For the past several years, Taiwan has expressed its strong interest in joining the Trans-Pacific Partnership (TPP) in anticipation of the second round of negotiations for new members. President Ma Ying-jeou had directed officials to monitor TPP negotiations and to determine how Taiwan might meet the requirements of this emerging regional free- agreement (FTA). At the same time, Ma’s administration continued to strive to expand cross-Strait economic relations and complete the Cross Strait Services Trade Agreement (CSSTA) with China, which eventually failed to pass the Legislative Yuan as a result of strong public opposition manifested in the Sunflower Movement protests.
Since President Tsai Ing-wen took office in May 2016, she has also expressed her intent to pursue Taiwan’s membership in the TPP. With the election of President Trump and his decision to withdraw the United States from the TPP, however, Taiwan now has no choice but to abandon its efforts to join the TPP, especially with the fate of the TPP itself in grave doubt. Meanwhile, Taiwan’s economic ties with Mainland China have come under pressure with Beijing insisting that Tsai explicitly accept the so-called “1992 Consensus” and the “One-China” policy. In order to avoid further marginalization, Taiwan has begun to develop policies to strengthen bilateral economic ties in the region on the assumption that Beijing could and would block its membership in existing regional trade pacts. In this context, Taiwan is also considering whether it should try to negotiate either an FTA or a bilateral investment agreement (BIA) with the new US administration.
Key considerations
In assessing which of these two options to pursue, the Tsai administration first needs to determine how they relate to Taiwan’s specific economic priorities. In general, a bilateral FTA is aimed at expanding market access by reducing or removing tariffs, import quotas, and nontariff barriers for certain export and import products. The Korea-US FTA, for example, covered a broad range of sectors, including agriculture, automobiles, pharmaceuticals, manufacturing, consumer electronics, information communications technologies, and services. Beyond market access, the United States has emphasized the development of comprehensive trade and investment rules governing regulatory policies, state-owned enterprises, labor practices, environment, intellectual property rights, and so on. Some FTAs include investment chapters that address specific foreign investment issues of concern to the negotiating parties.
In contrast, a bilateral investment treaty or a bilateral investment agreement in the case of Taiwan (BIT/BIA) is focused primarily on protecting and providing a level playing field for foreign investors and more generally on promoting the adoption of market-oriented domestic policies that encourage foreign investments. It seeks to establish clear limits on the expropriation of foreign investments and requires that foreign investors be provided national treatment. It aims to restrict the imposition of performance requirements, enhance transparency of regulations, and allow foreign investors to hire their own managerial personnel and freely repatriate investment-related funds. While a standard BIA does not cover taxation policies, parties may separately negotiate a double taxation agreement (DTA) that would exempt repatriated profits from double taxation. Finally, foreign investors will have the right under a BIA to submit disputes with the government to international arbitration.
So how would an FTA or a BIA with the United States address Taiwan’s economic needs and priorities? In the long term, a comprehensive FTA that lowers tariff and nontariff trade barriers is expected to increase bilateral trade and help boost Taiwan’s economic growth. Such an FTA could increase Taiwan’s competitiveness vis-à-vis other countries in the region, including those that currently have FTAs with the United States, e.g. Korea, Australia, and Singapore. The significance and impact, however, depends on the existing bilateral trade and tariff structure, the specifics of the agreement, and more importantly, on broader policy and market factors. It is important to keep in mind that FTAs by themselves do not necessarily translate to economic growth for either or both parties. For example, China and Japan are the top and fourth largest trading partners of the United States, respectively, even without the benefit of FTAs, while Taiwan is already ranked ninth on the list. Precisely how and to what extent a US-Taiwan FTA can further contribute to Taiwan’s exports and economic growth thus remains an issue to be examined more thoroughly.
Meanwhile, Taiwan’s top priority, as laid out in President Tsai’s inaugural address, is to move Taiwan away from an export-led growth model based primarily on original equipment manufacturing (OEM) to develop Taiwan’s own innovative industries in the areas of information technology, biotechnology, renewable energy, smart machinery, and defense.In particular, although Taiwan itself has abundant domestic talents and capabilities, this strategic plan will likely require the acquisition of advanced technology and foreign direct investment (FDI) in these new industry sectors. This means that Taiwan’s immediate focus should be on improving its investment environment for foreign high tech companies, especially given the fierce competition for advance technology in the region. In the latest JP Morgan survey, investor confidence in Taiwan fell to an all-time low, reflecting “worries over the local economic and political climate, in particular uncertainty over the government’s labor policy.” Negotiating a strong BIA with the United States would be aimed at spurring reforms to improve Taiwan’s investment environment. Taiwan will also need to consider additional unilateral policies to restructure its economy in the long term.
Secondly, Taiwan needs to consider the potential costs and requirements of negotiating either an FTA or a BIA with the United States. Given that the Trump administration is likely to be more demanding in negotiations, Taiwan must be prepared to make even more significant market access “concessions” that will require at least the early and full opening of its agricultural (especially beef and pork) sector. There will also be pressure to change a broad range of Taiwan’s policies with respect to its foreign exchange controls or state-owned enterprises (SOE), among other issues. While negotiating a BIA may also be difficult, the scope of a model BIT is much more limited and the requirements will be fewer and probably less difficult to meet. Although agricultural market access issues may arise, there may be a greater degree of flexibility in these negotiations in terms of timelines. The key demands in a US-Taiwan BIA will likely be focused on revising current investment laws and regulations to allow even greater openness and better access to the formulation of regulations that affect foreign investors.
Finally, and perhaps most importantly, Taiwan should consider the political feasibility of these two different options. How likely is the Trump administration to agree to launch an FTA or a BIA negotiation with Taiwan? While abandoning the TPP and leaving the door open for bilateral FTAs, President Trump has called for the revision of existing multilateral FTAs such as the North American Free Trade Agreement (NAFTA). This will take an enormous renegotiating effort, especially with Mexico, at this time. Moreover, the early priorities for bilateral FTAs will likely be with the United Kingdom (initially a scope study) and possibly Japan, Vietnam, and other current TPP members in Asia. These will be difficult and time-consuming negotiations. Will the “anti-free trade” Trump administration want to start its term by quickly launching even more bilateral FTAs beyond replacing the TPP? At the same time, the new administration will be reviewing trade relations with China, among others, seeking to initiate trade remedy or enforcement actions to achieve “fair trade.” This effort will lead to increased trade friction that will preoccupy the Trump administration for at least a few years.
The question then is where Taiwan will rank in terms of US trade policy priorities. Negotiations for an FTA with Taiwan will be seen as more complicated and time-consuming than for a BIA, and presumably less feasible. (Note: The United States currently has 14 FTAs with 20 countries, with the last one completed with South Korea in 2011, while it has BITs signed or in force with 47 countries.) Given its unofficial relationship with the United States, Taiwan faces additional hurdles in Congress that could further complicate and delay the approval of a comprehensive FTA that involves more sensitive bilateral market access issues. One must also take into consideration how China might react politically to the negotiation of a US-Taiwan FTA, as opposed to a BIA, and how the Trump administration might respond as it further engages with Beijing. While some do see this period as a window of opportunity for Taiwan, the degree of uncertainty is quite high.
On the other hand, BIA negotiations are expected to encounter fewer problematic issues given Taiwan’s relatively strong legal, political, and financial structure and openness to foreign investments, as compared to other Asian economies. The United States is already the second largest source of foreign investment in Taiwan (with cumulative investment of $23.7 billion and the second-largest destination of Taiwan’s outward investment (with cumulative investment of $14.45 billion). Insofar as this effort promises to further expand investments and create jobs in the United States, a US-Taiwan BIA may also be more attractive to the Trump administration.
The main point: Taiwan needs to consider not only the potential economic costs and benefits of an FTA or a BIA, but their political feasibility as well. Ideally, Taiwan should pursue a more comprehensive and ambitious FTA. The critical question is whether the potential long-term benefits justify the cost, the time, and the significant uncertainties of this process, especially if this were to undermine the opportunity to achieve an admittedly less ambitious but more feasible BIA that addresses Taiwan’s current economic priorities. The completion of a BIA could also serve as a building block toward an eventual FTA, should the opportunity arise in the future.