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ASIA TRADE: Taiwan’s worsening trade policy predicament

Taiwan’s preferential trade agreements. Picture and source: World Trade Organization.

Western democracies – as in the G7 – more outspokenly express support Taiwan’s right to participate in the international community than in the past amidst Beijing’s growing assertiveness. Yet in the trade and investment policy field concrete action from CPTPP members or the EU is missing.

This month Taiwan will inaugurate a new president, Lai Ching-te, who takes over the helm of the country from his Democratic Progressive Party fellow Tsai Ing-wen.

Lai’s challenge will be to navigate the ever more turbulent waters of the US-China tech, economic and military rivalry of which Taiwan is one of the crucial flashpoints.

Shrinking policy space

Taiwan has been struggling to push back against its sidelining on the international scene. The fight is bound to take a more dramatic turn under Lai’s watch. It will also play out on the trade policy scene.

Despite the island country being a full member of the World Trade Organization without being a sovereign state, it is struggling to be able to participate in new international trade arrangements.

Trade policy professionals will have already noted the shrinking policy space that Taiwan enjoys on the international sphere.

This comes despite its centrality in the economics of the current technological revolution, for example as provider of the high-end semiconductors that power the current artificial intelligence boom.

The island’s predicament hails from the 1970s. Back then the United Nations and most importantly the United States switched to recognising communist China as legitimate representative of the country rather than Chiang-Kai check’s Taiwan. Beijing was given the seat at the UN Security Council, Taiwan was pushed out of it.

For decades both Beijing and Taipei claimed to represent the whole of China – giving birth to the ‘One China’ principle that China and the international community cling to today.

But since Taiwan became a democracy in the 1990s and the DPP rose to prominence as a party – initially on a platform of independence from China – Taiwan tends to consider that it merely represents itself.

The incompatible political regimes and related divergent paths taken by society since almost a generation make it increasingly difficult to conceive an amicable unification of the two territories.

The Taiwanese voters, though, have opted for pragmatism and appear content to keep their status ambivalent and not risk a rupture with Beijing that could lead to violence. The country nonetheless seeks to participate in international fora as a self-governed state and contribute to the international community – such as in the health area.

The United States is the guarantor of this status quo, change of which it will only accept if unification is consensual and negotiated. It protects Taiwan militarily – but also seeks to ensure Taiwan does not make bold moves that could provoke Chinese retaliation.

Beijing for its part has not changed its tune. Its goal of ‘reunification’ with Taiwan remains unchanged – it is even hardening. As its power increases and the prospect of consensual unification wanes, the risk that it succumbs to the temptation of a military attack is growing.

APEC but not IPEF – and certainly not CPTPP

Taiwan will be represented at the next trade ministers’ meeting at APEC, the Asia-Pacific grouping of countries created in the 1990s in Peru on 17 and 18 May.

If APEC had been created in recent years, would Taiwan have been accepted as it is, i.e. an independent customs territory that is allowed to be a member of international organisations and groupings that are relevant to it?

It is doubtful.

The fact that Taiwan is not a participant in the Indo-Pacific Economic Framework initiated by the United States in 2022 with a range of Asia-Pacific countries speaks volumes about the growing exclusion of Taiwan from any formal groupings that include members wary of blowback from China.

This week-end’s APEC trade ministers meeting will focus on the future of the Comprehensive and Progressive Trans-Pacific Partnership Agreement after the United Kingdom joined it as its 12th member.

CPTPP parties now have to address the question of how to handle China’s and Taiwan’s application to join the deal, both filed in 2021.

CPTPP diplomats under New Zealand’s chairmanship in 2023 adroitly agreed on a mechanism that will help kick the China-Taiwan can down the road while still processing the queue of other applicants to the accord. These include Costa Rica, Ecuador, Uruguay, South Korea and Ukraine.

The so-called ‘Auckland Principles’ stipulate that the CPTPP is open to accession by any economy that is willing and able to meet the CPTPP’s trade, market and sustainability standards, has a demonstrated history of compliance with their existing trade commitments and can achieve the consensus of its parties.

It is not difficult to see how this affects Taiwan’s accession bid to the Asia-Pacific trade pact: Taiwan might well meet the first two criteria, but not the third. In March and April, Taiwan sent diplomats to all CPTPP countries to build a case for its accession – but the consensus remains elusive.

China, whose chances of success under the Auckland Principles are equally low, has already made it clear to CPTPP members that it opposes Taiwan’s accession.

“As Taiwan has not applied to the CPTPP as a sovereign state, its application does not appear to be incongruous with China’s ‘One-China’ interpretation—regardless of China’s view on Taiwan’s motivation to accede to the CPTPP,” writes an analysis posted by the Australian parliament in December 2021.

The Australian note contrasts Beijing’s approach to Taiwan in CPTPP with its support for Hong Kong joining the other big Asian trade agreement RCEP. This comes as no surprise given China’s de facto take-over of Hong Kong in recent years.

G7 more vocal in support of Taiwan’s participation in international fora

There is a contrast between what key leaders of the international community proclaim and how they translate this into practice when faced with a decision to enter into any formal or legally binding arrangement with Taiwan – not least on trade.

The G7 ruffled feathers with Beijing in 2023 when the heads of government called on China to keep the peace in the Taiwan Strait. This year’s Italy-hosted G7 is also taking positions in support of allowing Taiwan to have its role in the international arena.

In April 2024 in Capri G7 foreign ministers stated: “We support Taiwan’s meaningful participation in international organizations, including in the World Health Assembly and WHO technical meetings, as a member where statehood is not a prerequisite and as an observer or guest where it is.”

Next June’s G7 leaders joint communiqué is also expected to have supportive language for Taiwan.

The US has made good on its G7 pledges on the trade front. Whilst reluctant to include Taiwan in IPEF, it has gone ahead with negotiating a bilateral agreement on trade – without preferential market access though – with Taiwan under the heading ‘US-Taiwan Initiative on 21st Century Trade’.

The first pillar of the agreement, concluded in 2023, includes ‘WTO Plus’ commitments on customs and trade facilitation as well as on e-commerce and digital. It also introduces standards on ‘good regulatory practices’ and ‘anti-corruption’ that exist in several bilateral free trade agreements.

Negotiations are ongoing on agriculture, labor, and the environment. They are also expected to include rules on state-owned enterprises and non-market practices.

EU fear

But will the other G7 members be as bold? Will Canada or Japan, for example, stick their neck outs to support Taiwan’s CPTPP bid?

Or will Germany, France and Italy nudge the European Commission to do more with Taiwan on trade?

The EU has been reluctant to envisage any type of formal trade arrangement with Taiwan for years, despite the economy’s importance in industrial supply chains for Europe. Taiwanese companies have invested in Europe in recent years, taking part in Brussels’ new industrial policies the same way Japanese or Korean firms do. They do so without the same legal guarantees of market access and without the free trade agreement institutions that foster regular dialogue – thus putting the Taiwanese at a disadvantage.

In 2015, then trade commissioner Cecilia Malmström proposed in a new trade strategy to start negotiations on a bilateral investment treaty with Taiwan once negotiations that were in their infancy with China on a similar agreement were concluded.

The CAI as this deal with China was named was set aside in 2020. Since then nothing of note was proposed to Taiwan, bar a slight upgrade of regular officials meetings allowing Taiwanese ministers and deputy ministers to meet director-generals for trade, the single market and digital at the European Commission.

In contrast to many individual member states, the EU has not even dared sign a single legally non-binding memorandum of understanding with Taiwan, for example on issues such as digital trade and recognition of electronic signatures. This is despite the fact that individual EU member states do sign MoUs with Taiwan on a range of economic issues.

Two factors shape the EU’s Taiwan trade policy: ignorance and fear.

If not ignorance, then there is insufficient appreciation of the fact that the One China principle by which the EU abides doesn’t mean one can’t do sign any official arrangement with Taiwan – when even the United States and other smaller Asian countries sensitive to China’s reactions continue sign bilateral investment and trade accords with Taiwan.

The fear factor was expounded clearly by former advisor to the EU’s previous foreign policy chief Federica Mogherini Natalie Tocci in an article for The Guardian this week.

The fear factor is clearly playing out regarding Taiwan. There is fear of China. The commission fears blowback from member states who are afraid of China.

Yet Brussels’ attitude to Taiwan can well be seen as a test EU leaders declarations about becoming more’ assertive’ in the bloc’s trade policy and about fighting back against coercion not least from China.

The fact that the Hungarian government – whose special relationship with China has only deepened in recent years – will preside of the EU’s council in the second half of 2024 doesn’t indicate there will be a change of heart in Brussels in the short term.

But perhaps the EU trade leadership will want to look beyond the short term.

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