Think a free trade agreement between America and Taiwan is about one large country (America) trying to reconcile its awkward relationship with a small island (Taiwan), with sure-bet howls from China, and no implications for India?
Think again.
The U.S.-China stand-off that started in 1949, when Chiang Kai-Shek’s Nationalist Kuomintang Party lost the civil war on the Mainland to Mao’s Chinese Communist Party and fled to Formosa, need not cause Armageddon as the outcome of a ‘great powers competition’.
Formosa could be host to the greatest peace-through-trade deal in modern history.
A United States-Taiwan FTA could be a win-win-win-win, for China, America, India, and Taiwan, respectively the world’s 2nd, 1st, 6th, and 21st largest economies.
What’s In It For China?
For President Xi Jinping’s Chinese Communist Party, it’s heresy to call Taiwan an independent country. Rather, as the Party celebrates its 100th anniversary this year, it doesn’t always use the adjective “peaceful” before the noun “reunification.”
Yet, they’re four reasons the CCP should think constructively about a U.S.-Taiwan FTA.
First, forceful reunification isn’t in China’s interest.
Right now, American policy planners are war gaming three scenarios:
China terrifies Taiwan with peripheral attacks on its offshore interests in the South China Sea and Formosa Strait.
China asserts its sovereignty over Taiwan with a quarantine, allowing in only food and necessities, but forbidding weaponry, as the U.S. did in the October 1962 Cuban Missile Crisis.
China launches a full air and amphibious invasion of Taiwan, and/or a decapitation strike with special forces.
The first and third possibilities could mean conflict spreading to the Mainland, and war waged by the of the strongest nuclear-armed powers. The second possibility, though (unlike an embargo) not an act of war, would compel an American response, which again would raise the spectre of expanded conflict.
All three would risk the loss of life on Taiwan, and the destruction of its first-rate infrastructure. In such circumstances, what foreign investors, other than Chinese state-owned enterprises, would want to do business on Formosa? The current trend toward economic decoupling, against which President Xi warned at the April 2021 Boao Forum for Asia, would accelerate to finality.
Alas, he’s not satisfied with a fourth scenario, doing nothing. The incongruity between CCP ambitions and American determination to show it’s not caught in a Thucydides Trap means the status quo isn’t sustainable.
Second, Taiwan is China’s last best hope to clear its name.
Any honest analyst within the CCP knows the Party has a public relations problem. Worldwide, it’s lost credibility as to upholding the ‘One Country, Two Systems’ formula. That’s moribund thanks to CCP repression in Hong Kong, from prosecuting the venerable Queen’s Counsel, Martin Lee, to creating a “My Home Is In China” curriculum for schools.
What better way to restore confidence in the CCP’s commitment to the formula than to treat Taiwan with the special and differential treatment it is owed? The foundation of a U.S.-Taiwan FTA necessarily would be One Country, Two Systems, as was the erstwhile special trade treatment America granted to Hong Kong from 1992 to 2020.
Moreover, China presents itself as supporting a rules-based multilateral trading system, which it entered 20 years ago when it acceded to the World Trade Organization in December 2001. Support for a Taiwan FTA would be proof positive.
Third, International Law is on Taiwan’s Side.
At the Boao Forum, President Xi rightly proclaimed, “International affairs should be handled by everyone.”
Yet, CCP officials repeat ad nauseum the mantra “don’t mess with our internal affairs,” as if respect for the sovereignty of a country exhausted the corpus of International Law.
There exists, too, a right of self-determination for all peoples, both internal (those in a recognised state) and external (those not), and a responsibility to protect principle, which reinforces sovereignty by helping countries meet their obligations, such as avoiding ‘never again!’ monstrosities.
Moreover, Taiwan is an ‘other customs territory’, which means it has autonomy in foreign economic policy matters to chart its own course.
Yes, that’s one country, China inclusive of Taiwan, and two systems, a Mainland with no U.S. FTA, and an Island with an FTA.
Finally, there’s precedent. Taiwan acceded to the WTO, effective Jan. 11, 2002, as an other customs territory. The CCP has respected that formula to the present day, and itself applied it in 2003 to Hong Kong in the Closer Economic Partnership Arrangement.
Fourth, China’s other borders are a mess.
A ring of failed or failing states, plus American friends, encircle much of the Mainland.
Further west, on April 24, the European Union called out China on “…for endangering peace in the South China Sea and urged all parties to abide by a 2016 … [Permanent Court of Arbitration] ruling, which rejected most of China’s claims to sovereignty in the Sea.” Its 10-page Indo-Pacific strategy calls for “promotion of democracy, rule of law, human rights and international law.”
What should the CCP learn from this clockwise tour?
Avoid more headaches!
Strategic prudence lies in supporting a bilateral FTA involving America, with a view to peaceful reunification.
America’s Interests
There’s no deal without Congressional renewal of the Trade Promotion Authority which expires on July 1, 2021. Here’s the authority Congress should delegate to the President:
First, invite China into the room.
Transparency and inclusiveness will help persuade China to support a U.S.-Taiwan FTA. American negotiators should involve CCP officials as observers in their talks with Taipei. That would be proof positive America has nothing to hide in using the FTA to de-conflict trade relations with China. China’s fidelity to this outside-the-box process could be guaranteed with a proviso: their officials get tossed out of the room if they persist in bomber and fighter jet flyovers across Taiwan’s air defence identification zone.
Second, follow WTO rules, and go WTO Plus.
Any deal should be ambitious, fair, and actionable, and thereby satisfy the three FTA parameters required by Article XXIV of the General Agreement on Tariffs and Trade and Article V of the General Agreement on Trade in Services.
It’s ambitious if it covers ‘substantially all trade’ (the first parameter). So, it should provide duty-free, quota-free treatment for all two-way U.S.-Taiwanese agricultural and industrial trade, with the minimum possible exceptions for genuinely sensitive products, and likewise liberalize trade in services across all modes of supply, with the fewest possible non-conforming measures.
It’s fair if it avoids raising barriers to non-members, including China (the second parameter).
It’s actionable if can be implemented in a reasonable period, with notice to the WTO (the third parameter).
On intellectual property protection, state-owned enterprise disciplines, dispute settlement mechanisms, and border carbon adjustments, the FTA must be WTO Plus.
Third, write rigorous, but simple, rules of origin.
Rules Of Origin that determine whether merchandise gets duty-free-quota-free treatment should be stringent enough to prevent trans-shipment of Mainland-origin merchandise through Taiwan to the U.S., but flexible enough to encourage the integration of supply chains from the Mainland to Taiwan, and onto the U.S.
The ROOs for autos and auto parts in the United States Mexico Canada Agreement are instructive. A general 75% -added requirement would ensure significant economic activity occurs in Taiwan. A 40% labour rule that sets a minimum wage would address fears of competition against ‘cheap Chinese labour’.
However, ROOs that delve into minutiae (e.g., parts and components) for every product category would enrich lawyers and thereby depress the use of DFQF treatment.
This Matters To India
India’s long, venerable tradition of non-alignment dates to Jawaharlal Nehru. But, it’s fraying. India is being yanked into the Supply Chain Resilience Initiative and other palpably China-containment arrangements, including a possible FTA with the European Union (talks, dormant since 2013, may be announced on May 8).
De-escalating U.S.-China tensions would help restore that tradition. If they de-escalate, then so, too, would Sino-Indian and Indo-American tensions. Saying “Haan jī” (हाँ जी) to a U.S.-Taiwan FTA, especially one that allows China and India to dock-on, can facilitate all three outcomes.
In a calmer environment, Raisina Hill can expect (1) Washington won’t demand India join menacing military groupings against Beijing (as that would inhibit docking), and (2) Beijing won’t cause yet more trouble along the Line of Actual Control in Aksai Chin and Ladakh (as retaliation for India joining an anti-China alliance).
India, Inc. can plan for de-politicised business with a bona fide one China country and its two Mainland and Taiwan. New ventures, like the EU-India infrastructure scheme, won’t force countries as diverse as Australia and Montenegro to navigate sides rather than focus on the socio-economic merits of project proposals for their long-term development goals.
What Taiwan Gets And Offers
Taiwan has long-sought closer trade relations with the U.S, broader and deeper than their mere 1994 Trade and Investment Framework Arrangement.
For the fourth win, America needs to ask of Taiwan whether Taiwan:
A. Adheres to a capitalist development path?
B. Has multi-party, free and fair democratic elections?
C. Permits U.S. naval vessels to dock at its ports?
D. Export semiconductor chips (and pretty much everything else that matters inside a computer) that America needs (plus reconfigure its supply chains from the Mainland to Vietnam, and back home)?
E. All of the above?
The answer is E.
Simply put, Taiwan plays ball with America. America seems to understand the overall Indo-Pacific game strategy, but it’s hesitant to swing for the fences. So, if America won’t play ball with Taiwan through an FTA, then might Taiwanese reappraise their game with Chinese 160 nautical miles to their west? Might Asians, Indians included, look for managers other than America to get to play in the big leagues?
Raj Bhala is the inaugural Brenneisen Distinguished Professor, The University of Kansas, School of Law, Senior Advisor to Dentons U.S. LLP, and Member of the U.S. Department of State Speaker Program. The views expressed here are his and do not necessarily represent the views of the State of Kansas or University, Dentons or any of its clients, or the U.S. government, and do not constitute legal advice.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its Editorial team.
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