Taiwan’s quest for global economic integration despite CPTPP hurdles

Taiwan’s newly elected President Lai Ching-te vowed to lead Taiwan in joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and being more involved in regional economic integration. Due to China’s political pressure, Taiwan’s prospect of joining CPTPP remains dim. However, Taiwan’s trade and investment shift away from China in recent years suggests the island’s growing economic integration with the world.

Taiwan’s official statistics show that in the first four months of 2024, the US surpassed China and became Taiwan’s largest export destination for the first time in the last two decades. Nearly 70% of Taiwan’s exports to the US are Information and Communication Technology (ICT) goods (such as computers, smartphones, tablets etc). This is a sharp contrast when Taiwan, up until a few years ago, still relied on China to export ICT goods to the US. The growing geopolitical uncertainty has driven Taiwanese firms to move part of their export capacity from China back home.

China’s declining importance in Taiwan’s exports reflects a wider shift in the regional production network. Data from the US Bureau of Economic Analysis shows that China’s share in the US imports of consumer goods declined from 39% in 2017 to 28% in 2023 while other countries in the Asia-Pacific rose from 22% to 27%. India and Vietnam are now the US main imports of consumer goods from the region.

The restructuring of Taiwan’s external trade ties results from investment relocation. The US, the Association of Southeast Asian Nations (ASEAN), and Europe have become more important than China in Taiwan’s outward foreign direct investment (OFDI) destinations in recent years, according to Taiwan’s Investment Commission.

In the first four months of 2024, Canada emerged as Taiwan’s largest investment destination. The Foreign Investment Promotion and Protection Arrangement between Taiwan and Canada, signed in December 2023 could have boosted Taiwan’s investment in the country.

Canada is the second largest economy among the CPTPP members, after Japan. Therefore, Taiwan’s signing bilateral investment with the country is a significant step forward. Apart from Canada, Taiwan has also signed bilateral investment agreements or economic agreements with five other CPTPP members, including Japan, Malaysia, Vietnam, Singapore and New Zealand. The bilateral economic engagements with those countries are expected to partially offset the negative impact of Taiwan’s lack of full CPTPP membership.

The semiconductor industry will be key to Taiwan’s future economic integration with the region and the world. An important reason is that Taiwan’s economy is increasingly inclined toward the semiconductor industry. Taiwan’s Ministry of Finance’s data shows the growing importance of integrated circuits (ICs) in Taiwan’s total exports, from 29% in 2018 to nearly 40% in 2023.

Furthermore, the absence of bilateral and multilateral free trade agreements limits Taiwan’s export options primarily to electronic goods and semiconductor chips. These products have enjoyed reduced tariffs under the International Technology Agreement of the World Trade Organization, facilitating Taiwan’s economic ties with other countries.

Although China remains the largest export destination for Taiwan’s ICs, its importance has gradually declined. On the other hand, Taiwan’s exports of ICs have been growing fast and become a pillar in Taiwan’s exports to Japan, South Korea, Mexico, the US, Europe, India, and ASEAN. In particular, Taiwan’s export of ICs to India has thrived the most in the last few years.

The data from Taiwan’s Investment Commission also suggests the prominence of the semiconductor industry in Taiwan’s external economic ties with these countries and regions.

In 2023 for example, 56% of Taiwan’s total OFDI went to electronic parts and components manufacturing (which incorporates semiconductor chips and components). In the same year, 57% of Taiwan’s OFDI in electronic parts and components manufacturing went to the US, followed by Europe’s 28%, ASEAN and India’s 9%, and China’s 6%.

Taiwan’s significance in the global semiconductor industry does not provide a promising prospect for its entry into the CPTPP. China’s distrust toward the current Lai administration implies its blockage of Taiwan’s entry into the trade deal will remain.

China’s extensive economic ties with the region provide the country leverage to pressure on the CPTPP members. Despite China’s diminishing role as a “world factory”, the country remains the most important trade partner for many CPTPP members.

The US higher tariffs against certain Chinese goods have accelerated the resetting of the regional division of labour which started more than a decade ago when China’s wage hike wiped out many labour-intensive manufacturers in the mainland. China has gradually transformed into a main supplier of semi-industrial goods to other developing countries, such as Vietnam and India, for their final assembly and export. This is evidenced by China’s growing export of electrical machinery to other countries in the region.

The lack of US participation in the CPTPP increases China’s and decreases Taiwan’s probability of joining this cross-regional trade pact. The former Trump administration focused on fixing America’s huge trade deficit by revising the bilateral FTAs with South Korea, Mexico and Canada. The current Biden administration’s Indo-Pacific Framework for Economic Prosperity did not provide a concrete plan for engaging with the regional economy more deeply. Several domestic issues are considered more important and are receiving greater attention before the upcoming presidential election in November, thus distracting the US’s attention from external economic engagements.

Taiwan might need to rely on the US to strengthen its defensive capability against China’s military aggression. However, it cannot rely on the US in the political battlefield with China to join the CPTPP.

The island’s strength in fabricating semiconductor chips will allow it to stay connected closely with the CPTPP members and the rest of the world. Nevertheless, without being formally involved in multilateral economic engagements that incorporate a wider range of industries with various countries across the world, Taiwan’s economic future is narrowly bonded with the semiconductor industry which is highly vulnerable to the growing US-China rivalry and competition for power.

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