The Future of US-Taiwan Economic Relations: Lessons from the Past

The Future of US-Taiwan Economic Relations: Lessons from the Past

The Future of US-Taiwan Economic Relations: Lessons from the Past

By: Riley Walters

Riley Walters is a senior non-resident fellow at the Global Taiwan Institute and a senior policy analyst and economist in The Heritage Foundation’s Asian Studies Center.

When attempting to answer the question “How might US-Taiwan economic relations change over the next four years?,”  a good place to start is to look at how US-Taiwan relations have changed in the last four years. While there’s no doubt in my mind that the overall relationship has been net positive over the last four years, the Trump administration has failed to take more initiative towards building on the US-Taiwan business and trade relationship—including failing to launch negotiations for what seems like an ever-elusive US-Taiwan free trade agreement (FTA). Recent changes in the US-Taiwan economic relationship, however, should encourage more action by the next administration.

Looking Back

In late 2016, the US-Taiwan economic relationship looked bright. There was growing support for Taiwan to potentially join the Trans-Pacific Partnership (TPP), either at the invitation of the US or Japan. In October of that year, the Office of the US Trade Representative (USTR) held its tenth Trade and Investment Framework Agreement (TIFA) dialogue with Taiwan’s Ministry of Economic Affairs. Officials at the event—the leading forum for US-Taiwan trade officials since 1994—discussed ways to improve bilateral trade and investment. Then, just two months later, then President-elect Donald Trump spoke on the phone with President Tsai Ing-wen (蔡英文)—sending a wave of optimism throughout Washington about the future of US-Taiwan relations.

However, it quickly became evident that any optimism about the trade relationship may have been misplaced. President Trump removed the US from TPP negotiations on his first day in office (much to the chagrin of Japanese officials whom have carried forward the trade pact). Little did we know that the 2016 TIFA dialogue would also be the last of its kind. And after four years, US officials have still made no effort towards free trade negotiations, despite regular appeals from Congress and Taiwan’s efforts to remove long-contested barriers to negotiations.

Despite the apparent lack of US-Taiwan economic engagement on an official level, US-Taiwan business relations have improved quite significantly over the last few years. Between 2016 and 2019, US exports of goods and services to Taiwan increased by 10 percent to USD $43 billion, while imports of goods and services from Taiwan increased by 34 percent to USD $62 billion. Foreign direct investment (FDI) flows have been positive as well. As of September 2020, Taiwan has become the US’ 9th largest trading partner.

There were of course some black marks on the bilateral business relationship—like Foxconn’s oversold investment in Wisconsin. But there were even more bright spots—including TSMC’s announced investment into Arizona and Microsoft’s decision to build its first overseas cloud-computing data center in Taiwan.

As Taiwan continues to position itself as a hub for trade, investment, and the digital economy, as well as a gateway into Southeast Asia through its New Southbound Policy, there are surely to be more opportunities for enhancing business relations going forward.

But while business relations have been positive over the last four years, Taiwan was never a top priority for the Trump administration’s trade negotiators. Since coming into office, the Trump administration’s priorities for trade included renegotiating the North American Free Trade Agreement, taking an aggressive trade policy towards China, and signing other preferential trade agreements—with the United Kingdom, Japan, and Kenya taking priority. These, as well as other trade policies (such as trade disputes with the European Union), meant there were no additional resources for trade negotiations with Taiwan.

USTR—with the use of its “301 tariff exclusion team,”—found itself reviewing tariff exclusions for US companies that might go out of business due to the US-China trade war instead of negotiating more trade deals. For the negotiations the administration did prioritize, it was evident that US officials were only prioritizing these because they were some of the US’ largest trading partners (Canada, Mexico, Japan) that they failed to strike a trade deal with after leaving TPP negotiations.

Of course, it is important to recognize that US officials have held particularly critical views on the US-Taiwan trade relationship that pre-date the Trump administration. Unlike with other major trading partners, US officials have a long-held view that trade negotiations with Taiwan would neither yield significant economic benefit nor would they necessitate a comprehensive trade deal to resolve outstanding trade issues. 

But now, Taiwan has become one of the US’ largest trading partners without a preferential trade agreement (besides China and the European Union).

On top of US officials’ apparent lack of desire for a trade deal, USTR and the US Department of Agriculture have also had an issue with Taiwan’s import ban on US pork and beef for over a decade. While there has been no TIFA dialogue recently, there was an even longer hiatus between 2007 and 2013 because of the pork and beef issue. It’s fair to assume that when the Trump administration came into office, they decided that these dialogues were going nowhere and to put an end to them altogether.

And yet, just a few months ago now, President Tsai announced that her administration will be taking steps to remove many of these restrictions on US pork and beef imports.

Her decision, while controversial at home, won the praise of some of the US’ top officials at the time, including the Secretary of Commerce Wilbur Ross, Secretary of State Mike Pompeo, and even Vice President Mike Pence. According to Secretary Pompeo, “The US welcomes President Tsai Ing-Wen’s August 28 statement that Taiwan will move quickly to lift restrictions on imports of US pork and beef. This move opens the door for even deeper economic and trade cooperation. Kudos to President Tsai for her leadership.” However, USTR has remained silent on the issue.

For years now, President Tsai has signaled that her administration is ready to begin free trade negotiations. The recent announcement of the removal of pork and beef restrictions is a clear message for the next US administration that she is serious.

Another area of opportunity for US-Taiwan relations is the recent announcement of a bilateral economic dialogue headed by the US Department of State. The new Economic Prosperity Partnership dialogue will focus primarily on technology issues and include discussions on semiconductors, healthcare, energy, and more. This is a welcomed development in the US-Taiwan economic relationship, as there has been a need to expand the economic partnership for years.

Nevertheless, it’s fair to say that even with this new initiative the last four years of official US-Taiwan economic engagement is too little, too late.

Four More Years of Lackluster Economic Engagement? 

First, failure by US trade officials to respond to the Tsai administration’s removal of pork and beef restrictions with credible action will reflect poorly, not just on the US-Taiwan relationship, but on the Tsai administration as well. Previously, Taiwanese officials were hesitant to base trade negotiations on preconditions like removing these restrictions. A lack of US response will confirm their suspicions.

Second, failure to follow through with regular meetings of the new bilateral economic dialogue will send a message (particularly to those in Beijing) that the US isn’t serious about expanding its economic relationship with Taiwan. It’s great that the State Department is taking the initiative to build the US-Taiwan economic partnership, but it would be a shame if US engagement did not include the USTR and other agencies as well for regularly scheduled meetings.  

And finally, even though Taiwan is a member of the World Trade Organization, able to negotiate its own trade deals, and an important link in many industrial and technology supply chains, Taiwan will continue to be left out of regional and bilateral trade deals—such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or the Regional Comprehensive Economic Partnership (RCEP)—if the US isn’t helping bring Taiwan into the fold.

It is difficult to say whether we’ll get another four years of the same kind of uninterested USTR. A new USTR may still prioritize other issues, like renegotiating a US-China deal or pursuing a trade agenda focused on sectoral agreements.

But if there is a lesson to be learned from the last four years, it is that developing the US-Taiwan economic relationship and finally pursuing a US-Taiwan FTA is one issue the next administration cannot ignore.

The main point: While US-Taiwan business relations improved over the last four years, US trade negotiators have failed to take advantage of the improving economic relationship.