Taiwan in the Global Economic Landscape – Brookings Institution
Taiwan in the Global Economic Landscape
Ma Ying-jeou won a second four-year term as president of Taiwan in January 2012, with 51.6 percent of the votes cast in the election. This result signifies, among other things, a solid endorsement of President Ma’s first-term leadership of navigating through challenges of economic stress and natural disasters in the midst of global crises. As a trading nation―and lacking the formal political relationships of most nations―active participation in the international economy is especially important to Taiwan. This article aims (1) to examine the current state of play of Taiwan’s global economic participation; (2) to evaluate the strengths, weaknesses, opportunities, and threats Taiwan is now facing; and (3) to propose a “maxi-min” approach to enhancing Taiwan’s role in the world.
Global Efforts to Promote Economic Growth and Sustainable Development
In order to ensure economic security in a turbulent and interconnected world, a measured dose of liberalization is essential. Taiwan, like other economies, must act quickly to keep up with emerging trends, but must also undertake prudent cost-benefit analysis. On the one hand, the innovative competitiveness of the private sector must not be stifled; on the other hand, the public sector must promote economic growth and social equity by formulating comprehensive policies, including structural reform, lest changing circumstances or external shocks work to our detriment. In a globalized world, economies will neither be spared the ripple effects of others, nor can they escape the responsibilities of being a stakeholder in the global community.
The Ma Ying-jeou administration has identified six emerging industries in Taiwan―namely biotech, eco-tourism, green energy, medical and healthcare, organic farming, and cultural innovation―for which the government and private enterprises are seeking to boost competitiveness through a variety of means such as innovation and branding. In addition, four intelligence industries are to be promoted―cloud computing, smart electronic automobiles, IPR commercialization, and smart green buildings. The government plans to develop new visions and forward-looking policies in these industries. Development in these areas will forge structural change for economic growth, which will in turn contribute to the much-needed innovative and sustainable growth.
But these efforts to strengthen certain key industries could not exist in a vacuum, and interaction with the outside world is necessary. As late as 2009, Taiwan faced at least four specific external challenges to its competitiveness: (1) a relative lack of institutionalized trading mechanisms with mainland China, which is Taiwan’s neighbor, the home of more and more of its manufacturing, and a giant potential market; (2) the volatile financial situations and depressed economic climate in the United States and Europe; (3) a lack of free trade agreements with most economies; and (4) perceived political opposition from China to establishing such agreements with third parties.
In order to solve or mitigate these challenges, and to both enhance opportunities for near-term trade and boost mid-term international competitiveness, the Ma administration pursued an Economic Cooperation Framework Agreement (ECFA) with China. The ECFA was signed on June 29, 2009 and became effective as of September 12 of that year. The Early Harvest provisions are to be completed in three years starting in January 2010; China is removing tariffs on more than 500 products from Taiwan to the benefit of the island’s bicycle, petrochemicals and machinery industries. China will cut import tariffs on $13.84 billion worth of items including petrochemicals and vehicle parts, and Taiwan will cut tariffs on $3 billion worth of goods including parts for baby strollers and bicycles, and raw materials for textiles. This year more segments of ECFA, including goods and services, investment protection and dispute settlement are in the pipeline for further negotiation. Open sky (for air transport liberalization) and cloud valley (for high-tech information network clustering) are also identified as items of future collaboration.
Taiwan has been actively seeking bilateral economic cooperation pacts with other like-minded partners, including a revival of Trade and Investment Framework Agreement (TIFA) talks with the United States and a possible FTA with the European Union (termed as Trade Enhancement Measures by the European Chamber of Commerce). Sequentially, Singapore and Taiwan have initiated the negotiation of ASTEP (Agreement of Singapore-Taiwan Economic Partnership). Japan and Taiwan signed a landmark investment pact in September 2011. Feasibility studies on cooperation or partnership agreements with the potential partners of the Philippines, Indonesia, and India are now being undertaken. Other economies in the region, notably South Korea, are pursuing and implementing trade liberalization agreements; if Taiwan is excluded from broader regional economic integration, trade and investment will be diverted away from it.
Tables 1 and 2, below, illustrate Taiwan’s changing trade and investment portfolios with key partners and reflect the shifting global economic landscape.
Since 2002 Taiwan has also increased its international economic participation in multilateral fora, complementing the bilateral efforts noted above. In APEC, Taiwan has made great strides in collaborating on initiatives in Emergency Preparedness, Paperless Trade, and Crisis Management Center for Small & Medium Enterprises. Furthermore, public-private joint partnership has been highlighted by Taiwan’s initiation and participation in projects such as the Supply-chain Connectivity Framework and the Food Emergency Response Initiative.
In the World Trade Organization, Taiwan acceded to the Government Procurement Agreement in 2009. It continues to work and find ways to promote next-generation issues, including a potential extended Information Technology Agreement (known as ITA2), and regulatory cooperation. Taiwan’s commitment to a successful conclusion of the Doha Development Round remains firm and it stands ready to share its development experiences with emerging and developing economies.
Challenges Ahead for Taiwan: A SWOT Analysis
Strengths: Competitiveness, Competence, and Policy Mix
President Ma has put forth his vision of a Golden Decade featuring innovative approaches to stimulate economic growth and sustain competiveness. President Ma’s re-election and the KMT majority in the Legislative Yuan should increase the chances for policy reform and development, and initial signs are encouraging. Reputable international rating agencies, including IMD, WEF and BERI, have rendered high rankings for Taiwan’s competitiveness and network readiness for the year 2011. President Ma’s new Cabinet lineup, announced after the January 2012 election, is composed of prominent technocrats with financial and technological expertise who will be expected to steer Taiwan through the ripple effects of global financial storms.
The Ma administration has provided the foundation for prosperity and stability with continuous liberalization and cross-strait policies designed to benefit Taiwan. ECFA and 16 other agreements have institutionalized cross-strait economic relations, and reversed the harmful trend of run-away businesses and capital flight. Stability and mutual prosperity – not only across the Taiwan Strait, but in the region as well – will be mutually reinforcing.
President Ma’s cross-strait policy rubric of “sideline confrontations, create win-win situations” has taken us as far as the implementation of the Early Harvest provisions in ECFA. ECFA could well serve as catalyst for deepening regional economic integration, intensify the regional supply chains, and contribute to regional peace and prosperity.
Taiwan’s domestic politics, as in many countries, could easily disrupt an otherwise rational policy choice—a case in point was the U.S. beef import case that has flared up in 2009 and continues today. After much deliberation and nearly 12 months of field investigations, research on international health standards, inter-agency coordination, and public outreach, a U.S.-Taiwan beef import agreement was signed in 2009. However, given the partisan atmosphere that prevailed at the time in the run-up to Taiwan’s municipal elections, the Legislative Yuan weakened the agreement with an amendment to limit the scope of import.
But this uncertainty though is no more severe than the fact that the U.S. president’s trade promotion authority has not yet been extended by the U.S. Congress, nor is it more dangerous than the farmers’ riots in South Korea and Japan. A solution to the beef impasse – which continues to hold up other advances in Taiwan-U.S. trade relations – will require mutual understanding and concerted efforts in consensus building.
Opportunities: ECFA as Catalyst to Regional Integration
While Asia continues to be the engine of global economic growth, Mainland China’s 12th Five-Year Plan (2011-2015) highlighted that nation’s attempts to ease the double-digit growth and avoid over-heating, open more domestic markets, and enhance the services industry. Taiwan’s “golden decade” blueprint (2011-2020) has some overlapping interests and both sides seem ready to further improve economic cooperation and seek common development and prosperity.
The value of ECFA as a catalyst for regional harmony and prosperity is most evident when Taiwan’s global official and non-official partners expressed their welcome sentiments after the inking of ECFA, including Singapore, Japan, the E.U. and the U.S. It was dubbed a “landmark,” with value of the pact extending beyond the immediate economic cooperation between Taiwan and China. Foreign chambers of commerce were pleased with the reduction of business transaction costs, and the potential for a wider scope of operation. The win-win-win potentials are enormous and are firing the imaginations of entrepreneurs and business executives. Integration rhythms of vertical, horizontal and criss-cross sorts are being widely explored at an unprecedented tempo.
Indeed, ECFA helped create a sense of urgency in the regional business community about speedier efforts in forging integration, such as South Korea’s call for faster negotiation with early harvest of sorts to avoid losing competitive advantages, and the U.S. urge for reviving TIFA (Trade & Investment Framework Agreement with Taiwan). ECFA will not only dissipate the risk of Taiwan being marginalized – a threat Taiwan faced as regional integration began to take place without it – but will also bring about sequential economic linkages with other economies in the region. ECFA will add much value to regional integration via vertical and horizontal integrations of regional and global supply chains. The stakes of ensuring the stability of economic linkages will in turns strengthen incentives for regional collaboration in facilitating ease of flows for goods, services, manpower, and technology.
ECFA will facilitate more cross-strait exchanges and collaboration in capital, work force, management style, technological innovation, and business culture, and hence could contribute to transforming mainland China into a milder, not tougher, hegemony.
As President Obama has made remarks supporting increased economic ties and reduced tension across the Strait, and is committed to providing Taiwan with most of the needed defense capability, the U.S. is playing an indispensable role in ensuring that the resurging China continue to be a responsible stakeholder. This balancing act of engaging and putting a check on the mainland China is not only good for Taiwan, but also good for the mainland. In each and every step of the paradigm shift, the emerging multilateral world should see a more harmonious international system, a much better structured world and a more humane approach to integration.
Taiwan could well serve as a catalyst for Mainland China’s evolving development. It may be constructive as a reference point in the creation and strengthening of the various fabrics of political, legal, economic, social and cultural development in China. As the world’s 18th largest economy and a creditable guardian of Chinese traditional culture, Taiwan has much to offer in the wake of global re-balancing and structural reform in her own right.
So far, the world has appreciated Taiwan’s aspiration to extend the benefits of ECFA and the peace dividend to others by joining other regional and global international organizations. As a trading island, Taiwan is well geared for exploring integration schemes, such as ASEAN + X, the Trans Pacific Partnership, the International Civil Aviation Organization, the United Nations Framework Convention on Climate Change, and the South Pacific Fishing Management Organization, among many others.
Lacking membership in these and other international regimes, Taiwan could neither contribute to the international community, nor fulfill the global citizen’s responsibility in good governance. In the schemes of liberalization, facilitation, standardization, regulatory reform, and development assistance, Taiwan should not be absent. The growing confidence in Taiwan as a “responsible stakeholder” rather than a “trouble maker” should enhance Taiwan’s expanded international participation and contribution.
Taiwan will continue to apply for international participation for practical reasons that will benefit both it and the international community. Taiwan does not need to be an open gap for health or environmental security. Taiwan has a lot to contribute to economic security with the efforts in establishing a SME Crisis Management Center in APEC, for instance.
Threats: Delicate Balance between Expectations and Feasibility
China’s approach to ECFA, especially the proportional – not absolute – equilibrium in Taiwan’s favor in the Early Harvest negotiations, further enhance the image of China as capable of being a reasonable and responsible stakeholder. On the other hand, China’s expectations may or may not match the feasible pace of change in Taiwan, and vice versa.
The sensitive issue of Taiwan’s de facto, if not de jure, sovereignty will require wisdom in the domestic, cross-strait and international arenas. Any oversight or misstep by either side could easily backfire and ignite tension of various intensities in the region. Cross-strait dialogues on the sovereignty issue must take place sooner or later and should be “sensible, reasonable and legal” (合情、合理、合法). International reactions and appropriate treatment of this critical issue remains a possible threat to the landmark breakthroughs elaborated thus far.
As to the pressure on the bilateral Trade and Investment Framework Agreement (TIFA) between the United States and Taiwan, a strong sense of mutual good-will is in order. The United States has over time come up with various “pre-conditions” for initiation or revival of TIFA—first intellectual property rights, then the pharmaceutical industry, and now beef. What might be next? The expectation of “preconditions” certainly differs greatly from expectations for the “TIFA Agenda” per se.
Taiwan has always been in a delicate position in U.S.-China-Taiwan triangular relations. The shifting paradigm of the current geo-political and geo-economic landscapes has created a sense of mutual distrust between the insurmountable U.S. and the inevitable Mainland China, shall we say. The undercurrents of the Trans Pacific Partnership led by the U.S. vis-à-vis the “ASEAN+X” schemes actively participated in by Mainland China cannot be a blessing for the region or the world, even though healthy “competitive liberalization” in the pure economic sense could be persuasive.
A Maxi-Min Approach for Economic Integration
Given the positive and negative factors in both the internal and external environments identified in the SWOT analysis above, Taiwan is striving for a viable approach to sustainable development in the global financial and economic environment. Taiwan does not want to be – and cannot afford to be – left out of the regional integration process. This is most evident in the current cross-strait economic relations. Nevertheless, Taiwan needs to diversify its risks, and avoid becoming overly reliant on China. A maxi-min approach, proposed here, is geared towards maximizing common interests and minimizing conflicting interests. In other words, Taiwan aims to maximize the internal strengths and external opportunities on the one hand, and to minimize the internal weakness and external threats on the other.
ECFA could serve as an example for conflict resolution with a maxi-min approach. With concerted efforts and open communication, we could alleviate the weaknesses and threats identified above. Political will for high-level communication is indispensable for dissipating potential or perceived weaknesses and threats. The strengths and opportunities should be firmly grasped and modified behaviors should be rewarded in a mutually reinforcing confidence-building mechanism. Regional security is manifested in our maxi-min deliberations. It is of no avail if we simply moan and groan over the unsettling yet unavoidable dynamics in the shifting paradigm. We ought to exert joint wisdom with strong political will for conflict resolution.
Some may question Taiwan’s will and capability to fulfill its commitments. It is not difficult to realize that adapting to the challenges of globalization is a great challenge for most nations, including Taiwan, given different levels of development. Good governance in the areas of policy formulation, consensus building, bipartisan collaboration, public outreach, domestic restructuring, and adapting to international standards will continue to be the challenges for most developing economies. The global trade system is at an impasse not because most do not have the political will, but because in a given time, we are facing the tough issue of good governance. It may be helpful for trade partners to render more empathy than suspicion, more capacity building than finger pointing.
Taiwan will continue to resist the possibility of being marginalized, and to strive for an environment conducive to joint collaboration and healthy competition. We would like to build on what we have accomplished and broaden our participation in the international community. Relations with our trade partners could be explored bilaterally, regionally and globally. As a member of the World Trade Organization, Taiwan is entitled to explore free trade agreements with all other WTO members. Taiwan’s free trade agreements with others need not be seen by third parties as a dangerous threat, part of a zero-sum game, or a winner-take-all trap. In due course, they could prove to be engines of growth, catalysts for regional integration, and models for mutual learning in the process of globalization. With a maxi-min paradigm for implementation, we could ensure that regional peace and prosperity are here to stay.
The geo-economic challenges in the Asia-Pacific region are inseparable from the overall global economic landscape. The global imbalance and structural reform are the key issues of concern. Whereas the United States and European Union are currently experiencing varying degrees of economic distress, the surging of the emerging markets has become a new source of hope for economic growth. Global institutional arrangements, such as the G20, have attempted to address the global imbalance and construct a global economic order for the post-crisis era. Taiwan, though ranked as the world’s 18th largest economy, has not had the pleasure of contributing to the G20. However, Taiwan has undertaken bold endeavors in unilateral reform, bilateral trade agreements, plural endeavors in APEC, and multilateral efforts in the WTO. Taiwan stands ready to continue its efforts in ECFA with China, and some potential bilateral and plural deliberations in the region, including the U.S.-Taiwan TIFA, ASEAN++, and TPP. The spirit of open regionalism, which underlines the construct of APEC, should be a good reminder for us all when we are building toward well-managed cross-Pacific relations.