Taiwan, benefiting from its geographical proximity and close ties with mainland China, is set to become the world's third-biggest machine-tool exporter, overtaking Italy to lie behind only Germany and Japan. Now non-Taiwanese firms, such as Germany's Siemens, are seeking to join the Taiwan bandwagon.

The cross-strait Economic Cooperation Framework Agreement (ECFA), which came into effect at the start of this year, is apparently helping. Seventeen machine tool-related items are on the "early harvest list" of products with cross-strait trade tariff concessions.

Individual firms reported export growth rates of 31.53% to 66.72% for some types of computer numerical control (CNC) lathes during the first six months this year and are looking to growth rates of 80% on total export orders from the mainland this year. Total exports of machine-tool items from Taiwan are estimated to grow by some 20% in 2011, creating between 1,500 and 2,000 jobs, according to some predictions.

Machine tools, by definition, help people to make things. Crudely put, the right tools mounted in a factory hall mean a piece of metal slid in at one end is ejected a few minutes later at the other end as a complete crankshaft or whatever other component is being made. CNC machine tools keep production lines going - an update on the 1950s, when somewhat crude punched tape directed drills and milling cutters where to apply their force. Since mainland China is the world's factory, that is where increasingly sophisticated machines are in demand.

Export growth rates of other goods shipped across the Taiwan Strait covered by the ECFA's early harvest list accounted for only 12.9% in the first seven months of the year, suggesting Taiwan's machine-tool makers are benefiting disproportionately from smooth relations with the mainland.

Taiwanese manufacturers, like their mainland counterparts, have been relying on German and Japanese companies for machinery controllers, as each industrial product requires complex solutions and calibrations.

Engineering conglomerate Siemens now plans to set up a high-end machine-tool control technology application center in Taiwan. The decision has delighted Taiwan's Ministry of Economic Affairs (MOEA), as the mounting of the actual machines and designing the control mechanisms are worlds apart in terms of sophistication.

Siemens' support will increase the output of self-produced machinery controllers in Taiwan, ensuring that the island's machine-tool manufacturers retain their technology edge over the mainland, while easing the need to maintain large, capital-consuming inventories to counter slow delivery of foreign-made components, according to the MOEA and executives within the sector.

The machine-tool manufacturers' local customers, such as producers of automobiles, consumer electronics and aerospace components, as well as heavy industry and national defense companies, may also benefit considerably from the sector's enhanced competitiveness.

"On their way to fully automated factories, Taiwan and China still need either us or the Japanese," a Siemens official, who declined to be named as he wasn't authorized to speak to the press, told Asia Times Online. "But depending on the exact degree of cooperation Siemens is to offer, the setting up of such a machine-tool control technology application center in Taiwan should make the Taiwanese sector to a considerable extent more competitive."

The MOEA, after the global financial downturn in 2008, set up the non-profit Precision Machinery Research and Development Center (PMC) to help the island's machine-tool makers increase their level of sophistication and ability to compete with rivals in mainland China and South Korea.

"In terms of yield and quality level, Taiwan-made machine tools are obviously better than China's. Also when it comes to brand recognition, Taiwan has a significant advantage," Sergio Fong, an associate engineer with PMC, told Asia Times Online.

Mainland China enshrined a temporal rules of origin clause in the ECFA so as to avoid an overly strong impact on its own domestic machine-tool sector, Fong said. "The rule stipulates that within the next two to four years, the CNC controllers, whose value anyway makes only for 10% to 30% of a machine tool's total costs, must be domestically made to be granted tariff concessions by China," Fong said.

Hence Siemens' decision to set up a technology application center, which will only provide technical assistance to the Taiwanese, rather than directly sell Siemens-made components from Taiwan. Other foreign companies seeking a bigger share of the China cake may follow its lead.

Even so, the surge in machine-tool exports may not all be attributable to the ECFA, according to Hu Sheng-Cheng, a professor at the Institute of Economics of Academia Sinica, Taiwan's highest research institution.

In the first half of 2011, the first six months during which the ECFA has been effective, "exports of machine tools as defined by the ECFA's Chapter 82 [covering various machine tools, molds, valves, bearings and undefined mechanical parts] grew by 36%. However, in the first half of 2010, [growth] had been 78.6%. Moreover, in June, the export growth rate was down to 19% year-on-year," he said.

Hu argued that while many export items do benefit from the ECFA, intermediate goods Taiwan exports to the mainland, such as the machine-tool items on the early harvest list, benefit to a lesser extent as some are assembled in the mainland and exported from there to third countries.

According to Hu, these Taiwan-made items already received tariff concessions, and that, if the ECFA should really be beneficial, final products such as complete cars, complete CNC lathes and so forth ought to be included.

"It is said that Germany's Volkswagen gave up its plans to produce in Taiwan exactly because exports of complete cars are not covered by the ECFA," Hu said.

Also the ECFA hardly played a direct role in Siemens' decision to set up its application center in Taiwan, Hu argued.

"Taiwan provides tax incentives for research and development, and strictly protects intellectual property rights. Local research and development personnel are highly qualified, have a feeling for market demands and have a high degree of loyalty towards the employer. That's why they chose Taiwan over China for their center."