The U.S.-Taiwan Commercial Relationship: Moving toward a Free Trade Agreement?

Abstract

The U.S.-Taiwan Commercial Relationship:Moving toward a Free Trade Agreement? Scott L. Kastner (bio) The past few years have been a golden age for the U.S.-Taiwan relationship. Security cooperation between Washington and Taipei has deepened, the U.S. Congress has passed legislation such as the Taiwan Travel Act that codifies closer ties, the American Institute in Taiwan has opened a huge new facility in Taipei, and the United States has approved extended stopover visits by Taiwan's president, including in New York City. Now, many in both Washington and Taipei argue that the two sides should seek similar advances in the bilateral economic relationship by opening negotiations on a U.S.-Taiwan free trade agreement (FTA). Some members of Congress have been outspoken in support of a bilateral FTA, and the Senate version of the Taiwan Assurance Act introduced in 2019 sets this as a goal.1 Likewise, a growing number of U.S. observers have advocated for a bilateral FTA.2 As for Taiwan's position on this issue, President Tsai Ing-wen views a U.S.-Taiwan FTA as an important priority.3 This essay argues that the United States and Taiwan should begin to negotiate a bilateral FTA. Although U.S.-Taiwan economic relations have been mostly amicable, the relationship has been characterized by a number of persistent disagreements. An FTA would offer the opportunity to resolve these disagreements and would help prevent the marginalization of Taiwan—widely viewed in Washington as an important strategic partner—in a region increasingly characterized by bilateral and multilateral FTAs that Taiwan has been unable to join. [End Page 4] U.S.-Taiwan Commercial Relations Despite the island's relatively small population of around 24 million people, Taiwan was the United States' eleventh-largest merchandise trading partner in 2018. Total bilateral trade in goods stood at $76 billion in 2018, with the United States running a bilateral deficit of $16 billion. Although substantial, these numbers represent only 1.8% of total U.S. trade and indeed suggest that Taiwan has become a less important trading partner than it was in the past. During the late 1980s, for instance, Taiwan was the sixth-largest trading partner of the United States, and it stood as the eighth-largest trading partner into the 2000s.4 It is worth emphasizing, however, that official trade statistics understate the actual scale of the current U.S.-Taiwan commercial relationship by a considerable amount. Taiwanese manufacturers, since the 1990s, have moved a substantial portion of their production facilities to China, in large part to take advantage of lower labor costs there. Important component parts often originate in Taiwan or elsewhere and are imported into China for assembly. The final products are then exported abroad. Taiwan firms reported export orders from the United States of $146 billion in 2018, which was nearly triple the value of U.S. imports from Taiwan in that year. Many of these goods were assembled in and exported from China, meaning they are counted as Chinese exports to the United States (even when they are manufactured by Taiwanese companies and include, in some cases, substantial inputs originating from Taiwan).5 The current U.S.-China trade war has potentially large implications for commercial ties between the United States and Taiwan. The American Chamber of Commerce in Taiwan notes that the trade war is already causing some Taiwanese manufacturers to consider relocating production back to Taiwan.6 If the conflict continues to escalate, the number of firms considering moving facilities back to the island is likely to grow. Even if [End Page 5] a settlement is reached, the Trump administration's erratic approach to U.S.-China trade, coupled with a more generally adversarial relationship that will likely remain uneasy regardless of who wins the U.S. presidential election in 2020, generates considerable uncertainty for Taiwanese companies with significant operations in China. This uncertainty, in turn, will likely push more firms that depend heavily on U.S. exports to move operations out of China—either back to Taiwan or elsewhere. Managing Disagreements Given that the U.S.-Taiwan economic relationship is quite extensive, it is not surprisingly sometimes characterized by points...