Taiwans Accession to the WTO and its Economic Relations with the United States and China

CRS Report for Congress
Taiwan’s Accession to the WTO and Its
Economic Relations with the United States
and China
Wayne M. Morrison
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division
After several years of negotiations, Taiwan joined the World Trade Organization
(WTO), the international organization that sets rules for most international trade, on
January 1, 2002. China fought to allow Taiwan to join the WTO only as a “separate
customs territory” and only after China obtained membership (which it did in December
2001). Trade and investment relations between China and Taiwan have boomed in
recent years; China has replaced the United States as Taiwan’s export market. However,
political tensions between China and Taiwan remain high. In an effort to further boost
U.S.-Taiwan economic ties (and to lessen Taiwan’s growing economic dependency on
the mainland), some Members of Congress have indicated support for a U.S.-Taiwan
free trade agreement (FTA). This report will be updated as events warrant.
Taiwan-U.S. Commercial Relations
Taiwan is a major economic and trade power and a significant U.S. trading partner.
Taiwan’s 2004 GDP was $306 billion (making Taiwan the word’s 20th largest economy).
Taiwan’s total trade (exports plus imports) in 2004 was $342 billion (with exports at $174
billion and imports at $168 billion).1 In 2004, Taiwan was the 8th largest U.S. trading
partner ($56 billion), 9th largest export market ($21.7 billion) and 8th largest import source
($34.6 billion).2 The United States is Taiwan’s third largest trading partner (after Japan
and China), its third largest export market (after China and Hong Kong) and its second
largest source of imports (after Japan). Major U.S. exports to Taiwan include
semiconductors and other electronic components, basic chemicals, and industrial
equipment. Major U.S. imports from Taiwan include semiconductors and other electronic
components, computer equipment, and communications equipment. Total U.S. foreign

1 According to the WTO, Taiwan is the world’s 15th largest exporter and importer (2004 data).
2 During the first eight months of 2005, U.S. exports and imports to and from Taiwan were up
by 8.7% and 1.4%, respectively, over the same period in 2004.
Congressional Research Service ˜ The Library of Congress

direct investment (FDI) in Taiwan (on a historical cost basis) in 2003 was $12.1 billion,
while Taiwan FDI in the United States was $3.0 billion.3
Table 1. U.S.-Taiwan Trade: 2000-2004
($ millions)
200020012002200320042003-2004 % Change
Total U.S. Exports to Taiwan22.418.218.417.521.724.3
Top 3 U.S. Exports to Taiwan
Semiconductors and other5.
electronic components
Basic chemicals1.
Industrial machinery2.
Total U.S. Imports from Taiwan40.533.432.231.634.69.5
Top 3 U.S. Imports from Taiwan
Semiconductors and other10.
electronic components
Computer equipment
Communications equipment1.
U.S. Trade Balance-16.1-15.2-13.8-14.1-12.9 —
Source: U.S. International Trade Commission DataWeb.
Taiwan and the WTO
Taiwan’s attempt to join the General Agreement on Tariffs and Trade (GATT) and
its successor organization, the World Trade Organization (WTO), dates back to 1990. In
September 1992, a GATT Working Party was established to handle Taiwan’s application
to the GATT as “the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu,”
or “Chinese Taipei” (a designation similar to that of Hong Kong and Macau, both of
which, while not independent countries, are WTO members). At that time, several GATT
signatories indicated support for allowing Taiwan to join the GATT only after China did,
a position supported by many members when the WTO was established in 1995.

3 U.S. FDI data for Taiwan in 2004 has been suppressed to avoid disclosure of data of individual
companies. Taiwanese FDI in the United States in 2004 was $3.2 billion.

Taiwan’s WTO membership was formally approved on November 11, 2001, the day
after China’s WTO membership was approved.4 On December 2, 2001, the Taiwanese
government notified the WTO that it had ratified its WTO accession agreement, and on
January 1, 2002, it joined the WTO. Under the terms of its WTO accession, Taiwan
agreed to cut tariffs and remove non-tariff barriers over specified time periods:
!Tariffs. Simple average tariffs on agricultural products dropped from
their pre-WTO level of 20% to14% in 2002, and will fall to 12.9% by5
2007 when tariff cuts are fully implemented. Similarly, simple average
tariffs on industrial goods dropped from 6.0% to 5.8% (in 2002) and
scheduled to fall to 4.2% in 2004. Taiwan agreed to join all Uruguay
Round zero-for-zero initiatives by eliminating all tariffs on paper,
pharmaceuticals, medical equipment, construction equipment, steel, toys,
furniture, agriculture equipment, civil aircraft, distilled spirits, and
information technology products. Taiwan also agreed to participate in
the WTO Chemical Harmonization Initiative.
!Automotive Products. Taiwan agreed to cut tariffs on imported autos
from 30% to 10%, decrease the commodity tax on vehicle imports,
eliminate an existing 9% subsidy on automobile components designed in
Taiwan, and remove a 50% local content requirement for auto parts.
!Government Procurement. Taiwan agreed to join the WTO
Government Procurement Agreement (GPA), which will open its
procurement markets to a wide range of U.S. products, including6
power-generating, transport and power transmission services. Taiwan
also agreed to implement a new, more fair and transparent, contract and
dispute resolution system regarding government contracts.
!Services. Upon WTO accession, Taiwan agreed to open completely a
number of service sectors, including professional services (architects,
accountants, engineers, lawyers), audiovisual services, express delivery
services, advertising, computer services, construction, wholesale and
retail distribution, franchising, and environmental services. Taiwan also
agreed to allow foreign companies to hold a controlling interest in
Taiwan communications companies, and to remove various barriers for
telecommunication services in Taiwan. Finally, Taiwan agreed to
provide substantially full market access and national treatment in the full
range of financial services, such as banking, insurance, and securities.

4 Later that month, Taiwan’s Legislative Yuan passed a comprehensive revision to its tariff
schedules to reflect its WTO commitments.
5 Taiwan agreed to implement 68% of its tariff reductions upon accession. The remaining 32%
(covering 2,217 tariff lines) will be implemented over time. For example, tariff reductions for
most chemicals, iron and steal, auto parts, and plywood will be completed by 2004, and those for
most motor vehicles by 2008.
6 The Taiwan Economic News reported in December 2002 that Taiwan was close to completing
negotiations to join the GPA. However, a final agreement has yet to be worked out.

!Agriculture. Taiwan agreed to immediately liberalize previously closed
markets for rice; expand market access for pork, poultry, and variety
meats; and to make significant immediate tariff reductions on hundreds
of agricultural products (such as potato products, pears, grapes,
grapefruit, sunflower oil, and soup). Taiwan also agreed to eliminate
restrictive sanitary and phytosanitary (SPS) regulations.
!Intellectual Property Rights (IPR). Taiwan agreed to makes its IPR
protection regime conform to the WTO Agreement on Trade-Related
Aspects of Intellectual Property Rights (TRIPs) upon accession.
U.S. government and business officials have given Taiwan relatively good marks for
its WTO implementation efforts to date. However, complaints have arisen over a number
of issues, including inadequate enforcement of IPR laws, failure to privatize state-owned
enterprises, lack of transparency for trade rules and regulations, restrictive SPS measures,
uneven administration of tariff-rate quotas (especially for rice), and regulatory barriers on
pharmaceuticals and telecommunications.
WTO and Taiwan-China Commercial Ties
Bilateral trade flows have grown substantially since Taiwan and China joined the
WTO, despite the current lack of direct economic and political links (most trade goes
through Hong Kong). According to Taiwan trade data, its exports to China have risen
from $9.9 billion in 2002 to $34 billion in 2004 (up 243%), while imports have risen from
$7.9 billion to $16.7 billion (up 111%), making China one of Taiwan’s fastest growing
trading partners (see Table 2). In 2004 alone, Taiwan exports to, and imports from,7
China rose by 58.9% and 51.8%, respectively in 2004 (over 2003 levels).
Taiwan places significant restrictions on imports from China (especially products
that might compete directly with Taiwanese-made goods). Many trade restrictions have
been lifted in recent years, which has boosted imports from China. Taiwan’s trade policies
have helped it maintain large trade surpluses with China. Taiwan’s trade data indicates
that it had a $17.3 billion trade surplus in 2004 (while Chinese data estimate that surplus
at $51.3 billion).
Table 2. Taiwan’s Major Trading Partners: 2004
($ billions)
Total TradeExports ImportsTrade Balance
J a pan 56.8 13.2 43.6 -30.4
United States49.828.121.66.5
China 50.734.016.717.3

7 Chinese trade data show the level of bilateral trade to be significantly higher than Taiwanese
data. Chinese data show total trade with Taiwan at $78.3 billion in 2004; imports from, and
exports to, Taiwan were $64.8 billion and $13.5 billion, respectively. The disparity between
China’s and Taiwan’s trade data is likely the result of how the two sides count trade that passes
through Hong Kong. The Chinese data would indicate that a significant share of Taiwan exports
to Hong Kong (as reported in official Taiwanese trade data) is actually re-exported to China.

Hong Kong31.929.82.127.7
South Korea17.05.311.6-6.3
Taiwan World Trade341.9174.0167.96.1
Sources: Taiwan Bureau of Foreign Trade. Chinese and Taiwanese data on their bilateral trade differ
sub stantially.
Taiwan has shifted many of its labor-intensive, export oriented, industries to the
mainland. The actual level of Taiwanese FDI in the mainland is greatly debated. Taiwan
maintains restrictions on the amount and types of investment that are allowed to be made
in China by Taiwanese investors, although many seek to circumvent these restrictions by
investing in the mainland through off-shore companies. Taiwanese data show the
cumulative level of Taiwanese FDI in China through 2004 at about $41.3 billion, or about
half of its cumulative FDI. Some Taiwanese business groups contend that the actual level
of Taiwanese FDI in China is far higher than Taiwanese and Chinese official data, with
estimates ranging from $60 billion to over $150 billion. According to Taiwan’s Ministry
of Finance (MOF), Taiwanese FDI flows to the mainland over the past five years have
“increased by leaps and bounds.” The MOF estimates that the share of Taiwan’s total FDI
going to the mainland (on an annual basis) rose from 33.3% in 2000 to 67.2% in 2004,
an indication that mainland China has become the dominant destination for Taiwanese8
investors. Electronics and electrical industries are the largest recipients of Taiwanese
FDI in the mainland. According to a report by the Center for Strategic and International
Studies (CSIS), Taiwan invested firms employed a total of 8.2 million Chinese workers
(3.9 percent of China’s urban labor force) and produced $70.2 billion in output (or 4.69
percent of China’s total industrial output).
Since 1996, the Taiwanese government has maintained a “no haste, be patient”
policy, seeking to limit the level of Taiwanese investment with the mainland for security
reasons, but this policy has come under review in recent years, mainly because of growing
economic problems in Taiwan. The economic slowdown in the United States and other
major world economies in 2001 caused Taiwanese exports (especially information
technology products) to decline sharply, raising unemployment to record levels (5.3% in
November 2001), and pushing the economy into recession (real GDP declined by 2.1%).
These conditions led several Taiwanese government and business officials to call for an
abandonment of the “no haste, be patient” policy as a means to help revive the economy.
In August 2001, Taiwanese President Chen Shui-bian endorsed the replacement of the “no
haste, be patient” policy with an “active opening, effective, management” policy, which
would relax current restrictions on investment in the mainland, establish commercial
links with China, and gradually allow mainland investment in Taiwan.
Supporters of closer economic integration with the mainland argue that Taiwanese
firms must take advantage of China’s growing demand for goods and services, as well as
its abundant low-cost labor, in order to stay competitive in world markets. Several
Taiwanese business representatives have called on the Taiwanese government to remove
restrictions on direct commercial links with the mainland, as such restrictions add

8 Taiwan Ministry of Finance Press Release, March 20, 2005.
9 Center for Strategic and International Studies, Taiwan’s Cross-Strait Economic Strategy and the
WTO, by Jane Skanderup, January 2004.

significant costs to doing business with China.10 Some supporters of normalized trade
relations with the mainland have called on the Taiwanese government to negotiate an
FTA with China. Many Taiwanese policymakers believe that closer economic ties with
the mainland will help to stabilize the relationship and reduce the likelihood of a Chinese
invasion. Opponents of closer ties with China contend that such policies will accelerate
the transfer of Taiwanese firms to the mainland, leading to a hollowing out of core
industries, and raising the level of unemployment in Taiwan. Another major concern is
over becoming too economically dependent on the mainland and thus becoming more
vulnerable to political pressure from China.
Chinese officials have indicated support for direct trade links with Taiwan, but have
often predicated that support on Taiwan’s acceptance of Beijing’s “One China Principle,”
which states that Taiwan is part of China, a position rejected by Taiwan’s government.
More recently, it appears that Chinese officials have tended to avoid tying political issues
to closer economic ties, perhaps in part in the belief that closer economic cooperation will
advance China’s goal of “reunification.” However, cross-strait relations remain volatile.
For example, on March 14, 2005, the Chinese government enacted into law its long-
standing stated policy that it would use military force if Taiwan declared independence.
The Taiwan government responded by announcing that it would slow down the pace at
which certain industries are allowed to invest in China and the pace at which bans on
certain imports from China are relaxed.11
Some U.S. policymakers have expressed concern that China may attempt to use its
expanding economic power, and Taiwan’s growing dependence on its economic ties to
the mainland, to undermine Taiwan’s autonomy. Some Members of Congress have
indicated support for a U.S.-Taiwan free trade agreement (FTA) that would reduce trade
barriers by both sides, thus boosting U.S.-Taiwanese economic ties.12 Bush
Administration officials have indicated support for such an FTA, but only after Taiwan
first agrees to resolve various trade disputes with the United States, in particular Taiwan’s
inadequate enforcement of IPR, and trade barriers on telecommunications services,
pharmaceuticals, and various agricultural products13 On November 29, 2004, the United
States and Taiwan resumed discussions (after a six year hiatus) under the Trade and
Investment Framework Agreement (TIFA), a forum designed to resolve major trade and
investment disputes. Progress towards resolving current trade disputes being addressed

10 One study found that establishing direct trade links between China and Taiwan would boost
GDP on both sides by 3% and increase trade by a total of $10 billion. See Peter Chow, Francis
Tuan and Zhi Wang, “WTO Accession and Economic Integration Among Taiwan, Hong Kong
and China,” Pacific Economic Review (October 2001).
11 Taiwan, Ministry of Finance press release, March 14, 2005.
12 Legislation was introduced in the 108th Congress, H.Con.Res. 98 (Rep. Ramstad), expressing
congressional support for a U.S.-Taiwan FTA. The bill had 69 cosponsors.
13 Some progress has been made on these issues, especially on IPR. The International Intellectual
Property Alliance (IIPA) estimates that IPR piracy in Taiwan cost U.S. firms $314 million in lost
sales in 2004 (down from $465 million in 2003). In a November 2004 press release, the IIPA
stated that Taiwan had “made significant law reform and enforcement progress in 2003-2004,”
but stated that piracy “remains high” and that much work remains to be done.” In January 2005,
the USTR upgraded Taiwan’s IPR status from “Priority Watch List” to “Watch List” in
recognition of Taiwan’s progress in improving IPR protection.

under the TIFA could lead to an agreement to begin discussions for a bilateral FTA.
China may oppose a U.S.-Taiwan FTA, especially if it views Taiwan’s motivation for
such an agreement as political, rather than economic. It is not clear whether Chinese
opposition would discourage the United States from pursuing an FTA with Taiwan.