Taiwan and Singapore said they are exploring a trade agreement in what would be a major breakthrough for Taiwan after decades of being overshadowed by China, which considers the self-ruled island its own.

The agreement, if not blocked by Beijing, could push other countries to seek similar pacts with export-reliant Taiwan, whose economy has struggled during the global slowdown and in the face of low-cost Chinese competition.

Next up looking for a trade pact with Taiwan could be former colonial ruler Japan, Malaysia or the Philippines, analysts predict.

China has regarded self-ruled Taiwan as a breakaway province, its one-China policy, since the end of the Chinese civil war in 1949. China, a permanent member of the U.N. Security Council, is recognised by 170 countries. Taiwan is recognised by just 23.

Taiwan has not signed free trade agreements with its major trading partners due to the long-standing opposition from China but expects Beijing to back off now following their own economic cooperation framework agreement (ECFA) signed in June.

Taiwan, which has agreements with five Central American allies totalling 1 percent of its total foreign trade, will negotiate with Singapore under the World Trade Organisation framework, officials from both sides said.

China reacted carefully to the news. Foreign Ministry spokeswoman Jiang Yu called on "relevant countries" to "cautiously" handle the issue.

China's Taiwan Affairs Office, in a brief and characteristically opaque statement carried by the Xinhua news agency, said it believed Singapore would "appropriately handle economic and trade relations with Taiwan".

The China-Taiwan pact, seen lifting trade between the $390 billion island economy and its No.1 export destination, has raised the island's appeal among Asian nations.

"Everyone knows Taiwan is an export-led country dependent on its foreign trade," Foreign Minister Timothy Yang told reporters.

"We believe via Singapore we can strengthen our economic and trade ties with the 10 Association of South East Asian Nation members not to mention a continued focus on South Asia."

Singapore's Taipei trade office said the two had "agreed to explore the feasibility" of a deal and would meet later this year. Taiwan says it has the right under the WTO to seek FTAs.

Microchip components and petrochemical and machinery products stand to gain from an FTA as Taiwan's main exports to Singapore, its sixth-biggest trading partner with $13.423 billion in two-way trade last year. Singapore ships similar items to Taiwan.

Beijing had long used its diplomatic clout to block free trade deals. But China signalled last month that it was finally willing to let Taiwan negotiate trade pacts with the outside world, a senior Taipei official said.

"The FTA is a good start," said Kung Ming-hsin, vice-president of the Taiwan Institute of Economic Research. "If more and more countries sign FTAs with Taiwan, afterwards that can dilute Taiwan's (economic) dependence on China."

China, which may already have overtaken Japan as the world's second-largest economy, has been busy signing free trade agreements of its own, prompting fears of isolation in Taiwan.

"From a macroscopic viewpoint, Taiwan cannot continue to be isolated in the face of this wave of regional economic integration," the foreign minister said. "After ECFA, we need to pick up the pace of forming relations around the region." (Reuters)