Confronting the Chinese Conundrum - The American Spectator | USA News and Politics
Confronting the Chinese Conundrum

With the collapse of the Doha round of trade negotiations late month, additional economic liberalization may come to depend more on bilateral and regional free trade agreements (FTAs). Already about 300 such accords are in operation around the world; they could play an even greater role in the future.

FTAs also provide geopolitical benefits. In particular, they give Washington a means to strengthen bilateral ties with other states at a time of increasing international challenge. As political relations fray even with some long-time friends, the prospect of financial gain remains a strong inducement for allies to maintain close ties with the U.S.

Employing creative tactics to enhance American influence is particularly important in Asia, where China’s rise is transforming the region.

Although many Chinese remain desperately poor and economists disagree over the most accurate statistics representing the Chinese economy, the People’s Republic of China now possesses one of the top four economies on earth. The PRC’s rapid growth has spawned growing Chinese investment and especially trade in Asia and around the world.

At the same time, Beijing is asserting itself diplomatically and substantially augmenting its military. China is still far from achieving superpower status, but is fast becoming a significant regional power.

As a result, PRC influence is increasing even in nations long friendly to the U.S. Political tensions between Tokyo and Beijing cannot obscure their growing economic relationship; Australia is cultivating friendly political ties while profiting from expanding economic opportunities with the PRC. South Korea, a U.S. ally for more than 50 years, now trades more with China than with America; more South Koreans look favorably on the PRC than on America.

Economic ties also are increasing between China and Taiwan even at a time when the latter attempts to forge a separate political and cultural identity. Indeed, roughly four percent of Taiwanese live in the PRC, primarily for business reasons. PRC officials hope and independence-minded Taiwanese fear that the prospect of economic gain or loss may cause Taipei to compromise on its territorial integrity.

China’s evident rise has caused some Americans to see China not only as a diplomatic and economic competitor, but as a dangerous military adversary as well. They believe war is likely and direct confrontation is the only way to preserve U.S. influence in East Asia.

War obviously is in no one’s interest, especially between nuclear-armed powers. But the future of Beijing and the region is not fixed. U.S. policy can change the future.

AMERICA RISKS PLAYING A LOSING HAND if it bets U.S. simplicity against Chinese subtlety, however. Both Canberra and Seoul, for instance, have indicated a distinct lack of enthusiasm for any U.S. plan to “contain” the PRC.

A more nationalistic Japan seems more inclined to back America, but such resolve might not survive an actual confrontation. Taiwan, too, prefers smooth relations between Washington and China. Even a short-term U.S. victory in any conflict likely would leave Taipei at a long-term disadvantage.

Under these circumstances, Washington should look for additional cards to play. The most important benefit of American friendship today may be access to the U.S. economy. America retains the largest, most productive, and most advanced economy on earth. Any Asian country would benefit from linking up with the U.S.

Playing the trade card seems most important in cases where Beijing’s attraction is strongest, such as South Korea. Not only has China replaced the U.S. as the Republic of Korea’s leading trading partner, but, as noted earlier, younger South Koreans have begun to turn away from America to China and even North Korea. Sharp disagreement over policy towards the North has soured official relations as well.

But Seoul and Washington are negotiating an FTA. It is the one area where ROK officials seem enthusiastic towards the U.S.

Taiwan may be even more important. It is America’s eighth biggest trading partner (and America is third on Taiwan’s list), with two-way trade running about $60 billion annually, and is a high-income consumer and high-technology producer. Indeed, the U.S. exports more to Taiwan than to Australia, Chile, and Singapore, all of which now enjoy FTAs. Despite increasing economic links between Taiwan and China, the U.S. remains the largest investor in Taiwan, while the latter is a sizable investor in America.

ESTIMATES OF THE LIKELY INCREASE in U.S. exports through an FTA run from about 15 to 30 percent. Among the U.S. industries that would most benefit from freer trade with Taiwan are agriculture, automotive, electrical equipment, and machinery. (The island state already is the fifth largest destination of U.S food exports.) American services, too, would gain: potentially significant opportunities would open in the education, financial, health, telecommunications, and transportation sectors. Indeed, an FTA would position U.S. enterprises to take advantage of Taiwan’s ongoing transition towards a service-oriented economy.

Improved investment procedures would encourage additional financial flows in both directions. An FTA also would provide an opportunity to better protect intellectual property, a significant boon to U.S. firms.

Strengthening standards in Taiwan likely would aid U.S. producers in China, the great intellectual property (IP) cheater. Given the increasingly important role of Taiwanese business in China, better IP protection by Taipei would serve as an example for the PRC.

The island, with widespread economic penetration throughout Asia, would provide an obvious base for U.S. enterprises to expand their reach. More important, Taiwan’s proximity to China and, more important, increasing economic integration with the mainland, would yield another beneficial effect. A Taiwan-U.S. FTA would indirectly boost American ties with the PRC, both investment and exports.

Taiwan enjoys cultural, family, and historical ties with the mainland; Taiwanese enterprises have become major investors in China. Taipei, as an innovation center, complements the PRC, a production center.

Moreover, since Beijing views Taiwan as part of one China, U.S. firms operating in Taiwan and investing in Taiwanese concerns might find improved access to the larger China market. This is likely to be of particular benefit to smaller U.S. enterprises which do not have the wherewithal of, say, a Boeing to easily breach the Chinese market.

OTHER, LARGER GEOPOLITICAL CONSIDERATIONS also favor an FTA. Taiwan is the great Asian anomaly, a not-quite country that remains a potential conflict left over from the Cold War. For nearly three decades Washington recognized the Republic of China, rather than the People’s Republic of China, as the sole legitimate government of the mainland (plus Taiwan).

President Richard Nixon opened a dialogue with the PRC and President Jimmy Carter switched formal ties from Taipei to Beijing. Since then Taiwan has existed in an international twilight zone, a commercial powerhouse officially recognized by just a couple dozen small nations. Despite a population of only 23 million, Taiwan ranks 16th in the world in terms of trade. An FTA with the U.S. would strengthen Taiwan’s position as it deals with a China determined to absorb the island.

Most obviously, such an accord would help grow the Taiwanese economy. Although the impact would be modest — a study by Taipei’s Chung-Hua Institution for Economic Research predicts a two percent increase in exports and .5 percent hike in GDP — any boost would help Taiwan as it confronts its rapidly growing neighbor across the Taiwan Strait.

Moreover, the Institute for International Economics suggests that such an arrangement would further integrate Taiwan into East Asia. Enhancing Taipei’s relative economic importance and thus its political profile would increase its neighbors’ stake in regional stability.

Even long-time U.S. allies such as Australia and South Korea have no interest in being drawn into a conflict arising from coercive Chinese action against Taipei. The tighter Taiwan’s links to surrounding nations, the higher the price everyone would pay in any military conflict. Although neighboring countries would be no more inclined to back Taiwan’s desire for a separate identity, they would be more likely to press the PRC to rely on peaceful, evolutionary developments to bring Beijing and Taipei together.

A U.S.-TAIWAN FTA WOULD further demonstrate America’s commitment to Asia as that region races past Europe in importance for America’s future. Washington already has implemented free trade accords with Australia and Singapore and is negotiating one with South Korea. Similar agreements have been proposed for nations ranging from Indonesia and Malaysia to the Philippines and New Zealand. An FTA with Taiwan would further demonstrate the U.S. commitment to Asia. (Washington also should expand this approach to what remains the most important Asian economy, Japan, though the politics on both sides of the Pacific would be complicated.)

Unfortunately, opposition to free trade is rising in Washington, even among Republicans. However, the benefits of moving ahead with a U.S.-Taiwan FTA are too great to ignore. The issue is geopolitics as well as economics. Since “the great game” with China already has begun, Washington needs to use all the tools at its disposal to enhance its regional influence. That includes freer trade with America.

Doug Bandow
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Doug Bandow is a Senior Fellow at the Cato Institute.
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