The Taiwan Banker

Empty stores shelves and spiking prices have become a fact of life in the US since the pandemic. One such case that emerged around May was baby formula. Formula is an essential source of nutrition for some babies, so these supply chain issues quickly became a political crisis for US President Joseph Biden, fueling more calls for supply chain resilience and “reshoring.” In this case, however, most production already took place in the US, so the problem was not over-reliance on overseas exporters. Rather, the market was over-concentrated in four companies, one of which was shut down earlier this year by regulators due to a bacterial outbreak. Furthermore, ample production capacity existed overseas, sometimes at higher quality than that available in the US, but imports were being turned away at the border. Calls for reshoring have several motivations, and not all of them justifiable. This case illustrates the important distinction between that and “friendshoring,” or production in geopolitical allies with similar regulatory standards. The full implications of this distinction, which after all involves a major portion of the world’s economy, have not yet been explored in the fraught political discourse of the US. On a larger scale, this confusion has hampered American trade policy. A la carte On May 23 in Tokyo, US President Joseph Biden announced the launch of the Indo-Pacific Economic Framework (IPEF), the centerpiece of his multilateral economic approach in Asia. IPEF is a lightweight version of a trade deal; in fact, it does not touch the central issues of tariffs at all. IPEF is structured in four pillars, managed on the US side by different government agencies: “connected economy,” “resilient economy,” “clean economy,” and “fair economy.” Signatories can select pillars on which to engage on an a la carte basis; it remains to be seen which countries will select which pillars. “The Indo-Pacific Economic Framework is not a free trade agreement; rather, it is an executive branch initiative to negotiate standards and rules in the region,” says Tori Smith, Director of International Economic Policy at the American Action Forum, a center-right leaning think tank. The main reason for this non-traditional structure is mainly domestic. Biden intends to sidestep congress for any concrete negotiation results under these pillars. He would be foolhardy to count on any Republican support in the current environment, and Democrats are likely to lose both houses of Congress in November. One of the main aims of US trade policy in Asia is to provide neighboring countries an alternative to Chinese markets. Because of its structure, however, IPEF is unlikely to create any serious competition to Chinese trade, according to Smith. The current partners are Australia, Brunei, India, Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Thailand, and Vietnam. The inclusion of Taiwan without China might have caused IPEF to be seen as overtly political, causing difficulties for South Asian partners. Instead, the US announced a bilateral trade agreement (BTA) with Taiwan. This announcement is an outstanding accomplishment for Taiwan, years, or even decades in the making. At the same time, beyond this particular and unique situation, a stronger multilateral approach featuring deeper integration would more credibly signal a stable commitment to the region. Bicycle diplomacy Unfortunately, the US is unlikely to ever find a better alternative way to bolster trade with Asia and shape the region than its previous Trans-Pacific Partnership (TPP). A multilateral trade deal with a focus on economic reforms, TPP would have promoted American governance ideals backed up by trade flows. China would have had the opportunity to join the same economic community as the US, creating a potential channel to defuse tensions. Withdrawal from the deal was one of former President Donald Trump’s signature campaign promises. Reflecting the wholesale shift in domestic sentiment, his opponent Hillary Clinton also disavowed support, despite her role in its creation. Trump also went on to start a trade war with China. Biden still recognizes the threat from China, which has been highlighted by the war in Ukraine. At the same time, he also wants to distinguish his foreign policy from that of Trump through a greater focus on multilateralism and more support for allies. Trump’s reckless behavior had raised questions in key countries like Germany and Korea. The question now is what sort of multilateralism Biden intends for Asia. In particular, there are increasing indications that the US may take a step back on its trade war with China. The trade war originally kicked off with tariffs on two lists of imported goods, which became effective on July 6 and August 23, 2018. US law mandates that these measures be reviewed after four years, which is coming up. There is a significant possibility that the US will take the opportunity to weaken the tariffs. Daleep Singh, Deputy National Security Advisor for International Economics, asked at a Senate hearing, “Why do we have tariffs on bicycles or apparel or underwear? There are a whole host of goods…where it’s not obvious to me at least what strategic purpose they’re serving.” Labor unions – a key constituency for an administration eager to move the agenda beyond “culture war” issues – have expressed distinct hostility to such plans. At the same time, they can hardly be seen as allies for trade with alternative markets. Ratcheting back Although it could be portrayed otherwise, this move would not signal a reversal of Trump’s adversarial approach towards Chinese trade. On the contrary, only by holding out the possibility of calmer waters does the US maintain the ability to sanction China when it is truly needed. It is sometimes necessary to pull a ratchet back in order to gain future leverage. The Ukraine situation is largely beyond China’s control, making this a good window of opportunity. There are some larger geopolitical forces in the current environment worthy of consideration. Some influential thinkers have recently called for a “détente” with China as the US shifts is focus elsewhere. The overall concept is largely unworkable due to the Taiwan security issue. Proponents have been vague about what sort of common ground could be reached. The Scottish historian Niall Ferguson said that “instead of talking tough on Taiwan in Tokyo, [Biden could have] taken a trip to Beijing — fittingly, on the 50th anniversary of Nixon's trip there in 1972.” Writing in Foreign Affairs magazine, Professor Francis Gavin encouraged “both sides to stand down from recent efforts that risk humiliating the other or escalating to war.” The main point that could be discussed on security would be for Taiwan to forgo its own security, which would be a non-starter. Specifically on trade, however, détente looks more reasonable. There is a tendency to view domestic debates over sanctions as a question of ideology, when in fact they involve questions of military capacity and should be seen in that light. From this perspective, how much sense does it make for the US to be fighting a war with China and Russia at the same time, when China (for the time being) has not committed any act of aggression towards Taiwan? Furthermore, businesses considering Chinese production are now on notice that politics could interfere at any time, and not only from the US side, but also from China’s “zero covid” and other policies. Thus, regardless of taxes, the main trend for the time being will likely be outward migration of capital. Thus, Biden’s stance appears to have some political logic that goes beyond just inflation. It is becoming clear that US economic policy is being increasingly driven by diplomatic and security considerations – and nowhere more than the Taiwan BTA. In fact, US Secretary of Commerce Gina Raimondo recently told CNBC at the World Economic Forum in Davos that “we need to move to making chips in America, not friend-shoring.” Taiwan’s flagship semiconductor fab industry has become a bottleneck in US and even global manufacturing, and it is not surprising that the US hopes to divert supply chains away from a potential geopolitical hotspot. Nevertheless, there are also other countries in the world with fabs. Chip envy For the moment, this orientation is mainly good for Taiwan. The US has fallen so far behind in production that Taiwan’s chip market is not in danger, nor even those of allies like Korea. It is however notable that the administration is unwilling to publicly defend those allies’ economic interests. Furthermore, even if Raimondo’s vision were feasible, it would not make chip supply more robust. Trump may have left office, but some hints of his “America first” policies remain. In particular, he was much more amicable to organized labor than most Republicans, an element of continuity between the two presidents. It may fall to the next president to point out that a good economy makes labor unions stronger, rather than the other way around. Mathematically speaking, the trade deficit will never get fixed without identifying potential export markets. Asia is dynamic enough of a region that relevant US policies must make sense in their own right, rather than just as a legislative shortcut.