The relatively open cross-border flow of goods, services, capital, people and data that characterized the past four decades of globalization is giving way to a new era of "clubs" and "fences." Clubs form when countries agree to harmonize their regulations, lower barriers and facilitate preferential trade among club members. Fences are regulatory barriers that slow or block business activity across borders.

Taiwanese companies are in a challenging spot in this evolving and volatile landscape, as they must balance interests in important locations in Asia-Pacific and the West, which sometimes may be difficult to reconcile. The following discusses clubs and fences in the context of trade and sanctions.

International trade

From one club to many: The international trading system has long resembled a club. The World Trade Organization (WTO) is the preeminent one, and its 164 members, including Taiwan, had to commit to free trade principles as a condition of membership. However, the WTO as a trade club today risks losing relevance as progress on significant new initiatives has slowed considerably.

Faced with a WTO impasse on further trade liberalization, a growing number of countries have joined regional trade agreements, which more than tripled in number from 97 in 2000 to 360 in 2023. These regional clubs have grown in scope and ambition, going beyond preferential tariff commitments to achieve broader regulatory harmonization among members. As an illustration, according to the World Bank, the average trade agreement in the 1950s covered eight policy areas, whereas more recent agreements have covered an average of 17. Recent examples of this trend are the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); notably, Taiwan is not presently a member of either.

Nonetheless, to remain competitive, Taiwanese companies should be familiar with the benefits, preferences and requirements of these clubs because Taiwanese entities play an important role in regional supply chains as owners and managers of production facilities throughout Asia-Pacific.

Fences and barriers: Countries also are testing the limits of traditional trade rules through expanded unilateral trade actions and more vigorous industrial policy and subsidies. Increasing unilateral self-help measures serve as "fences" in the international trading system, restricting the movement of goods to and from target states. The most salient example is the "tariff wall" against Chinese imports erected by President Trump and maintained by President Biden, and the retaliatory tariffs imposed by China. Taiwanese companies must be nimble to avoid being caught in the middle. Given these fences, and the current trend toward "de-risking" supply chains, exports of goods to the US from ASEAN and other third countries have been rising. In reaction, the US has dramatically increased investigations into whether such third-country exports are "circumventing" or "evading" the tariff wall on Chinese goods, another risk factor for Taiwanese companies.

The WTO adjudication system, which once acted as a brake on unilateral barriers and subsidies, has largely collapsed as a meaningful discipline. Since its inception in 1994, the WTO has acted as a forum for resolving most international trade disputes, ensuring the uniform application of trade law, and offering political and legal mechanisms to maximize compliance. In recent years, however, the WTO has gradually been blocked from serving in this role due to disagreements among key stakeholders. Indeed, at present there is not a single Appellate Body adjudicator, and the Body has stopped functioning altogether.

Sanctions: From the margins to the center of the global economy

Sanctions historically have been limited in number and deployed by powerful nations against smaller economies. While the number of sanctions regimes in place in any given year will vary, that number nearly doubled between 2000 and its 2014 peak of 558 distinct regimes. Sanctions against Russia following its 2022 invasion of Ukraine served as a new chapter in the role and scope of sanctions.

The Russia sanctions are unprecedented in three ways. First, a substantial sanctions package has targeted a major world economy. Second, a broad coalition of countries has enforced the sanctions, led by the G7. And third, while the Russia sanctions draw on a range of established and tested economic mechanisms and legal authorities, they are far broader in scope and include several novel attempts at economic isolation, including sanctions targeting particular services or activities such as dealings in debt or equity.

Russia has responded with countermeasures generally aimed at blocking or dulling the impact of foreign countries’ sanctions. These countermeasures often leave foreign companies doing business in Russia or seeking to exit Russia in a difficult position, where compliance with foreign sanctions may be incompatible with Russia’s countermeasures or vice versa.

Only extraordinary circumstances are likely to generate the political consensus needed for the imposition of such far-reaching sanctions imposed by a broad coalition of governments against a major economy. When they do, however, the resulting fences can have significant economic impact on sanctioned states, the states imposing sanctions, as well as businesses and the global economy.

Export controls

Export controls on the transfer of goods, services and technologies may be viewed as a corollary of multilateral sanctions regimes. Export controls are country-specific and can be imposed unilaterally or in coordination with other exporting nations, such as via the Wassenaar Arrangement. They can be imposed for foreign policy, national security and anti-proliferation reasons. Penalties for violations can be severe.

The Trump and Biden administrations significantly increased restrictions on the transfer of advanced technologies to China, with the highest controls on certain designated end users such as those placed on the "Entity List." The technologies covered by these more recent restrictions generally are not munitions or dedicated defense items, but rather are so-called "dual-use" technologies—commercial items deemed to have a potential national security-related use or sensitivity. The US has sought to erect high fences around advanced technologies like AI, semiconductors, quantum computing and robotics, and has sought buy-in from other countries that are important exporters of such technologies. Recent measures have significantly expanded the scope of semiconductor export controls, causing substantial ripple effects throughout the electronics supply chain.

The controls are enforced extensively outside the US. They apply not only to direct exports, but also to re-exports, downstream sales and transfer in-country to foreign nationals. They apply not only to goods made in the US, but also to goods made outside the US if they are deemed to be the direct product of certain US technology or contain specified thresholds of controlled US components.

Taiwanese companies are world leaders in the development, production and export of advanced technologies. As such, it is imperative for them to stay abreast of evolving export compliance issues.

In sum, the trade and sanctions landscape for Taiwanese companies is changing in important ways. As technology leaders and key players in global supply chains, Taiwanese companies should position themselves to take competitive advantage of regional trade "clubs," and to navigate applicable tariff, sanctions and export control "fences," in order to thrive in the years to come.