The Taiwan Banker

After nearly five years, Taiwan-US Trade and Investment Framework Agreement (TIFA) talks finally resumed shortly after US President Joe Biden took office, showing that stronger Taiwan-US economic and trade relations have become part of the administration’s global economic and trade alliance strategy. This also confirms the difference between the Biden administration’s multilateral strategy and the bilateral economic and trade strategy of the previous administration of Donald Trump. In the Trump era, even if the US regarded China as its main strategic competitor, apart from the semiconductor supply chain, Taiwan did not seem to hold particular importance. Taiwan had always placed hopes on the Trump administration to conclude a Taiwan-US BTA, but it was never able to achieve anything. Setting an example to help Taiwan negotiate and sign BTAs with Japan and the EU The significance of the resumption of the TIFA talks is that Taiwan and the US have upgraded TIFA into a platform to preliminarily negotiate a BTA. Although the US side did not clearly endorse this, President Tsai, the Executive Yuan, and the Representative Office in the US have clearly linked the talks to a potential BTA, which shows a tacit agreement with the US. In addition, the content of these talks included trade facilitation, labor, and environmental protection, which are the basic elements of free agreements with the US, including the Trans-Pacific Partnership (TPP) led by the Obama administration. At the same time, more than half of US senators have also called on US Trade Representative Katherine Tai to start preparing an agreement. With all the external conditions in place, a US-Taiwan BTA might reach the finish line in a very short time. Trade has always been the main driving force behind Taiwan’s economic growth, and its trade dependence ranks among the highest in the world. Therefore, regional economic integration and free trade agreements with major countries have always been the focus of its foreign trade development, and as the world’s largest economy and consumer market, the US is of course an important partner. Because of obstruction by the Chinese Communist Party, Taiwan struggled with these tasks. Therefore, in addition to market factors, a BTA breakthrough would be important for two deeper reasons. First, as the Biden administration is actively forming alliances against China in the Asia-Pacific region and Europe, and is making good progress, a BTA would set an example, which would be helpful for follow-up agreements between Taiwan and Japan, Europe, Britain, Canada, Australia, and India. In fact, if it were not for the CCP’s intractable interference, FTAs with the above-mentioned countries would already have been completed. In addition, inking a BTA with the US could also contribute to Taiwan’s entry into the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The CPTPP is almost entirely derived from the original US-led TPP. If the Taiwan-US BTA can be successfully negotiated, this would also be in line with the specifications of the CPTPP, allowing Taiwan’s work to join the CPTPP to be achieved with half the effort. Therefore, this opportunity is truly a stepping stone for Taiwan’s integration into the global economic and trade system. The impact for Taiwan would not be less than that of joining the World Trade Organization (WTO). Ten years ago, many mistakenly believed that the Cross-Strait Economic Cooperation Agreement (ECFA) would be the key for Taiwan’s deeper integration into the global economy. Over-concentration on intermediate and upstream processes Second, a BTA would also profoundly impact Taiwan’s industry development. Free-trade agreements generally affect the development of a country's industry, and the allocation and use of its resources. A BTA is equivalent to two countries opening up each other’s niche markets in a global market where trade barriers still exist. If the other party is a low-end market that does not require high product quality, the limited resources of the home country will be guided to low-end production, which is not conducive to industry transformation and upgrade. Counterparties focusing on the high-end market however are. This helps explain why a Taiwan-US BTA would be far more important than the ECFA, and would even have the opposite effect on Taiwan’s industrial development. Taking a closer look, one of Taiwan’s most serious problems is that its downstream industries have almost all moved abroad. This was of course thanks to the strong attraction of the Chinese market in years past, and Taiwan’s industries have long been accustomed to working with Asian supply chains, causing almost all manufacturers to concentrate on intermediate and upstream products, mainly based on the OEM production model, emphasizing standardization, and lacking final product distribution rights. Being unable to enter final product markets, it has proven difficult for them to understand marketing channels and consumer habits, making it is impossible to also develop strong final products and brands. This predicament eventually resulted in a deterioration of terms of trade, as measured by export prices. The combined effect makes it difficult to increase profit margins, which is an important reason for the economic predicament of low wages. Therefore, although the US is the world's largest consumer market, it is not Taiwan's largest exporter; Japan and Europe have large markets, but Taiwan’s exports to there are far smaller than their share of the global consumer market. Taiwan’s largest export market is China, and at 40%, its exports to China are far greater than its share of the global consumer market. Moreover, more than three-quarters of Taiwan’s exports to China are intermediate products. Regardless of Taiwan’s export structure, industry structure, or profitability, this is not a healthy state, and much room still exists for optimization. The early harvest list of the ECFA on both sides of the Strait mainly included Taiwan’s midstream and upstream petrochemicals, textiles, automotive parts and components, and machine tools industries. Of course, because these are Taiwan’s main export industries to China, the main purpose of the ECFA was to reduce transit tariffs on these products. However, ECFA also consolidated and strengthened Taiwan's industrial structure. If we think that the industrial structure is not healthy, then a Taiwan-US BTA, which could truly penetrate the US final product market, would correct it. In the past two years, the high US tariffs on Chinese exports have triggered Taiwanese capital to return home. This has become the main force driving Taiwan’s formidable economic growth, and the proportion of Taiwan’s exports that go to the US has increased rapidly. Lower tariffs on products exported to the US would not only strongly help Taiwan attract investment, but also give it the opportunity to start investing in final consumer goods for the US market, and correct the symptoms of excessive midstream and upstream concentration. Diversification into non-electronics industries In addition, although Taiwan’s ICT industry is strong, most of it already enjoys tariff-free treatment under the WTO Information Technology Agreement (ITA). Therefore, the largest beneficiary of a BTA would be non-electronics industries. This could realize one of the ardent expectations of these industries over the years: for the government to negotiate and sign a self-determined BTA. In the past, Taiwan’s manufacturing industry was over-concentrated in electronics, but non-electronics manufacturing is increasingly being hit by intensified international competition, as well as the economic integration of the Regional Comprehensive Economic Partnership (RCEP). A BTA would help Taiwan diversify away from just its electronic and non-electronic manufacturing industries. In fact, in the current situation with no Taiwan-US BTA, the government has taken great pains to solve the problem of industry structure. The past 5+2 industry innovation plan and the current six core strategic industry plan have all tried to guide Taiwan's industrial diversification, upgrade, and transformation. But it is undeniable that for these projects to succeed, they need the support of key technologies and components from the US. The defense and biotechnology industries are obvious examples. Therefore, the Taiwan-US BTA can also play a key role to support the government's industrial policies. Financial services to be affected Finance may be the domestic industry most impacted by a BTA. After all, it is the most important source of profit for US foreign investment. Looking at the past economic and trade negotiations between the US and Japan and South Korea, the US clearly and strongly demanded the opening of the financial market, and Taiwan should be no exception. In fact, Taiwan's current financial liberalization level is mostly the result of pressure from the US over the years. Fortunately, though, Taiwan has already liberalized considerably, and the requirements of the US are already well understood. Therefore, even if the impact is unavoidable, Taiwan should be able to handle it calmly. A BTA would have a wide range of impacts on Taiwan’s economy. In addition to industry development, it could also affect Taiwan’s labor conditions and environmental protection policies. This is because the US has attached great importance to the principles of fair trade and "competitive neutrality" in recent years, and it hopes that its trading partners will not use poor labor conditions or loose environmental standards to trade unfairly with the US. These requirements may of course give Taiwanese manufacturers higher costs, but from another perspective, low wages, poor working conditions, and environmental issues are all issues that must be overcome as Taiwan moves toward industrial sustainability in the pursuit of inclusive growth. These problems have always been difficult to solve with the strength of Taiwan's internal economy alone, and standard thinking and conflicts of interest will always exist. Looking at the history of Taiwan’s economic development, almost all structural changes and optimizations have been driven by external forces. For example, the US required financial liberalization as a condition for entry into the WTO. Therefore, if the Taiwan-US BTA helps improve Taiwan's working conditions or environmental quality, it could help the overall economy in the longer term. A BTA would inevitably face domestic doubts, but we hope that minor issues do not affect the main direction. It would be very important for the healthy development of Taiwan's industry and economy, which is worthy of support by the whole population. It should be completed as soon as possible. The author is a professor at the Department of Economics, National Central University.