How Vital is the CPTPP Membership to Taiwan?

Written by Yun-Chieh Wang.

Image credit: 01.09 總統接見「加拿大眾議院外交暨國際發展委員會主席諾特訪團」by 總統府/ Flickr, License: CC BY 2.0.

On September 22, 2021, six days after the Chinese government submitted its application to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the Taiwanese government handed in its application to the depository in New Zealand. According to World Trade Organisation (WTO) data, Taiwan ranks as the top 15 goods export and the top 18 goods import economy in 2020. However, Taiwan has only signed a few trade agreements with its trading partners and cannot join critical regional trade agreements such as Regional Comprehensive Economic Partnership (RCEP). Therefore, participating in CPTPP is expected to promote Taiwan’s trade ties with the trade partners effectively.

The most direct benefit of Taiwan’s participation in CPTPP is to obtain the tariff preference offered by countries without trade agreements. According to “Smith’s certitude,” a nation would gain when the trading partners eliminate the duties for importing products. Thus, with lower export duties, it is undoubted that Taiwan can embrace positive economic growth with membership. Currently, among the CPTPP members, Taiwan currently has trade agreements with Singapore and New Zealand. Namely, joining CPTPP will tighten the trade relationship with countries such as Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, Peru, and Vietnam. Several of the listed countries are Taiwan’s vital trading partners at current. The table below compares the applied tariff rate for Most-favoured Nation (MFN) and CPTPP. It is clear that Taiwan would enjoy a relatively lower tariff rate after becoming an official CPTPP member.

The Comparison of Taiwan’s Top Twenty Products

To understand how Taiwanese export products can benefit from joining CPTPP, we need to examine the tariff differences for Taiwan’s top 20 export products in the five countries: Australia, Canada, Japan, New Zealand, and Vietnam. The reason for selecting the five countries is due to the constraint of data availability in the WTO database. The table below summarises how the applied tariff rates for the top 20 export products will change after Taiwan becomes a CPTPP member. 

Firstly, for the Taiwanese top 20 export products to Australia, the major product—a type of petroleum oil, will not be affected since it has already faced a zero-tariff rate. However, the second largest and other 13 products will benefit from the tariff rate reduction.

Second, among the top 20 export products to Canada, the bicycle will have the most significant reduction with a range of 13%. Other products such as plastic products, tires, machinery, and vehicle parts will also enjoy a zero tariff after participating in CPTPP.

Third, Japan is Taiwan’s most vital trading partner among CPTPP members, accounting for 6.79% of the total Taiwanese export in 2020. The majority of Taiwan’s export to Japan, approximately 40%, focused on electronic integrated circuits (HS 85.32); nonetheless, those products have already enjoyed zero tariffs under MFN rates. In addition to electronic integrated circuits, certain chemical and light industry products will benefit from the tariff reduction after joining CPTPP. For instance, nickel sulphates and certain types of plastic products will enjoy zero tariffs when exporting the products to Japan.

Fourth, Taiwan and New Zealand signed ANZTEC in 2013; therefore, the participation of CPTPP will not significantly change the applied tariff rate. Lastly, for Taiwanese exports to Vietnam, the textile industries will benefit the most, with the tariff rate dropping sharply from 12% to 0%. Moreover, the data has shown that Taiwan will benefit the most from its trade relation with Vietnam after joining CPTPP.

Reasons Other Than Tariff Reduction for Taiwan to Join CPTPP

Apart from more open market access for goods, another benefit for Taiwan of joining CPTPP is to obtain more transparent and stable services and investment environment. The CPTPP members agreed on applying a “negative list” when regulating the openness of the services and investment commitments. A positive list, used under the General Agreement on Trade in Services (GATS) system, means that the country only opens the sectors mentioned in the agreements; on the other hand, imposing a negative list means that the country opens its services sector except the ones listed in the agreements. Since the Taiwanese government has emphasised the development of its high-technology sector, there may be some unforeseeable services growing at the moment. Thus, a negative listing commitment can ensure market openness, allowing Taiwanese businesses to provide their services without unnecessary trade costs.

Moreover, one important reason for Taiwan to join CPTPP is the so-called Haberler’s spillover. It indicates that when two or more countries are signing a preferential trade agreement, countries (the third countries) excluded must experience a loss in trade. According to UNCTAD’s estimation, Taiwan suffers a 3 billion (US dollars) loss from excluding RCEP. Because Taiwan has not signed many trade pacts with its trading partners, and it also seems unlikely for Taiwan to participate in RCEP shortly, this situation has further emphasised the importance of the participation of CPTPP to the Taiwanese government.

Another benefit that the CPTPP membership will bring is the diversification of trading partners. If the country overly depends on one country for trade, an unforeseeable measure from the trade partners might disrupt the production chain and cause unnecessary loss to domestic sectors. For instance, in 2021, China suddenly banned the import of Taiwanese pineapple due to the detection of “pests”. Regardless of the political motivation behind Chinese action, the unexpected trade disruption has caused chaos in the Taiwanese agricultural market. Moreover, China has imposed the same measures on the wax apple and sugar apple export from Taiwan after a few months, which lead to a similar disruption. Since CPTPP effectively reduces the trade barriers among member countries, it is expected that Taiwan will diversify its market and enhance its trade relationship with several partners after gaining CPTPP membership. Moreover, it will ultimately reduce trade loss if significant trade partners impose similar restrictions without advance notification.

Conclusion

CPTPP means more than a mega FTA to Taiwan. The decreased tariff rates have shown that Taiwanese export sectors will ideally experience an increase in production. Besides, the improving conditions on non-tariff measures will also facilitate the trade between Taiwan and the existing members towards a more inclusive and freer trade. While several Taiwanese industries will benefit from the participation of CPTPP, it is not to say that the trade pact would not harm the country. However, it is the policymaker’s responsibility to assist and reimburse the sectors suffering a negative impact. Thus, a financial aid program and a comprehensive project will be essential to ensure that no one is worse off in the trade deal.

Haberler’s spillover pointed out that an excluded country will face a potential loss by a newly signed agreement. Thus, the more agreements Taiwan could not join, the greater the loss Taiwan would face since the trading partners would instead choose the destination with lower trade costs and less friction. In addition, to diversify its trading partners, it is urgently vital for Taiwan to strengthen its trade ties with other countries to avoid the sudden impact caused solely by one country. Thus, though CPTPP is not a panacea to cure all the trade problems, it is undoubtedly an opportunity for Taiwan to elevate its trading capacity and contribute to regional economic integration.

Yun-Chieh Wang is a Master of International Economics candidate at Geneva Graduate Institute. She obtained her bachelor’s degree in Agricultural Economics from National Taiwan University, where she discovered her passion for international trade. To better understand the interaction between trade and domestic policy, she decided to pursue her first master’s degree in Public Policy at the University of Tokyo. After graduation, she worked at Chung-Hua Institution for Economic Research (CIER) as a research associate, focusing on trade analysis. Her job at CIER broadened her knowledge of global trade issues, motivating her to pursue further studies in Economics in Geneva.  

This article was published as part of a special issue on “Comprehensive and Progressive Agreement for Trans-Pacific Partnership.”

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s