The Global Taiwan Brief Volume 2, Issue 21

The Adaptable State
By: Anna Scott Bell

How Taiwan Will Contribute to a New TPP Trade Agreement
By: Chin-yen Cheng

Taiwan’s Sovereignty and the “One-China” Policies
By: David Elber

Changing Taiwan’s Startup Culture
By: Lauren Kao

---

 

The Adaptable State

By Anna Scott Bell

Anna Scott Bell is program associate at the Global Taiwan Institute and staff editor of the Global Taiwan Brief.

I am happy to introduce this week’s Global Taiwan Brief, which features writing from our spring term interns Chin-yen Cheng, David Elber, and Lauren Kao. As part of its mandate, GTI is committed to cultivating and equipping the next generation of Asia policy leaders, and our internship program is a significant part of how we do this. During their time here, these three students conducted original research, which they have turned into articles for the Brief. On behalf of the Global Taiwan Institute, I want to thank Chin-Yen, David, and Lauren for their excellent work here, and their many contributions to our organization.

Chin-yen Cheng, an international trade and investment MA student at the Elliot School, revisits Taiwan’s role in the Trans-Pacific Partnership (TPP), and asserts that, in a newly configured, post-American TPP, Taiwan’s membership could be critical to offsetting the loss of the United States. David Elber, a MA student in Chinese Studies at SAIS, writes about different iterations of the supposedly inflexible “One-China” policy, pointing out that that the People’s Republic of China (PRC) is less rigid than most assume. His piece was inspired by former President Ma Ying-Jeou’s comments, made at the Brookings Institution in March; Ma divided the “One-China” policies of countries with whom the PRC maintains relations into categories, highlighting their divergences. Finally, Lauren Kao, a rising senior at George Washington University, who studies conflict resolution, looks at Taiwan’s efforts to establish an “Asian Silicon Valley.” Specifically, Kao identifies the cultural and regulatory shifts this would require from Taiwan

The thread that runs through these three pieces is adaptability. Taiwan is not the first state to occupy a circumscribed and ambiguous international position; but few have done so with such creativity and adaptability, or with such commitment to the common good. These pieces illustrate three important components of Taiwan’s creative adaptation: first, as in the case of the TPP, Taiwan is adept at proving its own worth, especially in cases where it has been excluded. As an additional example, many have noted that Taiwan is second only to Israel in successfully lobbying the US Congress, but the island’s vast and intricate network of relationships with the United States government were developed in response to the loss of official ties—a loss that prompted creative adaptation.

Second, as with the multiplicity of “One-China” policy interpretations, Taiwan carves out space for participation where others are unlikely to see it. In the same way that Taiwan has expanded the small space left for it by China’s minimal rhetorical flexibility, building meaningful diplomatic and trade relationships with countries that ostensibly only have ties to China, Taiwan has accepted unofficial roles in international organizations, but assumed the full responsibilities of membership. As has become apparent in the recent uproar over Taiwan’s exclusion from the World Health Authority (WHA), Taiwan has used its observer status, however limited, to make significant contributions to global health.

Third, as in its efforts to become a hub of innovation, Taiwan has had to be clear-eyed about its own society, culture, and institutions, reevaluating and retooling when necessary. Though it has yet to fully adapt in the ways that Lauren Kao suggests, its uniquely precarious geostrategic position has meant that Taiwan has not had the luxury of stasis, and has proven capable of remarkable transformation, whether from authoritarianism to democracy or from traditional society to a beacon of gender equality and LGBT rights.

While Taiwan has proven itself unparalleled at adapting to the exigencies of marginalization, such creativity has its limits, as the 2017 WHA episode illustrates well. Using its creative adaptability, Taiwan has made significant contributions to the international community despite China’s attempts to isolate the island. It is past time to see what Taiwan is capable of, unhindered by artificial, PRC-imposed limitations.

 

How Taiwan Will Contribute to a New TPP Trade Agreement

By Chin-yen Cheng

Chin-yen Cheng is an MA student at George Washington University and an intern at the Global Taiwan Institute.

Even though President Trump has withdrawn from the Trans-Pacific Partnership (TPP), Japan, Singapore, and other countries are still planning to push for the TPP. With the United States no longer participating in the trade pact, the remaining TPP members should work to create a more inclusive as well as deeper forms of cooperation with other nations to secure a strong partnership. Taiwan should be included in the new TPP.

Background

In the absence of the United States, now is the time for TPP members to consider including other economies in the partnership. Although Taiwan has expressed its willingness to join the TPP negotiations since 2011 and set up a policy preparation task force in 2014, Taiwan has not been included in TPP planning thus far. Moving forward, Taiwan should be strongly considered as a participant in the reconfigured agreement. The TPP negotiations were first initiated by New Zealand, Singapore, and Chile as the Trans-Pacific Strategic Economic Partnership alongside the APEC summit in 2002. In the subsequent 13 years, the negotiations were expanded, and eight other countries began to participate. The United States joined the negotiations in 2008, followed by Japan in 2013. The TPP was formalized in 2015. However, the United States officially withdrew from the Partnership in 2017.

In order to exert a comparable economic impact on the world, the TPP should include more partners. In the wake of US withdrawal, TPP members’ total global economic output has dropped from 37 percent to 13 percent (World Bank, World Development Indicator, GDP current price).^[1] Taiwan, as an export-oriented country, is a strong player in Asia that should be considered because of its crucial role in the global supply chain, its influential spillover effect on technology transfer and talents training in developing countries, and its sound intellectual property rights environment that has long secured investors’ interests.

Taiwan is the tenth largest trading partner of the United States, which–despite withdrawing from the TPP–is still an economy that TPP members will trade heavily with going forward. With Japan taking the lead in TPP enforcement, it is important to note that Taiwan is Japan’s fifth largest trading partner.^[2] with whom Taiwan maintains friendly relations. Taiwan is also in an important position both  to help countries tap into the Chinese and Southeast Asian markets and also to support economic development with its potential spillover effects.

Taiwan’s Important Role in the Global Supply Chain

Taiwan has successfully established an important role in the global supply chain because of its original equipment manufacturing and original design manufacturing (OEM/ODM) contracting business models.  The contracting business models enhance the efficiency of the supply chain by allocating and outsourcing the production of intermediate goods. According to Manufacturing Market Insider, based on the revenue gained, four out of ten top contract manufacturers were from Taiwan in 2017. Taiwan supports an efficient production process and high quality R&D talent, providing intermediate goods for advanced economies.^[3] Moreover, government incentives have brought in subsidiaries and contracts, mostly from the US and Japan.^[4]

Additionally, Taiwanese manufacturers are further investing in China and Southeast Asian countries to reach economies of scale.^[5] For example, the notable Apple supplier, Foxconn, is a Taiwanese company manufacturing in China. Also, Taiwan’s direct investment to Southeast Asia has increased over the years and with the New Southbound Policy, a further increase in investment is expected. Therefore, due to the intimate investment ties with important economies in Asia and Taiwan’s position in the global supply chain, including Taiwan in the TPP will benefit both advanced and developing economies.

Potential Spillover Effects on Technological Transfers and Labor Training

With more investment outflows from Taiwan, more potential technology transfer and labor training will help developing economies of TPP members to upgrade their industries. Taiwanese businesses have already contributed to economic development and industrialization in Southeast Asian countries. For example, Thailand, Malaysia, and the Philippines have seen an improvement of industrialization in production technologies, management skills, and marketing skills in manufacturing industries through Taiwan’s FDI investment since the 1980s.

The TPP-11 countries account for 31 percent of Taiwan’s investment outflows. The fact that Taiwan already has intimate investment ties with TPP member countries means that including Taiwan would only benefit them more, because existing investment barriers will be lifted. Additionally, China accounted for 40 percent of Taiwan’s outward investment by 2016; Taiwan reported increases of 0.6 percent and 23.1 percent on exports to China in 2016 and the first quarter of 2017, respectively. Despite the fact that China uses its economic leverage to restrict Taiwan’s international space, which has so far hindered it from joining the TPP, China itself maintains close trade and investment ties with Taiwan. Furthermore, China is also likely to benefit from Taiwan’s participation in TPP, given the high levels of trade and investment interdependence experienced by both sides of the Strait. Consequently Taiwan’s involvement in the TPP can offer member countries a means of accessing the Chinese market,  which they otherwise could not because of China’s exclusion from the negotiations. With the intimate investing relations among Taiwan, China, and TPP countries, the interdependence of the economies in the region has become increasingly important.

Investment Ties with Taiwan and IPR Environment to Protect Investors in Taiwan

Possessing strong investment ties with China, Japan, and the United States, Taiwan provides a stable platform and gateway for countries to invest in, especially due to its sound IPR system that protects investors’ interests. Given the fact that intellectual property protection is one of the major concerns when investors consider opportunities in China, Taiwan has an obvious appeal: it provides a strong IPR environment for investment and access to the Chinese market.  According to World Economic Forum 2017 Global Competitiveness Report, Taiwan is ranked third in Asia in terms of intellectual property rights protection, followed by South Korea and China.

Although Taiwan is not part of the World Intellectual Property Organization (WIPO), Taiwan not only follows key international agreements against violation of IPR, but also works to track counterfeited products from China. Additionally, despite the fact that some industries related to security and environmental protection are closed to foreign investment in Taiwan, most sectors of manufacturing are open and Taiwan has comprehensive laws aimed at solving investment disputes. Hence, given Taiwan’s advantageous location and sound regulatory environment, including Taiwan in the TPP agreement will reduce investment barriers and protect interests when investors invest in Taiwan.

Conclusion

As a strong economy in the Asia region, Taiwan can enhance and add value to the TPP plan in many ways. Taiwan should be considered in plans for a reconstituted TPP agreement,  due to Taiwan’s crucial role in the global supply chain, technology transfers and skills training through investment, and its sound intellectual property environment. Forging more intimate relations with Taipei through Taiwan’s participation in the TPP will open the door to TPP member countries being able to reap greater economic benefits because of Taiwan’s access to the US, Japanese, and Chinese markets.

The main point: Countries in Asia still have hope for the TPP. They should include Taiwan in TPP plans because Taiwan can offer a valuable role in the global supply chain, it can provide technology transfers and skills training, and it can effectively protect intellectual property.

---

^[1] Latest data accessed 4/27/2017
^[2] UN Comtrade database, imports ranked 5th; exports ranked 4th. https://comtrade.un.org/data/
^[3] John Q. Tian, Government, Business, and the Politics of Interdependence and Conflict Across the Taiwan Strait, 2006, P74
^[4] Shelley Rigger, Why Taiwan Matters: Small Island, Global Powerhouse, 2011, P50
^[5] An-Chi Tung, Henry Wan Jr. Jan, The Win–Win Outcome along the Evolving Global Value Chain, 2013

 

Taiwan’s Sovereignty and the “One-China” Policies

By David Elber

David Elber is a China Studies MA student at the Johns Hopkins School of Advanced International Studies (SAIS) and an intern at GTI.

While still President-elect, Donald Trump suggested that the United States need not be bound by the “One-China” policy. In response, various experts worked to explain why it was necessary to reaffirm the policy for the stability of US-China relations. This advice did not go unheard: according to a White House statement, when President Trump spoke with People’s Republic of China (PRC) President Xi Jinping on the phone in February, he “agreed, at the request of President Xi, to honor our ‘One-China’ policy.”

The specific formulation of Trump’s phrasing is significant in several ways, but of particular note is his use of the word “our” to refer to the “One-China” policy. This forces people to consider not only what exactly “our” policy is relative to China’s, but also the implications of China’s willingness to accept variance on a  core issue for the Chinese Communist Party (CCP).  

The US “One-China” policy may be considered to be “a distillation from key documents such as the three US-China Joint Communiqués and the Taiwan Relations Act (TRA), and a series of policy statements made over the years, such as the ‘Six Assurances.’” Specifically, according to the Joint Communiqué on the Establishment of Diplomatic Relations between the People’s Republic of China and the United States of America: “The United States of America recognizes the Government of the People’s Republic of China as the sole legal Government of China … [and] acknowledges the Chinese position that there is but one China and Taiwan is part of China.”  The word “acknowledges” was chosen carefully to give the US a degree of flexibility.

The US “One-China” policy is also distinctly different from China’s “One-China” principle. According to the PRC, “there is only one China in the world, Taiwan is a part of China and the government of the PRC is the sole legal government representing the whole of China.” In contrast, the US “One-China” policy is distinct in several ways. For one, the United States has taken a deliberately ambiguous approach to the issue of Taiwan’s sovereignty. Additionally, framing it as a “policy” rather than a “principle” renders it more of a course of action than a fundamental, incontrovertible truth, as the PRC has framed it.

Often, this is where the conversation ends when people discuss what is meant by the word “our”  in the context of the “One-China” policy. In reality, however, there is another important element to this classification. The United States is not the only nation to have a “One-China” policy—that President Trump chose the language of “our policy” not only differentiates it from the PRC’s principle, but also distinguishes it from the policies of other nations.

On March 7, at his talk at the Brookings Institution, Ma Ying-Jeou noted that, while 173 nation states maintain diplomatic ties with the PRC, only 137 countries signed joint communiqués when establishing diplomatic relations. These communiqués include the country’s recognition of the PRC and also the country’s stance—or lack thereof—on Taiwan’s sovereignty. Ma focused on the latter consideration, further noting three categories of statements. He said that 52 states recognize the PRC’s sovereignty over Taiwan; 29 states use vague language on the issue (as the United States does with “acknowledges”); and 56 states do not mention Taiwan.

The potential implications of these figures as Ma presented them are significant—more than half of the countries that signed joint communiqués with the PRC have not taken a clear stance on the issue of Taiwan’s sovereignty. Ma emphasized the perspectives of the foreign countries involved, remarking that “121 states prefer to keep some flexibility and reservations as regards the PRC’s claims to Taiwan.”  

More interesting, though, is the PRC’s willingness to accept this state of affairs. The PRC has been surprisingly flexible when it comes to the semantics of how other nations view one of its core interests. The issue of territorial sovereignty is not one that the CCP takes lightly; rather, it is an issue that China has actively striven to uphold. Why, then, would it acquiesce on such a visible stage?

The most logical answer is that the PRC wanted to establish formal relations with as many nations as possible, and that it prioritized this goal. To that end, in order to establish diplomatic relations with the PRC, a country must “show its readiness to sever all diplomatic relations with the Taiwan authorities and recognize the government of the PRC as the sole legal government of China.”

So long as a foreign nation accepts that the PRC is the sole legitimate government of China and is willing to sever diplomatic relations with Taiwan, it would seem that the PRC can be satisfied. In other words, the explicit, direct, and unambiguous statement that Taiwan is a part of China is not deemed entirely necessary. If the PRC’s goal has been to establish formal relations with as many nations as possible, then this makes sense, pragmatically. Adhering to this standard expedites the establishment of diplomatic ties because, even if a foreign government were reluctant to take a hard stance on the issue of Taiwan’s sovereignty, it could still agree to the PRC’s terms. The CCP would also not need to fear nationalistic public outcry, because it could show its domestic audience that the nations in question were not denying their claims. For their purposes, an implied recognition of sovereignty—insofar as the contrary is not being directly stated—is good enough.   

The PRC’s willingness to accept ambiguity in certain cases implies that there may be more wiggle room when negotiating with Beijing than the dominant narrative would suggest. While this does not mean that countries wishing to have diplomatic relations with China will be providing arms to Taiwan anytime soon or countries wanting to have better relations with Taiwan may do so without the expectation of protest, it does mean that rhetorically, there could be flexibility depending on the specifics of a given situation.  

The main point: The PRC’s willingness to accept different formulations of “One-China” implies that Beijing might be more flexible in negotiations than might be expected.

 

Changing Taiwan’s Startup Culture

By Lauren Kao

Lauren Kao is an undergraduate at George Washington University’s Elliott School of International Affairs and an intern at GTI.

In December 2016, President Tsai Ing-Wen announced a plan to create an “Asian Silicon Valley” (ASV) in Taiwan to foster innovation, and strengthen US-Taiwan relations in startup industries. With rising Chinese labor costs for Taiwanese companies operating in China, Taiwan’s industrial and manufacturing sectors will begin to feel the pressure in Asian markets. Taiwan also faces a brain drain, stagnant work wages and a conservative business culture, all of which drive domestic firms’ need to transition and change, embracing software markets, artificial intelligence, Internet of Things (IoT) and R&D. However, as the last of the four Asian Tigers without the financial centers of Hong Kong, Chaebols of Korea or the multinational companies of Singapore, Taiwan’s reliance on small and medium companies for Original Equipment Manufacturing (OEM) and information technology requires a new business model.

Taiwan needs to reinvent itself and adopt a culture of accepting risk, and even failure, as a means to achieve innovation. The current Silicon Valley-Hsinchu Technology Park relationship and Silicon Valley’s “fail fast, fail often” mantra are important reference points in the process of stepping out of the culture’s fear of failure and need to succeed.

Taiwan can learn from the success of the US Silicon Valley by encouraging risk-taking but should also be cautious in implementing a similar mantra.  The US Silicon Valley’s “fail fast, fail forward” mantra is both controversial and enduring in driving the ecosystem known for producing tech giants like Amazon and Tesla. There is some debate over how important risk-taking is to the Silicon Valley model. The strategy calls for rapid experimentation and learning from failures, which provides the illusion that entrepreneurs seek risk. In reality, much of their success is due to their self-confidence. But because investors have bought into the risk narrative, it drives demand and sets up unrealistic expectations, which entrepreneurs scramble to meet. Silicon Valley has thus relied on a “Darwinian process to drive innovation.” Consequently, the chicken-and-egg dilemma of whether innovation drives funds or funds drive innovation is usually at play in US Silicon Valley startups.

Whether or not risk plays a primary role, or the illusion of risk acts as a catalyst, driving innovation and funding, risky practices are unavoidable in Silicon Valley. Elon Musk, the most visible entrepreneur and venture capitalist in Silicon Valley, often uses unconventional means to finance his companies, Tesla and SolarCity. In addition to using personal lines of credit (LOC) to buy $475 million shares, Musk uses money earned from more established companies to help fund more fledgling enterprises. In 2002, Musk sold his stakes in PayPal for $165 million to create SolarCity, SpaceX and Tesla. Similarly in 2013, Musk used funds from credit lines to buy $100 million of Tesla shares and $10 million of SolarCity shares to increase capital in the respective companies. The risks are high in using personal loans and shares as collateral for shareholders, and also draws the question of conflicting interests between an executive and the companies. Musk also embodies the visionary an archetype:  the optimists of Silicon Valley that can tolerate risks and failure but also excel at reinvention, as when Musk remained engaged with the companies Zip2 and Paypal after he was fired.

Consequently, the conservative business culture in Taiwan will be the biggest hurdle to overcome for the Tsai administration. Taiwan has the resources to establish and sustain a vibrant startup environment, but the challenge is creating a culture that values innovation and risk-taking. With a relatively small consumer market of $23 million, and exports accounting for 70 percent of its GDP, the country is heavily invested in the global supply chain and therefore susceptible to disruptions. The addition of software and startups, on the other hand, requires a different mindset from the OEM manufacturing, information technology and hardware industries. Furthermore, Taiwan’s domestic firms are unwilling to invest in Taiwanese ventures, when the political climate is challenging, industrial policies are outdated, and labor policies are strict.

In the long term, the society must demonstrate that it values creativity and individualism through public education and encouragement. A culture of imagination must start from the top and start early, through policies, leadership, and access to resources. Instead of focusing on producing results and hard skills in math and sciences, there needs to be flexibility in the curriculum, in order to cultivate a system of values and beliefs that embraces failures and reinvention. Government and civil society organizations can provide educational grants and funds to incentivize students, connect them with a wider international network of startups and investors, and also expose them to cultures abroad,  which will enable students to expand their perspective. Innovation begins with a vision but can only be sustained by a network of financial support, capacity and overall environment.

Another issue revolves around the idea of design and brand for startups. Many Taiwan business and governmental websites overlook design to maximize efficiency by placing as much information on each page as possible. From logo design to service, a startup company’s brand is its identity and future,  with a real impact on consumer preference and loyalty. HTC and Acer similarly have risen to global markets only to realize that a shift to improved branding and design are necessary to effectively presenting their products. The prime example is the rivalry between Samsung and Apple; while the former is arguably “out-innovating” the latter, Apple relies on its brand recognition and identity to maintain its consumer fan base.

In terms of successful Taiwanese startups, many cite the Gogoro startup and its success. However, it is also an example of the conservative business culture that may be siphoning opportunities for funding away from young  entrepreneurs without an influential background or portfolio. Gogoro’s electric-powered Smartscooter and ability to swap batteries at multiple charging stations throughout the city attracted consumers and helped the startup expand into Europe and the US. Its founder, however, is Horace Luke, whose expansive portfolio as HTC’s former chief innovation officer and Chief Creative Officer at Microsoft helped attract investors to fund Gogoro. Instead of relying on well-established figures and known entities, there needs to be a culture where venture capitalists and angel investors cater to young startups. Presently, the accelerator Appworks Ventures (之初創資), raised $50 million to invest in domestic startups, and continues to be an important benefactor for startups.

By increasing international contacts and funding, Taiwan will boost its exposure to practices that stem the risk aversion culture.

In fact, Taiwan has maintained a strong connection with the US Silicon Valley through the Hsinchu Science and Industrial Park (新竹科學工業園區). Since the 1970s, Silicon Valley companies often hired Taiwanese engineers overseas and in the United states, leading many Taiwanese-American hardware engineers to rise up in the ranks to management and executive levels. Monte Jade, named after the highest mountain in Taiwan, was created in 1989 by Taiwanese-American executives in Silicon Valley to further promote businesses and technology investments and cooperation between the Bay Area and Taiwan. With over 180 corporate members and an overall membership of 20,000 in Hsinchu Park and Silicon Valley, it actively promotes entrepreneurship by drawing together entrepreneurs, venture capitalists and others through its conference, forums and tours. However, more needs to be done, as Taiwan continues to have few startup successes. The Monte Jade case introduces important ideas, such as creating a system of internal knowledge transfers and communication, which enables transnational connections, but Taiwan’s startup culture issues continue to conflict with the risk-taking ethos of Silicon valley.

Furthermore, with aims to improve material resources such as the National Development Council’s tech accelerator Startup Stadium and other operation bases, the government may need to loosen regulations, to allow for an influx of foreign investment and startups to connect Taiwan to the larger global startup scene.

Finally, the ASV should also seek to reverse the brain drain by increasing wages and incentives that can foster an environment for startups, foreign investment and investors. More needs to be done to address the nearly 1 million young professionals in careers such as university professors, medical professionals and IC engineers and designers who leave Taiwan due to low pay, few opportunities and a dim future. Even if labor policies for foreign workers and professionals are relaxed, Taiwan will continue to face a talent deficit.

The main point: Taiwan’s key lesson is to learn is to adopt a culture of accepting risk, even failure, as a means to achieve innovation. However, the US Silicon Valley is a far from perfect model itself and should not be the sole model Taiwan’s Silicon Valley should look to.