India-Taiwan: No FTA on the card amid ambiguous foreign policies

Taiwan consistently remained a matter of interest for India even after it had recognized the People’s Republic of China’s claim over Taiwan in 1950. Despite such complexity, Taiwan is a significant part of Indian interest in trade and security throughout the Indo-Pacific and in maritime. Now it centers on building economic relations and mechanisms for free trade. What is the possibility?

The ambiguity towards Taiwan simply emanates from the One China Policy which recognizes the People’s Republic of China as mainland China.

However, the relationship took a new turn and gained momentum after Taiwan launched a “New Southbound Policy (NSP)”, which aptly matched India’s “Act East Initiative”.

The new bold initiative of launching NSP was the brainchild of President Tsai Ing-wen when she took office on May 20, 2016. President Tsai lost no moment as she pledged in her inauguration address, to promote a “New Southbound” policy in the years ahead, aiming to deepen Taiwan’s economic and cultural ties with the member countries of the Association of Southeast Asian Nations (ASEAN) and India.

In fact, at an international conference in Taipei in 2017, Tsai put India at the center stage of its brand-new initiative; she looked at India for her ambitious economic policies and hoped for better collaboration between democratic institutions. Tsai declared Taiwan’s regional integration and institutional collaboration in the Indo-Pacific region.

In the beginning, it worked well which resulted in the signing of upgraded bilateral investment agreements with India in 2018.

As a vibrant democracy, a top producer of the most advanced microchips and the 21st largest economy in the world, Taiwan has strived to bolster supply chain resilience with India and other partner countries to make meaningful contributions to peace, stability and prosperity in the Indo- Pacific region and beyond.

Officials in Taipei have urged Taiwanese businesses to invest in India and Southeast Asia over the past seven years, amid tense Taiwan-mainland political relations. Taiwanese businesses have invested in the mainland since the 1980s to take advantage of costs that are lower than those at home.

Despite such a case, the possibility of an India-Taiwan Free Trade Agreement (FTA) is not on the card, according to a senior diplomat.

What are the factors?

Trade with Taiwan

While Taiwan-India bilateral trade reached an all-time high of US$7.7 billion in 2021, that figure only accounts for a fraction of the respective annual foreign trade — a mere 0.9% in Taiwan’s external trade and 0.8% of India’s.

Further, the key indicators of the economic relations while promising remain much below expectations with a mean total investment of $879 million during the entire period from 2018-2023.

So, Taiwan is India’s 32nd largest investment source with only 116 companies operating in India, as compared to the 11,000 Taiwanese companies in much smaller Southeast Asian countries.

The sub-minimal investments and overall trade volumes don’t reflect upon the maturity of such policies.

While Taiwan has been pushing for the FTA which is based on the fact that Taiwanese investors have long been the raison d’être in China’s emergence as the World’s Factory. According to the data from Taiwan Economic and Cultural Center (TECC), from 1991 to mid-2021, Taiwan invested a total accumulated amount of US$193.51 billion in China. [Such investment] Significantly contributed to bridging the gap between China and global trade and commerce by providing abundant capital, advanced technology, manufacturing experiences and management skills, reports suggest.

How important is the FTA in addressing the gaps?

“Not necessarily, as the FTA does not guarantee any surge of investment or bilateral trade,” says the former secretary of the Ministry of External Affairs (MEA) who had extensive experience in dealing with economic matters.

Besides, the FTA is a long-drawn process which takes huge resources, manpower and years of negotiations, he explains. For example, despite the EU becoming a significant trade partner of India, the two sides have been attempting to negotiate a free trade deal since 2007.

Then how can India leverage the strength of Taiwan within the overall ambiance of economic relations and bilateral agreements?

Semiconductor opportunity

Taiwan’s main strength is in the machinery and electrical equipment sector which thrives on its semiconductor manufacturing capabilities. The importance of semiconductors can be gauged from the fact that it is the most critical material—the brains of modern electronics—driving technologies for national economic growth, security, and global competitiveness.

The scale is staggering as the global semiconductor industry is currently valued at $500-$600 billion, which is part of a $3 trillion global electronics industry. Out of which Taiwan hold the number one position in semiconductor foundry services with a whopping 64% global market share.

“The existing mechanism works,” clarifies the secretary, pointing out the various schemes launched by the Government of India.

He referred to the policies for the semiconductor industry, such as the Design Linked Incentive (DLI) and Production Linked Incentive (PLI) schemes.

In a bid to make India’s $10 billion chip-making initiative more attractive to investors, the Center upgraded the PLI scheme with fiscal support for a DLI scheme to drive global and domestic investment related to design software, IP rights etc. The scheme now provides uniform 50% fiscal support for all nodes (65nm to 28nm chip production). Besides, it will provide 50% of capital expenditure in the process which includes chip design, assembly, testing, marking and packaging (ATMP).

“There is a great news,” he elaborates, hinting at a Rs 1,54,000 crore semiconductor plant in Gujarat which is proposed by Vedanta and Taiwanese chipmaker Foxconn. Two other projects have also been announced — a $3 billion plant in Karnataka by the International consortium ISMC (a joint venture between Abu Dhabi-based Next Orbit Ventures and Israel’s Tower Semiconductor) and a $3.5 billion plant in Tamil Nadu by Singapore’s IGSS Ventures.

However, the complexity is huge and that requires further incentivisation measures by the Indian government, such as capital subsidies, land, electricity and power for semiconductor fabrication (fab) facilities.

Taiwan’s trade engagement with India should be focused on areas where mutual value can be added. In fact, it has been noted that most of India’s top twenty trade partners, including its top two, do not have FTAs.

While an FTA remains the gold standard for trading relationships Taiwan aspires to, its absence does not mean trade relations and opportunities cannot be advanced. However, progress will require patience, persistence, an understanding of Indian needs from an Indian perspective, generosity of spirit, and a long-term view of opportunities as experts point out.