Taiwan Must Do Real Free Trade

August 25, 2021 Updated: August 25, 2021


Taiwan has become perhaps the hottest spot in the world in terms of a potential outbreak of war between it and China, which could potentially also draw the United States, Japan, Australia, India, and much of Southeast Asia into the conflict. Indeed, it could well become another World War of unimagined destruction.

The background to this is, of course, the fact that the Chinese Communist Party (CCP) failed to conquer Taiwan when it defeated Chiang Kai-shek’s armies and the Kuomintang, the nationalist political party in mainland China in 1949. The United States continued to recognize Chiang’s government in Taiwan as the official government of China and as the reigning holder of a permanent seat on the United Nations Security Council. Consequently, the United States armed forces protected Taiwan from any attack by the communist regime on the mainland.

Much of this changed, of course, in the wake of President Nixon’s visit to Beijing in 1972. Washington normalized relations with the Chinese communist regime in 1978 and recognized that regime in Beijing as the official governing body of China and as the official holder of the permanent U.N. Security Council seat. The question of the status and future of Taiwan was finessed by using a formula that could be interpreted in its own way by each of the negotiating parties. It was agreed that “there is only one China, and that Taiwan is part of it.” That left the question of who rules Taiwan unanswered and perhaps to be determined by future events and/or discussions.

The United States withdrew its ambassador to China from Taipei and sent him to Beijing. But one thing did not change. Although there was no formal statement of agreement on the matter, the U.S. Navy continued de facto to defend Taiwan. In Washington, the U.S. Congress adopted what became known as the Taiwan Relations Act, which established a system of informal diplomatic relations between Washington and Taipei and provided for continuing trade and economic relations. Most importantly, it called for the United States to “maintain the capacity to resist and resort to force or other forms of coercion that would jeopardize the security or the social and economic systems of the people of Taiwan.”

Thus, while the United States has no security treaty requiring it to defend Taiwan, its own law requires it to maintain the ability to do so. What it would actually do under certain circumstances is not known to anyone, hence the term “strategic ambiguity” has come into use to describe the U.S. security policy on Taiwan and China.

In these circumstances, it would seem important for Taiwan to do two things. One is to build up its own defense capability and to make any mainland invasion potentially extremely costly. In effect, the idea is to make any China mainland military victory in Taiwan so potentially pyrrhic that Beijing will not try to invade. It is necessary for Taiwan to do this so that no one in the United States can question why America should defend Taiwan when Taiwan is not preparing to defend itself.

The second thing Taiwan must do is to conduct its international trade and globalization policies in the most open, fair, and free trade-oriented manner possible.

This has not been, and is not today, the case. Rather Taiwan has long been a perfect example of mercantilist trade protection and export-led growth policies. It consistently accumulates trade and current account surpluses of 10 percent or more of GDP as it pursues economic policies to achieve export-led growth. While this has been successful, it is also illegal under International Monetary Fund and World Trade Organization rules. Indeed, at the foundation of the global economic system in 1944 at the Bretton Woods conference, the great British economist John Maynard Keynes called for high tariffs to be imposed on the exports of countries that regularly accumulate large trade surpluses.

Such surpluses, including those of Taiwan, are accumulated by policies that manage the national currency to be under-valued versus the U.S. dollar. This is called currency manipulation and is aimed at stimulating exports while restraining imports. It is sometimes called: “beggar thy neighbor,” one party gains at the expense of the other. The U.S. Treasury has been threatening for several years to take action against Taiwan to force its government to halt this policy.

Another issue is that of investment, production, and export subsidies. Taiwan’s semiconductor industry has been very successful and is the world technological leader in production of advanced semiconductor chips. This has been due to skill and hard work, but also to heavy government subsidies to the industry. Such subsidies are also at odds with free trade, free-market rules and are considered “beggar thy neighbor” policies. They are particularly harmful to the United States as the foundation of the global economy.

If Taiwan wants the United States to defend it against bullying and even possible invasion by Beijing, it would do well to start playing by the rules.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Clyde Prestowitz
Clyde Prestowitz
Clyde Prestowitz is an Asia and globalization expert, a veteran U.S. trade negotiator, and presidential adviser. He was the leader of the first U.S. trade mission to China in 1982 and has served as an adviser to Presidents Reagan, George H.W. Bush, Clinton, and Obama. As counselor to the secretary of commerce in the Reagan administration, Prestowitz headed negotiations with Japan, South Korea, and China. His newest book is "The World Turned Upside Down: America, China, and the Struggle for Global Leadership," which was published in January 2021.