Taiwan and the TPP

(This piece is a collaborative effort between correspondents Dominic Yang, Victoria Chang and Albert Tseng. To read their previous articles: “How Should Taiwan Solve Complex Global Puzzles?” “China’s Stock Market Today, Taiwan’s Economy Tomorrow” and “Why Should Taiwan Join the AIIB?“)

The Trans-Pacific Partnership (TPP) is a very controversial trade agreement proposal among an initial twelve Pacific Rim countries. The ultimate goal, according to its proponents, is to promote economic growth by enhancing innovation, productivity, and competitiveness – by creating employment and raising living standards through lowering barriers to trade and instituting shared economic norms. There are varying impacts among all countries involved. We posit Taiwan on the TPP map to discuss our thoughts about geopolitical and economic implications of the TPP.

Geographically, we look at five regions including potential members: Northeast Asia (Japan, South Korea, China), Southeast Asia (Singapore, Malaysia, Vietnam, Brunei, Philippines, Thailand, Indonesia), Oceania (Australia, New Zealand), North America (Canada, United States, Mexico), and South America (Chile, Peru, Columbia). We discuss the potential scenarios for Taiwan regarding the internal economic and broader geopolitical implications of joining the TPP in order to analyze and develop Taiwan’s strategies.

Taiwan’s current situation

The first task in assessing the impacts of Taiwan joining the TPP is to analyze the present Taiwanese industrial scene and identify its structural limits and strengths.

Economically, based on Taiwanese government statistics in 2015, the growth rate of the Southeast Asia import market (excluding Brunei) for Taiwan has been a decline at -11.2%, with Taiwan’s market share (for Jan – Jul 2015) at 5.8%. Japan’s growth rate in the Southeast Asia import market has been -7.3%, with 9.3% market share, and South Korea’s growth rate has been -7.1% with 7.0% market share. In contrast, China’s growth rate has been 4.4% with 19.1% market share. This correlates with the assumption that Taiwan competes with Northeast Asia,with similar export conditions, joining the TPP. It also indicates that Southeast Asia has produced substitutes and found a more competitive supplier in China.

Taiwan’s export growth rates to Oceania, North America, and South America have been -7.3%, 1.9%, and -6.6% respectively. In these three regions, there are only two countries where Taiwan has had positive growth rate in Jan – Jul 2015: United States (2.1%) and Mexico (17.7%).

The primary problem of Taiwanese industry is the gap between the input and output of productivity (especially in the service industry), and the unbalanced focus for preferring the ICT (Information and Communications Technology) semiconductor technological manufacturing industry to other types of manufacturing. In short, Taiwan is facing the urgent need for industrial upgrade and restructuring. For more developed countries, joining the TPP results in more resources and protections to upgrade, restructure, or maintain their knowledge-based economies — that is, activities that require innovations and patents, with the biomedical industry as one example. However, Taiwan is still trapped in industrial transition between the low-end manufacturing of a developing country and the knowledge-based economy of a developed country.

Given that Taiwan’s economic structure is more than 50% services industry, production should be strong enough to replace the old type of manufacturing industry, yet the limits of Taiwan’s service industry is that they are not competitive enough compared to developed countries. In the financial sector, Taiwan still contributes 14% to 15% of its services labor force, which is twice as much than the US in this sector at 7.6%.However, financial services account for the same share of the services output, at about 25%. Overall, the growth of Taiwan’s services industry has been slowing over the past several years.

There is no denying that it would be difficult for Taiwan to join the TPP directly. There are geopolitical factors behind this. Recall the situation surrounding Taiwan joining the WTO — Taiwan eventually became a formal member in January 2002, after China joined in December 2001, even though Taiwan (R.O.C.) had been a founding member of GATT (the predecessor to the WTO).

While joining the TPP, Taiwan’s government may encounter the usual problem about which the official name to use for membership. As a member of the WTO, Taiwan is called “The Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu,”, instead of “Chinese Taipei” or “Taiwan (R.O.C).” This moniker was also mentioned last year when Taiwan expressed interest in joining the China-led Asian Infrastructure Investment Bank (AIIB). After the Ma-Xi meeting in Singapore this November, nobody can be sure if Taiwan’s government would be able to choose a better name than “The Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu”, to join the TPP.

On the other hand, China has viewed the TPP as a potential threat by which the United States is trying to strengthen its ties with Asian countries. US officials have mentioned clearly that they see this pact as potentially a partial effort to counter China’s influence in Asia. From this perspective, Taiwan again could become a tipping point between the United States and China.

Impact to Taiwan’s internal economy

With a more direct eye toward the economy, joining the TPP will intensify the competition faced by Taiwan’s services industry against those of neighboring states in Southeast Asia and Northeast Asia, especially the strong financial sectors in Singapore and Japan. This could be painful, yet we believe it is necessary for upgrading the way industries operate in Taiwan. This upgrading step will come sooner or later, with or without the TPP; therefore the TPP could become the originating spark for the transition and yield possibly stronger positioning in the future competitive arena.

If Taiwan stays solely focused on semiconductor manufacturing, the environment could become harsh after joining the TPP, especially after Vietnam and other Southeast Asian countries have increasingly caught up in ICT manufacturing know-how, on top of their cheaper labor.

Taiwan has been specializing in the semiconductor manufacturing industry for several decades; we believe it is time to use the knowledge and human capital in Taiwan to stress innovation and soft power, instead of commodities products that could be replaced when other regions elsewhere have similar resources and capabilities with lower labor costs. The manufacturing industry must incorporate much more variety besides technological sectors. The industries that the TPP covers are abundant, and there are other fields that Taiwan could develop to find a niche.

Joining the TPP no doubt will inflict painful consequences for many industries and workers in Taiwan, as the economic structure has been too conditioned to low-cost, low-margin commodities manufacturing. In the short term, the transitional pain should be acute, yet in the long run if Taiwan finds its new competitive advantages in this process, the outdated economic model of Taiwan, unchanged since the last economic miracle, can be refreshed.

However, there is no denying that being involved in the TPP will bring negative impacts on many of Taiwan’s industries, including semiconductor, machinery, electronic parts, and agriculture (i.e, pork, poultry, fruit). The public should be worried about serious economic and social shocks. Therefore, the Taiwanese government, or at least opposition parties, may decide not to join and potentially provoke greater outcry from Taiwan’s possibly advantageous industries. At the least, though, as controversial as the TPP might be, not joining the TPP will require Taiwan to collectively find an economic direction different from that of the “global economy,” without the marginal benefits and interconnections provided by the partnership.

Below is a quick chart of the current strengths and weaknesses of several TPP members compared to Taiwan:

Joining the TPP is more than economics

In addition to economic benefits, the TPP is also intended for the US to geopolitically reassert its presence in the Pacific (the “Pivot to Asia”), and to contain China’s rising regional influence in Asia. The discourse behind this free trade agreement sounds familiar, as if Cold-War-type power arrangements have crept forward to the 21st Century geopolitical environment. What is different is that the Cold War created a clear cut ideological and political divide between states of the world, whereas the present international space is more multipolar, with new alliances and blocs not yet fully formed. Therefore, the TPP is structured as more than just the average free trade agreement.

Much could be argued on this point of the TPP’s intention beyond pure economics, including the assertion that it could potentially alter a nation’s internal structure and regulations. Eventually, it could be seen as a method for the US to incorporate other countries into its geopolitical mindset, originating from financial ties and diplomatic attachments. The international competitions today have dispersed into broader diplomacy and trade battles, as opposed to the orthodox ‘Realpolitik’ context of geographical blocs fighting against each other. Needless to say, voices emphasizing a more collaborative economy in the region have not been absent, and Japan’s Prime Minister Shinzo Abe expressed the strategic significance for the TPP if China joins.

Therefore, what is presented in front of Taiwan regarding the path of geopolitical choice today is unlike the more obvious choices of the past, if the TPP is to be viewed as a geopolitical design. Taiwan’s answer to the geopolitical questions on participating in the TPP should be balanced with how the practical impacts of the TPP affect Taiwan’s industry and social makeup. After all, despite the TPP’s origins in a simple multilateral trade agreement in the southern Pacific between Brunei, Singapore, New Zealand and Chile, the TPP has become arguably one of the most far reaching pieces of the current global power fabric anchored by the US and Japan, the world’s largest and third largest economies.

The essence of the international affairs game in the last century has evolved  into something far more complex. Although Taiwan’s participation may not alter its dearth of official diplomatic recognition to a substantial degree, but the tenor of economic relations between Taiwan and many of its important trading partners will change. In this perspective of the TPP, Taiwan’s geopolitical relations will shift and change in tandem with economic changes.

But what if Taiwan cannot even join the TPP? It is never easy for Taiwan to join any international organizations and agreements. For example, the US might consider its future interactions with China if Taiwan joined, because China could also be a potential member. Other existing TPP members might also calculate their own political and economic future with China before supporting Taiwan. Moreover, as mentioned, domestic opposition in Taiwan to the TPP might halt Taiwan from even applying.

In short, while it is tempting to lament Taiwan’s “marginalization” and push Taiwan to join the TPP just for the sake of being in an international club of nations, the geopolitical implications are complicated. Joining the TPP assumably will pull Taiwan closer into the orbit of the US and Japan, yet it is not an automatic guarantee for further diplomatic recognition or political gains, at the cost of downsides to Taiwan’s economy and social structure. However, harmonizing the “tenor of economic relations” between Taiwan and the rest of the region may be just as important — even vital to Taiwan’s future — as traditional diplomatic recognition or associations.

Conclusion

No matter which economic policy direction Taiwan chooses, one thing is for sure: Taiwan’s economy will encounter more extensive and more intensive challenges from global competition. By joining the TPP, Taiwan can have access to broader markets and develop stronger business competitiveness in those overseas markets. Consumers can achieve benefit through trading competition, such as better and more affordable medicine. However, it would also bring negative impacts on some enterprises and industries by imposing harsh market pressure.

Without joining, however, Taiwanese industries might save short-term benefits and profits but should then make preparations for more competitive products and services to survive in the global markets in the long run. Especially, Taiwan will need to consider how to react if doors are closed due to China’s influence.

The TPP will remain a crucial point of contention for Taiwan’s future economic development, especially for the new administration elected next year. Here are some suggestions for the new administration: the public sectors need to propose a systematic thinking to cope with TPP and other trade related issues, such as reevaluating current regulatory regimes’ compatibility with the TPP rules, and fortifying Taiwan’s social safety net and services. For weaker industries, the government needs to implement different policy tools to assist some weak industries in advance – such as tax subsidies, technological transfers, and structural upgrades.

Finally, any decision on the TPP will have to be balanced between the positive and negative economic impacts, with possible geopolitical implications. To be able to evaluate those pros and cons, Taiwan needs to approach the question of TPP with a national strategy in mind. It is too early in a political shift in Taiwan currently for the formation of a national strategy, but Taiwan may not have much time left.

(Feature photo of container yard in Taiwan, from Wikipedia)