With the collapse of the multilateral WTO Doha Round of trade negotiations, the US has vowed to pursue alternative means of trade liberalization through bilateral free trade agreements (FTAs) with willing partners -- particularly with economies in the emerging economic powerhouse in East Asia.
This shift will bring into stark relief a major dilemma for US trade and diplomatic policy: the increasing political and economic isolation of Taiwan within the region. Heightening the US dilemma is the reality that the current wave of discriminatory intra-East Asian FTAs is already diverting trade and investment away from Taiwan's economy.
In determining whether the time has come for a US-Taiwan FTA, it is important to establish a clear picture of the positions and interests of the three parties directly affected: the two potential partners -- the US and Taiwan -- and, of course, the elephant in the room, China.
With total two-way trade amounting to just under US$57 billion last year, Taiwan is the US' eighth-largest trading part-ner, ranking ahead of France and Italy and just behind South Korea. The US is in turn Taiwan's second-largest trading partner.
Ironically, however, it is the Taiwan-China trade and investment connection that has emerged as the strongest economic tie among all of Taiwan's international relations -- despite the continuing tension over sovereignty issues.
Using China's statistical count (which more accurately includes much of Taiwan's exports to Hong Kong as ultimately bound for China), bilateral trade in 2004 amounted to US$78 billion, with Taiwan enjoying a trade surplus of US$51 billion.
This surplus stems in part from the fact that the Taiwanese government has many trade restrictions on imports from China. Electronics and related equipment constitute a significant portion of Taiwan's exports to China.
The underpinning of this burgeoning electronics trade with China is based upon huge investments that Taiwanese companies have made over the past decade. Though official estimates place the total investment at US$40 billion, more accurate unofficial estimates (which include money routed through Hong Kong and various Caribbean havens) run from US$70 billion to US$100 billion.
Turning to the political and strategic background to the proposal for a US-Taiwan FTA, it should first be acknowledged that according to the economic and political criteria set forth by the administration of US President George W. Bush itself to prioritize the choice of FTA partners, Taiwan should rank near the top of the list.
Among the key tests that Taiwan meets are the following: It is a democracy; it already has a significant economic relationship with the US; it is willing to negotiate a comprehensive agreement that goes beyond WTO liberalization; it is a stalwart diplomatic and security ally of the US; and finally, an agreement would enjoy bipartisan support in the US Congress.
On the downside, Beijing adamantly and forcefully opposes nations signing FTAs with Taiwan, arguing that this will in effect give Taiwan the status of an independent nation and violate what it considers the international rule of "one China." In pursuit of the goal of isolating Taiwan diplomatically, Beijing has directly threatened nations that have considered FTAs with Taiwan, warning them that they "would bring political trouble to themselves " if they proceeded with such an action.