TAIWAN – TPP OR NOT TPP?

Written by Michael Reilly.

Image credit: Container City by GPA Photo Archive/Flickr, license CC BY-NC 2.0

Not since the end of the 2nd World War has the international trading environment been shrouded in so much uncertainty. Four years ago, the future looked clear. In October 2015, the USA and eleven other countries agreed on what would have been the world’s largest free trade agreement, the Trans-Pacific Partnership (TPP), covering 40% of the global economy. The USA and the EU were also talking about a similar agreement, the Transatlantic Trade and Investment Partnership (TTIP). Then came the Brexit referendum and Donald Trump’s election as president of the USA. One of Trump’s first acts after inauguration was to withdraw the USA from the TPP. TTIP negotiations with the EU have not been held since 2016 and the EU has now concluded that the proposal is ‘obsolete and no longer relevant.’

The Trump administration has also engaged in a series of trade disputes with other countries, most notably with China. Taiwan, unlike other American allies, has yet to be directly threatened by the USA over trade policies. However, the impact of these trade disputes on Taiwan has nonetheless been considerable. Taiwan’s most important export partners are China and the USA, and with an export-GDP ratio of 64% making it possibly the most trade-dependent country on earth, Taiwan is susceptible to the effects of the USA-China trade dispute.

Taiwanese owned firms and subsidiaries are responsible for up to 20% of China’s exports to the EU, and probably a similar proportion to the USA. Taiwan is also the second largest source of FDI for China. Both exports and investment are heavily concentrated in the ICT sector, which accounts for over 40% of all Taiwan’s exports and more than 60% of those to China. The bulk of this is in components, or intermediate goods such as memory chips or semi-conductors, rather than fully finished products. Trade in intermediate goods comprises 64% of Taiwan’s total trade with North America and 73% of that with the rest of Asia. This is much higher than for comparable countries: for Japan, Korea and the United Kingdom for example, intermediate goods comprise between 19% and 23% of total exports and imports.

This becomes especially relevant in considering the US-China trade dispute, for China’s primary role in much of the ICT trade is as the final assembly point of intermediate goods from Taiwan, Japan, Korea, South East Asia and elsewhere, including the USA. The proportion of value added in China is usually small: barely 3.5% of the final selling price in the case of mobile phones. In the words of the World Trade Organisation: The statistical bias created by attributing the full commercial value to the last country of origin can pervert the political debate on the origin of the imbalances and lead to misguided, and hence counter-productive, decisions.

Vietnam’s exports show this well. While the USA-China trade dispute is having a negative impact on overall growth in the region and on global trade generally, Vietnam’s exports to the USA jumped 33% in the first half of 2019 as suppliers sought to move production away from China to avoid the increase in tariffs. In the same period, Chinese exports to the USA fell 12%. Asian Development Bank analysis suggests that the more serious the dispute, the greater the boost to Vietnamese growth as it benefits from trade diversion. It is not clear that this is what President Trump expected when he said, ‘trade wars are easy to win.’

Policy makers in Taiwan, on the other hand, seem well aware of the implications, given the importance of Taiwan’s bilateral trade and wider relationship with the USA. Like the KMT administration before it, the current government made joining the TPP a key trade objective. Although the agreement faced collapse after the USA withdrew, in a rare and intriguing example of Japanese leadership, Prime Minister Shinzo Abe successfully resurrected the agreement and re-branded it as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) – in effect a TPP minus the USA. It entered into force in December 2018. Although only two of its eleven signatories – Canada and Japan – are in the G7, its members still represent 13.4% of world Gross Domestic Product (GDP), making it the third largest global trade agreement after the EU-Japan and USA-Canada-Mexico Agreements. Even without the USA, CPTPP members led by Japan account for over 25% of Taiwan’s total trade, making membership highly desirable for Taipei.

Given that until quite recently Japan appeared lukewarm about the TPP as originally envisaged, Abe’s new enthusiasm deserves scrutiny. It may simply reflect Japan’s historic preference for multilateral trade liberalisation through the World Trade Organisation (WTO) rather than bilateral deals. With further progress on multilateral trade agreements blocked for some years now, the CPTPP is the next best thing. It may also be motivated by a desire to protect the multilateral trading system in the face of a protectionist American president.

But it is also pertinent to ask whether the proposal is motivated by geo-strategic considerations, especially given the poor state of Japan’s relations with its two key neighbours, China and Korea. Since the agreement is primarily trade related, it might actually make membership for Taiwan easier to achieve. If membership was to be decided purely on objective criteria, then Taiwan would have to commit to market opening measures and structural reforms that it has to date been unwilling to consider. The majority of CPTPP members are democracies sharing common values, while the three largest economies within it – Japan, Canada, Australia – all face issues in their bilateral relations with China. These countries may be more sympathetic to Taiwan’s situation and willing to be flexible on some of the accession criteria. But as Abe has also suggested that the EU might also align itself with the CPTPP, there is the possibility of a huge new free trade agreement embracing most of the developed world, but including neither China nor the USA. A few years ago, the very idea would have been unthinkable. It may yet come to nothing; but if such an agreement does make progress, it will have major implications for Taiwan and its current trade links and security relationships.

Michael Reilly is a Non-resident Senior Fellow in the Taiwan Studies Programme at the University of Nottingham. His research interest includes the EU’s relations with Taiwan, specifically prospects and opportunities for developing these against the continuing growth of China. His latest book, The Implications of Brexit for East Asia, co-edited with David W. F. Huang, was published in summer 2018

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