Russell Hsiao is the executive director of the Global Taiwan Institute and the editor-in-chief of the Global Taiwan Brief.
Like in the United States, Taiwan will have its midterm election later this year in November and it is potentially game-changing. Will the ruling coalition maintain control or will the opposition regain power? What will the results mean for the more consequential 2020 presidential election? While the attention of policymakers during an election year reasonably focuses on these aforementioned questions, there are also many other critically important issues in 2018 that should not be lost on Taiwan watchers. But first, what are some of the domestic headwinds that could influence Taiwan in 2018?
Three months into 2018, the ‘year of the dog’ (for the lunar calendar) is already shaping up to be an eventful year in Taiwan. On February 23, the Tsai Ing-wen administration announced its second major reshuffle of personnel since she became the head of government in May, 2016. In a game of musical chairs, the heads of agencies responsible for national security, defense, and cross-Strait policy were switched around. Joseph Wu (吳釗燮), who served as President Tsai’s first secretary-general of the National Security Council (NSC) and then as head of her presidential office, was tapped as foreign minister to replace veteran diplomat David Lee. Lee served as the foreign minister since May 2016 and was moved to direct the NSC and replace Yen Teh-fa (嚴德發), who was reassigned to head the Ministry of Defense. Feng Shih-kuan, the outgoing defense minister, will take the helm as the inaugural chairman of the Institute for National Security Studies (國防安全研究院), a new quasi-governmental think tank supported by the Defense Ministry that will open in May. Chen Ming-tong (陳明通) was brought back in as the new minister for the Mainland Affairs Council (MAC). Chen served as MAC minister in the tail end of the second Chen administration and also four years as deputy when Tsai was the head of the agency. Given the backgrounds of these individuals, these assignments do not appear to indicate a policy change by the Tsai administration, but rather reflect a re-calibration of personnel to optimize the management of current policies and to strengthen domestic political support.
On the 71st anniversary of the 2-28 incident, the Island of Joy and Happiness Coalition (喜樂島聯盟), a non-governmental group, was formally launched to campaign for a nation-wide referendum on independence to be held in early 2019. For such a vote to occur, the Legislative Yuan must amend the Referendum Act (公民投票法), which currently prohibits referendums on constitutional changes that would involve redefining the nation’s territory or change its official title. The Coalition —launched by Formosa TV chairman Kuo Bei-hung (郭倍宏)— was joined by former president Lee Teng-hui (李登輝), former president Chen Shui-bian (陳水扁), former vice president Annette Lu (呂秀蓮), and former presidential adviser Peng Ming-min (彭明敏), as well as the New Power Party, the Taiwan Solidarity Union, and other smaller political parties. The success of this campaign will ultimately require the support of the ruling party and its lawmakers (to amend the law). In the lead up to the November elections, this will likely put pressure on the Democratic Progressive Party (DPP) and also the Tsai administration to adopt other measures that are supported by this segment of the voter base.
Protests over the central government’s efforts to reform the crumbling pension system reached a boiling point in late February when military veterans clashed with police in an altercation that turned violent and eventually resulted in the death of a retired colonel. Following the incident, the Executive Yuan announced that it was delaying a decision on military pension to give time for more deliberation while recommitting to follow through with original plans to implement the pension cuts in July. The reforms, which is opposed by veteran groups, is seen to be generally supported by younger voters who are concerned about whether the social safety net will be around for their future. The opposition Nationalist Party (Kuomintang), which has been traditionally supported by the country’s veterans, has taken up the cause of opposing the Tsai administration’s reform efforts. The ongoing debate over pension reforms (military, civil service, public school teachers) highlights generational differences that may influence the 2018 elections, depending on voter turnout of different demographic groups.
These are just several of many domestic headwinds that will influence Taiwan in 2018. In this special issue of the Global Taiwan Brief, we’ve invited four members of GTI’s Advisory Board to weigh-in on what they think are the most important issues to watch for in 2018. The topics covered include cross-Strait relations, economics, defense, and international space.
The main point: The attention of Taiwan watchers is focused on the 2018 November elections, but there are many other critically important issues, like cross-Strait relations, economics, defense, and international space.
Correction: The November elections in Taiwan are local elections and not for the legislative yuan.
Taiwan in 2018: Prospects for the US-Taiwan Economic and Trade Relations
Dr. Peter C.Y. Chow is a Professor of Economics at City University of New York. He is a member of GTI’s Advisory Council.
2018 is expected to be a year of prosperity amid financial volatility for the US and Taiwan economies. The IMF projects US GDP growth rate as 2.7 percent in 2018 after Congress passed President Trump’s tax cut bill. Taiwan’s economy is highly open and interdependent with the US and the global economy. When the US economy grows by one additional percentage point, concomitantly Taiwan’s overall export grows by 0.15 percent, and its total GDP increases by nearly 0.07 percent. With a healthy and progressive economy in the United States, the Director General of Budget, Accounting, and Statistics of Taiwan government projects its GDP to grow by 2.42 percent in 2018, the highest rate in the past several years. If and when both economies are on the right track in terms of growth, many trade issues between these two countries should be easier to resolve.
President Trump’s trade and economic policies include both ‘carrot and stick’ for American businesses and US trading partners. The carrot is represented by tax cut, and investment in infrastructures and deregulation. The ‘stick’ comes in the form of unilateral trade protection by imposing sector-specific tariffs on foreign imports. These are important implications for the US-Taiwan economic and trade relations in 2018 and the future.
Tax cut and increasing government spending in infrastructures will cause the US budget deficit to aggravate, at least in the short-term. As a result, the short-term interest rate in the United States will increase. It is generally anticipated that the Federal Reserve System will also raise the interest rate three to four times in 2018 to gauge the potential, yet manageable, inflation in a full employment economy. The mixture of monetary and fiscal policy in the United States would increase capital inflows and put pressure on the dollar exchange rates, which will have repercussion on trade balance in the United States.
Taiwan’s financial exposure to the US financial market is low and manageable. Total Taiwanese bank’s exposure is about NT $6.98 trillion, with NT $5.57 trillion in the insurance industry and only NT $1 trillion in the banking industry. Hence, the volatility in the United States financial market, whatever it will be in 2018, will have only limited impact on Taiwanese financial stability. Bankers in Taiwan are reputed for their excellence in risk management as evidenced from past financial crises.
President Trump prefers bilateral to multilateral trade deals and emphasizes sector specific trade protection, rather than overall macroeconomic re-adjustment, which is essential to correct trade imbalance in any country. The President has imposed tariffs on solar energy battery, washer machine, and just recently on steel and aluminum imports. With Taiwan’s active participation in the global supply chain, US tariff on imports from China and other countries will indirectly affect Taiwan’s export to the United States and interrupt the existing global supply chain as well. Taiwan’s export to China and Hong Kong is 41 percent, and 18 percent of its export is towards South East Asian countries. Of these exports, 60 percent are in intermediate products, parts, and components. Most of these intermediates are processed in the aforementioned countries, and then re-exported to the US and other OECD states. Protection tariffs on imports, though not directly targeted at Taiwan, would indirectly affect Taiwan’s export to the United States, which accounts for 12 percent of Taiwan’s total export to the world in 2016.
Taiwan has actively participated in the “Select USA Investment Summit” in the past and will participate again in 2018 and other future meetings. Taiwan’s annual excessive saving over its investment is around NT $2 trillion (about US $67.8 billion). Some large-scale Taiwanese multinational corporations (MNCs) have been globalized by evaluating investment opportunities all over the world, including the US. President Trump’s tax cut on corporation income tax may lure some more Taiwanese MNCs to invest in those industries, which are aiming at the US and third markets. As the American investment environment becomes increasingly friendlier, Taiwanese entrepreneurs will redirect their focus from China to the United States.
In the past, American MNCs made foreign investment overseas by shipping final products back to the US, whereas most Japanese MNCs targeted host countries and/or third markets. Intra-firm trade accounts for an average of 28.4 percent of US exports and 36.6 percent of US imports in 2006-2010. Divergent trade strategies of MNCs between the United States and Japan contributed to the overall trade deficit in the United States. Among them, the US trade deficit with ASEAN Economic Community (AEC) accounts for 11.11 percent of its total trade deficits with the world in 2016. American MNCs overseas can shift their trade destination by collaborating with Taiwanese counterparts in South East Asian countries in those sectors that the US has ‘comparative disadvantage’ yet Taiwanese MNCs have ‘comparative advantage.’ The product list in this category based on 6-digit Harmonized System (HS) product code, compiled by the author of this article, totals to US $228.5 billion in ASEAN imports in 2016. Among them, of the total US $37.84 billion imported from Taiwan, only US $6.64 billion comes from the US. If American MNCs could collaborate with Taiwanese firms to penetrate in the ASEAN markets to reduce US trade deficits in AEC, then US national interest will be linked with Taiwan’s ‘New Southbound Policy’ launched by the Tsai Administration. President Trump’s tax cut for US corporations can include a comprehensive package that offers tax incentives for US MNCs that not only invest exclusively in the US, but also for the MNCs that have increased their export in ASEAN countries (reduce their sales back to the US) through their collaboration with Taiwan.
Taiwan is the seventh-largest consumer of US agricultural products, of which, the fifth-largest consumer of US wheat and the sixth-largest market for US corn and soybeans. Taiwan government dispatched a procurement mission to visit some major agricultural states and signed a US $3 billion procurement deal for US grains in 2017. This trend will continue in 2018 and into the future.
As Taiwan’s economy is undergoing structural transformation to technological frontier, US trade with and investment in Taiwan will further grow in coming years. Trade in service, in which the US has a surplus in the two-way trade with Taiwan and its overall trade with the world, will further increase. Taiwan government has been deliberately de-regulating many of its service sector to be compatible with what the US anticipates. One of the most recent developments is the revision on the production of generic pharmaceutical products at the Legislative Yuan. The passage of this bill fully exemplified that Taiwan is a role model on the protection of intellectual property rights.
One hiccup in US-Taiwan trade negotiations has always been the contentious issue of importing US pork, due to the use by the United States of ractopamine—a drug that leads to more muscular meat. This is due to a social and cultural perspective of food consumption in Taiwan where many people are secular Buddhists who do not eat beef, but do eat pork. Taiwanese people consume seven times the amount of pork than beef per capita. By comparison, per capita consumption of pork in Taiwan is about two times as that in Korea and about one and half time as that in Japan. The maximum residual level (MRL) of ractopamine under CODEX—an international food safety standard—though internationally acceptable, does not account for the unique consumption pattern of Taiwanese people.
The US government should try to understand the religious practices of Taiwanese people and not insist upon an immediate lifting of Taiwan’s ban to import pork with additives, until Taiwan’s consumers fully understand the food safety related to pork imports from the United States. It could do so by allowing a grace period of gradual phasing US pork into Taiwan, while the public reaches a consensus regarding US agricultural use of ractopamine. More importantly, export of pork from the United States to Taiwan only accounts for less than 0.1 percent of the total US agricultural exports to Taiwan. Washington should focus on big sale tickets, instead on insisting on minor items, such as pork export to Taiwan.
Looking forward to the US-Taiwan economic partnership, both Washington and Taiwan should put all contentious issues on the agenda for negotiations, instead of setting minor sector-specific trade problems as a pre-condition for resuming the long delayed Trade and Investment Framework Agreement (TIFA) negotiations in 2018. From TIFA to the long overdue bilateral investment treaty and free trade agreement is the pathway to fulfil President Trump’s aspiration of signing bilateral deal including a ‘free and fair trade’ between the US and Taiwan.
However, if the Trump Administration is really serious about negotiating bilateral trade deals, an important test will be whether the US Congress renews the Trade Promotion Authority (TPA) act, which will be phased out on July 1, 2018. Under the TPA act, the President of the United States is authorized to negotiate trade deals with its trading partners and Congress can only vote “up or down” with no amendment on any signed trade pact. Without the TPA, it is unlikely that any country will seriously negotiate with the United States, and no trade deal, bilateral or multilateral, can be done. This is not a bilateral issue between the United States and Taiwan. But, it will affect whether or not a bilateral accord between Washington and Taiwan is feasible.
The main point: Washington and Taiwan should resume the long delayed Trade and Investment Framework Agreement (TIFA) negotiations in 2018 by focusing on big sale tickets. If US MNCs can collaborate with Taiwanese business entrepreneurs to exploit the ASEAN markets so as to reduce U.S. trade deficits, then U.S. national interest will be linked with Taiwan’s “New Southbound Policy.”