The American Enterprise Institute (AEI) recently held a conference to present a report by AEI about trade with Taiwan titled Taiwan, Inc.

The conference included opening remarks from former deputy secretary of defense Paul Wolfowitz and a panel composed of Dan Blumenthal, director of Asian Studies at AEI; Mignonne Chan, executive director of the Chinese Taipei Asia-Pacific Economic Cooperation Study Center; Rupert Hammond-Chambers, president of the US-Taiwan Business Council; and Derek Scissors, senior research fellow for economics at the Heritage Foundation’s Asian Studies Center.

Wolfowitz recalled that during his time at the State Department, Taiwan was most often spoken of as an obstacle to improved relations with Mainland China. He said that was the wrong way to look at Taiwan; rather, he contended that Taiwan was an opportunity and a miracle of economic growth along with Singapore, Hong Kong and South Korea. These became examples of the fact that poor countries could become prosperous in the post-World War II period.

The success of Taiwan ultimately benefited China due to the investment and technology transfer by Taiwan to the mainland. Wolfowitz also credited Taiwan for transforming itself from an iron dictatorship that assassinated dissidents to a model of democracy, as the Chinese witness Taiwan's elections and talk shows on television. He remarked further on the expansion of trade and tourism between Taiwan and China.

According to Wolfowitz, this progress leaves an area where Taiwan has gone backward, as Taiwan has become isolated whenever countries have downgraded relations in order to extend closer ties to China. He admitted that this circumstance cannot be changed. He held out the prospect that in spite of this handicap, Taiwan could become much more of a center of trade, commerce and finance.

If greater economic liberalization can be achieved, Wolfowitz predicted that Taiwan could become a more important commercial center than Hong Kong, "the freest economy in the world," is because Hong Kong is extremely small and suffers from serious air pollution. Despite all of the positive developments, Wolfowitz warned that it is necessary to be concerned about the military imbalance in the Straits of Taiwan.

Speaking first, Scissors criticized Taiwan for needing open trade in order to provide needed resources, but often acting as a follower in liberalizing trade policy. He said China is too mature an economy to lead Taiwan to prosperity. He allowed that China is blocking progress to some extent, but he still maintain that Taiwan should lead in promoting trade agreements rather than join them after they have been concluded.

Scissors criticized Taiwan further for maintaining foreign-exchange controls. He called for Taiwan to allow land- and labor-intensive enterprises to go out of business, because Taiwan does not have a competitive advantage in these areas.

If Taiwan became a more active commercial center, according to Blumenthal, this would make it a less attractive object of coercion by the People’s Republic of China, because it could endanger not only people, but also supply chains. However, the Taiwanese need to liberalize their economy to make it a bigger and safer place.

Another interest of the United States is that increased trade with Taiwan would benefit the U.S. economy and help improve U.S. access to the mainland, as well. Blumenthal blamed the United States for not rewarding Taiwan for its overtures to the mainland, for putting up barriers to a free-trade agreement with Taiwan that no other country faces, despite the fact that China itself has signed a free-trade agreement with Taiwan.

Hammond-Chambers added his voice to the critique of Taiwan's trade policy and added that the government of Taiwan has missed opportunities to make progress on needed domestic reforms. He warned that the deterioration of the U.S. economy has affected this government's ability to promote its interests and discourage adversaries from being adventurous. He observed that Taiwan has too many universities, but still needs an English-language business school. There is also a need for more business input within the leadership of the country. Other needs he identified are tax reform and improved transparency.

Chan responded that she found the report "sincere" as to how Taiwan could achieve a "leap forward to another stage" with regard to internal reform. However, she found that some of the perceptions and observations "may detach from reality," and she welcomed the opportunity "to patch up some of the gaps here." She pointed to the World Economic Forum's Report on Global Competitiveness for 2012-2013, which ranks Taiwan fourth out of 144 countries in terms of financing through their local equity market, trailing only Hong Kong in Asia, and Taiwan ranks ninth in terms of venture capital availability.

She then addressed central bank policy and stated that after the third round of quantitative easing by the U.S. Federal Reserve, all Asian central banks went "on alert in terms of hot money floating around Asia."

Chan identified four issues for comment "beyond Taiwan, Inc." First, she remarked that the title "Taiwan, Inc." is reminiscent of the expression "Japan, Inc." from the 1980s. The connotations bring up the fact that Japan was not burdened by defense expenditures; that it implies mercantilist business/government relations, which is a curse for market liberals; or the term could be used in a neutral sense. She insisted that the vision of the constitution of Taiwan is populist and not corporate, and she referred to the understanding between Taiwan and China of mutual nondenial of de jure sovereignty coupled with mutual recognition of de facto sovereignty.

Second, Chan articulated a strategy of "balanced, inclusive, innovative, secure and sustainable growth." This contemplates government intervention, such as approaching the banking industry according to the five Ps (people, purpose, payment, protection and perspective), and domestic and foreign companies being treated according to the same standards. The program aims for overall prosperity, not a zero-sum game. She quoted Michael Porter of Harvard Business School saying in April 2010: "There is no other practical alternative to (the commercial agreement between Taiwan and China)." Taiwan has also concluded a pact with Japan and hopes to negotiate free-trade agreements with Singapore and New Zealand by the end of this year, and will integrate further with Asia, but she argued against unilateral concessions that are based on assumptions if they are mutually beneficial, such as with the United States.

Third, Chan noted Taiwan's involvement in the Uruguay Round of trade negotiations and in technology advancement agreements, and this involvement is now being extended to environmental goods and services and disaster preparation in cooperation with other Asian nations. She expressed hope that the World Trade Organization would overcome the difficulties that accompanied the failure of the organization’s Doha Round of trade negotiations.

Finally, regarding the U.S. role in the region, Chan called for the United States to express American exceptionalism by acknowledging Taiwan as a model for economic growth and conflict resolution, and the partnership between the United States and Taiwan should remain strong.

Scissors responded that Taiwan should not be satisfied with the blueprint laid out by Chan. Rather, because of its need for natural resources, it needs to be proactive, but it is handicapped somewhat by the fact that it does not have an active partner for such a policy in the United States. He also wondered why Taiwan doesn't move to increase economic ties with complementary economies outside of Asia, such as India, Brazil and even small countries, but a commenter in the audience opined that Taiwan's diplomatic isolation might prevent this.

Blumenthal criticized both parties in Taiwan, one as a corporate party and the other as a social-welfare party, noting there is little interest in reforming the large state-owned enterprises, so perhaps one party will make an issue of this, as indicated by protests over monopolistic electricity rates.

Hammond-Chambers cited billion-dollar investments by Qualcomm and Corning, but he said further progress is hampered by the need to upgrade the power infrastructure.

Chan responded that Singapore and India have said that they will not pursue free-trade agreements with Taiwan until China takes that step.

The lead author of the report and moderator, AEI's Gary Schmidt, concluded by saying that the issues discussed are important even though many years go by without significant progress, and he added that economic steps are necessary to prepare the way for political progress.

Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.

Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.