China tension will fuel US-Taiwan economic talks

Growing confrontation and competition between the United States and China have paved the way for closer US-Taiwan economic relations. Taipei should take advantage of this changing geopolitical environment to advance deeper institutionalized trade ties with Washington.

A complex supply chain network between American and Taiwanese companies has grown over decades. Despite this close industrial partnership, several issues have prevented the two sides from implementing institutionalized economic agreements.

First, market forces have primarily fueled US economic ties with the Asia Pacific. Washington’s relatively passive response to the development of institutionalized regional economic integration had left a power vacuum for China to fill.

Although most of Beijing’s economic agreements are shallow, they bind Beijing with the regional economy more closely.

In response, former US President Barack Obama’s administration actively promoted the Trans-Pacific Partnership as the economic dimension of its “pivot to Asia” in 2011.

American policy of trying to integrate China into the global economy downplayed Taiwan’s strategic importance. It also overlooked the advantages of reaching a bilateral free trade agreement (FTA) with the island.

Slow progress

Other factors which discouraged Washington from pursuing an FTA with Taipei included Taiwan’s slow progress in improving intellectual property safeguards and its pharmaceutical pricing, which favors local drug producers.

Another issue revolved around Taiwan’s refusal to open up its rice and telecoms markets.

As a consequence, no significant economic agreement was reached under the Trade and Investment Framework Agreement (TIFA) – a forum for cooperation between the US and its partners initiated in 1994.

The TIFA served only as a means for Taipei to consult Washington on a broad range of economic issues before its admission to the World Trade Organization in 2002.

But US economic policy toward Taiwan has changed as China’s growing military and political assertiveness challenges American interests in the region.

The island’s increasing geopolitical significance makes establishing institutionalized economic links essential to Washington’s strategy to counterbalance China. As part of this realignment of US policy, Washington and Taipei resumed the TIFA dialogue in 2021.

Two other economic talks have been initiated as well – the 2022 Third US-Taiwan Economic Prosperity Partnership Dialogue and the US-Taiwan Initiative on 21st-Century Trade.

Unlike most conventional FTAs, none of the economic talks between the US and Taiwan involve negotiations over tariff reductions and opening their service sectors for investment.

So far, the emphasis has been on setting up new regulatory rules – such as trade facilitation measures and worker-centered trade policies – as well as securing supply chain networks and cooperation on combatting climate change.

This unconventional approach to building institutionalized economic ties is grounded in several realities of US-Taiwan trade. Average American tariffs are already relatively low.

And given Taiwan’s high savings rate and relatively small and aging population, its market is relatively less lucrative than other bigger economies.

Agricultural imports

Even without greater market access to goods and services, bilateral ties have grown stronger in recent years. According to Taiwan’s Ministry of Finance, the US share in Taiwan’s total exports has gradually expanded from 11% in 2014 to 16% in 2022.

One of the most significant growth sectors is agricultural goods. Last year the US was not only Taiwan’s largest source of agricultural imports but also the biggest export destination for its agricultural products.

Between 2018-2022, Taiwanese investment in the US was four times that of the period between 2013-2017, according to Taiwan’s Investment Commission.

Simply encouraging more bilateral trade and investment between Taipei and Washington will not construct a solid frontline to counterbalance China’s growing influence in regional economic integration.

In the last two decades, Beijing has actively pursued and concluded multilateral economic agreements where Washington has been generally absent. China negotiated an FTA with ASEAN which was signed in 2002.

China is an important member of the Regional Comprehensive Economic Partnership that incorporates 16 countries in the region. It has also expressed interest in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership – a cross-regional FTA comprising Pacific Rim nations and the United Kingdom.

The US will need to line up its allies to fortify its trading network in the face of China’s increasing role in directing the development of institutionalized economic integration.

Yet regionally and globally, Washington faces challenges in rebuilding a US-centered multilateral economic network that relies on knocking down tariffs for goods and eliminating barriers to investment between the regional economies.

The US has so far made a priority on making progress on non-conventional trade issues, including supply chain resilience and labor and environmental issues.

Rising tensions

Those priorities were accentuated in both US-Taiwan economic talks and the Indo-Pacific Economic Framework (IPEF). Although Taipei is not part of the latter, the issues covered could bring Taiwan’s trade and economic standards in line with those of IPEF economies.

Apart from the institutional effort to tie the two economies, Taiwanese firms increasingly invest and trade in the US amid rising tensions between Washington and Beijing.

Taiwan’s strategic significance and manufacturing strength in the semiconductor industry has made it a crucial partner for the US. Taipei’s heightened strategic role will help it collaborate – directly or indirectly – with like-minded countries.

This could facilitate some future economic diversification away from China for Taiwan.

Min-Hua Chiang holds a Ph.D. in Economics from the University of Grenoble Alpes. She is currently based in Maryland in the United States.

This article is republished from East Asia Forum under a Creative Commons license. Read the original article here.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy of China Factor.

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