A Taiwanese Perspective on the Need for a US-Taiwan Free Trade Agreement

A Taiwanese Perspective on the Need for a US-Taiwan Free Trade Agreement

A Taiwanese Perspective on the Need for a US-Taiwan Free Trade Agreement

On November 20, 2020, the first US-Taiwan bilateral dialogue on economic prosperity was held in Washington, D.C. A memorandum of understanding that lays the foundation for further cooperation was signed by Taiwan Representative to the United States Ambassador Hsiao Bi-khim (蕭美琴) and American Institute in Taiwan Managing Director Ingrid Larson. During the dialogue, both countries commited to seeking and strengthening cooperation in supply chain security, a clean and secure 5G network, and in other key areas. Recently, many think tanks and commentators have also openly called for a US-Taiwan Free Taiwan Agreement (FTA). President Tsai Ing-wen (蔡英文) has also openly called for a US-Taiwan FTA.

The prospect of a US-Taiwan FTA has also been mooted on-and-off over the past two decades. Although Taiwan has long wished for such an agreement, numerous obstacles have prevented the deal from moving forward. Yet as the COVID-19 pandemic forces the global economy to transform and China rises as a regional hegemon threatening the US’ interests in the Indo-Pacific region, previous political and economic concerns that hindered the realization of the US-Taiwan FTA should no longer seem valid. Now is the right time to initiate the negotiation of a US-Taiwan FTA. 

The Political and Economic Aspects of US-Taiwan Relationship

Taiwan has always been a reliable US political ally. Although the United States and Taiwan no longer maintain formal diplomatic relations, the partnership between the two nations has remained strong and has continued to progress over the past four decades. US-Taiwan cooperation on security and economic matters has helped to maintain stability in the region and has created economic prosperity for both countries. 

The stance of the US Congress has been clear and evident, as it has repeatedly urged for a US-Taiwan FTA. The executive branches’ attitude have, however, been conservative—the current administration, despite its forward leaning posture on Taiwan, has also been reluctant to engage in free trade negotiations with Taipei. The fear that a US-Taiwan FTA would irritate Beijing was said to be the main reason for hesitation. It is also believed that the USTR is taking a conservative position since it worries that a US-Taiwan FTA would jeopardize the ongoing US-China trade deal. Some even argue that it is not worth pushing for such an agreement since a US-Taiwan FTA would only bring limited benefits to the parties. 

Economically speaking, the United States and Taiwan are also closely connected. In 2019, Taiwan was the US’ 10th-largest trading partner for goods and services and the 15th-largest investor. The total trade volume between the two nations in 2019 amounted to USD $85.5 billion. More importantly, the two economies are highly complementary. For example, as the largest semiconductor manufacturing economy, Taiwan provides chip manufacturing services to the US’ fabless integrated circuit (IC) design companies. Meanwhile, Taiwanese firms purchase state-of-art semiconductor manufacturing equipment from the US. Close ties and cooperation between US and Taiwanese industries can also be found in the chemical, machinery, and automobile manufacturing sectors.

A Turning-Point for the International Economy

Since the outbreak of the US-China trade war and the COVID-19 epidemic, the global economy has tasted the bitter repercussions of its over-reliance on China as “the world factory.” Consequently, a supply chian revolution has emerged, as countries and industries are now reversing their over-reliance on Chinese manufacturing. Although the change in the global supply chain is not necessarily targeting China, its impact may be irreversible. Firms and investments are now moving out of China and relocating to India and Southeast Asian states. Countries are also restructuring their trade policy and enhancing cooperation with reliable allies and like-minded countries to prepare for future threats. Like all other nations, Taiwan also faces the question of how to position itself in the global economy. Should Taiwan continue to embrace the still-tempting market opportunities and increase its economic dependence on China? Or should Taiwan reduce such reliance and develop cooperation with other allies? 

In recent years, the global economy has swiftly integrated, mainly through FTA negotiations. Despite Taiwan’s strong economy and advanced industrial capacity, the political pressure from China has prevented Taiwan from engaging in meaningful FTA negotiations. In the 2002 US International Trade Commission’s (USITC) report assessing the possible economic impact of a US-Taiwan FTA, an interviewed Japanese trade official explained how China deters other countries from engaging in FTA talks with Taiwan. By limiting Taiwan’s economic outreach, China lured and forced trade-dependent Taiwan to integrate with China’s economy. By doing so, China’s ultimate goal is to project its political influence over Taiwan once the cross-Strait economic integration is forged. As the Japanese trade official observed, if the US does not take the lead in signing an FTA with Taiwan, it would be difficult for any country that is considering an FTA with Taiwan to endure the pressure from China. 

Maintaining Taiwan’s economic distance from China is vital to both Taiwan and the US. The strategic value of Taiwan’s advanced semiconductor industries is particularly notable. Currently, Taiwanese firms control nearly 70 percent of global semiconductor foundry production. Taiwan is also one of the few countries that can supply superior-quality chips for civilian and military use without worrying that the chips are compromised for espionage purposes. Out of security concerns, the US would surely want to prevent China from gaining access and influence over Taiwan’s highly sensitive industry. In the past several years, the US has repeatedly urged Taiwanese semiconductor firms to move their production facilities to the US. This past June, Taiwan Semiconductor Manufacturing Company (TSMC), the worlds’ largest and most advanced semiconductor foundry firm, announced its USD $12-billion investment plan to develop an advanced semiconductor manufacturing plant in Phoenix, Arizona. The new plant will utilize TSMC’s cutting-edge 5-nanometer technology for semiconductor fabrication, directly creating more than 1,600 high-tech professional jobs. As US Secretary of State Michael Pompeo tweeted, the TSMC investment plan “bolsters US national security at a time when China is trying to dominate cutting-edge tech and control critical industries.” 

Strategically, the US needs to reduce Taiwan’s economic dependence on China and ensure that Taiwan’s advanced information and communications technology (ICT) industry is free from China’s direct and indirect control. On the other hand, Taiwan also needs the US’ support to maintain its economic and political independence. A US-Taiwan FTA would significantly expand economic cooperation between the US and Taiwan, mitigate China’s influence, and secure Taiwan’s political and economic stability. The value of entering into a trade pact with Taiwan should not only be evaluated by the amount of revenue generated. The geopolitical and military-strategic impacts should also be taken into consideration. 

Changing Geopolitics in Asia

Robust economic growth since the 1980s has allowed China to develop into a regional superpower. Although the leadership in Beijing repeatedly claims that “China will never seek hegemony or engage in military expansion now or the future,” their actions suggest otherwise. China’s recent expansive territorial claims and intrusive measures in the South China Sea have threatened freedom of navigation in the area. Through projects like the Belt and Road Initiative (formerly “One Belt, One Road,” 一帶一路), China has also used its economic might to influence countries in the region. Just as Paul Kennedy famously proclaimed that “the rise of new great powers […] one day would have a decisive impact on the military/territorial order,” China is now on the path toward actively projecting its influence and challenging US hegemony in East Asia. Unsurprisingly, Taiwan is undoubtedly the prime target that China wishes to gain control over.

It’s Time for a US-Taiwan FTA

The United States has always used FTAs as tools to forge and strengthen partnerships with its allies. In the past 35 years, among the 20 countries that the United States has concluded FTAs with, only four (Mexico, Canada, South Korea, and Japan) were among the US’ top 15 trading partners. The recent plan for a US-Kenya FTA also demonstrates that economic gain has never been the US’ primary concern when selecting FTA partners. Considering that Taiwan has consistently been among the US’ top 15 trading partners—and there is a critical security need to strengthen the US-Taiwan partnership—a US-Taiwan FTA is politically and economically supported.

The negotiation of a US-Taiwan FTA would certainly irritate China and affect US-China relations. In fact, any US’ actions that prevent Beijing from gaining influence over Taiwan uniformly provoke China. But should this be the reason for the US to give up its reliable ally and surrender its economic, political, and security interests in the region? Of course not. Since FTA negotiation is the most effective way to consolidate the US-Taiwan alliance and is beneficial to both parties, the US should not be overly concerned about China’s reaction. Not to mention that a trade agreement is already the least politically sensitive option, since it would not involve discussions of sovereignty or statehood-recognition issues. As Ambassador Kurt Tong notes, “the biggest impediment to a US-Taiwan trade agreement over the years has not been commercial considerations, but a lack of political will.” The leaders in Washington and Taipei have long placed too much emphasis on Beijing’s reactions. It is time to change and move forward.

In the past, skirmishes over Taiwan’s restrictions on the import of US beef and pork products have also delayed US-Taiwan trade talks. However, after President Tsai announced that Taiwan will ease US beef and pork restrictions starting in January 2021—a decision that caused President Tsai’s popularity to fall by 10 percent—such concern is no longer warranted. Taiwan has also paved its way and is prepared to strengthen its cooperation with the US.

For Taiwan, a US-Taiwan FTA would help to consolidate ties with a significant trade partner and ease its economic dependence on China. The FTA would enable Taiwan to break through China’s blockade and may even open up opportunities for Taiwan to engage in trade talks with other countries. Economically, the United States would benefit from ensuring the security of supply chains of high-end technologies. Politically and militarily, a US-Taiwan FTA would help the United States to strengthen its partnership with Taiwan and counter China’s expansion. As such, the conclusion of a US-Taiwan FTA is beneficial to both nations.

China’s power will likely continue to grow, and the US-China rivalry will not fade away anytime soon. Both Taiwan and the US should be prepared to face their common adversary and a rising hegemon. Taiwan’s Minister without Portfolio and chief trade negotiator, Deng Chen-Chung (鄧振中), has also expressed that Taiwan will “always be ready” for reaching an agreement with the United States. A US-Taiwan FTA would be the perfect answer for the US to respond to its ally’s call and the best way for the US to demonstrate its willingness to continue its leadership role in Asia. Now is the perfect time to push for a US-Taiwan FTA.

The main point: While the recent US-Taiwan bilateral dialogue on economic prosperity is a key step forward in the US-Taiwan relationship, it is only the beginning. In order to safeguard Taiwan and further US interests in the Indo-Pacific, both nations should work to negotiate a free trade agreement.