Mega Trade Blocs: Stumbling Blocks or Opportunities for Taiwan?

The proliferation of regional trading arrangements in the Asia Pacific in recent decades has led to various mega-trade blocs within the region. What are the implications for Taiwan?
Peter Chow

Besides the long-term planning for a regional Free Trade Area of the Asia Pacific (FTAAP), preparations have been underway for a while now to expand the Association of Southeast Asian Nations (ASEAN) Free Trade Area (ASEAN-FTA) to include Australia, China, India, Japan, South Korea, and New Zealand, and thus create the Regional Comprehensive Economic Partnership (RCEP). Once in effect, RCEP will account for about one-third of total global GDP and more than one quarter of total world trade.

Meanwhile, the Trans Pacific Partnerships (TPP) agreement has been expanded from its original four (Brunei, Chile, Singapore, and New Zealand) to include more members. The U.S. joined in in 2009 and invited Australia, Canada, Japan, Mexico, Malaysia Peru, and Vietnam to join what is known as TPP-12. It accounts for 40 percent of total global GDP and about one-third of total world trade. In terms of the size of total GDP share of the world economy, the total GDP of the TPP is greater than that of the European-27 (EU), while that of the RCEP is a little below the EU’s.

While both the RECP and the TPP have the incentive to enlarge their respective membership to increase their sphere of influence in the region, their application procedures and membership requirements have limited Taiwan’s options in its membership bids. While ASEAN members have FTAs with all six of the aforementioned outsiders, trade is not standardized. Each ASEAN +1 operates under different “rules of origin” and other regulations. Hence, the RCEP is more interested in consolidating the many ASEAN+1s to ensure standard rules for trade within the RCEP as a group. The RCEP will therefore give priority to those countries that already have signed FTAs with ASEAN, which Taiwan does not have.

Moreover, before Taiwan can negotiate its RCEP membership, China insists that the “early harvest product list” of the Economic Cooperation Framework Agreement (ECFA) be expanded to include more products and, more controversially, the service trade industry, which would further incorporate Taiwan into China’s orbit economically in the short term and politically in the longer term. Joining the RCEP would risk leading Taiwan into the “one China” trap.

For its part, the TPP has an open admission clause for “like-minded” Asia-Pacific Economic Cooperation (APEC) members that are interested in joining, and Taiwan definitely qualifies. However, there is a double eligibility criterion: approval from both individual member states and the TPP as a whole is required. Efforts to secure TPP and RCEP membership are therefore primarily shaped by external factors such as multilateral trade negotiations rather than domestic policy priorities. Taiwan can only prepare to apply, rather than apply, to join the RCEP for the time being, as the door has been temporarily shut until the founding members sign in 2015.

As a member of APEC, Taiwan’s chances of being invited to the TPP negotiations are high and can be exploited immediately. Yet, the TPP is a high quality FTA which includes not only comprehensive tariff reductions on all merchandise trade, zero percent tariff on agricultural commodities, de-regulation of service trade, but also regulation of labor and environmental standards, intellectual property rights, and state-owned enterprises, with the intent to create the standard for FTAs in the 21st century.

Taiwan would be well advised to take the necessary steps to ensure its eligibility to join the TPP, and some down payments might be required. If the U.S. insists that continuing Trade Investment Framework Agreement (TIFA) talks is a pre-condition for any serious trade negotiations, then among those contentious trade disputes, the pending issue of lifting the ban on pork imports from the U.S. — which is only the tip of the iceberg for the current trade regime — would cause a great deal of controversy domestically. Although the government and the Democratic Progressive Party (DPP) have reached a consensus on bidding for TPP membership, and both fully understand that U.S. support for Taiwan is crucial if it is to join the trade bloc, neither is prepared to pay the price of offending Taiwanese farmers, whose votes are crucial to both parties, by pushing the necessary reforms.

If Taiwan can resolve the obstacles created by its contentious trade issues with the U.S. and subsequently secures Washington’s support, the next question will be China would react. Beijing has not ruled out the possibility of seeking to join the TPP. However, the high admission criteria for the TPP would probably force China to postpone its membership bid — unless Beijing really reforms its economic structures and industrial governance to fulfill TPP membership requirements. Whether Beijing would draw a red line on Taiwan’s bid for TPP membership is anyone’s guess as this point.

China’s growing assertiveness in its foreign policy could shift the dynamic of international relations in Taiwan’s favor. Although most Asia Pacific countries, including Taiwan, are keen to trade with China to the extent that doing so is beneficial to their economies, they need U.S. security guarantees to keep China’s increasingly hegemonic foreign policy in check, especially now that Beijing seems to have shifted from Deng Xiaoping’s guidance of “bidding for time and hiding capabilities” to something more muscular. That said, the U.S. rebalancing, or “pivot” to Asia cannot be limited to its military presence; an economic role is just as important for regional security. Hence the TPP as an indispensable component of the U.S. pivot to Asia. If the pivot includes Taiwan — as it should — and if, as argued above, it has the necessary economic components, then the enlargement of the TPP membership will provide Taiwan with a window of opportunity to further its development.

Taiwan is the 12th largest trade partner of the U.S., and the interdependence of Taiwan and the U.S. in the trade in intermediate goods is a major factor in the context of global commercial activity. Growing trade in parts and components, the trade complementarity, and the rapid development of global value chains (GVC) that have dominated trade growth and shifted trade patterns in recent years all underscore the depth of the interrelatedness between the U.S. and Taiwan.

Using computable general equilibrium (CGE) model simulations on the effects of the TPP with or without Taiwan, Hsu Bo-xiang of the Taiwan Institute for Economic Research illustrated that including Taiwan in the TPP would increase U.S. exports by 0.1 percent, enhance social welfare by US$2.8 billion, improve the terms of trade by 0.1 percent and reduce the U.S. trade deficit by US$108.4 million. Moreover, by admitting Taiwan into the TPP, the trade creation effect through liberalization on the services sector, in which the U.S. has a strong comparative advantage, would greatly benefit the U.S. by creating more high-paid jobs for American workers.

One pressing task for Taiwan will be to bid for bilateral FTAs with countries that have dual membership in the RCEP and TPP to pave the road for accession to both trade bodies. Of the countries that have overlapping RCEP and TPP membership, only two — New Zealand and Singapore — have signed FTAs with Taiwan. Five other countries (Australia, Brunei, Japan, Malaysia and Vietnam) should be considered by Taipei as top priorities for bilateral FTAs.

This is an uphill battle for Taiwan. Securing domestic consensus ahead of making the necessary structural changes is the only way to ensure success.

Peter C.Y. Chow is a professor at the City University of New York

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