The State of U.S.-Taiwan Economic Relations Remarks by AIT Chairman Raymond Burghardt San Francisco Taiwan Chamber of Commerce January 17, 2009

OT0903E | Date: 2009-02-20

Introduction

Ladies and gentlemen: I am very pleased to be here again in the San Francisco Bay Area to address this gathering, representing so much intellectual power and entrepreneurial drive.  It has been two years since I last had the privilege to speak before you and I am able to report that the interaction between the United States and Taiwan continues to define a strong relationship.  The last two years also have seen important political milestones in Taiwan: the election of a new President and Vice President and a new Legislative Yuan.  In this manner Taiwan reaffirmed its strong commitment to government by and for the people.  The impressive electoral turnout and smooth transition to the new administration last spring reinforced our faith in this vibrant young democracy.  Next week we will all be watching the transition between two U.S. Administrations. I spent time in Washington yesterday with some of the key people who will be responsible for managing U.S. relations with Asia in the Obama Administration. I am confident that the next Administration will continue to treat this unique relationship as one of mutual interest and great importance. Many of those coming in to the Obama Administration in positions with responsibility for Asian Affairs have long and deep experience with U.S.-Taiwan relations, both in and out of government.

The U.S.-Taiwan relationship, being both strong and multi-dimensional, has matured to the point where it can accommodate differences of opinions in some areas as well as cooperation in other areas.  Over the past eight years, the United States and Taiwan have had differences regarding some political issues.  We worked through them in recognition of the enduring value of the relationship.  The U.S.-Taiwan economic relationship, which is my main subject tonight, has always been a strong and vital one, although it has also had its ups and downs.  Both sides always keep in view our common interests and continue to press forward in an effort to realize them.  The recent progress in cross-strait economic relations, which I'll also discuss briefly, is a development much welcomed and supported by the U.S. Government and by the U.S. business community.  And the current global economic situation characterized by chaotic markets and disappearing demand for goods and services, requires a global response.  The U.S. is working closely with its international partners to address the global financial crisis.  Taiwan, as one of the world's major trading economies, and as an active member of the Asian Development Bank, the World Trade Organization, and APEC, has an important role to play in regional and global efforts to restore growth.

First, I would like to say a brief word on our fulfillment of defense obligations under the Taiwan Relations Act.

The recent U.S. approval of military sales to Taiwan has provided an important boost to the relationship, as has the recent visit to the United States of Defense Minister Chen Chao-men, the first by a Defense Minister in many years. I had the honor of accompanying the Minister to the Conference in Amelia Island, Florida of the U.S.-Taiwan Business Council.  The notification to Congress in early October of $6.5 billion in military sales underscores the continued close security cooperation between the U.S. and Taiwan and our full commitment to the Taiwan Relations Act.  The office of then-candidate Barack Obama commented at that time that the notification was fully consistent with U.S. obligations under the Taiwan Relations Act, and that the sale helped to contribute to Taiwan's defense and the maintenance of a healthy balance in the Taiwan Strait.

Now, at the end of the last week of the Bush Administration, I would like to review the past eight years of U.S. - Taiwan economic relations.

In October of 1990, Taiwan formally commenced on its 12 year odyssey to join the world's premier international trade forum, The GATT.  By the time of Taiwan's accession in January of 2002 the GATT had been transformed into the World Trade Organization.  In those 12 years of negotiation Taiwan's laws, regulations and practices regarding intellectual property rights protection and regarding trade in goods and services had been thoroughly dissected and reconstructed by WTO members to ensure consistency with the provisions of the WTO.  Throughout the first two years of the current Bush Administration, the United States played a major role in that effort. The U.S. and Taiwan delegations worked assiduously together to ensure a successful WTO accession by Taiwan.

Now, the main mechanism for U.S. - Taiwan economic and trade negotiations is something called the Trade and Investment Framework Agreement or TIFA,  which was signed by AIT and TECRO (then known as CCNAA) in 1994.  We normally hold TIFA meetings at a fairly high level roughly every 12 to 18 months.  However, during the early days of Taiwan's WTO accession in 2002 and 2003 our trade relationship hit a rough spot. The U.S. had serious concerns in the areas of agriculture, IPR protection, market access for pharmaceuticals, telecommunication regulations and financial sector reform. These issues created significant trade friction between us. The inability to make bilateral progress on these issues in the immediate period after Taiwan's WTO accession led the United States to take the unusual step of suspending high level meetings and visits in the economic area, including the meetings of the TIFA.

This stalemate persisted during two years of sustained and difficult negotiations.  But by November 2004 these challenges had been surmounted sufficiently to permit the holding of a TIFA meeting in Washington, DC. We then began a period of productive work on a range of industrial and agricultural market access issues as well as on government procurement, investment, taxation, electronic commerce, textile transshipment and some access for U.S. rice into the Taiwan market.

As this Administration ends, what is the status of US-Taiwan economic relations?

Today, the U.S. and Taiwan enjoy a strong bilateral trade and economic relationship. Taiwan is our 13th largest trading partner with approximately $60 billion in 2-way trade in 2008. Due to the severe and growing economic crisis, we anticipate a somewhat lower figure in 2009. Over the years, U.S. businesses have invested over $16 billion in Taiwan, making the U.S. the largest foreign investor on the island.

Taiwan is the sixth largest market for U.S. agricultural exports and the value of our agricultural exports to Taiwan has grown for six consecutive years. Nevertheless, agricultural market access problems remain some of the most difficult in our trade agenda.

Starting with agriculture, I'll say a bit about two areas where bilateral trade problems remain and negotiations will have to continue into the next Administration. Then I'll mention two areas where we have made some progress.

The biggest agriculture problem is still beef. Nearly three years ago, Taiwan led Asia in re-opening its market to imports of U.S. boneless beef.  Taiwan consumers have since welcomed U.S. beef, buying $103 million worth in 2007 alone. They are confident that U.S. beef is safe.   But imports of U.S. "bone-in" beef and other beef products continue to be banned, despite ample scientific evidence that they pose no safety risk.   We understand that Taiwan's Department of Health will soon publish the findings of its risk assessment on the safety of U.S. beef products.  That should bring us even closer to a truly, science-based opening of this market to the full range of U.S. beef products.

Taiwan's policy process really has struggled to try to reach a decision to reopen the Taiwan beef import market on conditions consistent with sound science and with the guidelines of the relevant international organization - the World Organization for Animal Health (OIE). One important aspect of dealing with the issue is how to communicate with the general public about the risks that exist and that do not exist in different American food products.

Another major aspect is to adopt food safety regulations that are consistent with international standards. This is one of the obligations required by the WTO membership. It includes establishing the acceptable residual amounts of pesticides and veterinary drugs used in the production of agricultural imports. These are called maximum residual levels or MRLs. If you don't set these levels on a timely basis, imports are halted and you have a lot of trade friction. One of the best known cases is the U.S. long-standing request for the establishment of a standard for the feed additive for pork that is being used safely by many U.S. producers.

The other problem area I'll mention is market access for pharmaceutical and medical devices. This has been the subject of intensive work between U.S. and Taiwan negotiators for years. It was a major area of dispute when I was AIT Director in Taipei eight years ago. There is the so called "black hole' problem and the separation of prescribing and dispensing issues. Within Taiwan's national health plan, the "black hole" involves the overly generous reimbursement by the Department of Health for generic drugs, way beyond the costs of production of these pharmaceuticals. This creates a pool of funds that are available to influence the purchasing decisions of hospitals and physicians, often to the detriment of research-based pharmaceuticals. A related concern is the possible effect on patients when doctors involved in dispensing drugs have a profit motivation to prescribe certain medications. We have established working groups to examine and seek solutions to these challenges in Taiwan's health care system.

Now let's turn to a bright spot. One area where we did have great progress in the past eight years is Taiwan's improvement in its regime for Intellectual Property Rights (IPR) protection. It has established a dedicated IPR court, submitted to the Legislature Yuan a useful Internet Service Provider (ISP) bill, implemented a campus IPR plan aimed at hardcopy and on line copyright infringement, and passed legislation governing peer to peer (P2P) internet infringement. In recognition of these significant efforts USTR just yesterday, January 16, 2009, removed Taiwan from all special 301 lists. We applaud Taiwan's creation of an IPR climate that fosters innovation, investment, and trade for foreign and Taiwan business alike.

Another area of progress was that in December last year, Taiwan formally initiated accession procedures at the WTO in Geneva to accede to the WTO Procurement Agreement. As this agreement will involve a change to Taiwan's domestic statues, it still must be approved by the Legislative Yuan. Taiwan's accession to the GPA will enhance economic opportunities for American and other foreign firms doing business in Taiwan as well as for Taiwan companies abroad.

Looking to the future, in addition to the agricultural and pharmaceutical issues I mentioned, some other topics of interest to our business community could be investment, taxation, electronic commerce and textiles transshipment. As the new administration takes office, we should anticipate the continuation of an active negotiating agenda on these matters.

Let me finish the subject of our bilateral trade relationship by mentioning an issue which would undoubtedly be raised by someone's question -- the possible negotiation of a Free Trade Agreement (FTA) with the United States. USTR has never ruled out any mechanism to advance bilateral economic relations with Taiwan, including an FTA. However, the decision to move forward with any potential FTA partner requires that appropriate progress has been made in the bilateral trade agenda and that there is a broad consensus among key stakeholders in the government and private sector. Negotiation of an FTA with any economy will also require that Congress restore the President's Trade Promotion Authority (Fast Track). That authority has expired. At this point in the U.S. Government transition, any major new trade initiative is a matter for President-elect Obama and his advisors to decide. Until the fundamental question of how the new U.S. President and Congress will deal with TPA and FTA's is clarified, initiating dialogue with potential partners around the world, including with Taiwan would be premature.

Cross strait economic relations and agreements

We have recently seen the blossoming of the cross strait economic relationship to the benefit of business on both sides of the Taiwan Strait as well as in America.  The first agreements reached were to have passenger charter flights four days per week and Mainland tour group visits to Taiwan.  Passenger traffic began to flow under these agreements in early and mid July, although the volume of arriving Mainland tourists has still not lived up to earlier projections.  These relatively easy agreements had been largely completed by negotiations between trade organizations in the last year of the Chen Shui-bian administration.

Then on November 4, 2008, SEF and ARATS signed four agreements concerning cross-strait air and sea transport, postal service and food safety.  These agreements were major breakthroughs. The Air Transport Agreement established daily charter passenger flights between several cities in Taiwan and the Mainland, charter cargo flights and new direct civil aviation routes between Taiwan and Mainland China.  Planes no longer need to detour through Hong Kong or Japan air space. PRC and Taiwan traffic controllers now communicate directly. The new flight route saves a great deal of time and jet fuel.  The increased ease of travel is welcomed heartily by any businessman involved in cross-strait commerce.  The Maritime Cargo Agreement also makes possible much more direct shipping routes. Taiwan and PRC shipping companies are now permitted to establish reciprocal representative offices and will be exempt from income and freight taxes.  The Postal Service Agreement establishes direct cross-strait service and will greatly simplify the existing system, permitting direct contact between Taiwan and PRC postal services for routine business.

The subject matter for likely future SEF-ARATS Agreements include financial services market access, banking regulation and supervision, and investment, taxation and IPR protection.  Some of the immediate economic benefits of these cross-Strait agreements may not always appear significant in themselves, but each incremental step in an ongoing process will help build a climate that favors investment and growth. The United States welcomes increased economic and trade ties between China and Taiwan.  Especially at a time of declining global economic output and trade, enhanced cross-Strait economic links are very helpful in maintaining economic activity.  And at a more fundamental level, such links help foster a climate of stability, progress, and hope.  The United States will continue to support the expansion of cross-Strait economic ties, based on equality and mutual interest.   The expansion of cross-Strait economic ties is also bolstering the value of our already very important economic partnership with Taiwan.  As Taiwan and the PRC advance in their efforts to create trade agreements governing the flow of goods, services, capital and labor between them, such efforts have the strong potential to mutually reinforce and promote the parallel U.S.-Taiwan work of building more and more blocks in our strong and ever more open economic relationship.

Conclusions

The US-Taiwan economic relationship is clearly a vibrant and growing one.  US support and assistance has been critical as Taiwan made its remarkable transformation from an underdeveloped economy dominated by agriculture to one of the world's leading high technology powerhouses, and from one-party authoritarianism to a model of freedom and democracy.  As President Bush stated on the occasion of Taiwan's presidential election in March:  "Taiwan is a beacon of democracy to Asia and the world."

The United States and Taiwan share a commitment to open economic systems in which transparency and respect for the rule of law are intended to ensure fair conditions for business competition.   We need to strive to remove government regulations that are discriminatory and protectionist, while as the same time supporting policies that encourage competition, as well as prudential and fiduciary responsibilities in the private sector.

The past three decades have seen dramatic changes in the global environment and the current situation promises even more change.  The current, extreme turbulence in the world economy certainly is a major challenge for the people of America and Taiwan. We must address this crisis and cooperate in planning the recovery.  Taiwan's economy is in good condition to weather the ongoing turmoil in capital markets, thanks in part to considerable foreign exchange reserves and high levels of liquidity.

However, it would be unrealistic to expect that shrinking consumer spending world-wide, particularly in the United States and the PRC, will not have an impact on Taiwan's economy since so many of its businesses are export-oriented.  In fact the projections of GDP and export growth now being issued by Taiwan think tanks point to a significant downturn.  But economic interdependence entails both positive and negative consequences.  Uncertain times, in fact, often provide new opportunities for those with creativity and drive.  These are the very qualities that propelled Taiwan's economic miracle and made the island's technology firms world-class.  Indeed, many leading Taiwan business figures are emphasizing the opportunities offered by the present situation to improve competitiveness.

Faced with crisis, some may be tempted to retreat into economic isolationism - turning their backs on the openness, innovation, and free trade that have been embraced by the U.S., Taiwan, and so many others with such remarkable success.  Nothing could be more wrongheaded than such a retreat.   Our present challenges offer in fact an opportunity to improve the global economic system - a system that over the decades has delivered dramatic economic growth to millions in Asia and around the world.  President Bush highlighted this idea at the APEC CEO Summit in Lima last November:  "With confidence in our ideals, we can turn the challenge we face today into an opportunity -- and lead the way toward a new era of prosperity for the Asia Pacific and beyond."

Finally, I want to point out that my country's policy toward Taiwan has been consistent through five transitions to new administrations.  History has shown that the fundamentals of our robust although unofficial relationship have flourished through all of these shifts in American politics.  The solid foundation of our relationship includes three points:  the traditional friendship between us; the continuity of the Taiwan Relations Act; and the values we share, such as democracy, respect for human rights, an open society and freedom of expression.  We can be confident in the continued strength of our friendship and mutual trust.