of privilege puts the policy in a quandary because FTAT now suddenly has lost its appeal. So the administration swept the policy back to the planning department. And, after a long pause, what eventually emerged is the resuscitated concept of special privilege.
It is of my opinion that if privilege is eventually granted to occupants in the trade zone, in the future, the privileged will only suck away opportunities from the unprivileged. In other words, the future economic success for the trade zone will only come at a price paid by the unprivileged.
I also believe this policy may even be dangerous because when lower labor cost and labor conditions are translated to lower selling price and greater market share, it is only a matter of time when the privileged drive the unprivileged out of business; and the knock-on effect will cause widespread factory closure and unemployment outside the trade zone. Even though it is a simple logic, yet government and proponents choose to see only the jobs and investment creation in the zone, and not the destruction outside of the zone.
A similar kind of destruction found its way to a new government program—the Taiwanese Business Repatriation Initiative (TBRI), which supposedly is designed to augment national economy with return of overseas investment. TBRI is pregnant with various perks and privileges; and it will give qualified repatriates the comparative advantage to outstrip their unprivileged competitors. Suffice it to say that TBRI is also unfair and unreasonable because it allows the government to privilege the repatriates, and not the native Taiwanese, much like the parents deed the land to the returning absentee child, and not the stay-at-home dutiful child who plows the land.
Besides labor issues, the government may even consider making other accommodations in the trade zone, such as: land usage, land lease, tax breaks for imported raw materials, just to name a few. So the more the government gives, the wider the fairness gap goes.
Let's look at our economy from a different angle. As of today, Taiwan boasts a strong economic freedom. Yes, some restriction can still be found in the system; however, those restrictions are needed to underpin our economic liberty, and should not be removed in a slapdash manner. In the case where change is necessary, complimentary measure must be devised to support the change; and the change must be carried out throughout the country, and not just in special zone because as demonstrated above, unfair special privileges in the trade zone can jeopardize the overall economic system.
In addition, it is fairly common to see the economic freedom stands cheek by jowl with issues such as guest worker and basic labor wages, among major economies however, not a single country has yet to allow unlimited foreign labors. So if our government does choose to loosen or remove the guest labor quota in the trade zone, the outcome of that policy will not be a free economy, nor a demonstration of one; rather, the result is a prerogative economy where privilege is unevenly distributed—as a case in point, in order to receive the privilege, one must be either a qualified repatriate or a tenant inside the special zone.
When we do encounter an economic liberalization policy that can't be reasonably implemented, without partiality and in one single stroke, then a gradual and scalable approach implemented on national level is always a better alternative than full-scale liberalization in a special zone.
Of course, I'm not suggesting that there can't be exceptions to the rules. There were times when special zones were the only solution when gradual and national implementation was proven insurmountable. In fact, in the cross-strait economic and trade development heretofore, the most momentous special zone concept was first brought up by me. Unfortunately, however, the trade zone idea did not materialize and the concept was grossly distorted.
Here is how it got started. In 1993, the government proposed the APROC initiative (Asia-Pacific Regional Operations Center) to entice multinational conglomerates to call Taiwan the headquarters of their Asia-Pacific grid. Owing to existing transportation regulation, ease of entry to the country was onerous for mainland Chinese and cumbersome for non-Chinese nationals; therefore a comprehensive reform was badly needed. Due to time constraints, the reform and the subsequent national implementation were both proven impossible. So, when juxtaposed with Hong Kong and developing Shanghai, Taiwan lacked the infrastructure needed to support the multitude of foreigners and their movement in and out of our country.
To circumvent the situation, I proposed to then-Premier Lian Chan, and then-President Lee Ten-hui that we expand the Taoyuan International Airport to allow a special APROC zone. The purpose of this proposal is to allow immigration exemption on international travelers (arrival and departure), and eliminate transportation problems with respect to foreign visitors traveling inside our country. Furthermore, since the APROC zone is concentrated in a small area, public infrastructures inside the zone can be quickly retrofitted and new policies can be immediately carried out to support the need of an APROC (see Recommendation for APROC, 梁國樹 Liang, Kuo-Shu Financial Reform v. 3, Recommendation for Economic development, Yuan-Liou Publishing Co., Ltd. Taipei, Page 115-124).
In my proposal, I recommended that we should not only customize the regulation to fit the APROC zone, we should also deploy full scale financial and monetary policies inside the zone in line with international standards and already practiced by other financial centers. I further emphasized the importance of adding new air travel destinations to connect Taiwan to at least 20 major cities in China so the sheer volume of passengers can transcend Taoyuan International Airport into a major connection and transfer hub for airline companies in the Asia-Pacific grid.
None of the suggested measure requires gradual implementation, and all are within the scope of a full scale, immediate deployment; and that is why a special APROC zone was recommended at that time.
Premier Lian Chan embraced the concept and invited me to the Research, Development and Evaluation Commission of the Executive Yuan to oversee the implementation, but I declined the invitation, and afterwards the proposal was unable to be realized. According to Premier Tang Fei, my recommendation to build the APROC zone at Taoyuan’s airbase did get pass down for implementation, but subsequent incidents of vandalism as a result of sloppy airbase management ensued. Despite the special zone not being brought to completion, many advertised the idea of a Taoyuan Aerotropolis that it suddenly gave rise to a round of land speculation around the airport and the neighboring areas. Recently EVA Airways metaphorically criticized the concept as "an egg with egg white, but no yoke", which admittedly was true as more works were needed before the concept will bear fruits — such as financial and trade business. In the meantime though, property speculators are enjoying the runaway windfalls.
Over the years, our government has already streamlined immigration and customs procedures to allow ease of entry. The new regulation has vitiated the need for a special zone; but the government is still going headstrong about reviving the idea of the special zone. If some blame shall befall on me, it would be completely understandable as I am the one who came up with the concept in the first place.

Our country already has a liberalized economic system and we do not need a special zone today. Giving privilege to the occupants in a special zone will undoubtedly inflict grave harm to the unprivileged companies and even the entire economic system.

Government has made enough futile attempts in planning a special zone that has meaningful substance; therefore, I sincerely suggest that it's time to bring down the curtain on the never-ending bad play; it's time to stop placing false hope on an anachronistic slogan; and it's time to get serious about the long neglected reforms. Finally, let me just say this: let it go; let this slogan and all other failed slogans fall into oblivion.
Original Document in Mandarin Chinese can be found at:
This opinion piece does not necessarily reflect the views of the DPP.