June 3, 2002

June 3, 2002 | Backgrounder on Trade, Economic Freedom

Why the Time Is Right for a Free Trade Agreement with Taiwan

The International Trade Commission (ITC) is preparing a report for Congress and the executive branch on the advisability of negotiating a formal free trade agreement (FTA) with Taiwan, one of America's top trading partners. Indeed, a bill already drafted by Senator Max Baucus (D-MT)1 would authorize the Administration to negotiate such an agreement on a "fast track" basis. Consideration of this bill awaits the release of the ITC report, due out later this summer.

Signing an FTA with Taiwan would benefit both sides. For the United States, it could mean as much as $500 million a year in increased U.S. farm exports to Taiwan, a substantial increase in U.S. automobile exports, and an expanded market for American financial services. For Taiwan, it would certainly help its high-tech sector, which began recovering from its poor performance in early 2002. But there are significant issues that must be addressed as well.

While the United States should seek a free trade agreement with Taiwan in the near future, that FTA must address deficiencies in Taiwan's laws and enforcement structure regarding, for example, its rice quotas and intellectual property rights (IPR) protections, especially the limited sanctions against those who pirate copyrighted optical media.

Taiwan recognizes that the political benefits of establishing closer ties with the United States go beyond free trade. Once an FTA with the United States is completed, Beijing would be less likely to assume that it could take military action against the island without involving America and more likely to seek a resolution of frictions by using enticements and general goodwill than by threatening military force. If a U.S.-Taiwan free trade agreement can have this effect alone, it is worth the Administration's priority attention.

The Merits of an FTA with Taiwan

Throughout the past decade, Taiwan consistently ranked as one of America's top 10 export markets. Now, with its successful accession to the World Trade Organization (WTO), Taiwan has reached a level of economic and trade competence that would enable it, through an FTA, to open its still-restricted agricultural, manufacturing, and service markets to American business. Moreover, a free trade agreement with Taiwan would be a creditable addition to America's existing pool of FTAs: with Canada and Mexico in the North American Free Trade Agreement (NAFTA) and with the considerably smaller trading partners of Israel and Jordan.

Taiwan's exporters enjoy relatively free access to U.S. markets today. Nevertheless, there are several international political considerations that lead Taipei to seek an unrestricted trade and investment regime with the United States, despite some domestic political resistance in Taiwan. Specifically, it seeks to expand its participation in the international community and fears further isolation by China.

It is hard to see a downside to a free trade agreement with Taiwan for American exporters or investors. The process of negotiating the FTA would give the Office of the U.S. Trade Representative (USTR) significant leverage to prod Taipei to expand market access for American businesses and investors, to liberalize trade, and to close some loopholes in IPR protection and elsewhere, which Taiwan was able to preserve in negotiations over its WTO accession.

Benefits for U.S. Farmers.
Taiwan, which imports over $2 billion in U.S. farm products annually, is America's fifth largest export market for agricultural goods and a bigger customer than China. In fact, it ranks as one of the top three consumers of U.S. corn, feed grains, peaches, plums, celery, apples, cherries, broccoli, and hides.

To enter the WTO, Taiwan had to reduce its duties on imported agricultural products, which dropped from an average of about 20 percent to the current 14.5 percent. These duties will continue to fall to 12.86 percent by 2010. Yet American rice, poultry, and pork remain under Taiwan's "Tariff Rate Quotas," which means Taiwan will import limited amounts of these items at the new duty rates while the rest will continue to face tariffs of up to 300 percent. U.S. agricultural products will not be able to compete against homegrown Taiwan farm goods. An FTA with Taiwan would give agricultural goods such as American rice, pork, chicken, and beef access to a market in which these commodities are now excluded by strict non-tariff barriers.

When Taiwan signs the WTO's Government Procurement Agreement (GPA), and provided China does not block Taiwan's adherence, American rice will receive preferential treatment from Taiwan's official buyers over rice from non-GPA members. This is because Taiwan's government purchases 65 percent of all quota rice on a first-come, lowest-price basis. With an FTA, all U.S. farm products should gain direct tariff- and quota-free access to Taiwan's consumers.

It is important that U.S. negotiators pay special attention to Taiwan's restricted rice market. This is a politically sensitive issue with politicians in Taipei, and understandably so. Taiwan's government estimates that overall domestic farm production will drop $1.5 billion (in U.S. dollars)--and it announced a $330 million support budget just for rice farmers in 2001--simply to cope with the pressures of WTO accession. In 1999, Taipei purchased 415,000 metric tons of locally grown rice for $275 million. Under an FTA, virtually all of that market would face competition with good-quality, competitively priced American rice. Across the board, American farmers stand to gain $500 million in new income from exports to Taiwan once an FTA is signed.

The value of an FTA with Taiwan would dim considerably, however, if Taiwan seeks to exempt rice--or anything else--from FTA negotiations. Such an attempt would run counter to the underlying principles in Article XXIV of the General Agreement on Tariffs and Trade (GATT), the precursor of the WTO. That article notes the contribution to the expansion of world trade that comes from closer integration between the economies of contracting partners. In 1994, GATT/WTO members agreed to an understanding of Article XXIV, "recognizing also that such contribution is increased if the elimination between the constituent territories of duties and other restrictive regulations of commerce extends to all trade, and diminished if any major sector of trade is excluded."2

Benefits for U.S. Banks, Automobile Manufacturers, and Drug Companies.
American farmers would not be the only Americans to gain from a free trade regime with Taiwan. Service industries, especially financial services, would be able to compete freely against Taiwan's top-heavy, Japanese-style, state-dominated banks.

Although Taiwan's financial services markets have opened substantially since its accession to the WTO, the annual market potential for U.S. financial institutions in capital management is in the hundreds of millions of dollars, and there remain restrictions on foreign bank, insurance, and capital firms that could usefully be relaxed.3 Under an FTA, for example, Daimler-Chrysler, the last American automobile maker without an assembly footprint in Taiwan, would be able to sell its cars directly in Taiwan without the much higher tariff rates for imported vehicles.

American pharmaceutical companies also would gain from an FTA. They seek fewer restrictions, equitable pricing regulation, and rational market access policies.4 They want new reimbursement regimes and less cumbersome validation data requirements. An FTA would help bolster Taiwan's nascent biotech industry as well by making Taiwan more attractive to international companies looking for research and development partnership opportunities. Taiwan would do well to study Singapore's experience in luring global pharmaceutical firms and, in a broader sense, must look to the future, not to the present, if it hopes to expand its biotech sector.

Political Benefits for Taiwan Outweigh Economic Benefits

An FTA with the United States would certainly help Taiwan's high-tech sector--which has been in the doldrums for the past 12 months but also has been recovering nicely this year. Taiwan's leadership also looks to an FTA regime with the United States as an essential part of its global strategy to develop economically so as to maintain its independent political identity.

This, of course, is the compelling reason for Taipei to move ahead, but moving to an FTA with the United States will not be painless. An FTA would certainly affect Taiwan's farmers, who employ 8 percent of the workforce while producing only 2 percent of gross domestic product (GDP). It will affect Taiwan's banking and other services as well. However, these are costs Taiwan tallied up as it entered the WTO, and no doubt President Chen Shui-bian has considered the additional social pressures of signing a U.S.-Taiwan free trade agreement and decided they are worth the shock.

In a broader sense, there are political benefits to tying Taiwan closer to the United States that argue for moving ahead quickly with an FTA in Washington. The closer U.S.-Taiwan economic ties are seen to be in Beijing, the less likely Beijing will assume that it can take military action against Taiwan without involving America. Beijing would then see the benefits of resolving frictions with Taipei through enticements, concessions, and general goodwill rather than with threats of military force. If a U.S.-Taiwan FTA can have this effect alone, it would be worth giving it priority attention in Washington.

An FTA Must Close IPR Loopholes

Pressure to sign an FTA with Taiwan, however, must not overlook serious issues. U.S. Under Secretary of Commerce for International Trade Grant Aldonas, for example, has complained bitterly about Taiwan's spotty record in protecting intellectual property rights and asserts that Taiwan's laws designed to protect intellectual property are not compliant with international norms and that enforcement remains weak.

On their face, Taiwan's laws comply with WTO norms, but it is also true that Taiwan did manage to negotiate loopholes in the U.S.-Taiwan WTO "working party" talks that showed up in less-than-ideal legislation.5 Legislation that applied to Taiwan's optical media companies would have confiscated companies with production lines that were found to be churning out pirated DVDs, VCDs, and CD-ROMs, but it was diluted to specify that the confiscated equipment had to be used "entirely for" the infringement of copyrighted products. Needless to say, Under Secretary Aldonas and the U.S. Department of Commerce demand "the closure of plants engaged in these illegal activities," regardless of whether they are pirating part-time or full-time.6

Most of Taiwan's pirates, who long ago fled to China, have returned as investors/owners of legal "optical media" (OM) plants in Taiwan. The U.S. industry fears that Taiwan's illegal OM manufacturing capacity is migrating again to China, where factories can pirate at will and re-smuggle their contraband across the Taiwan Strait. Taiwan's OM pirates are ruthless, and there are credible reports that many are tied to organized crime.7 They are in the pirating business because it is profitable and because Taiwan's anti-pirating laws limit standing for a complaint to the copyright-owner only. Neither private citizens nor prosecutors themselves have legal standing to charge OM pirates. What Taiwan needs--and, indeed, may be prepared--to do is to form a dedicated anti-pirating corps within the police and customs services. In any case, Taiwan's IPR problems must be remedied in negotiations before an FTA with Taiwan should be completed.

While Taiwan's level of compliance with the WTO's trade-related aspects of intellectual property rights norms (TRIPS) is good, by international standards (except for the effective enforcement aspect), it could be improved. Laws passed last winter in Taipei were a substantial move in the right direction. They extended copyright protection to computer programs and lengthened the validity of patents to 20 years; the Optical Media Law and Motion Picture Law specifically punish pirating. In addition, the extensive amendments to the Patent Law and the Copyright Law resulted by September 2001 in the confiscation of $228 million in pirated goods, with a further $83 million seized between January 28 and March 31 of this year.

Further gains will occur if plugging the last loopholes in Taiwan's IPR legislation, enforcement, and sanctions is made a condition of a U.S.-Taiwan free trade agreement.

What U.S. Negotiators Should Seek

The United States should seek a free trade agreement with Taiwan on a fast-track basis, but several areas of concern must be addressed in the negotiations. Specifically, to create an open and beneficial trade environment between America and Taiwan, the United States should:

  • Insist that rice not be excluded from the negotiating agenda. Taipei is under pressure to protect Taiwan's rice farmers, but the value of a free trade agreement quickly diminishes if any major sector of trade is excluded.
  • Close the remaining loopholes in Taiwan's intellectual property rights protection regime. Minor adjustments in Taiwan's laws are necessary if sanctions are to be extended to all pirating activity; penalties must be stiffened, and further legislation is needed to make IPR violations public crimes subject to direct police enforcement without the need for a copyright-holder's complaint.
  • Discourage any attempt by China to block Taiwan's accession to the WTO Government Procurement Agreement. China is said to be blocking Taiwan's accession to the GPA. Now that both China and Taiwan are WTO members, Beijing's continued sniping at Taipei is unacceptable.

Conclusion

A free trade agreement between the United States and Taiwan would be a significant boon to American agricultural, manufacturing, and financial services exporters. But it must ensure both that Taiwan cannot unreasonably close its important agricultural markets and that its laws relating to the protection and enforcement of intellectual property rights are significantly strengthened.

USTR negotiators should have increased leverage in negotiating a deal with Taiwan, because Taiwan seeks the FTA for political as much as for economic reasons. The real question is whether Taiwan's political leaders are ready to face the challenges that an FTA with the United States would pose.

John J. Tkacik, Jr., is Research Fellow for China, Taiwan, and Mongolia in the Asian Studies Center at The Heritage Foundation.


1. The United States-Taiwan Free Trade Agreement Act of 2001 (S. 1636), introduced November 6, 2001.

2. See World Trade Organization, Understanding on the Interpretation of Article XXIV of the General Agreement on Tariffs and Trade 1994, at http://www.wto.org/english/docs_e/legal_e/10-24.wpf.

3. For a comprehensive look at these remaining restrictions, see American Chamber of Commerce, "2002 Taiwan White Paper," Taipei, May 2002, pp. 15-21, at http://amcham.com.tw/dl/2002_white_paper_industry.zip.

4. Ibid., pp. 34-38.

5. Charles Snyder, "US Keeps Taiwan on Its List of World's Worst IPR Abusers," Taipei Times, May 2, 2002, at http://www.taipeitimes.com/news/2002/05/02/story/0000134225.

6. Richard Dobson, "Taiwan to Remain on `Special 301' List," Taipei Times, April 13, 2002, at http://www.taipeitimes.com/news/2002/04/13/story/0000131644.

7. See International Intellectual Property Alliance, 2002 Special 301 Report: Taiwan, p. 265, at /static/reportimages/56F78AC0EC667CCF85678965EB140B5A.pdf (May 2002).

About the Author

John J. Tkacik, Jr. Senior Research Fellow
Asian Studies Center

Related Issues: Trade, Economic Freedom