ASIA PROGRAM SPECIAL REPORT NO. 118 FEBRUARY 2004 INSIDE Cross-Strait Economic Ties: RAMON H. MYERS Taiwan-China Agent of Change, or a Trojan Horse? Economic Relations: Promoting Mutual Benefits or ABSTRACT: This Special Report discusses both opportunities and challenges of cross–Taiwan Undermining Taiwan’s Strait economic ties for domestic economic developments in China and Taiwan as well as their Security? bilateral relationship. Ramon H. Myers of the Hoover Institution argues that Taiwan will gain page 4 economically,build friendship and trust, and pave the way for a long-term solution of the divid- ed-China issue by engaging China. Terry Cooke of the Foreign Policy Research Institute main- TERRY COOKE tains that economic globalization will bring about regional stability and reduce military and Cross-Strait Economic political tension across the Taiwan Strait.Tun-jen Cheng of the College of William and Mary Ties & the Dynamics of suggests that the principal hazard for Taiwan because of the concentration of Taiwan’s trade with Globalization and investment in China is recession or currency fluctuation on the mainland.While the three essays agree that Beijing is unlikely to use Taiwan’s economic dependence on the mainland to page 8 coerce Taiwan politically,they differ on whether the growing cross-Strait economic ties will nec- TUN-JEN CHENG essarily bring about economic benefits to Taiwan. Doing Business with China: Taiwan’s Three Main Concerns Introduction mainland has accumulated to about $30 bil- Gang Lin lion. Investment on the mainland has expand- page 12 ed from labor-intensive industries to capital- espite pervasive political distrust and intensive and technology-intensive ventures. hostility across the Taiwan Strait, Taiwan’s information technology industry, D economic exchange between Taiwan including high-tech semi-conductor produc- and mainland China has developed swiftly in tion, has spread over China’s Yangtze River and recent years. According to Taiwanese statistics, Pearl River areas. Hundred of thousands of trade between the two sides of the Strait Taiwanese business people now permanently reached $37 billion in 2002—accounting for reside on the mainland, particularly in more than 15 percent of Taiwan’s total foreign Shanghai and the province of Jiangsu. Because trade—and China was Taiwan’s number-three 150,000 Taiwanese people reside in close trading partner, next only to the United States proximity in the Jiangsu city of Kunshan, the (18 percent) and Japan (16 percent). Relying city has earned the nickname of “Little Taipei.” on Chinese statistics instead, the figure for What has been the impact of economic cross-Strait trade is even higher, with $45 bil- exchange between Taiwan and the mainland lion trade value for 2002. While Taiwan’s on the island’s domestic economy, and on the imports from China are not very significant bilateral relationship? Does the mainland pose ASIA PROGRAM for the island’s total imports, China has sur- an opportunity or a threat to Taiwan’s devel- passed the United States as the biggest market opment? To what extent has the mainland for Taiwanese exports.Taiwan’s trade surplus market helped sustain Taiwan’s growth? Or, has with China far exceeds the island’s total trade overseas investment resulted in the island’s surplus. In other words, without trade surplus economic hollowing out and increasing with China,Taiwan would be in trade deficit. unemployment? Does the Taiwanese economy In addition, Taiwanese investment on the rely on China’s market so heavily that Taipei Gang Lin is program associate at the Woodrow Wilson Center’s Asia Program. ASIA PROGRAM SPECIAL REPORT has lost its leverage in dealing with Beijing political- expected to replace Taiwan as the world’s largest ly? What is the rationale, if any, behind Taipei’s cau- manufacturing agent of high-technology products. tious attitude toward the opening of the Three Links By engaging China to influence its economic mod- (postal, business, and transportation) across the ernization,Taiwan will gain greater economic wel- Taiwan Strait? Are the Three Links a purely eco- fare, build friendship and trust, and pave the way for nomic issue, as Beijing claims? Is the deepening eco- a long-term solution of the divided-China issue. nomic relationship between the two sides a trap for In the second essay, Terry Cooke of the Foreign Taiwan, or a way to soften Beijing’s position on the Policy Research Institute observes that the global political issues dividing the two? Is there any linkage supply chain for Information Technology (IT) prod- between economic integration and political accom- ucts has been extending steadily across the Taiwan modation? To what degree will Taiwanese people Strait.This process has gradually led to regional and living on the mainland serve as agents of change, global integration that brings substantial benefit to influencing each side’s perception of the other, as both Taiwan and China.With a dominant share in 2 well as policies of Beijing and Taipei toward each China’s export industry,a growing share in the local other? What are the political inclinations of those Chinese market, and strong R&D roots in Taiwan, Taiwanese people doing business with China on the the cross-Strait IT interaction is a win-win game for issues of Taiwan’s future, party identification, and both sides. Leverage in the IT sector is not as much cross-Strait relations? Will sufficient domestic sup- in the hands of politicians in either Beijing or Taipei port allow the leadership of Beijing and Taipei to as in the hands of Taiwan’s globally-experienced IT deal with each other more flexibly? Does the firms. Economic globalization will bring about United States have a role to play in promoting eco- regional stability and reduce military and political nomic links across the Taiwan Strait? The following tension across the Taiwan Strait. three essays discuss these and related issues. In the third essay, Tun-jen Cheng of the In the first essay, Ramon H. Myers of Hoover College of William and Mary discusses Taiwan’s Institute argues that no evidence suggests that main- three main concerns over doing business with land China has adopted trade policies that will force China. First, China seemingly is in a position to use Taipei to accept Beijing’s political demands. Taiwan’s economic dependence on the mainland as Expanding cross-Strait economic relations mutually leverage to coerce Taiwan politically and militarily. benefit both sides. According to Myers, if the Second, Taiwanese businessmen in China may Taiwanese government can formulate a win-win unwittingly become a political force championing strategy toward mainland China, it can retain its the cause of unification on behalf of Beijing.Third, position in the emerging Chinese market, which is cross-Strait economic linkage may have an industri- al “hollowing out” effect on Taiwan’s economy. According to Cheng, in the foreseeable future, THE ASIA PROGRAM Beijing is unlikely to coerce Taiwan politically and militarily by flexing its economic muscle, as many The Wilson Center’s Asia Program is dedicated to the proposition that only those with a sound scholarly grounding can begin to Taiwanese fear.Taiwanese businessmen on the main- understand contemporary events. One of the Center’s oldest land are not agents of Beijing advocating pro-unifi- regional programs, the Asia Program seeks to bring historical and cation policies. However, because of the concentra- cultural sensitivity to the discussion of Asia in the nation’s capital. tion of Taiwan’s trade with and investment in In seminars, workshops, briefings, and conferences, prominent China, a great hazard is recession or currency fluctu- scholars of Asia interact with one another and with policy practi- tioners to further understanding of the peoples, traditions, and ation on the mainland. behaviors of the world’s most populous continent. Rupert Hammond-Chambers of the U.S.- Taiwan Business Council offered commentary on Asia Program Staff: these three essays when they were first presented at a Robert M. Hathaway, Director Gang Lin, Program Associate November 3, 2003 seminar sponsored by the Amy McCreedy, Program Associate Woodrow Wilson Center’s Asia Program. He argued Wilson Lee, Program Assistant that while China’s open market has provided new Timothy R. Hildebrandt, Program Assistant opportunities for Taiwanese businessmen, the CROSS-STRAIT ECONOMIC TIES: AGENT OF CHANGE, OR A TROJAN HORSE? increasing competitiveness of Chinese industries has nomic ties for the two sides’ domestic economic also posed a threat to Taiwan’s economy and development as well as their bilateral relationship. increased Beijing’s voice in regional affairs. While the three essays agree that Beijing is unlikely Moreover, by encouraging regional economic inte- to use Taiwan’s economic dependence on the main- gration without Taiwan’s participation, Beijing has land to coerce Taiwan politically, they differ on tried to marginalize Taiwan’s economic role in the whether the growing cross-Strait economic ties will Asia Pacific, Hammond-Chambers added. necessarily bring about economic benefits to In brief, this Special Report explores both Taiwan. opportunities and challenges of cross-Strait eco- 3 ASIA PROGRAM SPECIAL REPORT Taiwan-China Economic Relations: Promoting Mutual Benefits or Undermining Taiwan’s Security? RAMON H. MYERS as China since 1990 adopted trade poli- cies with Taiwan that have or will force H the Taiwan authorities to accept Beijing’s political demands they now oppose? Or have economic relations between Taiwan and 4 China, because of the two sides’ relatively compar- ative advantage, generated trade benefits for both sides, thus leading to dialogue and a resolution of the divided-China issue? Answering these questions can explain how Taiwan-China economic relations have evolved and what kind of economic and political future the two regimes face. TAIWAN-CHINA ECONOMIC RELATIONS What are the special characteristics of Taiwan- China economic relations? First, we are referring to a short period of economic relations, namely from in China send remittances and earnings to Taiwan, 1990 to the present.