In March 2019, U.S. Secretary of State Mike Pompeo told the House Foreign Affairs Committee that China is a threat to the United States. “This is a great power battle and we’re engaged in it across the world,” he added. China now challenges American influence in all aspects, and Taiwan represents a frontier in this hybrid competition. While the island’s security still relies heavily on Washington’s guarantees, there’s a rising risk that the United States may lose Taiwan to Beijing economically. There are three reasons for this trend.
A Drifting Taiwan
The first is Taiwan’s drift.
Taiwan’s trade dependency on the United States was largely replaced by dependency on China after 2001, when both Taiwan and China entered the World Trade Organization (WTO). The share of Taiwan’s total trade involving the United States halved, falling from 23 percent to 12 percent, from 1998 to 2018, while China’s share doubled from 15 to 31 percent. In January 2017, Taiwan adopted a New Southbound Policy (NSP) attempting to divert the island’s exports away from China and into South and Southeast Asia, but without concrete results. Taiwan’s export reliance on China increased 2 percentage points to 41 percent in 2018, peaking historically at 45 percent that March, while the export share to the 18 countries covered in the NSP decreased by 1 percentage point in the same period. Simply put, this new policy did not work well.
Even worse, Taiwan’s global strategy is not leading anywhere. There are two groups of regional integration emerging around Taiwan, but the island is unlikely to enter either. First, the Regional Comprehensive Economic Partnership (RCEP), which targets 16 Asia-Pacific countries, including China, would require Taiwan to join as a province of China — a condition Taiwan simply cannot accept. Second is the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which includes 11 Trans-Pacific countries, now led by Japan after the withdrawal of the United States. However, China may also block Taiwan by pressuring its partners to veto any Taiwanese bid to join. The alternative for Taiwan to promote its trade relations is to sign free trade agreements (FTAs) with major economies. Yet the political issue of the status of Taiwan would halt most negotiations in the first round.
Unfortunately, Taiwan’s economy is drifting to the middle of nowhere.
A Pulling China
The second factor is China’s pull. China’s economic attraction for Taiwan is growing at both the regional and local levels.
China’s GDP per capita has increased nine times on a purchasing-power-parity basis since 1990. This formed a strong economic gravity pulling all neighboring economies into China’s orbit — and particularly Taiwan, which is just 100 nautical miles off the mainland’s southeast coast. China now is capable of offering lucrative incentives to convert the loyalty of its commercial allies as the existing economic hegemon — namely, the United States — is in relative decline. For example, some Eurasian leaders in developing or underdeveloped countries may see China’s Belt and Road Initiative as a good opportunity. They may also feel that the Chinese-led Asian Infrastructure Investment Bank (AIIB) is more accessible than the American-led World Bank in granting big loans for development projects.
At the local level, China’s economic influence on Taiwan specifically has become more tangible and comprehensive. Since the late 1980s, Taiwanese investment had been lured by preferential policies from Chinese central and local governments. As of last year, the total amount of Taiwanese investment in China has accumulated to $180 billion — 10 times the Taiwanese investment in the United States in the same period. As a result, over 400,000 Taiwanese quality managers and talents are currently working and living in Chinese cities with their family members. The total number may surpass 2 million people, close to one-tenth of Taiwan’s population.
In terms of cross-strait relations, the two sides of the Taiwan Strait resumed warm ties in 2008 and reached 23 agreements during Ma Ying-jeou’s presidency. Yet the official channel of dialogue was suspended after President Tsai Ing-wen’s inauguration in May 2016. Beijing began to unilaterally conduct cross-strait affairs without prior consultation or negotiation with Taipei. Even while cross-strait tensions rose, in January 2018, quasi-citizenship was granted to Taiwanese living, studying, or working in China and some national treatments involving subsidies or bank loans were opened to Taiwanese enterprises.
Beijing’s carrot-and-stick approach towards Taiwan remains, and the carrot is growing sweeter.
A Pushing America
Meanwhile, the United States risks pushing Taiwan away. President Donald Trump’s Taiwan policy, if there is one, has been inconsistent between political and economic affairs since 2017.
In politics, the United States has strengthened its security commitment to Taiwan to tackle the escalating tension in the Taiwan Strait. The new Taiwan Travel Act, taking effect in March 2018, encouraged more frequent and higher level official exchanges between Washington and Taipei. To maintain Taiwan’s capacity of self-defense, informal notification of a $2 billion sale of 108 M1A2 tanks and weapons was sent to the U.S. Congress in early June. Another, bigger package — possibly including 66 F-16V fighter jets — may also seek Congress’ approval later this year. The Pentagon has further made naval patrols in the Taiwan Strait a new normal to contain Beijing’s maritime aggression.
Nonetheless, these policy favors do not apply to the economic field. While economic ties have faded in recent years, the U.S. Trade Representative (USTR) Office did not change its tough attitude toward Taiwan. Its latest annual report reiterated serious concerns over Taiwan’s bans on U.S. pork products and beef products containing ractopamine. Due to this first priority issue, the USTR has suspended regular trade talks since October 2016, and put on hold the initial steps of preparing an FTA with Taiwan. During the APEC summit last November, U.S. Vice President Mike Pence agreed to bring the Taiwanese envoy’s request to restart talks back to Washington but there was no change. Apparently, the USTR is not inclined to compromise on this issue.
Another case is even more acute and embarrassing. Taiwan was subjected to Trump’s tariffs on steel and aluminum imports to the United States starting in March 2018, because Taiwanese steel products were suspected to contain China-made steel. In response, Taiwan resorted to severe measures that restricted its steel products with any content of China-made steel from being exported to the U.S. market. Taipei even launched a self-investigation into dumping and government subsidies focused on select China-made steel products sold in Taiwan from 2015 to 2017. Embarrassingly, these extra efforts were all in vain, and Taiwan was not included on the tariff exemption list.
While politicians in Washington have been wooing Taiwan, their economists are sabotaging that effort.
How To Reverse the Trend?
There are three things Washington may need to do to avoid losing Taiwan to China economically.
First, renew its Taiwan policy. Washington’s Taiwan policy is authorized by the Taiwan Relations Act, which envisions a passive but neutral role for the United States to safeguard the security and stability of the island. Yet this policy is now insufficient to maintain the status quo in the Taiwan Strait as China’s power is rising in all aspects. Washington requires a new policy doctrine that entails an active and strategic role in regional geopolitics in order to regain the balance that it desires.
Second, restore its economic diplomacy. Washington must realize that it cannot rebalance its Taiwan policy without fixing the inconsistency that decouples its current approaches to political and economic ties with Taiwan. Setting an integrated agenda to stimulate more economic engagements could be the best way for the United States to replace or to somewhat reduce Taiwan’s economic over-reliance on China. To revive its economic influence on Taiwan, Washington may need to recover its lost art of economic diplomacy, which triumphed during the Cold War.
Third, revise its Indo-Pacific strategy. While Washington prioritizes the defense of openness as a global strategy, its leadership in the Indo-Pacific region is challenged by Beijing. The Pentagon just released a new report on June 1, in which Taiwan was mentioned with Singapore, New Zealand, and Mongolia as countries awaiting strengthened partnership, but its objective was nothing more than providing Taiwan with defense articles and services to provide a sufficient self-defense capability — practically a cliché. If Washington really regards Taiwan a valuable partner in the great power competition, it may need to design a much clearer role for Taiwan to play strategically. The focus should also go beyond geopolitics to geoeconomics, which would also require Washington to think about whether to rejoin the CPTPP as well as whether to help Taiwan to enter it.
In short, losing Taiwan to China, either politically or economically, would be more than the thin end of the wedge for the United States. It is time for Washington to act before it is too late.
Dr. Charles I-hsin Chen is Executive Director of the Institute for Taiwan-America Studies at Washington D.C. He was previously a Presidential Spokesman for President Ma Ying-jeou in Taiwan and Research Fellow at the Center for Rising Powers at University of Cambridge. His articles have appeared on The Diplomat, Foreign Affairs, Foreign Policy, The National Interest and some international newspapers.