Taiwan’s Economic Clout May Be Its Shield

Despite the renewal of hard-line rhetoric from Beijing, many here believe that the spreading web of economic interdependence tying China’s developing economy to this successful Asian high-tech tiger has sharply diminished the chances of a military confrontation.

China, provoked by Taiwan’s recent election of a pro-independence president, who takes office this month, has been threatening to make life difficult for the new leader’s corporate backers unless they renounce any support for independence.

No one doubts that China’s leaders might cancel a contract or deny a Taiwanese businessman entry to prove a point in the dispute about who is the rightful ruler of greater China. And until the half-century-old sovereignty issue is resolved, a possible military solution will always be on the table.

But while the political battle rages on, at least 40,000 Taiwanese firms have quietly become China’s leading outside investors during the last decade, with about $24 billion in place and $20 billion more in the pipeline. They employ as many as 6 million mainland workers in a nation where soaring unemployment is a growing threat to the Communist leadership.

That’s why, despite the March election of Chen Shui-bian and the resulting political tension, observers are surprisingly confident that China and Taiwan are on the verge of a dramatic improvement in economic relations.

They cite Chen’s strong support for lifting the ban on direct trade, transport and postal links with the mainland; the pending entries of China and Taiwan to the World Trade Organization; and the mainland’s need for foreign technology and capital to keep its lumbering economy afloat.

These views run contrary to those of Taiwan’s backers in the U.S. Congress, some of whom have threatened to register their dissatisfaction with Beijing this month by voting against permanent trade status for China, a condition of the U.S.-China WTO agreement. Ironically, if China is denied that status, many here believe, it would work against Taiwan, not for it.

“Once they enter the WTO, direct ties [and] direct shipping will happen,” said Norman An-Ping Chang, president of Taiwan’s Chia Hsin Cement Corp., which employs about 700 people in seven mainland plants. “Economic relations between the two sides will improve.”

This is pragmatism talking--the collective wisdom of an increasingly influential group of Taiwanese business leaders who have successfully exploited an “Alice in Wonderland” system of third-party go-betweens, bureaucratic loopholes and old-fashioned subterfuge to set up shop in China.

After supporters of Nationalist leader Chiang Kai-shek fled the mainland Communists and established a competing government here in 1949, the two sides forbade business across the Taiwan Strait. That meant no direct transportation, shipping, phone service or mail delivery.

When China began opening up in the 1980s, Taiwanese eager to take advantage of the mainland’s low-cost labor and its potentially huge consumer market used intermediaries in Hong Kong or third countries to conduct business with their giant neighbor. In 1990, the Taiwanese government lifted its explicit ban on investment on the mainland, but the direct barriers remained in place, held hostage to the unresolved sovereignty dispute.

Upholding the letter, if not the intent, of the ban on direct business has not been cheap. Indeed, for many Taiwanese firms, it has been unprofitable.

They have had to establish front companies in Hong Kong, Singapore or the British Virgin Islands to divert cargo through obscure Japanese or South Korean ports and have been forced to fly thousands of extra miles through Hong Kong even though the mainland is just 100 miles away.

Knowledgeable Westerners believe that Taiwan’s pragmatic new president, who takes office May 20, might be more successful in crafting a new relationship with China than were his predecessors, many of whom had fled the Communist regime.

In recent years, Nationalist officials, fearful of Communist manipulation or retaliation, tried to put the brakes on the booming cross-border business that had turned southern China into a manufacturing base for Taiwanese exporters. All mainland investments worth more than $50 million were required to get government approval.

“Some fear if we increase our economic reliance on the mainland, we increase our political reliance,” said An-chia Wu, vice chairman of Taiwan’s Mainland Affairs Council.

But the commercial reliance works both ways: Taiwan has become a critical source not only of investment and employment for China but also of technology.

Even Wu admits that the forces of globalism are pushing the two entities closer together. That process will accelerate if, as expected, both join the WTO, the mandate of which is tearing down discriminatory trade and investment barriers.

“After both sides step into the WTO, [they] will be forced to talk about direct trade,” Wu said.

For Taiwan, WTO membership would speed liberalization of its financial services and agriculture markets, lower barriers to its exports and make it easier to negotiate bilateral treaties, particularly with countries that historically have been aligned with the mainland.

China’s entry into the WTO--which would open its potentially lucrative telecommunications and information technology sector and strengthen intellectual property laws--would be particularly good news for Taiwanese high-tech powerhouses such as computer maker Acer Group.

The mainland’s importance to Taiwan was highlighted in recent weeks when Acer and several other large Taiwanese firms, under threat from Beijing, were forced to publicly declare their support for the reunification of Taiwan and the mainland.

Acer--whose $200 million in mainland investments include a newly opened software development lab in Shanghai--was vulnerable to pressure because its chairman, Stan Shih, was among a small group of business leaders who openly supported Chen during the election.

Executives such as Chang, the Princeton-educated head of one of Taiwan’s largest family-owned corporations, operate in what is already an increasingly united greater China economy. Five years ago, he concluded that he must stake out a claim in China, the world’s largest producer and consumer of cement.

That wasn’t easy. After getting permission from authorities in Beijing and Taipei, Chang established a subsidiary in Singapore--which has a bilateral investment treaty with China--to operate his mainland cement producing and finishing plants. To further protect against Chinese interference, Chang took on the World Bank as a partner.

“Taiwanese people are very imaginative,” he said.

Even so, raw materials headed for Chang’s plants have to stop first in Hong Kong or one of the countries that provide bureaucratic legitimacy for Taiwanese vessels that cannot legally sail directly to mainland China.

“It’s ridiculous. You go there, land, get a piece of paper and take off,” Chang said.

Within China, Chang’s products have to compete in a market where heavily indebted state-owned cement firms have flooded the economy with their excess capacity, driving prices into the ground.

So far, “mainland China is not really a moneymaking market,” Chang said. But he hopes that will change once China’s entry into the WTO forces inefficient firms out of business and removes tariffs and other barriers to foreign firms such as his.

China “is a huge market. How can I not be there?” he said.

As long as the political tensions remain, this bread-and-butter diplomacy is the surest way to maintain peace in the region, according to Andrew Nien-Dzu Yang, a military expert at the Chinese Council of Advanced Policy Studies in Taipei.

In addition to providing management skills and technology, Taiwanese businesspeople are now allowed to take their families to the mainland and are establishing communities in China’s nearby Guangdong province. They’re even opening schools stocked with textbooks that reflect Taiwan’s view of the world, Yang said.

“This doesn’t mean we increase our dependence,” Yang said. “Our investment in mainland China has created a lot of change.”