Interview with Author Ian Easton
November 29, 2017
Taiwan’s All-Volunteer Force and Military Transformation
December 20, 2017

The Untapped Potential of U.S.-Taiwan Trade Relations

(Source: Reuters)

By: Rachael Burton |

Q&A with Rupert Hammond-Chambers 

Since 2004, Taiwan has consistently ranked as one of the top 12 trading partners of the United States. While many look to defense articles as being the marker of strong U.S.- Taiwan Relations, economic ties are often an overlooked strength in the relationship. The Taiwan Relations Act (TRA) stipulates that it is the policy of the United States to maintain the capacity to resist any forms of coercion that would jeopardize, not only the security of the people on Taiwan, but the social and economic system as well. Indeed, efforts to strengthen and enhance U.S.-Taiwan relations must take a holistic approach to the island’s defense―to include economic vitality―as a credible deterrent and as a safeguard of Taiwan’s contributions to the international community.  

To explore future prospects of U.S.-Taiwan trade relations, the Project 2049 Institute and Rupert Hammond-Chambers discussed the overall trade relationship between the United States and Taiwan, Taiwan’s contributions to global supply chains, as well as the economic opportunities and challenges Taiwan’s government faces. Mr. Hammond-Chambers is the President of the U.S.-Taiwan Business Council and the Managing Director (Taiwan) for Bower Group Asia. 

U.S.-Taiwan trade relations have evolved from Taiwan’s industry entering the global market to Taiwan’s entry into the World Trade Organization (WTO). By providing a brief overview of U.S.-Taiwan trade relations since the 80’s, how would you characterize where trade relations stands today?

In the 1980’s, trade relations between the U.S. and Taiwan could be characterized as stable, dynamic, and focused on “big-picture” issues. The real driving force behind trade relations was Taiwan’s semi-conductor industry that propelled Taiwan’s tech and manufacturing industry. Due to companies such as the Taiwan Semiconductor Manufacturing Company (TSMC), the growth of this industry cemented Taiwan’s central role in the global technology supply chain. TSMC, among other companies such as MiTAC and Quanta Computer, would formulate and partner with U.S. companies to support the production and manufacture of technology for products such as calculators and basic technology games that put Taiwan’s industry on the map. Taiwan’s “economic miracle” continued to move forward with steady GDP growth at 5-6%. Paired with high demand from the United States, Taiwan’s economy began to move up the value chain as Taiwanese companies were producing increasingly sophisticated information technology (IT) products, such as laptops. In addition, due to Deng Xiaoping’s “opening and reform” policies, Taiwan’s capital began to gravitate towards China (PRC) in an effort to keep manufacturing costs down, which anchored Taiwan businesses in China. In the 1990’s, the World Trade Organization (WTO) negotiations between the U.S. and Taiwan, which began in ‘94 and concluded in ‘98, was a significant period as Taiwan’s economy was poised to undertake the first comprehensive process of reform and consolidation. However, due to political lobbying by Chinese authorities, Taiwan could not formally accede to the WTO until 2002, along with the PRC. 

Since entry into the WTO, the trade relationship has been marred by Taiwan’s slowing economy, the ‘08 financial crisis, and two significant disruptions to U.S.-Taiwan trade talks. In 2003 and 2007, the U.S. enacted punitive freezes on the U.S.-Taiwan “Trade and Investment Framework Agreement” (TIFA) talks, the first freeze was in relation to Intellectual Property (IP) rights issues, and the second was on trade issues related to beef. There are rumors that the current U.S. Trade Representative (USTR) is considering another freeze on TIFA over disagreements on pork. At the moment, TIFA exists as the only official platform for Taiwan and the U.S. to have meaningful trade talks. As a result, greater commercial opportunities between the U.S. and Taiwan are wasted when this mechanism is not utilized. If Taiwan’s industry and companies are not as able to integrate into the United States’ economy, and high-level exchanges are less frequent, this weakens the overall relationship between the U.S. and Taiwan. 

From the 1980’s to the early 2000’s, U.S. and Taiwan trade relations flourished in large part due to a great deal of high-level exchanges between the United States and Taiwan’s economic leadership. During the Clinton administration, a steady stream of economic ministers from Taiwan visited the United States to promote the trade relationship, participate in the negotiation process, and build relations with their interlocutors. Notably, the current President of Taiwan Tsai Ing-wen, at that time, was a key trade negotiator involved in Taiwan’s entry into the WTO. However, the momentum of high-level discussions has waned as the pace of high-level meetings has slowed, tarnishing the precedent set in years past. For example, the most recent visit by a senior Taiwanese official to Washington was then-minister of economic affairs John Deng (鄧振中) in February 2015. The lack of high-level exchanges deprives Taiwan’s government of the ability to advocate on behalf of Taiwan’s industry and to build relationships with their counterparts in the United States. Taiwan and the United States should look to rebuild earlier precedence and momentum set in the 80’s and 90’s in regards to high-level economic exchanges. 

What role do Taiwanese businessmen play in China’s production growth? What differentiates them from their Chinese counterparts?

Taiwan businesses play a significant role in China’s production growth. Taiwan’s foreign direct investment (FDI) continues to flow into China, but mostly is comprised of existing investment to owned “legacy” facilities in order to upgrade equipment or to expand. Though Taiwan businessmen have anchored manufacturing plants in China, new Taiwan FDI tend to follow market trends that are moving to South and Southeast Asia, not to new investments in China. Another area that is less understood and appreciated about China’s production growth is the role and leadership of Taiwan executives working in Chinese companies. Taiwanese executives are extremely competent at supply chain management, managing factories, and are incredibly capable businessmen and women. This skill set is lacking in China, so Chinese companies, and by extension the PRC state, benefits from Taiwan’s talented business class. However, this is causing a talent drain on the island that the Tsai administration is working to address. 

When it comes to business, what differentiates Taiwan from China? On the top of the list is intellectual property protection (or intellectual property rights [IPR]). Taiwan is well positioned and situated to handle higher end IPR than their Chinese counterparts. However, Chinese companies have a lot of muscle, and even though IPR is a significant competitive advantage for Taiwan, Beijing has the means to convince foreign companies to invest in China despite legitimate concerns over IPR. 

You have discussed the strengths of Taiwan’s industry and talent, as well as the island’s role in the global supply chain. As Taiwan continues to advance and reinvigorate its economy, what barriers need to be overcome?

Taiwan struggles with regulatory issues and an absence of transparency over its business rules, which makes the environment difficult to navigate. For example, there are significant barriers to taking out money if one invests in Taiwan. The absence of private equity (PE) investment on the island is another challenge. While many Taiwanese companies would benefit from PE investment, ambiguous rules and regulations that are utilized to assess sales in fact create more hurdles for investors. The process itself lacks transparency and discourages foreign capital. While investors face similar challenges in China, the Chinese government does a better job of managing its regulations to attract foreign investment. However, recently, Taiwan’s Financial Supervisory Commission announced a new regulation that will allow mutual fund managers to set up onshore vehicles for PE investments. 

A second barrier is the challenge of creating a business and making it public, leading investors to look to China instead. The environment to start a business in Taiwan could be improved. Furthermore, an absence of people to work in these companies, paired with a lackluster visa program to attract and retain talent, remains an uphill battle for Taiwan. The Taiwan government has taken some action to address these fundamental issues through the Legislative Yuan’s passage of the “Act Governing Recruitment and Employment of Foreign Professionals” in late October. Yet, implementation of the law will be a crucial benchmark once the Executive Yuan conducts a review in spring 2018. Generally, there has not been a sense of urgency coming from the Taiwan government to address the issue of cultivating talent in an environment conducive for not just the “5+2 innovative industries” but for start-ups and the arts, as well. 

On June 18th, Taiwan sent its largest-ever delegation to the fourth SelectUSA Investment Summit, held in Washington D.C., with the intent to expand economic ties in areas such as aviation, information and communication technology, machinery, petrochemicals, and steel. What are some of the opportunities and challenges currently facing U.S.-Taiwan trade relations in these sectors?

At this year’s SelectUSA Investment Summit, Taiwan not only sent its largest delegation, but it was the second largest behind China and ahead of Japan. This year, Taiwan businesses came with an interest in investing up to $34 billion in the United States. The Summit is an important economic space here in Washington D.C. and was well attended by U.S. companies. In addition, Matthew Pottinger, Senior Director for Asia at the National Security Council, met and spoke with the Taiwanese delegation at a forum hosted by the U.S.-Taiwan Business Council. Overall, this occasion allows industry and Taiwan’s government to dialogue, and SelectUSA serves as a good example of a platform through which the U.S. and Taiwan can engage on these issues outside of TIFA. 

Taiwan’s SelectUSA delegation also made stops in San Francisco and Houston, highlighting the important relationship between Taiwan businesses and investments at the state and municipal levels. Robust Taiwanese-American communities in the U.S. (ie: Boston, Austin, and Silicon Valley) have contributed to the success of U.S.-Taiwan commercial relations. U.S.-Taiwan trade relations tend to be more productive at the state level as they focus on investments and exports, while larger trade barrier issues are under the purview of the federal government. 

While the main challenges in U.S.-Taiwan trade relations deal with agriculture, sectors such as aviation, and information and communication technology (ICT), are strong with significant outsourcing to Taiwan by system integrators like Boeing and Lockheed. Companies such as Qualcomm and Apple are heavily invested in the island’s supply chain. While there are growing domestic environmental concerns regarding Taiwan’s petrochemical industry, it remains a force on the island and seeks investment opportunities abroad. Steel remains an important sector for Taiwan but there are questions regarding unfair trade practices. A sector not mentioned is the role of energy and its impact on Taiwan’s national security. 

In your statement to the House Foreign Affairs Asia Pacific Sub-Committee, you characterize U.S. policy as “under-realizing” the development of Taiwan’s market, which ultimately hurts U.S. exporters. Furthermore, bilateral solutions addressing issues related to intellectual property, beef, and pork, have yet to materialize. Given these challenges, the U.S.-Taiwan Business Council has recommended that the U.S. launch negotiations with Taiwan for a Free Trade Agreement (FTA) without preconditions. Why are negating preconditions important, and what does it signify?

The first issue regarding preconditions in U.S.-Taiwan trade negotiations is the moving goal post (i.e.: In 2003, the U.S. government asked Taiwan to address IPR, and in 2007, Taiwan was asked to address beef). The precondition issue can be judged as a punitive tactic, and is used as a barrier to ensure that the U.S.-Taiwan trade relationship is managed without aspiration. Economics and trade is a cornerstone of the Taiwan Relations Act (TRA), along with assisting Taiwan’s defense needs. Traditionally, the trade relationship has largely been able to maintain an apolitical stature in comparison to the security aspect of the relationship. Unfortunately, it appears that after Taiwan acceded to the WTO, the economic relationship has turned more political. The trade relationship has tracked the same way as the defense relationship, by means of a downward trajectory with an apparent effort by the U.S. government to maintain “stability” in the U.S.-China relationship. The U.S. entered Trans-Pacific Partnership (TPP) negotiations without preconditions. Arguably, even though the Trump administration is no longer pursuing the TPP, bilateral negotiations without preconditions between Japan, and thus Taiwan, should be considered. 

As President Tsai aims to build Taiwan’s indigenous defense capabilities, what role can the U.S. defense industry and the U.S. government play in building Taiwan’s indigenous capacity?

There is already some basic cooperation between Taiwan and U.S. defense industries that are separate from Foreign Military Sales (FMS) and offsets. For example, Boeing and Airbus source equipment from Taiwanese aerospace companies like the Aerospace Industrial Development Corporation (AIDC), which provides doors for commercial airplanes. However, these companies are system integrators that buy and assemble, they are not building everything themselves. Based on global standards, it is limited and difficult to become a qualified contractor within commercial and defense spaces. While Taiwan has made some inroads on this front, it has done a poor job of leveraging its offset programs to better integrate its companies as suppliers in the United States’ commercial and defense supply chain. As the Trump administration aims to secure sourcing within the U.S. defense supply chain, it will become increasingly difficult for foreign companies to source parts for U.S. defense items. Based on a U.S. Department of Defense (DoD) estimate, in 2013, U.S. defense spending of roughly $20 billion on equipment went to foreign contractors. Taiwan’s defense industry should be proactive in getting involved in the early stages of development programs here in United States. For example, had Taiwan participated in the  F-35 (Joint Strike Fighter [JSF]) program as a tier-2 JSF Security Cooperative Partner, it’s possible that Taiwan would be better positioned to receive F-35’s, and Taiwan’s industry would have become an industrial partner for the production of F-35’s. This was a huge missed commercial opportunity for Taiwan to integrate companies that were already certified in the supply chain. Current development programs that Taiwan’s government should seek to integrate into are land systems, light tanks/army programs, and missile defense platforms. Additionally, Taiwan has significant tech of its own in regards to missile development. Taiwan should be considered to enter into cooperative research and development projects with the U.S. defense industry on a shared-cost basis. In 2003, then Acting Undersecretary of Defense for Acquisition, Technology, and Logistics, Michael Wynne, submitted a letter to Congress that designated Taiwan as a “major non-NATO ally” which holds large implications for defense industrial cooperation with Taiwan. If Taiwan’s government is truly serious, they will identify several programs in the short to medium term and get involved. This would be the most effective way of starting the process of integrating Taiwan companies into the global defense industry supply chain. Countries like the Republic of Korea and Turkey have boomed by going this direction (as has NATO and non-NATO allies). The more integrated Taiwan and the U.S. are, the stronger the relationship will be. 

You have mentioned that Taiwan’s economy is currently at a crossroads with a new President and administration working to invigorate Taiwan’s people and economy. What can be done to maintain and strengthen U.S.-Taiwan trade relations?

There is great potential in the U.S.-Taiwan trade relationship; however, at the moment, it is difficult to significantly expand it. The Trump administration is wielding a heavy stick vis-a-vis trade, with a focus on the trade imbalance between the U.S. and Taiwan. This could be addressed by Taiwan if the government sought alternative energy vendors in the United States, which could put a significant dent in the trade imbalance. Another consideration is for the U.S. to be prepared to release licenses and support some of Taiwan’s major defense programs. There is a need for dynamism in all aspects of the U.S.-Taiwan relationship and it begins with continuous high-level engagement between the U.S. and Taiwan governments. Iterated in President Trump’s first visit to Asia, the  “Indo-Pacific” strategy should certainly include Taiwan, given that President Tsai’s New Southbound Policy and Taiwan’s standing as a democratic government is well suited to fit into―and is already a part of― a “free and open” Indo-Pacific region. 

Rachael Burton is the Deputy Director at the Project 2049 Institute where she directs program management and and project development.