Taiwan’s chances of joining Asia’s trade pact are dwindling

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Hello from Taiwan, a country whose success in weathering the coronavirus pandemic and crucial position in global electronics supply chains has won it many new friends and a lot more recognition.

After Taipei contacted countries from Japan to Europe to America last year with donations of protective equipment, several nations have reciprocated with generous gifts of vaccines now that those are in short supply in Taiwan. Following donations from the US and four eastern European countries over the past few months, Japan on Tuesday pledged its fifth batch of AstraZeneca to be flown to Taiwan.

All that goodwill extends beyond fighting the pandemic. To be more precise, to trade. Japan, which took the lead in reviving the Trans-Pacific Partnership (TPP) after the US abandoned it, wanted to use its rotating chairmanship this year to help Taiwan join what is now known as CPTPP. But, as today’s main piece examines, that is proving more difficult than was foreseen.

Charted waters looks at the impact of supply shocks on prices ahead of today’s data on US inflation.

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Domestic factors keep Taiwan out of the CPTPP

Leading trading nations should not need much help in acceding to CPTPP. As the fledgling regional trade club, which so far has only 11 members, it is eager to grow in order to become more relevant.

The UK, whose application members will discuss in a first meeting before the end of the month, is a case in point. Taiwan is different. Chiefly because China is bent on blocking its participation in any international forum.

This has, however, made China’s rivals keen to promote Taiwan’s cause. “We are very, very keen on getting Taiwan into CPTPP as quickly as possible, because once China is in, accession will become virtually impossible for Taiwan,” said a Japanese diplomat who has been working on the issue.

Unfortunately, Taipei appears to be squandering the chance. Despite saying for years that it would like to seek membership, and having moved to allow the deregulation required by CPTPP in many areas, the Taiwanese government has yet to take decisive steps towards formally requesting accession.

“They are preparing, they are preparing,” said the Japanese diplomat. “But given that realistically the entire process can take a year or more, it may now be too late for us to shepherd this through.”

Prospective new members must hold informal consultations with all members first before formally applying for accession. After the formal application is received by the New Zealand-based CPTPP office, it notifies the chair, which then calls a meeting of all members and convenes an accession working group.

Speaking to Trade Secrets, John Deng, Taiwan’s trade representative, said he recognised that there was a window of opportunity that Taiwan could not afford to miss. But “we are not ready to make that decision yet,” he added, referring to a formal application.

The reason appears to be not protectionism but domestic political problems and bureaucratic inertia.

Taiwanese trade experts say that since the lion’s share of the country’s exports were electronics goods that were already tariff-free, the areas where major concessions would have to be made for market access were limited. The only market Taiwan’s negotiators say is completely off limits for liberalisation is rice, and the government also hopes to retain some protection for certain fruit. But according to experts, completely opening the market for 98 per cent of all items will not be a problem.

However, Taipei has yet to deliver that message publicly.

“It is hard to believe that CPTPP is still a priority for us as our government has not demonstrated its determination,” said Roy Lee, a trade expert at the Chung-Hua Institution for Economic Research, a cabinet-backed think-tank. “Look at the UK, they published a White Paper where they clearly outlined their vision and their trade liberalisation commitments in detail.”

Deng conceded that Taipei may not match London in its communication skills. But he also said that his government felt that by presenting detailed market opening commitments in order to gain members’ support, like the UK has done, it would give away bargaining chips. “The outcome should be negotiated,” he said.

That is an approach Lee argues misunderstands the way CPTPP works. But it is not the only hurdle. More importantly, Taipei is held back by growing partisan fights over liberalising its market for foreign food imports.

The decision by President Tsai Ing-wen to allow imports of US pork containing ractopamine within certain internationally recognised limits has backfired in that the opposition has called a referendum to undo the measure. Delayed because of the pandemic from its original date in August to this December, the vote is seen by trade officials as a huge risk to any future trade negotiation Taipei might engage in.

It is also holding up CPTPP preparation: in order to conform to the regional pact’s market access standards, Taipei would have to replace its total ban on imports of food from regions affected by Japan’s Fukushima nuclear disaster with a regime that allows in those products proven to be uncontaminated. But officials from Taiwan’s ruling Democratic Progressive party said that taking that step now would only give the opposition more munition in its anti-market-opening campaign, making it virtually certain that the December referendum would pass.

The consequences of this logjam for Taiwan’s long-term prospects to participate in regional trade pacts are dire. China is already lobbying CPTPP members about its accession: despite its acrimonious relationship with Australia, Beijing recently sent a letter asking for Canberra’s support on the matter. On Monday, the foreign minister of Singapore, the country that takes over the rotating CPTPP chairmanship next January, expressed support for a Chinese accession in a meeting with his visiting Chinese counterpart Wang Yi.

Meanwhile, Asian diplomats took note that the first foreign diplomat received by Pedro Castillo, Peru’s new president, was the Chinese ambassador. This has triggered speculation that Peru — the latest country to ratify CPTPP in July — could block a future Taiwanese membership bid.

Taipei has tried its best to win goodwill in Lima. Last year, it opened its market to Peruvian blueberries, making headlines in the Andean nation for days. But it is unclear whether that sweetener can outweigh Lima’s need for Chinese help with the raging pandemic.

Overall, trade experts believe that Taipei’s window of opportunity is slowly closing. The Japanese diplomat said: “I am now much more pessimistic.”

Charted waters

Claudia Sahm, author of the Stay-at-Home Macro Substack, has a great post out looking at supply-chain shocks and the impact they are having on US inflation.

What we like about the post is that it puts the recent disruptions in their historical context, explaining in the process why it would be pretty useless for the US Federal Reserve to tighten monetary policy when inflation driven by supply shocks tends to be transitory.

It also shows how the recent rise, while substantial, still leave prices way below the level at which they were before global supply chains became vastly more efficient over the past three decades. Here’s a chart taken from the post that sums that up nicely.

US inflation figures are due out later today. While a dip from the July number is expected, supply disruptions persist and the consensus view is that prices will remain higher than pre-pandemic. However, as Sahm highlights, history suggests a better cure than tighter monetary policy would be to address the shock at its source by vaccinating a far greater portion of the world’s population. Claire Jones

Trade links

The chips shortage could result in almost 10m fewer vehicles being produced, according to this FT article.

Nikkei ($) reports that South Korea’s antitrust agency is fining Google $177m for forcing Samsung and other smartphone manufacturers to use only approved versions of the Android operating system. 

The EU will seek ($) digital partnership pacts and semiconductor value chains with Japan, South Korea and Singapore as well as trade and investment with Taiwan, according to a draft of the latest Indo-Pacific strategy seen by Nikkei Asia. 

The Economist Radio has a podcast out explaining why it took so long for containerisation to take off. It’s here on Spotify. Francesca Regalado and Claire Jones

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