The Taiwan Banker

Taiwan’s efforts over many years to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) have finally resulted in a formal application, an important step forward. Unlike most free trade agreements (FTAs), which have inevitably faced domestic controversy, starting from the 8-year plan to enter the Trans-Pacific Partnership Agreement (TPP) announced by the Ma administration many years ago, consensus regarding the CPTPP has been extremely high. Both the ruling and opposition parties, as well as the business community, generally agree that this is an important milestone for Taiwan, helping it deepen its international economic integration. Apart from deepening economic integration and ensuring that Taiwan’s market-based economy, the significance of the CPTPP for Taiwan is that it will share the market and rules of the game with major economic and trade powers, which is important for the rebirth of its economy. Looking back, Taiwan's economic and structural transformations have almost all been driven by external factors, such as the financial liberalization “requested” by the US, or WTO accession. This is because domestic constraints often make innovation and transformation difficult. Therefore, it is extremely important to actively grasp or create external drivers of economic renewal. Joining the CPTPP would be an accomplishment similar to financial liberalization or WTO ascension. Taipei Mayor Ko Wen-je warned that it would be like a “tsunami.” This is an exaggeration, but there is no need to hesitate. Taiwan’s accession to the WTO was indeed like a tsunami, but through the WTO’s Information Technology Agreement (ITA), Taiwan was able to become today’s science and technology leader. The opposition party believes that Taiwan is applying to the CPTPP as an act of urgency under pressure from China’s submission, but not that it would help push Taiwan's economy forward. Background and thinking are most similar to Taiwan and Japan Regarding the background and thinking of participation in the CPTPP, the case of Japan is most worthy of reference. Negotiations for the TPP, predecessor of the CPTPP, started in 2010. The most important reason why former US President Obama was able to successfully complete the TPP before leaving office in 2015 – the first regional trade agreement of the century, and the world’s largest in economic scale –was Japan’s accession. After the Abe administration came to power in 2012, it offended the traditional political bases of agricultural collectives, launched the "Heisei Kaikoku" trade policy, refuted the prevailing “TPP subjugation theory,” and advocated open trade and regional integration. There were several key factors behind this shift. First, trade conflict broke out with China in the serious 2012 anti-Japanese demonstration. In 2013, Xi Jinping proposed the concept of economic integration along the Belt and Road, and established the Asian Infrastructure Investment Bank, reducing the space for trust and mutually beneficial economic relations, and also deepening the antagonism between the two. Second, Japan's aging and declining birthrate brought a risk of shrinking consumer markets. Japan’s decision to join TPP not only arose from external difficulties, but also internal issues. According to estimates that year, Japan’s population would fall to 80 million in 2060. Facing a potential population decline of nearly 40 million people, and pressure on the young and middle-aged to take care of the aged, the Japanese government hoped to use the TPP, a free investment and trade zone composed of high-income economies in the Asia-Pacific, to stay ahead of product market and price competition with China and South Korea. It hoped that consumer markets similar to Japan’s would expand markets for its cutting-edge technological advantages in medicine, robotics, and green industries. For this reason, when US President Donald Trump abandoned the TPP nearly 5 years ago, which has its own trade and industry strategy considerations, Japan immediately gave up on it and decided to lead the transformation of TPP into CPTPP. Japan, the last to join the TPP negotiations, faces deflation, aging and declining birthrates in its domestic market; its economic challenges are no less severe than Taiwan’s. In addition, the competitive pressure in its export market is similar to Taiwan’s. Facing the severe challenge of price competition and exchange rate controls from South Korea and China, as well as an inability to innovate and manage as well as the United States, the Japanese consumer electronics brands which previously dominated global markets are now in trouble. By joining the TPP, Japan is trying to break through its current and future difficulties in economy and industry structure to reverse this decline. Taiwan faces many of the same issues, and thus could benefit similarly. An opportunity for comprehensive transformation and upgrade CPTPP is also a free trade agreement. Therefore, although its direct pros and cons for industry are of course the first concern, this may not be the most important level of influence. CPTPP reduces tariffs on industrial products to almost zero. For Taiwan, which is less integrated into the regional economy, the advantages for the economy as a whole far outweigh the disadvantages. No industry will be severely damaged, and the benefits will be more significant for the traditional industries which are most eager to sign FTAs. The service industry is also unconcerned. Taiwan’s general service industry has a high degree of openness. Joining the CPTPP will be an opportunity for it to shine in member countries’ markets. Agriculture is the industry most likely to be impacted by the CPTPP – both in Japan and Taiwan. Unlike industrial products, which are almost fully traded, for more sensitive agricultural products, the zero-tariff ratios of CPTPP member countries vary. Japan is 78.2%, with 34 tax reduction models and a maximum tax reduction period of 21 years; Vietnam is 98.4%, with 23 tax reduction models and maximum tax reduction period of 16 years. Taiwan hopes to follow the Japanese, or Vietnamese model, with a combination of a maximum tax reduction model and tax reduction period. Although the tax reduction range is high, the tax reduction model is diverse and retains flexibility of choice. Notably, Japan's "defense" in agriculture is certainly good, but more important is its "offense." Then-Prime Minister Abe persuaded farmers to aggressively transform agriculture, turning passive damage into an active attack, and making agriculture an export industry. The government assisted farmers to become Japan's main export force. Likewise, Chen Chi-chung, chairman of the Council of Agriculture, pointed out that the CPTPP is Taiwan’s “best chance for comprehensive transformation and upgrade of agriculture.” Pain is inevitable, but there is no other way – and the same is true for other sectors as well. Besides the immediate effects on tariffs, CPTPP will have an important impact on industry and trade structure. First, it would give play to the economic complementarity of regional organizations. The expansion of economic scale and consumer demand within a regional organization does not necessarily mean that individual exporters can also expand their regional exports. It still depends on the complementary (cooperation) or substitution (competitive) relationship between the exporter and the exporter and other countries in the market. This is why Japan attaches great importance to CPTPP as well as RCEP, which likewise includes China and South Korea. Taiwan’s largest trading partner is still China, At 40%, the ratio of its exports to China is much higher than the share of China in the global market. More importantly, the relationship between industry substitution and complementarity is getting weaker. Taiwan’s accession to the CPTPP can deepen economic and trade relations with member countries (especially high-income ones), reduce the risks of deep connection with China, open up more complementary markets, drive high-value industry development, and make Taiwan’s trade and industry structure healthier. This could have a complementary effect with the government’s New Southbound Policy and efforts to turn itself into a high-end manufacturing center. Japan joined the TPP, and has led the CPTPP. In addition to the driving effect on economic growth, it also pays attention to the macroeconomic effects of its international agreements. It aims to move away from the current vicious cycle of price competition in its main export industries to seize high value-added growth in industries with strong potential, generating positive stimulus through overseas product innovation and management thinking, and accelerating the pace of domestic agricultural reform to enhance overseas competitiveness. This is also what the Taiwanese government intends to achieve through its "5+2" industrial innovation plan and six core strategic industries. Improved domestic economy and industry Therefore, Taiwan’s efforts to integrate into the regional economy are only one part of the justification for the CPTPP. More importantly, it should be used to improve the domestic economy and industry. The CPTPP is advertised as a high-quality, high-standard regional integration agreement that meets the needs of economic development for the new century. The issues it includes far exceed WTO standards – including trade in goods and services, business environment, fair competition, legal principles, and horizontal integration. Therefore, the impact on member states will far exceed mere tariff reductions and market access. The necessary regulatory amendments will include the economic institutions of the member states, which has made critics even question a possible transfer of sovereignty. Putting aside Taiwan’s excellent performance in investment and trade, the biggest challenges it faces are the net zero emission target and environmental protection in response to global climate change, and its difficulty in increasing salary levels and improving labor conditions with growth, along with the resulting growth in distribution gaps. These problems are often difficult to resolve through internal reforms. The CPTPP's environmental and labor chapter requires the environmental standards and labor conditions of member states to reach a certain level based on the principle of “competitive neutrality” – which conforms to the global trends of sustainable development, inclusive growth, and ESG. I hope that economic and trade growth can also take environmental sustainability and labor rights into account. The CPTPP will be the best external driver to help Taiwan solve these problems. The author is a professor at the Department of Economics, National Central University