For most economies, trade is an essential engine for creating job opportunities, acquiring technologies, and offering consumers more options. And free trade, as the elimination of trade barriers, can fine tune the game of comparative advantage in international trade. Under free trade, overall economic welfare can be maximized and resources can be optimally allocated. Free trade, in short, offers a fair chance to compete.
On this playing field, more competitive industries will inevitably emerge on top, and more vulnerable sectors will lose out. Free trade can also bring in outside competition, which can have severe negative effects on unprotected domestic industries over the short run. But over the long run, this added competition can help make certain industries more healthy and resilient. As a result, free trade can ultimately help promote economic growth.
Though Taiwan is a trade-oriented economy, its free trade agreement (FTA) coverage is insufficient, and it has not yet had a fair chance to compete in the international arena. Time and time again over the years, exports have been proven to be the most important and reliable engine for driving the economy of Taiwan, with the most recent example being the economic slowdown between the second half of 2014 and the first half of 2016 due to the plunge in global crude prices. Though most East Asian countries, Taiwan included, experienced consecutive declines in exports at some point during that period, Taiwan was the only country that suffered a three quarter-long recession lasting from the third quarter of 2015 to the first quarter of 2016.
Of all of Taiwan’s exports, around 34 percent are information technology parts and components, 11 percent are communication products, and 55 percent are traditional manufacturing products such as basic medals, machinery, plastics, chemicals, equipment, and textiles. This means that 45 percent of Taiwan’s exports are high tech items that do not face tariff barriers in most of Taiwan’s exports destinations thanks to the Information Technology Agreement (ITA) enforced by the WTO in 1997. However, the other 55 percent of Taiwan’s exports in traditional products must cope with tariff barriers ranging from 5 percent to as high as 40 percent, precisely because Taiwan has not yet concluded or finalized an FTA with any major world export destination.
South Korea has been Taiwan’s foremost competitor for global export market share, given that 80 percent of exports from South Korea and Taiwan are similar in type. But because of its FTA disadvantage, Taiwan has been losing ground to South Korea. For example, Taiwan’s share of the Southeast Asia market was larger than South Korea’s until 2007, when an FTA between South Korea and the Association of Southeast Asian Nations (ASEAN) came into effect. The ASEAN region is Taiwan’s second-largest export destination, behind only China, with the US and Europe as Taiwan’s third and fourth-largest destinations, respectively. With South Korea having concluded FTAs with all of Taiwan’s major external markets, and its FTA coverage almost eight times that of Taiwan’s, Taiwanese exporters have been gradually losing valuable market shares to South Korean industry. Moreover, trade and investment are highly correlated, and so Taiwan’s outbound investments in those markets have significantly decreased over time. And this decreasing outbound investment is reducing the ability of Taiwanese businesses operating overseas to form supply value chains alongside domestic firms. Since more than 78 percent of Taiwan’s exports are intermediate goods, weakening supply chains leads to slower GDP growth and export momentum.
It is therefore crucial for Taiwan to sign as many FTAs as it can in order to have a fair chance at competing. Given that Taiwan is lagging far behind its major competitors, Taiwan ought to target the most advanced FTA it can -- namely, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). CPTPP currently has 11 members, and they are all economically vibrant economies in the Asia-Pacific region. These CPTPP members account for about 13.3 percent of global economic capacity and 14.5 percent of the world’s total trade volume. And CPTPP has been widely recognized as one of the highest-quality multilateral FTAs, with extremely comprehensive coverage across all relevant economic and trade dimensions.
CPTPP may not offer what its predecessor, the Trans-Pacific Partnership, might have, after US President Donald Trump issued an executive order in January 2017 withdrawing the US from the original deal. It is true that the US is a singularly important and irreplaceable market, but the CPTPP process is expandable, and CPTPP can welcome other members after it enters into force. With CPTPP setting a high standard for ongoing and future FTAs, Taiwan needs to do all it can to secure inclusion.
Taiwan has been a dedicated member of Asia-Pacific Economic Cooperation (APEC) since 1991, and the 2014 APEC Leaders’ Declaration stressed that the long-term APEC vision for a Free Trade Area of the Asia-Pacific (FTAAP) should be fulfilled by APEC members voluntarily and non-bindingly through a process conducted parallel to APEC itself. The APEC Leaders’ Declaration in 2016 reiterated that the FTAAP and APEC processes were parallel, and that FTAAP would be realized through ongoing projects including TPP (now CPTPP).
It is noteworthy that, among all regional FTAs under consideration, CPTPP is the only such process with members that are all APEC economies. As a dedicated APEC economy, Taiwan absolutely wants to be included in FTAAP. And it has been confirmed in APEC that Taiwan must first gain CPTPP membership in order to eventually join FTAAP.
Joining the CPTPP would certainly create substantial pressure for certain industries in Taiwan. But short-term impacts cold be converted to long-term resilience given proper planning. The deal is crucial if Taiwan’s manufacturers and exporters are to have any chance of competing internationally. Seeking to join the CPTPP is, without question, critical for the future health of Taiwan’s economy.
(Dr. Darson Chiu is the Secretary General of CTPECC)