U.S.-Taiwan Trade Agreement Lacks Substantive Benefits
By Kuo Chung-lun
United Daily News, June 3, 2023
Representatives from Taiwan and the United States signed the first agreement under the "U.S.-Taiwan Initiative on 21st Century Trade" on June 1, 2023.
The first agreement includes such issues as customs administration and trade facilitation, small and medium-sized enterprises, anti-corruption, good regulatory practices, and domestic regulation of services. The second one, which will cover labor, agriculture, state-owned enterprises, and environmental issues, has proven to be more challenging and time-consuming in negotiations. The third agreement would be the most difficult as it will involve "tariff reduction" and "market access for the service industry." Taiwan claimed that signing the first agreement was an important step towards completing the U.S.-Taiwan free trade agreement using a “building blocks” approach, with cautious hopes of resolving all issues by the end of the year.
It is almost impossible for Taiwan to complete negotiations with the United States. Given the current inclination towards protectionism by both the Democratic and Republican parties, the United States is not engaging in FTA negotiations with any country in the least. Furthermore, with the upcoming presidential election in the United States, it is highly unlikely that an FTA with Taiwan will be completed by the end of the year.
The Biden administration, following the policies of the Trump administration, is no longer pushing for free trade, or returning to the U.S. tailored-made Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). However, to compete with the Regional Comprehensive Economic Partnership (RCEP) led by mainland China and to attract Indo-Pacific allies, a new trade framework called the Indo-Pacific Economic Framework (IPEF) has emerged. To avoid political controversy and attract more members, the Biden administration intentionally did not invite Taiwan and instead proposed the " U.S.-Taiwan Initiative on 21st Century Trade " as an alternative.
On May 27, trade ministers from 14 countries participating in the IPEF held a ministerial meeting in Detroit to conclude negotiations on the international supply chain, while Taiwan was left out. An agreement was reached to establish a council to coordinate supply chain actions and create a "crisis response network" to issue early warnings to member countries in the IPEF regarding potential supply disruptions, enabling them to seek support during supply chain interruptions.
The United States is clear about its intentions - on one hand, it is using the IPEF to attract allies in the Asia-Pacific region, and on the other hand, it is establishing a bilateral framework with Taiwan. While excluding Taiwan from the IPEF, it still expects Taiwan to fulfill its obligations and provide the necessary supply chain support to the United States and its allies. For Taiwan, which holds a critical position in the supply chain, this is an unfair treatment.
To appease Taiwan, the United States has simultaneously announced its intention to sign the first agreement under the "U.S.-Taiwan Initiative on 21st Century Trade." It appears that Taiwan is satisfied with this development, as some believe that due to the complexity of the subsequent negotiation stages, signing the first agreement is a way to expedite the process and treat it as an early harvest.
However, the first agreement does not entail any changes in tariffs, resulting in no substantial benefits for Taiwan’s industries. Taiwan, in essence, gains consolation prizes in terms of strengthening economic ties with the United States, increasing American exports to Taiwan, and enhancing Taiwan's ability to resist economic coercion from mainland China.
Currently, the U.S.-Taiwan trade agreement may seem lackluster, but the tax agreement that really benefits Taiwan is still being negotiated with great anticipation. Ambassador Hsiao Bi-khim, representative to the United States, recently stated that she hopes to resolve issues related to the avoidance of double taxation, which is currently a high priority for Taiwan. Additionally, Secretary of the Treasury Janet Yellen stated that the absence of a tax agreement to prevent double taxation poses a major obstacle to the development of U.S.-Taiwan economic cooperation.
Taiwan climbed to the eighth spot among the top ten trading partners of the United States last year. Taiwan has accumulated a total investment of $13.7 billion in the United States, yet it is the only major trading partner of the United States that has not signed an agreement to avoid double taxation which poses a significant barrier to Taiwan’s investment in the United States.
This issue has become more prominent since Taiwan Semiconductor Manufacturing Company (TSMC) invested in the United States. TSMC sent a letter to the Department of Commerce last year, expressing that the lack of a double taxation agreement has hindered its supply chain partners from investing and building new factories in the United States. Previously, Chairman Bowei Lee of the LCY Group was interviewed by the Wall Street Journal and expressed a desire to build a new factory in the United States to produce semiconductor materials.
It is crucial to shed light on the recent developments among the United States, Taiwan, and mainland China. Following the trade agreement, the United States and Taiwan are now set to negotiate the avoidance of double taxation agreement, a move that may provoke the mainland. China’s Embassy in Washington stated that China has demanded the United States to cease "any form of official interaction with Taiwan."
It is fair to say that China’s protest is unfounded. Taiwan has already signed tax agreements with 34 countries, including Japan, Canada, and Germany. There even exists the "Cross-Strait Tax Agreement" between Taiwan and the mainland. If China seeks to protest the U.S.-Taiwan agreement, then its efforts would likely be futile.
The author is deputy editor-in-chief of United Daily News.