There has been a significant breakthrough in Taiwan-US trade relations. The first agreement of the US-Taiwan Initiative on 21st-Century Trade was signed in Washington on Thursday last week, covering customs administration and trade facilitation, goods regulatory practices, domestic services regulation, anti-corruption and small-and medium-sized enterprises (SMEs).
It is the most substantial, comprehensive trade deal that the two nations have signed since 1997 and is a crucial first step to inking subsequent bilateral deals such as trade, investment and tax agreements.
The initiative should also help dispel concerns in the international community about geopolitical risks that Taiwan might represent.
The initiative is different from conventional free-trade agreements in that it focuses on high-level topics. In addition to the areas already agreed upon, negotiations are to address labor, environmental and agricultural issues, digital trade, non-market policies and practices, state-owned enterprises and standards — a clear difference from trade agreements that tend to focus on things such as reducing tariffs.
Opposition parties have accused the government of lacking focus on tariffs, saying that the initiative is little more than internal propaganda for the governing party.
However, this fails to recognize the special characteristics of Taiwan’s industrial development, which has been to a large extent centered on the high-tech industry, or how within the larger context of recent events, including US-China trade disputes, the COVID-19 pandemic, the outbreak of the war in Ukraine and China’s increased threats against Taiwan, the nation needs to find new methods and a new approach to engage with the reconfiguration of global supply chains that the US is promoting.
The core of Taiwan’s industrial sector is semiconductors, in which the key to competitiveness is supply chain integration, cutting-edge technologies, cultivation of world class talent and reducing the impact of tariffs.
Despite being blocked by China from participating in regional free-trade organizations, the vast majority of Taiwanese-made components for telecommunications products have preferential tariffs, so negotiations on tariffs are simply not a priority.
The US-Taiwan Initiative on 21st-Century Trade is expected to be of great importance to international trade and it will help Taiwan align with the core issues of the US-led Indo-Pacific Economic Framework for Prosperity (IPEF), which focuses on robust supply chains, clean energy, carbon reduction, infrastructure, an integrated tariffs framework, anti-corruption policies, and fair and flexible trade practices.
Taiwan’s economy has remained robust despite the US-China trade situation and the pandemic, but with China’s increased military threats — especially following the visit of then-US House of Representatives speaker Nancy Pelosi last year, when the Chinese Communist Party ordered an exercise to simulate a military blockade of Taiwan — Taiwan has been exposed to considerable geopolitical risk.
The threats have led to some international producers being concerned about the potential for conflict in the Taiwan Strait and the effect that would have on supply chains, which is why the “Taiwan+1” policy was introduced. The policy requires Taiwanese manufacturers to establish facilities outside of Taiwan to spread the geopolitical risk.
The geopolitical concerns have led international investors to hesitate before buying Taiwanese stock, with perhaps the most representative case being Warren Buffett’s Berkshire Hathaway Inc divesting virtually all of its stock in Taiwan Semiconductor Manufacturing Co (TSMC) in the past six months, despite having bought about US$4.1 billion in US depositary receipts in the third quarter of last year.
This kind of investment behavior flies in the face of the principles of long-term holdings and of “investing in values.” Buffett was explicit about his reasons for the sale, saying that even though TSMC is one of the best-managed and most important companies in the world, he simply had problems with its location.
Buffett’s miscalculation of Taiwan’s geopolitical risk meant that he missed out on a rally in TSMC’s stock, a mistake that the “Oracle of Omaha” should not have made.
The geopolitical risks Taiwan faces might be regarded as a weakness, but at the same time they also present an opportunity, demonstrating to the free world that if it wants to build a reliable, stable supply chain to reduce economic reliance on China, it simply cannot do without the participation of innovative, fair and transparent economies such as Taiwan.
Nikkei Asia and the Financial Times released a report on Taiwan’s essential status within the global high-tech supply chain. The report said that despite a debate about whether Western companies should diversify their supply chains given the possibility of conflict in the Taiwan Strait, they would pay a high price for cutting ties with Taiwan.
It asked whether the high-tech industry — especially the supply chain for electronics — would survive without Taiwan.
The outside world seriously underestimates Taiwan’s importance in the supply chain, which goes far beyond semiconductors, the report said. Taiwan’s integrated supply chain covers almost everything imaginable, from chips to components, from printed circuit boards to casings, from lenses to packaging..
If there were conflict in the Taiwan Strait, the entire global supply chain would collapse, it said.
A report titled The Global Economic Disruptions from a Taiwan Conflict by independent US research provider Rhodium Group said that disruptions from a blockade scenario in the Taiwan Strait would endanger more than US$2 trillion of economic activity.
The Washington-based Semiconductor Industry Association said that should Taiwan’s original equipment manufacturer chip supply be cut, it could potentially cost electronics equipment manufacturers reliant on a stable supply chain almost US$500 billion in lost revenue.
Clearly, the global economy cannot sustain the cost of a conflict in the Strait, and the irreplaceable nature of Taiwan’s comprehensive supply chain makes finding an alternative simply inconceivable.
The importance of Taiwan’s supply chain means that global economic security is already inextricably tied to the maintenance of peace in the Strait. Thus the fate of Taiwan and the world are bound.
The international community has gradually learned that “a Taiwan contingency is a contingency for the global economy,” and that peace in the Taiwan Strait is linked not only to the universal values of the free world, but is also inextricably bound to global prosperity. As a result, the world needs to transform its attitude of watching from afar and should now, despite China’s objections, strenuously oppose any unilateral changes to the “status quo” in the Strait.
Even though Taiwan is going through the darkest times it has experienced in decades in terms of the threat from China, it is getting more support than ever from the international community. It is enjoying a golden age in its ability to express its values to the world.
The US-Taiwan Initiative on 21st-Century Trade is a light at the end of a particularly long and dark tunnel.
Translated by Paul Cooper
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