New Southern Strategy is an Impossible Strategy
China Times Editorial (Taipei, Taiwan, ROC)
July 14, 2016
Executive Summary: The new regime is in a hurry to promote its New Southern Strategy. Unfortunately problems have arisen at the Formosa Plastics steel plant in Vietnam, and the China Steel steel plant in India. If this were not enough, the Philippines has demanded arbitration in the South China Sea, adding fuel to the fire. Clearly the New Southern Strategy is far more problematic and risky than the new regime imagined. The new regime must improve relations with the governments on its New Southern Strategy list. It must establish channels by which it can negotiate, solve problems, and sign agreements. Otherwise its New Southern Strategy will remain a pipe dream.
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The new regime is in a hurry to promote its New Southern Strategy. Unfortunately problems have arisen at the Formosa Plastics steel plant in Vietnam, and the China Steel steel plant in India. If this were not enough, the Philippines has demanded arbitration in the South China Sea, adding fuel to the fire. Clearly the New Southern Strategy is far more problematic and risky than the new regime imagined. The new regime must improve relations with the governments on its New Southern Strategy list. It must establish channels by which it can negotiate, solve problems, and sign agreements. Otherwise its New Southern Strategy will remain a pipe dream.
The Formosa Plastics steel plant in Vietnam required nearly 10 years of planning and construction. Total investment approached 340 billion NTD. It finally began operations. But last month, on the eve of its opening, the Vietnamese government conducted a tax audit, and demanded an additional 70 million USD. Without any evidence, the Vietnamese government blamed Formosa Plastics for marine pollution that resulted in fish kills. This incited public outrage, and the Vietnamese government fined Formosa Plastics 500 million USD.
Worse still, Formosa Plastics was forced to endure this mistreatment. Formosa Plastics Group Chairman Wang Wen-yuan and Vice President Wang Jui-hua went to Vietnam to deal with the matter, only to find themselves held for ransom. Unless they paid the 500 million USD, they would not be allowed to leave, and the plant would not be allowed to begin operations. Formosa Plastics was forced to pay out 500 million USD before the plant could begin operations.
China Steel factories in India also suffered a serious setback. The Indian government reneged on its agreement. Tariffs on hot-rolled steel raw materials were originally set at 5%. But the Indian government doubled the rate to 10%. By contrast, competitors Japan and South Korea only had to pay 1%. According to China Steel, its plant in India is probably unsustainable, and the company is already "expecting the worst".
The new regime is holding high its New Southern Strategy banner. It is trumpeting a new era of community with Southeast Asia, of trade with India and other nations in South Asia. It seeks to shift Taiwan investment on the Mainland to other parts of the world. Its primary purpose is "de-Sinicization" and increased diversification.
First consider de-Sinicization. Both academia and industry have criticized de-Sinicization as "unrealistic and impracticable". The Mainland's economy is worth 10 trillion USD. It is the second largest economy in the world. Annual import volume is 2 trillion USD. After the United States, it is the second largest market in the world. By contrast, Southeast Asia's economy is worth 2.6 trillion USD. India's economy is worth 2.2 trillion USD, less than half that of the Mainland. Furthermore, Taiwan and the Mainland share the same culture and the same language. They have been doing business with each other for several decades. The new regime would replace the Mainland with nations in the south. But as objective data and hard reality show, that is simply impossible.
Now consider diversification. It makes sense not to put all one's eggs in one basket. Businesses need to avoid excessive reliance on only a few major customers. The same is true for nations. But when seeking alternatives, one must protect the markets one already has. The new regime's policy has turned cross-Strait relations into a Cold Peace. Attempting to reduce cross-Strait economic and trade relations, in order to shift them to the south is obviously a mistake, and the risk is obviously much too high.
If the new regime is determined to implement its New Southern Strategy and enable companies to invest in the south, it must improve bilateral economic and trade relations with these governments. In the short term this will help companies secure better conditions. In the event companies run into trouble, the government must come forward on their behalf and help them find solutions.
In the mid to long term, it must sign agreements with these countries in Southeast Asia, including investment agreements and tax treaties. It must seek preferential tariff treatment and investment protection. Businesses require government protection. Investments require legal protection. This will encourage companies to adopt the New Southern Strategy. Otherwise, the new regime's New Southern Strategy will remain a solo performance.
Many of those who advocate the New Southern Strategy say that investments on the Mainland are not protected by the rule of law. Guangxi rules, therefore investment risks are high. But the New Southern Strategy has the same problems. In fact, the problems are even more serious. Among the New Southern Strategy target nations, only Singapore boasts clean government and the rule of law. Other nations are plagued by official corruption and unclear laws. The Formosa Plastics steel plant in Vietnam, and the China Steel steel plant case in India, make that all too clear.
When Taiwan companies that have invested on the Mainland encounter problems, the two sides had channels for problem solving. Numerous agreements have been signed in recent years. Taiwan businessmen and Taiwan investments on the Mainland have been afforded protection and dispute resolution mechanisms. The Mainland even had a “pro-Taiwan” policy rooted in political considerations. It gave priority to problems encountered by Taiwan companies. Countries targeted by the New Southern Strategy lack such channels. This is apparent from the new regime's utter lack of response to Vietnam's mistreatment of Formosa Plastics and India's mistreatment of China Steel. The new regime has played dead and said nothing.
We would like to offer the new regime a bit of advice. Putting all one's eggs in one basket is of course inadvisable. But before spreading them all out, take care of the basket first. Otherwise one may wind up throwing good money after bad. To spread the risk by means of the New Southern Strategy, the new regime must first strengthen bilateral relations, and establish channels for problem solving. It must first sign safeguard agreements. Otherwise the New Southern Strategy will remain an Impossible Strategy.