Nikkei Asia

Taiwan Needs Economic Support from US, Not Just Arms

China's use of trade coercion to sway the island's election highlights vulnerability.

Adjunct Fellow
Container ship YM Unanimity seen docked at its home port in Keelung, Taiwan, on October 16, 2016. (Craig Ferguson/LightRocket via Getty Images)
Container ship YM Unanimity seen docked at its home port in Keelung, Taiwan, on October 16, 2016. (Craig Ferguson/LightRocket via Getty Images)

Questions of how to manage relations with China were not the only issues weighing on Taiwanese voters when they went to the polls on Jan. 13.

How to address the impact of trade challenges and resulting weak economic growth and income inequality were also concerns on the minds of those casting ballots for a new president and legislature.

China understood this. In the months leading up to the election, Beijing attempted to swing voters against the incumbent Democratic Progressive Party (DPP) by using economic threats.

They may have been at least partially successful. Although China is not happy with the outcome of the presidential race, Beijing can take some satisfaction in the fact Lai Ching-te, the DPP's successful nominee, won with only 40.1% of the vote, down significantly from the majorities incumbent Tsai Ing-wen racked up in her 2016 and 2020 victories for the DPP. Indeed, Lai, Tsai's vice president, might well have faced defeat if the two main opposition parties had been able to come together behind a single candidate.

In the legislative polls, the DPP not only lost its majority but even narrowly finished second to the opposition Kuomintang (KMT) in the race for seats. There is the very real possibility that the KMT and the Taiwan People's Party may now work together to frustrate Lai's agenda.

The truth is, Taiwan is vulnerable to cross-strait economic coercion. Economic growth has slowed in recent years, in part because of COVID-19, but also because of more long-term challenges.

Dependent on exports, Taiwan is not part of either of the region's two major trade pacts: the Regional Cooperative Economic Partnership or the Cooperative and Progressive Trans-Pacific Partnership. Unable to capitalize on tariff waivers, comparatively low wages have become key to Taiwan's exports competitiveness.

In 2010, with the KMT's Ma Ying-jeou as president, Taiwan and China signed the Economic Cooperation Framework Agreement (ECFA). While many of the ambitious goals set forward in the pact were never realized, "early harvest" portions of the ECFA produced some tariff reductions and even the elimination of tariffs on some products, particularly agricultural goods.

As the election campaign began to take shape last April, China announced the start of a series of investigations into purported Taiwanese import restrictions, involving thousands of products, that it suggested were in violation of the ECFA and World Trade Organization rules. To make the threat clear, the investigations were extended so as to end shortly before the Jan. 13 election.

In late December, China ratcheted up the pressure by saying it would suspend ECFA tariff breaks for several Taiwanese petrochemical products. Then a few days later, Beijing said it was considering whether to extend the suspension of tariff concessions to many more products, including agricultural items. Following Lai's win, some Taiwanese leaders now suspect that the ECFA might be canceled altogether.

The U.S. should take the recent election results as a warning sign about the power of Chinese economic coercion and understand that the best way to counter Beijing is to take positive, mutually beneficial actions to expand its economic relationship with Taiwan.

There are two obvious steps to take.

First, the U.S. Congress should pass legislation eliminating the "double taxation" penalty under which Taiwanese and American companies that do business in both places pay taxes on the same operations to both governments. This creates inefficiencies and an unfair playing field, insofar as the U.S. has tax treaties that ameliorate this problem with many of Taiwan's competitors, including China.

Because the U.S. does not recognize Taiwan as an independent nation, a traditional tax treaty comes with complications.

That is why Congress has stepped to the front lines, with both House and Senate committees this month bundling a bill to grant double taxation relief in respect of Taiwan into a broader bipartisan tax relief bill. The House Ways and Means Committee passed the broader bill by a 40-3 vote last Friday and the administration of President Joe Biden has also offered its support.

Second, Congress should grant Biden trade promotion authority (TPA) to negotiate a traditional free trade agreement with Taiwan.

The administration has pursued trade talks with Taiwan since August 2022. These yielded an initial agreement in June that covered areas such as customs administration, regulatory practices, anti-corruption measures and programs to aid small and midsized enterprises. The Biden administration, however, has refused to discuss tariff issues with Taiwan, partly because it says this obviates the need for TPA.

Congress has disagreed with this approach and in August passed a bill retroactively "implementing" the agreement signed with Taiwan in order to assert its authority over trade.

The vote on the bill was overwhelmingly bipartisan in both houses and indeed was declared unanimous in the Senate. This type of support is very unusual for a trade bill and shows just how much consensus there is in Congress when it comes to economic relations with Taiwan.

That does not necessarily mean Congress would actually grant TPA to Biden to negotiate a free trade agreement with Taiwan, especially when he is failing to even ask for it.

Still, the House Select Committee on the Chinese Communist Party last month said in a bipartisan report that Congress should "enact legislation setting negotiating priorities and a process for congressional consideration of comprehensive bilateral trade agreements, starting with Taiwan." These are precisely the type of guidelines that are generally included in TPA legislation.

Unlike most issues being debated in Congress, there is bipartisan support for taking action to counter Chinese coercion against Taiwan. Beijing's interference with this month's election should prompt Congress to realize that if it wants to support Taiwan, economic measures are as important as military assistance.

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