May 3, 2022

U.S.-Taiwan Free Trade Agreement: The Economic Case

In a Heritage Backgrounder, Tori Smith, Gabriella Beaumont-Smith, and Heritage Research Assistant Rachael Wolpert write that the security-related arguments for pursuing closer economic ties with Taiwan through a free trade agreement (FTA) are strong and widely cited.

While U.S. security interests play an important role in trade policy, the economic case for deepening the bilateral relationship is just as strong. The last major analysis of the potential economic effects of a trade agreement between the United States and Taiwan was conducted in 2002 by the U.S. International Trade Commission (ITC) at the request of Congress. The ITC’s report estimated that “the removal of quantifiable barriers would have a negligible impact on U.S. production and gross domestic product (GDP), but would have a small impact on Taiwan production and GDP. Taiwan GDP could increase by 0.3 percent.” This report, while offering helpful data, is now quite outdated as nearly 20 years have passed. The trade relationship between the United States and Taiwan has experienced significant change and growth over that period.

Recognizing the need for updated data, this report includes a new economic analysis of a potential FTA. The study uses the same type of computable general equilibrium (CGE) model the ITC used to analyze the impact of removing tariff barriers between the two countries. However, the analysis goes one step further by modeling the potential effects of removing some non-tariff barriers in both countries. This added feature allows for a broader look at the impact of a trade agreement since tariffs in the United States and Taiwan are already relatively low: roughly 3.4 percent and 6.9 percent, respectively.

Using the Global Trade Analysis Project (GTAP) Data Base and a CGE model, the Heritage report demonstrates the estimated effects of eliminating all tariff barriers between the United States and Taiwan. It also reduces or eliminates Taiwan’s non-tariff barriers on agriculture, beef, and pork imports as well as U.S. non-tariff barriers on agriculture, beef, pork, textiles and apparel, and automotive imports. Under this model, an FTA with Taiwan would increase total trade for both the United States and Taiwan, U.S. exports to Taiwan, Taiwan exports to the United States in nearly all sectors, and GDP for both countries. A U.S.–Taiwan FTA would also negatively impact China’s GDP and total trade volumes.

The United States and Taiwan have spent decades building a strong security and economic relationship. TIFA, Taiwan’s accession into the WTO, and other engagements aided in the deepening of economic relations. As shown in this model, a U.S.–Taiwan FTA would further deepen the partnership and lead to economic benefits for both countries. An FTA should cover all sectors and eliminate all non-tariff barriers that are not backed by science-based evidence for the protection of health and safety. Doing so would increase total trade, exports, and GDP for both countries while also providing market-based alternatives to trade with China.

Xi Jinping's "Zero-COVID" Gambit

Chinese leader Xi Jinping hoped for smooth sailing ahead of this fall’s 20th Party Congress, during which he planned to win a precedent-snapping third term in power. But the omicron-fueled COVID-19 outbreaks in multiple cities have dampened that hope and are now the single greatest challenge standing between Xi and his ambitions. To confront this threat, he is doubling down on his “zero-COVID” policy—a decision that could make or break his leadership.

Heritage Visiting Fellow Michael Cunningham writes that this is not altogether uncharted territory. The Wuhan outbreak and subsequent lockdowns in early 2020 posed a massive threat to Xi’s leadership, causing him to temporarily disappear from the public eye. Ultimately, however, Xi managed to emerge with a sense of vindication, as propaganda showed the pandemic surging overseas while most parts of China went months at a time, if sometimes implausibly, without reporting a single local infection. The question is, can he pull it off a second time?

Wuhan in 2020 looks like child’s play compared to the current situation. While the Wuhan outbreak occurred due to a cover-up and inaction on the part of the government, the omicron variant is spreading despite the government’s employment of drastic—even harsh—measures to keep infections as low as possible. Some in the West expected the highly infectious nature of omicron to force Beijing to follow the lead of most of the rest of the world in opening up, so as to minimize the disruption to the economy and society. But from Xi’s perspective, this was likely never a feasible solution. Two years of relentless propaganda have tied his and the Communist Party’s fortunes to their success at keeping COVID-19 cases and fatalities to a minimum. The prospect of an uncontained outbreak overwhelming the nation’s healthcare system and resulting in tens of thousands of deaths among the under-vaccinated elderly population is too risky in Xi’s calculation, especially in the lead-up to a Party Congress.

Yet, strict adherence to this policy also carries risks. China’s economy is already reeling from these lockdowns, and the longer they continue, the more difficult it will be to achieve the 5.5% growth target set at the annual legislative session last month. Furthermore, the lockdown in Shanghai has showcased the strain these policies have on social stability, which has been tested by various forms of protests and even some looting. Though unlikely, if a lockdown anywhere leads to mass unrest, it could quickly spiral out of control, resulting in a crackdown by security forces that would seriously damage public perceptions of the regime’s legitimacy and risk creating a fissure in the leadership.

More likely than mass unrest, however, is the prospect that omicron is so infectious that, despite the economic and social costs, even the most severe lockdowns might fail to contain the virus. This is the biggest threat facing Xi ahead of the Party Congress. Most economic and social costs can be rationalized, as long as the lockdowns are successful. However, failure to stop the virus’ spread will threaten public perception of Xi’s and the leadership’s competence and legitimacy during a politically sensitive year. Xi can have local officials fired for mismanaging an outbreak, but as the loudest voice in support of zero-COVID policy, he is backing himself into a corner from which the only way out is success.

To be sure, the likelihood that COVID-19 will force Xi out of power is extremely low. Roughly half a year before the Party Congress will likely be held, no one has been groomed as a possible successor, and state propaganda—which Xi controls through well-placed political allies—continues to tout his leadership as essential for the country’s future. Furthermore, China’s strict approach to managing the pandemic continues to hold popular appeal in China among those not directly affected by lockdowns.

Nevertheless, if Xi’s gambit doesn’t pay off—if his harsh measures ultimately bring the economy to a standstill yet still fail to contain the outbreaks—he will not emerge unscathed. For example, his loss of credibility could make it harder or even impossible for him to drive policy in areas that traditionally fall outside the General Secretary’s remit, such as the economy. Depending on how badly he is discredited, the party may nominate a successor-in-waiting at this Party Congress to prevent Xi from getting a fourth term in 2027—an accomplishment he is otherwise on track to achieve.

Indeed, Xi expects the zero-COVID policy to succeed at preventing a major legitimacy crisis before the Party Congress, even if it comes at a high economic and social cost. It’s a gamble, but China’s leader has gambled before and won.

The U.S.-Japan Security Alliance Must Act Now to Deter China from Attacking Taiwan

Russia’s second invasion of Ukraine on February 24, 2022, was a brutal reminder of the potential for authoritarian countries to attack smaller countries on their periphery. Moscow’s assault should also be a catalyst for enhancing deterrence against Chinese expansionism in the Indo–Pacific region.

Heritage Senior Research Fellow Bruce Klingner writes that China has stepped up its intimidation strategy against its neighbors in both the East and South China Seas. Japan has responded by issuing uncharacteristically bold statements criticizing Beijing’s threats against Taiwan, as well as engaging in bilateral military contingency planning with the United States. Japan’s actions are consistent with its stated desire to assume a larger regional security role.

Japan has demonstrated that it is an increasingly important security partner to the U.S. in countering China’s attempts to intimidate its neighbors. Tokyo has been studying its possible military responses to a Chinese attack on Taiwan, including protecting any U.S. warships and military planes that come to Taiwan’s defense. Japanese military support would be a critical piece of a U.S. response. But questions remain about the extent of Japanese support in a defense of Taiwan and which role its Self-Defense Forces (SDF) would play in a Taiwan contingency.

While Japan has significantly enhanced its military capabilities in recent years, the SDF will potentially be constrained by operational shortcomings as well as by numerous constitutional, legal, and political constraints. In addition, Japanese decision-making is notoriously slow, even in times of crisis.

China’s escalating threats against Taiwan, and its rapidly increasing military capabilities, require that the United States and Japan get ahead of these challenges and enhance ongoing coordination of potential responses. Tokyo and Washington should work together to resolve the labyrinth of Japanese impediments to rapid action, as well as clearly delineate bilateral roles, missions, and capabilities for Taiwan-related contingency operations. Establishing the foundation for effective responses should be done now rather than during a crisis.

Japan’s rhetoric and actions on assuming a larger security role in the Indo–Pacific have been positive and significant. Tokyo’s willingness to call out Chinese belligerence and advocate solidarity with Taiwan are commendable. Japan’s economic response to Russia’s invasion of Ukraine was rapid and forceful, portending a similarly robust reaction to Chinese action against Taiwan.

For the near term, Japan will maintain strategic ambiguity, as will the United States, on whether and to what degree it would defend Taiwan. It is not expected that Tokyo would make fundamental, formal changes in either diplomatic relations or security policies toward Taiwan. In Japanese policymaking, the prologue to effective coordination with the U.S. often lasts an exceedingly long time. The alliance must start now to convince Beijing every day that “today is not the day” to attack Taiwan.

Unleashing Its Market Is Way America Beats China

Heritage ASC Director Walter Lohman writes that it’s not clear where things are headed in Congress on the so-called China bill, otherwise known as the America COMPETES Act. The House and Senate have each passed their own versions and appointed more than 60 congressmen and senators to work out a compromise. Where they come out ultimately is anyone’s guess. Both bills have so little to do with China that the best outcome would be tossing out the whole thing and starting over next year.

Given the possibility that the conferees will power through, however, it’s worth commenting on one of the two bills’ provisions that will, in fact, seriously affect America’s competitive position vis-a-vis China; namely, those focused on trade.

The way the U.S. interacts with the world through its trade policy is central to its competition with China. You can’t beat something with nothing. Americans can complain about the economic relationships that friends and allies are building with China. They can try to shame them over China’s abysmal human rights record or scare them about its strategic intentions. None of that is going to work. The U.S. has to offer these countries a viable, attractive alternative package of benefits. Now, that doesn’t mean just giving them whatever they want. It has never meant that.

Neither the House nor Senate versions of the America COMPETES Act is perfect on trade, but the House version is terrible. Among other things, it removes from the Anti-dumping and Countervailing Duties process restraints that prevent it from becoming fully a tool of crony capitalists seeking unfair protections from foreign competition. Overreach like this may be good for well-lawyered companies. It’s not good for the Americans who will pay the price.

China is already subject to more Anti-dumping and Countervailing Duties orders than any other country, by far. The U.S. imports virtually no steel from China as a result of the American steel industry’s appeals to current law. This is not about China. It’s about blocking imports from other countries just as effectively as has been done with Chinese-made steel.

Another provision of the House COMPETES bill removes de minimis values on imports from countries that don’t make the grade as “market economies” and don’t sufficiently protect intellectual property. Sure, that will get at Chinese imports—$800 at a time. (No, that’s not missing any zeros.)

Ultimately, however, it could impact Americans, especially small businesses, importing from other countries, too. And it will increase the cost of processing goods at the border with no added benefit to U.S. security.   

Then there are the provisions in the bill widely called “reverse CFIUS.” This section, authored by House Appropriations Committee Chairwoman Rosa DeLauro, D-Conn., is called that because like the Committee on Foreign Investment in the United States, it covers investment. As opposed to guarding against incoming investment that may compromise American security, “reverse CFIUS” would screen outbound investment. And it would do so, not for discrete impacts on U.S. security interests, which there is a case for, but where such investment could result in “risk to a national critical capability.” The bill tries to give some definition to this phrase, but it’s still so broad as to constitute a sort of capital control, the likes of which China imposes on its people, but the U.S. has always refrained from, to its great advantage.

Finally, the House COMPETES Act reauthorizes wasteful, ineffectual Trade Adjustment Assistance, a program that, by the way, has historically been reauthorized only because supporters hold new free trade agreements “hostage” to it. The problem is, given Washington’s current gloomy disposition on trade, no free trade agreement, nor even the authority to negotiate one, is on the horizon. COMPETES is the new leverage point, or hostage, for Trade Adjustment Assistance supporters. Only in this case, the nation would be much better off if Congress shot the hostage.   

The U.S. is not going to win this global fight with China through increased regulation and government spending. We need to do just the opposite, unleash the American market, and use its extraordinary appeal to counter whatever China can offer. Congress would do best to start over and craft something to do that.