Taiwan, China and the TPP

As the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP) negotiations grind slowly forward, China and Taiwan are engaged in deepening and widening their own bilateral agreement, the Economic Cooperation Framework Agreement (ECFA). The TPP is a high standard, modern agreement among twelve countries on both sides of the Pacific led by the United States but does not include China[1]. The RCEP is less ambitious but nevertheless a reasonably comprehensive agreement among the ten ASEAN countries[2] and ASEAN’s six partners[3], dominated by China, but doesn’t include the United States.

RCEP may at some point converge into a larger region-wide agreement, often referred to as the Free Trade Area of the Asia-Pacific, or FTAAP. Given the challenges both face, it is by no means certain that either agreement will be successfully concluded and if concluded, ratified by its members. Nonetheless they represent the best current prospects for trade liberalization in the region. Almost all of the major economic players in Asia Pacific are included in one or other of these negotiations, or in some cases both—with the exception of Taiwan. Taiwan is in neither, and this is a growing cause of concern to policy makers in Taipei. Taiwan has focused its efforts on gaining admittance to the TPP but faces a number of challenges, among them the position of China. However, Taiwan’s participation in the TPP (or the RCEP for that matter) should not be seen as antithetical to China’s interests. Indeed, Taiwan’s participation could be beneficial to China in several ways.

Why Taiwan Needs to be in a Regional Trade Agreement (RTA)

Taiwan is a major trading nation. Exports account for about two-thirds of its GDP and its economy is closely integrated into global supply chains. Taiwan is a separate member of the WTO, distinct from China, but the deadlock over Doha means that trade liberalization efforts are increasingly being concentrated on RTA negotiations. As the web of overlapping RTAs has been developed, Taiwan has been largely excluded, except for its agreement with China, and recently concluded agreements with New Zealand and Singapore. Currently about a third of Taiwan’s trade activity is with TPP member economies and the disciplines being negotiated in the TPP are the sort of disciplines that Taiwan needs to take on if it is to continue to reform its economy and prepare it for increasing competition. At the same time, China-Taiwan trade and investment is growing substantially, to the point where there is significant opposition in Taiwan to continued expansion of linkages with China, lest Taiwan be drawn so closely into China’s economic orbit that it will lose any scope for independent action.

Obstacles to Taiwan’s TPP Entry

There are several obstacles that Taiwan needs to overcome if it is to be a serious contender for TPP membership. Among these are existing protectionist measures in Taiwan and a relatively weak political infrastructure to address protectionist pressures. All economies of course have special interests that want to be protected or excluded from global competition; Taiwan is no exception. The agricultural lobby in particular is disproportionally influential, especially pork producers. A number of service industries, such as banking, insurance and professional services, are also reluctant to see protectionist barriers dismantled. To be able to address the concerns of these lobbies, as well as to offset their influence by mobilizing broader economic interests, an effective trade bureaucracy and political will is needed. At the current time, Taiwan appears to be somewhat deficient in both. The ineffectiveness of the Ma Administration in dealing with the agricultural lobby, and difficulties faced in getting the services provisions of the China-Taiwan ECFA approved in the Legislative Yuan, have been described as an “institutional deficit”[4] One of Taiwan’s great strengths, its lively and vibrant democracy, can also become a drawback if opposition is not formulated in a responsible manner and if government leaders fail to champion reforms.

The China Factor

In addition to its internal challenges in convincing TPP partners and its own constituencies that it is ready to meet TPP standards, Taiwan has to face the uncertainty of Chinese reaction. Should China decide to oppose Taiwan’s entry into the TPP, it would put TPP countries in the unenviable position of having to choose between Taiwan and China, and given China’s growing economic clout it is easy to speculate which way they would choose. Fortunately China has not to date opposed Taiwan’s entry, and indeed there are good reasons why Taiwanese participation in the TPP could be in China’s interests.

Senior Chinese officials have been quoted as saying that China does not object to non-governmental economic and trade exchanges between Taiwan and countries having diplomatic relations with China although China opposes agreements of an official nature.[5] New Zealand and Singapore provide examples of countries with both diplomatic relations and trade agreements with China that have concluded “non-official” trade (economic cooperation) agreements with Taiwan. Taiwan is a recognized “customs territory” which is the status it enjoys within the WTO so there is no legal reason why the Taiwanese customs territory could not be a negotiating partner in the TPP. This would of course have to be handled sensitively so that China did not see Taiwan’s participation as a political Trojan horse that could imply or lead to independence or separate political status. China itself has never ruled out the possibility that one day it may be ready to take on the disciplines of the TPP as it proceeds with its economic reform. The participation in the TPP by a close economic partner like Taiwan could help Chinese companies meet global competition, particularly if they established a presence in Taiwan. Taiwan’s participation in the TPP would also provide an economic counterbalance to the growing domination by China of Taiwan’s economy and thus mute some of the backlash that expansion of the ECFA has engendered. A Taiwan that was able to put its eggs into more than one basket, and take the necessary measures to ensure that its trade with the US and other partners would continue to be robust even as its trade with China increased, would be a more stable partner for China.

Conclusion

Taiwan, in the top 20 tier of global trading economies, must become part of the emerging Asia Pacific trade architecture if it is to retain its competitiveness but Taiwan needs to demonstrate that it is politically ready to make the tough decisions necessary to meet the rules of entry. It needs TPP entry to be able to compete with countries like Korea that are well integrated into Asia Pacific RTAs, and to avoid the impact of trade diversion on the global supply chains in which it participates. It needs the TPP to force the disciplines required to bring about domestic reforms. And it needs TPP access to balance its growing dependence on trade with China. As long as Taiwan plays the game above-board and does not use access to the TPP to advance a hidden political agenda, there should be no reason for China to oppose Taiwan’s entry. Indeed, a stronger and diversified Taiwanese economy is in China’s interests. Taiwan could be a useful platform for Chinese companies to take advantage of TPP rules and disciplines, and help China prepare for the day when it will be ready for the TPP.