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After signing the Cross-Straits Economic Cooperation Framework Agreement (the "ECFA") with the People's Republic of China ("Mainland China") in June last year, Taiwan signed the Arrangement between the Interchange Association and the Association of East Asian Relations for the Mutual Cooperation on the Liberalization, Promotion and Protection of Investment (the "Agreement") with Japan on September 22, 2011. The Agreement opens new doors for Japanese investors interested in Taiwan or entering the Mainland Chinese market through Taiwan.
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The Agreement
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Historical Background
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Although Taiwan and Japan do not have official diplomatic relations, there have been close ties between the people and businesses of the two countries. The Association of East Asian Relations and the Interchange Association, representing their respective governments, signed the Arrangement for the Establishment of the Respective Overseas Offices on December 26, 1972. Following this model, Taiwan and Japan entered into the Agreement.
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Major Provisions
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The Agreement covers three areas: (1) investment promotion; (2) investment protection; and (3) investment liberalization.
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(1) |
Investment promotion
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Except for certain situations, investors from the two countries will not be subject to any restrictions when making inward and outward remittances; there will be no local content requirement for goods or nationality/citizenship requirement for directors and managers.
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(2) |
Investment protection
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In addition to moveable and real property, investment protection is extended to cover technologies, intellectual property and securities; expropriation (including measures having equivalent effects to expropriation, i.g., "indirect expropriation") will be allowed only when prompt, adequate (consistent with fair market value) and effective compensation is available; disputes between investors and the local government may be submitted to international arbitration (e.g., arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law or Rules of Arbitration of the International Chamber of Commerce, etc.).
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(3) |
Investment liberalization
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Based on the national treatment principle and the most-favored-nation principle, investors from the two countries may enjoy treatment that is no less favorable than that given to investors of the host country or offered to other foreign investors by the host country, but the offer of this treatment is subject to certain conditions (relevant details will be provided upon request).
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Viewing from the national treatment, most-favored-nation treatment and promise of prompt, adequate (based on fair market value) and effective compensation for expropriation (and indirect expropriation), the Agreement has indeed reached the standard of an international investment agreement.
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Unfortunately, Japanese investors investment in certain industries in Taiwan, such as telecommunications, finance and marine transportation, are still subject certain restrictions as other foreign investors do. To prevent Mainland Chinese investors, who are subject to stricter requirements, from taking advantage of the Agreement, indirect investments from certain investors or investors from Mainland China may be denied the benefits available under the Agreement.
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The ECFA and the Agreement
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In view of a soaring yen, stricter labor and environmental regulations, anti-nuclear protests after the earthquake in March and an unstable power supply ensuing the earthquake, Japanese companies appear to be weighing the possibility of accelerating their plan to move overseas. Although Mainland China is now the world's major investment destination and consumer market, due to historical reasons, Japanese investors may be concerned about the political risks associated with foreign direct investments in Mainland China.
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On the other hand, Taiwan, whose private sector has long had a friendly relationship with Japan, shares a similar cultural background and language with Mainland China. As a result of the signing of the ECFA, many products and services from Taiwan or provided by Taiwanese companies in Mainland China are entitled to treatments sometimes better than those under the WTO. In light of this, Japanese companies may consider entering the Mainland China market by partnering with Taiwanese companies or investing in Taiwan first and then Mainland China as a Taiwan company in order to take advantage of the Agreement and the ECFA.
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As the ECFA is only a framework trade agreement, many substantive provisions are subject to further negotiations. However, the early harvest plan of goods and services thereunder offers instant trade benefits to Taiwan companies. For example, the tariffs on 539 products manufactured in Taiwan (including 18 agricultural products, 88 petrochemical products, 50 transportation tools, 107 types of machinery, 136 textile products and 140 other products) and imported into Mainland China will be gradually reduced to zero by 2013.
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As for service industries, Mainland China has opened a few sectors to Taiwan that are not opened under the WTO (e.g., R&D services on natural sciences and engineering, specialty design services and hospital services) or sectors that are subject to stricter requirements under the WTO (e.g., software implementation services and convention services). After the ECFA's entry into force, a company established in Taiwan may operate in Mainland China as a Taiwanese service provider if it has provided such services in Taiwan for three consecutive years, has paid taxes and owns or leases commercial premises in Taiwan, regardless of the nationalities of its shareholders. Also, motion pictures produced in Taiwan are not subject to Mainland China's import quota.
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In sum, through the most-favored-nation treatment, national treatment and various investment protection offered by the Agreement to Japanese investors, Japanese investments in Taiwan will be fully protected and may enjoy preferential treatment. For example, if a product or service is covered by the early harvest plan, the product or service may be exported to Mainland China at a lower tariff, or companies may provide services that are off limits for Japanese investors in Mainland China. By establishing closer ties with Taiwan or its businesses, Japanese investors may enter the Mainland China market faster and more effectively.
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Japanese companies are among the most active and successful investors in the world. If they can take advantage of the benefits granted by the ECFA and the Agreement, they may find a new path for their business expansion in Mainland China.
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