Taiwan Tensions and Deepening Transatlantic Cooperation

January 10, 2022
12 min read
Photo credit: Javen / Shutterstock.com
The Taiwan Strait is a key trade route critical to the free flow of commerce that connects Taiwan to like-minded democracies around the world.

The island also plays a central role in the semiconductor supply chain, whose disruptions have already exacerbated economic woes during the coronavirus pandemic. Any conflict in the region would have wide global implications. It is therefore no surprise that the EU’s Indo-Pacific Strategy lists potential tensions in the Taiwan Strait as a direct challenge for Europe’s security and prosperity. A joint US-EU Statement in June 2021 similarly highlighted the importance of peace and stability across the Taiwan Strait.

As cross-strait tensions have the potential to spill over into other parts of the world in ways increasingly difficult to ignore, more countries are beginning to understand that Taiwan’s well-being is tied to their own. This realization formed the background for the discussions at the Fourth Taiwan Trilateral Forum (TTF), a Track 1.5 trilateral dialogue which GMF convened virtually in December 2021. Participants from the United States, Europe, and Taiwan exchanged views on shared challenges as well as opportunities for cooperation among the three sides across areas such as trade, technology, and security.

Taiwan Trilateral Forum

The Taiwan Trilateral Forum facilitates discussion on how Taiwan can contribute to international fora as well as peace and security in the Asian region. The forum is also structured to enable candid conversation about Taiwan’s place in the international system by bringing together policymakers, intellectuals, media, and business voices from Europe, the United States, and Taiwan.

Supporting Taiwan’s Regional Economic Integration

The landscape of economic engagement in the Indo-Pacific region is changing rapidly as countries pursue new investment initiatives and trade agreements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Regional Comprehensive Economic Partnership (RCEP). At the same time, distortionary non-market practices and economic coercion from countries such as China continue to pose a challenge to both old and new multilateral agreements and to organizations such as the World Trade Organization (WTO).

This environment provides both opportunities and challenges for Taiwan, an export economy dependent on international trade, as it tries to seek closer economic integration with other partners in the Indo-Pacific and beyond. Through the New Southbound Policy, it has made some progress, but tensions with China make it more difficult for Taiwan to join new trade pacts or take up leadership roles in existing multilateral organizations where it is a member.

China blocked Taiwan’s participation in the RCEP, which came into force on January 1, 2022. Chinese official media celebrated the move as a way to isolate and marginalize Taiwan in the Indo-Pacific and punish it for not accepting the “one country, two systems” policy on China’s terms. Being excluded from the RCEP is unlikely to significantly harm Taiwan’s economy according to Taiwanese sources, however, as 70 percent of its exports are already tariff-free in RCEP countries.

Taiwan faces similar challenges regarding the CPTPP, but with likely greater consequences. Taiwan applied to join the CPTPP shortly after China did in September 2021. As one participant at the Taiwan Trilateral Forum highlighted, new membership decisions are made by consensus of existing members. Though Taiwan enjoys good relations with some members, such as Japan, it does not have well-developed ties with others, including some members in Latin America. As China staunchly opposes Taiwan’s membership, the prospects for Taiwan joining are not high, and probably only exist as part of an arrangement in which China and Taiwan join simultaneously as they did when they both joined the WTO in 2001. Even under those circumstances, however, Beijing may succeed in preventing Taiwan from becoming a member. Taipei will need to make a strong case with existing CPTPP members.

Taiwan even faces Chinese opposition in multilateral organizations and trade pacts where China is not formally represented. For instance, China used Hong Kong’s veto power to block a Taiwanese national from taking up a leadership role in the WTO’s Government Procurement Committee, of which China itself is not a member. (China itself argued that its “concern and sensitivities” should be taken into account despite its status as a non-party.)

Taiwan even faces Chinese opposition in multilateral organizations and trade pacts where China is not formally represented

Under the circumstances, bilateral trade and investment deals are an important means for Taiwan to integrate more closely with the global economy. Since 2020, the EU has held an annual investment forum with Taiwan. The EU is now Taiwan’s fourth largest trading partner, accounting for 26 percent of investments into Taiwan. The plans for an EU-Taiwan Bilateral Investment Agreement (BIA) received a strong push in the first Taiwan-related resolution of the European Parliament, passed in October 2021. However, the prospects for a BIA remain murky, as there is still no formal institutional framework under which to pursue the agreement. The commission had previously indicated it would not launch formal negotiations before the Comprehensive Agreement on Investment (CAI) with China was concluded; however, while it was concluded in principle at the end of 2020, the CAI is currently in the freezer.

Taiwan is also hoping to negotiate a bilateral free trade agreement with the United States. The US-Taiwan Trade and Investment Framework Agreement (TIFA) talks resumed in 2021 after a four-year hiatus during the Trump administration. At the US-Taiwan Economic Prosperity Dialogue, a bilateral mechanism created in 2020 to facilitate an expansion of economic cooperation in the absence of trade negotiations, the two sides discussed supply chains, economic coercion, the digital economy, and 5G network security, as well as greater cooperation on science and technology issues. One participant suggested that it may make sense to introduce a similar dialogue between the EU and Taiwan to supplement the more narrowly focused dialogues currently taking place. Taiwan’s Ministry of Foreign Affairs announced in early 2022 that Taiwan and the EU are working on a plan to enhance economic ties, educational and scientific exchanges, and more.

China’s increasing use of economic coercion is a common challenge experienced by all sides. For instance, Taiwan’s Far Eastern Group was recently fined by the Chinese government. Although the fines were formally issued for alleged violations of environmental and safety regulations, among others, the Taiwan Affairs Office spokesperson’s remarks suggested that the real reason was political and for the company’s alleged support for the Democratic Progressive Party.

TTF participants also discussed the case of Lithuania, which China removed from its customs declarations list, making imports and exports from and to the country impossible. This came after Lithuania allowed Taiwan to open a Representative Office under the name “Taiwan” rather than “Taipei,” rejecting Beijing’s preferred nomenklatura. Due to Lithuania’s limited direct exposure to the Chinese market, the Chinese government resorted to weaponizing global supply chains by leaning on big multinational companies to cut their ties with the small Baltic nation. In December 2021, the German Baltic Chamber of Commerce sent a letter to the Lithuanian government, warning that unless the country was able to restore economic relations with China, German investors may soon have to pull out of Lithuania.

To counter such practices, the European Union has been developing its Anti-Coercion Instrument, formally proposed by the Commission on December 8. However, it will take multiple additional rounds and revisions before the instrument comes into force. Additionally, with 27 member states and therefore 27 publics, as one TTF participant pointed out, the threshold for something to be officially considered coercion and for action will likely remain high even after the instrument takes effect.

Coordination on Technology and Supply Chains

The pandemic has magnified the importance of supply chain resiliency and the problems associated with relying on sole sources in critical supply chains. This is especially true in the semiconductor industry, where shortages have resulted in idle factories in other industries such as automotive. These shortages have reinforced the trend among various governments to invest in local innovation and production when it comes to these vital components that are essential to all modern technology. The US government plans to provide $52 billion in subsidies for domestic semiconductor research and factories through the United States Innovation and Competition Act (USICA). EU President Ursula von der Leyen has announced the European Chips Act to make European technology more competitive.

It is not only the EU and the United States that are pursuing more autonomy when it comes to semiconductors and other high tech. The Chinese government has been pursuing ambitious plans to localize full semiconductor value chains in China. It has provided incentives for foreign companies to transfer operations across the entire value chain to China and to ensure that some intellectual property is transferred to these companies’ China-based subsidiaries that are legally separate from the parent company. China has also pressured US companies to oppose USICA, threatening them with losing market share in China if they do not stand up for China’s interests.

Some TTF participants pointed out that cooperation among players along regulatory lines is needed to ensure that chips and the IoT devices using them are secure. Working across different jurisdictions with uneven regulations may hinder the ability to effectively tackle these issues, according to one TTF participant. China currently plays an outsized role in international standard-setting organizations, such as the International Telecommunication Union.

Because of its key role in semiconductor production and computer chip assembly, Taiwan is an important part of the global technology supply chain. At the same time, it also faces new challenges and uncertainty amid the trend of reshoring semiconductor production. The US-China trade war has prompted a large group of Taiwanese companies to re-shore from China to avoid US tariffs; it remains to be seen whether this move is permanent, but it reflects these companies’ desire to diversify their supply chains in the face of increasing uncertainty. Taiwanese companies like Taiwan Semiconductor Manufacturing Company (TSMC) that have built production facilities in the United States are concerned about supply chain nationalism there and what this may mean for receiving equal treatment going forward. TSMC’s founder has criticized the United States for plans to build full local chip supply chains in the country and accused rival company Intel of stoking fears of Taiwanese companies to secure US subsidies.

It will also be important to develop a common understanding of anticipated long-term demand in the coming decade to jointly ensure there is neither over- nor undersupply, especially as multiple countries are simultaneously looking into domestic investments in semiconductors.

Several TTF participants pointed to the need to sharpen definitions and collaborate on identifying the key areas of concern and developing potential responses. This might include spelling out common principles between allies and partners about what supply chain resiliency entails. It will also be important to develop a common understanding of anticipated long-term demand in the coming decade to jointly ensure there is neither over- nor undersupply, especially as multiple countries are simultaneously looking into domestic investments in semiconductors. Offering a cautionary note, however, one TTF participant highlighted the need to let market forces play a role and ensure that such calculations do not become a central planning exercise by governments.

European Engagement with Cross-Strait Security Issues

There is no doubt that Europe sees Taiwan as an important partner when it comes to its political system and its values. Europe has expanded trade and economic relations and is developing exchanges on topics such as disinformation. On the heels of its resolution to deepen ties with Taiwan, the European Parliament sent its very first official delegation to Taiwan in the fall of 2021, where it met with President Tsai Ing-wen and discussed Taiwan’s experiences combatting disinformation and hybrid attacks, among other things. A Slovak delegation of government and business representatives also recently visited Taiwan.

Taiwan’s central role in the semiconductor industry is among the reasons why European governments are paying more attention to potential security contingencies in the Taiwan Strait. However, the precise role that Europe can and should play in a cross-strait contingency and what cooperation with other partners and allies would look like in concrete terms remains ill-defined.

One thing that Europe can and should do, according to TTF participants, is to make better and more detailed plans for adequate political and economic responses to various cross-strait contingencies. A TTF participant suggested that Europe may also be able to help Taiwan increase its “whole-of-island” resilience, including by investing in its asymmetrical capabilities for self-defense, supporting Taiwan’s efforts to reform its reserve force, and working together with Taiwan’s defense industry.

Another TTF participant highlighted the need to not overstretch. Not every country needs to get involved in high-end conflict in the Taiwan Strait or have the ambition to do so. Instead, it is important for countries to only commit to engage and contribute in areas where they can have a substantive impact. As such, there are significant differences between the kind of cooperation Taiwan can pursue with Japan, which has clear and immediate stakes in the region, compared to Europe, which would be affected less directly by tensions in the Taiwan Strait.

How Europe reacts in the case of another Ukraine contingency will be closely watched in the Indo-Pacific, including in Taiwan. Some of the gray-zone tactics used by China against Taiwan are also being employed by Russia against Ukraine. While there is no concrete evidence of coordination between China and Russia across the two theatres, it is important that NATO allies and partners keep in mind the potential for coordination. In particular, they should consider how Russia could respond to a contingency in the Taiwan Strait, such as by supporting China or acting as a spoiler.

Though much of the focus in debates around Taiwan contingencies has been on an invasion scenario, TTF participants stressed that this is not the only—much less the most likely—challenge. Taiwan’s security is already threatened daily by Chinese gray-zone tactics, such as disinformation, cyberattacks, and PLAAF flights into Taiwan’s air defense identification zone. Beijing’s goal is to create a fait accompli through this gray-zone activity. Consequently, one important positive role that Europe can play to defend Taiwan’s security is pushing back against these tactics and imposing costs together with the United States.

There has been both significant progress in exchanges and coordination among the Americans, Europeans, and Taiwanese—as was also evident at the Trilateral Forum. But the need for closer cooperation to navigate an increasingly challenging global environment is clear. On the one hand, relations have grown much closer, with a range of new dialogues and initiatives emerging within a very short span of time. Some of these have produced quite good results. On the other hand, the international environment will grow more challenging in the coming years. Although efforts to nudge China toward acting as a more responsible global citizen will continue, few participants had any illusions that it would fundamentally change its behavior at home or abroad. Issues such as economic coercion are likely to intensify. It will take close coordination and, more importantly, solidarity among partners and allies to withstand these and other challenges in the coming years.