The Global Taiwan Brief Volume 2, Issue 13
US-Taiwan Trade and Investment Relations in the Trump Era
By: Russell Hsiao
Taiwan’s Trading Space in a Post-TPP World
By: Shihoko Goto
Taiwan’s Trade Policy Priorities in the Face of Global Uncertainties
By: Sara Yi-Ying Lin
A Roadmap for Enhancing US-Taiwan Economic Relations Post-TPP
By: Robert Wang
US-Taiwan Trade and Investment Relations in the Trump Era
Russell Hsiao is the Executive Director of the Global Taiwan Institute and the Editor-in-Chief of the Global Taiwan Brief.
As president of the United States, Donald Trump has altered the course of the previous administration’s policies in many arenas. Nowhere, perhaps, has the impact of the new administration’s shift in policies been more visible than in the trade arena.
On his first day in office, President Trump notified the Office of the United States Trade Representative (USTR) to withdraw from the painstakingly-negotiated Trans-Pacific Partnership (TPP), a multilateral trade deal. The 12-nation trade pact had been the hallmark of the latter half of the Obama administration’s “Pivot to Asia” policy. Consequently, countries throughout the world have been scrambling to adjust to the new political-economic reality in the world’s strongest democracy. Taiwan is no exception.
While clearly eschewing multilateral trade agreements, the Trump administration has indicated its interest in pursuing bilateral trade deals with other countries. To be sure, the pathway ahead for the TPP is at best murky, yet the Tsai Ing-wen administration is ramping up efforts to deepen bilateral dialogue with the United States on “upgraded” economic cooperation.
Indeed, at the American Chamber of Commerce’s annual Hsie Nian Fan celebration on March 22, President Tsai declared that “Taiwan and the US should engage in bilateral discussions and trade negotiations as a matter of priority. Both sides should have frank and substantive discussions and work together towards a new bilateral trade agreement. Preferably, of course, FTA type.” Her administration recently proposed a stimulus package of US$29 billion (T$882.4 billion) over eight years, which is subject to approval by the Legislative Yuan, ostensibly to shore up the island’s export-driven economy in light of perceived global economic uncertainties.
These extraordinary efforts by Taiwan’s government dovetail with the Trump administration’s stated goals of creating jobs at home and encouraging more investment into the United States. In written responses to questions posed by the Senate Finance Committee, President Trump’s nominee for head of the Office of the US Trade Representative, Robert Lighthizer, unequivocally stated “I intend to develop a trade and investment policy that promotes a stronger bilateral relationship with Taiwan.”
The former deputy USTR and next possible top trade negotiator noted that the United States will “examine the prospect of additional negotiations with Taiwan.” He added, “Recognizing that foreign investment from Taiwan and elsewhere can create more jobs in the United States and increase U.S. economic growth and competitiveness, I intend to develop a trade and investment policy that promotes foreign investment into the United States that advances these objectives.”
In this special issue of the Global Taiwan Brief, we asked three experts to weigh in on a potential upgrade in US-Taiwan economic relations under President Trump. The three contributors include a career US Foreign Service Officer with more than 30 years of experience, an economic policy researcher in the Taiwan government, and a prominent think tank expert. The articles explore a range of topics, such as an overview of Taiwan’s current trade policy; Taiwan’s “trade space,” post-TPP, and a roadmap for enhanced US-Taiwan economic cooperation.
There are, indeed, many uncertainties brought about by the Trump administration’s change in trade policies. Despite this shift, however, complementary interests remain between the United States’ and Taiwan’s economic policies.
As one article in this week’s issue notes: “The current Tsai administration, recognizing the risks of having China take up nearly 40 percent of our export trade volume, opted for a policy direction designed to facilitate the diversification of trade and investment destinations to avoid over-dependence towards one economy.”
Despite the apparent setbacks for the multilateral approach towards global trade, another article in this week’s issue points out potential opportunities for Taiwan in this new political environment.
While recognizing the potential for improved economic relations between the United States and Taiwan, the third and final article in this week’s issue soberly asks the critical question: Where will Taiwan rank in terms of US trade policy priorities under the Trump administration? It then offers a clear-eyed assessment of the political feasibility of options for upgrading trade relations.
The main point: While there are complementary interests between the Trump administration’s approach to trade and Taiwan, questions about priority and political feasibility remain.
Taiwan’s Trading Space in a Post-TPP World
Shihoko Goto is the Senior Associate for Northeast Asia with the Woodrow Wilson International Center for Scholars’ Asia Program, based in Washington.
The US withdrawal from the Trans-Pacific Partnership (TPP) agreement in January was not unexpected, given President Donald Trump’s hostility towards the trade deal on the campaign trail. Yet, while the Trump administration’s views on multilateral economic pacts are clear, how other governments can move forward in the new reality of a less-engaged Washington remains murky. Decreased US commitment to multilateral trade deals and, more broadly, to a consensus-based approach to reaching deals, will be particularly challenging for Taiwan. Nevertheless, the end objectives for Taipei are still the same: ensuring that Taiwan’s economy continues to expand and that it remains an integral part of the global economy. What is more, an enhanced appetite for Washington to move forward with bilateral trade deals, instead of taking a multilateral approach, could potentially be to Taiwan’s advantage.
Taiwan was not one of the 12 founding members of the TPP. Yet, the Ministry of Economic Affairs’ strategy had been not only to assume that the agreement would conclude successfully, but also to prepare to be accession-ready so that Taiwan would would be able to make a strong case for being accepted in the first round of opening to new members. In fact, the final text of the TPP is carefully worded so that Taiwan’s unique political standing in the global order would be considered. Article 30.4 on accession states that the TPP is “open to accession by any state or separate customs territory that is a member of APEC, and any other state or separate custom territory as the parties may agree.”
Without the world’s single largest economy as a member state, the TPP cannot move forward as it currently stands. There are, however, two possibilities to move forward within a multilateral framework. The first would essentially be to redraft and rename the TPP (calling it TPP 11 as shorthand) so that the negotiated agreements come to fruition. This would benefit Taiwan insofar as the goals for entry into the open platform are clear, and it is likely to have support from a number of key member countries. The problem, however, is that the political will available for a TPP 11 is weak, and there is currently no momentum for such a move.
The second, more viable option for a multilateral agreement may actually be a reformed and expanded TPP. Trade ministers from the 11 TPP member countries met in Chile in mid-March for the first time since President Trump’s decision to pull the United States out of the TPP. Another first was the fact that representatives from the People’s Republic of China (PRC) and South Korea joined the group; their continued involvement would enhance the allure of a new, reinvigorated TPP deal, even without the United States. The downside for Taiwan, though, will be that, like with the Regional Comprehensive Economic Partnership (RCEP) agreement, the PRC is unlikely to be open to Taiwan joining the negotiations or forging ahead with a new deal on an equal footing.
There could, however, be a silver lining to Washington pulling away from multilateral deals. Trump has made clear that, in spite of his hostility towards TPP and questioning of NAFTA as it currently stands, he is in favor of pushing forward with trade agreements that would bolster US economic growth and create jobs in particular. Moving forward with a bilateral Free Trade Agreement (FTA) with Taiwan would certainly be in the interest of the United States, as well as of Taipei. After all, Taiwan is the United States’ ninth-largest trading partner, and US companies and consumers would benefit from greater access to the Taiwanese market. Granted, it is less the economic argument for a US-Taiwan FTA that is proving to be the stumbling block to a deal. Rather, it is political concerns about Washington’s relations with Beijing that have been the single biggest hurdle for making headway in a bilateral trade agreement to date. Indeed, while Trump has retracted his initial stance as President-elect regarding the “One-China” policy, when he reaffirmed the longstanding US position regarding the PRC’s government, the fact remains that public acknowledgement and understanding about Taiwan’s unique position has been elevated. That awareness of the political as well as economic importance of Taiwan could be leveraged to push for a bilateral US-Taiwan FTA, especially given that Trump has Trade Promotion Authority to expedite trade deals in a Republican-led Congress.
A lower-key approach that may skirt some of the more obvious political challenges would be to pursue a Bilateral Investment Agreement (BIA) between Washington and Taipei, focusing on specific interests. What is clear is that, while the existing bilateral Trade and Investment Framework Agreement (TIFA) is a solid base for economic relations between the two, prospects for a BIA would incentivize Taipei to liberalize its markets further, cut down on regulation of business, and pursue domestic reform, including making its labor market more attractive to both home-grown and foreign talent.
The fact remains that it is in Washington’s interest that Taiwan remains a prosperous democracy. At the same time, Taiwan is facing increasing competition for foreign investments and access to overseas markets, not only from the PRC, but from Southeast Asia as well as South Korea. Concluding a bilateral trade agreement with the United States can play a key role in ensuring that Taiwan remains a regional manufacturing and technological hub, as well as a steady US partner in the region. At the same time, it is imperative for Taipei to continue pursuing policies of liberalization and reform, not only in preparation to join a future multilateral trade agreement, but also to ensure that its services sector flourishes as much as its world-class manufacturing sector has, in order to stay ahead of the global economic curve.
The main point: US withdrawal from the TPP was a blow for a multilateral approach to global trade. It was also a disappointment for Taiwan, which envisaged itself as a potential new entrant to the pact. Nevertheless, the end objectives for Taipei are the same: ensuring that Taiwan’s economy continues to expand and that it remains an integral part of the global economy. What is more, an enhanced appetite for Washington to move forward with bilateral trade deals instead of taking a multilateral approach could potentially be to Taiwan’s advantage.
Taiwan’s Trade Policy Priorities in the Face of Global Uncertainties
Sara Yi-Ying Lin, is a Policy Researcher for the Office of Policy Evaluation and Integration in Taiwan’s Ministry of Economic Affairs. Sara holds a B.A. in International Relations from Brown University and was a former Project 2049 Taiwan Fellow. (Disclaimer: The views from this article are solely her own and do not represent the official stance of the Ministry of Economic Affairs, Taiwan.)
Taiwan has been an export-driven trading nation over the past few decades. As such, its trade policy becomes critical in ensuring its position in this increasingly competitive global economic environment. Taiwan’s admission to APEC in 1991 and to the WTO in 2002 were significant milestones in legitimizing its role as a key player in the global economy.
During the Ma Ying-jeou administration (2008-2016), Taiwan’s emphasis was on bolstering trade ties with China. Most of the government’s trade negotiation efforts were placed on the Economic Cooperation Framework Agreement (ECFA) and a substantial portion of the administration’s trade promotion resources were dedicated towards China.
The Tsai Ing-wen administration recognized the risks of China absorbing nearly 40 percent of Taiwan’s export trade volume, and opted for a policy designed to diversify trade and investment destinations to avoid over-dependence on a single trading partner.
Worldwide Economic Uncertainties and Taiwan’s Response
Given Taiwan’s economic dependence on trade, its policies are influenced by world events. In addition to the sluggish economic growth affecting economies around the world, the 2016 Brexit vote in the United Kingdom (UK) and the election of President Donald Trump in the United States introduced greater unpredictability to the global economy. Rising populism in Europe and the United States may steer future trade policies towards protectionist efforts.
As the negotiation for Brexit with the European Union (EU) is scheduled to begin on March 29, 2017, the final terms and impact of Brexit remain to be seen. The EU is Taiwan’s 5th largest trading partner and its largest source of foreign direct investment (FDI). The UK is Taiwan’s 3rd largest trading partner within the EU, and its 2nd largest source of FDI from the EU. Both the EU and UK play significant roles in Taiwan’s trade and economy, and the results of the Brexit negotiation may well impact Taiwan in ways that require proactive and timely responses.
To ensure a smooth transition, Taiwan will maintain an open dialogue with the UK through the Taiwan-UK Trade Dialogue, which has been held annually for the past 19 years. Through official dialogue, Taiwan will continue to seek to further strengthen its trade relations with the UK during and after the Brexit negotiations have been completed. On the EU front, The European Commission has officially included the possibility of initiating a BIA (Bilateral Investment Agreement) with Taiwan in its 2015 “Trade for All” policy paper. Taiwan seeks to continue the dialogue and push for the official initiation of the BIA negotiation.
Similarly, Taiwan is currently the 9th largest trading partner for the United States. Not unlike their European counterparts, President Trump and his administration also bring in a different philosophy to trade negotiation, firstly rejecting the Trans-Pacific Partnership (TPP) and seeking to renegotiate NAFTA and other key bilateral trade agreements. While the general blueprint may be set, the actual measures and actions will have to wait until the US Trade Representative is appointed and his/her team is in place and in motion. Given these uncertainties, the whole world—Taiwan included—is watching to respond to the United States’ next economic move.
During the Obama administration, Taiwan was preparing itself for the second round of TPP member accession, and it commenced some of the regulatory reforms that would have been required of a new TPP member, including passing 15 fishing by-law amendments, which came into effect January 2017. Other regulatory reform efforts, including TPP-grade amendments Patent Act, Trademark Act, Pharmaceutical Act and Cosmetics Hygiene and Safety Regulatory Act have been drafted by the administration and submitted to the Legislative Yuan for review. These efforts were made in the hope that Taiwan would be better positioned for acceptance into the TPP. With the United States pulling out of TPP, the remaining 11 member countries are still exploring different possibilities for regional integration, but this may take more time. In the interim, Taiwan will continue to maintain an open dialogue under the Trade and Investment Framework Agreement (TIFA) with the United States, and explore potential possibilities for a mutually beneficial bilateral trade agreement that would include both market access and investment chapters.
Taiwan’s Economic Landscape
After eight years of China-driven trade and economic policy, Taiwan requires a long-overdue industrial upgrade and overhaul. This is the rationale behind the 5+2 Innovative Industries, which are: Green Energy, Asian Silicon Valley, Biotechnology, Smart Machinery and National Defense plus New Agriculture and Circular Economy. The government seeks to accelerate the industrial transformation upgrade to propel the next generation of economic growth drivers. These 7 industrial focuses share the commonality of satisfying domestic needs, and the potential for attracting further private sector investments. These forward-looking industrial policies seek to drive economic growth for the currently stagnant economy.
Together with this wave of industrial innovation, the New Southbound Policy also serves to diversify Taiwan’s trade and investments, both going outbound and inbound. To this end, the Tsai administration seeks to focus on the following trade policy directions to bolster the efforts of New Southbound Policy.
Taiwan’s Current Trade Policy Direction
In order to open up greater market access and investment opportunities for our agile corporations that seek to expand their market and also their manufacturing base beyond China, Taiwan needs to actively promote dialogues for potential trade negotiations. In addition to the aforementioned United States, EU, and UK, it is also in the process of engaging in dialogues with Japan and Australia to explore possibilities for further collaboration.
In terms of the ASEAN countries, Taiwan seeks to upgrade existing BIAs (some of which are over 20 years-old) with Singapore, Indonesia, the Philippines, Malaysia, Vietnam, and Thailand to better protect the rights of investors to and from Taiwan. Taiwan also seeks to explore potential BIAs with Brunei, Myanmar, Laos, and Cambodia, and to expand to South Asian countries such as Pakistan, Sri Lanka, Bhutan, and Nepal. Given the potential political sensitivities, the BIA strategy is a first step towards better and more robust trade relations between Taiwan and these New Southbound nations.
In spite of the impasse in passing the TPP, even in the form of TPP-minus the United States, Taiwan remains open to the possibility of regional economic integration through other arenas, including a Free Trade Area of the Asia-Pacific (FTAAP) driven APEC members, the Regional Comprehensive Economic Partnership (RCEP), which is backed China, or another version of TPP that evolves from TPP-minus US, promoted by key TPP members, including Australia and New Zealand.During this period of uncertainty, Taiwan will continue to actively participate in the multilateral and plurilateral trade arenas, including the WTO and APEC, where substantial exchanges at the ministerial and senior trade official level are conducted in a constructive manner.
The main point: Taking into consideration the global uncertainties due to election results and administration changes, Taiwan continues to remain agile and proactive in engaging in bilateral and multilateral dialogues to further promote trade.
A Roadmap for Enhancing US-Taiwan Economic Relations Post-TPP
Robert S. Wang is a Senior Associate at the Center for Strategic and International Studies (CSIS). Mr. Wang previously worked at the US Department of State as a career Foreign Service Officer for more than 30 years, with postings in Mainland China (Beijing and Shanghai), Japan, Singapore, Hong Kong, and Taiwan, and as the desk officer for Cambodia. From 2013-2015, he served as the US Senior Official to the Asia-Pacific Economic Cooperation (APEC) forum. Prior to this, he served as the Deputy Chief of Mission at the US Embassy in Beijing and the Deputy Director of the American Institute in Taiwan.
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.
