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China’s export market a ‘real vulnerability’ for Taiwan: Expert

Council on Foreign Relations research fellow David Sacks joins Yahoo Finance Live to discuss trade talks between the U.S. and Taiwan and how the U.S. and China could clash over Taiwan policy.

Video Transcript

- The US and Taiwan are set to begin formal trade talks, a move that aims to further strengthen bilateral ties amid souring relations between Washington and Beijing. The move comes weeks after a controversial visit to Taipei by House Speaker Nancy Pelosi.

And our next guest says the time is ripe to deepen the trade relationship. Let's bring in David Sacks. He's Council on Foreign Relations senior fellow. David, good to have you back on the show. I guess we're still waiting for all the specifics to come out on what exactly the US is seeking with Taiwan. But the natural question here, how is this likely to complicate relations with China?

DAVID SACKS: Yeah. I mean, clearly China is going to object to these negotiations, especially in the wake of Speaker Pelosi's visit and another congressional delegation that just returned from Taiwan as well. So I don't think that that's surprising in any way. But it's still something that we should pursue. Taiwan is a top 10 trading partner of the United States.

We know how important it is for global semiconductor manufacturing as well. And the United States has a broader interest in ensuring that Taiwan is not overly reliant on trade with China. The mainland is Taiwan's largest export market. And I think that's a real vulnerability for Taiwan and one that we should work on helping alleviate.

BRIAN CHEUNG: Hey. It's Brian Cheung here. So I mean, more important in all of this is also just the Taiwanese posturing as well. Where does the government there stand in terms of how aggressive they'd like to kind of tie up with the United States here? When you look at the posturing from President Tsai Ing-wen over in Taiwan, do you feel like they're going to be pretty aggressive on wanting to sharpen those ties here? Or are they also weary of not wanting to anger their neighbors across the street?

DAVID SACKS: No, I think this is a top priority for President Tsai. She's a trade negotiator by training. She helps lead the negotiations for Taiwan to enter the World Trade Organization. And she took a very politically unpopular step over a year ago when she lifted export restrictions on US pork and beef with an additive called ractopamine.

Very politically unpopular on Taiwan. But that was an olive branch to the United States to essentially signal, I'm ready to make the concessions that I need to make for a trade deal. I'm ready to negotiate in good faith. And so I think this is a top priority. I think this would help cement her legacy and really cement closer ties between the United States and Taiwan. So I think, again, the time is right for a trade deal between the United States and Taiwan.

- As far as you can tell, I mean, what kind of deal are we talking about specifically? You mentioned chips are really at the center of this. And in many ways, we have seen companies like TSMC, which is, of course, the largest manufacturer, come out and try to sort of toe that line between being a Taiwanese company but also not upsetting China. I mean, how could we see this potentially being negotiated in a trade discussion?

DAVID SACKS: Yeah. So I mean, one thing to highlight is, of course, the Biden administration does not have trade promotion authority right now. And that complicates any negotiation. So it's unclear to me whether the end product here will be a formal trade agreement that's submitted to Congress for approval or whether it's something just short of that that addresses trade facilitation, labor standards, environmental standards, but doesn't necessarily address tariffs or market access questions, and therefore it doesn't need to be submitted to Congress. So I think that's one of the really important remaining questions.

I also would highlight that Taiwan was very disappointed that it was not included in the Indo-Pacific Economic Framework, which was an instrument that the Biden administration put forward to address a lot of these questions about secure supply chains, semiconductors, digital trade, and other things.

So I think this was really necessary because Taiwan was left out of that framework. And my own preference would be to include Taiwan in IPEF so that we can really talk in a comprehensive way about semiconductors and these supply chains. But barring that, I think that these trade negotiations are a necessary step.

BRIAN CHEUNG: David, is there anyone outside of China that would kind of be ruffled by these negotiations here? I mean, Taiwan is a full member of the WTO, right?

DAVID SACKS: Yeah. I mean, you raise a very important point. Taiwan is a full member of the WTO. It's also a member of APEC, which is the primary regional trade grouping. The ironic thing here is that China has a free trade agreement with Taiwan, the ECFA agreement signed in 2010 under President Tsai's predecessor, President Ma. So it's pretty rich that China has a free trade agreement with Taiwan but is going to object to the United States seeking its own free trade agreement with Taiwan.

The important thing as well to think about from Taiwan's perspective is it only has two FTAs with developed economies, Singapore and New Zealand. So I think trade marginalization is a big issue for Taiwan. It has applied to join CPTPP. But so has China.

So China might try to leave Taiwan out of that trade agreement as well. So I think that if the United States takes this first step, negotiates a meaningful trade agreement with Taiwan, that could incentivize Japan, Australia, South Korea, and other major economies in the region to open up similar negotiations with Taiwan because they'll see that this is something that is feasible, something that's possible. And, yes, China will object to it. But it can't really stop this in any meaningful way.

- David, let's pick up on that point because we have seen China increasingly try to engage more with its Asian neighbors at a time when the US has been missing from these large trade pacts. RCEP obviously led by China. But you mentioned CPTPP. This was initially a trade group that was meant to counter China. And now you've got China applying for inclusion there. Are we likely to see pressure grow against China from countries like Japan, from those like Australia in light of everything that's playing out between US and Taiwan?

DAVID SACKS: So I expect that China will get into CPTPP at some point. I don't think the United States-- obviously, we're not a member. It's hard to see how we could keep China out. I think they are seriously negotiating for entry there. So it is deeply ironic that this was, as you mentioned, an agreement that we led the negotiation of to essentially set high standards, lead economic integration in the Indo-Pacific and now that economic integration will occur with us standing on the sidelines.

So the real thing missing for the United States for its China strategy, for its regional strategy is a real trade strategy. We don't have one. I don't think IPEF is a suitable substitute for steps like joining CPTPP. I do think that a robust bilateral trade agreement with Taiwan would be a good first step. And hopefully then we can think about ways of working with Taiwan, Japan, and South Korea on digital trade standards, semiconductors, and other critical supply chains.

BRIAN CHEUNG: I feel like we hit every letter in the alphabet in every single one of those acronyms. So always great for a trade segment. David Sacks, Council on Foreign Relations senior fellow. Appreciate the time. Thanks so much.