Written by Roy Lee.
Image credit: 08.28 總統針對國際經貿情勢發表談話 by 總統府/ Flickr, license: CC BY 2.0.
Taiwan has been preparing for CPTPP accession for the last eight years. The economic importance of CPTPP for Taiwan is critical, as it is perhaps one of the limited options available for Taiwan to avoid being marginalised from the Asia Pacific regional integration process. This article starts with a review of key policy rationales for Taiwan’s CPTPP accession, then analyses major challenges and impediments, and offers thoughts on future prospects.
The Economic Importance of CPTPP
Taiwan has a close trade relationship with CPTPP Members. On average, around 21% of Taiwan’s exports went to the 11 CPTPP members. More importantly, CPTPP is a key source of imports, accounting for 29% of Taiwan’s total imports. In terms of investment, Taiwan’s outbound investment growth in the CPTPP area has been growing steadily, from 24 % of total outbound investment in 2017 to 31% in 2019. Likewise, investment from CPTPP members in Taiwan is rising from 15.4% of total inbound investment in 2017 to 20.6% in 2019.
The importance of CPTPP participation goes beyond the economic closeness. While most trading countries in the Asia Pacific region already have multi-layered preferential trade and investment relations between them through bilateral and regional agreements outside CPTPP, Taiwan has been excluded from meaningful participation in most REI activities in the last two decades. The seriousness can be demonstrated by comparing the Free Trade Agreement (FTA) coverage rate––the indicator that measures the proportion of exports that enjoy preferential tariff treatment under a country’s FTA to total exports––between Taiwan and Singapore, South Korea, Japan, and China in 2020. Amongst all five economies, Taiwan’s FTA coverage stands at only 12.08%. In addition, while most countries in this group have multiple free trade relationships, Taiwan has only 1 FTA with Singapore.
The impact of REI non-participation is obvious. On average, over 41% of Taiwan’s export still faces a simple average tariff rate of 7.05% among the 11 CPTPP countries, most of which are non-hi-tech. Sectors facing ultra-high tariffs include plastics, textile, steel, metal products, and proceed foods (Table 2). In addition, one consequence of REI exclusion is the sustained pressure on offshore production outside Taiwan; just 46% of Taiwanese firms already delivered their export orders from Taiwan in 2020.
CPTPP as an Impetus for Regulatory Reform
One key effort since the inception stage of Taiwan’s preparation for TPP/CPTPP accession is the mandate for relevant government agencies in Taiwan to undertake reviews of regulatory consistencies and divergencies against CPTPP obligations. Referred to as ‘regulatory gap analysis,” it was one of the key elements of the “TPP Promotion Strategies Action Plan” published in late 2014. The objective is to identify discrepancies between Taiwan’s current domestic regulations and CPTPP obligations. The outcome of the exercise is an ambitious legislative package of twelve laws and by-laws that require amendments to eliminate inconsistency. All major amendments in light of the CPTPP legal gap preparation have completed the legislative process in 2022.
Further, CPTPP offers the external impetus for a much broader scope of regulatory reform agenda, especially regarding an evidence-based administrative decision-making process. One direct example is the reform of food safety regulatory practices. CPTPP’s chapter on Sanitary and Phytosanitary Measures (SPS; Chapter 7) builds upon and reinforces the WTO SPS agreement. The main elements of the SPS chapter include, among other things, adhering to international standards, risk analysis should be carried out on a science-based approach and shall consider least–restrictive alternatives. These disciplines underpinned two critical reform developments in Taiwan: the veto of a recent referendum to sustain a zero-residual restriction on ractopamine in imported pork (the ractopamine pork motion) in December 2021 and the removal of the import ban on certain Japanese agricultural products in March 2022. Both cases demonstrate Taiwan’s consensus on the importance of adhering to and implementing international trade disciplines, including regulations based on science-based risk assessment.
Opportunities and Challenges
- The Opportunities
China’s strong opposition in most circumstances is the main reason that prevents Taiwan from REI. China has adopted a “REI through China” approaches under which Cross-Strait integration and China’s sponsorship are the pre-conditions.These pre-conditions are increasingly “mission impossible.” First, economic diversification rather than deepening integration with China is now the mainstream policy consideration. Second, the sentiments and consensus in Taiwan suggest that Taiwan’s REI participation must be “linked with” or sponsored by China politically impossible. On the other side, it seems unlikely for China to also make any concessions.
CPTPP membership appears to be the only viable option available. Article 5 of CPTPP states that after the date of entry into force of CPTPP, any state or “separate customs territory” may accede to this Agreement, subject to such terms and conditions as may be agreed between the parties and that state or separate customs territory. There is no legal uncertainty concerning the qualification of Taiwan to apply for CPTPP membership. Furthermore, CPTPP is the only regional undertaking that some current members have openly welcomed Taiwan to apply. In addition to Japan’s official welcome statement made by its foreign minister, the Joint Standing Committee on Foreign Affairs, Defence and Trade of the Australian parliament also recommends the Australian government to “encourage and facilitate the accession of Taiwan to the CPTPP” in 2022. Finally, CPTPP is also the only regional undertaking in which China is not yet a former member or signatory. With the collective decision-making process of the CPTPP, it would potentially lower the political concerns and offer comfort room for CPTPP members against China’s opposition.
2. The China Factor
Despite the welcoming nature of the CPTPP for Taiwan, the China factor as a roadblock to Taiwan’s CPTPP membership still can emerge from at least the following two scenarios:
- Scenario 1: With the growing economic (the largest trading partner for most CPTPP members except Canada and Mexico) and political power, China expresses its outright opposition to accepting Taiwan’s application at the outset. Technically. China could achieve this objective by convincing some current members to disagree with forming a working group for Taiwan or to decline Taiwan’s request for bilateral consultation.
- Scenario 2: China argues that the CPTPP should follow the “China-first” approach. The working group to process Taiwan’s application must be deferred until consensus is reached to create a working group for China.
Both scenarios could undermine Taiwan’s admission process. Even under the accommodating nature of scenario two, it could still seriously delay Taiwan’s CPTPP membership. It is because while CPTPP members such as Singapore has expressed its support for China, Japan and other CPTPP members appear to be sceptical about China’s application on both the strategic consequences and China’s readiness as well as willingness to meet the CPTPP standards. There are also ongoing trade and maritime territorial disputes between China, Australia, and Vietnam. This suggests that it could be a lengthy process for China to fully sort out concerns and reservations even at the application phase.
For Taiwan, there is a possible “safety in numbers” scenario, in which Taiwan could team up with other applications to avoid being trapped by China’s complexity. Unfortunately, as suggested by Singapore Prime Minister Lee Hsien Loong, the actual situation is that delay is perhaps unavoidable for Taiwan. In a recent media interview, Lee indicates that Taiwan accession “… the consultation, will take a while. Individual countries will have different views.” However, it is not clear the exact content of the “different view” expressed by CPTPP members on Taiwan. Yet, it is plausible that it is intertwined with issues regarding China’s position and its own admission process.
3. Challenges Concerning Readiness
For domestic liberalisation readiness, the most challenging issue will be removing tariff protection for the agricultural sector. As summarised in Table 7 below, the average trade-weighted tariff rate for manufactured goods entering Taiwan is only 1.49%; the average tariff for agricultural imports is 9.44%. As a rule of thumb, CPTPP aims to eliminate tariffs for all members with a very limited list of exceptions. On average, zero-tariff coverages are 100% and 96.2% for manufactured and agricultural goods respectively, for current CPTPP members. The zero-tariff requirement indicates that for Taiwan’s agricultural sector, most of the 9.44% tariffs must be phased out under CPTPP.
Taiwan’s Council of Agriculture identifies a list of 20 “sensitive agricultural products,” including rice, peanuts, red beans, garlic, pineapples, mangoes, bananas, chicken and pork belly, that are currently protected not only high tariff rates but also tariff-rate quotas and special safeguard measures to be most vulnerable. In preparation, the Council of Agriculture vowed to accelerate the reform process, elevate the support level, and pursue a negotiation strategy of maintaining the maximum level of protection. The only sector identified as sensitive for the manufacturing sector is the “whole-car” production sub-sector under the automobile industry, which is currently protected by a 17.5% tariff against imported cars.
The strategic value of CPTPP for Taiwan is evident. On the other hand, China’s objection as part of its strategy to isolate Taiwan from the regional integration process seems to be perpetual, regardless of the Cross-Strait relationship. Therefore, the future of Taiwan’s CPTPP membership depends critically on the following two factors. First is the ability to lock in support from key CPTPP members such as Japan and Australia; The recent call for collective action against China’s economic coercions voiced by Canada, Australia and Japan potentially provides additional impetus to achieve this. Second is the demonstration of Taiwan’s CPTPP readiness, such that negotiation with Taiwan is considered low-hanging fruit. Finally, ensuring current members that Taiwan’s accession is purely economically motivated to dilute geopolitical sensitivity is equally crucial.
Roy LEE is currently the senior deputy executive director of the Taiwan WTO and RTA Centre, CIER. He also serves as a commissioner of Taiwan’s International Trade Commission, MOEA, and international trading affairs committee member of the Chinese (Taiwan) National Association of Industries.
This article was published as part of a special issue on “Comprehensive and Progressive Agreement for Trans-Pacific Partnership.”