The Taiwan Banker

Over the past several years, the US and Europe have begun to consider the successes and failures of the globalization brought about by the WTO, and have made two findings. First, when China was initially allowed to join the WTO, the hope was that its integration into the global economy would make it more open, but China instead used the tailwind offered by the WTO to rapidly grow its economy and strengthen its authoritarian mentality. Second, the WTO has overemphasized market openness while neglecting inclusive growth topics such as the environment, labor, and corruption. This has sparked increasing criticism and spurred a re-evaluation of globalization. Amidst all this, friendshoring has become an important new trend. When it comes to global supply chains and opening of markets, countries must do all they can to link together with like-minded strategic partners. At the same time, they must also look to progressive, high-quality trade agreements if they are to increase market risk resilience. The US-Taiwan Initiative on 21st Century Trade is a product of this economic zeitgeist. US Skepticism Despite the clarity in the context and objectives of the Initiative, skeptics of the US still mistakenly describe it as “trade in US services.” In reality, these two concepts are quite different. The previous service trade agreement with China provoked great controversy because it only covered market opening, while completely overlooking progressive values such as labor rights, environmental protection, and SME participation. On top of this, the incongruence in scale between Taiwan’s and China’s markets, political differences, military threats, and the subsidies received by China’s state-owned enterprises all added to Taiwanese concerns. In contrast, the Initiative pursues inclusive and sustainable growth, labor rights, and environmental protection, emphasizes fair competition between nations, and stresses shared strategic objectives when selecting partners for cooperation. Moreover, as the digital economy has transformed trade, a new toolset is needed. Friendshoring: A new trend On the 20th anniversary of China joining the WTO, the BBC published an article entitled “How the West invited China to eat its lunch.” According to the article, China’s nominal GDP exploded from US $1 trillion to US $17 trillion, far exceeding Western expectations. Initially, Western democracies offered many favorable conditions for China’s accession to the WTO. However, the hope for a shift towards a more open and liberal society has gone thoroughly unrealized. According to research from the European think tank Geopolitical Intelligence Services, the result of Western democracies opening their markets to China was to aid and strengthen a competitor. In the past, China employed a mix of capitalism, socialism, authoritarianism, and nationalism. Since 2012, however, it has shifted significantly towards the latter two ideologies. The West must come together once more if it is to reverse this decline. Its best strategic choice following this period of globalization is friendshoring, to develop even closer economic ties with like-minded allies. That it is to say, supply chains must be reconfigured, especially those in key components and raw materials. This sort of risk resilience refers to the entire group, not just a single nation. If any segment of a supply chain experiences issues, it could threaten the entire group. Therefore, each member must share values and develop closer economic relationships. In the past, the pursuit of low-cost offshoring often overlooked many risks and problems. Therefore, Western nations must now begin paying attention to diversification and avoid over-concentration of key products. “Short chaining” is also trending, which can not only reduce the risk of supply chain disruptions, but also reduce transportation-related carbon footprints. Semiconductor products and rare-earth metals are the most frequently mentioned key components and raw materials. Although the US and Australia have already increased their extraction of rare-earth metals, China’s output still makes up 80% of the global total. Additionally, China is discussing how to strengthen its control over rare-earth production and export. As a result, the US and Australia have begun searching for alternative sources, reducing their reliance on China. According to statistics from the Semiconductor Industry Association (SIA), TSMC and Samsung are the two largest producers, accounting for 55.6% and 16.4% of global production respectively. Although US semiconductor companies sell 48% of global wafers, the US share of production has continued to fall, from 37% in the 1990s to a meagre 12% today. As a result, even though US wafer production costs are 30% higher than those in Taiwan and Korea, and 50% higher than those in China, the US has passed the non-partisan CHIPS Act, which aims to supply US $23 billion in aid to US wafer production. A more sustainable and fair globalization In 1999, several major global cities exploded into large protests over the WTO. Demonstrators feared that excessive open-market globalization could impact environmental protection, labor interests, and SMEs. Recently, these voices have grown louder, and have urged every nation discussing a new wave of economic agreements to emphasize principles of quality, fairness, and sustainability to bring about inclusive bilateral growth. As a result, the economic agreements of the 21st century must satisfy and protect labor interests, remove forced labor from global supply chains, promote gender equality, and highlight trade as a force for good in the promotion of labor interests. Additionally, they must support reduction of carbon emissions, and promote green and low-carbon economic growth. They must combat bribery and corruption, establish measures for disgorgement of the fruits of corruption, and refuse safe haven for corrupt foreign officials. Regarding SMEs, they must remove trade barriers and share best practices, and assist companies founded by women and vulnerable groups. From a big pot to customized meals If the WTO is a big pot, then the US-Taiwan Initiative on 21st Century Trade could be said to be a refined, customized meal. Through continued interaction between stakeholders on both sides, the Initiative advances and deepens economic ties between the US and Taiwan, promotes shared values, and advocates for a united response to shared challenges and opportunities. Both sides must use these shared values as a foundation, and promote bilateral trade as a priority, while also pushing innovative and inclusive economic growth for labor, the environment, and industry. After the agreement is set in motion, the US and Taiwan will begin negotiations with the goal of signing a strong and economically significant trade agreement. The Initiative currently covers 11 topics for negotiation in the early stage, which could grow in the future. They include trade facilitation, good regulatory practices, agriculture, anti-corruption, SMEs, digital trade, labor, and the environment. These goals share a high-degree of resemblance with ESG principles. Therefore, the Initiative will also help to encourage the standardization of ESG. In January, Taiwan and the US discussed topics including trade facilitation, anti-corruption, good regulatory practices, SMEs, and service domestic regulation. In the future, US-Taiwan trade will simplify customs clearance, including checking documents in advance. In order to speed up this process, both sides will adopt digitization measures and electronic systems. Goods will also undergo necessary import-export tests and authentication processes, which will speed up customs and reduce the cost of receiving goods for manufacturers and consumers. Additionally, the pandemic has sped up global digitization and nations have continued to draw up digital trade rules. They have also replaced complicated cross-border documents with electronic authentication methods, substantially reducing the time and costs of cross-border trade. Moreover, they have adopted further transparency measures and have established many bilateral mechanisms. This will boost efficient cooperation in due course, while also allowing both sides to share their successes and report problems, and offering both governments a chance to more efficiently understand problems with trade and investment. Prior to 2000, the US had long been Taiwan’s largest export market. This provided Taiwan’s economic liftoff with necessary momentum, and also helped Taiwan accumulate enormous foreign reserves. Even today, the US remains Taiwan’s largest source of orders. However, adopting Taiwan’s overseas order mode of production has also allowed China to become Taiwan’s greatest trade competitor. Looking forward, through the U.S.-Taiwan Initiative on 21st Century Trade, and in keeping with the high-quality trade framework and political effects that follow, we can expect a deepening of US-Taiwan economic ties and promotion of shared values, allowing the two nations to jointly create new opportunities. The author is a Senior Researcher at TABF