Taiwan: Cross-border opportunities amid global change: A tale of two trade agreements, Trump and Taiwan

by White & Case LLP
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Recent international developments could impact Taiwan's global competitiveness while opening opportunities for new trade negotiations in the Asia-Pacific region.

Compared to its neighbors, Taiwan is party to very few trade agreements. This puts Taiwan at risk of an increasing competitive disadvantage in global trade and investment. For this reason, new developments in 2017 with the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP) agreements present some important challenges and opportunities for Taiwan.

What does US withdrawal mean for the TPP and Taiwan?

One of the Trump Administration's first actions earlier this year was to withdraw from the TPP, explaining it will focus instead on bilateral trade agreements, which it believes will yield better terms for the US.

Initially, this appeared to end all prospects for the TPP, which Japan's prime minister said made no sense without the US. However, the remaining 11 parties to the TPP, who spent more than 10 years negotiating the US-led agreement, recently agreed to "assess options" for bringing a "TPP-11" into force without the US, even though the volume of trade among the TPP-11 would be barely a quarter of what it would have been under the original TPP. Japan, in particular, changed course and is leading the effort for a TPP-11 with New Zealand. A key challenge to this effort will be that developing TPP countries like Vietnam and Malaysia, which agreed to concessions in the TPP on the condition that they would obtain improved access to US markets, have demanded renegotiation of the TPP-11 to realign the balance of costs and benefits without the US.

No matter what happens with the TPP itself, some of its achievements are likely to carry over into new US bilateral agreements and possibly other multilateral agreements. For example, TPP-like services and e-commerce chapters may be included in the multilateral Trade in Services Agreement (TiSA) currently under negotiation. And TPP-inspired provisions for trade in goods, services, IP or investment could become part of an upgraded RCEP agreement.

For Taiwan, these new developments are relevant in two key respects.

First, if Japan is successful in its efforts to revive the TPP, a second tranche of countries may have an opportunity to join the TPP—including Taiwan. Joining the TPP would deliver unique benefits for Taiwan, which could attain state-of-the-art market access and investor protections with 10 countries with which it now has no free trade agreement.

Second, current conditions could be right to negotiate a US-Taiwan bilateral free trade agreement, as the US looks for willing partners in the region, thereby opening one of the largest economies to Taiwan exports and facilitating US investment into Taiwan.

US$84.9 billion

Taiwan-US goods and services trade totaled approximately US$84.9 billion in 2016.

Office of the US Trade Representative

How does the RCEP compare to the TPP?

The RCEP is often described, inaccurately, as a China-led agreement competing with the TPP for influence in Asia. In fact, the RCEP is largely an initiative led by the Association of Southeast Asian Nations (ASEAN). It joins together ASEAN members and the six countries with which ASEAN has existing free trade agreements: Australia, New Zealand, Japan, China, India and Korea.

The TPP and the RCEP both strive to establish a harmonized, predictable and preferential set of regional trade rules that provide incentives for businesses to locate supply chains within the covered region. Both aspire to be pathways to an Asia-wide agreement under the auspices of Asia-Pacific Economic Cooperation (APEC) called Free Trade Area of the Asia-Pacific (FTAAP).

Key membership differences between the TPP and the RCEP are that the United States, Canada, Mexico, Peru and Chile were TPP—but not RCEP—parties, while China, India and Korea and most ASEAN countries, including Thailand, Indonesia and the Philippines, are RCEP—but not TPP—parties. In addition, the RCEP is still under negotiation, whereas the TPP has been signed and awaits ratification.

The TPP is viewed as a "high standard," "transformational" agreement with ambitious provisions unlikely to be in the RCEP covering state-owned enterprises (SOEs), the digital economy, intellectual property, investment, regulatory due process, transparency, labor and the environment. Some TPP provisions are aimed at China on the expectation that it would eventually join the TPP (such as disciplines on SOEs and investment restrictions, protection of encryption products, prohibitions on "made in China" performance mandates and forced disclosure of source code, and penalties for trade secret theft and hacking). 

The current target for completing the RCEP is by ASEAN's 50th anniversary in November 2017. That goal now seems unrealistic, because developed countries seeking higher standard RCEP provisions are at odds with developing countries focusing mainly on lower duties. At the same time, countries like India are reluctant to open their markets to imports from China.

These trends were on display at the May 2017 APEC trade ministers meeting in Hanoi as ASEAN countries and China pressed ahead on RCEP, Japan and New Zealand pushed for TPP-11 and called for a "high quality" RCEP, and the US sought only bilateral consultations.

10th

Taiwan was the US' 10th-largest goods-trading partner (US$65.4 billion in total two-way goods traded) in 2016.

Office of the US Trade Representative

How could these recent developments affect Taiwan?

If the RCEP is completed and ratified, businesses from non-RCEP countries like Taiwan (and the US) will likely be at a disadvantage in competing for business within the RCEP region and in competing for supply chain investment opportunities in Asia. While the US will likely ignore the RCEP for domestic political reasons, Taiwan may be prevented from joining the RCEP due to China's policy.

Taiwan's chances of joining the TPP may be better. But if the TPP is not revived, Taiwan could be left outside looking in as the Asia-Pacific region becomes ever more interconnected via preferential trade and investment networks.

Economic forecasts had predicted that non-TPP ASEAN countries would suffer declines in exports, investment and GDP relative to competing regional TPP-party countries. If the RCEP is successfully completed, non-RCEP countries in Asia, including Taiwan, are likely to face a similar competitive disadvantage. For example, Korea provides a pointed contrast to Taiwan. Although both countries share similar export mixes and markets, Korea's export performance significantly outpaced Taiwan's from 2010 to 2016 (5.3 percent vs. 1.4 percent). This is true even though Korea's chaebols remain unreformed, its labor rates are higher than Taiwan's, and its currency is less competitive. The likely explanation is Korea's entry into numerous free trade agreements, as well as its advantage in global brands.

Taiwanese businesses should encourage Taiwan's government to aggressively pursue opportunities to engage in trade negotiations in the Asia-Pacific region, use their business contacts to build bridges to the various RCEP countries and support the FTAAP.

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