Taiwan and the Regional Comprehensive Economic Partnership (RCEP): An Australian Perspective

Transcription

1 Taiwan and the Regional Comprehensive Economic Partnership (RCEP): An Australian Perspective Final Report December 2014

2 ABOUT ITS GLOBAL ITS Global specialises in public policy in the Asia Pacific region. Its expertise encompasses international trade and economics, direct foreign investment, environment and sustainability, international aid and economic development: and corporate social responsibility and management of strategic risks. ITS Global Level 1, 34 Queen Street, Melbourne VIC 3000 AUSTRALIA Tel: (61) Fax: (61) Commercial in confidence. The views expressed in this publication are those of its authors. The consultant takes no liability for commercial decisions taken on the basis of information in this report. The information is accurate to the best of the consultant s knowledge, however the consultant advises that no decision with commercial implications which depends upon government law or regulation or executive discretion should be taken by any person or entity without that party s having secured direct advice.

3 Page 3 Taiwan in the RCEP: An Australian Perpsective EXECUTIVE SUMMARY The Regional Comprehensive Economic Agreement (RCEP), announced in 2009 at the East Asia Summit, will create a regional free trade area in the Asia Pacific region with GDP totalling US$21.3 trillion and a combined population of 3.4 billion. While Taiwan is not currently participating in the negotiations, it has signalled an interest in joining the RCEP. The case for doing so is clear. The RCEP will create a regional free trade area comprising ASEAN (Association of Southeast Asian Nations) and the six countries with which ASEAN currently has a Free Trade Agreement (FTA) Australia, China, India, Japan, the Republic of Korea, and New Zealand. It will be a comprehensive agreement intended to cover trade in goods and services, foreign investment, economic and technical cooperation, intellectual property, competition policy and recognition of global supply chains. There are several key reasons why Taiwan s inclusion in RCEP is both desirable and beneficial for Australia and other RCEP economies: The benefits to RCEP economies from Taiwan s participation in the RCEP are twofold: almost all RCEP countries would reap greater economic gains under the agreement and it would support frameworks for more open markets in the region. In the current global trading environment, regional agreements such as RCEP present the most viable opportunities for further liberalisation of trade barriers and the creation of regional frameworks that support open markets and good governance. Ultimately the RCEP could provide a pathway towards a free trade area that covers the entire Asia Pacific region. Taiwan s participation in RCEP will contribute to that process. Economic modelling shows that there would be additional economic gains for almost all RCEP economies resulting from trade liberalisation were Taiwan admitted to join RCEP. ASEAN countries could achieve GDP (Gross Domestic Product) gains of up to 26 per cent. China s GDP could increase 8.5 per cent. Taiwan would also be one of the main economic beneficiaries. Taiwan s gains from being admitted to the RCEP would not come at the expense of any of the existing RCEP members. The actual economic benefit is likely to be substantially larger as economic models do not capture all of the gains that arise from liberalisation of trade and investment under free trade agreements. Taiwan is an advanced economy of the Asia Pacific region, a significant trader and a growing source of foreign investment, particularly in China. Taiwan is important to global manufacturing supply chains and strategically important to key export supply chains in Asia Pacific. Of the economies participating in RCEP, Taiwan is the fourth most important contributor to gross regional trade after China, Japan and Korea. Its share of Asia Pacific trade in the electronics industry is on par with larger economies of Korea and Japan. Taiwan is also one of the leading sources of foreign direct investment in China. Taiwanese industry is highly integrated in global manufacturing supply chains, and more integrated than Japan, Korea, Hong Kong and Singapore. Taiwanese industry is a key source

4 Page 4 Taiwan in the RCEP: An Australian Perspective of economic value in the region Taiwan typically leads the world in terms of trade accounted for by intermediate goods, particularly in the electronics industry. Taiwan is also strategically important to export supply chains. Taiwan adds more economic value to the total gross exports of Asia Pacific economies than the economic value added by Singapore and Hong Kong combined. Taiwan s participation in regional free trade agreements would strengthen the bilateral relationship with Australia and advance Australia s strategic policy objectives in the Asia Pacific region. Taiwan is Australia s eleventh most important merchandise trading partner and its seventh largest export market. It is a key destination for Australian resource exports, a growing source of foreign direct investment, and a gateway market to other Asia Pacific economies, including China. Taiwanese participation in RCEP would support Australia's objective of promoting economic integration among Asian Pacific economies. It would ensure the Agreement included all key economies in the regional manufacturing supply chain. As an advanced economy in the Asian Pacific region, Taiwan's participation would also enhance adoption in RCEP of effective governance. Pursuit of the common objective of building effective regional architecture for free markets among Asian Pacific economies would also add a valuable dimension to the bilateral relationship with Australia. While RCEP is restricted only to economies with which ASEAN has an FTA, Taiwan could begin to build a broader FTA relationship in stages, as India did, and seek initial engagement on that basis in the RCEP process.

5 Page 5 Taiwan in the RCEP: An Australian Perpsective CONTENTS Introduction 7 1. Taiwan s significance in global and regional supply chains The importance of Taiwan to trade and investment Taiwan s significance in global and regional supply chains Taiwan s economic importance to Australia Strengths of the bilateral economic relationship Opportunities for Australian businesses Benefits for Australia The benefits to RCEP economies from Taiwan s participation in RCEP Economic benefits Geopolitical benefits Options for Taiwan to join RCEP 26 Endnotes 28 Annex I: summary of economic gains 30 Annex II: Why the modelled gains are understated 31 Annex III: Summary of economic modelling by the Centre of Policy Studies, Victoria University Introduction Results Conclusion 37 Appendix 1: Tables of Results 38 Appendix 2: The GTAP Model 40 Annex Endnotes 42 Bibliography 43

6 Page 6 Taiwan in the RCEP: An Australian Perspective Acronyms APEC ASEAN AUD CGE CoPS FTA FTAAP GDP GTAP ICT NTB OECD OTRI RCEP TPP USD WTO Asia Pacific Economic Cooperation Assocation of Southeast Asian Nations Australian dollars Computable general equilibrium Centre of Policy Studies, Victoria University Free trade agreement Free Trade Area of the Asia Pacific Gross domestic product Global Trade Analysis Project Information and communication technologies Non tariff barrier Organisation for Economic Cooperation and Development Overall trade restrictiveness index Regional Comprehensive Economic Partnership Trans Pacific Partnership United States dollars World Trade Organization

7 Page 7 Taiwan in the RCEP: An Australian Perpsective Introduction At the 2012 East Asia Summit, Leaders launched negotiations on a Regional Comprehensive Economic Partnership (RCEP). The RCEP seeks to create a regional free trade area, initially based on ASEAN (Association of Southeast Asian Nations) and the six countries with which ASEAN currently has a Free Trade Agreement (FTA) Australia, China, India, Japan, the Republic of Korea, and New Zealand. Taiwan has an FTA with Singapore, but not as yet with ASEAN. Taiwan however, has signalled interest in joining RCEP and expanding its FTAs with regional trading partners. The rationale for RCEP is clear in 2013 the 16 RCEP economies accounted for 28.4 per cent of global GDP (gross domestic product), totalling USD21.3 trillion, with a combined population of 3.4 billion. 1 The RCEP agreement is envisaged as a comprehensive agreement intended to cover trade in goods and services, foreign investment, economic and technical cooperation, intellectual property, competition policy and recognition of global supply chains. Along with the Trans Pacific Partnership Agreement, it is viewed as a step towards the creation of more open regional markets, including the eventual realisation of an APECwide free trade area. Taiwan plays a significant role in the Asia Pacific region in trade, investment and particularly through participation in global supply chain networks. It is an important trading partner for Australia. There are compelling reasons for its inclusion in regional agreements which serve to benefit other participating economies, including Australia, and which advance common interests toward greater economic integration in the Asia Pacific region. In Australia s case, RCEP includes 9 of its top 12 trading partners, which account for almost 60 per cent of Australia's total two way trade, and 70 per cent of Australia s exports. In 2013 Taiwan was Australia s 11 th largest trading partner for goods, and its seventh largest export market. 2 This report supports the case for Taiwan s inclusion in the RCEP. It sets out: The key role Taiwan plays in supporting trade and investment in the region, in particular through its participation in global and regional supply chains; The opportunities Taiwan s participation in RCEP presents to strengthen the bilateral relationship with Australia and advance Australia s trade policy goals in the region; The economic benefits arising from trade liberalisation which would accrue to existing RCEP members from having Taiwan in the RCEP agreement, as opposed to not; and The geopolitical benefits for all RCEP members, and more broadly for APEC, resulting from Taiwan s contribution to regional frameworks which promote more open markets.

8 Page 8 Taiwan in the RCEP: An Australian Perspective 1. Taiwan s significance in global and regional supply chains Taiwan is an advanced economy in the Asia Pacific region, a significant trader and a growing source of foreign investment; particularly in China. Taiwan is highly integrated in global manufacturing supply chains and is strategically important to key RCEP export supply chains. Without Taiwan s participation, RCEP will not be able to deliver optimal economic gains to RCEP members since it will exclude an important link in the regional supply chain for electronic and electrical goods. 1.1 THE IMPORTANCE OF TAIWAN TO TRADE AND INVESTMENT Taiwan is a growing and advanced economy The Taiwanese economy has a strong history of economic growth and is one of the most developed economies of the Asia Pacific region. Between 2005 and 2012 the Taiwanese economy grew at an average annual rate of 4 per cent. 3 By 2012, Taiwan s GDP was USD 475 billion and GDP per capita was USD 20,387. In 2012, Taiwan was ranked 18th in the world in both merchandise exports and imports. 4 Merchandise exports reached just over USD 300 million in 2012, 1.64 per cent of total world exports and merchandise imports reached USD 270 million, 1.45 per cent of total world imports. In 2012, Taiwan had a current account balance of USD 50 billion. Taiwan has a comparative advantage in the production of electrical and optical equipment; as well as chemical and non metallic mineral products. 5 In 2011, the total value of Taiwan s electronics exports reached USD 117 billion, accounting for 20.9 per cent of GDP. This was a 50 per cent increase in value upon 2009 levels. 6 China and Japan are important trading partners In 2009, Taiwan s total gross merchandise trade (imports and exports) with China and Japan was just over USD 160 billion. 7 This was more than half of Taiwan s total merchandise trade with all RCEP economies. China is a key export market for Taiwan. Taiwan exported approximately 81 billion USD worth of goods and services to China, equal to 36 per cent of Taiwan s total world exports and about 57 per cent of Taiwan s total exports with RCEP economies. Taiwan ran a trade surplus of USD 53 billion with China in Over the same period, Japan was the largest source of imported goods and services to Taiwan. Total Japanese imports reached USD 38 billion in This was approximately 20 per cent of Taiwan s total world imports and 35 per cent of gross imports from RCEP economies. Taiwan ran a gross trade deficit with Japan of USD 22.5 billion in Japan is also the largest source of foreign direct investment in Taiwan among the RCEP economies, 8 accounting for around 80 per cent, and providing 30 per cent of global foreign direct investment in Taiwan.

9 Page 9 Taiwan in the RCEP: An Australian Perpsective Taiwan is an important trade hub in Asia-Pacific The majority, almost 60 per cent, of Taiwan s merchandise trade is with the RCEP economies. 9 In 2009, Taiwanese trade with the region reached USD 250 billion. This was equal to 7.25 per cent of total merchandise trade flows between the RCEP economies ( RCEP economies has been defined to include Taiwan and Hong Kong, as well as all of the countries currently negotiating the RCEP; excluding Laos and Myanmar). Taiwan s share was equivalent to that of Hong Kong and Singapore combined. Taiwan is also the fourth most important economy to gross RCEP trade after China, Japan and Korea (See Figure 1). Total Taiwanese merchandise trade with China and Japan accounted for about 4.5 per cent of trade among the RCEP economies over that same period. In 2009, Taiwan s trade in electrical and optical equipment reached USD 112 billion, which is equal to about 12 per cent of all merchandise trade in electronics goods among the RCEP economies (See Figure 2). Taiwan s share of RCEP trade, which is primarily within the electrical and electronics industry, is on par with larger economies of Korea and Japan. Over half of Taiwan s gross regional trade in electronic goods is with China; in 2009 exports to China were worth USD 52 billion. This bilateral trade flow was the second largest of all regional trade flows across the electronics sector (the largest being USD 55.5 billion in electrical and optical equipment exports from Korea to China). Figure 1: Share of total gross merchandise trade flows (all products) between Asia Pacific economies (2009) Japan, 16.74% Singapore, 5.51% China, 25.97% ASEAN, 24.26% Philippines, 1.78% Thailand, 4.93% Taiwan, 7.25% Korea, 10.88% India, 4.50% NZ, 0.92% Malaysia, 5.22% Viet Nam, 2.28% Brunei, 0.23% Indonesia, 4.15% Cambodia, 0.15% Hong Kong, 2.61% Australia, 6.86%

10 Page 10 Taiwan in the RCEP: An Australian Perspective Figure 2: Share of total gross merchandise trade flows (electrical and optical equipment) between Asia Pacific economies (2009) Japan, 13.88% Philippines, 3.33% Singapore, 5.24% China, 33.25% Taiwan, 11.62% Korea, 12.67% India, 1.91% ASEAN, 22.93% Thailand, 5.45% Viet Nam, 0.72% Malaysia, 6.44% Brunei, 0.01% Indonesia, 1.70% Hong Kong, 1.38% Cambodia, 0.04% Australia, 2.06% NZ, 0.29% Taiwan is a growing source of foreign investment In 2012, total Taiwanese foreign direct investment in RCEP economies reached just over USD 50 billion; 10 or just less than 5 per cent of total foreign investment between RCEP economies. In absolute terms, Taiwanese foreign direct investment across the RCEP region has been steadily increasing since 2009 (See Figure 3). In 2012, the primary destinations for Taiwanese foreign direct investment were China, Singapore and Hong Kong, which respectively received USD 28 billion, USD 10 billion and USD 7 billion. In 2012, Taiwanese investment in China accounted for almost two thirds of all Taiwanese foreign direct investment in RCEP economies. Taiwan is also a leading source of foreign Investment in China. In 2011, it was the fourth largest source among RCEP economies; following Japan, Singapore and Korea. 11 Taiwan invested USD 37 billion in the Chinese economy over this period, which amounted to approximately 2 per cent of global foreign direct investment in China. In 2012, Taiwan accounted for almost 9 per cent of total RCEP foreign direct investment in China. Taiwanese companies generally invest in, and operate, a number of electronic parts and production facilities in China. 12 For example, Foxconn has production facilities in China to complete the assembly processes for various smartphones; including Apple s iphone. In 2010, the Taiwanese firm Simplo invested in a production plant in Chongqing to manufacture battery packs for laptop computers. 13

11 Page 11 Taiwan in the RCEP: An Australian Perpsective Figure 3: Total Taiwanese foreign direct investment in Asia Pacific economies $60,000 $50,000 USD Million $40,000 $30,000 $20,000 $10,000 $ ANZ&I $ $25.71 $52.19 $ ASEAN $8, $9, $11, $12, Hong Kong $4, $6, $6, $7, China $21, $23, $37, $28, Japan $2, $2, $2, $2, Korea $ $98.89 $ $ TAIWAN S SIGNIFICANCE IN GLOBAL AND REGIONAL SUPPLY CHAINS Taiwan plays an important role in manufacturing supply chains Taiwan is one of the most highly integrated RCEP economies in global manufacturing supply chains; both in terms of importing intermediate goods for export (backwards participation) and exporting intermediate goods for the purposes of third party exports (forward participation) (see figure 5). 14 Measured in terms of total participation (forward and backward), 15 Taiwan is more integrated in global supply chains than Japan, Korea, Hong Kong and Singapore. Taiwan also has a higher level of forward participation in global supply chains than Korea, Hong Kong and Singapore; which indicates that Taiwan is a key source of economic value in the region. Taiwan typically leads the world in terms of trade accounted for by intermediate goods. According to the World Trade Organization (WTO), 71 per cent of Taiwanese imports, and 65 per cent of its exports, consist of intermediate goods. 16 The Taiwan economy is important for the economic value it adds in global manufacturing supply chains. Taiwanese industry is mostly situated upstream in the supply chain. This position, as well as the length of such supply chains, is equivalent to that of larger RCEP economies, such as Japan and Korea. Taiwan s economic contribution is generally characterised by high value added production processes, such as research and development and design. The Taiwanese economy is also more specialised in the production of intangible production inputs and other high value intermediate products, than other RCEP economies.

12 Page 12 Taiwan in the RCEP: An Australian Perspective Figure 5: Participation in global value chains (2009) Forward Backward Taiwan is highly integrated in global ICT and electronics supply chains Taiwan has developed formidable export competitiveness in the information communications technology (ICT) and electronics industry, particularly in the sub sectors of flat panel displays, and semiconductor chips and machinery. Taiwan s share of global ICT and electronics exports reached 5.7 per cent in Taiwanese firms are generally situated further upstream in global ICT and electronics industry supply chains than most RCEP economies (See Figure 6). 18 Their role in the supply chain ranges from research and development to the manufacture of high value added intermediate products. These products are usually exported to China for lower value added assembly processes. According to the APEC (Asia Pacific Economic Cooperation) Policy Unit, Taiwanese ICT and electronics companies have relocated 95 per cent of their assembly capacity for smartphone, laptops and digital cameras to mainland China. 19 Taiwan is also one of three major suppliers of intermediate ICT and electronics products within the global supply chain for smart mobile phones, personal laptop computers and flat screen televisions (the other two being Korea and Japan). 20. Taiwan has 19 companies on the Organisation for Economic Cooperation and Development s (OECD) list of the top 250 global ICT firms. Only Japan and the United States have more. The majority of Taiwan s ICT exports are produced by niche local businesses, particularly contract manufacturers, which produce intermediate goods for large consumer and technology brands from the United States, Japan, the European Union and China. 21

13 Page 13 Taiwan in the RCEP: An Australian Perpsective Figure 6: Total participation (forward and backward) and distance to final demand ICT and electronics industry (2009) Distance to Final Demand (left axis) Total Participation % (right axis) Note: The distance to final demand index measures (starting from one industry in a given country) how many stages of production are left before the goods or services produced by this industry reach final consumers Taiwan is strategically important to Asia-Pacific export supply chains Taiwan is a significant contributor of economic value added to export supply chains that have driven growth in the manufactured industries of RCEP economies. In 2009, Taiwan added around USD 50 billion of economic value to the total gross exports of RCEP economies (all products). 23 This was more than the economic value added by Singapore and Hong Kong combined. Taiwan is most important to the RCEP export supply chains for ICT and electronics products. In 2009, Taiwan added about per cent of the total economic value added by all RCEP economies to gross regional ICT and electronics exports (USD billion) (See Figure 7). 24 Taiwan is also important to the export supply chains of China s ICT and electronics industry. In 2009, Taiwan added almost 20 per cent of the total economic value added by all RCEP economies to such Chinese exports (approximately USD 20 billion). Taiwan is a significant contributor to the RCEP export supply chains of manufactured products. In 2009, Taiwan added approximately USD 1.5 billion of economic value to such exports. This amounted to almost 7.5 per cent of the total foreign value added to all gross manufacturing exports by RCEP economies (see Figure 8). Approximately USD 900 million of such economic value added was to the gross manufacturing exports of Chinese companies. This made Taiwan the third largest source of economic value added to Chinese manufacturing exports (after Japan and Korea) in RCEP. 25

14 Page 14 Taiwan in the RCEP: An Australian Perspective Overall, RCEP will not be able to deliver optimal economic gains to RCEP members without Taiwan s participation, because it will exclude an important link in the regional and global supply chain for ICT and electronic goods. Figure 7: Share of total foreign value added embodied in gross ICT and electronics exports of Asia Pacific economies, by source country (2009) Hong Kong, 2.59% China, 15.25% Taiwan, 13.54% Phillipines, 3.10% Singapore, 5.53% Korea, 15.22% ASEAN, 23.98% Thailand, 3.63% Malaysia, 8.30% Vietnam, 0.83% Japan, 23.22% Australia, 3.67% NZ, 0.21% India, 2.31% Indonesia, 2.47% Cambodia, 0.01% Brunei, 0.11% Figure 8: Share of total foreign value added embodied in gross manufacturing exports of Asia Pacific economies, by source country (2009) Taiwan, 7.28% China, 18.63% Hong Kong, 4.39% Phillipines, 1.32% Singapore, 3.87% Korea, 11.86% ASEAN, 23.04% Thailand, 4.97% Japan, 23.09% India, 2.44% Malaysia, 6.67% Indonesia, 4.62% Australia, 8.40% NZ, 0.87% Vietnam, 1.30% Brunei, 0.24% Cambodia, 0.06%

15 Page 15 Taiwan in the RCEP: An Australian Perpsective Taiwanese value-added in the ICT and electronics industry supply chains Smart Mobile Phones Smart mobile phones (smartphones) contain more than two dozen major components of varying complexities and costs. Taiwan has a strong and growing presence in the moderate cost component range. Taiwanese suppliers include Mediatek, a company which manufactures baseband integrated circuits; Foxconn, a renowned manufacturer of camera modules; and Dynapak, a leading producer of smartphone batteries. 26 Taiwanese companies are also major suppliers of low value passive components to both Apple and HTC Corporation; such as resistors, inductors and capacitors. 27 Overall, Taiwan is just as highly involved in all areas of the global smartphone supply chain as Japan, the USA, Korea and China. Taiwan is not only a significant contributor of economic value to the smartphone supply chain, it is also a key driver of the supply chains itself. For example, Taiwanese manufacturer HTC Corporation is one of the world s leading producers of smartphones. HTC sources memory and battery modules from Korea, LCD panels from Japan, and acoustic components from China. According to a study of smartphone supply chains by the Taiwanese Institute for Information and Industry, Apple and HTC purchased smartphone components worth just over USD 2.4 billion from Japan, Korea and China in Almost 60 per cent of the economic value within HTC s Desire smartphone is manufactured in China, Korea, and Japan. 29 Laptop Computers The Taiwanese firm Simplo Technology is currently the world s largest supplier of batteries for personal laptop computers. The batteries are a medium cost component accounting for approximately five per cent of the total cost of a laptop. Simplo supplies a number of key laptop vendors, including HP, Acer and Apple. The company also owns and operates manufacturing plants outside of Taiwan. In 2010, Simplo established a plant in Chongqing, China, which is responsible for more than 30 per cent of Simplo s total battery exports. 30 Flat Panel Televisions The Taiwanese economy is highly involved at the upstream and midstream level of the global supply chain for flat panel televisions; particularly in high value and medium parts production, as well as research and development. Taiwanese manufacturers include Innolux and AUO, which supply high value display modules; as well as Sintek, which supplies colour filters. Formosa Epitaxy and Optimax also manufacture moderate cost parts, such as LED backlights and poalrizers, whilst Novatek supplies display driver integrated circuits. 31

16 Page 16 Taiwan in the RCEP: An Australian Perspective 2. Taiwan s economic importance to Australia Taiwan is a key destination for Australian resource exports, a growing source of foreign direct investment, and a gateway market to other RCEP economies. Taiwanese participation in regional free trade agreements would strengthen the bilateral relationship and advance Australia s strategic policy priorities. 2.1 STRENGTHS OF THE BILATERAL ECONOMIC RELATIONSHIP Taiwan is an important destination for Australian resource exports Taiwan is Australia s eleventh most important merchandise trading partner. In 2013, Taiwan was Australia s seventh largest export market, with total exports reaching AUD 7 billion (excluding confidential trade) or 2.8 per cent of Australia s total exports (See Figure 9). As of 2012, the 5 year average growth rate of Australian exports to Taiwan reached 5.8 per cent. 32 In 2013, Australia s major exports to Taiwan included coal, iron ore, aluminium, copper, processed and unprocessed meat, as well as medicinal products (see Figure 10). Coal and iron ore notably accounted for over half of Australia s total exports to Taiwan (62 per cent). 33 Australia is also a major exporter of agricultural products to Taiwan, the most important items being beef and wheat. Australian food and lifestyle products are increasingly popular in Taiwan, such as vitamins and health supplements. As of 2013, Australia s total services exports to Taiwan reached AUD 704 million, which was equal to just less than 10 per cent of Australia s total Taiwanese exports. 34 The majority of this trade was in personal travel services (AUD 367 million) and education related services (AUD 202 million). Figure 9: Major Australian Exports to Taiwan, excluding confidential trade (AUD Million) 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1, All Other Goods Manufactured Chemicals Processed Food Manufactured Minerals Unprocessed Minerals Unprocessed Fuels

17 Page 17 Taiwan in the RCEP: An Australian Perpsective Figure 10: Top 10 Australian Exports to Taiwan (AUD Million) (SITC Code) Commodity Coal 1, , , , , , , , Iron ores & concentrates , , , , , Aluminium Medicaments (incl veterinary) Beef, f.c.f Crude petroleum Copper Zinc Wheat Animal feed Total 6, , , , , , , , Taiwan is a source of high-value manufactured import products In 2013, Taiwan was Australia s fourteenth largest import market, with total imports reaching AUD 3.7 billion (excluding confidential trade) or 1.7 per cent of Australia s total imports (see Figure 11). In 2013, Australia s major imports from Taiwan included refined petroleum products, motorcycles, computers, as well as various manufactured and electronic products; particularly office and telecommunications equipment (see Figure 12). 35 Over the same period, Australia s services imports from Taiwan reached AUD 310 million, which was equal to just less than 8 per cent of Australia s total Taiwanese imports. 36 The majority of such services trade was in transport services (AUD 129 million) and personal travel services (AUD 104 million).

18 Page 18 Taiwan in the RCEP: An Australian Perspective Figure 11: Major Australian Imports from Taiwan, excluding confidential trade (AUD Million) 4,000 3,500 3,000 2,500 2,000 1,500 1, All Other Goods Manufactured Minerals Manufactured Chemicals Other Manufactures Processed Fuels ICT Products Figure 12: Top 10 Australian Imports from Taiwan (AUD Million) (SITC Code) Commodity Refined petroleum Telecom equipment & parts Motorcycles & cycles Computers Prams, toys, games & sporting goods Manufactures of base metal, nes Musical instruments & parts Plastic articles, nes Vehicle parts & accessories Electrical machinery & parts, nes Total 4, , , , , , , , Taiwan is a growing investor in Australia s resources sector Foreign direct investment between Australia and Taiwan has increased significantly over the last decade; albeit from a low base. More specifically, total bilateral investment between the two countries has increased almost five fold since 2001 (See Figure 13). 37 As of 2013, total foreign direct investment in Australia by Taiwan was AUD 5.86 billion. The 5 year average growth rate was 4.5 per cent. 38 Taiwanese companies have made significant investments in Australian resources projects. In 2012, Taiwan s CPC Corporation announced that it would take a 5 per cent equity stake in the Shell Prelude floating LNG project in Browse Basin. In August 2013, Taiwan s largest private company, Formosa Plastics Groups, committed 1.26 billion AUD into Western Australia s Pilbara region through Fortescue Metals Group. 39

19 Page 19 Taiwan in the RCEP: An Australian Perpsective More recently, Taiwan s state owned power enterprise, Taipower, has said that it is seeking new investment opportunities in Australian coal projects. This would build on the company s existing 10 per cent equity stake in the Bengalla joint venture; a coal project located in New South Wales Hunter Valley region. 40 As of 2013, total Australian investment in Taiwan was just over AUD 5 billion, with a 5 year average growth rate of 7.8 per cent. The largest Australian investors in Taiwan are the Macquarie Group and the Australia New Zealand Banking Group (ANZ). Macquarie has investments in Taiwanese wind farms and container terminals, as well as Taiwan's leading cable and digital TV operator Taiwan Broadband Communications. ANZ has been in Taiwan since In 2012, it became the largest Australian investor in Taiwan, after spending AUD 333 million to upgrade its retail banking operations to a subsidiary. 41 Figure 13: Bilateral Investment between Australia and Taiwan (AUD Million) 6,000 5,000 4,000 Taiwanese Investment in Australia Australian Investment in Taiwan 3,000 2,000 1, OPPORTUNITIES FOR AUSTRALIAN BUSINESSES Taiwan is a gateway to other Asia-Pacific economies Australian businesses have the opportunity to use Taiwan as an investment gateway to other RCEP economies, particularly China; following the liberalisation of cross straits trade and investment restrictions. 42 For instance, Taiwan presents opportunities for Australian businesses to establish regional warehousing and logistics hubs for accessing the greater Chinese market, given that Taiwan has sizeable cost and time advantages in warehouse construction, has an efficient logistics sector and a number of cultural similarities with China. 43

20 Page 20 Taiwan in the RCEP: An Australian Perspective Sizeable opportunities exist for Australian higher education providers to partner with Taiwanese institutions to develop and deliver vocational training courses. 44 A decline in public funding for vocational training in Taiwan, combined with increasing demand for higher education, is driving Taiwanese demand for such courses. Liberalisation of Taiwan s financial sector has also created opportunities for Australian financial services providers to collaborate with Taiwanese financial institutions in developing and distributing financial products to the greater Chinese market. 45 This includes commercial banks engaged in trade and supply chain finance as well as fund managers specialising in asset management and retirement income services. 2.3 BENEFITS FOR AUSTRALIA Taiwan s participation in regional trade agreements would benefit Australia Negotiating a free trade agreement (FTA) with Australia or Taiwan joining RCEP would support Australia's strategic trade policy objectives in the Asia Pacific region. Taiwan is the largest trading partner in the Asia Pacific region with which Australia is not negotiating an FTA. This is an important gap in Australian trade policy architecture. Taiwan and Australia are both members of APEC which was established to foster regional economic integration. Australia is participating in both the RCEP and the TPP negotiations. Australia's long term objective is to see a regional agreement with all members of APEC participating. Australia joined the TPP in anticipation that others would join and was particularly pleased when Japan indicated it wanted to participate. South Korea has also indicated it wants to join. These developments add momentum to an emerging consensus among Asian Pacific economies in favour of a structured regional free trade agreement. Taiwanese participation in RCEP would support Australia's objective of promoting economic integration among Asian Pacific economies. It would ensure the Agreement included all key economies in the regional manufacturing supply chain. As an advanced economy in the Asian Pacific region, Taiwan's participation would also enhance adoption in RCEP of effective governance. Pursuit of the common objective of building effective regional architecture for free markets among Asian Pacific economies would also add a valuable dimension to the bilateral relationship with Australia.

21 Page 21 Taiwan in the RCEP: An Australian Perpsective 3. The benefits to RCEP economies from Taiwan s participation in RCEP The benefits to RCEP economies from Taiwan s participation in the RCEP are twofold: it would increase economic gains to most RCEP economies under the agreement and would strengthen frameworks for open markets in the region. 3.1 ECONOMIC BENEFITS RCEP economies would gain if Taiwan were to join the RCEP Economic modelling shows that there would be significant economic gains resulting from trade liberalisation for almost all RCEP countries if Taiwan was admitted to join the RCEP. The actual economic benefit is likely to be substantially larger as economic models do not capture all of the gains that arise from liberalisation of trade and investment under free trade agreements. ASEAN countries and China stand to gain the most. Taiwan would also be one of the main economic beneficiaries. Taiwan s gains from being admitted to the RCEP would not come at the expense of any of the existing RCEP members. The results of economic modelling confirm that if Taiwan was to join the RCEP and all participating economies were to eliminate all trade barriers among themselves: China would receive a marginal gain in GDP of 8.5 per cent resulting from Taiwan s inclusion in RCEP, with similar results for Malaysia; The majority of ASEAN countries Brunei Darussalam, Cambodia, the Lao PDR, Myanmar, Thailand, and Viet Nam stand to gain the most from Taiwanese membership of the RCEP. The real GDP for the group as a whole is estimated to be approximately 26 per cent higher than it would be were Taiwan not to participate in any trade liberalisation under the RCEP; The gains in GDP would be just over 4 per cent for Indonesia, just over 3 per cent for India and New Zealand and just over 2 per cent for The Philippines; The marginal gains in GDP from Taiwanese admission to the RCEP are not significant for the other RCEP economies Australia, Japan, the Republic of Korea and Singapore. The actual economic benefit for each of the existing RCEP economies of admitting Taiwan to the RCEP is likely to be substantially larger. The Centre of Policy Studies (CoPS) at Victoria University was engaged to conduct a computable general equilibrium (CGE) modelling analysis of the economic benefits that Taiwanese membership of the RCEP would generate for the ASEAN member states and their FTA partners. The model was used to represent the macroeconomic impact on all RCEP economies from admitting Taiwan to the RCEP.

22 Page 22 Taiwan in the RCEP: An Australian Perspective The results should be interpreted as measuring the macroeconomic consequences of the policy scenarios that would be observed over the medium term. This may be taken to mean after an adjustment period of between two and five years. The full report on the modelling prepared by CoPS is at Annex III to this report. The economic benefits are set out in more detail at Appendix I and II to Annex III. The modelled gains are understated The modelling results substantially underestimate the net economic benefit for each of the existing RCEP economies of admitting Taiwan to the RCEP. This is due to various shortcomings which arise from the nature of CGE (and other) classical economic models. The modelling results: ignore the dynamic gains from trade and, in particular, the impetus that trade liberalisation gives to business innovation and economy wide productivity growth; do not measure the benefits of liberalising non tariff barriers, such as import licensing, quantitative import quotas or technical barriers to trade. They do not take into account regulatory restrictions which impact on services and investment. In many RCEP economies, these policy measures present greater barriers to trade and investment than trade controls on goods; fail to capture the range of business firms that are involved in export and the range of goods that are traded internationally. This greatly limits the gains from trade. Larger economies not only tend to trade in larger volumes than smaller economies but also in a wider variety of goods. These are important features of global merchandise trade and particularly that within the Asia Pacific region, and finally; do not capture the possible long run effects resulting from liberalisation under RCEP, which are likely to be greater. The reasons why the absolute gains for RCEP economies are likely to be larger are explained at Annex II. 3.2 GEOPOLITICAL BENEFITS RCEP can support regional frameworks for more open markets In the current global trading environment, regional agreements such as RCEP present the most viable opportunities for further liberalisation of trade barriers and the creation of regional frameworks that support open markets and good governance. Ultimately the RCEP, and also the Trans Pacific Partnership (TPP) Agreement, will provide a pathway towards a free trade area that covers the entire Asia Pacific region. Taiwan s participation in RCEP will contribute to that process. Regional agreements allow groups of countries with strong trade and investment linkages between them to apply incremental efforts to a potential broader set of public policy measures than have traditionally been able to be addressed within a WTO Round. 46

23 Page 23 Taiwan in the RCEP: An Australian Perpsective Previous WTO Rounds of multilateral trade negotiations have eliminated many of the more tractable trade barriers, such as tariffs, such that measures impacting on trade today mainly arise from regulation of services and investment. At the same time, industrial supply chains have become more significant in trade. Intermediate goods, rather than final goods are now more important. 47 The trade flows in intermediate goods have become organised around a series of regional manufacturing hubs located in Western Europe, North America and East Asia. Trade in intermediate goods is now complemented by large flows of foreign direct investment to establish or expand productive capacity at the nodes that feed these regional manufacturing hubs. 48 Supply chains have become increasingly global or regional in their scope, and much more complex and sophisticated than they used to be (in terms of their participants, the roles that those participants play, and the interactions that take place between the participants along supply chains) such that the concept of a supply chain has been replaced by one of a network of supply chains. 49 The RCEP presents an opportunity to respond to these developments by building on established frameworks (in both the WTO and existing FTAs) or creating new ones, which advance more open markets in the region. RCEP is to cover trade in goods and services, foreign investment, economic and technical cooperation, intellectual property, competition, and dispute settlement measures, among other things. It is to be broader than existing agreements and consistent with the WTO. Taiwan can contribute to free markets in APEC RCEP, along with the TPP, can be seen as steps toward the creation of a comprehensive Free Trade Area of Asia and the Pacific (FTAAP) that would include all APEC economies. Taiwan s participation in RCEP is consistent with the creation of FTAAP. Conversely it does not make any sense to exclude any of the economies of the region, including Taiwan, from the architecture which will advance that. Australia, with South Korea, launched the idea of APEC in APEC s original aim was not to create a formal regional trade agreement, but to promote an open market for trade and investment among the APEC economies. Moves towards the idea of a wider regional agreement arose from ASEAN deepening economic integration among its member states, then negotiating FTAs between ASEAN and trading partners. At the same time the US began to negotiate bilateral FTAs, including with a number of APEC economies. Some APEC members, particularly Chile, were early advocates of an APEC wide FTA and then (with Brunei, NZ and Singapore) of a more limited FTA among some APEC economies including in particular the US. Australia's initial attitude was caution, out of concern that premature negotiation of an FTA might result in a poor agreement. A second consideration in Australian thinking was to avoid a situation where China might feel it was excluded and react negatively to the long term concept of building an open regional economy. When the Bush Administration decided to support the concept of a Trans Pacific Partnership (TPP) among some APEC economies, APEC also endorsed the idea of examining the prospects for the FTAAP. Australia endorsed the TPP concept. Not long after, ASEAN

24 Page 24 Taiwan in the RCEP: An Australian Perspective Leaders endorsed the idea of a RCEP, which would bring all the economies with which ASEAN had an FTA 50 into a single Agreement. This also included Australia. Given the role of Taiwan in regional trade and investment, and in particular its importance in regional supply chain networks, Taiwan s participation in RCEP, and ultimately the FTAAP, can contribute to the development of the architecture to more open markets in the region. The FTAAP has the potential to promote much broader and deeper integration of the APEC economies. It has been described as the grand prize for commercial diplomacy in the region. 51 Many observers see it as the ultimate geopolitical objective that underlies the establishment of the APEC in 1989 and constitutes the rationale for APEC s Bogor goals for the liberalisation of trade and investment and the focus of much of its efforts since its inception. The negotiation of the FTAAP in a single step, even if it were to be conducted over a lengthy time horizon, however, poses far greater negotiating and geopolitical challenges than confront either the RCEP negotiations at the present time. For these reasons incremental approaches by different groups of economies in the region, including the RCEP, present a viable way forward.

25 Page 25 Taiwan in the RCEP: An Australian Perpsective GTAP Modelling of Taiwan Participation in RCEP For this analysis, The Centre of Policy Studies (CoPS) has used the standard GTAP model. It is one of a suite of CGE models developed and maintained by the Global Trade Analysis Project (GTAP) consortium of research organisations around the world, which is co ordinated by the Center for Global Trade Analysis at Purdue University. 52 The standard GTAP model is the most basic representation of the world economy in terms of the activities that occur both within and between the various regional economies that make up the global economy. 53 A regional economy may be a single country or a group of countries that have been aggregated for the particular modelling task. For this analysis, Indonesia, Malaysia, Philippines, Singapore, Australia, China, Japan, the Republic of Korea and Taiwan were each specified as individual regions. For reasons of modelling economy, however, the remaining economies of interest to the analysis were aggregated into one of two groups of economies: the Rest of ASEAN comprising Brunei Darussalam, Cambodia, the Lao PDR, Myanmar, Thailand and Viet Nam and the Rest of FTA consisting of India and New Zealand. The GTAP analysis addressed two policy scenarios: 1. The liberalisation of all trade barriers by the 16 RCEP economies in respect of trade within the group, with no liberalisation by the Rest of the World. 2. The liberalisation of all trade barriers by the 16 RECP economies and Taiwan in respect of trade within the group, with no liberalisation by the Rest of the World. In doing so the analysis estimated the macroeconomic or economy wide impacts of each scenario. These were measured by the real changes in gross domestic product, household consumption, investment, the indirect tax base, exports, imports, and the terms of trade. 54 The differences between these estimates for the two policy scenarios represent the macroeconomic impact from admitting Taiwan to the RCEP. The macroeconomic impacts of each policy scenario were measured against a baseline scenario of no policy changes by any economy in the world. The baseline scenario was estimated with Version 8 of the GTAP database, which described the state of world economy in The GTAP database includes estimates of the ad valorem tax equivalent of all the trade measures that each jurisdiction imposed on each of the products it imported and exported in that year. In the case of the policy scenarios, the border tax equivalents for products traded between the liberalised economies were assumed to be zero. Annex III has a detailed description of the GTAP model.

26 Page 26 Taiwan in the RCEP: An Australian Perspective 4. Options for Taiwan to join RCEP The principles and objectives guiding the RCEP negotiations make clear the agreement will build on ASEAN s existing FTAs with participating economies. To take part in the RCEP, Taiwan could seek to negotiate an FTA with ASEAN. Alternatively, there is opportunity for Taiwan to join RCEP once negotiations conclude. The modus operandi of RCEP defines the options available to Taiwan to Join the RECP negotiations. They are set out in the Guiding Principles and Objectives for the Negotiating the Regional Comprehensive Economic Partnership 55 agreed among the current RCEP economies (see Box below). The principles and objectives stipulate that only economies with FTAs with ASEAN can participate. Once the negotiations are completed, other parties can seek to join. Australia and New Zealand, China, India, Korea and Japan all have FTAs with ASEAN ( ASEAN+1 FTAs ). Under the RCEP each ASEAN FTA Partner will be negotiating market access schedules with all of the other 15 RCEP participating countries. In the case of ASEAN participating countries, each ASEAN Member state will be negotiating with the six non ASEAN participating countries. As at time of completion of this report, the modality for tariff negotiations and the architecture for services and investment are yet to be finalized. The existing ASEAN+1 FTAs are a basic reference point. As well, a core principle is that RECP will have broader and deeper engagement with significant improvements over the existing ASEAN+1 FTAs, while recognizing the individual and diverse circumstances of the participating countries. We understand it has been agreed in the negotiations that each participating country would have a single schedule of commitments for goods, services and investment that would apply to all other participating countries, with scope for limited deviations negotiated through a transparent process. We understand as well there are significant differences of view on the scope and level of deviation. The Guiding Principles make clear that Taiwan has an opportunity to seek accession to RCEP when the negotiations conclude. The target date is We assess the prospect that target can be met is low. Key processes to guide negotiations in important areas remain unsettled. ASEAN itself is supposed to reach agreement on the formation of an economic union in The prospects of meeting that target, a very big one, are low. It would be prudent to assume RCEP will not be concluded in One option for Taiwan to consider is to initiate negotiations with ASEAN over a Taiwan/ASEAN FTA and aim to conclude quickly an FTA covering trade in goods. Many countries, including India have begun an FTA negotiation with ASEAN taking the process step by step. India negotiated first an agreement on goods. It started participating in the RCEP negotiations without having concluded investment and services agreements with ASEAN, although they are now reportedly well advanced. Taiwan could also make a formal request to join RCEP before the negotiations conclude and seek observer status in the negotiations.