The United States has signed a number of Free Trade Agreements (FTAs) since 2000 — with Jordan, Singapore, Chile, Australia, Morocco, Central American and the Dominican Republic, Bahrain, Oman, Peru, Colombia and Korea. It has substantially completed negotiations with Panama, and is in the process of negotiating with Thailand, Malaysia, United Arab Emirates and the Southern African Customs Union. On the face of it, the bilateral removal of barriers to merchandise trade between the two countries does not hold out the prospect of large gains to either side. Much of the trade between the two countries is in electronic circuits and other inputs to production and investment, where tariffs in both countries are already very low. And in general terms, the export patterns of one country do not match the import patterns of the other particularly closely. However, the fragmentation of production and the resulting network relationships across the region mean that the trade links between the United States and Taiwan could be far deeper than the direct bilateral trade flows might suggest.
If an agreement between the United States and Taiwan is to yield significant gains to both sides, it would need to include commercially meaningful concessions outside the area of merchandise trade. But here, there appears to be a problem. The conventional way of offering meaningful preferential concessions to a bilateral trading partner in services and investment is to commit to national treatment. This means that any discrimination against foreign investors or service suppliers is removed on a preferential basis. However, in many areas of services and investment, Taiwan has already committed to national treatment multilaterally in the WTO. Its GATS schedule is arguably one of the most liberal of any country at its stage of development. So what else can Taiwan offer that would be of commercial advantage to the United States? Taiwan could commit to non-preferential domestic reforms in its free trade agreement with the United States. There are several areas where Taiwan is already contemplating or newly undertaking significant domestic regulatory reforms. Binding these in a free trade agreement with the United States could help to secure the contemplated reforms and to lock in the newly implemented ones. And the gains from these reforms are likely to exceed those from offering national treatment on a preferential basis. A free trade agreement along these lines would provide useful gains to the US economy , projected to be around US$373 million per year. It would provide significant gains to the Taiwanese economy of over US$4.93 billion per year. These results can be put in context by comparing them to the gains from the possible successful completion of the Doha Round of trade negotiations. If the recently resumed talks were to lead to a ‘Doha lite’, this could provide indicative gains to the US economy of around US$1.8 billion per year, and gains to the Taiwanese economy of around US$1.7 billion per year. So a US-Taiwan free trade agreement could provide gains to the US economy equivalent to nearly 20 per cent of those available from a ‘Doha lite’. The free trade agreement would be particularly potent for Taiwan because of the inclusion of domestic regulatory reforms that would directly boost the productivity of the Taiwanese economy. The additional market opportunities for US exporters would be considerable: ‧ US$500 million a year for vegetables and fruits ‧ US$200 million a year for oil seeds ‧ almost US$300 million a year for meat products ‧ over US$1 billion a year for other processed food products ‧ over US$1.1 billion a year for electronic products ‧ around US$800 million a year for motor vehicles ‧ almost US$400 million a year for other transport equipment ‧ over US$600 million a year for chemical products ‧ almost US$200 million a year each for non-metallic minerals and fabricated metal products Overall, US exports to Taiwan will increase by US$7.313 billion a year. The additional market opportunities for Taiwanese exporters would include ‧ about US$1.5 billion a year for textiles ‧ about US$2 billion a year for apparel ‧ US$400 million a year for leather products ‧ around US$1.4 billion a year for chemical, rubber and plastic products Overall, Taiwan exports to the U.S. will increase by US$6.431 billion a year. The gains in Taiwan also accrue in the form of additional domestic sales.
Within the United States, the gains would accrue to the States where electronic products and/or food products were a relatively important part of the state economy — Oregon, Idaho, Iowa and New Mexico. The adjustment costs, minor though they are, would be borne by the States where textile and clothing production was important — South Carolina and Georgia. Although the free trade agreement would provide large gains for Taiwan, it is also projected to induce some structural adjustment within Taiwan. However, the adjustment costs need to be kept in perspective. First, the reductions in protection on agricultural imports from the United States would likely be phased over a long period of time. Secondly, the Taiwanese economy has been growing in absolute terms at average rates of about 4 to 5 per cent a year over the last 10 or 15 years. At this rate, the sectors that are disadvantaged in relative terms would not have to shrink in absolute terms. They would simply grow more slowly than the rest of the economy. Extending the free trade agreement to cover domestic reforms to services and investment, and to opening direct links with China, has mixed effects on the US economy. This is because reforms that improve the productivity of the Taiwanese economy can be a two-edged sword. On the one hand, the Taiwanese economy is richer, and able to buy more from the United States. On the other hand, the Taiwanese economy is more productive, and better able to compete with the United States on world markets.
Even if the United States and Taiwan were to agree tomorrow to enter into negotiations, these would not be completed until well after the extension of the Trade Promotion Authority (TPA) in the United States. However, the United States might well extend the Trade Promotion Authority in order to ratify the outcome of a Doha Round settlement. So the United States and Taiwan could agree to begin negotiations in the short term, in the expectation that a negotiated agreement could be passed through the US Congress on the coattails of a Doha Round settlement. This is plausible, given that the US-Taiwan agreement would deliver gains to the United States equivalent to nearly 20 per cent of those from a ‘Doha lite’.