The Nelson Report on the prospects of a US-Taiwan FTA

The Nelson Report, the unofficial newsletter of DC’s Asia policy community, took a look at the obstacles that stand in the way of a free trade agreement between Taiwan and the United States on Aug. 23. For the sake on discussion I’m posting the portion of the report that deals with the FTA in its entirety interspersed with my own thoughts. (Emphases mine).

TAIWAN INCREASINGLY SERIOUS ABOUT FTA WITH US, BUT...

SUMMARY: on the trade front, it’s been interesting to see a gradual but steady rise in activity here, and in Taipei, boosting the idea of a US-Taiwan FTA, an economic proposal with more than the usual amount of deeply embedded politics, domestic and international. At the Center for National Policy yesterday, John Deng, an old friend for the Washington trade community, but Taiwan’s new Deputy Representative here, ably made the latest presentation on the “case” for starting negotiations soon.

Not only is TPA (Trade Promotion Authority)/fast track presumed to be expiring next July, but the current US trade agenda needs to focus on economically significant deals. This Taiwan certainly represents, with a domestic market of $182.6 billion, far in excess of current US FTA or negotiating partners Australia, Thailand, and Malaysia, Deng argued.

And, he urged, Taiwan’s fledgling democracy, and booming free enterprise system, needs all the support it can get as it seeks to keep up with it’s giant partner/rival across the Strait...a China with which, Deng conceded, current relations are “stalled”.

Looming like the elephant in the living room, of course, is the presumed reality that you can’t talk about a US-Taiwan FTA as a stand-alone issue...you simply have to factor in the likely reaction from Beijing, and thus also the “larger issue” of US-China relations.

So an FTA discussion gets you right into the middle of the Cross Strait contest which has made official political relations between Washington and Taipei so difficult, since the Carter Administration.

We say “presumed” reaction from Beijing, since, as an official matter, US government folks have always, correctly, been reluctant to formally concede that China has what amounts to veto power over a US decision to start FTA talks with Taipei.

And in any event, as any USTR official will explain, on or off the record, until and unless Taiwan takes stronger steps to meet US concerns about IPR, and agricultural product access... and Taipei also indicates a plausible
intention to address these issues seriously in any FTA negotiations which might start...then Beijing’s views are a moot point.

But there is precedent to think that a deal could be reached, in principle, given the linkage of WTO membership for both Taipei and Beijing in the successful Clinton Administration PNTR negotiations, which facilitated admission for both “economies”.

Taiwan’s domestic politics also play into the equation, in that Beijing-Taipei relations are, under the DPP government, touchy, unpredictable, and often self-contradictory. For its part, China has emphasized its displeasure with the DPP by not dealing at all with President Chen and his officials, while making a point, in recent years, of welcoming the opposition KMT leadership.

It’s only fair to point out that China isn’t the only one who’s been playing favorites here; the U.S. also rolled out the red carpet for Ma Ying-jeou during his visit to Washington earlier this year, but has yet to allow either of Taiwan’s elected leaders into the capital.

The DPP government has reciprocated by trying, with little success, to stall the increasingly massive Taiwan business community investment in China. This is now something like $100 billion, Deng told the Center for National
Policy audience.

But it is erroneous to label the DPP government’s decision as a simple case of sour grapes. Taiwan’s increasing economic reliance on China creates not only an national security risk in the form of a serious conflict of interest with a country that has hundreds of missiles pointed at it, but an economic risk that has Taiwan putting all of its direct investment eggs in a single basket.

So the first question which arises, given China’s evident intention to wait out the Chen/DPP Administration in hopes of a more accommodating KMT under a President Ma, is why would China, formally or informally, give the US the
“green light” to start FTA talks while the DPP still rules?

But second question, and an important one, is whether the Bush Administration might conclude that giving China any such “veto” whether assumed or presumed, is a bad precedent along the same lines as clearing with Beijing the US military and other support for Taiwan which is required under the Taiwan Relations Act.

“Heads up” is one thing, but “we need your OK” is neither sensible, nor allowed, analysts remind us.

A third question is whether the DPP government is prepared to make some gestures to both Taiwan’s business community, and to Beijing...many steps the DPP government currently refuses to undertake, since it would involve compromising on the principle of sovereignty, a point Deng conceded yesterday.

The US business community can help, say by demanding that the “3 links” be opened up to permit direct, “normal” flights across the Strait, officials here quietly urge. The international language of commerce may yet bridge some of the perceptual and political gaps. Deng yesterday noted that Microsoft recently held its international managers’ meeting in Taipei, and that 400 of the 700 attendees came from the Mainland.

Unfortunately, the US business community learned long ago that Beijing sees Taiwan’s economic expansion as a risk to its own national interests, and seems to have suddenly lost its voice as Taiwan goes around looking for U.S. corporations to support for an FTA.

Another side of the issue the Nelson Report does not address are the possible consequences of a US-Taiwan FTA. The impending implosion of the Doha round of trade talks within the WTO has placed fresh impetus on individual economies to tie up together for the time being. One of the major reasons why Taiwan has been pushing the FTA so hard recently is that China has quite effectively frozen it out of ASEAN+3 by tying the soveriegnty issue to any bilateral trade accords with its member countries. Taiwan figures that having the US sign on as a “true” economic partner would probably be enough to reassure other countries to help bring Taiwan into the increasingly inter-connected web of regional and bilateral trade deals. Like I said before, this is not in China’s interest since it has been working assiduously to make sure Taiwan is strapped tight to its economic apron strings.

Unfortunately, I think the fight has already been lost for a US-Taiwan FTA. Not only is the Bush administration’s fast-track trade negotiating power running out next year, but the USTR’s office is already stretched thin negotiating deals with countries like Thailand and Malaysia. Even if Taiwan cleaned up its IPR record and addressed the afore-mentioned agricultural and pharmaceutical issues, I doubt the US would be able to open negotiations with Taiwan even if it wanted.

For more information on the obstacles and potential surrounding the US-Taiwan FTA, you can check out this transcript to a recent conference on the issue held at George Washington University, featuring the opinions of Taiwan’s unofficial ambassador to the US David Lee, GWU economics professor Michael Moore, and US-Taiwan Business Council President Rupert Hammond-Chambers, among others.

FTA Trade China Nelson Report

Cross-posted at Wandering to Tamshui