China and Taiwan have long been at odds, but those days are showing signs of coming to a close as they forge a friendlier partnership. A pending trade deal could bring the two nations closer together and lift the Taiwan exchange traded fund (ETF) to greater heights.

Jason Hu, mayor of Taiwan’s third-largest city and a top foreign policy expert, believes that China and Taiwan will sign a trade liberalization agreement before the end of summer, writes Russell Flannery for Forbes. The agreement will improve Taiwan’s competitiveness with mainland China by lowering tariffs on exports and may lead to more Chinese investments into Taiwan. So far, regular flights between the two have increased and political contacts have grown.

Naysayers say the agreement could hurt Taiwanese agriculture and manufacturing by opening the gates to cheap Chinese imports, constraining Taiwan’s sovereignty and increase politically driven investments by Chinese state-owned companies.

The trade deal would be the cherry on top of Taiwan’s economy these days:

  • Taiwan’s auto production value rose 15% quarter-over-quarter and 49.1% year-over-year in the fourth quarter of 2009, aided by an official tax break given to new cars sold, reports Quincy Liang for Taiwan Economic News. New-car sales in Taiwan was up 28.3% year-over-year last year.
  • Auto industry groups from China and Taiwan signed three cooperative letters of intent to accelerate cross-strait exchange in the auto industry. This platform of exchange will help Taiwan stay competitive and minimize damage from doing business with China when the free-trade agreement is enacted.
  • SinoPac Securities Investment Trust Co.’s manager of the island’s two top performing funds, David Tsai, predicts Taiwan’s Taiex index will start climbing in the second half and will rise 28% by next year on increased exports to a recovering global economy, reports Weiyi Lim for BusinessWeek. Taiwan’s exports amount to around half of its GDP. [Ways to Play Taiwan With ETFs.]
  • Assisted by closer economic ties with China, Taiwan’s economy may expand more than 4.8% this year, comments Vice Premier Eric Chu. Huei Ling Yu, president of Jih Sun S.I.T., believes the Central Bank will begin to raise rates in the second half at a slow pace.

For more information on Taiwan, visit our Taiwan category.

  • iShares MSCI Taiwan Index (NYSEArca: EWT)

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.