New Strains in the U.S.-China-Taiwan Strategic Triangle

The triangular security relationship between the United States, China and Taiwan is under strain again. The January 29 announcement of the $6.4 billion U.S. arms sales package to Taiwan marks a low point, but no major change in direction, for a U.S.-China relationship that began a downward spiral months ago. While not likely to cause bilateral relations to nosedive, the arms package does add another dip to a recently bumpy ride attributable to a host of issues ranging from Copenhagen 2009, the Iranian nuclear impasse to the Google debacle. What the analytical tendency toward political factors tends to overlook, however, is the tectonics of the economic reshaping of the U.S.-China-Taiwan strategic triangle over recent years, trends accelerated sharply by the conditions of the global recession throughout 2009. Nothing makes the salience of these economic factors clearer than the elements of carefully calibrated outrage, which Beijing has voiced over Obama’s arms package to Taiwan. An overview of the economic underpinnings of each leg of the U.S.-China-Taiwan relationship reveals the recession-accentuated sources of strain in this strategic triangle.

U.S.-China:  Dead-end for the Cooperative Roadmap?

Echoing the general theme of the ‘extended hand’ in his inaugural address, U.S. President Barack Obama struck a tone of cooperative engagement in his initial approach to China, inviting Beijing to join Washington in global co-leadership. Prepped by China policy experts during the presidential primary campaign, both leading Democratic candidates had come early on to see a particular opportunity for refashioning the U.S.-China relationship through co-leadership with China in the field of climate change and environmental sustainability.  

Early efforts at outreach to China coalesced around a program of clean energy cooperation between the United States and China—dubbed the U.S.-China Climate Change Roadmap—that came to underpin this strategic effort. According to this ‘new leaf’ approach, the single track of Treasury-led negotiations with China was not productive. Given Treasury’s mandate, the bureaucratic politics of the Bush administration SED process tended to shunt issues in the U.S.-China bilateral dialogue onto a single track—one based on the politics of yuan/dollar exchange rates. Despite a commendably patient and strategic approach, this ‘single-track,’ Treasury-led process yielded only limited results on currency issues [1] and produced in the public mind a perception of zero-sum negotiations leading to a cycle of blame between Chinese structural export dependence and consumer “oversaving, on the one hand, and U.S. structural deficits and over-consumption, on the other. According to the new Administration’s line of thought, a new parallel track of positive engagement with China was needed.  

As a result, Obama substantially restructured, and minimally renamed the interagency process with China to put it on two parallel tracks of engagement. The name of the Strategic Economic Dialogue was tweaked to become the Strategic and Economic Dialogue. More consequentially, the Dialogue was re-organized on a new co-chairman basis with Treasury Secretary Timothy Geithner chairing the traditional currency and exchange rate component of these talks and Secretary of State Hillary Clinton chairing the new strategic track, which included a focus on the cooperative potential of (environmental) sustainability partnerships with China.

Whatever merits this strategic re-design of the bilateral relationship may have once had, it has been massively undercut by the brute fact of global economic recession. As the nation’s—and administration’s—focus has switched increasingly to U.S. jobs, there has been a series of U.S. actions against imports of Chinese oil well drill pipes, steel and automotive tires (Asian Wall Street Journal, December 31, 2009). Adding tinder to this mix, China has recently sent signals that its government procurement will favor indigenously developed intellectual property (IP) against internationally recognized intellectual property, lending some credence to cynical interpretations of China’s motives in refusing to accept WTO disciplines for government procurement at the time of its WTO accession in 2001 [2]. This shift in mood was summed up by various reports from the just-concluded annual meeting in Davos (TIMES, January 28). In short, the politics of global recession have now trumped the politics of bilateral global co-leadership in the case of U.S-China relations.

China and Taiwan: The ECFA Dance Picks Up Pace

A general feature of the global recession has shown developed economies as slow to bounce back while large, developing markets have emerged from the recession more quickly and robustly. The northern hemisphere breakdown of this has been dubbed the “LUV phenomenon”—Europe remains stagnant in an “L-shaped” post-recession pattern, North America is experiencing a slow “U-shaped” recovery, and Asia is enjoying a brisk “V-shaped” growth pattern.

Within Asia, these same global tectonics have been reshaping relations between Taiwan and China across the Taiwan Strait. While China’s emerging economy has roared back with an 11 percent projected GDP growth rate for 2010, Taiwan’s advanced economy—highly dependent and tightly integrated into the global IT supply chain of the advanced economies —is expected to achieve only relatively weak growth of 3.5 percent in 2010 (The Taiwan Economic News, December 24, 2009). These conditions have created an opportunity for Beijing to extend its policy of aggressive regional economic engagement to Taiwan and to court the business sector with commercial blandishments. It is estimated that, in 2009, procurement missions from China have purchased in Taiwan close to $10 billion in consumer electronics, processed foods and other goods (China News Agency (CNA), August 19, 2009).

In essence, the ECFA amounts to a bilateral preferential or "free" trade agreement between Taiwan and China, adjusted technically to account for sovereignty concerns on both sides. The four preceding high-level rounds of meetings between Taiwan and China, mediated by the Straits Exchange Foundation (SEF) in Taiwan and the Association for Relations Across the Taiwan Straits (ARATS) in Beijing, have already produced a series of significant economic gains for Taiwan: a doubling of direct flights between China and Taiwan to the level of 270 per week; a further boosting of mainland tourism to Taiwan beyond the recently achieved level of 3,000 visitors per day; a Financial Framework Agreement to create a supervisory mechanism for financial service companies operating in both markets; a partial opening of Taiwan’s economy to direct investment in select industries by mainland firms; and regulatory agreements governing food safety inspections and cross-strait anti-fraud cooperation.

Taiwan and China initiated ECFA negotiations on December 21, 2009 and the avowed goal is to sign a formal agreement with China in the first half of 2010. Pressure is on in Taiwan to adhere to this timeline, even as its politically polarized public struggles to absorb its implications [3]. That China’s FTA with ASEAN took effect on January 1, 2010 and is the main impetus for the Ma administration to get its public to rally around the ECFA quickly. In addition to giving Taiwan exporters a more level playing field in China and Southeast Asia, there is also the hope that Singapore might follow the precedent of a Taiwan-China ECFA with a Taiwan-Singapore FTA. Currently, the Taiwanese Ministry of Economic Affairs is leading the administration’s efforts in this regard, identifying "early harvest lists" of sectors which stand to benefit directly from the ECFA [4] and initially excluding from the agreement a number of product categories where direct competition with mainland firms is more politically problematic [5].

In broad view, the key dynamic in all of these developments is their lesser impact for the globally integrated and globally mainstream sectors of Taiwan’s economy (i.e. IT/electronics) and their relatively greater impact for more parochial sectors of Taiwan’s traditional economy. By normalizing cross-Strait commercial relations in these ‘stodgier’ sectors, the ECFA makes possible an overdue structural adjustment. Along with greater competition, the agreement promises new markets in the mainland and a new level of economic integration, via the China market springboard, regionally and globally.

Perhaps the shock of an economic downturn was required to position Taiwan and China for this next level of mutual engagement and economic integration. While joint entry into the WTO was immeasurably important to both parties as a confidence-building measure, Geneva has not served as an arena for directly advancing bilateral rapprochement.

Taiwan and the United States:  All Roads Lead to Capitol Hill

For Taiwan, the focus of the economic relations with the United States has in recent years been firmly fixed on hopes for the initiation of talks for a U.S.-Taiwan Free Trade Agreement (FTA).  While there are strong economic and security arguments to be made in support of a U.S.-Taiwan FTA, Taiwan’s push in this direction largely stalled due to steady deterioration in the standing of former President Chen’s relationship with Washington, the expiration of U.S. executive branch trade authorities during the Bush/Obama transition, new difficulties in both the existing framework of U.S.-Taiwan trade talks and in the overall political climate for free trade deals and, finally, persistent concerns over Beijing’s possible reaction to U.S. entry into FTA trade talks with Taiwan  

While prospects have brightened recently in some areas, the horizon for such a trade deal remains heavily clouded in Washington. The political relationship between Taipei and Washington has improved markedly under President Ma but there has been little direction shown by the Obama Administration regarding its game plan for post-recession re-engagement with Asia, now on a growth arc. Bureaucratically, the existing machinery for bilateral trade negotiations between Taipei and Washington, the Trade and Investment Framework Agreement (TIFA) has blown a gasket recently due to a legislative change limiting U.S. beef imports into the country. Resolution of this issue and resumption of a robustly functioning TIFA process are both prerequisites before consideration for a fundamental strengthening of U.S.-Taiwan economic ties can be possible.  

More generally, President Barack Obama has so far chosen not to expend political capital to push for fast-track trade negotiating authority from Congress. Economically, the tail end of the Global Recession has prompted closer scrutiny by Congress of all such trade deals [6] and has forced the Administration to scramble to reformulate executive branch policy around a jobs focus. In essence, U.S. economic engagement with Taiwan is currently held hostage, not only by the arcane and relatively unimportant beef issue but also by an uncertain edifice of trade policy in the region. This reflects both ambivalence toward free trade among the Democratic base and indecision about how to proceed politically in the face of growing recognition of the need to undo the ‘knot’ which ties together financial imbalance  and a structural jobs deficit in the U.S. with the export-led, yuan rate-boosted growth model. First, to emerge from the global recession, China’s growth model is now in overdrive. Essentially, the global recession has laid bare structural tensions which have been embedded in the global system for decades and which are now being amplified by the unprecedented scale of China’s recent development and the rate of its growth. Until the mid-term Congressional elections provide some resolution, the current logjam between the Obama Administration and Capitol Hill suggests scant hope for any strengthening of the U.S.-Taiwan leg of this triangular relationship.  
 
Conclusion

Political tensions, such as the recent sale of the Taiwan arms package and the anticipated meeting between President Obama and the Dalai Lama, will likely continue to characterize U.S.-China relations throughout the year. These, however, should not detract policy-makers’ attention from the more deeply embedded structural forces at work. When all three economic legs of the U.S.-China-Taiwan triangle are stable and strong, the security equation across the Taiwan Strait tends towards better balance. When, as now, there is strengthening of one leg (China-Taiwan) accompanied by relative weakness (U.S.-China) and a stasis (U.S.-Taiwan) in the other two, the security balance is eroded. Since all three legs of the triangular security relationship depend upon growth, it would be wrong-headed for policy-makers in Washington to try to put any brake on the cross-strait normalization-taking place between Taiwan and Beijing. Equally, it would be shortsighted to allow that normalization proceed apace without paired attention to the two legs of the triangle, which connect directly to the United States. In the year ahead, the United States needs to find ways to address the structural defects in its economic relationship with China without becoming overly distracted by the fallout of political tremors on the surface of that relationship. Similarly, the Obama Administration is under pressure to align its party base and lead Capitol Hill to an international trade policy that effectively reengages with its key regional trade partners in the Asia-Pacific and promotes U.S. jobs more effectively through pro-growth engagement with that dynamic region. 

Notes

1. This process contributed to a 21.5 percent increase in the yuan’s value against the dollar from mid-2005 to mid-2008, but this movement then stalled with the onset of the global financial crisis in September 2008, effectively “re-pegging” the yuan’s value to the dollar throughout 2009.
2.  “In November (2009), China instituted a catalog of products that receive significant preferences for procurement by Chinese government agencies. For inclusion in the catalog, products must contain intellectual property developed, owned and registered in China.) as reported in eWeek.com  https://www.eweek.com/c/a/Government-IT/Tech-Groups-Object-to-Chinas-Indigenous-Innovation-Policies-665333/
3. An October 2009 report buy Taiwan’s Council of Labor Affairs showed a positive impact of 0.75 percent GDP growth and a net gain of 125,000 jobs under a favorable ECFA scenario and a dip of almost 0.2 percent in GDP, accompanied by a net loss of 47,000 jobs, in the event of the ECFA not being concluded.
4. Petrochemicals, auto parts and machinery, constituting 23.4% of Taiwan’s cross-strait trade with China, stand to benefit (source: Taiwan Economic  Cultural Office (TECO), New York).
5. Many agricultural products and certain industrial products such as steel, footwear, and white goods.
6. Tellingly, the fate of the Korea-U.S. FTA, which has been fully negotiated and signed but not ratified, still hangs in the balance as the new administration considers renegotiating past trade agreements, particularly for their labor and environmental safeguards.