The first round of Trans-Pacific Partnership (TPP) negotiations were concluded in October last year, and the treaty is now waiting to be ratified. At least six members representing 85 percent of the total GDP of the 12 member states have to ratify the pact. That means that the TPP cannot come into force if the US were to reject the deal.
Less than three months before the US elections, the TPP does not seem to be a popular topic on US presidential candidates’ agenda. Will the outcome of the election kill the TPP for good? I highly doubt it, since the TPP is all about setting trade rules in the Asia-Pacific region. Forfeiting the rule-setting role to China is not an option for the White House — therefore, the TPP will come about eventually.
Taiwan’s economic performance has been miserable since the second quarter of last year. One of the reasons behind the slowdown is its insufficient free-trade agreement (FTA) coverage. Taiwanese industries, especially traditional manufacturers, face high tariff barriers, and foreign and local investors have few incentives to invest, as Taiwan lacks FTAs. As the engines of trade and investment lose steam, GDP growth loses impetus as a result. To cope with said constraint, the Taiwanese government has been striving to join the second round of TPP negotiations. Furthermore, a “new southbound policy” was initiated.
President Tsai Ing-wen (蔡英文) calls the new southbound policy one of the nation’s most important policies. The Democratic Progressive Party released the policy’s preliminary scope and framework at its Central Standing Committee meeting in April. The policy reflects Taiwan’s new outward-looking economic strategy, with people at its core. A new partnership connecting human resources will be built in industries, investments, education, culture, tourism and agriculture between Taiwan and Southeast and South Asian countries.
The office in charge of the new policy stressed the difference between the original and new southbound policies. The old policy focused on cost-down measures, while the new policy looks at added value. The old policy targeted cheaper land and labor, whereas the new policy is about mutual exchanges, including welcoming Southeast and South Asian tourists and businesspeople to visit and invest in Taiwan.
The timing of the new southbound policy’s launch was perfect, as all eyes are now on ASEAN and India. The establishment of the ASEAN Economic Community late last year highlights the tremendous opportunities that these countries present. Individually, none of the 10 ASEAN member states stand out economically. However, their aggregate estimated GDP last year stood at US$2.45 trillion, making ASEAN the sixth-largest economy in the world. The group’s combined population as of October last year was 628.72 million, indicating a market with great potential. The Indian economy has also been doing well, outperforming most Asian economies in recent times.
While there are opportunities associated with the new southbound policy, the government also needs to identify possible challenges. It must realize that the international environment facing the new policy would be very different from the old one.
Before 2000, Southeast Asia did not have FTA initiative. Taiwanese investors in the region could easily import parts and components from Taiwan. As a result, the original southbound policy helped boost Taiwanese exports and GDP.
However, the situation is very different now. Since 2001, ASEAN has signed free-trade pacts with trading partners like China, Japan, South Korea, Australia, New Zealand and India. The group is also engaged in Regional Comprehensive Economic Partnership (RCEP) negotiations, with the trade pact expected to be concluded by the end of the year. Furthermore, some ASEAN members, such as Brunei, Malaysia, Singapore and, Vietnam, are involved in the TPP, with more ASEAN members expected to join the pact’s second round.
Those FTAs are changing the international business environment. For example: The rules of origin would require that items traded in an FTA area use parts and components manufactured within the region. Otherwise, there would be no tariff-reduction benefit. In that case, Taiwanese investors operating in Southeast Asia will have to face higher costs to import intermediate goods from Taiwan. That would limit the new policy’s ability to help boost Taiwan’s economic growth like the old policy did.
In short, for the new southbound policy to succeed, it has to work under the umbrella of crucial FTAs. The content of the TPP was released in November last year, and it is widely recognized as a high-quality agreement. By comparison, the RCEP is not perceived to be as good, because most of its members are developing countries with highly protectionist economic measures. Nevertheless, the TPP will be a critical benchmark for the RCEP to pursue in the long run. Therefore, it is very important for Taiwan to join the TPP.
TPP membership will not only help Taiwan significantly expand its much needed free-trade pact coverage, but also make its southbound policy more effective. The importance of the RCEP should be ignored, too, as both China and India are involved in this grouping. As the new southbound policy office has said, the new policy is not meant to renounce the Chinese market.
Darson Chiu is deputy director of the Taiwan Institute of Economic Research’s Macroeconomic Forecasting Center.
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