The United States, Taiwan, and an FTA

The issue of a U.S.-Taiwan Free Trade Area (US-TwFTA) is back on the agenda—at least it is back on Taiwan’s agenda. Recently, President Chen expressed hope that a US-TwFTA could be signed as soon as possible. The question is whether it is on the American agenda.

This is not a new issue. In December 2002, the Brookings Institution sponsored an expert seminar prospects for a U.S.-Taiwan Free Trade Area (US-TwFTA). The seminar brought together specialists from the United States and Taiwan: past and current government officials, scholars, industry representatives.

Participants agreed that a US-TwFTA would have positive economic impacts. Econometric studies in both the United States and Taiwan have shown that it would bring about increases in bilateral trade, and welfare in both economies and in GDP for Taiwan. Furthermore, many participants felt that a US-TwFTA would have an number of other important benefits. It would:

• Have additional positive dynamic effects on Taiwan that econometric models cannot measure, in the areas of services, such as logistics, and in-bound foreign direct investment.
• Create an environment that will strengthen the partnership between Taiwan and American companies, which will in turn help the latter in managing their relationship with China (the “gateway” effect).
• Help stimulate structural reform within Taiwan, accelerating deregulation and the evolution toward a knowledge-based economy.
• Provide Taiwan with better balance and diversity among its principal trading partners, and so avoid excessive dependence on China.
• Strengthen political relations between the United States and Taiwan.

On the other hand, there would likely be a negative impact on previously protected sectors, such as rice in Taiwan and perhaps textiles in the United States.

Some experts stressed the importance of the broader context in which Taiwan is seeking an FTA with the United States. A number of FTAs are being pursued globally, and an economy that does not “get there first” risks losing the contest for in-bound FDI and for market share in the economies to which it exports. The latter is the “trade diversion” effect of market-opening on a bilateral and regional basis. If, for example, there were to emerge FTAs between ASEAN and China, or among ASEAN, China, Korea, and Japan, both the United States and Taiwan would be at an economic disadvantage.

The principal obstacle to moving forward in December 2002 was the U.S. government. Its stated concern was the lack of progress on several bilateral trade issues: IPR enforcement, agriculture (especially rice), telecommunications services, and pharmaceuticals. Washington wanted progress on these trade issues if there is to be a bilateral meeting under the U.S.-Taiwan Trade and Investment Framework Agreement (TIFA), which was a necessary prelude to any discussion of a US-TwFTA.

Eighteen months have passed since the Brookings seminar. The benefits of a US-TwFTA identified at that time have not changed. Indeed, they have become more pressing. Nor have the obstacles that Washington then said must first be removed.

What has changed, it appears, is the tone of U.S. policy. At a May 6th event sponsored by Brookings, the U.S.-Taiwan Business Council, and the Center for Strategic and International Studies, Charles Freeman, the Office of the U.S. Trade Representative in charge of Taiwan matters, was fairly blunt in his complaints. The issues, he said, were the same. In particular, IPR piracy on Taiwan was still rampant (in spite of vigorous government efforts). The PRC is much worse on this score, but Freeman asserted that because Taiwan is much more advanced institutionally, “the notion that China and Taiwan, as far as intellectual property protection [are concerned] are even [considered] in the same sentence is scandalous.” Freeman expressed hope that, with progress on pending issues, a TIFA could be convened, but he made no promises.

For people in Taiwan, it may seem a bit unfair that the U.S. government is apparently holding a USTwFTA hostage to these bilateral trade issues. Some may even feel that Washington’s real motivation is to avoid a conflict with China.

But there is a certain logic in the Bush Administration’s position. First of all, the USTR has limited resources to negotiate FTAs. It naturally wishes to dedicate those resources to those countries with which success is likely. Second, USTR wants to do FTAs that have a practical impact—opening markets. In this regard, a country’s performance on past agreements becomes a predictor of how well it will abide by future ones. And third, USTR cannot move forward on an FTA with any country unless it has political support from the relevant American business sectors and their friends in the Congress. For USTR, an agreement that might have significant political or implementation difficulties is not worth the time it takes to negotiate. Based on Mr. Freeman’s words and the way that he said them, that is how USTR views a USTwFTA.

There is also something of an irony here. Taiwan needs to strengthen itself economically in order to maintain a globally competitive niche and to guarantee attractive employment for the population. The obvious way to do that is to build a knowledge-based economy. That being the case, the government must effectively protect knowledge—that is, it must effectively protect intellectual property rights. Protection of knowledge, for example, requires a stronger legal system that will enforce those rights and imposing greater disincentives to piracy. Creating the institutions to ensure IPR protection, therefore, offers a double-win. It is something Taiwan should do for itself, to help guarantee a knowledge-based economy. It will also remove a major irritant with the United States and facilitate discussion of an FTA.

Some in Taiwan may still suspect that the United States is unwilling to brook China’s ire by concluding an FTA with Taiwan. But here is another irony. If that is Washington’s true motivation, Taipei is letting it off the hook by not resolving these bilateral issues. The way to clarify whether the United States is prepared to address a USTwFTA on its economic merits and to determine whether these problems are real or not is to dispose of them. This will, I am sure, require some difficult steps. But they are steps that Taiwan should take in its own interests. Taiwan will improve its game by keeping the ball in the American court.