Now Is the Right Time for a Trade Agreement with Taiwan

This piece is part of the Strategic Trade series supported by the Atlas Network.

Members of Congress and U.S. international relations commentators who focus on the Indo-Pacific economy have recently revived the long-standing idea of concluding a comprehensive trade deal with Taiwan (Bandow, Walters, and Tellis). Now is in fact a very good time for this glaringly useful idea to be revisited—and this time acted upon!

The idea of a U.S.-Taiwan trade agreement has been debated off-and-on for at least two decades, with the most intense attention coming on the heels of China’s admission to the World Trade Organization (WTO) in December 2001 (and Taiwan’s own inclusion in January 2002). Mainstream think tanks discussed the idea energetically (Lardy and Rosen and Bush), and the Senate solicited an official U.S. International Trade Commission (USITC) assessment. The USITC concluded, rather dryly, that “the U.S. economy likely would experience very small effects from the elimination of trade barriers under a U.S.-Taiwan FTA,” given the disparate size of the two economies.

Close to two decades later, this year’s revival is being driven primarily by the broader rethink going on in Washington regarding U.S.-China relations, marked by the United States’ general desire to increase its leverage on China for the wider “strategic competition” between the two powerful nations. Advocates are now stressing both the economic and geopolitical benefits of a tighter U.S.-Taiwan trade and investment relationship.

On December 19, even before the Covid-19 crisis that has further embroiled U.S.-China relations, a bipartisan group of 161 members of Congress sent a letter to the U.S. Trade Representative (USTR) calling for “work toward beginning negotiations for a bilateral trade agreement with Taiwan.” On April 8, the leaders of nine conservative lobbying organizations wrote to President Trump asking him to “initiate negotiations on a free trade agreement (FTA)” with Taiwan. The Taiwan Allies International Protection and Enhancement Initiative (TAIPEI) Act of 2019, meanwhile, which entered into force on March 26, suggested that the USTR “should consult with Congress on opportunities for further strengthening bilateral trade and economic relations between the United States and Taiwan.”

Recent U.S. news coverage on Taiwan has been dominated by electoral politics, the coronavirus and . . . incongruously . . . baseball. In early January, Tsai Ing-wen won a remarkable landslide victory to retain her position as the island’s president; she was sworn in for four more years on May 20. Following the January 11 vote (which went smoothly despite China’s efforts to interfere), Taiwan went on to outperform most other societies worldwide in containing the coronavirus, with a mere 440 Covid-19 infections and seven deaths recorded thus far. This track record not only spurred renewed calls for Taiwan to be allowed to join last month’s World Health Assembly (which did not happen due to Chinese opposition) but also coincidentally sparked a boom in interest in the island’s usually overlooked athletes. In the absence of alternative distractions, millions of global sports fans have gone online to watch Taiwan’s obscure baseball stars pitch and hit in rare live competition.

In short, this year’s unique situation—with Taiwan inspiring positive headlines; American politicians looking for ways to stand up to China’s bullying; and markets looking for ways to bounce back from Covid-19—is a unique opportunity to focus on why a U.S.-Taiwan trade agreement would be beneficial for the United States.

My main point is that such an agreement makes good sense as a matter of trade and economic policy—as well as China policy and Taiwan policy. There are three key aspects worth emphasizing:

  1. Taiwan’s role in strategic trade: Taiwan hits above its weight in a number of strategically important business lines, in particular semiconductors and other components such as flat panel displays. Taiwan Semiconductor Manufacturing Company (TSMC) is regarded as a pivotal global player in high-end chip making—so much so that the U.S. government worked hard to elicit TSMC’s recent announcement that it will spend $12 billion on a new fabrication plant in Arizona. As the United States and China increasingly “decouple” in high-tech product lines, it makes sense to have Taiwan’s firms tied more closely to the U.S. technology ecosystem, rather than to China. The current unhappy situation of U.S. dependence on China is reflected by the fact that U.S. firms have invested seven times as much in China (and four times as much in Hong Kong) as they have in Taiwan. A bilateral trade agreement will help secure vital supply chains and draw Taiwan’s crucial technology capacities closer to the United States.
  1. Indo-Pacific “economic geopolitics”: A bilateral trade agreement with Taiwan could be negotiated relatively easily, and thus could help to quickly rebuild the notion that the United States is a meaningful player in the Indo-Pacific political economy. The irrelevance of the United States in recent years has been stark and obvious to all concerned—even as the region pressed forward with the 11-nation Trans-Pacific Partnership (TPP) minus the United States, and approached a conclusion to the 15-nation Regional Comprehensive Economic Partnership (RCEP) including China but excluding the United States (a conclusion is in reach later this year). The Trump administration set out to take a bilateral approach to trade policy, but beyond minor deals with South Korea and Japan and an unraveling barter agreement with China, it has achieved little. A comprehensive U.S.-Taiwan deal would be a game changer.
  1. Trade policy agenda-setting: Finally, because Taiwan is an advanced economy that shares many values with the United States, a bilateral agreement with Taiwan could help establish some critical precedents for new trade policies that the United States appears likely to pursue more vigorously in coming years. For example, a U.S.-Taiwan agreement could enshrine important principles on data privacy and cross-border data flows, right on China’s frontier. It could also reinforce the new bipartisan congressional consensus on labor and environment rules that was such an important part of finalizing the United States-Mexico-Canada Agreement (USMCA). It could even become an opportunity to explore the innovative “carbon tariff” idea promoted by a range of big thinkers, including former Republican secretaries of state George Schultz and Jim Baker.

Many of the most relevant commercial considerations for a comprehensive trade deal with Taiwan are firmly in place. Taiwan is the United States’ fourteenth-largest export market for goods and the eighth-largest market for agricultural products. It has strong rule of law and admirable government transparency, and mostly reasonable trade and investment regulations. Taiwan’s average trade-weighted tariff is 2 percentsimilar to the United States—but it has relatively high (9 percent) tariffs on agriculture, meaning that an agreement could spur a sharp increase in U.S. agricultural exports.

For similar commercial reasons, other nations have preceded the United States in going forward with bilateral trade agreements with Taiwan. Taiwan now has eight bilateral trade agreement partners, including fellow Asia-Pacific Economic Cooperation’s (APEC) economies Singapore and New Zealand. Those two nations both have notably strong and amicable ties to China, now including bilateral trade agreements with both sides of the Taiwan Straits. As the above-mentioned letter by conservative lobbyists stated, “nothing about an [agreement] with Taiwan is incompatible with serviceable, productive relations with China.”  

Indeed, the biggest impediment to a U.S.-Taiwan trade agreement over the years has not been commercial considerations, but a lack of political will. Leaders in both Washington and Taipei have worried, unnecessarily, about the impact of such a move on their cooperation with China, and they have also lacked sufficient trust in each other’s level of commitment to the endeavor. This played out for close to two decades via a long drama of low-stakes, chicken-and-egg gamesmanship, always taking place at a junior bureaucratic level, and focused on which side would act first—Taiwan announcing changes in its egregious rules for imports of pork and beef, or the United States committing publicly to talks on a comprehensive agreement. As President Tsai explained to a CSIS delegation to Taipei in January, now is the right time to break this impasse.

Taiwan’s reputation is at an all-time high in Washington, and closing a bilateral trade deal would bring real benefits to both sides. For the United States, the benefits would include a stronger partner in critical strategic trade sectors, a chance to define positive new trade rules in a crucial region, and—perhaps most important—bolstered U.S. leadership in Asia.

Ambassador Kurt Tong is a senior adviser (non-resident) with the Simon Chair in Political Economy at the Center for Strategic and International Studies and a partner at The Asia Group LLC. He was a U.S. diplomat for three decades including service as the ambassador for Asia-Pacific Economic Cooperation (APEC) and consul general in Hong Kong.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

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Kurt Tong
Senior Adviser (Non-resident), Economics Program