Taiwan in drive to sign trade deal with US

Hello from Taiwan, which recorded the strongest monthly exports ever in January, it emerged on Monday, with a 37 per cent jump compared with the same month a year ago. This gives you an idea of just how well the economy is doing in a country that has avoided lockdowns because it has contained the coronavirus, and where exports focused on IT gadgets and semiconductors are boosted by working from home, 5G buildout and furious demand for auto chips.

Taiwan finds those chips more sought after than ever because most of the semiconductors the carmakers crave are manufactured here. Still, the public mood has been shaken as attempts by Taipei to leverage its crucial position in global trade and supply chains — first to get its hands on vaccine shipments, and then to establish an economic and trade office in the South American country of Guyana — appear once again to have been derailed by its nemesis, China.

Speaking of which, our main piece looks at the steeplechase that is Taiwanese international trade policy, as explained to Trade Secrets by the country’s trade representative John Deng. Policy watch, meanwhile, examines Chad Bown’s dissection of the “phase one” trade deal between Washington and Beijing.

Taiwan’s drive to emerge from the shadows

It probably takes someone as sweet-tempered and patient as John Deng to tackle the Sisyphean task of Taiwanese trade policy. “There is always this shadow hanging overhead,” Deng, minister without portfolio and trade representative for Taiwan, said when he sat down with Trade Secrets last week. “Many countries will not say this publicly, but the way they act reflects this — the China factor.”

China claims Taiwan as part of its territory, and pressures governments around the world not to treat it as the independent country it in fact is. For trade negotiations, the result has been even more dire than in diplomacy: Taiwan has only managed to negotiate four bilateral trade agreements — with four of the countries that recognised it diplomatically at the time — and two economic co-operation agreements with New Zealand and Singapore.

Tsai Ing-wen, Taiwan’s president, started her career in public service in the late 1980s working on the team that negotiated Taiwan’s access to what eventually became the World Trade Organization.

Taipei succeeded in joining the WTO in early 2002, 21 days after China and under the unwieldy moniker “Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu (Chinese Taipei)”. But the proliferation of regional and bilateral trade deals and the rise in the significance of non-tariff trade barriers has left Taiwan dangerously isolated — an absurdity given its status as the world’s 17th largest trading nation and a hub of global electronics supply chains.

Right now, Taipei has (albeit faint) hopes of breaking out of this politically imposed isolation. For at the beginning of the year, the country threw its market open to US pork and beef, removing what Washington has for years cited as a key obstacle to the resumption of bilateral trade talks.

If only the US, Taiwan’s sole unofficial protector against the threat from China, were to sign a bilateral trade agreement with the country, others might follow — or at least that is Taipei’s hope.

“Other countries are all paying attention to the situation of their trading partners. The US taking the lead is a very big factor,” Deng said. “If the US can do this, I believe other countries will think that at least there is a precedent. Many countries look to precedent when making decisions.”

Deng’s justification of Taipei’s dogged pursuit of a trade deal with Washington echoes that of his boss. “To be honest, this is about political interest,” he said. Tsai, ever since announcing her unpopular decision in August last year that she would allow US pork containing small amounts of the feed additive Ractopamine to enter Taiwan, has also been stressing the need for this step for the sake of national security.

In the eyes of the Taiwanese government, the economic case for the coveted bilateral trade agreement with the US is mainly to tie the two economies together more closely.

“We need a very strong economy, otherwise it will be hard for us to counter the threat from China,” said Deng. “That requires two things: competitiveness and business confidence.” He argued that to ensure continued investment in Taiwan, businesses needed to be reassured of a stable external environment — a guarantee to be supplied by a bilateral trade deal.

The pressure to deliver such reassurance is on the rise. The trade negotiator is watching the spread of regional and bilateral trade deals especially involving Asia warily. The Regional Comprehensive Economic Partnership (RCEP), which was signed at the end of last year and includes China and 14 other economies in Asia and the Pacific but not Taiwan, threatens to lock the country out of key trade benefits.

Deng steadfastly refused to quantify the damage RCEP is expected to do to Taiwan’s economy. Although the government had commissioned studies of the impact, economists’ calculations made the overall macroeconomic effect look small because the dominance of information technology in Taiwan’s exports — most of which are traded internationally without any tariffs — diluted the damage.

But the government fears a very real threat from the reduction of tariffs on goods including chemicals, textiles and machinery among RCEP members. Taipei was worried that Taiwanese exporters of machinery, fibres or chemicals would be at an increasing disadvantage compared with South Korean or Chinese competitors when selling to growing markets in south-east Asia such as Vietnam or Indonesia as import tariffs in these countries, sometimes as high as 30 per cent, gradually come down under RCEP over the coming years.

“What the government is concerned about is the employment situation,” Deng said, pointing to Taiwan’s traditionally relatively equitable income distribution and the relevant sectors’ role as major employers. “What we worry about is that many workers have difficulties in finding jobs. Or that, although they don’t want to go abroad, they would be forced to do so. Or that the income gap will open up, with the pay in IT getting better and better and in traditional industries getting worse and worse.”

RCEP could, fears Taipei, force many companies to move production to south-east Asia. That could hollow out the country’s economy, just as electronics companies are gradually returning home from a decades-long push into China that hollowed out the local labour market once already.

Deng is single-mindedly focused on the US trade deal that Taipei believes could open the door to other bilateral trade agreements and thus eventually end its isolation.

But to entice Washington into talks, Taipei has had to take a domestic political gamble which might yet prove too big to pull off. The Kuomintang, the country’s main opposition party which has been struggling to regain momentum after its catastrophic election loss to Tsai a year ago, has pounced on her pork and beef market opening, a rare instance of public discontent over the otherwise popular president. Later this year, the KMT is planning a referendum on the market opening.

“If the referendum passes, the government probably doesn’t have any choice but to unwind the market opening policy,” said Deng, acknowledging that such a development would destroy the chances of negotiating a trade deal with the US and destroy Taiwan’s international credibility.

“So our first priority is not to let the August referendum pass and not allow it to overturn our policy,” he said. Watch this space.

Charted waters

Delphine Strauss has a story published earlier on Tuesday on migration patterns, that’s well worth a read. Delphine reports that economists are becoming increasingly concerned that countries that have weathered the pandemic well face a lasting economic drag from the global collapse in skilled migration.

To get a sense of the scale by which migration sank last year, we’d suggest you take a look at the chart below. Quite a plunge.

Policy watch

We briefly touched on Chad Bown’s dissection of the “phase one” trade deal between the US and China, “Anatomy of a Flop”. Today we’ll go into a little more depth.

The paper is as zingy as the title and rips into the centrepiece of the deal — a commitment by China to buy $200bn-worth of US imports covered by the agreement by 2021. Last year’s data show that China bought only about 60 per cent of its 2020 share. That’s quite a substantial miss. Bown, an economist at the Peterson Institute for International Economics, breaks the figures down for each economic sector and finds US manufacturing exports among the least honoured by the deal.

Bown’s paper is the most comprehensive we’ve seen on this core aspect of the phase one deal, but it’s not the first time people have queried China’s commitment to the commitments. What has the Trump administration’s defence been? It’s worth looking at former US trade representative Robert Lighthizer’s exit interview with Aime Williams last month in which — surprise, surprise — he blamed the pandemic. Let’s see what 2021 holds.

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