Next Steps for Enhancing US-Taiwan Trade Relations

Next Steps for Enhancing US-Taiwan Trade Relations

Next Steps for Enhancing US-Taiwan Trade Relations

Calls for a US-Taiwan free trade agreement (FTA) have grown louder since President Tsai-Ing Wen’s (蔡英文) reelection and as geopolitical tensions in the Asia-Pacific have intensified. While a strong case can be made for the benefits of an FTA, especially following Tsai’s unilateral announcement that she was planning to lift longstanding restrictions on the import of US beef and pork, the launch of negotiations for a comprehensive bilateral trade agreement is unlikely in the foreseeable future for several reasons. Instead, the United States and Taiwan should turn their attention to other initiatives that can generate swift and concrete results on priority issues and meaningfully advance their commercial and strategic interests.

Calls to Deepen Economic Ties

US and Taiwanese advocates of closer relations have long touted the benefits of a bilateral trade agreement, and growing tensions with China have only intensified these calls in the past year.     

Congress has pushed the Trump administration to make strengthening US-Taiwan trade and economic relations a higher priority. Last December, a bipartisan group of 161 members of Congress sent a letter to the Office of the United States Trade Representative (USTR) calling for increased efforts to begin bilateral trade agreement negotiations with Taiwan. Building on this, the Taiwan Allies International Protection and Enhancement Initiative (TAIPEI) Act, which entered into force on March 26, called on USTR to consult with Congress on opportunities for further strengthening bilateral trade and economic relations. Since then, many members have continued to urge the Trump administration to make progress on bilateral trade negotiations.

While the Trump administration has sought to strengthen US-Taiwan relations, its efforts have been centered mainly on areas other than trade. Seeking to further bolster commercial ties, President Tsai took the opportunity presented by US Health and Human Services Secretary Alex Azar’s August visit to Taiwan to express her interest in an FTA. Days later. in remarks to an online forum organized by Washington think tanks, she lamented that closer trade relations had been hindered by what she termed “technicalities that account for a small fraction” of bilateral trade. Her comments were understood as a reference to frictions over Taiwan’s quarantine restrictions on beef and pork, often cited by US officials as the primary issue standing in the way of closer trade ties with Taiwan.

Then, in late August, President Tsai unexpectedly ordered the lifting of restrictions on US pork and beef products. US Agriculture Secretary Purdue tweeted that the step was “encouraging news” and that he looked forward to final action from Taiwan. And Secretary Pompeo tweeted that the move opened the door for even deeper economic and trade cooperation. However, USTR did not issue any public statement on the move or respond to press requests for comment.

In an August 31 speech, State Department Assistant Secretary of State for East Asian and Pacific Affairs David Stilwell welcomed the cooperation between the United States and Taiwan on 5G, data protection, and other issues, while applauding Taiwan’s move on beef and pork. He announced that the two countries would establish a new bilateral economic dialogue to explore the “full spectrum” of the relationship, including semiconductors, healthcare, energy, and other issues. The speech was followed by a just concluded 48-hours visit to Taiwan by Under Secretary of State for Economic Growth, Energy, and the Environment Keith Krach, reportedly to discuss the structure of the new dialogue.

Weighing Taiwan as a Potential FTA Partner

The establishment of a bilateral economic dialogue was a recognition that economic cooperation lagged behind other aspects of the US-Taiwan relationship. However, the State Department’s announcement said nothing about an FTA or whether the administration might consider such an agreement with Taiwan. Were the administration to do so, it would have to weigh a number of factors. Among these are the nature of the trade and investment relationship and its potential for growth, the likelihood that Taiwan’s leadership has the political will necessary to conclude an agreement that meets US standards, and whether the FTA would support broader US economic and geopolitical interests. 

Based on the trade and investment criterion, the United States would likely view Taiwan as a generally strong FTA candidate. Taiwan was the 14th largest US export market last year, while the United States is Taiwan’s second largest destination for exports. Much of the trade is in industrial goods, but it also includes aircraft, fuel, and consumer and agricultural products. The United States is Taiwan’s top supplier of agricultural goods, accounting for about one-third of Taiwan’s total agricultural imports, and Taiwan was the seventh largest destination for US agricultural exports last year.

Although global trade has declined significantly as a result of the COVID-19 crisis, US-Taiwan trade flows have remained strong so far this year, with Taiwanese exports to the United States slightly above last year’s levels. This increase has been driven by the trade diversionary effects of US-China trade tensions and increased demand for information and communications technology (ICT) products during the COVID-19 crisis. However, the trade flows continue to strongly favor Taiwan, increasing the US trade deficit with Taiwan, now the United States’ ninth largest

In addition to the goods trade, the bilateral services trade is also robust, with a modest balance in the US’ favor. Furthermore, foreign direct investment flows have grown in recent years as well. These flows constitute a relatively small, but important share of each country’s overall FDI, with Taiwan’s FDI in the United States focused on the ICT and communications sectors, while the US FDI in Taiwan is concentrated in manufacturing, wholesale trade, and financial services. 

Taiwan also would likely be viewed relatively favorably as a US FTA candidate based on certain political criteria. President Tsai’s landslide re-election in January provided her a strong mandate, positioning her well to make the tough decisions likely necessary to conclude an FTA negotiation with the United States. An FTA would enhance bilateral cooperation and more closely align interests between the United States and Taiwan on commercial matters and geo-strategic issues and challenges. However, careful consideration would need to be given to the impact of such an initiative on US-China relations. 

Is an FTA in the Cards?

Notwithstanding the compelling case that can be made for a US FTA with Taiwan, as well as the heightened interest US and Taiwanese officials have expressed in the past year in boosting commercial ties, the United States is unlikely to launch FTA negotiations with Taiwan anytime soon. This is the reality regardless of which candidate wins the US presidential election in November and apart from any considerations of possible Chinese reactions to such a move.

There is no indication that an FTA with Taiwan would be a priority for President Trump were he to be re-elected. If Vice President Biden is elected, he has made clear that his administration will focus first on addressing the pandemic and rebuilding domestically before looking at any new trade agreements.

Even if a new administration decided to move ahead with an FTA with Taiwan, a major hurdle it would face is the expiration of Trade Promotion Authority (TPA) next July 1. Under TPA legislation, previously known as “Fast Track Authority,” Congress sets out trade negotiating objectives and procedural requirements that the Executive branch must meet in order for Congress to consider implementing legislation for an FTA under expedited procedures, including an up or down simple majority vote. While some have argued that TPA is not needed to negotiate an FTA, it is hard to envision a US trading partner willing to enter into a long and complex negotiation with the United States—and to expend the substantial political capital that would likely be required to conclude it—without assurances that the outcome would not be subject to significant renegotiation. At the same time, Congress has little incentive to pass controversial new TPA legislation in the absence of a pending trade agreement, creating an unfortunate Catch-22 situation. 

To avoid this TPA hurdle, a US-Taiwan trade agreement would have to be completed before the expiration of the current TPA, a virtually impossible task. USTR, which would lead the trade negotiations, has not convened a meeting of the Trade and Investment Framework Agreement (TIFA), the formal bilateral trade dialogue, since 2016. Such a meeting would be the most appropriate forum for discussion of outstanding bilateral issues and consideration of steps to lay the groundwork for a possible trade agreement.   

Other Options for Strengthening Economic Ties

Even if a comprehensive FTA negotiation is unlikely in the near-term, the two governments should pursue other initiatives that could expand their economic ties and commitments to one another’s futures. While work on tech-related issues under the State Department’s new economic dialogue may be useful in furthering cooperation on tech and other issues, the United States should also develop trade-specific initiatives that would deepen the bilateral trade relationship in key areas.     

A useful first step would be to promptly convene a TIFA meeting—not to focus on the trade deficit—but to review outstanding trade and investment barriers and develop a detailed plan and timetable for their resolution. Officials could also use the TIFA meeting to explore new bilateral trade initiatives, such as a digital economy agreement. Such an agreement would promote common approaches to digital governance issues, ensuring interoperability of US and Taiwanese digital ecosystems. The United States already has a digital trade agreement template, so early work could potentially get started in this area. 

This type of incremental approach to deepening US-Taiwan economic relations is the most productive path forward at this time. Rather than a laundry list approach, the United States should develop a small set of concrete initiatives that would generate tangible results in priority areas and then systematically build on those achievements. The emphasis should be on developing rules that can facilitate bilateral trade and investment, cooperation that can help build common approaches to multilateral challenges, and initiatives that can boost the US-Taiwan partnership.   

The main point: While the US-Taiwan economic relationship has only grown in recent years, a bilateral free trade agreement remains unlikely in the near-term. The United States and Taiwan should turn their attention to other initiatives that can generate swift and concrete results on priority issues and meaningfully advance their commercial and strategic interests.