Rethinking Taiwan: How the EU should follow China into a trade agreement

DISCLAIMER: All opinions in this column reflect the views of the author(s), not of PLC.

Taiwan-based firms run a substantial amount of China’s economy thanks to their deep business, cultural and linguistic ties with the mainland. This should make Europeans rethink their approach to trade relations with Taiwan, write Patrick Messerlin, Hosuk Lee-Makiyama and Michal Krol.

Patrick Messerlin is Director of the Groupe d'Economie Mondiale (GEM) at Science Po Paris and Professor of economics at Sciences Po. Hosuk Lee-Makiyama is Director of the European Centre for International Political Economy (ECIPE). Michal Krol is Trade Policy Analyst at ECIPE.

A year ago, deepening trade relations between Taiwan and the EU was seen as a far-fetched goal for the EU. It was formally never considered for a FTA with Europe, despite being one of the wealthiest countries in Asia; Taiwan’s growth rate is only surpassed by the top of the emerging markets, averaging at 6% during the 2000s.

However, in the eyes of most Europeans, Taiwan suffered from two shortcomings:  it looked like a small economy (with half the GDP of Korea); it represented an issue in Europe’s ever-strained relations with China. The first concern was always wrong, and the second one is increasingly inaccurate.

To begin, Taiwan-based firms de facto run a substantial amount of China’s economy thanks to their deep business, cultural and linguistic ties with Mainland. Combining the operations of the Taiwan-based firms in Mainland with Taiwan’s GDP – the concept of ‘Chiwan’ – suggests that Taiwan’s real size as a target market is almost the same as Korea’s, or roughly half of India’s GDP. As a result, Brand Taiwan is rapidly changing from a ‘world factory’ economy to a ‘world headquarter’ economy, a qualification that only Germany obtained amongst the EU27.

These developments are further accelerated thanks to the China-Taiwan Economic Cooperation Framework Agreement (ECFA). ECFA is admittedly a light FTA by any measure. However, it remains as one of the best market access tools to Mainland China, extending into tariffs on machinery and chemicals tariffs, into NTBs, opening up on business and financial services.

In short, Taiwan has received preferential access on the mainstay of EU export interests or guarantees on some of EU’s most contentious issues with China. Ironically, ECFA in its current state covers only 20% of Taiwan’s exports to China, but would cover half of EU’s existing exports to Taiwan, enabling some re-exports into China. This is not wishful thinking: Some EU businesses, in particular in the ICT industry, are already reaping the benefits of indirect market access.

Interestingly, the expected gains from such an agreement would be equally distributed across key EU member states, including countries and sectors that are deemed as on the paying side of our FTAs. For example, France would double its exports. Taiwan is also unique to by having has little agricultural production of its own although it is currently riddled with complicated barriers that would be open for negotiation. It is also the only developed Asian country without any car exports, a unique opportunity for our ailing small car production.

This leaves the China question. The One China policy has not stopped China itself from doing a FTA with Taiwan. Taiwan is negotiating FTAs with Singapore and New Zealand. Japan, the world’s third largest economy (who is even more careful in its political consideration to China than the EU) has already signed an investment treaty with Taiwan. It is a legitimate question to ask how the case is different for EU.

That said, a Taiwan-EU FTA cannot be about one-sided gains to the EU and Taiwan. It must also bring clear benefits to China. For instance, EU capital and know-how is needed for providing cheaper and better hospital services in China, where ECFA gives direct access for Taiwan-based firms – clearly a move in line with Beijing’s trade policy as well as with its broader goal of rebalancing the Mainland economy and improving welfare of all the Chinese.

It is very much up to the EU to shift from a confrontational to a pragmatic trade policy with respect to China – a first step before a direct bilateral deal with China is reached.