The U.S. Should Offer Taiwan a Free-Trade Agreement

The spread of the COVID-19 virus has dominated Western relations with China in recent weeks. The epidemic appears to be ebbing in the People’s Republic of China, though the costly social and economic impacts will linger.

A more serious source of conflict between the U.S. and the PRC is about to move to the fore: Taiwan. After the devastating defeat of the traditional ruling Kuomintang in the recent presidential election, the party chose a new chairman, Johnny Chiang, who dropped the KMT’s support for the “1992 consensus” that both Beijing and Taipei belonged to “one country.” He called on China to accept the island’s separate political identity. Beijing is more likely to increase its pressure on Taiwan.

At the same time, the U.S. risks becoming ever more entangled in the controversy, with congressional passage of the Taiwan Allies International Protection and Enhancement Initiative (TAIPEI) Act. The legislation urges the president to support Taipei with arms transfers and official visits and to consult with Congress on strengthening bilateral economic ties. The bill also directs the administration to back Taiwan’s participation in international organizations and to encourage other countries [[Correct? Or do you mean U.S. states?]] to enhance their ties with what only 14 countries (plus the Vatican) now recognize as the Republic of China (ROC). [right, other countries]

Relations between the America and China, the world’s two most important countries, are going badly. One of the greatest challenges, almost certainly more dangerous than the issue of trade, that has dominated President Trump’s approach to the PRC is the status of Taiwan. Washington should be wary of adding new political or military commitments to Taiwan. Instead, the U.S. should simultaneously advance economic and political objectives by negotiating a free-trade agreement (FTA) with Taipei.

Taiwan was taken as a spoil of war by Japan in 1895. It was returned to China only after Tokyo’s defeat in 1945. The island, then known as Formosa, became the last redoubt for ROC president Chiang Kai-shek when he retreated from the mainland after the triumph of Mao Zedong and the Chinese Communist Party in 1949.

Throughout the Cold War, the PRC and the ROC each claimed to be the only legitimate government of China. Mao’s cadres had the better practical case, since they controlled the mainland behemoth. Chiang had the stronger international backing, since the U.S. was in his corner, along with many of America’s allies. The ROC also held the United Nations membership and the Security Council seat.

As the Cold War proceeded, however, Taipei found that it was disposable. In 1972, President Nixon famously flew to Beijing and met Mao. Relations warmed as Washington allowed the PRC to supplant Taiwan at the U.N. President Carter completed the process, officially recognizing Communist China as the one legitimate Chinese government, on January 1, 1979. Congress then approved the Taiwan Relations Act, which mandated a form of unofficial official relations, though Washington agreed to the PRC’s demand that the U.S. acknowledge that there was only “one China,” meaning the government in Beijing.

America’s defection carried with it many other nations. Since then the mainland’s explosive economic growth has enabled the PRC to offer aid and trade to help peel away other governments that recognized the ROC. However, in addition to the 15 countries (counting the Vatican) that currently recognize the ROC, 57 others, including the United States, maintain various forms of semi-official “representation” offices.

For years Beijing appeared to accept this relational ambiguity while pressing for some form of reunification under the guise of “one country, two systems.” However, the CCP leadership has grown less patient and more insistent while the Taiwanese population has become more hostile and less quiescent. The PRC presumed that increasing economic ties would ultimately lead to unity; the example of Hong Kong was supposed to satisfy the concerns of the Taiwanese to maintain their political autonomy. However, that increased investment and trade have become more controversial in Taiwan precisely because they increase entanglement with the PRC, while the increasing CCP encroachments on Hong Kong’s special status have  destroyed any popular faith in the “one country, two systems” formula.

Indeed, the crackdown in Hong Kong rescued the reelection campaign of Taiwanese president Tsai Ing-wen. She seemed doomed by an economic slowdown, but opposition Kuomintang Party candidate Han Guo-yu was friendly to China. Given the dangerous tensions between Taiwan and the PRC, Han’s stance originally was seen as an advantage. Once Beijing demonstrated that autonomy depended on the CCP’s largely absent goodwill, Tsai became the defender of Taiwanese democracy and left Han far behind, especially among the young, who have an ever-diminishing identification with the mainland.

Although a direct Chinese attack on the island seems unlikely — the PRC’s military is improving, but such an operation probably remains beyond its ability — it could employ other coercive measures. The U.S. could not easily justify intervening in a conflict. If it did intervene, it would almost certainly do so alone, without any of its allies, which would be unlikely to risk making Beijing a permanent enemy. However, Chinese aggression would likely trigger severe economic penalties from Asian and European states, which could not simply acquiesce to Chinese aggression.

The best policy today is to minimize public conflict by empowering Taiwan. A U.S.–Taiwan FTA would increase would be good for both parties, increasing commerce between them. Taiwan already is one of the world’s freest economies; a free-trade agreement would encourage further liberalization in both countries.

Taiwan long has been an important trading partner for Americans. These days it ranks in the top dozen. Total trade for the first eight months of last year was almost $55.8 billion. That was an increase of about 16 percent over the previous year. In 2018 (full year), the total of goods and services was almost $94.5 billion ($40.3 billion exports, $54.2 billion imports). Merchandise trade totaled $76.3 billion ($30.6 exports and $45.8 imports). That was a substantial increase over preceding years — $68.2 billion in 2017, $65.2 billion in 2016, and $66.7 billion in 2015.

America’s top export goods are oil, gasoline and other fuels, machinery, civilian aircraft and parts, computer chips, autos, scrap iron and steel, machine parts, soybeans, and medical technology. Top export services are intellectual property, transportation, and travel. Top import goods are computers, computer parts, computer chips, cell phones and equipment, screws and other fasteners, unrecorded audio media, auto parts, valued added to returned imports, exercise equipment, and windshield wipers and electric-light parts. Top import services are transportation, travel, and research and development.

Foreign direct investment also runs both ways. In 2017, the flow from the U.S. to Taiwan was $17.0 billion. Taiwan invested $8.1 billion in America. Although that figure is modest in absolute terms, Taiwan is the 15th-largest investor in the U.S. Given the extensive trade and relatively low existing tariffs, non-tariff barriers deserve special attention. Intellectual-property protection is one important concern. Although the economic benefits of an FTA likely would be modest, the gains essentially are free money waiting to be picked up.

Unsurprisingly, the American Chamber of Commerce in Taipei (AmCham) supports such an agreement. More important, Taiwanese concern over Chinese pressure makes Taipei likely to strike a deal. President Tsai said, “If we can have a breakthrough in trade with the U.S., this will be very helpful in terms of encouraging many other trading partners to do the same.” Last June, Taiwan’s chief trade negotiator — and minister without portfolio — Deng Chen-chung said that Taipei will “always be ready” to forge an FTA. He urged talks without preconditions, to maximize “flexibility” and “space.”

One stumbling block in the past has been Taiwan’s ban on American beef and pork, treated with ractopamine, a drug that results in leaner meat. AmCham has advocated that Taipei “make an all-out effort to demonstrate to the U.S. that Taiwan would be a highly appropriate candidate for a bilateral trade agreement.” That means eliminating any “existing irritants” and demonstrating “Taiwan’s deep commitment to international standards, respect for sound scientific evidence, and dedication to a fair and open international trading system.” In early February the Heritage Foundation’s Riley Walters noted that “an effort by the new Taiwanese government and Legislative Yuan to address [this issue] would go a long way to promoting the opening of FTA talks.”

A new trade agreement would have other economic benefits. The PRC’s campaign against Taiwan includes efforts to make the island more dependent on Beijing. Walters has pointed to new Chinese incentives for “Taiwanese investment in China’s fifth-generation (5G) telecommunications development, high-tech research and development, and other sectors, such as tourism, finance, and agriculture.” An FTA would expand Taiwan’s alternatives and options as their nation’s economic embrace of China continues to tighten naturally as a result of language, culture, and geography. Taiwan could reduce its reliance on the Chinese “as they increase their political influence in Taiwan, primarily using economic actors,” President Tsai said.

Moreover, PRC obstruction made it difficult for Taipei to negotiate greater economic integration with its neighbors. More than a decade ago Nicholas R. Lardy and Daniel H. Rosen of the Institute of International Relations contended that “a U.S.–Taiwan FTA might help overcome this reluctance.” Even if it did not, the benefits of a bilateral FTA would help Taipei keep pace as its neighbors reached agreements among themselves.

Such a pact would offer political as well as economic benefits, solidifying Taiwan’s international presence and tightening its international integration. Washington has used NAFTA and agreements with South Korea, Australia, and several Latin American nations to draw its partners closer. Taiwan ‘s prosperity has helped it preserve its separate identity even as the PRC has grown dramatically; a free-trade agreement would offer Taipei a small boost. “National security and foreign policy considerations should argue in favor of arrangements that further sustain Taiwan’s economic welfare,” Lardy and Rosen have noted.

An FTA would solidify Taipei’s international presence, tighten its international integration, and improve its economic prospects. Increased prosperity as a result of an FTA with the United States would aid Taiwan’s efforts to retain its current recognitions. Beijing has been pressing hard to flip more of the few countries that still recognize Taipei — both Kiribati and the Solomon Islands flipped last fall. The Trump administration wants to punish such countries, which have only done what America did four decades ago. A new trade agreement would be a better alternative.

An FTA would improve Taiwan’s possibility of entering international economic organizations on an ad hoc basis. It will be harder for Beijing to demand Taiwan’s exclusion from international agencies if Taipei remains a significant economic power, prosperous and profitable. This helps Taiwan preserve space in the international system.

A trade agreement would also improve Taipei’s ability to deter the PRC militarily through increased defense investment, buttressed by continued U.S. weapons sales, despite Beijing’s very loud displeasure. A Taiwan made more prosperous through a trade deal would be better able to protect itself. Taipei doesn’t have to defeat the PRC. It only needs to make the price of a Beijing victory unacceptably high.

Would a president who dislikes trade move forward? Proponents should stress the political and security benefits. After all, he has flunked the trade issue. He focuses on the trade deficit, which is an irrelevant accounting fiction. He denounced good arrangements, NAFTA and the Korean Free Trade Agreement, made marginal (and largely negative) changes to them, and then sold them as historic triumphs. Worse, he killed the Trans-Pacific Partnership, which was economically beneficial and designed to achieve the political goal of diminishing China’s economic reach in Asia Pacific.

Trump might fear that moving forward with Taiwan could interfere with completion of his trade-war negotiations with Beijing — round two is planned but not certain of success. On the other hand, he might see dual negotiations as an opportunity to press the PRC at a time of relative weakness, as it emerges from the coronavirus crisis. Moreover, the president has shown an interest in Taiwan, despite sometimes retreating when pushed by Beijing. He recently approved a new tranche of arms sales to Taipei.

He should see how a trade agreement would expand American ties with Taipei. And so long as even the PRC acknowledges that Taiwan is a separate system even if not, in Beijing’s view, a separate country, then the Taiwanese have a right to make their own economic arrangements with the U.S., as has Hong Kong.

Getting the president on board for Taiwan might help spur his or a future administration to propose additional bilateral FTAs in Asia. That could help make up for the loss of the TPP. Indeed, one or more FTAs might help revive the TPP, which would have improved access for U.S. products throughout Asia while strengthening the region’s economic ties with America. Perhaps that pact, already implemented by its other adherents, could be rebranded and the president convinced that the new iteration was his idea.

Despite the virulent partisanship on Capitol Hill, a Taiwan free-trade agreement probably would pass. Although Republicans traditionally have backed Taiwan more strongly and Democrats less so, China has few friends in Congress these days. Congress has approved resolutions reaffirming the Taiwan Relations Act, on its 40th anniversary; the Taiwan Travel Act, which allows high-level official visits both ways; and the Asia Reassurance Initiative Act, which reaffirms the relationship with Taiwan. Last year the House also approved the Taiwan Assurance Act, which reinforces U.S. commitment to Taiwan, affirms Taiwan’s strategic importance, and urges continued military sales to it. Both chambers also approved the TAIPEI Act, though they have yet to resolve their differences. The TAIPEI Act provides for administration consultation with Congress over economic ties between the two governments.

Moreover, trade with Taiwan is on individual members’ minds. Last year Senator Cory Gardner (R., Col.) and Representative Ted Yoho (R., Fla.) cited trade when welcoming President Tsai to Hawaii.

In December, 161 members of Congress sent a letter to U.S. Trade Representative Robert Lighthizer, urging him to open negotiations with Taiwan. They argued: “As the trade and investment relationship with Taiwan already supports an estimated 373,000 U.S. jobs, working toward the negotiation of a high-standard and comprehensive U.S.–Taiwan bilateral trade agreement would further enhance our shared goal of enhancing the global competitiveness of U.S. industries while spurring American job creation.”

Perhaps anticipating objections from the usual bipartisan protectionists, the members emphasized the potential for expanding markets for U.S. exports, including food, an emphasis that should appeal to President Trump, since he is concerned to win back support from farmers who suffered from his trade war with China. To the Left, which most worries about low-wage foreign competition, the writers noted that “Taiwan already affords its workers a high standard of labor protection, consistent with International Labor Organization conventions, and is a leader in environmental protection in the region.”

All told, a free-trade agreement with Taiwan would be a win–win. Now is the time to move forward, with President Tsai coming off a resounding election victory and President Trump looking for policy successes as the November election approaches. The U.S. should be prepared for what turns out to be a powerful economic rebound once the COVID-19 virus subsides.

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