Update on China-Taiwan FTA

Looks like Taiwan and China will be signing an FTA this June according to The Washington Post. I look forward to reading the document, as whatever wording is used to address Beijing and Taipei could possibly be used in a future peace treaty between the two parties.

Besides a warming of relations with Beijing, the FTA will also open doors to similar agreements with other countries, notably Asean members. The United States will want to ink one as well, knowing that Beijing won't protest since it signed one with Taipei first. If I was an American government official, I'd certainly want to get it done within a couple of years to maintain (if not increase) trade and hence American influence in Taiwan. Why do you ask?

Quite simply the China-Taiwan FTA will either maintain or increase Taiwan's dependency on Chinese trade, potentially providing Beijing with additional leverage over the island. The United States may not yet be ready for Taiwan to assume a closer orbit around the mainland, therefore having an FTA with Taipei would at the very least maintain the status quo.

Is that a good policy? Depends on who you ask. However the U.S. government will find it increasingly difficult over time to maintain the status quo, especially considering China's military modernization. The U.S. would be hard pressed to sell F-18s or nuclear submarines to the island, which are fast becoming the most basic armaments in the U.S. military. Economically, China is likely to maintain annual GDP growth over 8% for the next several years and could easily show favoritism to Taiwanese companies in an effort to limit America's options.

I understand that kicking the can is always the preferable policy decision when confronting lose-lose scenarios. However I can't help but wonder if U.S. Taiwan policy will soon face a rather large wall.

Cloudy with a chance of thunderstorms

No, I haven't sacrificed my studies at Fletcher for a career in meteorology, nor am I trying to predict any weather. The title instead is my expectation of Sino-U.S. relations for the next few years.

The New York Times is running a story about the differences in priorities between China and the United States. I think they hit the nail on the head about why the United States and China can't seem to agree on anything, and made a plausible argument for why China will come around and do things the American way (China doesn't want to be seen as the bad guy in the global community).

However, the piece itself is short on why the Chinese government maintains its current position on the variety of topics raised (Renminbi valuation, Iran, and American job creation). As I see it, China can't change its policies on these issues because of domestic concerns. If China were to allow its currency to appreciate (read increase) in value, then its exports would become more expensive, something that companies and consumers don't like. On Iran, China enjoys a strong position serving as the only major economic power investing in the country. As a result of the sanctions and growing Russian dissatisfaction, Iran increasingly relies on China for investment. Moreover, China benefits from the natural and energy resources it is able to extract from the country. China would love to see job creation in the States to increase demands for its exports, but it won't sacrifice Chinese jobs to make it happen.

The article mentions China's sovereignty concerns for not cooperating, but I think this misses the point. The Chinese government may very well use the sovereignty excuse for not cooperating, but really it's because the changes required of it would harm the Chinese economy and by extension domestic society. Going forward I think we can expect to see more of these instances, where deriving mutual benefit will be more difficult. However, just because something is difficult does not mean it isn't worth pursuing. After all, you don't let cloudy skies prevent you from getting things done. Neither should the American or Chinese governments.

Left out in the cold

With the China-Asean FTA Taiwan is in a bind. The goods it sells to China will be 5-15% more expensive now compared to the Asean members and could result in a significant decline in trade if no solution is found. To put it in perspective, Taiwan enjoys a $67 billion trade surplus with China and its exports to the Chinese market constitute 26% of their total. Let me repeat that. 26% of Taiwan's exports go to China.

What options does Taiwan have to counter the China-Asean FTA? Taiwanese companies could lower their prices accordingly, but that is something they probably don't want to do. The other option is for China and Taiwan to sign an FTA of their own (which could happen this year). Not only would this level the playing field for Taiwan in the Chinese market, but it could also open the door for quasi-FTAs with the Asean members themselves. Beijing has quite a few reasons for implementing an FTA with Taiwan, two major ones being that 1) Taiwanese companies employ lots of Chinese workers and 2) failure to establish one could be a PR disaster for China in Taiwan.

I've made the entire grand strategy available so you can flip through it. The assignment was to write it from the perspective of the government in power, with the expectation that it would be an internal document not seen by the public. I included bits of humor and I think you'll be able to spot them. Please be honest and not claim it as your own work. Use of the bibliography is fine obviously.

Reading list

I've read a lot of books on China (more than 25 and counting). As such I think it would be worthwhile to provide a reading list of sorts for those of you who would like to learn more about it and its relationship with the U.S. I've put them in descending order, from easy reading at the top down to the hardcore at the bottom. Feel free to throw out your recommendations.

Understanding China by John Bryan Starr
China: A New History by John Fairbanks (THE book on Chinese history)
Integrating China Into the Global Economy by Nicholas Lardy
The Great Wall and the Empty Fortress by Andrew Nathan & Robert Ross
The Search for Modern China by Jonathan D. Spence
America's Response to China by Warren Cohen
Mao's China and the Cold War by Chen Jian
Ten Episodes in China's Diplomacy by Qian Qichen (Qian is a former Chinese foreign minister. This book is useful in that it provides insight into the official Chinese government's line of thinking on foreign policy.)
China's Unfinished Economic Revolution by Nicholas Lardy (dated info but a good read)
Governing China: From Revolution to Reform by Kenneth Lieberthal (a textbook really, but good for understanding China's governmental organization)