After five years of negotiations, 12 members of the Trans-Pacific Partnership (TPP) have reached an agreement early last month. The trade pact is not only a historic achievement for US President Barack Obama in terms of his administration’s “pivot” to Asia, but an important milestone in paving the way for establishing global trading regulations for the 21st century.
The pact, whose members generate about 40 percent of the world’s GDP, is to eliminate or reduce about 18,000 tariffs and non-tariff barriers, adding about US$285 billion to global GDP by 2025.
Taiwan last year ranked 20th in exports and 18th in imports in global trade, while exports accounted for more than 70 percent of its GDP. Its economy, which is closely integrated into regional supply chains in East Asia, is likely to suffer from the TPP.
Still, most Taiwanese have not fully comprehended the impact the TPP might have on the nation’s industries, neither have the media conveyed an assessment on the consequences of the pact.
The lack of long-term strategies and the failure to grasp the changing world have been two major problems plaguing the nation’s public and private sectors. The former leads to shortsighted and reckless policies, while the latter cripples the ability to make prudent and insightful decisions. The two features have been reflected in the nation’s ambivalent stance toward the TPP.
Decisionmakers have been swinging back and forth between two approaches to regional integration, lacking the resolve to implement fundamental reforms, which explains why the nation remains a bystander in the TPP, while the hope of joining the pact looks dim.
Taiwan’s apathy toward joining regional economic pacts can be attributed to its strategic ambivalence and indecisive approach. Also, a China-leaning mindset has partially constrained Taiwan’s strategic flexibility and limited the expansion of economic influence abroad.
Two schools of thought have dominated the nation’s strategy to join regional integration.
The first is characterized by its market-driven approach and argues that the nation should deepen economic ties with its primary export markets. Since China and Southeast Asian nations are Taiwan’s No. 1 and No. 2 export destinations, the best way to sustain economic prosperity is to accelerate economic integration with them. Following this, expediting economic engagements with the latter by signing trade deals, like the Economic Cooperation Framework Agreement (ECFA) with Beijing or the Regional Comprehensive Economic Partnership (RCEP) with ASEAN and other Asian nations should be the top priority.
The other school of thought argues that the way to solve the nation’s economic quandary is to improve its competitiveness in the global supply chain by upgrading industrial facilities and nurturing a business-friendly environment. Enhancing economic ties with free-market nations, such as the US and Japan — who are the driving forces of innovation, foreign investment and regulatory reform — would help revamp Taiwan’s economy.
Not surprisingly, the two schools of thought maintain conflicting strategies regarding the road to regional integration.
The first school prioritizes the RCEP over other initiatives. Since RCEP members account for about 60 percent of Taiwan’s export markets, tariff reductions brought about by the deal can boost sales of Taiwanese products in these markets, while consolidating supply chain networks with member nations to avoid the negative effects of investment diversion.
In contrast, the other school pays more attention to the TPP, due to political and economic considerations. Given that the latest contraction in GDP has exposed the nation’s over-dependence on demand from China, it would be a smart move for Taiwan to ameliorate this risk by fostering economic ties with other nations and diversifying its export markets. At this point, the TPP — a highly integrated trading bloc with comprehensive market access — could serve the nation’s interests and play a constructive role in facilitating industrial transformation.
The nation’s leadership has been hesitant with respect to deciding which school of thought would be better, as the officials failed to take action to promote the participation in regional trade blocs. Strategic ambivalence led to an indecisive approach, while a half-hearted resolve led to suspicions over Taiwan’s sincerity about joining the TPP.
From a strategic perspective, finalizing the TPP symbolizes a preliminary victory for the US in the competition for economic prerogative over setting global trading rules, while showing that Washington is not ready to defer the privilege to China.
On Oct. 6, one day after the TPP was signed and a week after his meeting with Chinese President Xi Jinping (習近平), Obama told Americans: “We can’t let countries like China write the rules of the global economy.”
Soon after Obama’s remarks, US Trade Representative Michael Froman, who is also a chief negotiator in the TPP, said that the TPP is “the most concrete manifestation of our [the US’] rebalancing strategy toward Asia” and “a manifestation of US leadership in the world.”
The remarks from US leadership suggest that the “China factor” does play a crucial role in fostering a consensus among TPP members. Considering that China is soon to surpass the US to become the world’s largest economy, it is better for Washington to establish the TPP as a bulwark to balance China’s increasing economic clout in Asia. Hence, TPP is not just a trade pact, but also economic leverage for Washington to fulfill its “pivot.”
The TPP conveys multifaceted strategic implications.
First, it has successfully built a set of high-standard rules in trade, which are likely to become global standards and would be modeled by the WTO or other regional economic initiatives.
Second, the pact would improve regional stability by dragging China into its regulated bloc and reinforcing economic interdependence among members. If Beijing joins the TPP, it would be forced to deepen market liberalization and reform its state-owned enterprises, which would allow Washington to have the upper hand in the competition between free-market capitalism and state capitalism.
Third, the TPP serves as a stimulus for economic reform. Since it addresses emerging issues with high standards, it compels members to amend their laws in accordance with TPP regulations. This makes the TPP a legitimate cause for its members to undertake domestic reforms.
In addition to its strategic significance, the finalization of the TPP would affect the global economy in various ways.
The first is a snowball effect on prospective TPP members. After the negotiations were completed, several nations expressed their interests in joining the trade bloc. For instance, South Korea has expressed interest in joining the TPP to offset its economic reliance on China, while Indonesia, a key member of the RCEP, has unveiled its intention to join the bloc within two years. It is expected that more nations would start showing interest in joining the TPP.
The second is a spillover effect on other trade regulations. Given that the TPP deals with emerging and cross-cutting issues, it is likely that other regional trade initiatives or the WTO would learn from it to formulate their rules. For instance, under the TPP, Vietnam is required to legalize independent trade unions and Malaysia is asked to crack down on human trafficking. Once China joins the TPP, Washington could ask Beijing to adopt the same standards followed by Vietnam and Malaysia. Hence, TPP regulations are likely to generate widespread influences beyond its members.
The third is a facilitator effect on other trade negotiations. The successful conclusion of TPP talks puts pressure on other competing regional trade initiatives and hastens their negotiation processes. For instance, the negotiations over the RCEP and the Transatlantic Trade and Investment Partnership are likely to be accelerated by the TPP’s finalization. Furthermore, the stagnant progress of WTO negotiations might gain new momentum in fear of being marginalized by other trade blocs.
How can Taiwan join the TPP?
First, it should demonstrate its resolve to join the bloc by upgrading the status of its TPP negotiator agency from Cabinet level to presidential level. An official appointed by the president should be in charge of coordinating and supervising ministries regarding domestic TPP policies while conducting negotiations with TPP members.
Second, the government should accelerate regulatory reforms by revamping laws in accord with TPP rules. Since the deal involves many regulatory changes at home, the government needs to take action in reviewing and rewriting outdated legislation to send a positive message to TPP members.
Third, the government should make efforts to gain the support of every TPP member, while using membership as a catalyst for economic reform. In fact, Taiwan’s potential participation in the TPP has been welcomed by the US and Japan, while the nation has signed free-trade agreements with two TPP members, New Zealand and Singapore. With the backing of the two largest economies and two trade partners in the bloc, Taiwan’s TPP ticket should not be as difficult as some expect.
As long as the government can carry out significant reforms and convince other TPP members, the so-called “China factor” to disrupt Taiwan’s membership would not be as destructive as some argue. After all, the TPP is a trade deal and each APEC member is entitled to participate in it. The nation should take the TPP as a valuable opportunity to tackle difficult reforms and overhaul the economy.
Taiwan’s path to the TPP might be tortuous, involving many difficult choices. Essentially, it is a choice about whether the nation wants to maintain the “status quo” or wants to take on tough challenges. It is a choice about whether Taiwan wants to be engulfed in China’s economic whirlpool or wants to preserve economic flexibility by diversifying economic links with global markets.
Time is fleeting. It is time for the government to abandon its strategic ambivalence and make bold moves to join the TPP.
Eric Chiou is an assistant professor at National Chiao Tung University who specializes in international political economy and international relations.
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