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Lack of trade agreements – a threat to Taiwan’s future

Frank Bickenbach, Silas Dreier and Wan-Hsin Liu, IfW Kiel

Despite its small size of fewer than 24 million inhabitants, or 0.3 percent of the world’s population, Taiwan is one of the leading economies in global trade. With a share of almost 2 percent of global trade in goods, Taiwan ranks 16th among all economies in the world in 2021 – compared to just 57th place in terms of population. The most important export markets are China (including Hong Kong) with about 42 percent, followed by the ASEAN countries (16 percent), the US (15 percent), the EU (7 percent) and Japan (7 percent).

Taiwan is particularly successful in the electronics industry. Around half of Taiwan’s merchandise exports are electrical and electrotechnical goods. In addition to many successful small and medium-sized enterprises, there are also several large companies that are among the world market leaders in their respective fields.

For instance, TSMC accounts for more than half of the world’s contract manufacturing of semiconductors, and is the almost unrivalled technology leader in the production of semiconductors with particularly small structure widths. MediaTek held a global market share in smartphone processors of about 40 percent in 2022, and in the same year, about 14 percent of all PCs sold worldwide came from the two Taiwanese companies ASUS and Acer.

Lack of trade agreements brings massive disadvantages

Taiwan’s important role in global trade is all the more remarkable, as it has only been able to conclude very few bilateral or multilateral investment or trade agreements due to China’s vigorously advocated “One China Policy”. Nevertheless, with China’s consent, Taiwan was able to join the World Trade Organisation (WTO) in 2002. It is moreover a member of important plurilateral WTO agreements, such as the global WTO Information Technology Agreement (ITA), which provides for the complete elimination of tariffs on numerous products in the information technology sector, the most important sector of the Taiwanese economy.

Memberships in the WTO and ITA have helped Taiwanese companies to establish a central role within the “Factory Asia” production network and in global supply and production chains, especially in the electronics and IT sectors, even without bilateral or regional free trade agreements. However, various recent developments have led to a significant increase in the disadvantages for Taiwan’s businesses resulting from the lack of regional and bilateral trade and investment agreements.

  • The intensification of economic and political conflicts with China has led the US and increasingly also the EU – like China before – to align their trade policy and their industrial policy increasingly towards geopolitical goals. With the aim of reducing strategic dependencies on China, strengthening their resilience to disruptions in international supply chains and defending technological leadership or sovereignty, protectionist and at times WTO-incompatible policy instruments (tariffs, export bans, subsidies and local content requirements) are increasingly being employed. As a result, the existing global and regional supply and production networks are increasingly coming under economic and political pressure to adapt. This is particularly true for “Factory Asia”.
  • The increase in geopolitical conflicts and geopolitically motivated economic policy measures is undermining the global rule-based economic order and is further weakening the role of the WTO. In addition, the US blockage of appointments to the WTO’s Appellate Body has led to the WTO’s dispute settlement system becoming dysfunctional, so that member states can no longer defend themselves effectively at WTO level against possible rule violations by other member states.
  • In recent years, countries in the Indo-Pacific region have concluded significant regional and bilateral trade agreements: In 2018, eleven countries in the region concluded the ambitious “Comprehensive and Progressive Agreement for Trans-Pacific Partnership” (CPTPP). This was followed, at the end of 2020, by the “Regional Comprehensive Economic Partnership” (RCEP), the world’s largest regional free trade agreement in terms of population and economic output of the countries covered. Taiwan is not a party to either agreement. In addition, the EU has signed comprehensive bilateral trade agreements with South Korea, Japan, Singapore and Vietnam since 2015. Negotiations have recently been concluded with New Zealand and are ongoing with other partners in the region (including Australia, India, and Indonesia) – but not with Taiwan.

Taiwan cannot participate in standards

The intensification of geopolitical conflicts and the accompanying weakening of the global rule-based economic order increase the uncertainty Taiwanese companies face in their foreign trade activities. At the same time, the various new bilateral and regional trade agreements between Taiwan’s trading partners and competitors in the Indo-Pacific region increasingly lead to an increasing disadvantage for Taiwanese companies in the reorganisation of regional and global production networks.

As a non-member, Taiwan does not benefit from the trade liberalisations specified in these agreements and does not take part in developing the rules and standards agreed therein. Moreover, the lack of own trade agreements hampers Taiwan’s efforts to reduce its economic dependence on China.

For Taiwan, joining the regional trade agreements as well as concluding bilateral trade or investment agreements with its most important trading partners would therefore be of considerable economic advantage. However, Taiwan’s accession to the RCEP seems out of reach for the foreseeable future, as this would require the consent of all parties to the agreement – including China. Taiwan’s accession to the CPTPP seems conceivable in principle. Both Taiwan and China have already applied for membership.

Increasing isolation of Taiwan would be costly

But, even a joint accession of Taiwan and China is vigorously rejected by China. Taiwan’s accession would require a unanimous vote of all eleven current CPTPP members – which seems unrealistic in the face of China’s opposition. The conclusion of bilateral trade or investment agreements with the EU, the US or other important trading partners would also likely meet with similarly strong opposition from China. Such agreements would thus only be feasible if Taiwan and its potential contractual partners were ready to face the likely retaliation from China.

For both Taiwan and its partners, an increasing isolation of Taiwan would come with considerable costs. Taiwan’s technological and economic potential, especially in the electronics industry, would be lost to the world. A long-term economic weakening of Taiwan would also increase the island’s economic dependency on China, possibly at the expense of the democratic and rule-of-law institutions built up over decades.

It is therefore important for Taiwan’s partners to carefully examine what possibilities and leeway they have to maintain or further strengthen economic cooperation with Taiwan? What diplomatic, economic, or even military countermeasures would they have to expect from China? And how could the associated risks be minimised?

Frank Bickenbach is Deputy Head of the Research Centre “International Trade and Investment” and a Senior Researcher at the Research Centre “Innovation and International Competition” at the Kiel Institute for the World Economy.

Silas Dreier is the coordinator of the Global China Conversations at the China Initiative of the Kiel Institute for the World Economy. He is also currently a Graduate Student of China Business and Economics at the University of Würzburg.

Wan-Hsin Liu is a Senior Researcher in the Research Centres “International Trade and Investment” and “Innovation and International Competition” at the Kiel Institute for the World Economy. She is also the coordinator of the Kiel Centre for Globalisation.

This article was written in the context of the Global China Conversations event series of the Kiel Institute for the World Economy (IfW). On Thursday (11 a.m., CET), Shin-Horng Chen, Vice President of the Chung-Hua Institution for Economic Research, and Sarah Kirchberger, Head of Asia-Pacific Strategy and Security at the Institute for Security Policy at Kiel University, will discuss the topic: “Tensions over Taiwan: What’s the Current Situation and What Challenges Arise for Businesses and the Economy?“. China.Table is the media partner of this event series.


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