- The Washington Times - Thursday, June 10, 2004

TAIPEI, Taiwan — This island in the East China Sea, considered by China a breakaway province, has played a pivotal role in the mainland’s re-emergence as an economic juggernaut after centuries of stagnation through its significant but odd trade and investment relationship.

Despite political tensions between Taiwan and China and a dearth of formal links between them, the rapid trade and investment expansion reflects the triumph of business pragmatism over touchy geopolitical issue on both sides of the Taiwan Strait.

Given the magnitude of Taiwan-China commercial relations, say China watchers, odds are that the partnership will continue to prosper, barring a political miscalculation by either Taipei or Beijing that puts the finely balanced experiment at risk.

Despite warnings by senior Taiwanese government officials not to get too dependent on the China market, the broad sentiment among savvy corporate leaders on the island is that China still presents a wealth of business opportunities, and they are determined to remain active in developments on the mainland that are reshaping many aspects of the global economy.

With a per capita income of nearly $14,000, foreign exchange reserves on the order of $207 billion, and liquid assets of $1.1 trillion, Taiwan has in the space of a few decades achieved one of the highest standards of living in the Asia-Pacific region and is well positioned to tap into China’s economic energy.

“We try to alert our exporters they should not rely too heavily on China … the relationship between the two sides is still very hostile. There are no guarantees, and any political move [by China] could affect their investment,” Steve Ruey-Long Chen, Taiwan’s deputy minister of economic affairs, said in an interview.

Taiwanese companies are eager to take advantage of China’s huge pool of cheap and increasingly skilled workers and to position themselves for the gradual opening up of the country’s domestic market of 1.3 billion consumers — particularly the well-heeled and rapidly expanding middle class of 300 million.

“Businessmen go where everyone else is going: China. Taiwanese investors are following the trend,” said Jaushieh Joseph Wu, chairman of Taiwan’s Mainland Affairs Council, an organ of the Executive Yuan, when asked to comment about Taiwan’s huge investment stake in China.

Mr. Wu, who earned a doctorate in political science at Ohio State University, added that investors in Taiwan also seek to invest in other large countries such as Germany and the United Kingdom.

“If Taiwan is to remain an open economy, we cannot tell businessmen not to go to China,” Mr. Wu said. “We count on their instincts to go where they can make money.”

The strong presence in China of Taiwan’s direct competitors in the high-tech arena — South Korea and Japan — is an additional reason why Taiwanese firms need to have a direct stake in China.

Business executives in Taiwan say that having the same language and culture as the mainland gives them a leg up over many of their international competitors. By the same token, China wants to continue to tap Taiwan’s research and development resources, its advanced integrated-manufacturing capabilities, and managerial, marketing and logistics edge. And last but not least, industrialists on the mainland want to benefit from continued inflows of export-oriented Taiwanese investment funds.

High-tech manufacturing products are the backbone of Taiwan’s $300 billion a year economy, and computers and computer peripherals are the island’s principal exports.

According to Taiwanese government estimates, about half-a-million workers from this island are already working in China. Private-sector analysts reckon the figure could be 1 million. Taiwan’s National Association of Industry and Commerce estimates that 40,000 firms from the island have investments on the mainland.

Cheng Liu, senior vice president of Cathay Financial Holdings, Taiwan’s biggest financial conglomerate, said his group is optimistic about Taiwan-China business relations. On April 27, the Cathay group received approval from China to enter into a 50-50 life-insurance joint venture with China Eastern Airline.

Mr. Cheng a former executive with J.P. Morgan (China) said the group does not allow politics to mix with business.

Thomas Shan-Chih Liu, Cathay’s corporate-planning chief, said the growth potential of the China market over the next 20 to 30 years is enormous.

According to various estimates Taiwan’s direct investment in China is on the order of $100 billion, although Shang-Ren Lee, director of policy studies at the Taiwan Solidarity Union, says it could be as high as $170 billion if one factors in minority stakes in foreign joint ventures and through Taiwanese-owned front companies in offshore tax heavens.

In 2003, mainland China including Hong Kong combined surpassed the United States as Taiwan’s top export market as the value of shipments increased 22.1 percent to $49.8 billion, and imports from Hong Kong and China rose by 31 percent to $12.6 billion.

In the same period, the value of Taiwan’s exports to the United States totaled $25.9 billion, but imports from the United States declined by 7 percent to $16.8 billion.

Mr. Chen, the deputy finance minister, said efforts by mainland China to cool its economy could affect to some extent Taiwan’s projected economic growth in 2004, but he added that the effect should not be very significant.

American and European business associations in Taiwan are publicly urging the Chen Shui-bian government to expedite efforts to try and establish direct links with China across the strait — efforts that have been bogged down by political and security apprehensions in Taipei.

Richard R. Vuylsteke, executive director at the American Chamber of Commerce in Taipei, said in an interview that the main spokes of growth for Taiwan “are West.”

He said the chamber’s 800 members believe that, with direct cross-strait links, they can be in both Taiwan and China.

“Increasingly, it is the quality and variety of links across the Taiwan Strait that for multinational companies determines whether Taiwan will remain an important economic player,” the chamber said in its 2004 Taiwan White Paper, published last week.

Restrictions on the movement of people, goods and capital across the strait, the report said, “dilute Taiwan’s attractiveness as a base of operations that operates as a springboard into regional markets.”

Top government officials in Taiwan, however, counter that the reasons for lack of progress rest with China.

“The mainland still has preconditions for such talks. They treat Taiwan as a local government,” said Fadah Hsieh, vice chairman of the Council for Economic Planning and Development in the Executive Yuan.

Beijing is not interested in talking on an equal basis, he said, and “we don’t think talks should have preconditions.”

However, Mr. Wu, Taiwan’s Mainland Affairs Council chairman, believes talks on cross-strait links are “not likely to happen before the end of the year,” and indicated Taiwan will wait awhile until Beijing tones down its rhetoric.

Beijing suspects that the Republic of China’s president, Chen Shui-bian, still has an independence agenda, and it has repeatedly publicly warned that China will crush any moves in this direction.

China has about 600 missiles aimed at Taiwan.

Jeffrey Bader, former chief U.S. trade negotiator for China and Taiwan, believes the Chinese “want to continue to develop their economic and commercial relationship with Taiwan generally, and will not allow political disputes to interfere with this.”

Mr. Bader, a China specialist now with the Washington-based consultancy Stonebridge International, said in a telephone interview that the Chinese nevertheless are “deeply concerned over the direction they believe President Chen wants to take Taiwan politically, and maybe are exploring options for a tougher cross-strait policy.”

The former senior U.S. official said he does not expect increased tensions in 2004 for two reasons: Mr. Chen’s generally conciliatory words and second, because the People’s Republic of China is waiting for Taiwan’s legislative elections in December.

Under pressure from the Bush administration, Mr. Chen made a moderate May 20 inauguration speech aimed at calming Beijing and Washington.

On June 2, James Kelly, assistant secretary of state for East Asian and Pacific affairs, said the United States welcomed the speech and that Mr. Chen, “by making clear his administration’s commitment not to take unilateral steps that would change the status quo and underscoring its openness to seeking accord with Beijing … is helping to restore dialogue across the Taiwan Strait.”

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