Participation in international trade agreements, whether bilateral or multilateral, would benefit Taiwan’s economy and reduce its excessive dependency on China. But entry into some pacts is more likely to be feasible than others.
In mid-April, China announced it would start investigating whether nearly 2,500 Taiwan export products conform to its fair-trade rules. The products to be investigated fall into such categories as agricultural goods, textiles, metals, and construction materials, as well as rubber, plastics, and chemical items.
While Beijing claims that Chinese trade groups sought a probe of Taiwan’s trade practices of their own volition, that seems unlikely. “Trade groups in China do not operate independently from government or party influence,” says Ross Darrell Feingold, a Taipei-based lawyer and political risk consultant. While such groups may be the source of the complaint, “the decision to initiate and publicize these investigations is certainly political.”
Highlighting the political overtones is Beijing’s announcement that it may not conclude the probe until January 12, the day before Taiwan’s 2024 presidential election. The investigation’s effect on Taiwan’s economy may thus remain uncertain for months. Still one thing is clear: Taiwan now has more impetus than ever to reduce its risky economic dependency on China. Since Tsai Ing-wen was elected president in 2016, Beijing has time and again sought to use economic pressure as leverage to punish Taipei for rejecting its unification overtures.
Despite Taiwan’s efforts to diversify economically, whether through the New Southbound Policy (focused on Southeast Asia, India, and Oceania) or trade with G7 countries, China remains its top trading partner by far. Including Hong Kong, China accounted for 38.8% of Taiwan’s exports in 2022. Taiwan exports more to China/Hong Kong than it does to the rest of its top 10 trading partners combined.
To be sure, Taiwan has made some progress in diversifying its economy away from China in recent years. In 2022, 35% of its overseas investment went to countries covered by the New Southbound Policy, surpassing the amount invested in China for the first time, according to government data cited by The Economist in March. Total trade with those countries rose from US$96 billion in 2016 to US$180 billion in 2022.
At the same time, Taiwan is accelerating investment in the U.S. as leading chipmaker Taiwan Semiconductor Manufacturing Co. (TSMC) builds a complex of manufacturing facilities in Arizona. From 2018 to 2022, Taiwan’s direct investment in the U.S. surpassed US$8 billion, compared to US$2.2 billion from 2013 to 2017, according to Singaporean bank DBS.
The next step in Taiwan’s China de-risking strategy – and one wrought with challenges – is to ink trade agreements that will give the island democracy significantly greater market access, as well as help solidify its position in the world arena. Underscoring the urgency of the matter is Taiwan’s exclusion by China from the Regional Comprehensive Economic Partnership (RCEP), which includes 15 Asia-Pacific countries. Tariff reductions within the new trading bloc could hurt Taiwan’s exporters, especially in the petrochemical, machinery, and steel sectors. (Most tech products are already tariff-free under the Information Technology Agreement of the World Trade Organization).
Taiwan has not signed a bilateral trade deal since Ma Ying-jeou’s presidency (2008-2016), during which it reached agreements with Singapore and New Zealand. However, it is possible that Taiwan and the U.S. will reach consensus on a form of bilateral trade and investment agreement before President Tsai Ing-wen steps down next May. The current initiative – coined the U.S.-Taiwan Initiative on 21st-Century Trade – is designed to forge principles impacting 11 areas: trade facilitation, good regulatory practices, anti-corruption, SMEs, agriculture, standards, digital trade, labor, environment, state-owned enterprises, and non-market policies and practices. If the initiative comes to fruition, it could potentially pave the way for a future full-fledged free-trade agreement that would also cover market access.
Sources who spoke to Taiwan Business TOPICS about the 21st-Century Trade Initiative consider the fledgling trade deal to be a welcome step, while noting that it would be unlikely to actually move the needle much in a bilateral economic relationship that has few remaining market barriers.
“I’m loath to call breadcrumbs a banquet, though the Biden administration is doing the best it can with the hand it has been dealt by Congress,” says Rupert Hammond-Chambers, president of the U.S.-Taiwan Business Council, of the trade initiative. “There is no consensus in Congress on how to handle trade liberalization, but there is consensus that Taiwan is critical to U.S. national interests, and we might be able to do things with Taiwan that Congress has no appetite to do with the rest of the world, moving faster than IPEF” (the Indo-Pacific Framework for Economic Prosperity).
Ivan Kanapathy, a senior associate at the Center for Strategic and International Studies (CSIS) in Washington, D.C. and a former China, Taiwan, and Mongolia director at the National Security Council, says the Initiative has value, though its scope will be limited.
“There is not a lot of market access that can be given from a tariff standpoint,” he says. “That said, there are regulatory adjustments that can be made that will smooth the road, removing speed bumps in trade, which could help better align Taiwan with CPTPP,” the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which Taiwan has applied to join.
Taiwan Minister without Portfolio John Deng last year told Politico that the trade agreement would establish “a very solid legal infrastructure” for trade between the two sides while signaling to the world that Taiwan will not remain reliant on China for its economic well-being.
“Our markets are pretty much open, so it’s more symbolic” of U.S. support for Taiwan, Nazak Nikakhtar, a partner in the International Trade and National Security Practice at law firm Wiley Rein in Washington, D.C., says of the trade initiative. However, “for Taiwan to decouple from China is not going to be an overnight process, because what Taiwan has built up in China is significant,” she notes, adding that some of Taiwan’s foremost technology companies rely on China for much of their revenue.
The CPTPP challenge
Compared to participating in a multilateral trade pact like RCEP or CPTPP, Taiwan is considered to have a higher chance of securing a bilateral trade agreement with the U.S., since Washington is likely to be in a better position to rebuff pressure from China.
Nevertheless, Taiwan is actively pursuing its application to join the CPTPP, the successor organization to the Trans-Pacific Partnership. The combined GDP of the CPTPP member states is US$13.5 trillion, and the pact encompasses a market of 500 million people that accounts for 13.5% of global trade.
CPTPP accession matters for Taiwan, which has been excluded from the steady integration of Asia-Pacific economies over the past two decades. Deputy Foreign Minister Roy Chun Lee, who previously served on Taiwan’s International Trade Commission under the Ministry of Economic Affairs, has noted the “obvious impact” of being excluded from regional economic integration. On average, more than 41% of Taiwan’s exports still face a simple average tariff rate of 7.05% among the 11 CPTPP countries. Sectors facing steep tariffs include plastics, textiles, steel, metal products, and processed foods.
CPTPP membership would also enhance Taiwan’s economic security by binding it more tightly to countries other than China – though Beijing has also applied to join the pact. The more such integration occurs, the less leverage China has to pressure Taiwan.
When Taiwan applied to join the pact in September 2021, it used the same name it did for WTO membership: the Separate Customs Territory of Taiwan, Penghu, Matsu, and Kinmen (Chinese Taipei). Beijing acquiesced to that nomenclature in the early 2000s. In theory, it should have no reason to object now.
A new member can join the CPTPP only if all 11 signatories – Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam – approve its application. While China is not yet a signatory, it could potentially use its economic clout to dissuade other countries from agreeing to Taiwan’s membership.
The icy state of cross-Strait relations could augur ill for Taiwan’s chances of joining CPTPP, especially as Beijing beat Taipei to the punch. “Why did Taiwan wait to apply until after China applied?” asks Hammond-Chambers. “It was a massive mistake to come in after the Chinese. Taiwan should have played offense and got out in front of China; now [Taiwan’s bid] looks more reactive.”
“CPTPP would be a huge win” for Taiwan, he says, while noting that while “the big economies” like Japan would likely support its bid, China is likely to “lean on” Peru, Chile, and possibly Malaysia, any one of which could veto Taiwan’s entry.
Looking at the bright side, Minister of Foreign Affairs Joseph Wu last November told the legislature’s Foreign Affairs and National Defense Committee that “so far, we have not met any one [CPTPP member] country that has openly or privately expressed their objection to Taiwan’s bid.”
That may be true, but the reality is that CPTPP members would be loath to admit Taiwan and not China. Ideally, both countries could join the pact, as they did the WTO. But as a non-market economy, China’s ability to satisfy the CPTPP’s stringent requirements is questionable.
It seems increasingly likely that the outcome will be a drawn-out application process for both Beijing and Taipei. Shortly after Taiwan and China launched their respective bids, Wendy Cutler, vice president of the Asia Society Policy Institute and a former Acting Deputy U.S. Trade Representative, wrote in financial publication Barron’s: “Until CPTPP members are all fully convinced that China and Taiwan are in a similar position, they are best served by waiting before taking the next step of establishing accession working groups.”