Pundits have an inexplicable love affair with preferential trade agreements. Doug Bandow advocates that the US and Taiwan negotiate a free trade agreement for foreign policy reasons. The economic arguments he tosses in are not compelling:

Taipei is America’s eighth biggest trading partner (and America is third on Taiwan’s list), with two-way trade running about $60 billion annually, and is a high-income consumer and high-technology producer. The U.S. exports more to Taiwan than to Australia, Chile and Singapore, all of which now enjoy FTAs.

Estimates of the likely increase in U.S. exports through an FTA run from about 15 percent to 30 percent. An FTA would position U.S. enterprises to take advantage of Taiwan’s ongoing transition toward a service-oriented economy.

The island, with widespread economic penetration throughout Asia, would provide a base for U.S. enterprises to expand their reach. More important, Taiwan’s proximity to China and increasing economic integration with the mainland would indirectly boost American ties with the PRC. Since Beijing views Taiwan as part of one China, U.S. firms operating in Taiwan and investing in Taiwanese concerns might find improved access to the larger China market.”

How is the fact that the US and Taiwan are already such active trading partners an argument in favor of a PTA? Isn’t that an indication that their bilateral trade barriers are relatively low? Moreover, where does that 15 to 30 percent increase in exports come from?

A US-Taiwan FTA would appear to be mostly trade diverting, not trade creating, primarily because the gains to Taiwan would derive almost entirely from increased exports of apparel, a sector in which the island’s production and exports have been declining for years in the face of competition from lower-cost producers… While preferential access to the US apparel market under an FTA would provide short-term economic benefits, it almost certainly would have adverse consequence for Taiwan’s long-term economic growth and welfare.

For the United States, the biggest anticipated gains from an FTA with Taiwan are in the auto sector, although these gains also would almost certainly reflect trade diversion.

As for economic integration with the mainland, why should we expect lower import tariffs and quotas to increase the number of “U.S. firms operating in Taiwan and investing in Taiwanese concerns”? It sounds like Bandow wants an investment agreement, not a trade deal, since I doubt that many US businesses will set up shop in Taipei to capitalize on the opportunity to export textiles and apparel to the United States. Moreover, as of May 2006 the deputy USTR wasn’t too enthusiastic about Taiwan as a route to the mainland:

Echoing positions long held by the business community, Mr Bhatia said globalisation required integrated cross-border supply chains, in which China played an increasingly important role. Against this background, Taiwan’s restrictions on the transfer of commercial technology, imports of certain goods from the mainland, cross-Strait travel, investment in China and direct transport links across the Strait put the island at a disadvantage, he said.

The economic case for a US-Taiwan FTA looks weak. I’ll leave the geopolitical issues to more qualified commentators.