Counter Trade Winds: Prospects for an EU-Taiwan Investment Agreement

Counter Trade Winds: Prospects for an EU-Taiwan Investment Agreement

Counter Trade Winds: Prospects for an EU-Taiwan Investment Agreement

Michael Reilly is a former British diplomat; from 2009–2015 he was a senior representative of UK defense company BAE Systems. His book: Towards an EU-Taiwan Investment Agreement – Prospects and Pitfalls was published by Palgrave Macmillan in November 2017.

Apart from city-states such as Hong Kong or Singapore, Taiwan is probably the most trade-dependent economy in the world. Its 2014 trade/GDP ratio of 130.5 percent far surpassed that of any comparable economy and its dependence on trade has served Taiwan well over the years, contributing to generally robust overall economic growth. Therefore, it is reasonable that Taipei has been keen on joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) composed of 11 economies. As the world’s largest single market, logic would suggest that the European Union (EU) should also be of major interest to Taiwan’s policymakers and exporters. Yet, since the start of the 21st century, trade between Taiwan and the EU has stagnated. In 2001, Taiwan was the EU’s 3rd largest bilateral trading partner in Asia, by 2011 it had dropped to 7th, accounting for a smaller share of total EU trade than both Hong Kong and Singapore combined, despite its much larger size.

Taiwan is the EU’s 18th largest trading partner overall (2016), while the EU is Taiwan’s fourth largest market, behind China, the US, and Japan. By contrast, EU trade with most of the rest of Asia has boomed. Trade with Korea grew 168 percent between 1997 and 2015, and that with China more than tenfold. This stagnation in Taiwan’s trade is not confined to the EU. Its exports to the United States in dollar terms were lower in 2015 than they had been 15 years earlier. Much of this is due to changes in the pattern of Taiwan’s trade, for it trades far more today with its neighbors, above all China, than it did 18 years ago. Even here though, there are worrying signs, for since the signing of the landmark Economic Co-operation and Framework Agreement (ECFA) in 2010, Taiwan’s exports to China have been growing more slowly than those of many other countries, including its key competitor, South Korea.

So the announcement in October 2015 by EU Trade Commissioner Cecilia Mälmstrom that the European Commission would “explore launching negotiations on investment with […] Taiwan” seemed to be a welcome opportunity for Taiwan to rejuvenate its trade ties with the EU, and thereby lessen its worrying dependence on China. Thirty months afterwards, however, progress has been limited to a couple of ‘scoping meetings’ to discuss broad parameters of what might be covered by any agreement, and there is little indication that either side attaches any urgency to concluding one. An instinctive reaction might be to blame China for the lack of progress, given its visceral opposition to anything that might suggest or imply Taiwanese sovereignty. But in this case, the real obstacle is not Chinese opposition, but a simple mutual lack of impetus.

Maybe this is because for Taiwan an investment agreement seems to fall some way short of a Free Trade Agreement (FTA) and would, therefore, seem to add little to existing trade. But EU expectations are that it would be a trade agreement in all but name, concentrating not on tariffs, however, which are already low or non-existent in two-way trade, but on the regulations and market access barriers that hold back trade growth. In the case of the EU, assumptions about China and Chinese reactions are almost certainly a constraint. China is now the EU’s second-largest trading partner after the United States. Moreover, since the 2007 global financial crisis, cash-strapped European governments have courted Chinese investors in the hope they will help finance government deficits and infrastructure programs. While the number of successful deals is only a fraction of those hoped for, China has nonetheless been able to use them to good effect, securing European governments’ support for its position in political areas.

The documented cases of such behavior are few, but together with the sheer size of trade with China, they have persuaded many European leaders to be very wary of doing anything that might offend it. This is reinforced by the negotiating style of many Chinese diplomats, with thinly veiled threats almost a routine part of bilateral meetings and a marked contrast to the usually polite discussions that characterize EU meetings. The consequence is that EU politicians, and officials alike, are frequently reluctant to take any action that they think might be unwelcome by China.

Commission insiders say that this is especially true of personnel within the Directorate General for Trade, the very officials responsible for negotiating an agreement with Taiwan. (In their defense, trade officials can point to their proposals in 2013 to levy anti-dumping duties on Chinese made solar panels, which were opposed by some EU member governments who feared retaliation by China). Since 2013, EU trade officials have been in negotiation with China over an investment agreement; by December 2017, 16 rounds of discussions had been held without obvious progress. Commission officials seem to think that China will not support the EU signing an investment agreement with Taiwan before it has done so with China, if the trade negotiators agree, it suggests Taiwan may be in for a long wait.

But the hard evidence for this view is limited. China did lobby hard to ensure that it was able to join the WTO before Taiwan did. And New Zealand and Singapore, both of whom have signed FTAs with Taiwan, only did so after first agreeing on ones with China. Europeans may also point to vociferous Chinese reaction to EU leaders meeting the Dalai Lama, or other actions that have incurred Chinese displeasure. Contrary to common assumptions and widespread media reports, however, there is almost no evidence that such reactions have had any adverse impact on bilateral trade. After then British Prime Minister David Cameron met the Dalai Lama in 2012, for example, there was no ministerial contact between the UK and China for 18 months, but trade continued to grow regardless.

Experience from other negotiations suggests that the most effective way of persuading the Commission to be more proactive is through exercising pressure from European businesses for an agreement, which is largely absent right now. Tellingly, the original push on the Commission to start negotiations with Taiwan came not from businesses but from the European Parliament. In part, this is because European companies now see the Chinese market as offering far greater opportunities than the market in Taiwan does. EU exporters are also discouraged by the regulatory or technical obstacles that must be overcome to do business in Taiwan, and are skeptical that significant changes will happen anytime soon.

European complaints about market access barriers may not worry Taiwanese policymakers. For them, the relationships with the United States and Japan are more important. The former provides significant security reassurances, and both the United States and Japan are bigger trading partners than the EU. Taiwan’s main trade priority is, therefore, accession to the CPTPP. This used to be known as the TPP until President Donald Trump’s decision to withdraw the United States from it and Taiwan’s desire to join was driven, at least in part, by the importance of its bilateral trade and wider relationship with the United States. Even without the United States as a member, however, the CPTPP participants, led by Japan, will still account for over 25 percent of Taiwan’s trade, making membership highly desirable. Before withdrawing, US trade negotiators had insisted that Taiwan would have to take steps to ease or remove market access barriers before an application to join the TPP would even be considered. The United States has long insisted that Taiwan remove its ban on the use of the ractopamine additive in pork, for example. That has not changed, and the government of Taiwan has committed to undertaking significant economic reforms as part of its preparations to apply to join the CPTPP. Carefully considered, these reforms will also send a positive signal to European business and trade negotiators. This should boost negotiations with the EU, as well as CPTPP members.  

An instinctive response from many in Taiwan might be to resist the reforms on the grounds that they will damage Taiwanese businesses. But the current plethora of regulations and market barriers hurt Taiwanese companies and consumers alike. They raise the cost of doing business, increase prices for consumers, and stifle domestic enterprise as well as foreign competition. World Bank studies show that it costs a Taiwanese exporter more to handle export regulations and procedures than it does Korean or Japanese competitors —and importers face similar hurdles. Far from helping Taiwanese business, many of these regulations appear to be more for bureaucratic convenience. The EU, for example, has long complained about Taiwan’s refusal to recognize its Certificates of Origin for agricultural produce, insisting instead on individual certificates from member states. Another example, is the requirement for the local testing of car parts, even though these have already been tested before leaving Europe.  

Furthermore, and most importantly, Taiwan has been increasingly more reliant on trade for its own growth, even as the global trading environment has worsened. By taking steps to ease some of the restrictions on trade, Taiwan will gain more attention from European businesses, improving the prospects for concluding an investment agreement. Moreover, reforming restrictions on trade will also set in place the necessary first steps for improving Taiwan’s own domestic growth prospects.

The main point: An Investment Agreement with the EU would be a significant achievement for Taiwan, but it is far from a done deal. By taking steps sought by European businesses and CPTPP members alike, Taiwan will improve prospects for reaching an agreement, and also ease the burden on domestic business and boost growth.