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Editor in Chief, The Taiwan Banker
Hank Huang (黃崇哲)
Shock waves in the global economy: can Taiwan ride out the storm? The Taiwan Banker NO.100107.04

With signs of life just appearing, a storm is arising in the global economy and in international trade. Aside from trade frictions between the U.S. and Europe having heated up, at the end of last month, based on “Section 301” investigation results, President Trump has also imposed 25% tariffs on up to US$60 billion of Chinese imports to the U.S., and also restricted Chinese acquisitions. Not 12 hours later, China also announced a retaliation list, imposing tariffs on US$3 billion of American imports, marking the start of a trade war.

 

Although in past experience, such exchanges have ended in negotiations, this time President Trump has shown strong resolve to balance the American trade deficit with China – on the one hand responding to hard-line domestic voters, while on the other, also sending China a “gift” for Xi Jinping’s indefinite extension of his term in power at the 19th National Congress. Adding on the “courtesy” of the Taiwan Travel Law – a challenge to the One China principle – Beijing’s heart must be dropping. In due course, the gift will be returned. The confrontation between China and the U.S. can only heat up. How can Taiwan, sandwiched between the two sides, and America’s main contact for Sino-U.S. trade, coexist with both powers?

 

Aside from Sino-U.S. relations, we also see that as American power retreats, other countries are scrambling for new development opportunities. For instance, even as the U.S. withdrew from the TPP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), evolved from that idea – similarly initiated last month by 11 countries including Japan and Canada – could realistically finish its signing process in little more than half a year. It is expected to come into effect at the beginning of next year. Although the CPTPP is considered a watered-down version of the TPP, on the whole, it still maintains its high standards, including zero tariffs for products representing up to 98% of trade, and service industry and e-commerce opening, etc. It is arguably the first modern full-service trade agreement.

 

With confrontation brewing between China and the U.S., it becomes more urgent for Taiwan to join the CPTPP in the second round. The 11 member states of the CPTPP are not only in the vicinity of Taiwan, but also have close trading relations, accounting for 27.6% of its total trading volume. More importantly, just as then-President Obama said when discussing the TPP: “We cannot let countries like China to write the rules of the global economy.” The entire TPP framework involves scaling up a high-standard economy which better protects intellectual property and reduces government interference – as opposed to a rising China, which continues to skirt its promises to the WTO of opening up. The future pattern of cross-strait economic and trade cooperation depends on Taiwan entering a new system of trade earlier than its counterpart, enhancing its industrial competitiveness, and increasing space for trade and commerce. Only by expanding its economic links to countries besides the great powers of the U.S. and China, can Taiwan avoid becoming a pawn for either side.

 

Particularly for the service sector – including finance – in continuation of Taiwan’s past preparations for the TPP, joining the CPTPP will give its service industry an chance to invest in a new global landscape, with all-new business opportunities. Taiwan inability to openly participate in multilateral or bilateral trade organizations, has constricted its services to a domestic island setup, forcing them into a CP war, wrongly competing by satisfying consumer demand at the lowest price, while forgetting that innovation and quality are the true keys to competitiveness. For finance, meager spreads are insufficient for professional development of project finance, and financial companies can only submissively deliver the same meager fees as overseas financial products. In the background of a seemingly profitable financial industry lies vast idle funds and a worrying industrial transformation bottleneck – all of which requires more open, competitive, and vibrant markets in the future to stimulate domestic industry and shore up development opportunities.

 

Taiwan has never had a comfort zone for survival and development, but its current situation is even more precarious. In the past, the specter of forcible invasion reminded people to stay vigilant, but with Beijing’s preferential policies towards Taiwan, reducing the costs of unification, Taiwanese society seemed silently accepting, without awareness of their great impact on the next stage of development. As Mencius once said: “Born of trouble, die of peace.” The clouds over international trade may arouse a sense of urgency in the government and the public to seek solutions in a quickly changing global environment.