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What the Taiwan-China Competition could spell for U.S. Economy?

Last month, the Chinese Ministry of Commerce launched a trade barrier investigation into the country’s exportation of almost 2,500 products to its island neighbor Taiwan, as tensions between the two nations grow both militarily and economically. Scrutinizing China’s export of mainly agricultural, chemical, textile, and mineral products to Taiwan, the investigation seeks to find, as Frank Pan writes for Global Compliance News “whether any restrictive measures, also referred to as ‘trade barriers,’” adopted by Taiwan “contravene applicable treaties” or “the market access or competitiveness of Chinese products or services.” Given the discretionary objective of such an investigation, it may be the case that rising hostilities between the two countries have seemingly spilled over into the trade arena.

If Taiwan is deemed “guilty” of erecting trade barriers that favor domestic industries and products over Chinese alternatives, the world’s second largest economy may retaliate by diminishing the export of products in the aforementioned categories with Taiwan, a bold move when considering that Taiwan is China’s fourth largest trading partner. Taiwan, in turn, may nonetheless bear most of the brunt of this possible verdict; China accounts for over 25 percent of the island nation’s trade, including over 21 percent of its imports. While the origins of a discretionary trade investigation may be faulted with the authoritarian power of the Chinese Communist Party (CCP), from an economist’s perspective Taiwan may be assigned some of the blame given that it erected trade barriers in the first place, an attempt to defend producer surplus that ultimately creates deadweight loss.

Nonetheless, it may be the United States that finds itself as a beneficiary in the end, as Taiwan preemptively scrambles to find alternative sources for its goods. Interviewing with The Wall Street Journal, Taiwan trade representative John Chen-Chung Deng explains, “We have talked to our businesses to see what kind of impact they may face under different scenarios,” and that measures being taken mainly include the diversification of the country’s trade relations. Already last year, President Biden signed the Chips and Science Act that saw $53 billion in subsidies go towards semiconductor manufacturing for US goods, much of which going towards Taiwan-based operations. Then in November, a series of New York-based meetings between the countries’ respective representatives saw further inroads made on increased trade and investment between the US and Taiwan, particularly in agriculture and digital technologies. As Taiwan looks eastward for investment opportunities the US has already benefited, but obstacles still stand in the way. An obstacle behind Taiwanese investment in the US is a lack of a comprehensive tax treaty between the two nations, meaning that Taiwanese businesses must pay income taxes in both the US and Taiwan, as well as facing higher rates on other taxes.

If the US can recognize and ready the political firepower necessary to deconstruct this instance of government intrusion, then the country may find itself in the prime position to profit off of Taiwan and China’s severance in trade relations. Referring back to microeconomic theory, while more efficient trade and investment between Taiwan and US may diminish producer surplus for the latter, the economy would, theoretically speaking, overall benefit from lower costs. The problem, of course, is that the costs are not as well distributed as the benefits, meaning that special interests who would be negatively affected by increased free trade can lobby politicians to vote against such measures. In many respects, this is an obstacle that China’s CCP doesn’t have to fear. In total, however, the circumstances seem opportune for the United States to cash in on Taiwan’s possible predicament; whether or not they seize on the opportunity, however, remains to be seen.


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