Dancing with the enemy A survey of January 15th 2005

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Dancing with the enemy Also in this section

Turning Taiwanese The islanders are developing a distinct identity. Page 2

The dragon next door War with may not be likely, but if it hap- pened it would be devastating. Page 4

Onshoring Taiwan is shifting much of its manufacturing to the mainland. Page 5

Come and see my mineelds A tourist attraction with a dierence. Page 6

Moving on Manufacturing is out, knowledge-based industries are in. Page 7 For all the hostility between Taiwan and , their respective economies are now deeply interdependent, says My fab is bigger than yours James Miles. That should help to keep the peace A cross-strait chip-making competition. IVE back our rivers and moun- dence from China, ideallythough it dare Page 8 Gtains, says a slogan inside a mili- not say soa permanent one. But the bar- tary base on the tip of (also rack routine of shouting slogans calling for known as Quemoy), a tiny island con- the reunication of Taiwan with the main- Separate ways trolled by Taiwan but shrouded by the land was abolished only last September. But the two neighbours must play it softly. same polluted haze that envelops , China knows that Taiwan is slipping Page 9 a port city on the communist-controlled ever further away. Since 2000, the island Chinese mainland. A soldier on guard says has been led by Chen Shui-bian, its rst giant loudspeakers inside the base still president from outside the Nationalist broadcast music across the 2km (1.2 mile) Party or (KMT) since the civil 100km stretch of water to Xiamen. war. The main aim of his Democratic Pro- Fuzhou The easy-listening fare, selected by Tai- gressive Party (DPP) is to bring about the is- East China CHINA wan’s political warfare troops, is a curi- land’s formal independence from China. Sea ous cold-war legacy on this fortress of an Its charter calls for a Republic of Taiwan, island. Taiwan’s defence ministry will not not a Republic of China, as the island now say what it is for. But the original purpose confusingly calls itself. Mr Chen himself of these broadcasts, which began after the has vowed not to go this far, but China’s Xiamen Taiwan inconclusive end of China’s civil war in leaders do not trust him. They have given Kinmen Strait Taichung 1949, was to undermine the mainland’s warning that a declaration of de jure inde- faith in communism and help to restore pendence (such as by a change of name) South TAIWAN Taiwan’s government as that of the whole would mean war. China of China. China had loudspeakers too, but Pessimistsand there are plenty of Sea they fell silent in 1991. It is decades since them in both and Washingtonar- Tainan the two sides lobbed artillery shells at gue that in the remaining years of Mr each other’s broadcasting facilities. Chen’s presidency, which runs to 2008, Kaohsiung Oddly, China would love it if Taiwan tension between China and Taiwan could really wanted to regain control of the escalate, even to the point of armed con- mainland. But the broadcasting station ict. Such a war could drag in the United and the slogans are merely anachronisms. States, Taiwan’s main provider of moral Acknowledgments and a list of sources can be found Taiwan’s armed forces, led by ocers who and military support. If America decided online were either born on the mainland or had to intervene, two nuclear powers would www.economist.com/surveys fathers who were, have found it hard to be pitted against each other. , from keep step with the rapid changes on the is- where America would probably launch An audio interview with the author is at land. These days the goal of Taiwan’s gov- any bid to defend Taiwan, could nd itself www.economist.com/audio ernment is to assert the island’s indepen- sucked in. The whole region could be1 2 A survey of Taiwan The Economist January 15th 2005

nationalism in check. In parliamentary (the world’s 20th biggest economy), China Mostly solid 1 elections in December, the KMT and its al- (number seven) and America (number Taiwan’s GDP growth lies caused a surprise by maintaining their one). Doomsayers in Taiwan, who a few % increase on a year earlier slim majority in the legislature. These par- years ago gave warning of a rapid hollow- 8 ties won support for their less confronta- ing out of their country’s economy as 6 tional stance towards China, despite their manufacturing migrated to China, have * lack of appeal to many native Taiwanese. been proved manifestly wrong. China, † 4 But around the region and in America, with Taiwan’s abundant help but not to 2 there are worries that Mr Chen will con- the island’s detriment, has become the pre- + tinue to rile the Chinese, who might one eminent manufacturing base for many of 0 – day lose patience and respond with force. the world’s information-technology (IT) 2 This survey will argue that the chances products. Even the initially sceptical Mr 4 of conict are slim. For all the nationalistic Chen is beginning to realise that Taiwan 1995 97 99 2001 03 05 exuberance of China, there is no sign of a can only gain by working with China to re- *Estimate †Forecast shift away from the fundamentally prag- move the remaining barriers to cross-strait Sources: Economist Intelligence Unit; national accounts matic external policy of the last quarter- ows of people, goods and capital. century. And Taiwan’s leaders, for all their In the next few years there will be 2 plunged into turmoil. braggadocio, are pragmatists too. Not just plenty of pro-independence rhetoric as Both China (economically) and Taiwan China, but America, Japan and other big the debate gets under way on Taiwan’s (politically) are evolving so rapidly that powers are urging them not to go too far. A proposed constitutional revisions that Mr talk of preserving the status quo between renamed or redened republic recognised Chen has said will be endorsed in 2006 them is no longer meaningful. Taiwan’s by the same handful of insignicant states and enacted two years later. But if he is smooth and rapid democratisation has al- that now recognise Taiwan would gain sensible, the main achievement of his lowed its people to redene their identity. nothing and probably lose a lot. President eight years in oce will be not that he Increasingly, they no longer think of them- Chen may resent America’s restraining made Taiwan truly independent (which, selves as Chinese. They are Taiwanese, hand, but he cannot do without it. in almost every respect, it has been for 55 and mainlanders are foreigners. In China, There is another remarkable transfor- years), but that he helped his country to too, nationalist sentiments are surging as mation under way that will put just as gain unprecedented prosperity, shoulder the nation becomes more prosperous and powerful a brake on any slide towards to shoulder with China. To get there, he the armed forces far more powerful. war: the rapidly growing economic inte- will need to ride the tide of Taiwanese Fear of China helps to keep Taiwan’s gration and interdependence of Taiwan identity with skilland some caution. 7 Turning Taiwanese

The islanders are developing a distinct identity

AIWAN’S deep fascination with a tele- years ago from province on the form in Japanese and adjust their plots to Tvised form of puppet theatre illustrates mainland coast facing Taiwan. Budaixi is extol the Japanese martial spirit. the complexity of what it means to be Tai- the name for it in standard spoken Chi- The end of Japanese rule in 1945 wanese. Budaixi, as the art form is known, nese, which the KMT forced the Taiwanese brought little relief to the puppeteers. Bu- is an omnipresent feature of Taiwan’s cul- to use, but the natives still mostly speak a daixi now had to be performed in standard tural and political life. The island’s biggest Fujian dialect. They are the descendants of Chinese. In the 1960s, televised budaixi budaixi production company, PiLi Interna- Fujianese who ed to the island to escape was banned for allegedly distracting is- tional Multimedia, says it has an annual upheavals on the mainland. Some trace landers from their work. By the time Tai- turnover of $35m. A million people a week their ancestry to the island’s original in- wan began moving towards a multi-party rent the latest PiLi shows on DVD. Budaixi habitants, Malayo-Polynesian-speaking democracy in the 1990s, budaixi was in puppets feature the wooden expressions peoples akin to those of Indonesia and the danger of dying out, but it became inter- and jerky movements of early TV anima- Philippines. China incorporated the island twined with a movement to revive Tai- tions, but the characters, costumes and into its empire after putting down an in- wanese culture, wrote Wu Sue-mei, a plots draw on ancient Chinese sources, surrection there in the late 17th century. scholar at Carnegie Mellon University. with a heavy dose of martial arts and spe- In 1895, China ceded Taiwan to Japan For all its moorings in the culture of the cial eects. The target audience is grown- after being defeated in a war over control mainland, Taiwan’s version is now being ups as well as children. Politicians like to of the Korean peninsula. Taiwan still has touted as something very distinct. For Pres- portray themselves as budaixi heroes. strong cultural ties with Japan, and many ident Chen and his generation, the struggle Taiwan’s 23m residents regard budaixi Taiwanese take a fairly positive view of the for democracy on the island and the strug- as Taiwanese, yet the genre has its roots on colonial era. But the Japanese discouraged gle for a Taiwanese identity amounted to the Chinese mainland. The hand-held Taiwaneseness. During the second world much the same thing. It pitted native Tai- puppets were imported more than 200 war, they forced budaixi troupes to per- wanese against the mainlanders, the la-1 The Economist January 15th 2005 A survey of Taiwan 3

2 bel attached to those who arrived with the KMT in 1949 (and their ospring). Main- landers make up about 15% of the popula- tion and still provide much of the support for the KMT and its allied splinter parties. But there are not enough of them to return the KMT to power. Democracy is forcing it to turn Taiwanese too. Surveys conducted by Taiwan’s Na- tional Chengchi University show a re- markable shift in Taiwanese self-percep- tion over the past 12 years. The number of those identifying themselves as Taiwan- ese has risen from 17% to 41%, whereas those who see themselves purely as Chi- nese have dropped from 26% to 6% (see Chen says it with budaixi chart 2). This alarms the government in Beijing, which not unreasonably suspects problem is the result of an unnished civil me, what do we get out of reunifying with Taiwan’s leaders of pursuing a deliberate war. It would nd simultaneous recogni- the mainland? It’s a dicult question, policy to de-sinify the island. tion of two separate Chinas almost as ab- concedes Wang Jisi of the Chinese Acad- horrent as Taiwan renouncing Chinese- emy of Social Sciences. I cannot think of Chinese? Us? ness altogether. many attractions. This view is shared by some opposition Galling though it is for China, Mr Although China feels a little more re- politicians in Taiwan, and it is true that Chen’s emphasis on Taiwan’s identity has laxed after December’s election results, it President Chen is fostering Taiwanese- helped win him votes. But he can go only still fears that Mr Chen will now look for ness, but he is doing it because it is popu- so far. In the build-up to December’s par- ways of backing down from his promise lar. Admittedly the policy does not encour- liamentary elections, Mr Chen angered not to make any constitutional changes age support for reunication with China, China’s leaders with his calls for a new that would aect the island’s ocial name but nor does it seem to detract from the constitution for the island, to be approved or the denition of its sovereign territory. public’s strong support for the preserva- by a referendum, and for provocative America is also worried. In December tion of the current ambiguous relationship name changes for government oces and 2003, President Bush, with China’s prime with China. Polls suggest that less than state-owned enterprises. Taiwan’s ner- minister, , by his side, dressed 10% of Taiwanese want independence as vous voters responded by denying the DPP down the leader of Taiwan for challeng- soon as possible, a gure that has hardly and its allies the majority in parliament on ing the status quo. Mr Chen got the mes- changed in recent years. No doubt China’s which they had set their sights. sage and watered down provocative plans sabre-rattling plays its part in that. But China knows that threats of war do for a referendum on cross-strait issues. Yet the new emphasis on Taiwanese not reinforce Taiwan’s identication with China crowed. America doesn’t want identity is making it harder for the DPP to the mainland. Some ocials in Beijing still to see Taiwan becoming independent, war cloak its dealings with the mainland in hope that economic interaction with Tai- breaking out across the strait and America ambiguity. In 1992, when Taiwan and wan will make people in the island feel being dragged into the water, says Zhang China began discussions between nomi- more Chinese again, but many now have Mingqing, a Chinese spokesman on Tai- nally non-governmental bodies set up by their doubts. My Taiwanese friends ask wan aairs. America has the problem of both sides to disguise their ocial con- ghting terrorism, the Iraq problem and tacts, they agreed on the notion of one the North Korean nuclear problem. It does China but deliberately left open exactly How do you feel? 2 not want a problem with Taiwan. what that meant. China broke o the talks Changes in Taiwanese/Chinese identity, % Since his censure by Mr Bush, Mr Chen in 1999 after Mr Chen’s predecessor, Lee Taiwanese respondents answering: has tried to repair relations with America, Teng-hui (of the KMT, but born in Taiwan Both Taiwanese Chinese sending drafts of important public docu- and very pro-Japanese) proclaimed that and Chinese ments on cross-strait issues to Washington Taiwan and China were separate states. Taiwanese No response in advance. Michael Kao, Taiwan’s deputy Now talk of one China, with Taiwan 60 foreign minister responsible for ties with as one of its components, has become dan- 50 America, says he has been explaining to gerous for Taiwanese politicians. Ma Ying- the Americans that President Chen is a jeou, the charismatic KMT mayor of Taipei, 40 pragmatic lawyer, not a political ideo- who is widely regarded as a potential fu- 30 logue. Mr Chen, he says, is trying very ture leader of his party, says that using the hard to hold the line so that political term would be political suicide in Taiwan. 20 movements in Taiwan would not push China, for its part, would clearly not be 10 him to [declaration of] de jure Taiwan in- happy with Mr Ma’s suggestion that Tai- dependence. 0 wan and China model their relations on 1992 94 96 98 2000 02 04 But Bush administration ocials are that between the two Germanies before not entirely convinced. They held exten- Source: Election Study Centre, National Chengchi University their unication. For China, the Taiwan sive discussions with their Taiwanese1 4 A survey of Taiwan The Economist January 15th 2005

2 counterparts on a speech that Mr Chen the point, he said that Taiwan was a coun- dence of strong public support for a ref- was to deliver on the occasion of Taiwan’s try of 36,000 square kilometres, in other erendum, Mr Chen could not achieve this national day on October 10th. The speech words, just the island and a few islets. even if he wanted to. Personally he seems was billed by Taiwan as an important Radicals in Mr Chen’s party and in its to prefer a gradualist approach, stopping overture to China. But to the Americans’ main ally, the Taiwan Solidarity Union, short of the nal, formal change. In his rst surprise, it contained last-minute addi- want Taiwan to revise its constitution to term of oce he enraged China by adding tions, not cleared in Washington, that chal- clarify its de jure independence, arguing the word Taiwan to Republic of China lenged the decades-old principle of over- that the island has only a narrow window passports. He has recently suggested a lapping sovereignty between the Republic of opportunity while China is preoccu- change of tactic in the island’s dogged but of China and the People’s Republic of pied with its preparations for the 2008 futile attempt to join the United Nations: it China. The sovereignty of the Republic of Olympics. China, the theory goes, would is now asking for admittance as Taiwan, China is vested with the 23m people of Tai- avoid a war in order to ensure the success not the Republic of China. This has caused wan. The Republic of China is Taiwan, and of the games, which it wants to mark the anxiety in Washington, where ocials re- Taiwan is the Republic of China, Mr Chen country’s emergence as a great power. sent his goading of China and feel he does said. And just to make sure everybody got Without a legislative majority or evi- not understand the risks he is taking. 7 The dragon next door

War with China may not be likely, but if it happened it would be devastating

T THE beginning of this new cen- wanese aircraft as soon as they take o Atury, nowhere is the danger for Watch out 3 from the island. The technical superiority Americans as great as in the , Defence spending as % of GDP of Taiwan’s weaponry could well be over- where the potential for a war with China, a 6 taken by China’s within a few years. nuclear-armed great power, could erupt Taiwan Kurt Campbell, the Pentagon’s senior out of miscalculation, misunderstanding 5 ocial responsible for the region at the or accident. So argues Nancy Bernkopf 4 time of the crisis in 1995-96, says the big- Tucker, an American scholar, in an edited gest cautionary tale was how dicult volume, Dangerous Strait, due to be pub- 3 America found it to communicate with the lished shortly. Other threats may be more China Taiwanese and to understand their ca- 2 certain, such as conict in the Middle East, pabilities and intentions. This did not terrorism or clashes with rogue or failed 1 bode well should the two sides nd them- states, yet none but a collision with China selves ghting together against China. So would be as massive and devastating, Ms 0 the Clinton administration decided to step 1992 94 96 98 2000 02 03 Tucker suggests. up contacts with the Taiwanese armed Source: IISS Since 1995, China has been engaged in a forces, including mutual visits and training rapid military build-up on the coast facing of Taiwanese ocers. Taiwan, triggered by the then President range ballistic missiles (SRBMs) along the In 2001, after George Bush became Lee’s visit to his alma mater, Cornell Uni- coast. It has also increased deployments of president, the Republican administration versity. China was incensed by America’s longer-range missiles that could target strengthened these ties. Mr Bush also of- willingness to give a Taiwanese president American bases in Japan or on the Pacic fered to sell Taiwan a huge package of ad- a public platform on American soil. It saw island of Guam, about 1,500 miles from vanced weaponry and help it buy diesel the event as conrmation that Taiwan’s de- Taiwan. And it is working to develop land- submarines. As Michael Swaine, an Amer- mocratisation was strengthening interna- attack cruise missiles, which could be red ican academic, notes in Dangerous tional support for Taiwan’s separateness. across the 160km (100 mile) strait and pen- Strait, reports suggest that there are now Military pressure, it felt, was needed as a etrate even the most sophisticated anti- more American military programmes in warning to Taiwan and the Americans missile defences that Taiwan is acquiring progress with Taiwan than with any other about the dangers of going too far. from America. major American ally. And America has In 1995 and 1996 China staged large- China has also been buying an array of been adding to its submarines and bom- scale military manoeuvres in the Taiwan Russian weaponry, from SU-27 and SU-30 bers stationed on Guam. Strait, including the ring of unarmed mis- ghter jets to quiet Kilo-class submarines But Taiwan itself is curiously ambiva- siles close to Taiwan’s two main ports. and Sovremenny-class destroyers. These lent about China’s growing military pro- America responded with its biggest naval ships are equipped with Sunburn anti- wess. The purchase of new weapons from deployment in the region since the Viet- ship missiles, the ones America’s navy America has become bogged down in nam war, sending two aircraft-carrier bat- fears most, says Peter Brookes, a former erce political debate on the island, with tle groups to the area. China has red no senior defence ocial in the Bush admin- many arguing that they are too expensive, more missiles since, but has positioned istration. Russian-supplied anti-aircraft will take too long to acquire and integrate large numbers of truck-mounted short- batteries on the coast can lock on to Tai- into the Taiwanese military, or will simply1 The Economist January 15th 2005 A survey of Taiwan 5

2 fuel an arms race with the mainland. missile strikes against the mainland there say it should be revived. China has American requests that Taiwan do more to should China attack Taiwan. If you hit us said it might attack if Taiwan goes nuclear. protect vital structures such as command- with 100 missiles, we’ll ght you back If I had to nominate an area that was ripe and-control centres and airelds have met with 50 missiles, he said. If you hit Taipei for a strategic surprise in the next three or similar foot-dragging. Taiwan’s defence or Kaohsiung, we’ll strike . To four years, I would probably place China- spending as a share of GDP has been de- the many Taiwanese who balk at spending Taiwan at the top of the list, above North clining for several years, to around 2.4% in $18 billion on America’s proposed arms Korea, says Mr Campbell. 2003, below ’s (2.8%) and well package, oensive weapons seem a more Policymakers in Washington are right below China’s (see chart 3, previous page). cost-eective way of deterring an attack. to worry about the risks, but the chances In 2005 it is set to rise to 2.5%. Taiwan has been working for several are that Chinese leaders would think more years to develop supersonic cruise mis- than twice about mobilising their arsenal. Look at it our way siles that could hit mainland targets. Since Politically, any military action against Tai- The problem, according to James Mulve- President Chen took oce, it has installed wan could well prove riskier for China non of the Centre for Intelligence Research less advanced subsonic anti-ship missiles than doing nothing. The risk of failure and Analysis, an American consultancy, is on outlying islands that could also hit the weighs pretty heavily on a lot of the senior that there is a fundamental perceptual dif- mainland. These moves worry some in leadership [in China], says a Pentagon of- ference between Taiwanese ocials and the Pentagon, who think that in the event cial. A war that failed to achieve Taiwan’s American ones about the nature of the of conict a Taiwanese attack on the main- submission would be a powerful blow to Chinese threat. The Americans brief their land could escalate out of control. Natu- the party’s credibility. And it is hard to see Taiwan counterparts on Chinese military rally, they also anger China. how, even if China were to subdue Tai- capabilities, he says, but are ummoxed There are concerns, too, that Taiwan wan’s armed forces, it could be condent by their unwillingness to accept that the might secretly acquire nuclear weapons. of a lasting political solution that would threat is imminent. President Chen has ruled this out. But Tai- rule out any return to independence. The Americans are also worried that wan has tried in the past to make such A war would come at a terrible econ- these days the Taiwanese talk a lot more weapons behind America’s back. As re- omic price, not only for Taiwan but for about acquiring oensive capabilities of cently as the late 1980s, the Americans put China too. And one thing Chinese ocials their own. The prime minister, Yu Shyi- a halt to a suspected nuclear-weapons pro- seem to agree on is that the party’s grip on kun, last September famously threatened gramme in Taiwan. Some commentators power depends on a vibrant economy. 7 Onshoring

Taiwan is shifting much of its manufacturing to the mainland

N THE smoke-and-mirrors statistics for Taiwanese IT rms: Hon Hai Precision In- from their production on the mainland, in- Iforeign investment in China, dustry (whose exports from China in 2003 creasing their global market share across a appears as the biggest investor, followed, were worth $6.4 billion), Quanta ($5.3 bil- broad range of products, says Nicholas oddly, by the Virgin Islands. Trailing in lion) and Asustek ($3.2 billion). Altogether Lardy of the Institute for International Eco- sixth place, behind Japan, South Korea and Taiwan has 28 entries on the list, all of nomics in Washington. America, is Taiwan. But if investments them high-tech companies. Far from being Thanks to a huge trade surplus with were traced back to their true origins, Tai- undermined by competition from China, mainland China, Taiwan has built up the wan might well turn out to be the largest. Taiwanese IT businesses are beneting world’s third-biggest holding of foreign-1 The capital ow from Taiwan to China is turning the mainland into a global leader in information-technology (IT) The workshop next door 4 equipment, albeit one that still relies Taiwan’s foreign direct investment in China, $bn Taiwan’s trade with China, $bn mainly on imports for the more advanced 4 50 components. In 2002, China overtook Ja- pan and Taiwan to become the world’s sec- 40 ond-largest IT hardware producer after 3 America. The steep upward curve of 30 China’s IT exports is almost exactly 2 Exports matched by its imports of IT components 20 Imports from Taiwan. China is now the world’s big- 1 gest IT hardware exporter to America. Yet 10 more than 60% of these exports are made in China by Taiwanese companies. 0 0 1996 97 98 99 2000 01 02 03 1995 96 97 98 99 2000 01 02 03 04* China’s latest list of its top 200 export Sources: China Statistical Yearbook, National Bureau of Statistics; Taiwan’s Straits Exchange Foundation *First nine months at annual rate companies is headed by subsidiaries of 6 A survey of Taiwan The Economist January 15th 2005

A tourist attraction with a Come and see my mineelds dierence

INMEN, a small island nestled against missing: the mainland tourists. are in danger from poorly marked mine- Kthe Chinese coast but belonging to China’s initial response to the opening elds if they stray o the roads, as your Taiwan and occupied by 10,000 Taiwan- of the mini three links was lukewarm: correspondent discovered after walking ese troops, badly wants visitors. Since the sending tourists was seen as too much of through one by mistake. end of the civil war in 1949, its economy a gift to President Chen. But late last year Since 2002, mainland tourists have has depended on the military garrison. Is- the mainland authorities announced that been allowed to visit Taiwan proper, but landers rushed to build hotels when Tai- tourists could come, at least from Fujian Taiwan allows them in only if they arrive wan rst allowed tourists (though not province. The rst group arrived on De- via a third country for which they have a from China) to visit 12 years ago. But Tai- cember 7th, though Taiwan is limiting visa. This restricts the ow to all but the wanese visitors are not much enamoured numbers to 600 a day for now. very richest of mainlanders. Taiwan with an island ringed by mineelds . The The island could be a huge attraction wants to develop its tourist industry, but hotels are struggling and the property for mainlanders, 1,000 of whom already is worried that opening Taiwan proper to market has slumped. board boats every day simply to sail close mainland tourists will encourage illegal In an eort to give its outlying islands and gawp at one of the giant slogans put immigration and provide an easy way in a boost and show some goodwill to up many years ago by Taiwanese troops: for mainland secret agents. But Kinmen’s China, Taiwan in 2001 opened the mini Unite China with the Three Principles of top ocial, Lee Juh-feng, has no time for three links between the islands and the the Peoplethe philosophy espoused by such excuses. In future we hope the ma- mainland. It was not running much of a Sun Yat-sen and adopted by the KMT. If jority of tourists (in Kinmen) will be from risk. Taiwan proper would remain aloof, they set foot on Kinmen, however, they the mainland, not from Taiwan, he says. and the Kinmen islanders would get some revenue. But things did not work out as planned. The visitors did arrive, be- cause the new direct ferry service saved many Taiwanese businessmen hours of travelling time. But they hardly glanced at the little island as they shuttled to and fro. Life on Kinmen has continued in its traditional sleepy way. The 60,000 is- landers grumble ever more loudly as the garrison’s ranks begin to thin. Apart from servicing the troops, they have little to do. There is hardly any manufacturing other than liquor production and a factory that converts old bits of military ordinance into knives for tourists. The local govern- ment has done its best to liven the place up, recently sponsoring avant-garde art- ists to exhibit their works in disused mili- tary bunkers. But something is still Welcome to Kinmen

2 currency reserves: a record $239 billion at the rst wave of Taiwanese investors who lica of Taiwan’s high-tech industrial zones. end-November 2004. Taiwan is second ocked to the mainland after the Taiwan Some 300,000 Taiwanese businessmen only to Japan as a source of Chinese im- government began to ease investment re- and their dependants now live in the ports. And for Taiwan, China is the biggest strictions in the early 1990s. It is close to greater Shanghai area, causing property export market. Taiwanese companies em- Hong Kong, which together with nearby prices to soar. ploy some 10m people on the mainland. Macao oers the only direct ights from Taiwan is rife with stories of kidnap- For China, worried as it is about growing Chinese cities to Taiwan. pings, robbings and murders of Taiwanese unemployment, this is an enormous con- To start with, Dongguan was a magnet businessmen on the mainland. There is tribution to stability. In just a few years, a for low technology, labour-intensive also speculation about how many really strong economic symbiosis has developed industries. But since the late 1990s, Tai- make money; Tsai Ing-wen, a former head across the Taiwan Strait. wanese investment in the mainland has of Taiwan’s mainland-aairs oce under Take the city of Dongguan in Guang- moved rapidly up the technological lad- President Chen, estimates that only half of dong province (which borders on Hong der. Dongguan is still booming, but the in- them do. Even so, more than 70,000 Tai- Kong). The municipality is a vast sprawl of vestment hotspot has shifted north to the wanese rms have set up on the mainland, factories, many of them Taiwanese, Yangzi River valley, particularly in the area notwithstanding political tensions, Tai- stretching mile after mile through what around Shanghai, an area with good ac- wan’s restrictions on some investment were tiny villages a few years ago. Dong- cess to skilled workers and potentially bet- and the absence of direct ights. This is a guan is awash with Taiwanese money, ter placed for China’s domestic market. time of global competition, says Preston much of which has been there for a decade The town of Kunshan, an hour’s drive Chen, chairman of the Ho Tung Group, or so. Dongguan was an obvious choice for from Shanghai, has become almost a rep- which has invested over $100m on the1 The Economist January 15th 2005 A survey of Taiwan 7

2 mainland. If you don’t go [to China], oth- ocials say that output of IT products will directly if not carrying local freight. ers will, and the rst to suer will be you. triple by 2010. The absence of direct ights except to In Dongguan, some Taiwanese busi- To achieve this, China needs Taiwanese Hong Kong and Macao is the biggest nui- nessmen in low-value-added industries businesses, even if they support indepen- sance, though it really is no more than that. are getting restless as the stampede of Tai- dence. In May 2004, the Communist If you set o an hour before dawn from wanese capital shifts to the north. Some Party’s mouthpiece, the People’s Daily downtown Taipei, you can reach most of have begun to move elsewhere, including newspaper, accused Hsu Wen-lung, the the big cities on the mainland by the after- neighbouring Vietnam. If you come back founder of Taiwan’s Chi Mei Group, which noon. But direct ights would certainly in ten years it’s hard to say whether you’ll has a large chemical plant on the main- help. Getting to Shanghai currently takes nd any Taiwanese business here, says land, of using his prots for pro-indepen- six or seven hours. Flying direct would Juei Chen Wong, the boss of a Taiwanese dence causes. But China has not taken any take 90 minutes. electric-wire factory in Dongguan. direct action against the company. There The Taiwan government estimates that He is exaggerating: more likely, other are a very small number whom we do not direct air and sea links would reduce ship- Taiwanese businesses less dependent on welcome, says Mr Zhang, the Chinese ping costs by 15-30%. Sea transport would cheap labour will move in. For labour-in- government spokesman. But as long as be twice as quick, and air travellers would tensive manufacturers geared to the export they uphold the law, we let them invest. save $390m a year. But direct ights are market, China may be losing some of its We have not said we will expel them. fraught with symbolism, so both sides are shine. But the new wave of Taiwanese in- determined to extract maximum political vestment is looking for skilled labour, and So near and yet so far advantage from any move they make. is setting its sights not only on markets At government level, the two sides still For Taiwan, direct ights are part of a abroad but also on a fast-growing group of bicker over what they call the three direct bigger question: how much economic inte- auent consumers in China itself. This in- links: communication, trade and trans- gration with the mainland it should allow. vestment is helping to transform China’s portation, which have been disrupted Should it stop trying to curb investment in trade, now fuelled increasingly by higher- since the end of the civil war. But barriers certain technologies; open its doors wider value-added production. In 2003, China have been quietly dismantled. Mail is to trade with the mainland; and allow exported some $130 billion-worth of elec- channelled through Hong Kong; direct mainlanders to work, invest and holiday tronic and IT products, up 41% on the previ- telephone calls have been possible since in Taiwan? The economic arguments are ous year. Such products accounted for the 1980s; cross-strait cargo shipping can compellingly in favour, particularly in in- nearly one-third of total exports. Chinese be routed through a third area, but can go formation technology. 7 Moving on

Manufacturing is out, knowledge-based industries are in

T THE start of this decade, three-quar- tition. We think the company cannot rely sied by the bursting of the IT bubble. In Aters of the world’s notebook comput- on this sort of business in the long term, 2001, Taiwan’s economy contracted by ers were made in Taiwan. Now the last of says Mr Lee. We must nd a way out. 2.2%, the rst whole year of negative the production linesexcept for a few top- In Taiwan, this requires a radical growth in half a century. Unemployment of-the-range modelsare preparing to change in thinking. Although Taiwanese surged from 2.9% in 1999 to 5.2% in 2002. move to China. Taiwan is no longer a companies make a large proportion of the But now Taiwan’s economy is regain- manufacturing paradise, says K.Y. Lee, world’s IT hardware, whether in Taiwan or ing strength. GDP growth in 2004 was the chairman and chief executive of BenQ on the mainland, few of the consumers around 5.9%, buoyed by strong private in- Corporation, a Taiwanese maker of con- who buy the products would recognise vestment, and this year is expected to be sumer electronics and mobile phones. their names. What they see is the labels of 4-5%. The banking system, awash with bad How can the island adapt? Many of its other rms, often American, Japanese or loans three or four years ago, is looking far companies have prospered in the same South Korean. The island’s IT manufactur- healthier. The non-performing loan ratio way as BenQ, by making IT products for ers, whose output accounts for 15% of Tai- has fallen from 8.3% in 2001 to around 3.5%. other companies which sell them under wan’s GDP, have concentrated on making Unemployment fell to below 4.5% last their own brandsa process known as goods as eciently as possible rather than year. Despondency is giving way to vi- original design manufacturing (ODM) or on branding and marketing. The top 100 sions of Taiwan as a centre of research and original equipment manufacturing (OEM), global brands list drawn up by Interbrand, development (R&D), knowledge-based depending on the amount of creative a consultancy, does not contain a single industries based on the exploitation of work involved. But China is fast getting Taiwanese rm. ideas, logistics and nancial services, and into the ODM business too. At the same A few years ago, many in Taiwan feared globally recognised brands. time, consolidation among the brand- that the exodus to the mainland of the is- BenQ is among the rst of Taiwan’s big name IT producers has reduced the num- land’s anonymous industries would leave ODM rms (its turnover in 2003 was $3.2 ber of potential customers for the ODM Taiwan with swelling ranks of unem- billion) to try building a brand. Since 2001, manufacturers and intensied compe- ployed workers. Their worries were inten- when it was spun o from its parent, Acer,1 8 A survey of Taiwan The Economist January 15th 2005

A cross-strait chip-making My fab is bigger than yours competition

HE citizenship of Semiconductor formation from a maker of cheap plastic investing in 12-inch fabs on the mainland, TManufacturing International Cor- toys 25 years ago to a manufacturer of and can invest in 8-inch fabs (the next step poration (SMIC) is hard to establish. Reg- leading technologies. They even have a down) there only if they already have a istered in the Cayman Islands, the strategic dimension. In his 2001 book, 12-inch fab in Taiwan and ship their old 8- company has its headquarters in Shang- Silicon Shield, Craig Addison, a Hong inch equipment to the mainland. SMIC hai; its chairman and CEO is Taiwanese; Kong-based consultant, argues that Tai- was able to buy 12-inch equipment from the majority of its investment (he thinks) wan’s role in the IT industry has become private western rms, with a promise not comes from America; its biggest share- crucial to the global economy, so America to produce chips for Chinese military use. holder is Chinese; and it is listed in both would defend the island against attack. Taiwanese ocials are now belatedly America and Hong Kong. But the main Enter SMIC (usually pronounced discussing an end to the ban on 12-inch point is that to China it is Chinese, and to smick), founded in 2000 by Richard fab investment. Ho Mei-yueh, the eco- Taiwan it is simply menacing. Chang after he sold his Taiwanese com- nomics minister, says there is no need to In the semiconductor industry, iden- pany, Worldwide Semiconductor Manu- restrict technologies that China already tity has an importance that transcends facturing, to TSMC. Shanghai Industrial has, but it is very important that Taiwan the value of silicon chips. Taiwan is im- Holdings, a Hong Kong-listed company stay two generations of technology mensely proud of its global leadership in controlled by the Shanghai government, ahead of China. the sector. Not many people outside the became SMIC’s biggest single share- The mood in Taiwan is still bitter. business may have heard of the Taiwan- holder. SMIC’s listings in 2004 in Hong TSMC has led a lawsuit against SMIC, ac- ese giants, Taiwan Semiconductor Manu- Kong and New York raised more than $1 cusing it of stealing the Taiwanese com- facturing (TSMC) and United Micro- billion. The company is about to become pany’s intellectual property, which SMIC electronics (UMC), but these two the world’s third-biggest foundry. denies. Mr Chang, meanwhile, magnani- (denitely Taiwanese) companies be- But what worried Taiwan most was mously welcomes his competitors. He tween them account for around 70% of the opening in September 2004 of SMIC’s sees a vast potential market in China. the world’s foundry production (a state-of-the-art fabrication plant (or fab, People ask, ‘Richard, are you crazy? Are foundry is a semiconductor manufac- in the industry parlance) using 12-inch you inviting in the competition?’ [But I turer that produces chips for other wafer technology. Taiwanese companies say] when the pie is big enough, the com- brands). They symbolise Taiwan’s trans- are still barred by their government from petition is very friendly, he explains.

2 BenQ has expanded its branded opera- ing to build up its own brand, but contin- low-interest loans and launching new tions from around a quarter of its business ues to sell mobile phones to Motorola, transport infrastructure projects. to 35-40%. Acer, the world’s fth-biggest which has nearly half of Taiwan’s market. The industries Taiwan hopes to boost producer of personal computers, has Mr Lee says his company has managed are intriguingly known as the two tril- made notable gains in developing its to steer clear of potential conicts by mak- lions and the twin stars. The two trillions brand too. Acer notebook computers are ing its branded models clearly dierent refer to the semiconductor and the thin- now among the top sellers in Europe. from those supplied to ODM customers. lm transistor liquid crystal display (TFT For BenQ, the transition involves risks, Prot margins on branded business are LCD) at-screen industries, annual output not least that buyers of their ODM equip- three or four percentage points higher than of which is supposed to more than double ment might turn to other suppliers be- on ODM output, he says. BenQ spends far by 2006, to more than 1 trillion Taiwanese cause the new brand might compete with more on R&D than traditional ODM manu- dollars ($30 billion) each. The twin stars re- the ODM product. As Taiwan’s biggest facturers: around 3% of its revenue, against fer to digital content (such as digital games manufacturer of mobile phones, it is try- an average of around 1%. and computer animation) and biotechnol- For large, well-established companies ogy, which are expected to grow at similar such as BenQ and Acer, developing their rates. Cornering the market 5 own brands may be feasible. But the back- Taiwanese industry is well on its way to Products and applications made by Taiwanese bone of Taiwan’s industry consists of accomplishing some of these goals. The companies, 2003 world market share, % small and medium-sized enterprises that at-screen industry has grown rapidly, 0 20406080100 are looking for short-term prots. In their thanks to the nimbleness of Taiwanese race to drive down costs, R&D is an unaf- business rather than government support. Wireless LAN fordable luxury. So Taiwan’s government Taiwan now matches the market share of Notebook PC has long seen it as its business to help steer rival South Korea and could well surpass it ADSL industry in new directions. Two years ago in the coming year. Cable modem it unveiled a development plan known as Challenge 2008, which emphasised the Going, going LAN switch need to build brands and concentrate on Taiwanese ocials know they have little PDA cutting-edge technologies. It called for an hope of keeping their most treasured CD/DVD/RW increase in total R&D spending from just industries entirely on the island. China’s PC camera over 2% of GDP to 3% within six years. This growing domestic market for IT products is Cellular phone would bring Taiwan up to the current level pushing Taiwanese companies to move of the United States and Japan. The gov- closer to their consumers. In the TFT LCD Source: Industrial Technology Research Institute ernment would do its bit by providing business, manufacturers have been press-1 The Economist January 15th 2005 A survey of Taiwan 9

2 ing the government to allow them to move vestment in chip-fabrication plants using the (labour-intensive) production of the 8-inch wafer technology, even though small screens used in mobile phones to the China itself is setting up production lines mainland. , the head of Tai- using the latest 12-inch technology. wan’s Mainland Aairs Council, says that Both China and Taiwan are members after initial hesitation, restrictions on of the World Trade Organisation (WTO), small screens are now likely to be eased. but Taiwan still bars imports of a wide For all the push to the mainland, busi- range of mainland goods, from agricul- nesses still prefer to keep their latest tech- tural products to cars. Chinese investment nologies and cutting-edge R&D in Taiwan. in Taiwan is all but banned (though there Intellectual property rights (IPR) protec- are ways round that). Protectionist senti- tion on the island has improved consider- ment on the island is strong. Even though ably in recent years, not least thanks to [Taiwan is] a market economy, when we pressure from America. Although owners face such a hostile and strong neighbour, of intellectual properties still complain, we need to take some precautions, says Taiwan is certainly a far safer place for Mr Wu of the Mainland Aairs Council. them than the mainland. Anything to build a brand The KMT has promised a very dierent But for Taiwan to full its dreams, it will approach to cross-strait ties. The party’s need to open wider to China. It is already mainland through the prism of economic chairman, Lien Chan, says he wants a free- suering a growing shortage of the highly threat, it is in danger of isolating itself and trade agreement and eventually a full- skilled workers needed for its new indus- getting cut out of tomorrow’s deals, said edged common market with the main- tries. A freer ow of workers, facilitated by America’s chief representative on the is- land. A free-trade agreement would allay direct ights, would turn an already dy- land, Douglas Paal, in a 2002 speech. Taiwanese worries about exclusion from a namic economic relationship red hot, Restrictions on cross-strait investment mooted free-trade area embracing the 10- says Richard Vuylsteke, director of the hamper Taiwan’s eorts to build up its ser- member Association of South-East Asian American Chamber of Commerce in Tai- vice industries. They block Taiwanese Nations (ASEAN), China, Japan and South pei. Among other things, it would encour- banks, for example, from doing any more Korea. Mr Lardy of the Institute for Interna- age multinational investors to see Taiwan than set up representative oces on the tional Economics says that if such a re- as a back door to doing business in China, mainland or remitting money to Taiwan- gional arrangement went ahead, the is- a role that the island has long aspired to ese rms or individuals in China. In the land would lose out in a big way. The play. If Taiwan continues to view the semiconductor industry, they hobble in- problem is how to get China to talk. 7 Separate ways

But the two neighbours must play it softly

HE curators of China’s national mu- shunned the role of mediator between had a brief chat with China’s president, Hu Tseum in Beijing are wondering what to China and Taiwan. But now it is getting Jintao, there was a frisson of excitement in do with a three-metre high cylindrical cop- anxious to move things along. Taiwan. But it soon zzled out. In Decem- per container donated by a famous state- We are interested in hearing from the ber China threatened to pass a new law owned distillery in 2001. Inside it are 34 two sides if they think there’s a role for against secession to keep Taiwan in check. bottles of Chinese grain liquor, each repre- [America] that would be acceptable to Some American academics think there senting one of what China regards as its re- both sides. And increasingly both come to might be scope for an interim agreement. gionsincluding Taiwan. The 2.3-tonne ob- us and suggest that perhaps there is a role, This would involve Taiwan pledging not to ject is inscribed with the words: Precious says a senior State Department ocial. If declare de jure independence and China celebratory bottles for the unication of both sides wanted America to facilitate a promising not to attack Taiwan for a speci- the motherland. The museum originally dialogue, it is something we would give ed period, say 20-30 years. During this put it on display in the main hall, but it got consideration to, he says. But they period they would work on things like ar- in the way and last year was moved out haven’t quite come up with a blueprint for rangements for cross-strait transport and into a courtyard o limits to the public. what might work for everybody. building trust between their respective With a big refurbishment now under way, That is putting it mildly. Since the late armed forces. Taiwan would be given ocials seem rather embarrassed by it. 1990s, there has been no ocial contact of more freedom to join international bodies. Chinese and American leaders would any kind between China and Taiwan. A suggestion along these lines was put probably like to see the Taiwan problem China cannot bring itself even to talk forward in early 2004 by a former senior similarly put to one side. But the Taiwan- about talks with Mr Chen. When a Taiwan- ocial in President Clinton’s National Se- ese leaders’ growing impatience for recog- ese academic chosen to represent the is- curity Council, Kenneth Lieberthal, and nition is forcing China and America to re- land at a summit of Asia-Pacic leaders another China expert, David Lampton. Of- spond. In the past, America has always last November actually shook hands and cials in China and Taiwan listened po-1 10 A survey of Taiwan The Economist January 15th 2005

2 litely, but they remain just as far from the negotiating table. China still insists that any talks be held on the basis that there is only one China, of which Taiwan is a part. President Chen says that to accept this would be tantamount to surrender. His only hint of compromise has been to say that he would be prepared to resume talks on the same basis as the two sides’ spo- radic discussions in the 1990s, which in China’s view did involve an understand- ing on one China. But President Chen seems so utterly opposed to China’s own idea of one China that his big neighbour Let fortune smile does not trust him. The Americans say there is not much that China would gain for restoring stabil- beginning to understand Taiwan’s deter- they can do. According to a story told in ity. If the Olympic Games in Beijing in mination not to be unied. Its one coun- Washington, when a senior State Depart- 2008 were held against a background of try, two systems idea, which in eect puts ment ocial suggested in 1999 that China rapprochement across the strait, that Taiwan in the same category as Hong adopt a one country, three systems pol- would greatly assist China’s eorts to pro- Kong, is no longer pushed quite as aggres- icy to deal with Taiwan, Chinese dip- ject itself as a responsible world power. sively as before. One of China’s most lomats thought that was not a bad idea China could wriggle out of the straitjacket authoritative pronouncements on Taiwan except that it had come from an American. of its own rhetoric by accepting that even a policy in recent years, issued on May 17th Both sides, but especially China, would be move to formal independence by the is- 2004, did not mentionone country, two deeply suspicious of any plan pushed by land would make no dierence if no major systems and only touched on reunica- America. country recognised itand the likelihood tion. It concentrated on the dangers of for- It is widely accepted that an interim is that none would. But the Communist mal separation rather than railing against agreement putting aside questions of Party still seems to feel that the damage Taiwan’s de facto independence. sovereignty would be a good thing. But this would inict on its domestic credibil- But China’s President , who China would need considerable political ity would outweigh the benets. took over as chief of the armed forces in courage to stop insisting (even temporar- September 2004, would see no domestic ily) that Taiwan accept it is part of China Close enough benet in appearing weak on issues of na- (even if loosely dened). The new leaders Ultimately, China will have to come to tional sovereignty. Nor is there much pros- in Beijing are showing no signs of such terms with Taiwan’s permanent separa- pect of change in Taiwan as long as a gen- courage. If China were to shelve the issue, tion. The most it can ever realistically hope eration still embittered by the KMT’s it could not be sure that it would ever be foreven if a liberal democracy were to repressive rule remains in power. For the able to revive it. take root on the mainlandis an arrange- decade ahead, we need to keep the lid on More likely in the years ahead is a kind ment along the lines of the European Un- the pressure cooker, says an American of- of detente by default, with agreements on ion that preserves separate sovereignties. cial. Fortunately, such a policy will be smaller, more concrete, issues gradually Taiwan would not want to get any closer. strongly underpinned by mutual econ- helping to build up mutual condence. Tai- There is a glimmer of hope that China is omic advantage. 7 wan says it wants to build a bridge be- tween Kinmen and the mainland. If it can persuade China to agree, such a joint pro- Oer to readers Future surveys Reprints of this survey are available at a price of ject would be of enormous symbolic im- £2.50 plus postage and packing. Countries and regions portance. A minimum order of ve copies is required. New York February 19th Borrowing the term South Korea uses Send orders to: India and China March 5th for its eort to lure North Korea out of its The Economist Shop Turkey March 19th shell, President Chen said in November 15 Regent Street, London SW1Y 4LR Australia May 7th that he would adopt a sunshine policy Tel +44 (0)20 7839 1937 Business, nance and economics toward the mainland. He thinks that an Fax +44 (0)20 7839 1921 agreement could be reached on chartered e-mail: [email protected] Corporate social responsibility ights for cargo, as well as for passengers January 22nd for the lunar new year celebrations. This Corporate oer Consumer power April 2nd would be a good start. Bonnie Glaser of the For corporate orders of 500 or more and Oil April 16th customisation options, please contact the Rights International banking May 21st Centre for Strategic and International and Syndication Department on: Studies in Washington says achieving Tel +44 (0)20 7830 7000 agreement on the three links rst would Fax +44 (0)20 7830 7135 buy time and help create stability in the or e-mail: [email protected] Previous surveys and a list of forthcoming cross-strait relationship. surveys can be found online If only China felt the need. Its biggest in- www.economist.com/surveys centive might be the international kudos