Written by Raian Hossain.
Image credit: 07.06 總統偕同副總統出席「美國獨立紀念日酒會」 by 總統府/ Flickr, license: CC BY 2.0.
The question and the future of the self-governed island Republic of China (ROC), often known as Taiwan, has turned into a major topic of global power rivalry between the United States (U.S.) and the People’s Republic of China (PRC). The future of the triangular relations remains blurred due to the PRC’s increased determination to reunify Taiwan while the U.S. increased its presence in the Indo-Pacific region. People’s Liberation Army’s increased military presence across the unofficial median line of the Taiwan Strait and frequent crossing of Taiwan’s so-called air defence identification zone (ADIZ) reflects Beijing’s zero-tolerance policy towards the growing US-Taiwan ties. Taiwan has severe military security concerns, and the island has over-trade and investment dependency towards the PRC, which raises the question of economic security. As of 2022, the PRC accounted for 25% of Taiwan’s exports and 20% of its imports, making Beijing still the largest trading partner of Taipei. However, Taiwan made significant progress in growing trade by 25% with the U.S. in 2021 and expanded its trade volume with New South Bound countries under President Tsai Ing-wen. After a year of negotiations aimed at diversifying trade and commerce, the U.S. and Taiwan signed the first part of the US-Taiwan Initiative on 21st Century Trade. Meanwhile, the second round of negotiations has already started.
U.S.- Taiwan Trade Pact- A Brief Overview
The first agreement under the Taiwan-US Initiative on 21st-Century trade was signed at the American Institute in Taiwan (AIT) headquarters in Washington between the democratic-ruled island and the superpower ally. The agreement aims to strengthen the economic and trading relations between Taipei and Washington. The initial (first) agreement of the initiative covered issues related to customs administration and border procedures, good regulatory practices such as transparency, anticorruption, small and medium-sized businesses, services, and domestic regulations. The first agreement provides the foundation for other areas of trade and commerce, labour, environmental issues and concerns, digital trade, state-owned enterprise, non-market practices, and agriculture. According to President Tsai, the initiative is one of the most comprehensive trade agreements signed between the two sides (U.S. and Taiwan) since 1979 and likely creates opportunities with other European countries. Taiwan and the U.S. have already initiated the second round of negotiations on the initiative. During the second phase of negotiations, both parties have “exchanged views on proposed texts covering agriculture, labour, and the environment.” According to Washinton, these trade agreements and negotiations between AIT and the Taipei Economic and Cultural Representative Office in the United States are guided by the U.S. one-China policy, Taiwan’s Relations Act, the three U.S.-China Joint Communiques, and the Six Assurances.
Why More of Politics than Economics
The US-Taiwan Initiative on 21st Century Trade is undoubtedly a significant milestone in their economic relations, but it has more to do with politics than economics. In the past, Taiwan’s excessive agricultural products would need to be exported to the PRC. However, with Beijing’s politically motivated trade barriers, this has become a major concern for Taipei. Trade agreements such as the ‘US-Taiwan Initiative on 21st Century Trade’ help Taiwan to diversify the island’s trading pattern and assist in balancing its trade with the PRC. Ultimately, this would rescue Taiwan from an economic hostage position.
The trade agreement sends a strong political message and signal towards Beijing about Washington’s strong commitment and deepening relations with Taipei. It reflects a strong democratic partnership between the two likely-minded partners, while the PRC desires to isolate the island from the rest of the world. The PRC has strongly opposed such an official trade agreement between the U.S. and Taiwan, saying it violated the one-China policy. China’s Foreign Ministry referred to the trade agreement as a “wrong message to separatist forces seeking Taiwan’s independence.” The continuation of the second negotiation round sends a message towards Beijing that its threatening military drills and warnings are unlikely to stop the growing US-Taiwan ties. Besides strengthening economic ties, the U.S. continues to assist in security partnerships, like modernising Taiwan’s military with US$4.5 billion under the Taiwan Policy Act over the next four years.
The trade pact is also likely to assist the island in diplomatic isolation. Since 2016, Taiwan has lost its nine diplomatic allies and has only formal diplomatic ties with thirteen. Also, the trade agreement might open the door for similar trade pacts and stronger political ties with other U.S. allies in the Indo-Pacific region and beyond. According to Den Chen-Chung, Minister without Portfolio at Executive Yuan, “If we can have more international connections and attract more foreign investment, Taiwan will become stronger and much safer.” But the real question remains to what extent other states are eager to act similarly to the U.S., given Beijing’s resistance. Given the current global political climax, there are obvious political limitations for the developing world and even Western countries to consider similar trade agreements with Taiwan. However, the U.S.- Taiwan trade agreement is an opportunity for Taiwan to showcase its firm commitment to the international trading system and governance to win hearts and minds regionally and globally. Such trade agreements allow Taiwan to reroute its trading pattern in the short and long run. However, more importantly, it can showcase its political struggle and economic importance globally.
Another political strategic benefit associated with the trade agreement with the U.S. is its impact on Taiwan’s application to be part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). CPTPP is a free trade agreement that came into force in 2018. This trade agreement with the U.S. can provide additional consideration for Taiwan’s application. According to Den Chen-Chung, Minister without Portfolio at Executive Yuan, “The message we pass to [these countries] is we want to follow the rule, and our track record is very clear. Please give us a chance.” The US-Taiwan trade agreement can favour Taiwan’s application to CPTPP, bringing substantial economic benefits and a step toward the political objective of reducing over-trade and investment dependency towards the PRC. However, Taiwan is unlikely to be admitted so easily as the PRC will likely use its influence to block Taipei’s inclusion in CPTPP. Also, it is unlikely Taiwan would find the U.S. pressing for its inclusion in CPTPP due to complex geopolitical realities, just like Taipei was left out of the Washinton-led Indo-Pacific Economic Framework (IPEF). In the US-Taiwan trade agreement, usual components of Free Trade Agreements (FTA), such as tariff reduction and service market access, are not present in the US-Taiwan trade agreements. According to Professor Wu Dachrahn from Taiwan’s National Central University, as the agreement is not an FTA in pattern, “to be frank, the trade agreement signed between the U.S. and Taiwan does not appear particularly constructive.” Therefore, the US-Taiwan Initiative on 21st-Century Trade is more political than economic.
President Tsai’s Dual Smart Diplomacy
U.S.- Taiwan trade relations significantly improved, particularly over the last five years. Figures show that Taiwan’s U.S. exports grew by 69% between 2018 and 2021. Also, in 2021, Taiwan firms received $200.1 billion from exporting to the U.S. With improved political ties, it also helped to grow US-Taiwan trade relations. Initiatives such as the US-Taiwan Initiative on 21st Century Trade would further expand the political and economic relations between the two democratic allies. While continuing to improve its relations with the U.S., President Tsai’s signature foreign policy initiative, New South Bound Policy, has also added dividends politically and economically. The first five years (2016-2020) of the NSP helped to grow Taiwan trade by 12.9 per cent with New South Bound Countries. Taiwan’s innovative initiative (NSP) has led to three new updated bilateral investment agreements with India, the Philippines and Vietnam. Taipei is also in talks with New Delhi to sign a Free Trade Agreement. According to Professor Harsh Pant and Shashank Mattoo, “Realities in the Indo-Pacific region have changed, and it is time for New Delhi to deepen its political ties with Taipei. Also, there has been unprecedented momentum in India-Taiwan ties recently. Besides upgrading economic relations, there has been increased education, healthcare, and cultural collaboration with New Southbound countries.
President Tsai’s dual smart diplomacy of improving US-Taiwan relations and ties with some New South Bound countries are connected and linked as they are both primarily motivated to improve Taiwan’s political status globally while redirecting its trade and commerce. The trade pact with the U.S. and Taiwan definitely provides certain confidence to Taipei in further enhancing their trade relations with New South Bound and like-minded Western countries. The smart dual diplomacy pattern reflects how improving trade and economic relations are crucial and a steppingstone in improving ties with the superpower ally, west or New South Bound countries. The ongoing Smart dual diplomacy is undoubtedly helping in diversifying Taiwan’s trade and commerce but, more importantly, having positive implications in improving the islands’ international political status.
The US-Taiwan Initiative on 21st-Century Trade initiative is a milestone in US-Taiwan relations with certain economic and political benefits. With growing US-Taiwan ties, it is expected the two democratic partners are likely to face greater resistance from Beijing based on the One China principle. Also, the PRC can pressurise other New Southbound countries to alter their trade and commerce with Taiwan to isolate the island further. For Taiwan, the aim and motivation should be to convert such trade pact with the U.S. and bilateral investment agreements with New Southbound countries into an FTA to ensure economic safety and security.
Raian Hossain is a Doctoral Researcher at the School of Politics and International Relations of the University of Nottingham (U.K.). Mr Hossain is also a lecturer (on study leave) at the Department of Global Studies and Governance, Independent University, Bangladesh. His research interests include Indo-Pacific Affairs, South and East Asia geopolitics, Small and Middle Power Studies, China-US and Taiwan, and Bangladesh’s Politics and Foreign Policy.
This article was published as part of a special issue on Taiwan-US Trade Agreement.
Taiwan Insight 