E-Notes

A U.S.-Taiwan FTA: the View from Taipei

by Albert Liu and Yujie Wang

November 10, 2006

Mr. Liu and Ms. Wang are researchers at the Cross-Strait Interflow Foundation. Mr. Liu made a presentation based on this paper at the Roundtable Discussion on Free Trade and East Asia held in Philadelphia on October 4, sponsored by FPRI and co-sponsored by the World Trade Center of Greater Philadelphia. This paper and others from the conference are being posted at www.fpri.org.

For Taiwan, a free trade agreement (FTA) with the United States is important as a means to an end. That end is for Taiwan to be free to realize its full potential in the global community—i.e., that it can trade with economies in the Asia-Pacific region and the world in a liberalized competitive context, and in the process become further integrated in its geographic region, from which it is presently segregated.

Both the argument for and the impediment to a U.S.-Taiwan FTA are the same: China’s isolation of Taiwan. China has closed off almost every venue for Taiwan’s regional integration, both multilateral and bilateral. Taiwan has been denied participation in regional trade agreements like ASEAN+3, and no Asian country is willing to negotiate an FTA with Taiwan because of China’s objection. At the same time, China is pursuing bilateral FTAs with all the ASEAN countries and its other neighbors. Ironically, the only channel open to Taiwan for economic integration is with China itself. This is taking place on an intensive scale, as measured by Taiwan’s substantial investment in and trade with China. Both sides of the Taiwan Strait benefit from their interdependence economically, but China exacts a high political price: Taiwan’s further international isolation.

Accordingly, Taiwan is seeking an FTA with the United States, hoping such an agreement would serve as a catalyst that would encourage others in Asia to also enter into such an agreement with it. If that scenario plays out, Taiwan would be more integrated not just with China but across the Asia-Pacific region. At the same time, China as well as Taiwan would realize benefits. Taiwan would be encouraged to “normalize cross-Strait economic relations,” to lift the ban on more than 2000 Chinese import items, even to strike some form of FTA with China. For such reasons, China should see a U.S.-Taiwan FTA as a potential boon to its own further economic development rather than as a symbolic diplomatic deficit.

Taiwan’s Perspective on FTAs

Taiwan’s eagerness to enter into an FTA with the United States would not be so pronounced if the global community were working more fully in accordance with the principles underlying the creation of the World Trade Organization (WTO), to which Taiwan and China as well as the United States are signatories.

Taiwan prefers multilateral (more universal) to bilateral (or regional) trade agreements. Taiwan’s foreign trade ranks fifteenth in the world and accounts for 2 percent of the entire world trade volume. Therefore, Taiwan’s competitiveness depends on further internationalization. For Taiwan, more universal trade liberalization, as sought by multilateral talks of the WTO, would level members’ import custom tax, enabling Taiwan’s export products to compete more fairly. Less universal bilateral-regional trade talks, emphasizing complicated rules of product origins, would be very time- and procedure-consuming, and would be mutually exclusive with realizing a multilateral trade agreement.

Taiwan will suffer from the continuing failure of the Doha Round talks. Since the degree of openness of Taiwan’s market promised at the time of its WTO accession in 2002 was higher than other members, the success of the Doha Round would give Taiwan a chance to close the gap between the access it provides others and what it receives. If the Doha multilateral talks continue to be postponed, WTO members will resort more to bilateral-regional arrangement, which may cause more trade friction. Also, it is certain that the PRC would be more vigilant in its desire to exclude Taiwan from any of such arrangements.

Taiwan’s Position on a U.S.-Taiwan FTA

With the failure of the Doha Round in July, Taiwan feels it more necessary to pursue a bilateral FTA with the United States. Since the U.S. is the most important supporter of Taiwan, America’s FTA with Taiwan cannot be valued strictly from an economic or trade perspective. The sheer fact that Taiwan is isolated politically and economically by the PRC is reason enough to reach such an agreement. As economist Nicholas Lardy of the Brookings Institution observes:

China’s longstanding objections to Taiwan’s participation in bilateral and regional trade liberalization could impel the U.S. to negotiate a bilateral FTA with Taiwan. This is in fact the most compelling reason for the U.S. to do so. Such an agreement would be most beneficial to the Taiwanese economy if it emboldened other countries in the region to enter into FTA talks with Taiwan despite objections from China.[1]

Aside from countering China’s isolation, Taiwan sees a U.S.-Taiwan FTA in more positive terms. First, it would benefit both parties. For the U.S., a 2002 study by the U.S. International Trade Commission concluded that a U.S.-Taiwan FTA would benefit U.S. business, farmers, and workers. Machinery, motor vehicles and parts, and foodstuffs would be major beneficiaries. U.S. exports to Taiwan would expand by 16 percent. U.S.-based multinationals like IBM, Microsoft, AT&T, TI, Intel, Citibank etc. that are already well established in Taiwan would gain new access in Taiwanese market. Meanwhile, a recent study by Taiwan’s Chunghua Institute for Economic Research projected that a U.S.-Taiwan FTA could expand U.S. overall exports by 0.4 percent, yield a U.S. GDP growth of 0.02 percent and an additional $1 billion in overall welfare gain. For Taiwan, the Chunghua study shows that an FTA would boost GDP by more than 0.5 percent and exports by nearly 2 percent, and would provide an additional $2.6 billion to its economy. The 2004 Lardy/Rosen study found that overall welfare gains to the U.S. economy from such an FTA would surpass those from 10 other FTA partners like Australia, Singapore, Chile, New Zealand, the Philippines, and Indonesia. More importantly, such FTA would enhance protection of intellectual property rights (IPR), e-commerce, and financial and educational services.

Second, a U.S.-Taiwan FTA would demonstrate the commitment of both the U.S. and Taiwan to trade liberalization. Since Taiwan joined the WTO in 2002, it has worked with the U.S. to promote trade liberalization; notably strengthening the transparency, predictability, and fair competition of its market economy. An FTA would contribute to the goal established by APEC’s 1994 Bogor Declaration of creating a free-trade zone in the region among industrialized countries by 2010.

Third, a U.S.-Taiwan FTA would increase customs cooperation and enhance security in trade. Kaohsiung, Taiwan’s second-largest city, is the fourth-largest port of loading for exports to the U.S. and accounts for 5.6 percent of all U.S. imports. Since 9/11, Taiwan has actively participated in the U.S. Container Security Initiative (CSI) to reduce the risk of WMD entering the United States or falling into the hands of terrorists.

Fourth, an FTA would boost innovation-driven partnership in the IT sector of both parties. Several U.S. IT companies such as Intel, IBM, Hewlett-Packard and Dell have partnerships with Taiwan manufacturers that have grown to establish R&D centers in Taiwan and cross-licensing arrangements. A U.S.-Taiwan FTA would stimulate new cooperative ventures like mutual recognition agreements on electronic equipment and other emerging technologies. Taiwan would also be able to develop its human resources and finance and insurance industry in cooperation with U.S. counterparts.

Finally, A U.S.-Taiwan FTA would expand U.S. products and services exports in the Asia-Pacific region. Taiwan invests extensively in Asia and is integrally linked to global supply chains. Taiwan, Japan, and South Korea account for 40 percent of China’s imports, of which 40 percent Taiwan accounts for 12 percent. Taiwan also enjoys other advantages. Taiwan possesses a unique understanding of the Guanxi (or roughly, relationship oriented) culture of the Chinese market. At the same time, Taiwanese investors have brought with them internationally recognized trade practices and, to a certain extent, integrated these norms into Chinese business practices. As a result, Taiwan is well situated to assist U.S. companies, small and medium enterprises in particular, to expand in the Asia-Pacific region, especially in China.

Support for U.S.-Taiwan FTA in the U.S.

Bipartisan U.S. interest in free trade arrangements with Taiwan is not a recent phenomenon. President Ronald Reagan called for free trade with Taiwan in 1984, out of concern for the growing ROC-U.S. trade imbalance. The President stated, "Our common goal is to reduce barriers to trade which will benefit both our peoples." (China Post, Dec. 26, 1984) Senator Max Baucus (D-MT), ranking minority member on the Senate Finance Committee, was an early supporter of U.S.-Taiwan FTA, introducing the U.S.-Taiwan Free Trade Agreement Act of 2001 bill, which would have authorized the president to negotiate an FTA with Taiwan for congressional approval.

In March 2003, Reps. Jim Ramstad (R-MN) and William Jefferson (D-LA) submitted a resolution urging that the United States begin negotiating an FTA with Taiwan. This resolution been signed by more than 60 members of Congress to date. Four Taiwan Caucus co-chairs in the House of Representatives—Robert Wexler (D-FL), Sherrod Brown (D-OH), Steve Chabot (R-OH), and Dana Rohrabacher (R-CA)—submitted a concurrent resolution, which has been referred to the Committee on International Relations, urging that Washington reaffirm its commitment to the Taiwan Relations Act, including on commercial relations.

In September 2003, Sens. Jon Kyl (R-AZ) and Max Baucus, along with eight other senators, wrote to President Bush suggesting that any outstanding concerns in U.S.-Taiwan trade relations could be effectively and appropriately dealt with via negotiations of an FTA, as had been done in the case of Chile, regarding, among other things, its protection of intellectual property rights and treatment of agricultural products.

Taiwan and the U.S. made considerable progress in promoting trade and investment during a Trade and Investment Framework Agreement (TIFA) meeting in December 2004, including several bilateral trade issues of importance to the U.S., such as market access for rice, IPR protection, and policies regarding pharmaceuticals and telecommunications.

As of December 2005, 23 U.S. state legislatures had passed resolutions to negotiate an FTA with Taiwan. The Council of State Governments and National Association of Secretaries of States (NASS) passed similar resolutions that year. In the business community, the International Intellectual Property Alliance (IIPA) and American Council of Life Insurers (ACLI), and National Association of Manufactures (NAM) have expressed support for an FTA.

Taiwan’s Economic Liberalization Efforts

Over the past two years, the U.S. Trade Representative and the American Chamber of Commerce in Taiwan have been calling for Taiwan to further liberalize its economy according to WTO standards. They have encouraged it to reform its financial institutions, make stronger anti-corruption efforts, impose rice import quotas, open up the telecommunication market, and provide stronger IPR protection, both generally and for pharmaceuticals. The U.S.-Taiwan TIFA conference in May 2006 concluded that the U.S. and Taiwan should work together to complete the WTO’s Doha Round talk, establish a bilateral agricultural commission, ensure a pricing mechanism for medicine, and discuss IPR protection.

Taiwan’s government has worked hard to address these issues.

Taiwan seeks to negotiate FTAs with its Latin American allies which have FTAs with the U.S. so as to gain more access to the U.S. market. As of September 2006, Taiwan’s FTAs with Panama and Guatemala have gone into effect, negotiation of an FTA with Nicaragua is proceeding well, and the third round of Taiwan’s FTA negotiations with El Salvador and Honduras was completed; agreements are expected to be signed by yearend.

Conclusion

Taiwan’s pursuit of bilateral FTAs and China’s efforts to isolate Taiwan are flip sides of the same phenomenon. Both reflect the particular route to modernization that China has pursued. Ironically, Taiwan may want to thank China for its isolation, since it has forced Taiwanese businesspeople to go international and find their position in the global supply chain. Taiwan’s businesspeople have persevered and succeeded in this, particularly through original equipment manufacturers (OEM) partnerships with U.S. corporations. Conversely, China owes Taiwan some thanks, since Taiwan’s business community serves as a bridge leading China into the operations of international business. A U.S.-Taiwan FTA would reinforce this bridging role of Taiwan. At the same time, Taiwan’s remaining problems with the United States (like IPR protection) could be dealt with in a more institutionalized manner which would serve as a precedent for future negotiations with China. It would be a win-win-win solution.

Notes

  1. Nicholas Lardy and Daniel Rosen, “Prospects for a U.S.-Taiwan Free Trade Agreement,” Institute for International Economics, 2004. [back]

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