2021.08 The Taiwan Banker NO.140 / By David Stinson
New Southbound policy, M&A and overseas infrastructure investment- The financial industry has become the key to promote industrial transformationInterview Ms. Arati Shroff, Deputy Chief of the Economic Section at AIT
Muchhaschanged in the world since the last US-Taiwan Trade Investment FrameworkAgreement (TIFA) conference was held in 2016. The start of the trade war withChina in 2018 meant that the US’s economic relations with Taiwan would nolonger be constrained by cross-strait considerations.Taiwan’s outstanding handling ofthe global COVID-19 situation cemented its status on the world’s stage, andglobal semiconductor shortage shortly thereafter highlighted its industrialstrength.rength.Finally,with Taiwan’s concession on the ractopamine pork issue, Taiwanese’ hopes for abilateral trade or investment agreement have risen to unprecedented levels.This was the context of the TIFA conference, held virtually on June 30.Inorder to understand the growing possibilities foreconomic cooperation from the USperspective, the Taiwan Banker magazine interviewed Ms. Arati Shroff, DeputyChief of the Economic Section at the American Institute in Taiwan (AIT), the defacto US embassy in Taipei. Shroff wasoptimistic about the direction of bilateral ties, and spoke highly of Taiwan’sreliability as a partner.Diversification into or out of TaiwanTheUShas been increasingly focused on supply chain resilience since the start of theUS-China trade war three years ago. The heightened sensitivity on this issuehas helped Taiwan so far,reinforcing the trendtowards re-shoring from Chinaback to Taiwan.Nevertheless, there is no guarantee that this new thinking will continue tobenefit Taiwan.Oneof President Joe Biden’s first acts was to commission a 100-day inter-agencyreport on the topic, which was released on June 8. The report makes extensivenote of the geographical concentration of semiconductor manufacturing in areaswith geopolitical risk, and also makes note of the extensive subsidies given toTSMC.Shroffhowever emphasized the strength of Taiwan’s rule of law and investorprotections. “Where there are investments and trade going on, companies andcountries and people can feel comfortable and confidentknowing that these deals are going to be true and held up, and not held hostageby any type of political coercion.” These foundations help ensure stablecommercial dealings.Thereare a couple ways the financial sector can benefit from the increased attentionbeing paid to supply chains. First, they can follow Taiwanese manufacturersaround Southeast Asia, as they have been doingunder the New Southbound policy.Second,Shroff also mentioned that Taiwan’simproving trade secrets and IP protection will allow for increased M&Aactivity, which can create business for the financial sector.Athird area of possible involvement from the financial sector is overseasinfrastructure investment.As Shroffnoted, “Supply chains don’t just shift out of nowhere. There is funding andresources that go into that, whether that’s port development, whether that’snew shipping lanes. As we talk about theenvironment, that’s a significant factor, and that requires a lot of upgrades.”The USis thinking several steps ahead on this matter.OnNovember 21, 2020, during the final days of the administration of outgoingformer President Donald Trump, the USand Taiwansigned an MOU to enhance cooperation in a number of areas under the EconomicProsperity Partnership Dialogue (EPPD).The infrastructure portion of that plan aimed to let Taiwanese excesscapital reserves support overseas infrastructure development. The long-termnature of infrastructure projects means that institutional investors around theworld, such as pension funds, are often unwilling to commit funds. Combinedwith some further issues specific to Taiwan, such lending often requiresthird-party guarantees.Somecommentary at the time had wondered whether the Trump administration was hopingthrough this program to force the hand of the new administration, questioningwhether they would pursue it with the same vigor. At the same time, the Bidenadministration is taking a slightly different approach.In June, the G7 announced the Build Back aBetter World (B3W) initiative, which similarly aims to answer China’s Belt and Road Initiative,except through a multilateral rather than bilateral approach.Inresponse to this flurry of initiatives, Shroff told the Taiwan Banker, “Theactual nuts and bolts continue to be worked out.” Moreover, “it’s not one orthe other, with the UStalking to Taiwanor with the G7 and a multilateral approach. I think they can actually all fittogether quite nicely.” She acknowledged that special arrangements may benecessary given Taiwan’sinternational isolation.Finance drives changes in other sectorsRegardingspecific provisions in a potential agreement related to the financial sector,little information is available for the time being. Coming out of the TIFAmeeting, several working groups willmeet on follow-up issues, including a Technical Barriers to Trade Working Groupand Investment Working Group. The United Statesand Taiwan will continue towork closely to address outstanding trade concerns, including concerns raisedby the U.S.in areas of financial services, investment and regulatory transparency.Shroffdid however point to two issues receiving renewed emphasis. The first is theenvironment. US Trade Representative Katherine Tai highlighted the issue in herfirst speech, entitled “Greening US Trade Policy.” “For too long,” she said,“the traditional trade community has resisted the view that trade policy is alegitimate tool in helping to solve the climate crisis.” The FinancialSupervisory Commission (FSC) launched its Green Finance Action Plan 2.0 lastyear, including preparations for a new taxonomy of climate activities, so itshould be relatively prepared for this new focus.Asecond area, however, which has so far received less attention, is laborprotection. Biden has been emphatic on this issue in his domestic policy.“When it comes to the economy we’re building,rising wages aren’t a bug, they’re a feature,” he said in a May speech. Thisvision, corresponding to the S part of the ESG framework, will require furtherimplementation in Taiwan.Shroffemphasized that the finance industry is in a pivotal position to make thesesorts of changes. “Whether it’s the electric vehicle industry, whether it’s netzero emissions, whether it’s commitments Taiwanwants to make, commitments the USis making, or others in the region are going to make, that all requires money to fund the technologies and the R&D.”Putting Taiwan on the mapTheimprovement in relations between Taiwanand the US–aswell as the Western world as a whole–does not appear to be a short-term trend,according to Shroff. “That moment has arrived where Taiwan has shown itself on a globalscale to be a force for good.Whetherit’s technical expertise…or Taiwan being a strong democracy, holding thosevalues, whether it’s from press, or rule of law, or having hardworking andtalented people.”Globalrecognition of Taiwanis rising, she observed. “When I go places and talk about Taiwan, they’re not going to mistake it with Thailand.”Finally,Shroff emphasized the importance of people-to-people ties to help Taiwanmodernize and internationalize its business sector. “Taiwanhas a lot to offer, and the UShas a lot to offer. How can we continue to combine them? As we all know, TSMC,a Fortune 20 company, has made a major investment in the US, butit’s not just about investing, it’s also about the employment ties that aregoing to be created, the synergies when TSMC hires Americans and others in theUS, and when they bring those folks to Taiwan to train them. That reallycreates those linkages and shows what Taiwan has to offer.”Theseties will help deepen trust and cooperation with the US,creating a virtuous cycle to help Taiwan advance towards the nextstage of its development.