US-Taiwan FTA would have limited impact

US Embassy in Japan

U.S.-Taiwan Free Trade Agreement Would Have Limited Impact
U.S. International Trade Commission Oct. 21 report

A report released October 21 by the U.S. International Trade Commission (ITC) concludes that a free trade arrangement between the United States and Taiwan would likely have a "very small" impact on the overall U.S. economy, but trade flows for certain trade sectors would probably "increase substantially."

"In percentage terms, the U.S. sectors likely to benefit the most would be motor vehicles, rice, fish, and other foods. These sectors likely would experience increases in exports to Taiwan of more than 100 percent," the report predicts.

With regard to service industries, the report calculates that the removal of certain nontariff measures in Taiwan would mean "U.S. asset management firms and banks could expect to increase sales in Taiwan ... (and) might also affect U.S.-Taiwan trade or investment in textiles and apparel, vehicles, and education."

The complete report, entitled "U.S.-Taiwan FTA: Likely Economic Impact of a Free Trade Agreement Between the United States and Taiwan," is available on the U.S. ITC website at ftp://ftp.usitc.gov/pub/reports/stu...


Following is the text of the executive summary of the ITC report:

U.S.-Taiwan FTA: Likely Economic Impact of a Free Trade Agreement Between the United States and Taiwan

October 2002

Executive summary:

Scope of the Study
This report assesses the economic impact of establishing a Free Trade Agreement (FTA) between the United States and Taiwan. The report includes an overview of the Taiwan economy, an overview of the current economic relationship between the United States and Taiwan, a discussion of important industry sectors, an inventory of the trade barriers between the United States and Taiwan, estimates of the economic effects of eliminating quantifiable trade barriers, and an assessment of the effects of removing nonquantifiable trade barriers. It is estimated that both economies likely would experience relatively small economywide effects from a FTA. However, some sectoral trade flows would increase substantially in percentage terms. In motor vehicles, rice, fish, and other foods sectors, U.S. exports to Taiwan would increase by more than 100 percent. Similarly, U.S. imports from Taiwan for dairy, textiles, wearing apparel, leather, and certain crop commodities also would rise by more than 100 percent. In dollar terms, these changes are significantly smaller because in many of the sectors, current trade is small or near zero, so the percent change is being applied to a small base.

Overview of the Taiwan Economy
The Taiwan economy is only about 3 percent of the size of the U.S. economy, but has experienced strong, steady growth of about 8.2 percent annually since 1961. This sustained growth results in part from Taiwan’s strong export promotion strategies, which were implemented gradually during the decades of the 1970s and 1980s. These export strategies, which focused on reducing barriers to trade and investment, resulted in large trade surpluses, a steady increase in Taiwan’s foreign exchange reserves, stable prices, and full employment.

Over the decades, Taiwan’s economy has gone through several transformations- from an agricultural base, to a manufacturing center of labor-intensive products, and finally to a major supplier of high-technology goods. The driver of Taiwan’s economic growth is manufacturing, which was valued at $259 billion in 1999, and provided 98.6 percent of its exports in 2000. Electrical and electronic machinery account for the largest share of Taiwan’s manufacturing, totaling $101 billion of all manufacturing value in 1999. Because this subsector is growing so rapidly, Taiwan has become the world’s third largest producer of information technology hardware, and ranks first in the production of notebook computers, monitors, motherboards, and scanners. Taiwan also exports significant volumes of textile products and appliances.

Taiwan also relies on services to provide a large share of its gross domestic product (GDP). In 2001, services accounted for 67.2 percent of Taiwan GDP, and the largest share of this sector (32.7 percent) consists of finance, insurance and business services. In 2000, Taiwan agricultural production totaled $165 million, accounting for approximately 2 percent of GDP.

Taiwan’s major trading partners include mainland China, the United States, Hong Kong, Japan, the European Union, and other economies of Southeast Asia. With the exception of Japan, Taiwan maintains a trade surplus with its major trading partners, and the largest surplus is with the United States.

The top destinations for Taiwan foreign investment include mainland China, the United States, Central America, and countries within the Association of Southeast Asian Nations (ASEAN). The largest share of Taiwan investment in mainland China - 45.3 percent - is in electronics and appliances.

Taiwan lifted important investment restrictions in 1997, both on the operation of its own firms abroad and on foreign firms operating in Taiwan. In mid 1997, Taiwan began permitting its firms to issue shares abroad and lifted restrictions that prevented foreign firms from issuing shares in Taiwan. However, Taiwan continues to maintain a range of formal and informal restrictions on capital flows into and away from the island.

Taiwan imports significant amounts of intermediate products in order to maintain its sizeable export growth. From Japan, Taiwan imports large quantities of machinery and equipment, and from the United States, it imports significant volumes of industrial raw materials and other industrial inputs.

U.S.-Taiwan Economic Relationship
The United States is an important supplier of electrical machinery and appliances, transport equipment, scientific instruments, and chemical products to Taiwan. Additionally, the United States is a net exporter of agricultural products to Taiwan, and in 2001 Taiwan was the fifth largest market for these U.S. products, in terms of value. Taiwan, in turn, supplies many manufactured goods - particularly machinery - to the United States. In 2001 the largest of these U.S. imports from Taiwan included office and data processing machines, electrical machinery and appliances, telecommunications and recording equipment, apparel and clothing accessories, as well as other manufactured metal goods and road vehicles.

Although overall bilateral trade volumes between the two economies decreased somewhat from 2000 to 2001, Taiwan was the eighth largest U.S. trading partner in 2001, ranking 10th in terms of U.S. exports and eighth in terms of U.S. imports. U.S. exports to Taiwan totaled $16.6 billion in 2001, down from $22.4 billion in 2000, and U.S. imports from Taiwan totaled $33.3 billion, down from $40.4 billion in 2000. The U.S. trade deficit with Taiwan was $16.6 billion in 2001.

The drop in U.S.-Taiwan trade volume from 2000 to 2001 in part reflects a longer, downward trend in agricultural trade between the two economies. The total value of U.S. agricultural exports to Taiwan fell by 31 percent between 1995 and 2001, decreasing from $3.3 billion in 1995 to $2.3 billion in 2001. The value of U.S. agricultural imports from Taiwan also fell during that period, from $600 million in 1995 to $542 million in 2001. U.S. agricultural exports to Taiwan consist primarily of bulk commodities like wheat, course grains, soybeans, and cotton. The United States imports a number of consumer-oriented agricultural products from Taiwan, such as snack foods, processed fruits and vegetables. The United States also imports fish and other seafood from Taiwan.

Most U.S. investment in Taiwan is concentrated in the manufacturing sector, especially in electronics and chemicals, but also flows into wholesale trade and finance, insurance, and real estate. U.S. net capital outflows to Taiwan totaled $1.15 billion in 2000, and by the end of 2000, total U.S. investment in Taiwan totaled $7.74 billion. Taiwan’s investment in the United States also is concentrated in manufacturing (particularly chemicals and machinery), and in financial institutions, wholesale trade, and services. At the end of 2000, Taiwan’s investment in the United States totaled $3.22 billion, and net capital outflows to the United States in 2000 were $186 million.

Principal U.S.-Taiwan Trade Barriers
The United States maintains a relatively low average tariff rate of 2.8 percent. However, a number of higher tariffs remain on selected products, including poultry products, citrus juice, textiles, apparel, and trucks.

In order to gain admission to the WTO on Jan. 1, 2002, Taiwan made major improvements in its trade and business climates. For example, Taiwan reduced its average nominal tariff from 8.2 percent before accession to the current 7.1 percent, and will lower it again to 4.2 percent by 2007. Despite this effort, substantial trade barriers continue to exist. Many of the remaining tariff barriers are in the agricultural sector, where the average nominal tariff rate is 15.2 percent, down from the preaccession rate of 20 percent. That rate is scheduled to drop to 12.9 percent by 2006.

In addition to tariffs in the agricultural sector, Taiwan also maintains tariff-rate quotas (TRQs) on several agricultural products, including poultry products, several fruits, some fish and sugar and has an absolute import quota on rice. Tariff-rate quotas also are maintained on small passenger cars. In 2002, Taiwan’s TRQ on U.S. passenger car and light truck imports stood at 159,220 vehicles, which were assessed an in-quota tariff of 29 percent. By 2010, the quota will be raised to 684,617 vehicles, which will be assessed an in-quota tariff of 17.5 percent.

During the Uruguay Round, the United States scheduled TRQs for approximately 11 agricultural commodity areas. The United States also maintains certain quotas on textile and apparel.

In gaining accession to the WTO, Taiwan greatly improved its regulatory regime, but important nontariff barriers from Taiwain’s regulatory regime remain. These include some limitations on foreign investment and unnecessarily burdensome standards, testing, labeling, and certification requirements. While foreign investment restrictions have been reduced in many industries, limits still remain in telecommunications, air transport, and independent power sectors. Insufficient intellectual property rights protection remains a problem. In fact, because of enforcement problems and pirating, Taiwan was moved, in April 2001, from the United States Trade Representative’s Special 301 general watch list to the priority watch list.

U.S. trade remedy laws are among the concerns most frequently raised by Taiwan exporters to the United States. These exporters also contend that complexities in the U.S. regulatory system have resulted in additional costs and difficulties at the border. Taiwan authorities claim that certain customs regulations, particularly those applied to textiles and clothing, are overly complex and require unnecessary information.

Impact from Eliminating Trade Barriers
The U.S. economy likely would experience very small effects from the elimination of trade barriers under a U.S.-Taiwan FTA, but U.S. trade with Taiwan would increase. Commission analysis suggests that both total U.S. exports and imports would be 0.2 percent higher than levels expected in the absence of a trade agreement. In value terms, U.S. exports to Taiwan likely would rise from about $21.9 billion to $25.3 billion, a 16 percent increase, while U.S. imports from Taiwan would increase from $39 billion to $46 billion, an 18 percent increase.

In percentage terms, the U.S. sectors likely to benefit the most would be motor vehicles, rice, fish, and other foods. These sectors likely would experience increases in exports to Taiwan of more than 100 percent. On the other hand, U.S. imports from Taiwan for dairy, textiles, wearing apparel, leather, and certain crop commodities would rise by more than 100 percent. In dollar terms, these changes are significantly smaller because in many of the sectors, current trade is small or near zero, so the percent change is being applied to a small base. U.S. sectors experiencing the largest dollar increase in exports to Taiwan would include machinery and equipment ($868 million), motor vehicles and parts ($629 million), and foods ($520 million). U.S. sectors with the largest dollar increase in imports would include: textiles, wearing apparel and leather products ($3.3 billion), machinery and equipments ($866 million), metals and related products ($705 million), and electronic equipments ($610 million).

Overall, 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 as a result of eliminating trade barriers under an FTA. The removal of certain nontariff measures would have additional effects on services. For example, U.S. asset management firms and banks could expect to increase sales in Taiwan if certain nontariff barriers were removed under an FTA. The removal of these barriers might also affect U.S.-Taiwan trade or investment in textiles and apparel, vehicles, and education.

Effects on Agriculture
One of Taiwan’s economic disadvantages is its limited natural resource base. This limitation is one reason that the United States is able to export substantial amounts of raw material to the Taiwan economy, and it provides the United States with a comparative advantage under free trade conditions in agriculture, since only about one-quarter of Taiwan’s land area is cultivatable. In addition, over time Taiwan has deemphasized agricultural production and agriculture’s share of GDP is shrinking. Since 1951, the share of agriculture in Taiwan’s GDP has fallen from 32.3 percent to less than 1.9 percent in 2001.

Under an FTA with Taiwan, overall U.S. output of vegetables, fruits, and nuts are estimated to be about 0.3 percent higher in 2005. In terms of U.S. exports to Taiwan, the value of rice, fish, meats, vegetables, fruits, and nuts and other foods would increase by more than 50 percent.

U.S. imports of certain agricultural products from Taiwan also would increase. For example, since U.S. barriers to Taiwan dairy trade are high, the likely impact of an FTA would be an increase in imports of these products from Taiwan by 264 percent.

In addition to the simulation results, qualitative analysis of removing nontariff barriers to trade between the United States and Taiwan indicates that U.S. exports of rice to Taiwan likely would increase substantially if Taiwan’s absolute import quota was removed.
Effects on the Textiles, Apparel, and Leather Products
A U.S.-Taiwan FTA would have a very slight, negative impact on the U.S. textiles, apparel, and leather sector but a larger, positive impact on the same sector in Taiwan. The U.S. textile, apparel, and leather sector could shrink by about 0.4 percent as a result of larger volumes of Taiwan imports. The Taiwan textile, apparel, and leather sector could grow by about 8.2 percent. In relative terms, the volume of textile, apparel, and leather imports to the United States from Taiwan could be 126 percent higher than in the absence of the FTA.

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