The United States should quickly accept the offer of Taiwanese President Tsai Ing-wen to enter into negotiations for a Free Trade Agreement (FTA). Taiwan has become a focal point in U.S. policy toward the People’s Republic of China (PRC), partly due to the aggressive expansion of the latter’s military power in the South China Sea and its increasingly hostile actions toward any expression favorable to continued Taiwanese independence. President Biden and his team have signaled that they will not back down on support for the island nation or at least on maintaining the status quo regarding its autonomy. But deepening relations with Taiwan has more than geopolitical importance. Its highly successful economy and the structure of its trade with the United States offer ample justification for closer relations. An FTA is clearly in the economic interests of both nations.
In recent decades Taiwan has become overly dependent on trade and investment with its next-door neighbor. Taiwan business interests have more than $185 billion invested in mainland China. 400,000 Taiwanese citizens representing 2.5 percent of Taiwan’s workforce are based in China. Two-thirds of all Taiwanese economic output is exported to the PRC, and forty percent of its exports are sent to the mainland.
In effect, Taiwan and China have built a symbiotic relationship in the electronics industry. Taiwan is a world leader in semiconductor manufacturing and in many specialized types of chips vital to the computer and telecommunications industries. China has exploited its lower wages and lax environmental standards to become a dominant assembler of electronic devices, often in Taiwanese-owned factories such as those of contract manufacturer Foxconn. The cross-strait electronics juggernaut exports finished products like Apple devices and low-priced computers around the world.
The problem with this arrangement from a Taiwanese perspective is that China is gaining technological expertise in advanced electronics and has the ambition to become an autonomous, fully integrated supplier to the world, gradually displacing Taiwanese manufacturers. The model for this process is in the mobile telecommunications sector. Huawei is now a vertically integrated provider of telecommunications infrastructure and mobile devices. It prices its products below those of its competitors in large part due to government subsidies and questionable technology acquisition practices. Additionally, China is a key and sometimes sole supplier for basic materials needed by Taiwanese electronics manufacturers. Production of silicon, gallium and rare earths needed for advanced semiconductors and electric machinery is now dominated by Chinese companies. U.S.-China tensions have recently resulted in limitations on the ability of Taiwanese semiconductor and telecommunications providers to export to or make products in China. Finally, China has encouraged formation of regional trade arrangements like the Regional Comprehensive Economic Partnership (RCEP), which excludes Taiwan and has the potential to divert trade in advanced electronics and other goods away from the island.
Taiwan thus faces clear threats to its economic and political success. Chinese President Xi Jinping aspires for China to become the technological superpower of the 21st century and has threatened that Taiwan “must and will be” reunited with China. Xi has demonstrated the seriousness of his threats by actions in Tibet, Xinjiang and Hong Kong, and the relentless pursuit of the Made in China 2025 project. Taiwan thus has ample motivation to enter into a more stable, longer term relationship with its leading supporter, the United States.
On the U.S. side, there is a growing case to be made in economic terms for an FTA with Taiwan. The United States exports more goods to Taiwan than to either France or Italy, countries with more than twice the population and twice the economic output of the spirited island nation. The United States does have a trade deficit of $30 billion, including $17 billion in advanced technology products with Taiwan which it would like to narrow. Taiwan is a good market for U.S. electronic components, aircraft, defense equipment and raw materials like oil and grains. U.S. manufacturers of the highly sophisticated equipment used in semiconductor fabrication plants account for more than half of sales in this subsector and Taiwanese firms are premier customers. Taiwan is almost totally dependent on imports for its growing energy needs, including inputs like raw metals and feedstocks for the chemicals industry. The United States is a major supplier for these products and has the capacity to increase exports to meet Taiwanese demand.
Of more strategic economic importance is the fact that Taiwanese semiconductor leadership is crucial to the U.S. industry which, in terms of value represents over 47 percent of total value added in global markets in this industry. Taiwanese firms account for at least 48 percent of total semiconductor fabrication of semiconductors. Many U.S. semiconductor giants such as Apple, Qualcomm, and Nvidia base their economic model on chip design, and outsource actual fabrication to leading firms like Taiwan’s TSMC (Taiwan Semiconductor Manufacturing Company) and South Korean giant Samsung. U.S. chip design firms also account for 85 percent of the software needed for this segment of the industry. About 60 percent of TSMC business is with U.S. firms. The wider importance of such manufacturing interdependence has been underscored recently by shortages of chips designed for the auto sector, which has led to months-long closure of major plants in the United States, Japan and Europe. TSMC manufactures nearly 70 percent of all auto-specific chips.
Since Intel announced that it may outsource fabrication, having fallen behind the two East Asian giants in chips at the 7 nanometer and smaller range, TSMC is the most important partner for U.S. firms. Intel U.S. rival AMD already accounts for almost 10 percent of TSMC’s business. Samsung is a partner but also a competitor to U.S. firms because of its skill in design of these products and its ambition to displace U.S. design companies and manufacturers in global competition. If China were to cut off Taiwanese access to the raw and processed minerals or to the commodity components needed for advanced semiconductor production, it would represent a serious blow to the U.S. fabless sector and for the software and production equipment producers used by TSMC.
TSMC does have two fabrication plants in China but protects its best intellectual property by keeping its leading-edge processes in Taiwan. The company already has one plant in the United States and has announced a second plant, valued at $10-12 billion in capital costs, in Arizona.
In sum, even apart from the geopolitical considerations which have led to the U.S.-China rivalry in high technology industries and global political influence, the economic case for an FTA is compelling. The United States would like to have better access to Taiwanese food and energy sectors and to see improved protection for intellectual property rights. These are traditional problems for an FTA to solve. The mutual danger of Chinese efforts to displace the semiconductor industries in both countries as well as the mutual interdependence of U.S. and Taiwanese firms in this sector should motivate efforts to facilitate even stronger electronics ecosystems in the two countries. The United States and close allies in Canada and Australia are moving to address Chinese dominance in key raw materials such as rare earths and the minerals components for lithium-ion batteries, which are crucial to the electronics sector as well as the emerging electric vehicle industry. An FTA could also facilitate more Taiwanese investment in the safer shores of the United States. An aging population and low birth rates in Taiwan are a challenge to its growth trajectory. Better protections for intellectual property, the large market for technology products and a growing skilled workforce in the United States are favorable to investment there.
Europe and Southeast Asian countries could possibly offer mutually advantageous cooperation with Taiwan, but both areas are constrained by their endemic aversion to irritating the PRC because of their current investments in and growing export trade with the world’s second largest economy.
These realities open an opportunity for moving quickly to negotiations for a U.S.-Taiwan FTA. Half the members of the U.S. Senate and 161 members of the House of Representatives have endorsed the idea, and the reported openness of the Biden administration has laid the groundwork for the project in 2021. The Biden team will have to resist pressure from China, for instance in the guise of trading a commitment for further cooperation on climate change, to dampen enthusiasm for any action suggesting continued independence for Taiwan. But the economic and political considerations outlined here ought to outweigh any thought of backing down.
Read in Forbes