Government, Business, and the Politics of Interdependence and Conflict across the Taiwan Strait

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Government, Business, and the Politics of Interdependence and Conflict across the Taiwan Strait

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Government, Business, and the Politics of Interdependence and Conflict across the Taiwan Strait John Q. Tian

GOVERNMENT, BUSINESS, AND THE POLITICS OF INTERDEPENDENCE AND CONFLICT ACROSS THE TAIWAN STRAIT

© John Q. Tian, 2006. All rights reserved. No part of this book may be used or reproduced in any manner whatsoever without written permission except in the case of brief quotations embodied in critical articles or reviews. First published in 2006 by PALGRAVE MACMILLAN™ 175 Fifth Avenue, New York, N.Y. 10010 and Houndmills, Basingstoke, Hampshire, England RG21 6XS Companies and representatives throughout the world. PALGRAVE MACMILLAN is the global academic imprint of the Palgrave Macmillan division of St. Martin’s Press, LLC and of Palgrave Macmillan Ltd. Macmillan® is a registered trademark in the United States, United Kingdom and other countries. Palgrave is a registered trademark in the European Union and other countries. ISBN-13: 978–1–4039–7292–7 ISBN-10: 1–4039–7292–3 Library of Congress Cataloging-in-Publication Data Tian, John Q. Government, business, and the politics of interdependence and conflict across the Taiwan strait / John Q. Tian. p. cm. Includes bibliographic references and index. ISBN 1–4039–7292–3 1. Taiwan—Foreign economic relations—China. 2. China—Foreign economic relations—Taiwan. 3. Taiwan—Economic policy. 4. China— Economic policy. 5. Taiwan—Foreign relations—China. 6. China—Foreign relations—Taiwan. 7. Taiwan Strait—Strategic aspects. I. Title. HF1606.Z4C6836 2006 337.51249051—dc22

2005056612

A catalogue record for this book is available from the British Library. Design by Newgen Imaging Systems (P) Ltd., Chennai, India. First edition: July 2006 10 9 8 7 6 5 4 3 2 1 Printed in the United States of America.

To my wife and daughter with love


CONTENTS

List of Tables

ix

List of Figures

x

Note on Romanization

xi

Preface

xii

Abbreviations and Glossary

xvi

One

Two

Statecraft, Capital Mobility, and Institutions: Toward a Dynamic Interactive Model Economic Statecraft and National Power Capital Mobility and Institutions: Toward a Dynamic Interactive Model Government and Business in Cross-Strait Economic Interactions The Politics of Strategic Interaction across the Taiwan Strait Beijing’s Policy of National Unification Domestic Politics and Taipei’s Mainland Policy The International Context of Cross-Strait Relations Democratization and the Rise of Identity Politics Economic Integration and the Politics of Strategic Interaction The DPP Administration and Cross-Strait Relations

Three Government Policies and Cross-Strait Trade and Investment Trade Relations across the Taiwan Strait

1 5 9 11 18 18 20 26 31 37 45 56 57

viii

Contents Taiwanese Investment and Mainland China’s Policy Changes in the Economic Environment in Taiwan Taipei’s Policy Analysis of Investment Flows Modes of Taiwanese Investment in Mainland China

Four

Five

Six

62 64 68 70 77

Industrial Organization and Cross-Strait Economic Interactions Industrial Organization in a Dichotomous Market Structure Industrial Organization and the Dual Financial System Industrial Organization and Cross-Strait Economic Interactions

101

Taiwanese Investors and Local Government in Mainland China “Particularistic Contracting” and Rents Taiwanese Investors in a Rent-Seeking Society Taiwanese Investors in Jiangsu Province

122 123 129 133

Conclusion Power and Interdependence across the Taiwan Strait Beyond the State: Bringing Capital Back In

151 152 154

89 90 96

Appendix

159

Notes

161

Bibliography

188

Index

204

LIST

2.1 2.2 3.1 3.2 3.3 4.1 4.2 4.3 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9

OF

TABLES

Taiwanese visitors to mainland China Taiwan’s unemployment rate, 1991–2004, 1–6 Cross-Strait trade via Hong Kong Taiwan’s foreign currency reserves and exchange rates, 1982–2004 Taiwanese investment in mainland China Small- and medium-sized enterprises in Taiwan’s economy Small- and medium-sized enterprises’ share of total bank loans and export earnings, 1975–1997 Financial sources and size of private companies Revenue-sharing between the central and local governments, settlement for 1985–1990 and 1988–1990 Jiangsu in the Chinese economy, 1994–2001 Structural similarities of TVEs in southern Jiangsu, 1990 Foreign investment in Jiangsu (contracted), 1988–2001 Foreign investment in Jiangsu (realized), 1985–2001 Leading investors in Jiangsu (contracted) Taiwanese visitors and donations to Jiangsu Average size of Taiwanese firms in Jiangsu Ownership and size of Taiwanese investment in Suzhou

38 41 58 66 72 92 92 96 126 134 135 137 137 138 141 145 146

LIST

2.1 2.2 3.1 3.2 3.3 4.1 4.2

OF

FIGURES

Public opinion in Taiwan Taiwan’s unemployment rate, 1991–2004, 1–6 Cross-Strait trade via Hong Kong Taiwan’s trade dependence on mainland China Mainland China’s trade dependence on Taiwan International subcontracting networks Comparison of SMEs’ share of bank loans, sale value, exports, and employment

40 42 60 61 61 95 99

NOTE

ON

ROMANIZATION

Pinyin is used as the primary romanization system for Chinese terms in this book. However, the Wade-Giles romanization system is used for names and organizations in Taiwan, for example, Lee-Teng-hui, Lien Chan and Kuomintang—which would be Li Denghui, Lian Zhan, and Guomindang, respectively in Pinyin. Pinyin is used for the titles of works published in Taiwan.

PREFACE

This book explains the paradoxical development of deepening economic integration and interdependence and rising political tensions in current relations across the Taiwan Strait. In this paradoxical development, Beijing’s policy designed to stem the separatist drift in Taiwan through an engagement with trade and investment has only driven the two sides further apart politically. Yet Taipei’s policy of restricting the pace and direction of trade and investment flows to the mainland has equally failed. The book analyzes the dynamics of economic statecraft and strategic interactions across the Taiwan Strait, as well as the conflicts between the objectives of the states and the interests of the private sector. Both mainland China and Taiwan are widely regarded as strong states. This study, however, allows a reconsideration of the questions: how strong are the states facing each other across the Strait? To what extent does state power dominate that of enterprises in the complex process of economic interactions across the Taiwan Strait? This is an issue of global significance. The confrontational momentum resulting from this dynamic process has already heightened political tensions in this economically vibrant region. If the situation gets out of control, it can provoke a violent showdown in the Taiwan Strait that would most likely draw the United States and China into a major military conflict with disastrous political and economic consequences. Both Beijing and Taipei have tried to manipulate cross-Strait economic relationships to achieve their political objectives. But increasing economic integration raises Taipei’s concerns over national security because it could lead to economic dependence and political vulnerability. To prevent this, Taipei has maintained a ban on direct transport, trade, and postal services across the Taiwan Strait and has made great efforts to restrict Taiwanese investment flows to the mainland. At the same time, it has also tried to divert this trend through encouraging investment in

Preface

xiii

other locations such as Southeast Asia. While many of the restrictions have been eased or phased out by actual events, many barriers over cross-Strait economic exchange still remain. Taipei still maintains a negative list of sectors in which Taiwanese investment is prohibited. It only allows Taiwanese banks to set up representative offices but not branches. It has restricted Taiwanese investment in chip-fabrication to 8-inch wafer technology, even though the mainland itself has already set up production lines using the latest 12-inch technology. However, despite all these government restrictions and regulations, according to Taiwan’s Mainland Affairs Council (MAC) from 1991 to the end of 2004 there are more than 33,155 approved cases of Taiwanese investment in the mainland, with a total investment of more than US$41.25 billion. This corresponds closely to mainland China’s statistics of realized Taiwanese investment there. However, according to mainland China’s statistics, by the end of September 2004, more than 70,000 Taiwanese-invested firms were operating in the mainland, with a total contracted investment of more than US$76 billion. This is close to an estimate by Taiwan’s central bank at more than US$70 billion, which is more than half of all Taiwan’s overseas investments. The scale, depth, and intensity of cross-Strait economic relationships show that many of the government restrictions and regulations have not been effective. In this case, the failure of state intervention in economic interactions across the Taiwan Strait points to the limits of state power to control the movement of capital. To capture the dynamics of cross-Strait relations, this book first analyzes the politics of strategic interactions between the two sides. It then examines the specific policy designs of both sides regarding the flow of trade and investment across the Taiwan Strait. Finally and most importantly, it analyzes state-society interactions with regard to growing economic relations between the two sides. Unlike previous works on East Asian political economy that talk mostly about state agencies and government policies, the analytical focus of this book is on the organizational dynamics of the private sector and the institutional foundations of state-society linkages and interactions within the context of regionalization and globalization. Special attention is paid to the role of Taiwanese industrial organization, production networks, and the incentive structures of Chinese local governments in the paradoxical developments taking place in current relations across the Taiwan Strait. The book’s analytical focus on industrial organization, especially the role of small and medium-sized firms, is intended to reach beyond the ongoing debate between state-centric theoretical frameworks and

xiv

Preface

neoclassical economics in the study of East Asian political economy. In addition, analysis of the organizational characteristics of the private sector and their respective responses to state policies is also meant to add an explicit institutional dimension to theories of economic statecraft and the post-statist critique that has concentrated mostly on the structural power of big business. This book began as my doctoral dissertation at Cornell University. Research for the book is based on several field trips and many interviews with business people, banking officers in charge of business of foreign invested firms, scholars, and officials in both Taiwan and mainland China who specialize in cross-Strait relations or are in charge of crossStrait affairs. In addition, I have done extensive archival research and used statistics published both in Taiwan and mainland China. The completion of the book would have been inconceivable without the help and support of many people. First and foremost, I am deeply grateful to the members of my committee, Vivienne Shue, Peter Katzenstein, and Thomas Christensen, for their help and advice. Vivienne Shue has given encouragment at every stage in the development of this project. Peter Katzenstein has provided me with a most insightful and critical reading of the original draft. Thomas Christensen has always been a teacher and a friend, and his careful reading and corrections of my writings have helped push me to rethink many of my original arguments. I owe great gratitude to Mark Selden who has patiently advised me over the project in many ways. Paul Sorrell has provided excellent editing work of the book. Christopher Way also made a critical reading of the early draft of the book and his comments have also helped improve the text greatly. I also want to thank Anthony Wahl at PalgraveMacmillan and an anonymous reviewer for their encouragement and patience in the review process of the book. I owe a great deal to the intellectual and personal help of many friends. In particular, I want to thank Raymond Seidelman for his support and friendship over the years. I would probably never have ventured into political science if not for his encouragement and inspiration when I first met him as a graduate student at the Johns Hopkins University—Nanjing University Center for Chinese-American Studies. I would also like to thank Zhu Qingbao at the Institute of Taiwan Studies at Nanjing University, Zhang Guanhua at the Institute of Taiwan Studies under the Chinese Academy of Social Sciences, and Weng Junyi at Xiamen University for helping me get access to materials held at their institutions and at the Institute of Taiwan Studies at Xiamen University. Special thanks are due to Chang Zhiyu at the Mainland

Preface

xv

Affairs Council in Taiwan for providing me with statistics and other materials. Thanks also to Zhang Guang at the Henan Industrial and Commercial Bank and Ding Guofu at the Jiangsu Agricultural Bank for introducing me to businesspeople in various firms. I also want to thank Zhang Songping from the Jiangsu Provincial Government, and Jiang Qiuming from the Jiangsu Academy of Social Sciences for providing data on Jiangsu, and all those in both mainland China and Taiwan who agreed to talk to me and whose help made my research possible. Parts of an earlier version of the project were presented at the conference The New Century, New Perspective at National Taiwan University in 1997 and at the Annual Conference of the Northeast Political Science Association/ Northeast Association of International Studies in Philadelphia, November 2001. Also an earlier version of chapter 5 appeared previously in article form in Issues & Studies and I am grateful to the publisher for granting me permission to use the material here. I also want to thank the Ministry of Economic Affairs in Taiwan for permission to use figure 4.1, which is largely based on the one published in Kuo Wen-zheng, et al. SMEs: Financing and Marketing. MOEA/Chung-Hua Institution of Economic Research, No. 3, 1993. Finally, I want to thank my colleagues in the Department of Government at Connecticut College who have provided a wonderfully supportive environment that has enabled me to concentrate upon and to finish this project. Mellon Fellowships have provided me with many years of support for study and writing of the manuscript at Cornell. A Travel Grant from the Department of Government at Cornell, the L.T. Lam Award for South China Research, a Fellowship from the East Asian Studies Program at Cornell, a Travel Grant from the Einaudi Center for International Studies at Cornell, and two grants from the R.F. Johnson Faculty Development Fund and the Hodgkin’s Untenured Faculty Support Fund from Connecticut College in the spring of 2003 and again in 2004 made it possible for me to travel to Shanghai, Beijing, Guangzhou, Shenzhen, Xiamen, Nanjing, Zhengzhou, Taiwan, and Hong Kong for research trips and interviews. I owe most to my family. My wife Qi Mei and daughter Kathy have been sources of deep love and great joy. To them, this book is dedicated.

ABBREVIATIONS

AND

GLOSSARY

ABS APEC ARATS ASEAN CCP CEPA CIER CITIC DFI DPP EU FTA GATT GCC GDP GNP GSMC IC IT KMT LCM MAC MIC MITI

Acrylonitrile Butadiene Styrene (a plastic raw material) Asia-Pacific Economic Cooperation Association for Relations across the Taiwan Strait (mainland China) Association of Southeast Asian Nations Chinese Communist Party (mainland China) Closer Economic Partnership Arrangement Chung-Hua Institution for Economic Research (Taiwan) China International Trust and Investment Corp (mainland China) Direct Foreign Investment Democratic Progressive Party (Taiwan) European Union Free Trade Agreement General Agreement on Tariffs and Trade General Chamber of Commerce (Taiwan) Gross Domestic Product Gross National Product Grace Semiconductor Manufacturing Corp (mainland China) Integrated Circuit Information Technology Kuomingtang –the Nationalist Party (Taiwan) Liquid Crystal Module Mainland Affairs Council (Taiwan) Made in China Ministry of International Trade and Industry ( Japan)

Abbreviations and Glossary MOEA NAFTA NFI NICs NIE NPC NT$ NUC ODM OECF OEM OTZ PAC-3 PFP PMMA PRC PVC Reminbi ROC ROCs ROSZ SEF SEZ SMEs SMIC TAITRA TFT-LCD TIER TJYY TSMC TSU TVEs TY TYJ UMC UN WHO WTO

xvii

Ministry of Economic Affairs (Taiwan) North American Free Trade Agreement National Federation of Industry (Taiwan) Newly Industrialized Countries New Institutional Economics National People’s Congress (mainland China) New Taiwan Dollar National Unification Council (Taiwan) Original Design Manufacturing Overseas Economic Cooperation Funds (Taiwan) Original Equipment Manufacturing Offshore Transshipping Zones (Taiwan) Patriot Advanced Capability-3 People First Party (Taiwan) Polymethyl Methacrylate (a plastics product) People’s Republic of China (mainland China) Polyvinyl Chloride (a petrochemical product) Chinese yuan (mainland China) Republic of China (Taiwan) Regional Operation Centers (Taiwan) Regional Operation Special Zone (Taiwan) Strait Exchange Foundation (Taiwan) Special Economic Zone (mainland China) Small and Medium-Sized Enterprises (Taiwan) Semiconductor Manufacturing International Corp (mainland China) Taiwan External Trade Development Council (Taiwan) Thin-Film Transistor Liquid Crystal Display Taiwan Institution of Economic Research (Taiwan) Taiwan Jingji Yanjiu Yuekan (Taiwan) Taiwan Semiconductor Manufacturing Corp (Taiwan) Taiwan Solidarity Union (Taiwan) Township and Village Enterprises (mainland China) Taiwan Yanjiu (mainland China) Taiwan Yanjiu Jikan (mainland China) United Mircoelectronics Corp (Taiwan) United Nations World Health Organization World Trade Organization


CHAPTER

ONE

Statecraft, Capital Mobility, and Institutions: Toward a Dynamic Interactive Model

This book explores the paradoxical development of deepening economic integration and intensifying political rivalry in relations across the Taiwan Strait. In this dynamic process of interactions, Beijing’s long-term objective of national unification under its “one country, two systems” formula has been strongly resisted by Taipei. Under these circumstances, Beijing’s immediate goal is not to assert direct control over the island but to prevent it from drifting further away from China toward a permanent separation from the mainland. Beijing’s fear gained urgency when Lee Tenghui, who was born in Taiwan with a strong nativist leaning, became the president of Taiwan in 1988 and began making covert moves to support the Taiwan independence movement. Coinciding with these developments, the demise of communism throughout Europe, particularly the collapse of the Soviet Union and the reorientation of American foreign policy toward an increasingly confrontational posture in its relations with mainland China have provided Taiwan with a window of opportunity to break through its long-time diplomatic isolation and to explore new possibilities for nation building. These strategic realignments led to Lee’s visit to the United States in 1995 and eventually his formulation of the cross-Strait relations as a “special state-to-state relations” in 1999. In response, Beijing first resorted to emotional appeals and offered economic benefits in order to win over the hearts and minds of the people of Taiwan in order to weaken support for the surging independence movement. At the same time it also applied a series of coercive measures

2

Conflict across the Taiwan Strait

to deter Taipei from choosing the independence option. So far, these efforts have been to no avail. This failure is reflected first in the growing strength of the openly pro-independence Democratic Progressive Party (DPP) and then in its eventual victory in the 2000 and 2004 presidential elections. Rapid democratization in Taiwan has led to the emergence of a distinct Taiwanese identity. This is reinforced by the election of Chen Shui-bian as president twice. A veteran independence activist, Chen has made a series of moves to steer the island further away from China. Culturally, Chen has intensified efforts to de-Sinify the island (qu zhongguo hua) through cutting back on Chinese study and name changes of government agencies, overseas missions, and state-owned enterprises from the Republic of China (ROC) or China to Taiwan. Politically, he characterized cross-Strait relations as that between one country on each side of the Taiwan Strait and has continued to push for a new constitution to be approved through a referendum. More recently, he stated that ROC is Taiwan in his four-stage theory. These maneuvers have alarmed Beijing which fears that Taiwan’s de jure independence is becoming increasingly real as a result of Taiwan’s growing defense (and increasingly offensive) capability and its strengthening military ties with the United States. On its part, Beijing’s options to deal with the issue of Taiwan independence have become very limited. With the bankruptcy of the communist ideology as a result of the collapse of the East bloc and widespread official corruption, the legitimacy of the Chinese government has become increasingly dependent on maintaining economic growth and “its image as the protector and promoter of China’s honor and interests on the international stage.”1 Under such circumstances, the loss of Taiwan will threaten its nationalist credentials to govern and will deal a severe blow to China’s prestige and self-confidence, especially with its implications for the separatist movements in Tibet and the Muslim northwest. Therefore, Beijing has to do everything possible to defuse the ticking bomb of Taiwan independence or, at least, to postpone a violent military showdown in the Taiwan Strait in order to secure a peaceful international environment to ensure the momentum of economic growth. But as Michael Swaine points out, while Beijing very much wants to avoid conflict over Taiwan given its priority to focus on economic growth, it will fight if Taiwan moves toward formal separation from mainland China because the Taiwan issue is “inextricably related to national self-respect and regime survival.”2 This is demonstrated by the passage of the anti-secession law in March 2005 which legally binds the

Statecraft, Capital Mobility, and Institutions

3

government to the use of “non-peaceful means” if “major incidents of Taiwan independence” occur.3 Out of these political considerations on both sides of the Taiwan Strait has arisen the dynamics of strategic interactions. Both sides have been beefing up their air and naval forces. Taiwan’s defenses include F-16 and French Mirage-2000 fighters, Stinger and Patriot missiles, P-3 maritime patrol planes, Kidd-class destroyers, and long-range reconnaissance radar systems. It is also reported that Taiwan has been developing supersonic cruise missiles that could hit major mainland cities. And more recently a US$18.2 billion arms-sale package from the United States—pending budget approval from Taiwan’s Legislative Yuan—includes eight dieselelectric submarines, 12 P-3C Orion anti-submarine planes and six PAC-3 (Patriot Advanced Capability-3) missile batteries. Mainland China’s weaponry includes an array of newly acquired Su-27 and Su-30 fighter jets, quiet Kilo-class submarines and Sovremenny-class destroyers from Russia. It has positioned hundreds of short-range ballistic missiles targeted at Taiwan. It has also increased deployments of inter-medium and longrange missiles capable of hitting American bases in Japan and Guam. In addition, a new generation of warships, submarines and warplanes is under construction in the mainland. With almost certain intervention by the United States and Taiwan’s newly acquired aircraft, anti-aircraft, anti-submarine, anti-missile defense and even long-range cruise missile capabilities, any attempt by Beijing at a naval blockade or amphibious operations across the Taiwan Strait would be very costly and would certainly jeopardize its own economic growth. The failure of any such military operations could lead to a rapid escalation of the conflict into a major war between China and the United States with disastrous consequences. Recent comments by a Chinese general that China would use nuclear weapons if the American military intervenes in any conflict over Taiwan only indicate that the threshold for escalation is actually very low.4 With these considerations in mind, both Beijing and Taipei have been carefully maneuvering to avert, or at least postpone, a military showdown. One way to achieve this is through manipulation of trade and investment relations across the Taiwan Strait. The significance of this strategy can best be understood as a function of the costs and benefits associated with other policy alternatives perceived as untenable in this situation.5 In this regard, Taipei initially intended to use its economic muscle to gain political concessions from Beijing for recognition of its sovereign status. When this failed, it increasingly resorted to controlling the pace of crossStrait economic interactions pending positive gestures from Beijing.

4


On its part, Beijing has made no secret of the political objectives of its trade and investment policy toward Taiwan. Beijing has been trying to lure the Taiwanese business community into the rapidly growing mainland market by offering lucrative deals. The goal is to establish contacts with various groups in Taiwan in order to gain their support to increase pressure on Taipei to open the “three direct links” (santong)—direct trade, transportation, and postal services. Achieving this latter goal would be a significant breakthrough in Beijing’s unification strategy under the “one country, two systems” formula because establishment of the “three direct links” would draw Taiwan into deep economic interdependence with the mainland and thus tie the hands of Taipei from choosing the independence option. According to one commentator, the adoption of these tactics “to peddle politics through business and to influence the [Taiwanese] government through the people” (yishangweizheng, yiminbiguan) is part of Beijing’s broad strategy “to blockade Taiwan diplomatically, to check it militarily, and to drag along Taiwan economically.”6 As Baldwin points out, economic statecraft can be most effective when combined with the use or the threat of use of other dimensions of power.7 Diplomatically, Beijing has effectively stripped Taipei of diplomatic relations with every significant country in the world. Militarily, Beijing has sent warnings through frequent military exercises that any declaration of independence by Taipei will incur a military response. In this case, military power is designed to work with economic statecraft through what Knorr calls “putative” power. While Beijing has been steadily building up its military capability, the utility of this capability at this stage depends not—at least not primarily—on its actual use in warfare but on the standing threat to use it implied by its very existence. As James Mulvenon of the Rand Corporation points out, “China has a political strategy toward Taiwan with a military component, not vice versa.”8 Thus the threat of war is used primarily to create a psychological atmosphere within which other instruments of statecraft are conducted.9 It works “through the anticipation or anxiety of other states that the nation involved may resort to its military strength if a serious conflict of interest arises.”10 While economic linkages are designed in part to avoid the perceived costs and possible failure of a military attack on the island if it declares de jure independence, the very success of the policy has ironically brought tensions in cross-Strait relations to a new height. This book explores the dynamics of this paradoxical development of deepening economic integration alongside continuing political divergence. The argument of this book has gained new importance given the emergence of a similar situation


5

recently in Sino-U.S. relations and Sino-Japanese relations which are also characterized by intensifying political rivalry despite growing economic interdependence and expanding trade and investment ties. The theoretical constructs developed in this chapter serve as a framework for the analysis conducted in the rest of the book. Economic Statecraft and National Power As just mentioned above, both sides are seeking to manipulate economic links across the Taiwan Strait for political gain. While Taipei wants to use its economic muscle to gain political recognition for its long-sought sovereign status, Beijing makes it no secret that its economic policy towards Taiwan is part of its unification strategy. This use of economic statecraft and the dynamics it has created are illuminated by the theoretical framework laid out in Albert Hirschman’s National Power and the Structure of Foreign Trade. Hirschman argues that national power, in the sense of the capability of one nation to coerce another, can be applied through “peaceful” as well as military means. By “peaceful” means, he refers to the manipulation of trade ties for the purpose of creating political dependence. One way for a nation to achieve such influence is to alter the terms of trade in its target’s favor. This creates a situation of asymmetrical interdependence through trade relations that one side can then exploit as a means of inducing the other side to consent to the pursuit of its own interests.11 In a similar vein, Keohane and Nye argue that power in an interdependent situation lies in the ability of the less dependent party to disrupt the relationship since any disruption will be less costly to itself than to its partners. “It is asymmetries in dependence that are most likely to provide sources of influence for actors in their dealings with one another.”12 The effect of that influence is likely to be in direct proportion to the size of the immediate loss that can be inflicted by such disruption, and to the differences in size between the two countries involved or their relative degrees of specialization. Another way to achieve the “influence effect” is by targeting the vested interests created through trade. One side may direct sanctions, positive or negative, at certain groups in order to make these sanctions more efficient.13 The effectiveness of this strategy may, in turn, depend first on the threshold of indifference beyond which those who bear the pain or enjoy the benefits of the sanctions will mobilize; and second, on the threshold of pressure beyond which the government targeted by the sanctions can no longer hold out. Thus, the creation of potential adjustment

6


difficulties and of vested interests through trade is the twofold result of an economic policy aimed at achieving political influence rather than solely economic gain.14 However, the usefulness of Hirschman’s study is limited by being focused only on the effects of foreign trade without a corresponding analysis of other important aspects of economic statecraft such as international finance and foreign direct investment. And his analysis focuses mostly on “ideal” situations where the target nations involved have no substitute trading partners to turn to once such a hostile trade policy is initiated. In addition, his conceptualization of national power involves a military bias because he believes that “the root cause of the political or power aspect of international economic relations is the sovereignty of a country to interrupt its commercial or financial interactions with other countries.”15 Hirschman ignores the fact that the influence effect can also work through the use of “positive sanctions” which increase a trading partner’s expectations. Economic statecraft works best when combined with both the threat of negative sanctions and the promise of positive ones. As Baldwin argues, positive sanctions are more relevant to international politics because the prospects for success of negative sanctions are worse in this arena than in domestic politics.16 In addition, in the real world of multiple trading partners, the use of commerce as an effective means of statecraft can be very complicated. As Keohane and Nye point out, any attempt to manipulate interdependent relationships can lead to counterstrategies. This is clear in the case of economic interactions across the Taiwan Strait. Therefore, the chance of success of sanctions depends also on the capacity of the targeting country to carry out its chosen sanctions and the target country’s political will to counter them. “There is rarely a one-to-one relationship between power measured by any type of resources and power measured by effects on outcomes.”17 A further weakness of Hirschman’s theory is that it is focused mostly at the state level. In reality, the influence effect rarely works on a straight state-to-state basis. In cases where economic statecraft is used as a conscious policy, it is unlikely to automatically bring about the desired political effect. Rather, its effectiveness depends on the interactions of external variables and the configuration of state-society relations that often “mediate, refract, and filter the policy impact of transnational activities.”18 In the case of ongoing economic interactions across the Taiwan Straits, closer economic ties, if anything, have only nudged the two sides further apart politically while, at the same time, intensifying conflicts of interest between the state and business.


7

This paradox can only be understood by examining the dynamics set up between efforts at statecraft across the Taiwan Strait, on the one hand, and the political economy of state-society relations on each side, on the other. This requires us to go beyond the inter-state level and to incorporate Putnam’s “two-level game” analysis by linking domestic politics with interstate relations.19 However, Putnam’s original conceptualization of the national government as the sole actor linking the international and the domestic levels needs to be amended. As the transnational relations literature points out, Putnam’s arena of interstate interactions is populated not just by state governments, but also by crosscutting links formed among nongovernmental actors whose interests and goals may not be consistent with those of the state.20 In the case of cross-Strait relations, such interactions have proceeded at not just one but at three levels. This leads us to theories of transnational actors and “complex interdependence” in international relations that question the centrality of government in the formulation of foreign policy. Complex interdependence constrains the freedom of government action by shifting power away from some government institutions to other actors—private, international, or even foreign. This corresponds to the concept of “linkage communities” devised by Taiwanese scholar Yung Wei to illustrate the actual process of functional integration that occurs through extensive networks of personal contacts formed across boundaries with opposing ideological systems.21 Similarly, Susan Strange uses the concept of the “governing firm” to develop a “web-of-contacts” model of transnational relations. She argues that “trade between countries in goods and services will be, and is being, sustained by a complex network or web of transnational, bilateral bargains—bargains between corporations and other corporations, between corporations and governments and between governments. The interest of both parties to these bilateral exchanges is (and will continue to be) a far more powerful influence on the level, the direction, and the content of international trade than the puny efforts of states to interfere with market forces.”22 This concept of “linkage communities” or “web-of-contacts” serves as the basis of the analysis presented in this book and challenges both the state-centric realist theory in international relations and the developmental state concept in comparative political economy, which has been widely applied in the study of East Asian political economy. Realists see the state as the dominant player in international affairs because it is the state that controls the policy-making process of foreign policy, not private actors, whether transnational actors or multinational

8


corporations. They believe that states assert the primacy of the national interests over other members of the polity. When the state chooses to act, its power is greater than that of any sub-unit within it. In this context, interdependence derives from state policy—that is, it exists because states allow it to exist. Should states refuse to do so, the constraining quality of that interdependence would be broken.23 Similarly, the developmental state literature also attributes to the state the central role in a country’s long-term economic performance. According to this view, late industrialization requires state intervention to accumulate capital, provide entrepreneurship, and insulate policymakers from pressures of societal interests.24 Chalmers Johnson offers an institutional model of the developmental state that includes an elite bureaucracy led by a pilot economic planning agency and an authoritarian political system designed to ensure the autonomy of policymaking and close formal and informal linkages between the state and the private sector.25 The basic assumption of this argument is that the state knows what to do and is capable of doing it.26 One important weakness of state-centric approaches is that promulgation of a policy is often taken as proof of its effective implementation. There is a tendency to neglect the role of private actors because they are regarded as “weak, repressed, or absent.”27 In reality, however, the formulation and implementation of policies are a more dynamic process involving the inputs of both the state and society. As Peter Hall points out, “the capacities of a state to implement a program tend to depend as much on the configuration of society as of the state,” and those who discount the impact of society on public policy neglect “the fact that public policy is implemented to a great extent through societal rather than state organizations.”28 Similarly, Peter Evans argues that “a state that was autonomous would lack both sources of intelligence and the ability to reply on decentralized private implementation. Dense connecting networks without a robust internal structure would leave the state incapable of resolving ‘collective action’ problems.”29 Under these circumstances, a desire by the state to influence economic actors and business organizations is no guarantee of success. Policymaking and implementation often depend on the configuration between state power and social forces and whether their interests are in harmony or in conflict. It also involves a complicated process of mutual adjustment between the two. In this regard, Peter Evans’ notion of “embedded autonomy” is a significant advance because it combines Weberian bureaucratic insulation with an intense connection to the surrounding social structure. This connection constitutes the institutionalized channels for the continual negotiation


9

and renegotiation of goals and policies. To the extent that state policies comply with dominant social institutions and interests—legitimate or otherwise—they may succeed.30 Thus, the analytical focus on the state should not blind us to the ultimate constraints of the social environment in which the state is embedded, especially the structural power and political influence of capital. Capital Mobility and Institutions: Toward a Dynamic Interactive Model While most of the critique of the state-centric literature focuses on the structural power and political influence of big business,31 the real challenge to state power comes from the mobility capital has acquired in an increasingly global economy. That mobility means that to focus on business influence in the open political process is to address only one narrow set of policy issues that succeed in making it into the public arena. As Winters argues, while “many investors do participate in open politics, this is neither their most potent nor their most reliable form of influence. Far more important is the structural power they wield through their decisions about where, how much and when to invest the resources they control.”32 The rising power of capital and the declining cost of moving it around have made the “new capital” increasingly elusive, ever more able to evade the grip of governments.33 In what Friedman calls the “fast world,” capital flows in and out of countries according to their perceived political and economic merits.34 In their study of the liberalization of financial controls in the industrialized world, Goodman and Pauly argue that “the rapid growth of liquid international funds and the increasing globalization of production” have “enhanced the capability of firms to develop evasion and exit strategies. . . . Governments thus first found that controls had to be tightened continuously to remain useful and then discovered that the resulting or potential economic costs of such tightening soon exceeded the benefits.”35 In this context, while governments can still choose to control capital mobility through their coercive power, this action runs the risk of driving private actors to become more creative in their circumvention strategies. These developments have “effected a fundamental shift in understanding the functions of the state”36 in the sense that they have made it much harder for any state to act as an agent of control.37For example, in the process of economic interactions across the Taiwan Strait, Taipei first

10


resisted pressures from the private sector to loosen restrictions for fear that closer economic ties would compromise Taiwan’s political autonomy. However, despite the existing restrictions, Taiwanese businesses have swarmed over to the mainland en masse, making official bans largely irrelevant. Eventually, the state was forced to modify its policies to accommodate the changing situation. Otherwise, the government feared that it would have been unable to monitor—let alone to regulate— cross-Strait trade and investment flows.38 So far, the theory of capital mobility has focused mostly on the mobility and political influence of big business. Small and medium-sized firms are assumed to be less mobile and therefore less powerful politically. However, the case of cross-Strait interactions suggests that under certain circumstances, small and medium-sized business can be even more footloose and able to evade state regulations than big business. Thus an improved analytical framework should have an explicit focus on the organizational basis of capital mobility and the institutional foundations of state-society interactions. In this regard, I draw inspiration from the framework of the new institutional economics (NIE). In this context, institutions are defined as written rules as well as historically accreted practices and norms of behavior.39 An important insight of the institutional approach suggests that formal structures represent only one part of the complex interactions that affect political and economic behavior. Therefore, this approach does not posit a direct link between behavior and formalized rules. Rules are meaningless if they cannot be enforced by society and reinforced through cultural practices. The relationship between the two is often supported by relation-specific incentive structures, dispute settlement procedures, and norms of behavior. Under such circumstances, institutions function as a means to resolve problems through collective action and facilitate cooperation.40 For example, in Taiwan’s dichotomous industrial structure and dual financial system, family and kinship have traditionally functioned as institutional medium for trust and reciprocity among those engaged in business under conditions where the state was unable or unwilling to enforce contractual relationships. Also when facing pervasive financial restrictions by the state and the insufficiency of formal financial institutions to meet the capital needs of private business, Taiwanese entrepreneurs would turn to family and friends as major sources of capital that often would involve what Numazaki called significant “human relationships.” When immediate family savings or retained earnings are not enough, connections of kinship and other shared attributes within one’s guanxi (relations) networks would be mobilized for the


11

provision of funds in an environment of relative trust and security. Hence formal financial institutions dominated by the state coexist with informal ones.41 Thus the institutional analysis is important because it provides a means of appreciating the dynamics of state-society interactions. This approach is “institutional” because it conceives of mediation and interaction as grounded in institutional relationships that persist over time.42 As Hall argues, “the emphasis of institutional analysis is on the relational character of institutions, both formal and conventional, that bind the components of the state together and structure its relations with society.”43 Based on this broad analytical framework, this book focuses on industrial organization and the institutional foundations of state-society relations. Given the complexity of cross-Strait relations, I argue that state-business interaction is a dynamic process in which firms respond differently to government policies depending on both their organizational characteristics as well as their institutional links with the state. The starting premise of the book is that variations in industrial organizations create a particular dynamics in state-business interactions across the Taiwan Strait. Government and Business in Cross-Strait Economic Interactions As I have noted, this book sets out to explore the unexpected combination of deepening economic integration and heightened political tensions in current relations across the Taiwan Strait. In this paradoxical development, Beijing’s attempt to stem the separatist drift in Taiwan through engagement with trade and investment has only driven the two sides further apart politically. Yet, Taipei’s efforts to control the pace and direction of cross-Strait economic interactions have equally failed. This book explains this complex process through an analysis of Taiwanese industrial organization, production networks, and the incentive structures of Chinese local governments and their foreign investment policies. The focus is on the dynamics of state-business relations based on the organizational characteristics of firms and their links with the state. To prevent economic dependence on the mainland, Taipei has long tried to restrict cross-Strait economic interactions. While some of Taipei’s restrictions have been relaxed or practically phased out by actual events, many are still officially in place. Taipei still keeps the ban on direct trade and air links, thus increasing the time and costs of cross-Strait freight shipment. Taipei has also taken measures to discourage Taiwanese

12


businessmen from investing in mainland China. For example, tax write-offs are not possible for business losses on the mainland nor is financial assistance allowed from home-based banks. Until 2001, a cap of US$50 million restricted the scale of investment projects in the mainland. While the investment cap has been lifted since 2001, Taipei still maintains a rigorous screening system of investment of more than US$20 million and the cumbrous process for approval and monitoring for investment in particular sectors could grind business deals to a standstill. Taipei also bans banks to open full-fledged branches in the mainland. So far, only representative offices from several banks are permitted to operate in the mainland and engage in the business of remitting money to Taiwanese firms or individuals there. Initially, funds raised by listed companies through new share-issuing could not be earmarked for mainland projects. In addition, Taipei still maintains a negative list of sectors in which Taiwanese investments in the mainland are restricted. They include chip-fabrication plants using more than 8-inch wafer technology, telecommunication, transportation, and other infrastructure projects like water supply and power generation. Finally, Taipei has always encouraged investment in other regions like Southeast Asia in order to divert funds flowing to the mainland. It has even provided soft loans to some member countries of the Association of Southeast Asian Nations (ASEAN), like the Philippines, Indonesia, and Vietnam, to “finance the development of industrial parks, export-processing zones and other infrastructure projects that cater to the needs of Taiwanese investors.”44 However, despite all these restrictions, according to Taiwan’s Mainland Affairs Council (MAC), cross-Strait trade has increased from about US$11.67 billion in 1992 to US$61.64 billion in 2004. But according to mainland China’s Ministry of Commerce, cross-Strait trade in 2004 reached US$78.32 billion in which Taiwan’s export to the mainland was US$64.78 billion while mainland China’s export to Taiwan stood at US$13.55 billion. In 2004, Taiwan incurred a trade surplus of more than US$50 billion in its trade with the mainland. Currently, mainland China is not only Taiwan’s largest export market, but also the source of its largest trade surplus. In addition, there are now more than 70,000 Taiwanese-invested firms in the mainland with an accumulated investment capital of more than US$70 billion and it is estimated that more than one million Taiwanese now reside in the mainland.45 Clearly, Taipei’s efforts to restrict cross-Strait economic interactions have not been quite effective, despite the government’s continuing autonomy in setting policy priorities. This failure points to a paradox of state autonomy. As Peter Hall argues, “although this kind of insulation


13

provides the state with some freedom from social pressures, it does not necessarily mean that the government can impose its policies on resistant social groups. In this sense, insulation was symptomatic of a degree of impotence.”46 Given the fundamental changes in the structures of global production and finance, state capacity to control policy outcomes has been increasingly eroded by the ability of business to evade official restrictions. Interestingly, the power of capital mobility in this study has been most visible in the movements of small and medium-sized enterprises (SMEs). This underlines a power dimension that differs from existing theories on the structural power of capital. Given their small size, SMEs have no effective champion within the state and their influence on policy is very limited. As one observer points out, under such circumstances, when their interests conflict with that of the state, “they would typically seek to circumvent existing regulations on an individual basis rather than initiate collective action.” However, these “private adjustments by the countless small and medium-sized firms can sometimes develop an unplanned momentum of its own and snowball into formidable market pressure which, in due course, may leave the state economic bureaucracy with no other option than to modify policy.”47 Since Taiwanese firms are connected through extensive networks of subcontracting relations, the initial exit of a few firms soon led to the exit of a large cluster of related groups. This momentum, combined with the opening of the mainland market and an abundant supply of cheap labor, soon created what Gary Hamilton has called a “gold rush” effect. The success of a few firms that relocated to the mainland created competitive pressures on others to do the same. Given the unorganized nature of the rush and the weak institutional links between the state and the SMEs, the state finds it extremely difficult to regulate such investment flows—even more so to stop them. Since SMEs are substantial downstream users of the intermediate products and services of Taiwan’s big business groups, the exit of a large number of them has gradually dragged Taiwan’s big upstream industries into the mainland market. This rush to the mainland is reinforced by the rapidly opening and expanding mainland market. As more large business groups move to the mainland, they have increasingly felt the toll of the continuing bans on direct air and sea links across the Strait and have begun to put increasing pressures on the state to revamp its policies. Given their financial power and organizational resources, the open challenge from these business groups has created fears of Taiwan’s economic dependence on the mainland, which may compromise Taiwan’s

14


security. In response, Taipei has intensified its efforts to control crossStrait investment flows. Interestingly, the changing profiles of Taiwanese investors from small and dispersed labor-intensive firms to large capitalintensive business groups make them more visible and in many cases more vulnerable to government regulations. While most Taiwanese investors do not seem much constrained by government regulations, state autonomy in policymaking does not seem to be seriously compromised by business pressures either. The bans on direct air and sea links are still in place and the government still maintains a long list of restricted sectors in which Taiwanese businessmen cannot invest. This confirms Katzenstein’s thesis that state and society often interact in their partly interdependent and partly autonomous spheres of action.48 In a study of economic interactions across the Taiwan Strait, a focus on state-society interactions on one side only remains incomplete. The fact that so many Taiwanese businesses have been attracted to the mainland against so many odds prompts questions about nascent forms of governmentbusiness relations in mainland China. Besides having interest in its own right, a study of the interactions between Taiwanese investors and local governments on the mainland can also provide insights into the dynamics of an emerging new incentive structure at the local level in mainland China’s transitional political economy. This book approaches the paradoxical development of cross-Strait relations on three levels: the strategic interactions between the governments of the two sides; state-society relations on each side; and economic interactions through business networks. The first level is intended to explain why growing economic integration and interdependence have only increased political tensions across the Taiwan Strait. The second level is meant to show why government regulations of business activities have not been effective. The third level demonstrates how businesses make their own investment decisions within a unique institutional environment. The argument is presented in six chapters. Chapter 1, as we have seen, is the introduction. It spells out the basic theoretical framework guiding the analysis of this book. Drawing insights from theories of economic statecraft, capital mobility, and new institutional economics, I have developed a dynamic interaction model of state-society relations to explain the dual process of deepening economic integration and interdependence and intensifying political rivalry in relations across the Taiwan Strait. I have argued that state-business relations in cross-Strait exchange is a highly dynamic process in which firms respond differently to government policies based on both their


15

organizational characteristics and their institutional links with the state. It is dynamic because it focuses on the process in which formal as well as informal institutions and constraints interact, mediate, and enforce state-society relations on multifarious dimensions to produce a wide range of outcomes. Chapter 2 discusses the politics of strategic interactions in the ongoing relations across the Taiwan Strait. The analysis presented in this chapter is intended to show the dynamic factors pulling the two sides further apart politically despite deepening economic integration and interdependence. Given that the governments on both sides seek to manipulate cross-Strait economic relations in pursuit of their own political and strategic objectives, the focus of this chapter is on economic statecraft and the strategic considerations operating between the two sides across the Taiwan Strait. For Beijing, deepening economic interaction is a lure to woo Taiwan into an inextricably intertwined relationship that can be used to defuse the “time bomb” of Taiwan independence. Yet, Taipei fears unification on Beijing’s terms and tries to regulate the pace of economic interaction reasoning that full-scale economic integration will eventually compromise Taiwan’s political autonomy. Accordingly, the more economic ties grow, the more forcefully Taipei strives to break through its international isolation and to promote the rise of a distinct Taiwanese identity in order to counter the pull of the seemingly unstoppable process of economic integration. The strategic interactions emerged through engagement of trade and investment relations have only intensified political tensions across the Taiwan Strait and drawn the two sides increasingly closer to a military showdown that threatens to throw the whole region into turmoil. Chapter 3 discusses trade and investment flows across the Taiwan Strait and the specific policy designs by the two governments to manipulate the trade and investment flows. Through examination of the patterns, trends of cross-Strait trade and investment flows and the characteristics and regional distribution of Taiwanese investments in mainland China, it shows the dynamics of interaction between the two governments and between government and business on each side in which government regulations and restrictions have been constantly compromised by business strategies to evade. All this illustrates that effectiveness of government regulations on business behavior hinges very much on whether they comply or contradict with market conditions. It also demonstrates the complicated consequences of Beijing’s success to woo Taiwanese investors to the mainland in that it has further exacerbated its trade frictions with the United States and at the same time aggravated its trade deficits with Taiwan.

16


Chapter 4 examines industrial organization in Taiwan and institutional basis of government-business relations in economic interactions across the Taiwan Strait. The analytical focus is on Taiwan’s dichotomous market structure and dual financial system and their impact on the organization and behavior of Taiwanese businesses in the dynamic economic interactions across the Taiwan Strait. Unlike previous analyses that concentrate only on state policy and the structural power of big business, I pay special attention to the organizational characteristics of SMEs and their relations with the state and big business. I argue that organizational characteristics of businesses and their institutional links with the state affect the strategies they choose in their interactions with the state. In turn, successful implementation of state policies depends not only on state power, but also on its institutional links with the private sector and “compliance mechanism” at its disposal. The key is the organizational characteristics and the institutional basis of the mobility of the private sector. To the extent that state policies comply with the interests of business and the dominant social institutions, the policies may succeed. In this sense, state capacity to intervene in private business decisions may be ineffective not because of lack of autonomy but because autonomy can deprive the state of valuable institutional links with the private sector. Chapter 5 analyzes Taiwanese investments in the mainland within the context of China’s political and economic transformation. It focuses on the incentive structures of local governments in the mainland, the organizational characteristics of both Taiwanese investors and local firms and how they interact within the institutional environment of a rent-seeking society. In this context, cultural affinity is understood as a means to lower transaction costs and facilitate exchange. This is especially important given the widespread rent-seeking behaviors that have appeared as a consequence of some peculiar features of economic reform policies on the mainland, specifically decentralization of economic policymaking through “particularistic contracting.” Through a case study of Taiwanese investment in Jiangsu province with the largest concentration of Taiwanese investment on the mainland, this chapter shows the dynamics of the political economy in China’s transformation and a nascent form of state-business relations being constituted at the local level, especially between local governments and small investors from Taiwan. Chapter 6 concludes the book with an effort to rethink some of the conceptual problems with existing analytical frameworks of interdependence, economic statecraft, and of the East Asian political economy. I argue that a fundamental problem with the three is their assumption that actions of the private sector are necessarily linked to state preferences and


17

that economic influence in an asymmetric relationship automatically translates into political influence. As a matter of fact, to understand the relationship between economic interdependence and political power requires specification over the mechanism of how economic asymmetries are or are not translated into political power and fine analysis of state-society relations in a specific case. The focus of this book on the organizational characteristics and interests of the private sector and their interactions with the state is meant to fill the analytical gap.

CHAPTER

TWO

The Politics of Strategic Interaction across the Taiwan Strait

This chapter discusses the political and strategic interaction between the two governments across the Taiwan Strait. It tackles the question of why political tension has increased even as integration of the two economies deepens. Taipei and Beijing have both tried to manipulate cross-Strait economic relations in pursuit of their own political and strategic goals. For Beijing, growing economic interaction is a lure to woo Taiwan into an inextricably intertwined relationship. It hopes that an increasingly dense web of interdependence will defuse the “time bomb” of Taiwan independence, which could disrupt the mainland’s own process of economic reform. On the other hand, Taipei fears unification on Beijing’s terms and is striving to regulate the pace of economic interaction, reasoning that full-scale economic integration will eventually compromise Taiwan’s political autonomy. Thus, increased economic exchanges and cultural contacts have done little to ameliorate the political tensions. On the contrary, the seemingly unstoppable process of economic integration has led to intensifying political rivalry between the two sides. This chapter spells out the political context in which this complex interdependence has developed across the Taiwan Strait. Beijing’s Policy of National Unification The dispute across the Taiwan Strait is a legacy of both the Chinese civil war and the Cold War. For three decades, each side claimed jurisdiction over the other and threatened to use force to resolve the dispute. A turning

Strategic Interaction across the Strait

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point in mainland policy towards Taiwan came in January 1979 when the National People’s Congress (NPC) Standing Committee released a “Message to Taiwan Compatriots” initiating a new policy of peaceful unification. This document called for an end to military confrontations across the Taiwan Strait and a revival of contacts and exchanges. As a first step, it proposed that direct links in commerce, postal services, and transortation (san tong, the three direct links) be established immediately. In accordance with this policy change, Beijing ceased its regular shelling of the Nationalist-held offshore islands. This change of policy was reiterated on September 30, 1981 when NPC Chairman Ye Jianying made public the “guidelines for ensuring Taiwan’s return to the motherland in a peaceful unification,” known as Ye’s nine-point proposal.1 According to Ye, Taiwan would remain a “special administrative region” of the People’s Republic of China (PRC) after unification. This position was later endorsed by Deng Xiaoping in 1983 and again in 1984 when he formally advanced the “one country, two systems” formula for the settlement of the Taiwan question based on his formulation for handling the return of Hong Kong and Macao to China. Under this formula, Taiwan was to enjoy a high degree of autonomy, keeping its socioeconomic systems and power structures, including its independent executive, legislative, and judicial powers, and even retaining its own military and maintaining people-to-people contact with other countries.2 Beijing’s new policy was an attempt to exploit Taiwan’s growing international isolation, following the U.S. shift of diplomatic recognition from Taipei to Beijing, to bring Taipei to the negotiating table and open up direct postal, transport, and trade links—the “three direct links.” More importantly, however, the initiative reflected the shift in the domestic agenda toward modernizing the economy and seeking a peaceful external environment that was enunciated at the Third Plenum of the Chinese Communist Party’s (CCP) Eleventh Central Committee in December of 1978.3 In 1987, Taipei’s decision to lift the ban on visits to relatives on the mainland gave new impetus to cross-Strait interactions. Closely attentive to the transition in Taiwan following the death of Chiang Ching-kuo and the formation and rising influence of the pro-independence Democratic Progressive Party (DPP) after 1986, Beijing increasingly felt the urgency of unification and moved toward a more flexible policy in dealing with Taiwan. While still rejecting direct government-to-government negotiations, Beijing made it clear that it was willing to invite all political movements and parties to take part in discussions of any issues regarding unification, thus undercutting the DPP’s claim that the Kuomintang

20


(KMT—the Nationalist Party) would sell Taiwan out in party-to-party negotiations with Beijing. According to analysts in Beijing, the offer of party-to-party negotiations was designed to avoid disputes over which side should represent the central government, thus reducing the other to the status of a local government.4 Beijing also made great efforts to get the message across to the public on the island that, while it would not renounce the use of force, this threat was in no way targeted at the people of Taiwan. Rather its hostility was directed at foreign interference and the Taiwan independence movement.5 Domestic Politics and Taipei’s Mainland Policy However, the changing power structure within the KMT and its efforts to adjust to the rise of the DPP and the issue of independence kept Taipei from offering any immediate positive response to Beijing’s new flexibility.6 Worried that the passing of the older generation of mainlanders (those who moved to Taiwan in late 1940s and early 1950s) would further weaken the ties between the two sides, Beijing made increasingly emotional appeals to the remaining influential mainlanders in Taiwan to negotiate a solution to the problem of national division. At the same time, it intensified its efforts to promote cross-Strait economic and trade relations, hoping that a dense web of intertwined and interdependent relationships would help rebuild the sentimental ties between the two sides and undercut domestic support for the Taiwan independence movement.7 Although the shift in Taiwan’s mainland policy started in 1987 when Taipei lifted its ban on visits to relatives on the mainland, the real changes occurred only after 1988 when Lee Teng-hui became president. The fact that Lee himself was a local Taiwanese (ben sheng ren) was a source of grave concern to Beijing. Subsequently, Lee’s “casual” remarks often provoked strong negative reactions from Beijing. A cause of particular alarm was an interview with Ryotaro Shiba, a Japanese writer, during which Lee frankly admitted that he had considered himself Japanese up until the age of 22. He further remarked that the KMT, of which he was chairman, represented an “alien regime.” Entitled “The sorrow of being born a Taiwanese,” the interview first appeared in the Japanese newspaper Asahi Daily. In the interview, Lee compared himself to Moses, ready to lead his followers to escape from Egypt and build a separate nation in another place. Lee’s outpouring of nativistic sentiments, stated in Japanese to a Japanese writer, angered Beijing and


21

made it increasingly suspicious about the direction of Taipei’s mainland policy.8 Until Lee had fully consolidated his power in late 1992, Taipei’s mainland policy was made up of a set of mixed signals. While upholding the “one China” principle and advocating the unification of China as an ultimate goal, Taipei made it clear that it was firmly opposed to the communist regime and Beijing’s “one country, two systems” formula for national unification, which it regarded as a recipe for total capitulation. However, as Taipei became increasingly flexible in dealing with the mainland, it also intensified efforts to break through its international isolation with a reinvented “pragmatic diplomacy.” In 1989, Lee first expressed his willingness to recognize the mainland regime and its jurisdiction over the mainland in return for Beijing’s recognition of Taiwan’s jurisdiction over Taiwan, Penhu, Kinmen, and Masu. At the same time, while still keeping the ban on the three direct economic links, Taipei adopted a more permissive attitude towards indirect economic and trade relations with the mainland, hoping that its economic assets and leverage could be translated into political concessions from Beijing over the legitimacy of the Taiwan government as a sovereign state.9 With the end of the martial law in April 1991and increasing cross-Strait contacts, both sides of the Taiwan Strait maneuvered to negotiate over issues of mutual concerns through the semi-official channel between the Strait Exchange Foundation (SEF) on the Taiwan side and the Association of Relations across the Taiwan Strait (ARATS) on the mainland side. Much of the discussion in the first encounter between SEF and ARATS in 1992 focused on the “one China” issue. In the end, the two sides reached a compromise on the mutual acceptance of the “one China” principle with the understanding that each side had different interpretations of what that meant. This agreement later became known as “the 1992 consensus,” which made it possible for Koo Chen-fu, chairman of SEF, and Wang Daohan, chairman of ARATS to meet in Singapore in April 1993.10 Ironically, today “the 1992 consensus” has become the road block in the resumption of talks between Beijing and the Chen Shui-bian administration because of the latter’s refusal to recognize the existence of such an agreement. The mixed signals sent by Taiwan’s mainland policy at the time reflected a number of forces at work both domestically and internationally. Internationally, the diplomatic isolation and sanctions imposed by Western countries on Beijing following the Tiananmen Incident and the collapse of the Eastern bloc were perceived as a window of opportunity

22


through which Taiwan could break out of its diplomatic isolation and reintroduce itself onto the international scene. Domestically, there was a fierce power struggle within the KMT between the mainstream and minority factions following the death of Chiang Ching-kuo. This was as much a contest over the control of state power as over the direction of Taiwan’s mainland policy. At about the same time, the formation and rapid rise of the DPP as the process of liberalization and democratization unfolded complicated the realignment of political forces on the island and the redirection of Taipei’s mainland policy. The minority faction in the KMT, dominated by mainlanders, insisted that the one-China principle should be maintained because it had been the foundation of cross-Straits peace for the last four decades. Any departure, they argued, would rock the implicit consensus that kept peace across the Taiwan Strait and would endanger Taiwan’s security. For them, the future of Taiwan lay in the “peaceful evolution” of the mainland’s political landscape. Accordingly, they argued, cross-Strait economic and cultural exchanges would stabilize relations between the two sides and facilitate a peaceful evolution in mainland China. This position was quickly attacked by both the DPP and the mainstream faction within the KMT as a betrayal of Taiwan’s interests. Given the demographic change and political realities that had developed over the years, the minority faction of the KMT was quickly marginalized. When the marginalized group later broke away to form the core of the New Party, the KMT became virtually a “Taiwanese party”11 led by the mainstream faction consisting mostly of local Taiwanese elites with little memory of Taiwan as part of China and no fantasy of national unification. As one observer points out that the intraparty struggle within the KMT turns out to be more than just over the redistribution of power. More importantly, it is “clash between two seemingly irreconcilable emotional claims about Taiwan’s statehood and the national identity.”12 To counter Beijing’s “one country, two systems” formula, Taipei proposed a “divided-nation” model, asking Beijing to recognize it as an equal political entity. This is Taipei’s first step to move gradually away from its commitment to the “one China” principle. Proponents of this model argued that adherence to the “one-China” principle could only endanger Taiwan’s sovereign status internationally, because it deprived it of multilateral security guarantees without which Taiwan would be vulnerable to unilateral action by Beijing. The mainstream faction of the KMT has consistently resisted pressure to lift the ban on the three direct links, arguing that lifting the ban is one of Taiwan’s “trump cards” in cross-Strait political bargaining and should


23

be used to get major concessions from Beijing: namely, Beijing must treat Taiwan as an equal political entity, renounce the use of force against Taiwan, and allow Taiwan an international profile.13 Accordingly, they have insisted that the institutionalization of the divided-nation model should take precedence over the normalization of cross-Strait economic exchanges. With strong suspicion of Beijing’s intentions, Taipei worried that increasing interactions across the Taiwan Strait would pull Taiwan further into Beijing’s unification “trap” and strip Taipei of other options.14 The DPP, for its part, has openly pushed for Taiwan’s independence. It argues that Taiwan would be much better off as a de jure separate state than under the current situation in which it claims status as the government, or at least one government, of China. According to the DPP’s calculations, mainland China does not have the capability to cross the Taiwan Strait nor will the United States and Japan allow it to do so. The DPP also views increasing cross-Strait economic and other forms of exchange with some concern. It worries that if Taiwan cannot restrain the current growth in economic dependence on mainland China, it will eventually lose out to Beijing’s reunification campaign. In this view, the acceleration of cross-Strait exchanges could only tie Taiwan’s hands in the contest over self-determination and erode the growth of a distinct Taiwanese identity.15 Thus, Taipei’s mainland policy has been shaped by the power struggle within the KMT, the competitive pressures of electoral politics and political negotiations among the three established power blocs. Also, the struggle over democratic reform during Taipei’s regime transition and the ensuing redistribution of political power from the mainlander elite to the native Taiwanese inevitably became entangled in the contest over Taiwan’s international status, the reemergence of a Taiwanese identity, and its future relations with mainland China.16 In March 1991, Taipei released the “National Unification Guidelines,” which, in some sense, was a compromise between the mainstream and minority factions within the KMT. While it reiterated Taipei’s commitment to the one-China principle and the ultimate goal of national unification, it also insisted that this goal should be achieved in a gradual manner and must first respect the rights and interests of the Taiwanese people and protect their security and welfare. The document asserted that unification must be preceded by “an appropriate period of forthright exchange, cooperation and consultation conducted under the principles of reason, peace, parity and reciprocity,” and only after the two sides had “fostered a consensus about democracy, freedom, and equal prosperity.”

24


This document laid out three phases for unification. In the initial phase, called “exchanges and reciprocity,” both sides should enhance understanding through exchanges, eliminate hostility through reciprocal activities, and refrain from endangering each other’s security. Also, each side should respect the other as a political entity and not reject the other’s place in the international community. In the second phase, official contacts should be established following increased mutual trust and cooperation. After that, direct postal, transport, and commercial links would be allowed and the two sides should join efforts to develop the southeast coastal area of the mainland. Furthermore, both sides should promote an exchange of visits by high-ranking officials in order to create favorable conditions for consultation on issues of unification. Finally, the two sides should set up institutions to facilitate discussions on the eventual establishment of a free, democratic, and prosperous China.17 While they reconfirm the “one-China” principle, the “Guidelines” do not provide a clear definition of what it means. Nor do they give a definite timetable for unification. Instead, the document argues that the length of each of these phases depends very much on how long it takes to achieve its goals. As a result, the three-phase process advocated in the “Guidelines” has been widely seen as an indirect but effective tactic to slow down any move toward formal negotiations over reunification with the mainland.18 This ambiguity in the “Guidelines” caused suspicion in both mainland China and the DPP. While Beijing rejected it as an attempt to create “two governments under the disguise of one China,” the DPP argued that unification on these terms would lead to the sheer capitulation of Taiwan to mainland China. With elections for the Legislative Yuan due in December 1992, the DPP intensified its attacks on the KMT for failing to dispel fears that unification would simply be a betrayal of Taiwan.19 However, once Lee had consolidated his power in the early 1990s, he began to insert his vision of “one country, two equal political entities” more forcefully into Taipei’s official mainland policy, instituting a de facto departure from the one-China principle. Subsequently, Taipei tried to engage the mainland in a game of coexistence within its “divided nations” framework, ending the so-called “Period of Mobilization and Combating Rebels” and promising to open up the three direct links with the mainland and other forms of exchange if Beijing agreed to accept its “divided nation” formula.20 In August 1992, the National Unification Council (NUC) finally offered an explanation of what it meant by the “one-China” policy referred to in the “Guidelines.” It argued that “one China” refers historically to the


25

ROC founded in 1911 with de jure sovereignty over all of China. However, China has been divided into two separate jurisdictions under two equal political entities since 1949. At present, it was argued, the ROC has jurisdiction only over Taiwan, Penghu, Kinmen, and Matsu.21 Therefore, according to the NUC, “one China” had become more of a “cultural and historical concept” than a political one.22 From this time, Taipei increasingly used Lee’s formula of “one China, two equal political entities” to increase the legitimacy of the “Republic of China on Taiwan.” It seems to have all the advantages of the independence policy advocated by the DPP while at the same time avoiding the risks to Taiwan’s security that a declaration of independence would incur. As part of the process of political liberalization and democratization, Lee Teng-hui began to push steadily for the removal of legal restrictions on activities to advocate the cause of Taiwan independence. This move paved the way for the return of the leaders of the Taiwan independence movement driven into exile under the Chiang regime. As a result, the radical pro-independence New Tide faction within the DPP gained traction to achieve a balance of power with the moderate Formosa faction and forced the inclusion of the “independence clause” in the DPP’s party platform in late 1991.23 The DPP position was further radicalized at the end of 1992 when it laid out a policy toward China based on Taiwan independence. In a policy White Paper entitled “The DPP’s China Policy,” it openly claimed that Taiwan’s relations with mainland China had the status of international relations between two sovereign states, and any negotiations with the mainland “should adopt a government-to-government format and follow the practices of international law.”24 The gain by the DPP of 51 seats or 31.8 percent of popular vote in the 1992 legislative election made it a “determinant minority” in the legislature and enabled it to have a “virtual veto” on some important public policy issues. This success also encouraged the party to insert itself more forcefully into the process of the making of mainland policy. This, in turn, increased the complexities and difficulties of any cross-Strait political negotiations, especially negotiations within the party-to-party framework proposed by Beijing. For example, the DPP’s influence was clearly reflected in the Statute on Taiwan-Mainland Civilian Relations which stipulates that any major decisions concerning the three direct links with the mainland must obtain the consent of the Legislative Yuan, thus placing yet another legal hurdle in the way of efforts to lift the ban on direct economic and trade links and other forms of cross-Strait exchange.25

26

Conflict across the Taiwan Strait The International Context of Cross-Strait Relations

While Taiwan’s domestic politics were being reorganized, the international system was also changing with the end of the Cold War. Taipei’s perception of new opportunities and constraints within the new international system also affected its mainland policy. Two trends were identified by Taipei: one toward integration and the other toward separation. The formation of the European Union (EU), the North American Free Trade Agreement (NAFTA) and the Asia-Pacific Economic Cooperation (APEC) Forum all pointed to integration. This trend toward regional integration pushed Taiwan to reorient its economic relations to incorporate itself into an emerging intraregional division of labor among companies operating in East Asia. The essence of this dynamic intraregional growth alliance is the “special nature of the coupling-together of economies at different stages of development but with the same foreign trade strategy and rapidly rising parallel competition.”26 Among these complementary economies, “as each leading economic tier faced costerosion of its competitiveness in maturing industries, a next tier was available with lower-cost resources and a liberalizing investment environment to provide attractive sites for industrial relocation” within the region. As a result, East Asia is becoming increasingly interdependent.27 Situated within the dynamics of this regional integrative pull, Taiwan’s potential economic linkages within the so-called Greater China circle were further amplified by geographical proximity and cultural affinity.28 However, Taipei was aware that these regional integrative forces were also accompanied by another trend toward political separation, the revival of nationalism, and even the creation of new nations, as in the former Soviet Union, Czechoslovakia, and Yugoslavia. At the same time, Taiwan’s successful transition to democracy has greatly raised its profile on the international scene. But most importantly, the post–Cold War international system has increasingly put mainland China, as a rising power, on a collision course with the United States and, regionally, with Japan.29 Anticipation of this clash of interests was reflected in increasingly troubled Sino-U.S. and Sino-Japanese relations, the U.S. decision to upgrade its policy toward Taiwan, and Japan’s new security policy. Taipei saw this systemic change in international security arrangements as offering an opportunity to promote its own “divided nation” formula in its relations with Beijing in the short run, and “to explore an alternative path of nation-building” in the long run. Accordingly, Taipei launched an energetic and explicit campaign to increase its “international space.” In 1993 Taipei formally launched its bid for representation in the


27

United Nations (UN) and other international organizations. With the help of generous economic aid packages, it has also won diplomatic recognition from a handful of small states and upgraded ostensibly semiofficial representative offices in a number of important countries.30 More importantly, Taipei has increasingly used its economic influence among its investment host countries to vigorously push for a flexible “vacation diplomacy” involving trips to these countries by high-level government officials. This was targeted initially at the ASEAN countries that were emerging as important recipients of Taiwanese investment. The response of Southeast Asian countries to the competition offered by mainland China in attracting direct foreign investment (DFI) corresponded with Taipei’s plan to use its economic and capital leverage to counter mainland China’s increasing embrace through adopting a strategy focused on the south. This strategy was conceived in early 1993 in order to diversify Taiwan’s investment linkages and economic dependence away from mainland China toward Southeast Asia and to enlarge its political space for maneuver. All these maneuvers on the diplomatic front made Beijing increasingly suspicious that Taipei was moving away from the “one China” principle to achieve permanent separation of the island from the mainland. In response to these developments, in August 1993 Beijing issued an important policy White Paper, “The Taiwan Question and the Unification of China.” The timing was very important and reflected Beijing’s wariness of the Taiwan independence movement about which it had been warning for quite some time.31 The White Paper was released just as the DPP achieved its breakthrough in the elections for the Legislative Yuan, and the KMT mainstream faction had consolidated its power after the KMT Fourteenth Congress in August 1993. Beijing was laying down its bottom line in order to check the increasingly powerful separatist movement on the island.32 In the White Paper, Beijing reiterated its policy of peaceful reunification and the “one country, two systems” formula, which it defined as made up of four elements: one China, the coexistence of two systems, a high degree of autonomy for Taiwan, and negotiations. While it stated that the threat of force was targeted only at foreign interference and Taiwan independence movement, not the people of Taiwan, Beijing repeated its warning that it would use all necessary means, including military force, if Taiwan was to declare independence. Bejing also rejected all the initiatives proposed by Taipei regarding Taiwan’s participation in international organizations, including the various proposals for “two Chinas” “one China, one Taiwan” and “one country, two equal political entities.”

28


It reemphasized that the PRC was the only legal representative of China in the UN and other related international organizations. Thus, according to Beijing, while Taiwan could participate in nongovernmental organizations, it could not independently be a part of any intergovernmental organization.33 Only on the premise of adhering to the one China principle and in light of the nature and status of the international organizations concerned as well as the specific circumstances, can the Chinese government consider the question of Taiwan’s participation in the activities of organizations and in a manner agreeable and acceptable to the Chinese government.34 Beijing was increasingly alarmed by the growing independence movement on the island, which, in Beijing’s view, was being at least indirectly encouraged by the new leadership of Taiwan and its policies. In Beijing’s view, the revision of the old constitution of Taiwan symbolized the completion of the transfer of power from the mainlanders to the local Taiwanese elites who only paid lip service to the cause of reunification. With the rise of the DPP and the ideological accommodation between it and the mainstream faction of the KMT, cross-Strait relations had been fundamentally transformed from an ideological confrontation between the CPP and the KMT over the legitimate government of all Chinese territories to a struggle between the forces of unification and separation.35 Beijing’s Taiwan policy also reflected a perception of the international situation that was quite similar to Taipei’s. The end of the Cold War and the collapse of the Eastern bloc had effectively reduced China’s strategic value to the West. As a result, disputes previously brushed under the carpet had reemerged. The fallout from the Tiananmen incident, combined with rapid economic growth, had made mainland China a potential ideological and strategic rival to both the United States and Japan. Accordingly, adjustments in U.S. policy toward Taiwan were perceived as efforts to play the Taiwan card against mainland China. Beijing continues to feel that this new strategic context has directly or indirectly encouraged Taipei’s efforts to break out of the status quo and buoyed the hopes of the Taiwan independence movement. Beijing does, however, believe that the increasing importance that the post–Cold War international system gives to economic interests in the strategic calculations among states plays in its favor. Competition for markets has increasingly pushed countries to cluster into economic


29

regions based on geographical proximity and shared cultural traditions. According to Beijing’s calculations, the major powers share a common interest in maintaining stability in the international system, at least in the short term. Thus, despite their disputes with China, neither the United States nor Japan is ready to engage mainland China in an overall confrontation on Taiwan’s behalf since both believe that stability in the region is virtually impossible without mainland China’s cooperation. Therefore, in the short run, it is unlikely that either the United States or Japan will change their Taiwan policies in fundamental ways.36 Based on this calculation, Beijing has increased its pressure on Taipei to open up direct air and sea and commercial links while continuing to veto Taiwan’s participation as a fully fledged political entity in international organizations. Beijing has adopted a threefold strategy which, in the words of China’s foreign minister Qian Qichen, is “to isolate Taiwan diplomatically, to check it militarily and to drag it along economically.” This is designed to narrow Taipei’s options and leave it with no choice but to engage in political negotiations with the mainland.37 On top of these pressures, the transformation of Taiwanese society, democratization, and the influence of competing interests and public opinion have all made cross-Strait relations increasingly complex. Under such circumstances, Beijing realized that it had to adjust its policies towards Taiwan to accommodate to these changes. On January 30, 1995, President Jiang Zemin enunciated mainland China’s position on reunification in an eight-point statement. First, Jiang reiterated the position that “one China” is the basic principle for national reunification, and that the mainland would oppose any departure from this principle; second, under this principle, mainland China would allow Taiwan more leeway in cultural, economic, and similar non-official relations with other countries. Again, Jiang called for the further development of cross-Strait economic cooperation and cultural exchange, and for the recognition of a common Chinese culture as the basis for reunification. In the proposal, Jiang called for political negotiations to end the confrontation. To achieve this, he extended an invitation to Taiwan’s leaders while also expressing a willingness to accept any invitation from Taipei for equal bilateral consultations, as long as such a meeting did not take place in an international setting. More importantly, Jiang emphasized that Beijing respected the Taiwanese desire for autonomy, and again made it clear that the threat of the use of force was not targeted at the Taiwanese people. Prominent in the statement was the point that Chinese should not fight Chinese, indicating that Beijing was ready to acquiesce in the status quo based on the one-China principle—so

30


that as long as Taiwan does not declare independence, there will be no war.38 Jiang’s new policy initiative was a strong signal that Beijing was ready to make some political concessions over the issue of Taiwan’s participation in the international community if Taipei would come to the negotiating table. The unspoken objective was to defuse the “time bomb” of Taiwan independence and to prevent any crisis that would jeopardize Beijing’s plans to maintain a peaceful environment that would allow it to focus on developing its economy. But Beijing’s new policy initiative received only a cool response from Taipei: in April 1995 Lee Teng-hui issued a six-point statement in which he reiterated Taipei’s position and insisted that any meeting between him and Jiang should be held in an “international setting.”39 In July 1994, in response to Beijing’s White Paper and other pressures, Taipei released a mainland policy White Paper of its own, “Relations Across the Taiwan Straits.” Although reconfirming Taipei’s “one China, two political entities” framework, this document offers a rather ambiguous interpretation of “political entity,” glossing it variously as a state, a government, and a political organization.40 Instead of attempting to clarify the question of whether the PRC or the ROC was the rightful representative of China’s sovereignty, the document reiterated Taipei’s “divided nation” model, insisting on the ROC’s “equal status” with the PRC, with each having jurisdiction over its respective territory and coexisting as equal legal entities internationally. Aware that the Taiwan independence movement had gained greater bargaining room, Taipei was increasingly willing to play the Taiwan independence card to ward off the mainland’s peace overtures and its pressure to open the three direct links. It then blamed Beijing for the rising popularity of the independence movement, and indicated that continued efforts to deny Taiwan international participation and Beijing’s refusal to renounce the use of force against Taiwan would cause separatist sentiment to grow even stronger.41 The 1994 White Paper signaled an important departure in Taipei’s mainland policy. Not only did Taipei reject the mainland’s definition of “one China” as the PRC, but it has also increasingly avoided using the phrase as anything other than a historical and cultural concept. In response to Beijing’s pressure for political negotiations, Taipei has insisted that it will negotiate only when Beijing renounces the threat of the use of military force against Taiwan, recognizes Taiwan as an equal political entity, and allows it space for participation in the international community. In addition, to counter the integrative pull of economic


31

interactions across the Strait, Taipei, despite its rhetoric to the contrary, has set up various obstacles to impede further cross-Strait interactions. Thus, since 1994 and backed up by an array of measures, it has become clear that Taipei’s mainland policy is no longer just a bargaining chip in cross-Strait relations, but has become a policy instrument to regulate or even scale down the speed and scope of economic and cultural exchanges across the Taiwan Strait.42 This new objective became further crystallized at the National Development Conference held at the end of 1996. The National Development Conference clearly reconfirmed the trend toward a more restrictive policy for cross-Strait economic and trade relations, following President Lee Teng-hui’s “don’t rush, be patient” remark of August 1996 which was intended to cool the new fever among Taiwan’s business community for investment in the mainland. Lee’s remark was a retreat from an earlier speech promoting mainland China as Taiwan’s economic heartland and amounted to a veto of the proposal for a Regional Operational Center, vigorously promoted by economic officials and endorsed by Premier Lian Chan as a way of bypassing direct air and sea connections with the mainland while accommodating increasing business pressures to open up such links. The consensus reached at the conference emphasized that, while an economic linkage with the mainland is inevitable, it is also highly risky. Therefore, to safeguard Taiwan’s security, the government should engage in strategic planning about trade and investment relations with the mainland, especially investment by big business. Since cross-Strait economic relations are only part of Taiwan’s overall external trade and investment relations, “Taiwan first” should be the guiding principle of such relations. Under this principle, any assessment to open direct commercial and transport links with the mainland should be based on the principles of security, mutual benefit, and reciprocity. The objective of the new policy is to slow down, if not halt, cross-Strait interactions and fend off pressure from the business community for direct economic and trade links with the mainland. Taipei worries that if it cannot reverse the trend toward increasing economic integration, it will eventually lose out to Beijing’s reunification campaign.43 Democratization and the Rise of Identity Politics Taipei’s striving for international recognition of its sovereign status is only one part of a two-pronged strategy. Equally important are persistent efforts by Taiwan’s leaders to foster the growth of popular aspirations for

32


a separate nationhood at home to fend off Beijing’s unification campaign. This move was accelerated after Lee Teng-hui consolidated his power and began to steer the island gradually away from Taipei’s longtime commitment to the “one China” principle. As the first Taiwan-born president, Lee presided over a process of indigenization of the ruling KMT and the government structure by promoting local Taiwanese elites. More importantly, Lee used his control of the state to reengineer the “orientation of the state” away from “a cultural agent of Chinese nationalism to a power agent sponsoring the growth of Taiwanese identity.”44 Accordingly, he moved steadily to dilute the influence of Chinese culture and history through revisions of history books and reorganization of state-owned media outlets. Thus, the process of democratization in Taiwan is closely linked to the political construction of “Taiwan subjectivity” (Taiwan zhutixing), a concerted move to emphasize Taiwan’s non-Chinese identity. Participation in the decision-making process is used to socialize the public with a sense of Taiwan as an independent sovereign entity outside the jurisdiction of the PRC. As the process of democratization deepens, a distinct Taiwanese identity has been promoted in order to cultivate national consensus and unity.45 The surging Taiwanese consciousness and identity were also fuelled by strong grass-root pressure for the revival of Taiwanese social and cultural traditions that had long been suppressed under the previous KMT regime.46 Subsequently, the intellectual dynamism engendered by liberalization and democratization has developed a life of its own. The political elites and the mass media, freed from censorship, “began to promote native Taiwanese folksongs, movies in indigenous languages, books and magazines on local Taiwanese history, literature, politics, and customs.”47 Political liberalization and revival of indigenous culture unleashed strong popular pressures for a separatist Taiwanese identity. Thus, during the decade under Lee, he gradually weaned the island off the traditional KMT unification line and introduced it to a pro-Taiwan sentiment. Since the quest for Taiwanese identity started with “re-identification” and was often predicated on a critique of Sino-centrism, Taiwanese consciousness has increasingly come to be pitted against China and anything Chinese.48 From the beginning, the issue of national identity is subjected to political contest and manipulation. “Under the intensive mobilization of political elites at times of regime transition . . . the struggles over democratic reform and redistribution of political power between the mainlander group and native Taiwanese became entangled with national identity


33

conflict and the clash of different visions of Taiwan’s future political relations with mainland China.”49 Given changing demographics, democratization inevitably led to the increasing indigenization of the government structure and the political elites. About 85 percent of the 23 million people in Taiwan can trace their origins to migration from Guangdong and Fujian several centuries ago. These people late by became known as benshengren, or native of the province. Another 14 percent of the people of Taiwan are the offspring of those who retreated to Taiwan in the late 1940s with the KMT following its defeat in the Chinese civil war. These people are called the mainlanders and often referred to as waishengren, or people from outside the province. While the overwhelming majority of Taiwan’s population are Han Chinese, this slight difference in terms of ethnic origins has been explored by the pan-green politicians as a partisan tool to win votes in Taiwan’s intense electoral politics. Since the “native Taiwanese” constitute the majority of Taiwan’s population, the Taiwanese identity is an extremely powerful instrument for candidates to mobilize support. Under such circumstances, identity has been increasingly used as a powerful mobilizational weapon for advocates of Taiwan independence in their endeavor to pursue their separatist cause.50 As the movement to build a new Taiwanese identity gains momentum, the issue of identity and ethnic labeling gets widely abused and manipulated for political gains. To fortify their sense of “Taiwanese subjectivity,” the hard-line advocates of independence within the DPP and its pan-green allies reject any suggestion that they are Chinese. They see themselves only as Taiwanese set against the Chinese. Under such circumstances, the label of being Chinese almost means supporters of China and the label of being Taiwanese is to be seen as a true patriot of Taiwan. In this bitter environment, the process of democratization and de-Sinicization is forcing even the remaining mainlanders to turn Taiwanese too.51 Thus, the impact of this self-conscious political construction of a distinct Taiwanese identity and popular aspiration for an independent sovereign state is nothing but remarkable. When Lee Teng-hui first became the president, the overwhelming majority of Taiwan’s population still saw themselves as Chinese. By the end of his tenure, there was a significant increase in the number of people identifying themselves as Taiwanese. The profound shift in the self-perception of Taiwan’s population is reflected in a variety of surveys. For example, according to a survey by the National Chengchi University, in 1991 about 23.5 percent identified themselves as Chinese, 50.4 percent as both Chinese and Taiwanese and only 18.2 percent as Taiwanese. By 2000, those identified as Chinese

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dropped to 8 percent while those identifying as Taiwanese rose to 50 percent, and 39 percent as both.52 In another survey by Zhuoyue Magazine in 2003, more than 41 percent of Taiwanese youth identified as Taiwanese, not Chinese, and 72 percent wanted Taiwan to remain outside China as an independent entity.53 Clearly, the surging Taiwanese consciousness and identity were not simply a result of the democratic opening after having been suppressed under the authoritarian politics of the previous KMT regime. “The effects of historical and global forces on people’s political consciousness must be actualized through state actions, competing elite strategies, and their influence and compromises. Essentially, national identities are not inborn but are socially and politically constructed sentiments that are subject to change and manipulation.”54 In this process, the state was turned into an arena where “competing forces strove to gain control of the governing apparatus and use its power to steer cross-strait relations, erect a distinct cultural hegemony, and impose their own vision of nationbuilding, either in the direction of Taiwanization or Sinicization.”55 During the years under Lee, deliberate moves engineered to centralize decision-making power under the president and to reach a bipartisan consensus on national identity with the DPP remained the key issues in the making of Taipei’s mainland policy. In early 1993, in his keynote speech at the third meeting of the Second National Assembly, Lee first used the concept of “common destiny” to reinforce a distinct Taiwanese identity. This appeal to local consciousness was almost identical to the DPP’s call for a “Taiwanese sense of community.” As Lee explained later, this sense of commonality was the only thing that Taiwan could expect to rely on to meet the threat from the mainland.56 Hence a separate Taiwanese identity was gradually transformed from a counterhegemonic critique of Sino-centrism to an officially endorsed dominant ideology. The increasing ideological accommodation of the KMT mainstream faction led by Lee with the DPP, combined with sweeping democratic reforms, laid the foundation for the emergence of “a tacit grand alliance” between the two groups to further marginalize the mainlanders.57 The popularity of “Taiwanization,” not only in the DPP but even among the new leadership of the KMT, has compelled both the ruling party and the cultural elites to abandon the seemingly China-centered policies of the past. As the KMT was transformed into an indigenous Taiwanese party that shared the idea of Taiwan as an independent sovereign state, the DPP and its pan-green allies began to redefine the political content of the Taiwan independence movement from anti-KMT to anti-reunification and anti-China.58


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The emerging Taiwanese identity has been further sharpened by the fierce rivalry by the two sides across the Taiwan Strait on the diplomatic front. Beijing’s relentless efforts to cut off Taiwan’s few existing diplomatic ties have only pushed the people on the island “to lose confidence in a Chinese identity that had failed them.” Frustrated by the increasing international isolation and lack of recognition of their impressive achievement in economic development and democratic transition, the Taiwanese people began to “question the continuing utility of adhering to the ‘one China’ principle. Reinforced with Taipei’s change of direction in its mainland policy, this sense of pride and resentment towards the constraints imposed by China and the international community in respect to the ‘one China’ principle turned into mounting pressures to redefine Taiwanese identity away from China.”59 Under such circumstance, the new emphasis on Taiwanese identity makes it dangerous to talk of “one China” for Taiwanese politicians, even something like the loosely defined “1992 consensus” in which Beijing and Taipei agreed to disagree on the specific interpretation of the notion of “one China.” Thus, in his bid for the presidency in the last two elections, Chen Shui-bian’s stress on Taiwanese identity certainly helped him win votes. But there is more to it. For the hard-line advocates of Taiwan independence bent on taking Taiwan down a separatist path, democratization and the construction of a collective identity of the Taiwanese are an inherent part of their self-conscious efforts to build a separate Taiwanese nation.60 This alarms Beijing, which believes that Taiwan’s leaders are pursuing a deliberate policy to steer the island away from mainland China. But Beijing’s options to cope with these steps of “creeping independence” are quite limited. As Beijing has belatedly realized that the threat of using force will certainly not reinforce Taiwan’s identification with the mainland. If anything, it would only help boost the position of the hard-line proindependence politicians who can then explore it to fan up Taiwanese nationalism and speed up the pace of de-Sinicization of the Taiwanese society. In this situation, Beijing’s only hope to reverse the tide of rising Taiwanese nationalism is to accelerate the process of economic integration and cultural exchange with Taiwan in order to rebuild the emotional ties between people across the Taiwan Strait so people in the island can feel more Chinese again.61 But expanding economic, political, and cultural links across the Taiwan Strait only cause more anxieties among the independence advocates, who have long worried that deepening economic integration threatens to deprive the island of the independence option. For them, the urgent task

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is to cultivate a sense of “Taiwanese subjectivity” (Taiwan zhutixing) at home and to consolidate Taiwan’s sovereign status internationally before Taiwan’s window of opportunity is closed and China becomes too strong to keep away. To avoid Taiwan becoming too dependent on the mainland market and to resist the absorption by mainland China as the process of economic integration deepens, intensive efforts have been made to slow down the pace of cross-Strait economic interaction and to harden a sense of “Taiwanese subjectivity” against Chinese identity.62 To dilute the island’s Chineseness, radical moves have been taken to sever the few remaining symbolic ties to mainland China through the revision of history textbooks, curriculum reforms and increasing use of the indigenous dialect Minnanese in public discourse. They also include the introduction of new street and park names and national holidays; national museums, and sometimes even research institutes, have been placed under new leadership. More recently, the “de-Sinicization” movement has escalated into Taipei’s new policy to “rectify Taiwan’s names” “by removing ‘China’ from the names of government agencies, non-government organizations, state-owned enterprises” and even schools and colleges and “replacing them it with Taiwan.”63 In this campaign to de-Sinify the island, the politics of identity increasingly challenges all institutional structures and cultural practices tainted with Sino-centrism. It is hoped that “enhancement of indigenous symbolic meaning structures” and the subsequent “spiritual transformation” “may provide compensation” for the island’s deteriorating international status and frustrate Beijing’s hopes of bringing the island back into the fold by binding it to the mainland’s booming economy.64 As the independence advocates expected, the rapid rise of a distinct Taiwanese identity and the corresponding drop of Chinese identity among the population on the island have vastly complicated Beijing’s strategy of national reunification. First, it has created a series of crises in the short term as Beijing struggles to respond to Taipei’s intensified efforts to move the island further away from the mainland both politically and sentimentally. Then, it has seriously dampened the prospect of a peaceful reunification because the surging Taiwanese identity and growing support for the separatist cause leave Beijing with few options but to respond forcefully if Taiwan’s independence activists are buoyed up enough to move toward a declaration of formal independence. As a consequence, Beijing has been increasingly put on the defensive and was forced to adjust its policy to face the reality. As I will argue later, the passage of the anti-secession law in the spring of 2005 is a signal of a significant change in Beijing’s Taiwan policy from pushing for unification to trying to preserve the status quo at least in the short run.


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Economic Integration and the Politics of Strategic Interaction As I have argued the rise of the Chinese economy and rapid pace of economic integration across the Taiwan Strait are watched by Taiwan independence advocates with increasing trepidation. They fear that unless Taiwan can formalize its separation before China becomes too strong, the window of opportunity may be closed. In this regard, cultivation of a separate Taiwanese identity is part of the intensified efforts to resist absorption into a rising China as cross-Strait economic integration deepens. As mentioned earlier, currently, mainland China is not only Taiwan’s largest trading partner and export market, it is also its largest source of trade surplus. Also, by 2004, there were more than 70,000 Taiwaneseinvested firms in the mainland with an accumulated investment capital of more than US$70 billion.65 In addition, population movements across the Taiwan Strait have also been considerable. Between 1988 and 2004, Taiwanese made over 33 million visits to the mainland and, in the same period, mainlanders made more than one million visits to Taiwan. Currently, about one million Taiwanese are estimated to have settled down on the mainland with most of them in China’s southeast coastal areas, especially in the Pearl River Delta, the lower Yangtze River Delta, and southern Fujian, the three areas where the bulk of Taiwanese investment is concentrated. These increasing contacts, coupled with the liberalization of Taiwan’s foreign exchange regime, have helped pave the way for further economic integration66 (table 2.1). The growth of Taiwanese investments in mainland China indicates the complementary nature of the two economies. As Taiwan moves up the product cycle to achieve higher value-added production, the mainland has assumed—with the help of Taiwanese investors—its former niche in labor-intensive manufacturing. Given that most of these investments have been made outside official channels, the flexible movement of production factors, in a sort of “guerilla capitalism,”67 has drawn the two sides into a web of interdependent relations (the subject of chapter 3), increasing the number of parties with vested interests in sustaining and expanding such exchanges. Over the years, Beijing has sweetened its peace overtures with many specific proposals and encouraged the acceleration of cross-Strait economic exchanges in the hope that increased economic interdependence would help rebuild emotional ties across the Taiwan Strait and undercut popular support for independence. This strategy was enunciated by Chinese President Yang Shangkun in 1990 in a speech at the National Conference on Taiwan Affairs in which he stated that the development

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Conflict across the Taiwan Strait Table 2.1 Taiwanese visitors to mainland China (unit: persons)

Year

Number of visitors

Percentage change

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

437,700 541,000 948,000 946,632 1,317,770 1,526,969 1,390,215 1,532,309 1,733,897 2,117,576 2,174,602 2,584,648 3,108,650 3,441,960 3,660,570 2,731,900 3,685,310

–– 23.60 75.23 0.14 39.21 15.88 8.96 10.22 13.16 22.13 2.69 18.86 20.27 10.72 6.35 25.37 34.90

Total

33,879,708

––

Note: The sharp drop in Taiwanese visitors to the mainland in 2003 was a result of the SARS epidemic. Source: MAC, ROC. Cross-Strait Economic Statistics Monthly, No.146, March 2005, Table 19.

of “mutual economic relations and linkages between the two sides is an effective means of curbing separatist tendencies in Taiwan and realizing [China’s goal of] peaceful unification.”68 Beijing figures that as economic integration increases, Taiwanese business interests will increasingly chafe at the domestic ban on direct business links and bring pressure on Taipei to loosen restrictions on economic exchanges. Further, given the momentum of fast growth and economic integration within the “greater China” area, Beijing has judged that Taiwan businesses have few options but to link up with the mainland economy in order to maintain their competitiveness.69 In fact, the pressure to open up the three direct links is already so strong that the business community in Taiwan has been dubbed the “new unionist faction” (xin tong pai).70 Given that small and medium-sized firms provide the bulk of financial support for the DPP, their exodus to the mainland has put increasing pressure on the DPP to be more flexible in its policy toward economic and trade relations with the mainland.71 Not surprisingly, Beijing hopes that


39

manipulating the mainland market will enable it to check the drift toward independence and pull Taipei to the negotiation table. However, the effects of economic integration on cross-Strait relations are complicated by democratization and the exodus of a large number of firms to the mainland. First, after the ban on traveling to the mainland was lifted in 1987, a large number of Taiwanese have visited the mainland. But increased contacts between the two sides provided Taiwanese with first-hand experience of the existing gaps in standards of living and political openness between Taiwan and mainland China. Many Taiwanese took pride in their modernity and democratization. As a result, the initial euphoria for unification diminished. This awareness of difference, coupled with the deepening democratization on the island, has led to a growing sense of Taiwan’s uniqueness vis-à-vis mainland China. The growth of a distinctive Taiwanese identity has reverberated in the dynamics of both Taiwan’s domestic politics and Taiwanese aspirations for state sovereignty. This has been manifested in the aggravating issue of ethnicity between the minority mainlanders and the majority Fukienese72 and growing support for government efforts to assert Taiwan’s autonomy and demand international recognition of its de facto independent status, if not outright independence. According to a poll by Tianxia Magazine at the end of 2003, close to a quarter of the population on the island supported the independence cause. A year later, another poll by Lianhe Bao showed that the support for Taiwan independence rose to 31 percent while those favoring unification dropped by 10 percent to about 17 percent even though an overwhelming majority of the population still prefer maintaining the status quo which is de facto autonomy without either reunification or independence (butong budu) (see figure 2.1).73 It is possible that if Beijing were to drop the threat of the use of force in the event of Taiwan declaring independence, the support for the Taiwan independence cause would likely be much higher than indicated in a variety of polls over the last decade. More importantly, Beijing’s strategy of peddling politics through business by offering lucrative deals to attract Taiwanese investors has produced only mixed results politically. While the business community and management strata in Taiwan has been pressuring the government to lift the ban on direct cross-Strait commercial and transportation links, the exodus of a large number of firms to the mainland has antagonized other groups with limited mobility. These include blue-collar workers employed in manufacturing, farmers, and low-skilled labor in general. Concentrated mostly in the central and southern parts of Taiwan, these people constitute the core of the pan-green constituencies and are most

40


100 90 80 70 %

60 50 40 30 20 10 19 95 19 ,2 95 ,1 19 1 96 19 ,2 96 ,1 19 1 97 19 ,2 97 ,1 19 1 98 19 ,4 98 ,1 19 0 99 19 ,4 99 ,1 20 0 00 , 20 2 00 ,5 20 01 , 20 3 01 ,7 20 02 , 20 7 03 , 20 5 04 20 ,4 04 ,1 2

0

Status quo now/indefinitely

Figure 2.1

Unification now/later

Independence now/later

Public opinion in Taiwan.

Sources: Mainland Affairs Council, ROC, obtained on April 8, 2005 at: www.mac.gov.tw/english/english/ pos/9312/9312e_1.gif Survey conducted by: (a) Election Study Center, National Chengchi University, Taipei; (b) Burke Marketing Research, Ltd., Taipei; (c) China Credit Information Service, Ltd., Taipei; (d) Center for Public Opinion and Election Studies, National Sun Yat-Sen University, Kaoshiung; (e) Survey and Opinion Research Group, Dept. of Political Science, National Chung-Cheng University, Chiayi; (f) e-Society Research Group, Taipei. Respondents: Taiwanese adults aged 20–69 accessible for telephone interviews.

perceptive to their nationalist appeals.74 For them, business investment in the mainland amounts to a sell-out of Taiwan and is responsible for their hardships. Consequently, the economic downturn on the island and the coincidence of massive Taiwanese investment in the mainland and increasing job losses (see table 2.2 and figure 2.2) at home has become a potent rallying cry for pro-independence politicians against further economic integration with the mainland.75 These concerns are reflected in various public opinion polls. For example, regardless of the dynamics of globalization and the pressure for the constant renewal and change it implies, according to a poll in 2002 by the pro-independence think tank Taiwan Advocates (Qun Ce Hui), about 66.8 percent of those surveyed believed that Taiwan’s rising unemployment rate was related to business investment in the mainland, while more than 77 percent thought that it was a serious problem that businesses invested in the mainland while leaving their debt behind in Taiwan (jian jin Zhongguo, zhai liu Taiwan).76 These findings were reflected in the area of public policy, where in 2003 more than 59 percent of those surveyed wanted the government to tighten restrictions and regulations over Taiwanese investment in the mainland; more than 51 percent disagreed that the


41

Table 2.2 Taiwan’s unemployment rate, 1991–2004, 1–6 (unit: %) Year 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004, 1–6

Unemployment rate 1.69 1.57 1.67 1.51 1.51 1.45 1.56 1.79 2.60 2.73 2.69 2.92 2.99 4.57 5.17 4.99 4.48

Source: Accounting Agency, Ministry of Economic Affairs, ROC website: http:// zk3dmz2.moea.gov.tw/gnweb.statistics. statistics01/reports/F01.xls

three direct links could help revive Taiwan’s economy; almost 47 percent believed there were too many new mainland immigrants in Taiwan; more than 52 percent feared these new arrivals would affect employment opportunities;77 and more than 70 percent believed that direct transportation links with the mainland should be subject to conditions. As a result of these domestic pressures, rising levels of economic integration and continuing government restrictions on direct commercial relations have led to a serious conflict between the business community and supporters of government policy. While the business community prefers closer economic ties with the mainland and wants the bans on direct commercial links to be lifted, the government’s supporters oppose further economic integration in order to keep more investment resources at home to improve its own social welfare. The insecurity and anxiety produced by economic uncertainty, fear of further industrial depletion, and rising unemployment have bolstered support for increased government restrictions and regulations over investment in the mainland.78 So far, Taipei has been quite effective in resisting pressures from both Beijing and its own business community to revamp its policy on

42

Conflict across the Taiwan Strait 6

5

%

4

3

2 1

19

91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 20 03 04 ,1 –6

0

Year Figure 2.2

Taiwan’s unemployment rate, 1991–2004, 1–6.

Source: Accounting Agency, Ministry of Economic Affairs, ROC website: http://2k3dmz2.moea.gov.tw/gnweb. statistics.statistics01/ report/F01.xls

cross-Strait relations. To frustrate Beijing’s pursuit of the “influence effect” of economic relations, and to resist its continuing pressure for political negotiations, Taipei has maintained its ban on the “three direct links” and has made every effort to regulate the speed and scope of cross-Strait economic interactions. To be effective in pursuing these aims, Taipei has moved to centralize decision-making power with regard to its mainland policy. In addition to the influence wielded by a formidable array of government agencies and institutions—such as National Unification Council (NUC), MAC, and Strait Exchange Foundation (Taiwan) (SEF)—the final say on relations with the mainland rests with the president’s office. Appointees to MAC, for example, are often close associates of the president.79 With a broad range of powers, MAC functions more as a brake rather than a facilitator for expanding cross-Strait interactions. For example, MAC was instrumental in formulating the TaiwanMainland Civilian Statute (1992,7) that entrusted various government agencies with wide-ranging powers to restrict the entry into Taiwan of mainland personnel, products, and media publications. More importantly, the statute stipulated that lifting the ban on the three links with the


43

mainland requires the approval of the Legislative Yuan—Taiwan’s parliament. Since the DPP has an effective veto in the Legislative Yuan, the statute amounts to a lofty legal barrier in the way of further economic interaction across the Taiwan Strait.80 In order to counter Taipei’s restrictions and its insistence on governmentto-government or multilateral guarantees for Taiwanese mainland investments, Beijing has increasingly moved to pass laws and regulations unilaterally that guarantee the property and interests of Taiwanese investors on the mainland. Since the passing of the “Measures to Encourage Investment by Taiwanese Compatriots” by the mainland State Council in 1988,81 the mainland government went on to pass “The Law on the Protection of Investments by Taiwanese Compatriots” in 1994 and related regulations and policies to ensure its effective implementation.82 Also, various preferential arrangements have been granted to Taiwanese investors. Of the four Special Economic Zones (SEZs) set up along the southeast coast, Xiamen in Fujian Province was designated specifically to attract Taiwanese investors. In addition, Beijing granted national treatment to Taiwanese working and living in the mainland, multi-entry permits, special quotas for Taiwanese students attending mainland universities, and various cultural exchange programs.83 Finally, mainland officials and institutions in charge of cross-Strait affairs are increasingly reluctant to reveal any information about Taiwanese investments on the mainland in order to undermine Taipei’s efforts to restrict these investments.84 Moreover, as part of the dynamics of reform on the mainland, local governments have been granted increasing discretionary power over investment, foreign exchange, and trade. As a result, they have engaged in a rush to create their own development zones and offer sweet deals to attract foreign investors.85 With a shared language to facilitate communication with local officials and familiar with the informal ways of doing business at the local level, investors from Taiwan and Hong Kong have been among the first to take advantage of the various business opportunities offered by the local governments.86 To counter the pulling effect of growing economic integration across the Taiwan Strait, Taipei has pushed aggressively to reinforce its position in the international area. It successfully lobbied the U.S. Congress to pressure the White House to permit Lee Teng-hui to visit Cornell University in the summer of 1995. At the same time, Taipei extended olive branches to Beijing by agreeing to a second round of Koo-Wang talks that could be broadened to include political issues. It hoped that Beijing could be maneuvered into allowing Taiwan more international

44


space and accepting it as an equal political entity, reflecting Taipei’s position that only by cultivating strong multilateral backing could Taiwan survive closer economic relations and possible political negotiations with the mainland.87 In addition, given the intersection between external and domestic politics in Taiwan, the push for international recognition and the related quarrels with the mainland have increasingly been used in attempts to cultivate a sense of a distinct Taiwanese identity and sharpen the island’s claims for self-determination. Intermixed with and reinforced by Taiwan’s vicious politics of ethnicity, this tactic of deliberately increasing cross-Strait tensions has been exploited to work to the advantage of indigenous politicians within both the KMT and the DPP in Taiwan’s dynamic electoral politics. Following the same logic, just before Wang Daohan, chairman of mainland China’s ARATS, was scheduled to make an historic visit to Taiwan in 1999, Lee Teng-hui put forth his controversial “two-states theory” in July 1999, which defined cross-Strait relations as a “special state-to-state relationship.” This move, secretly prepared by a group headed by Tsai Ing-wen, effectively aborted Wang’s trip.88 More importantly, the “two-states theory” signified the final fragmentation of Taipei’s longtime commitment to the “one China” principle in which both sides of the Taiwan Strait agreed to disagree over its interpretations. The essence of Lee’s “two-states theory” was almost identical to the DPP’s “Resolution on Taiwan’s Future” passed by the party in May 1999. Both claimed that Taiwan is already an existing sovereign independent state whose name is the Republic of China according to the constitution. In this new paradigm, “Republic of China” was being reduced to a mere label for the sovereign Taiwan and it was not part of China. By this time, Lee had largely accomplished his nation-building project by first transforming the identity of the “Republic of China” as a sovereign state representing the whole of China (1949–1991) to a sovereign country within the historical, geographical, and cultural China (1991–1999) and finally to merely a label for the sovereign Taiwan (1999–).89 After more than a decade of gradual change and careful craft, the position that Taiwan is already an independent sovereign state is no long regarded as a radical proposition, but has been accepted as a mainstream view. Having presided over a process of indigenization of the KMT’s power structure and the government, the outgoing Lee decided to push his nation-building project further ahead with a “final twist” by inserting the “two state” theory as the driving force of a new Taiwanese nation.”90


45

To deter Taipei’s from moving too far toward formal independence, Beijing responded forcefully with a new White Paper on cross-Strait relations in February 2000. In addition to the two existing conditions for the use of military force, Beijing now threatened to resort to force if Taipei refused, sine die, to negotiate over the peaceful settlement of the issue of reunification.91 This was reiterated by Premier Zhu Rongji’s stern warning on the eve of Taiwan’s 2000 presidential election that Chinese people “will shed blood and sacrifice their lives to defend the sovereignty and territorial integrity” of the nation, and that the Taiwan question should not be allowed to drag on indefinitely. This warning has since been reinforced by China’s 2000 Defense White Paper and by a growing number of publications on the mainland stressing the urgency of solving the Taiwan question. In Beijing’s view, the “two state” theory openly challenges its bottom line of the one-China principle, leaving it with no choice but to increase pressure in order to rein in Taipei. To add a credible military component to the threat, Beijing has stepped up military preparations through procurement of an array of advanced weapon systems and increase in the scale and intensity of military exercises in the region by the People’s Liberation Army. This new round in the war of words has raised cross-Strait tensions to a new height. This tension even spilled over to business people who were sympathetic to pro-independence politicians in the 2000 and 2004 presidential elections when Beijing threatened pro-independence Taiwanese businesses that support for Taiwan independence could jeopardize their business on the mainland. For example, in May 2004 the People’s Daily openly attacked Hsu Wen-long, founder and former chairman of Chi Mei Corporation and other Taiwanese business people who supported Chen Shui-bian for “using money made on the mainland to support independence” back in Taiwan. Some mainland scholars even suggested imposing economic sanctions on Taiwan.92 The DPP Administration and Cross-Strait Relations The stalemate in cross-Strait relations continued following the transition of power from the KMT to the DPP and the inauguration in May 2000 of Chen Shui-bian, a veteran pro-independence activist. Initially Chen made a conciliatory gesture by pledging the “five nos”—an undertaking that, during his term in office, as long as Beijing had no intention of using military force against Taiwan, he would not declare independence,

46


change the country’s name from the Republic of China, incorporate the “special state-to-state” theory into the constitution, hold a referendum on sovereignty, or rip up the National Unification Guidelines and disband the National Unification Council.93 But despite Chen’s conciliatory gestures toward the mainland, the initial response from Beijing had been cautious and very complex. On the one hand, Beijing criticized Chen’s failure to unequivocally embrace the “one China” principle. Accusing him of being “evasive and vague” and “lacking sincerity,” Beijing reiterated its demand that “one China” be accepted and warned of the severe consequences of attempting to “split Taiwan from China.” At the same time, Beijing also noted Chen’s peace overtures and indicated that it was prepared to deal with him. Beijing indicated that to reopen talks, Chen need only return to the 1992 agreement between Koo and Wang in which both sides recognized “one China” but left its precise definition open to interpretation, and in which both sides indicated the unification of China as an ultimate goal. To induce Chen back to the one-China principle, Beijing went even further in July 2000 by stating that both Taiwan and mainland China are parts of China and that any new talks between the two sides would be on the basis of equality, not between a central government and a provincial one.94 While this kind of incremental advance offers a glimmer of hope, progress toward reconciliation and peace across the Taiwan Strait is far from assured. On the one hand, Beijing remains convinced that, despite the rhetoric, Chen is actually leading Taiwan gradually toward independence. Thus, the bottom line of Beijing’s policy is “listening to his words but watching his deeds.” The reason for Beijing’s suspicion is Chen’s vacillation in his China policy, often retracting statements, sometimes almost immediately afterward. For example, on July 27, 2000, he told a visiting American delegation that he accepted the “1992 consensus” and even blamed the mainland on insisting its own interpretation of the “one China” principle. But under pressure from his supporters, he backtracked almost immediately. Again in his 2001 New Year address, Chen recognized “one China” based on the ROC constitution and even went so far as to promise to work toward a new framework of “political integration” based on the current level of economic and cultural integration. He withdrew this statement later.95 Also, he pledged not to abolish the National Unification Council but he has never convened it. In addition, he has continued to implement Lee’s “two state” theory, which he later rephrased as “one country on each side” in August 2002.96 During the crisis at the end of 2003 over the referendum


47

campaign and constitutional revision, Chen claimed that the “five nos” he had pledged at his inauguration had long lost any relevance, despite his repeated assurances only a few months previously that the referendum and other constitutional initiatives would not include sensitive issues touching on the “five nos.”97 In another twist, while Chen proffered an olive branch, Beijing did not fail to notice that many strategic positions in Chen’s government had been filled by known supporters of Taiwan independence or people linked with Lee Teng-hui’s controversial “two-states theory.” These positions oversee areas ranging from mainland and foreign affairs to education and culture. Such appointments, along with Taipei’s continued moves to join the UN and the World Health Organization (WHO), attempts to alter the content of textbooks, and to change the country’s name in passports and in Taiwan’s overseas representative offices from the Republic of China to Taiwan, all smack to Beijing of a broad-based campaign to disengage Taiwan further from its existing ties with the mainland (qu zhongguo hua yundong).98 While political stalemate across the Taiwan Strait continues, several important developments have injected new dynamics into cross-Strait relations: the growing economic and political problems of Taiwan, Washington’s adjustments to its China policy by the new Bush administration, and the cycle of electoral politics for the 2004 presidential election. Caught in the global economic downturn and months of political turmoil following Chen’s decision to halt the construction of Taiwan’s fourth nuclear power plant, Taiwan’s stock market has lost about half of its value since Chen took office, which in turn has further weakened its ailing banking industry. Shrinking exports and lagging investment confidence saw Taiwan’s gross domestic product contract 2.35 percent year on year in the second quarter of 2001—the biggest decline in 26 years. In August of 2002, the unemployment rate reached an all-time high of 5.35 percent. While work on the power plant resumed in February 2001, after a ruling by Taiwan’s high court that the decision to stop the project did not follow proper constitutional procedures, six months of political conflict, including an attempted presidential recall and above all the continuing stalemate in cross-Strait relations, threw the island into a state of political chaos and economic uncertainty.99 The government’s lack of experience in its handling of the economy— with problems ranging from a falling stock market to rising bad loans, unemployment and capital flight—has further eroded public confidence. But Taipei’s domestic troubles have given new impetus to cross-Strait commerce. According to statistics from Taiwan’s Ministry of Economic Affairs,

48


cross-Strait trade increased 25 percent and authorized Taiwanese investment on the mainland soared 108 percent in 2000.100 By the end of 2004, mainland China was the destination for about half of Taiwan’s total outward investment. This helps explain why an increasing number of Taiwanese businesspeople who see the mainland market as a way to improve their fortunes have either quietly relocated to the mainland or have been pushing the government for change. This has corresponded with Beijing’s strategy after the 2000 election to reach out to everyone in Taiwan but Chen and his DPP party. Since the latter half of 2001, mainland China has hosted several Taiwanese opposition party delegations including two deputy chairmen of the KMT, one of whom was Taiwan’s former prime minister Vincent Siew. It blessed an exchange of visits between the vice-mayors of Shanghai and Taipei and feted Taipei’s KMT mayor, Ma Ying-jeou, in Hong Kong. Given its predicament, Taipei can only hope to strengthen its position vis-à-vis Beijing by reaching out more forcefully into the international arena. Taipei’s “alternative diplomacy” in the form of medical visits by former president Lee Teng-hui to Japan, and the high profile “trans-stop visit” by President Chen Shui-bian to the United States on his way to central America, succeeded in involving Beijing in diplomatic rows with both Tokyo and Washington following the collision of a U.S. EP-3 surveillance plane with a Chinese interceptor. Taipei’s strategy corresponds with the adjustment in American policy toward China following the inauguration of the Bush administration. This “rebalancing” of American policy away from mainland China and toward Taiwan has taken the form of increased arms sales to Taiwan—in both quantity and quality—and a more explicit commitment to Taiwan’s defense if the island were to come under attack from mainland China. In April 2001, President Bush pledged to do “whatever it takes” to help Taiwan in its defense and insisted that the Taiwan question must be settled peacefully and in accord to the wishes of the people of Taiwan. He also approved a US$18.2 billion package of arms sales to Taiwan. It was to include advanced eight diesel-electric submarines, 12 P-3C Orion submarinehunting aircraft and six PAC-3 (Patriot Advanced Capability-3) missile batteries. While the arms sale package is still pending approval from Taiwan’s Legislative Yuan, efforts have been made to increase the practical contact between the Pentagon and Taiwan’s military. As the U.S. commitment to Taiwan has become less ambiguous, Taiwan’s leaders have begun to argue that Washington’s credibility in the region is linked to Taiwan’s security.101


49

However, the geopolitical situation has been reversed after the terrorist attack on the United States on September 11, 2001. America’s new strategic focus on fighting terrorism and defusing the nuclear crisis on the Korean peninsula has drawn China and the United States together again. With its priorities in Iraq and the Middle East later, the U.S. policy was reverted back to the maintenance of stability and the status quo in the Taiwan Strait, a goal shared by Beijing. In this context, Chen’s provocative statements and continuously pushing the envelope has become an irritation to the Bush administration. Subsequently, Washington responded coldly to various provocations and initiatives by Chen such as his characterization of cross-Strait relations as that between “one country on each side” and his call for holding a national referendum on issues of “national importance.” On December 9, 2003, with the presence of visiting Chinese Premier Wen Jiabao, President Bush publicly rebuked Taiwan’s leader for comments and actions intended to unilaterally change the status quo to which the United States was opposed. Washington’s reassurance that it would not support Taiwan independence has eased Beijing’s anxieties. Hence Beijing reacted with considerable moderation to Chen’s frequent provocations and began to rely more on Washington to rein in Taipei’s accelerated moves toward a formalized break with the mainland. But the renewed strategic stability was disrupted by the dynamics of a new cycle of electoral politics in Taiwan. With a poor economic record, unprecedented unemployment levels under the DPP government and a lead in the polls by the pan-blue alliance (the KMT, the New Party and PFP—the People First Party) before the 2004 presidential election,102 Chen Shui-bian was facing an uphill battle in his re-election bid. Again he was motivated to arouse a sense of Taiwanese identity and popular desire for self-determination. Especially in an election period, these issues help divert the attention of the electorate from a sagging economy and unfulfilled promise of political reform. To jump-start his reelection bid, Chen simply could not resist the temptation to push the envelope and test the limits of Beijing’s tolerance. This explains why he made his unsettling remarks on August 3, 2002, that there is one country on each side of the Strait. This also explains why he went ahead with his pledge to hold an unprecedented two-item referendum in conjunction with the March 2004 presidential election, downplaying a strong warning from Bush. To reinvigorate his supporters, Chen resorted to the proven tactics of provoking Beijing with proposals for a new referendum and constitutional initiative. “The pattern is very simple: push publicly for independence, thereby raising concerns in Beijing, which in turn screams threats at

50


Taiwan. These threats frighten the Taiwanese people into believing that their only salvation from the belligerent mainland is true independence and the total protection from the United States. This starts a vicious cycle where actions and reactions are interlocked.”103 Chen first floated the idea of a new constitution in September and then in a march in Kaohsiung on October 26, 2003 held in support of a referendum, he appealed for a new constitution to be decided through a national referendum, promising that the new constitution would be completed before the end of 2006 and implemented by 2008. He repeated that it was time for Taiwan to adopt a new identity and become a “real country.”104 The quest for a referendum to decide Taiwan’s future had long been on the agenda of the DPP and others in the pro-independence camp, but had been opposed by the KMT. At first the pan-blue alliance was opposed to the measure, but their opposition soon collapsed under pressure from the polls that showed gains by the pan-green camp, which include the DPP, Taiwan Solidarity Union (TSU) and Taiwan Independence Party, on the referendum proposal. After this, the pan-blue alliance opted to support the proposed referendum law. Long suspicious of Chen’s agenda of creeping independence, Beijing was further alarmed by the change in the position of the pan-blue alliance on the referendum. Regarding the referendum legislation as a way-station on the road to independence, Beijing responded with a stream of stern warnings that any push toward Taiwanese independence via a referendum and a new constitution could lead to war, despite the prospect of heavy casualties, economic sanctions, or even a boycott of the 2008 Olympic Game in Beijing.105 However, an imminent crisis was defused when the pan-bluecontrolled Legislative Yuan passed a bill on November 27, 2003 that denied the executive the authority to call a referendum. The right to initiate a referendum lies with the legislature following a popular mandate. But the question of whether a referendum is to be allowed according to the law is left to a committee, seats on which are to be awarded according to legislative strength. It also makes it very difficult for Chen to call a referendum to amend the constitution, unless the amendments had already been approved by three-quarters of the legislature and the legislature has scheduled the referendum. The president only has power to call a special referendum on changing the country’s sovereignty when it faces external threats to its security—the so-called “defensive referendum” clause. Facing the defeat of his legislative review of the law, and in defiance of U.S. opposition to his planned referendum and constitutional initiatives,


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Chen quickly took advantage of the law and claimed he would call a “defensive referendum” or “preventive referendum” on the day of the presidential elections in March 2004 as a way of denouncing China’s military threat to Taiwan and demanding the withdrawal of missiles targeted at Taiwan. For Chen and his strategists, the result of the referendum is not important. The real significance of holding the referendum is the legal mechanism that has been created through such an act which can be triggered by the independence activists to finalize a permanent separation from China once such an opportunity occurs.106 Although the referendum motion was eventually defeated, crossStrait tensions continued with the controversial re-election of Chen in May 2004. Chen’s second administration continues to push for constitutional reform. But with the anti-independence pan-blue controlling the Legislative Yuan again after the election in December 2004, it will be very difficult for Chen to achieve his goal. Instead, he adopts an incremental approach, stopping short of the final, formal name changes by adding the word “Taiwan” to the ROC passports. He also changes the names of Taiwan’s overseas missions from ROC to “Taiwan,” refers to mainland China simply as “China” in official documents, and even issued a directive that “Taiwan” would henceforth be used instead of “China” in the titles of state-owned firms such as China Airlines. On October 10, 2004, Chen even treaded the presumed red line by declaring that “the sovereignty of the Republic of China is vested with the 23 million people of Taiwan. The Republic of China is Taiwan, and Taiwan is the Republic of China.” Openly challenging the decades-old principle of overlapping sovereignty between the Republic of China and the People’s Republic of China, he further clarified that Taiwan was “a country of 36,000 square kilometers,” in other words, just the island and a few islets.107 The legal mechanism created through a national referendum and Chen’s plan to use it to rewrite the constitution in 2006 and implement it in 2008 prompted Beijing to issue what amounted to an “ultimatum” to Chen on the eve of his second inauguration in May 2004 that “would decisively and completely shatter, at any cost, Taiwan authority’s attempt to permanently separate Taiwan from China if it dares to make major incidents of Taiwan independence.” Using the same legal mechanism to counter Chen’s attempt to create legal trappings of independence through constitutional revision, Beijing passed an anti-secession law in March 2005 mandating the use of non-peaceful measures if Taiwan secedes, takes actions that constitute “major incidents” entailing secession from China, or if “possibilities for peaceful reunification are completely exhausted.”108

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The timing of the legislation surprised many observers. The pan-blue coalition just retained its control of the Legislative Yuan and the general atmosphere in cross-Strait relations was relaxing. Therefore, the initial reactions to this legislation were mostly negative in the West.109 However, analysts from the greater China area argue that the anti-secession law indicates a significant change in Beijing’s Taiwan policy under the new leadership. Previously, Beijing threatened the use of force if Taipei refuses, sine die, to negotiate over issues of reunification. Also Chinese leaders said on many occasions that the Taiwan issue could not be delayed indefinitely. But Beijing has gradually moved away from the hard-line position of opposing Taiwan independence and striving for reunification (fan du cu tong) for some time and the anti-secession law only clarifies that shift in Beijing’s strategy to a more limited objective of preserving the status quo. Beijing has nothing to gain from trying to snatch Taiwan back through war and its priority for now is economic development. Beijing’s policy adjustment puts it in line with the position of Washington and the mainstream of Taiwan’s public opinion. For this purpose the anti-secession law is meant to draw a clear red line “to forestall Chen’s declared goal of passing a new constitution through referendum in 2006 and put it into force in 2008,” benchmark beyond which, Beijing fears, Chen’s independence agenda will be pushed to a point of no return.110 But the anti-secession legislation is only part of Beijing’s new strategy under China’s new leader Hu Jintao. Beijing’s strategy also has a soft side. It is a mix of both a harder and a softer line, making more concessions on nonpolitical topics while remaining uncompromising on sovereignty issues (ying de geng ying, ruan de geng ruan). Beijing has offered to open talks with any Taiwanese leader “regardless of his past rhetoric and actions” as long as he recognizes “the 1992 consensus,” a signal that Beijing is ready to talk to Chen within a reformulated framework of “one China” to which both sides of the Taiwan Strait belong. This amounts to a de facto reorganization of equal status of the ROC with the PRC. In addition, Beijing launched a charm offensive to win back the hearts and minds of Taiwan’s public. It showed more flexibility in opening negotiations that successfully led to direct charter flights for Taiwanese businessmen to return home for the Chinese Lunar New Year. Beijing invited the leaders of the opposition parties to visit the mainland in April and May of 2005. While it is not clear now whether these trips will lead to major breakthroughs in cross-Strait relations, they have opened new channels of communications between the two sides and have set off a new wave of mainland fever. For a while, even senior members


53

of the TSU and DPP members of the Legislative Yuan caucus were ready to visit the mainland before they were stopped by Lee Teng-hui and Chen Shui-bian’s personal intervention. Beijing’s most recent charm offensive of granting tariff-free status to fifteen types of Taiwanese fruits to be imported into the mainland market is targeted specifically at the farmers in south and central Taiwan, the heartland of the pan-green support base. But the euphoria following the visits of opposition leaders soon evaporated. After swinging back and forth for a while, Chen seems to have reverted back to the position of his core pro-independence constituencies. He dismissed the agreements reached between Beijing and the opposition parties as meaningless and insisted that talks over Taiwanese fruit imports into the mainland should only be conducted with the government authorized Taiwan External Trade Development Council (TAITRA) effectively forcing Beijing to negotiate with it on a government-to-government basis. When Beijing agreed to include TAITRA in the negotiation, Taipei bulked and continued to drag its feet until August 1, 2005 when Beijing unilaterally lifted tariffs on Taiwanese fruit imports into the mainland bypassing Taipei. However, Beijing’s strategy to erode the very support base of the pangreen coalition by wooing southern and central Taiwanese farmers could backfire. Expanded cross-Strait economic and political links could only heighten a deep-seated fear of Chen and his supporters that time may not be on their side. They worry that the mainland’s continuing economic growth and the seemingly inevitability of deep economic integration between the two sides may deprive them of the window of opportunity to formalize Taiwan independence. To prevent this, Chen moved to cool down a new wave of China fever following the visits to the mainland by the opposition leaders and the debate over the mainland offer of tariff-free imports of Taiwanese fruits. Under pressure from his pan-green supporters, Chen has also moved to harden the sense of Taiwanese subjectivity. “The nuisance arising from this wave of China fever was due mainly to confusion of national identity and status,” Chen said recently. “Therefore it is necessary to strengthen Taiwan first as the mainstream value and harden a sense of Taiwan subjectivity.”111 To this end, Chen has renewed his efforts to play the “China threat” theme in order to remind the Taiwanese people of Chinese hostility and to accelerate the pace of de-Sinicization of the Taiwanese society. In August 2005, he decided to add Taiwan before ROC to the website of the presidential palace and reaffirmed his position that “the ROC is Taiwan and Taiwan is the ROC” when he formulated his “four stages”

54


theory in his meeting with delegates of the American Formosa Foundation on August 2, 2005.112 A week later on August 8, 2005, he openly rejected the possibility of negotiating with the mainland on the basis of the “1992 consensus” or any proposal that is premised on “unification.” This not only includes mainland China’s new formula of both sides of the Strait belonging to one China but also “one China within the framework of the ROC constitution,” a position accepted by Chen himself several times previously and openly endorsed by Taiwan’s then Premier Frank Hsieh. He also reiterated his intention to tighten government restrictions over cross-Strait economic interactions if they could not be managed properly. Consequently, Taipei is working on new legislations to regulate high-tech transfers to the mainland to involve even non-sensitive technologies.113 On January 29, 2006, the Chinese new year, Chen surprised everyone again by suggesting that it was time to consider abolition of the National Unification Guidelines and disbandment of the National Unification Council. A month later, Chen indeed announced the cessation of the two despite displeasure from Washington and strong opposition from Beijing. Chen’s recent stepped-up efforts to push for the independence cause have been emboldened by the expansion of the U.S.-Japan security alliance to cover Taiwan as part of their “common strategic objectives” and de facto inclusion of Taiwan in a trilateral military coalition. Consequently, he openly appealed to the United States, Japan, and even the EU to form a “democratic alliance” to counter what he calls the China threat. Chen’s attempt to develop stronger partnerships with these powers is to use the protection of a multilateral defense system to advance his veiled political goal: to achieve formal independence for Taiwan before China becomes strong enough to deter outside intervention.114 To conclude, this chapter has discussed the political dynamics of strategic interactions across the Taiwan Strait. Beijing’s bottom line is the “one China” principle, and it regards any departure from this as a serious setback for cross-Strait relations. Accordingly, it has mobilized all its diplomatic resources to block Taiwan’s re-entry into government-level international organizations and to roll back any progress achieved by Taipei’s “pragmatic diplomacy.” For Taipei, the collapse of the Cold War system was perceived as a window of opportunity to test the possibility of seeking a permanent separation from mainland China. But the attempt at nation-building has been largely checked by mainland China’s threat of using force. Thus, for Taipei foreign relations, especially multilateral security guarantees, are the stuff of life and death. Any request that Taipei cease its “pragmatic diplomacy” amounts to a demand to give up the foundations of its security in case of a military


55

confrontation with Beijing. Thus, Taipei feels that it must break out of the status quo in order to discredit Beijing’s claims of jurisdiction, and this effort has intensified with the election of Chen Shui-bian in 2000 and again in 2004. But the more Taipei presses for international recognition, the more vigorously Beijing pushes for its isolation and promotes further economic interaction between the two sides in order to keep Taiwan from spinning away from China’s orbit. However, deepening economic integration runs the risk of depriving Taipei of the independence option. Therefore, the closer economic ties grow, the more forcefully Taipei strives for international recognition in order to counter the seemingly unstoppable pull of the process of economic integration. Given the structural constraints of the geopolitical reality and the perceived inevitability of deepened cross-Strait economic integration, Taiwan’s current leaders and their pro-independence supporters have resorted to intensified efforts to internalize a sense of Taiwanese subjectivity (Taiwan zhutixing) through a de-Sinicization campaign. This emerging Taiwanese identity has been reinforced by Taiwan’s increasing diplomatic isolation as more people in Taiwan feel frustrated by the lack of international recognition of their tremendous achievement in both economic development and democratic transformation. This, in turn, “plays into the hands of Taiwanese nationalists who renounce Taiwan’s Chinese roots and demand a permanent separation from the Chinese mainland.”115 The “de-Sinicization” movement initially involved curriculum reforms, rewriting of history books and constitutional revision. It then has blown into a full-fledged campaign to “rectify Taiwan’s names” through removal of “China” from the names of government agencies, nongovernment organizations, and state-owned enterprises. All these lead to Taipei’s stepped-up efforts more recently to formalize a permanent separation from the mainland as indicated by Chen Shui-bian’s new formulation of the “four-stage theory” which specifies that the Republic of China is Taiwan. In response to these “incremental steps towards Taiwan independence” ( jianjin Taidu), Beijing has passed an anti-secession law that mandates the use of non-peaceful means if “major incidents entailing Taiwan’s secession from China should occur.” Accordingly, Beijing has accelerated the modernization of its military in order to build up a credible threat to deter Taipei from moving toward a formal declaration of independence. Entangled in the geopolitics of the major powers in the region, these contradictory dynamics of closer economic integration, diplomatic juggling, cycles of electoral politics, and rising nationalist feeling have further deepened distrust and mutual suspicion and moved the two sides increasingly closer to a military showdown that threatens to plunge the whole region into turmoil.

CHAPTER

THREE

Government Policies and Cross-Strait Trade and Investment

As I have argued in chapter 2, both Beijing and Taipei have tried to use trade and investment to achieve their political objectives. Beijing has offered special incentives to Taiwanese businesses in hopes that closer economic ties will undercut support for the separatist cause and forestall Taiwan’s drift toward formal independence. For its part, Taipei is attempting to regulate the pace of economic integration, fearing that deepening economic dependence on the mainland will undermine Taiwan’s political autonomy. Taipei fears that cross-Strait economic integration will allow Beijing to manipulate it to coerce Taiwan into submission to Beijing’s demands. This chapter looks at the dynamics operating between government-to-government interactions on the one hand and relations between governments and businesses on the other. My analysis indicates that state policy can affect private strategy but not determine it. This provides a modification of the hard-core realist thesis as set out in Albert Hirschman’s National Power and the Structure of Foreign Trade. Indeed, the patterns, characteristics, and trends of Taiwanese investment on the mainland suggest that the success of government efforts to influence economic actors and business activities is far from guaranteed. In a unique dynamic of state regulation and private disregard, not only have Taipei’s restrictions on cross-Strait economic interactions been repeatedly compromised by the adaptive strategies of the private sector, but Beijing’s efforts to attract large capital-intensive high-tech investments have also fallen far short of its goals.

Trade and Investment Policies

57

Trade Relations across the Taiwan Strait Trade opened between Taiwan and mainland China on a small scale when the People’s Congress of mainland China sent a letter to Taiwan in 1979 calling for direct links between the two sides. As part of this initiative, the Ministry of Commerce in mainland China issued “supplementary measures on the purchase of Taiwanese products” in June 1980. According to these measures, consumer goods made in Taiwan were to be given preferential treatment over similar products made in other countries and could be imported into the mainland free of tariffs. In addition, Taiwanese businesses purchasing mainland products were to receive at least a 20 percent price discount.1 Taipei, for its part, maintained a strict ban on any economic and trade relations and regarded such relations as illegal and liable to criminal charges until 1984, several years after trade had actually begun. To break through Taipei’s bans, mainland China stipulated that mainland customs would accept commercial papers from Taiwan, and Taiwanese businesses could designate a mainland trading company as their agent to handle all the paperwork on their behalf. These incentives kicked off the first phase of cross-Strait trade relations. According to Hong Kong Entrepot statistics, indirect trade between Taiwan and the mainland (via Hong Kong) increased steadily from around US$77.8 million in 1979 to US$459 million in 1981, an annual increase of about 173 percent. Of this, Taiwan’s exports to the mainland surged 17.5 times, from US$21.5 million to US$384.2 million, an annual increase of over 800 percent, while mainland exports to Taiwan increased only 34 percent, from US$56.3 million to US$75.2 million, an annual increase of only 17 percent (see table 3.1). Trade contracted for the next two years following the cancellation of the tariff-free policy by the mainland in May 1981 which was replaced with a new adjustment tax of about 10 percent below tariffs on other imports. The special price discount offered to Taiwanese businesses purchasing mainland products was also discontinued. However, in September 1984, as reform gained new momentum and mainland China formally endorsed an externally oriented development strategy, the State Council delegated some of its powers over foreign trade and hard currency control to local governments and firms, creating new opportunities for Taiwanese businesses. Soon after, in July 1985, Taiwan relaxed legal export constraints and permitted free exports to the mainland on condition that they were conducted in an “indirect” fashion, that is, by way of Hong Kong or other intermediate locations.2 This move reflected

58


Table 3.1 Cross-Strait trade via Hong Kong (unit: US$1 million) Year

Total

By % /

1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

77.8 311.2 459.3 278.5 247.7 553.2 1102.7 955.6 1,515.5 2,720.9 3,483.4 4,043.6 5,793.1 7,406.9 8,689.0 9,809.5 11,457.0 11,300.0 11,458.9 10,019.0 9,803.1 11,573.6 10,504.8 12,019.8 13,950.4 17,247.3

–– 300.20 47.60 39.40 11.10 123.30 99.30 13.40 58.60 79.50 28.00 16.10 43.30 27.90 17.30 12.90 16.80 1.40 1.41 12.60 2.20 18.10 9.20 14.40 16.10 23.60

Taiwan- Mainland 21.5 235.0 384.2 194.5 157.9 425.5 986.9 811.3 1,226.5 2,242.2 2,896.5 3,278.3 4,667.2 6,287.9 7,585.4 8,517.2 9,882.8 9,717.6 9,715.1 8,364.1 8,174.9 9,593.1 8,811.5 10,311.8 11,789.4 14,761.9

By % /

Mainland- Taiwan

–– 994.4 63.5 49.4 18.8 169.6 132.0 17.8 51.2 82.9 29.9 13.2 42.4 34.7 20.6 12.3 16.0 1.7 0.0 13.9 2.3 17.3 8.1 17.0 14.3 25.2

56.3 76.2 75.2 84.0 89.9 127.8 115.9 144.2 288.9 478.7 586.9 765.4 1,126.0 1,119.0 1,103.6 1,292.3 1,574.2 1,582.4 1,743.8 1,654.9 1,628.2 1,980.5 1,693.3 1,708.1 2,161.1 2,485.4

By % /

Surplus

–– 35.4 1.4 11.8 6.9 42.2 9.3 24.4 100.4 65.7 22.6 30.4 47.1 0.6 1.4 17.1 21.8 0.5 10.2 5.1 1.6 21.6 14.5 0.9 26.5 15.0

34.8 158.8 309.0 110.4 68.0 297.7 870.9 667.1 937.6 1,763.5 2,309.6 2,512.9 3,541.2 5,169.0 6,481.8 7,224.9 8,308.6 8,135.2 7,971.3 6,709.2 6,546.8 7,612.6 7,118.2 8,603.7 9,628.3 12,276.4

Of Taiwan’s Total –– –– –– –– –– 3.50 8.20 4.40 5.00 16.10 16.60 20.10 26.60 54.60 82.70 93.80 102.50 59.90 104.10 113.40 59.84 91.61 45.46 47.62 56.70 199.98

Sources: Hong Kong Customs Statistics, from Mainland Affairs Council (MAC). Taipei: Cross-Strait Economic Statistics Monthly, No.146, Tables 5, 6, 7, and 8, March 2005, www.chinabiz.org.tw/maz/Eco-Monthly/home.htm

Taipei’s mixed motives. On the one hand, economic considerations and commercial reality dictated seizing the opportunities that were opening up on the mainland; on the other hand, by continuing to control the pace of economic exchange, it hoped to increase its political standing in bilateral relations with the mainland.3 As a result of this policy relaxation, a new surge of Taiwanese exports to the mainland followed. By the end of 1985, exports to the mainland had increased by 99 percent, from US$553.2 million at the end of 1984 to US$1, 102.7 million. Meanwhile, mainland exports to Taiwan decreased by 9.3 percent, from US$127.8 million to US$115.9 million, as the Taiwan government’s restraints on imports from the mainland continued in the form of a “positive list” subject to infrequent revisions. As late as 1987, only twenty-seven items were on the list and, by 1988, the list still included only fifty items, most of which were low–value-added agricultural products. At the same time, Taipei also set up a warning system allowing the


59

government to rescind permits when mainland imports threatened a corresponding sector in Taiwan. However, just as Taipei was relaxing restrictions on indirect exports to the mainland, Beijing re-centralized its control over trade relations with Taiwan under the Ministry of Foreign Trade. In 1987, the State Council stipulated that all trade with Taiwan should be conducted by officially sanctioned trading companies with permission from the Ministry of Foreign Trade, which must strictly abide by the terms of their permissions and pay relevant tariffs in full. The council banned all other companies and institutions from engaging in trade with Taiwanese businesses via a foreign intermediary, or with Taiwanese businesses and firms located outside Hong Kong and Macao. This strategy was designed to break Taipei’s ban on direct trade relations with the mainland, and it soon forced Taiwanese businessmen to set up intermediate firms in Hong Kong and Macao and to trade directly with mainland companies and institutions.4 In the meantime, the mainland formed various special trading companies under the names “you,” “fa” and “xing”, such as “You Li” (Xiamen), “You Lian” (Dongwuan), “Dong Fa” (Dongshan), “Pu Fa” (Zhangpu), “Xin Xing” (Fu Zhou), and “Tong Xing” (Xiapu), to trade directly with Taiwanese businesses on the open sea. According to Li Fei, by the early 1990s this kind of trade had reached more than US$400 million. Of this, Fujian took about 60 percent with Guangdong 30 percent and Jiangsu, Shanghai, and Zhejiang together accounting for the remaining 10 percent. Also, an increasing proportion of the shipment of goods across the Taiwan Straits was “indirect” only on paper. According to estimates by the Ministry of Economic Affairs, around 30 percent of cross-Straits trade officially destined for Hong Kong was shipped directly to the mainland. Except for fining a few offenders, there was not much Taipei could do to stop this practice.5 The real turning point came in 1987, when Taipei announced the cessation of martial law and formally lifted its ban on visits to relatives and ancestral homes on the mainland. At the same time, the relaxation of export constraints and the liberalization of Taiwan’s foreign exchange regime, in response to its changing position in the international economy, contributed to a jump in the volume of cross-Strait trade by 185 percent over two years, from US$955.6 million in 1986 to US$2.721 billion in 1988. Trade increased even more dramatically during the 1990s, when Taipei lifted its ban on indirect investment and market-oriented reforms on the mainland regained momentum after Deng Xiaoping’s tour of south China in 1992. According to Hong Kong Customs statistics, cross-Strait trade increased from US$7.41 billion in 1992 to US$17.25 billion in 2004. However, this figure is considered an underestimate. According to

60


an estimate by Taiwan’s Mainland Affairs Council, cross-Strait trade increased from about US$11.67 billion in 1992 to US$61.64 billion or 18.03 percent of Taiwan’s total foreign trade in 2004. But according to mainland China’s Ministry of Commerce, cross-Strait trade in 2004 reached US$78.32 billion. Currently, mainland China is not only Taiwan’s largest trading partner for Taiwan but also its largest export market. According to Taiwan’s statistics, in 2004 Taiwan’s exports to the mainland amounted to US$44.96 billion or 25.83 percent of its overall exports, while imports from the mainland reached US$16.68 billion or 9.93 percent of all Taiwan’s imports.6 But according to mainland statistics, Taiwan’s exports to the mainland alone reached US$64.78 billion in 2004 while its imports from the mainland was only US$13.55 billion with a surplus of US$51.23 billion in Taiwan’s favor7 (table 3.1; figures 3.1, 3.2, 3.3). In addition, in 1994 mainland China replaced the United States as the source of Taiwan’s largest trade surplus. Since then, Taiwan has incurred a persistent trade surplus with the mainland. Hong Kong Customs statistics showed a surplus of US$12.28 billion in 2004, about 199.98 percent of Taiwan’s global trade surplus of the year. But according to MAC’s own estimate, Taiwan’s trade surplus with the mainland in 2004 alone was US$28.28 billion or 460.7 percent of Taiwan’s global trade surplus, which means that without its substantial surplus with the mainland, Taiwan would have incurred a huge trade deficit.8 20,000 18,000 US$1 million

16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000

Total

Figure 3.1

T-Mainland

2004

2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1992

1993

1991

1990

1989

1988

0

M-Taiwan

Cross-Strait trade via Hong Kong.

Sources: Hong Kong Customs Statistics, from Mainland Affairs Council (MAC). Taipei: Cross-Strait Economic Statistic Monthly, No. 146, Tables 5, 6, 7, and 8, March 2005, www.chinabiz.org.tw/maz/Eco-Monthly/home.htm

61 30 25

%

20 15 10 5

Figure 3.2

95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

94

93

% of export

19

19

19

91

90

89

92 19

19

19

88 19

19

19

87

0

% of import

% of trade

Taiwan’s trade dependence on mainland China.

Sources: Mainland Affairs Council (MAC). Taipei: Cross-Strait Economic Statistic Monthly, No. 146, Tables 5, 6, 7, and 8, March 2005, www.chinabiz.org.tw/maz/Eco-Monthly/home.htm

18 16 14 12

%

10 8 6 4 2

% of export Figure 3.3

95

94

96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04

19

19

19

93 19

92 19

90

89

88

91 19

19

19

19

19

87

0

% of import

% of trade

Mainland China’s trade dependence on Taiwan.

Sources: Mainland Affairs Council, (MAC). Taipei: Cross-Strait Economic Statistics Monthly, No. 146, Tables 5, 6, 7, and 8, March 2005, www.chinabiz.org.tw/maz/Eco-Monthly/home.htm

62

Conflict across the Taiwan Strait Taiwanese Investment and Mainland China’s Policy

Due to the close links between trade and investment, surging trade relations between the two sides have produced parallel flows of investment capital. Even though investment from Taiwan can be traced back to the early 1980s, it was then small and sporadic. Substantial investment flows began only after 1987, when Taipei lifted its ban on kinship visits and, at about the same time, liberalized its foreign exchange regime. During the same period, mainland China adjusted its policy on cross-Strait economic relations from trade promotion to actively encouraging Taiwanese investment on the mainland. As mentioned earlier in the chapter, after 1987 mainland China recentralized control over trade with Taiwan and cancelled some of the policies that were especially favorable to imports from the island. In addition, until 1992, mainland China’s standard high tariff wall—nominal rates on imports averaged 42 percent, with rates typically increasing with higher degrees of processing—punished the sorts of imports Taiwan was best at producing. Accordingly, the new policy restricted imports of products that had already lost their competitive advantage on the island, encouraging their manufacturers to relocate to the mainland.9 In 1988, the mainland State Council promulgated twenty-two articles under the title, “Measures to Encourage Investment by Taiwanese Compatriots.” This document offered a wide range of preferential policy incentives to Taiwanese investors on top of those offered to other foreign investors. First, unlike other foreign investments, Taiwanese investors faced no restraints on technological levels or requirements on duration. Taiwanese investors were also guaranteed legal rights over property, such as assurance against political risks. If confiscation were to become unavoidable, the law provided for due compensation. Taiwanese could also set up wholly owned firms and take positions as chairpersons of joint ventures. In Fujian, over 80 percent of enterprises with capital from Taiwan are wholly owned firms. Unlike other foreign investors, Taiwanese businesspersons were allowed to enter the stock market and real estate market, and were given more generous inheritance and assettransfer rights than other foreign investors. Export-oriented firms with Taiwanese investors could import their processing equipment, intermediate inputs, and transport vehicles for personal use free of tariffs and commodity taxes. Taiwanese-invested firms were also exempted from tax on income for three years, one year more than other foreign-invested firms, and then they had to pay only half the tax for the next two years.


63

In effect, Taiwanese-invested firms began paying taxes after five years, and only if they were profitable by then. In the special economic zones, economic development zones, and in high-tech sectors, the corporate tax rate was only 15 percent—in contrast to the normal 30 percent—with an extra 3 percent local tax for other firms.10 At the local level, however, the treatment of Taiwanese investors varies wildly—although in general, provisions are much more favorable for Taiwanese investors than for other foreign investors, given a common cultural and linguistic background that can facilitate communication and deal-making. With newly gained power granted through decentralization and pressures for job performance based on DFI, job growth, and export performance, local officials have engaged in fierce competition to lure Taiwanese investors. To woo Taiwanese investors, local governments often provide generous exemptions that can include waiver of local income tax, land-use fees and property taxes. For example, Beijing offers a rent-free policy for certain industries in the high-tech sector. Fujian province has passed a series of measures on Taiwanese investors including the “Regulations on Collateral Loans” and “Regulations on the Use of Land by Taiwanese Investors in Fujian.”11 In August 1988, Xiamen issued preferential policies for Taiwanese investors, including an exemption from corporate tax for the first four years and half the normal rate for the next five years (with the proviso that industrial and agricultural projects have a contract life exceeding 10 years). In January 1989 Fuzhou City in Fujian province announced special preferences for Taiwanese investment. In 1990 Guangzhou, Shantou, and Zhuhai in Guangdong Province countered with their own packages for Taiwanese investors.12 In early 1999, Zhejiang Province put forward a new policy providing a tax holiday for the first five years and a reduced rate for the next five years. This was offered to Formosa Plastics during negotiations over setting up a US$10 billion giant petrochemical complex in Ningbo City in the province. The Ningbo municipal government asked Formosa Plastics to pay less than one-third of the US$700 million resettlement costs for rehousing local residents should it choose to invest there. In addition, many governments promise to return local taxes to foreign investors when tax holidays expire.13 Given the lack of a clear and effective legal system and frequent changes in policies at the local level, few foreign multinationals feel comfortable with such deals. However, these irregular practices at the local level have proven to be no barrier to investors from Taiwan and Hong Kong, who share the same language and culture. As a result, they are very good at taking advantage of these irregularities and personal connections with local officials to secure lucrative business

64


deals. Almost the first investors to move into the mainland, they have been able to get the most out of the preferential policies provided by local governments. The State Council measures of 1988 also stipulated that, after clearance of legal obligations, all profits made by Taiwanese investors could be remitted free of tax. In contrast to Taipei’s restrictions on the entry of mainland personnel to Taiwan, the mainland has granted Taiwanese investors and their Taiwanese employees multi-entry visas. Because there is no international treaty or third-party guarantee in case of legal disputes, the provisions give assurances that business disputes can be brought to arbitration at a third location. In areas with a large number of Taiwanese-invested firms, they may form Taiwanese business associations. Finally, Taiwanese businesses were entitled to all the policy incentives offered to other foreign investors. These preferential policies later became part of the “The Law on the Protection of Investments by Taiwanese Compatriots” issued in March 1994.14 In early 1989, the mainland decided to set up special areas earmarked for Taiwanese investors. Given the restrictions placed on investment in the mainland by Taipei, the State Council made it clear that Taiwanese investors could appoint their mainland relatives or friends as their legal agents. In May 1989, the State Council ratified the establishment of “Special Investment Zones in Fujian for Taiwanese Investors” in Haicang, Xinglin, the Huli Investment Zones in Xiamen, LangYu Island in Fuzhou, and the MeiZhou Bay Taiwan Investment Zones. In 1995, the State Council approved the establishment of “High-Tech Industrial Parks for Taiwanese Investors” in Nanjing and Shenyang.15 Following the rush to set up development zones since the early 1990s, mainland China is now sprinkled with zones like the Taiwanese Electronic Street in Shanghai, Toy City in Yutao, and Machinery Park in Xiaoshan, Zhejiang Province.16 At the end of 2004, Fujian Province planned to invest 400 billion yuan to build another Taiwanese investment zone in Xiamen, the largest in mainland China.17 Changes in the Economic Environment in Taiwan Across the Strait, Taiwan was feeling growing pressures to open economic and commercial ties with the mainland. Throughout the 1980s and early 1990s, the United States, Taiwan’s largest trading partner, was showing increasing impatience with surging trade deficits in its bilateral trade with Taiwan and a growing willingness to use protective measures to


65

correct the situation. Taiwan needed alternative markets to relieve its dependence on the U.S. market. Internally, by the 1980s, Taiwan’s economy was experiencing a gradual structural change as its supply of labor grew short. In 1987, about 65 percent of manufacturing firms were experiencing labor shortages. In 1990, Taiwan’s labor force participation rate dropped to 58.2 percent, the lowest in five years.18 Particularly hard hit were the labor-intensive sectors including textiles, apparel, leather, wood, plastics, the non-metallic, and the electrical and electronics industries, each of which suffered a loss of 10,000–80,000 workers during that period. Some of these sectors (e.g. apparel and leather goods) actually went through an absolute contraction in export volumes from 1989 to 1991. Even in the more strategic and dynamic sectors like electronics and precision instruments, there were signs of stagnation during 1989–1990, and the export performance of these sectors also went into decline.19 At the same time, the lifting of martial law and the rise of labor movements contributed to a sharp rise in production costs. Between 1986 and 1992, wage levels in the manufacturing sector increased by 80 percent, and if denominated in U.S. dollars, wages more than doubled. Between 1987 and 1990, wage increases averaged 12.2 percent while annual productivity gains were only 8.3 percent.20 In addition, land costs and pollution-control expenses also went up sharply. Rising costs meant that the search for cheap labor and land became the primary motivators of Taiwanese overseas investment. According to a survey of managers of the top 1,000 manufacturing firms, 100 financial institutions and the 300 top companies in the service sector, 86.8 percent listed problems with labor as the most important factor affecting the low investment rate in Taiwan.21 In addition, the trade surplus led to surging foreign currency reserves, which, in turn, created pressures on the New Taiwan Dollar (NT) to appreciate. By 1987, Taiwan’s foreign currency reserve had reached US$76.7 billion, the second largest in the world at the time. At the same time, the NT appreciated from 39.85 to one U.S. dollar in 1985 to 26.41 in 1989 and 25.16 to one U.S. dollar in 1992 (see table 3.2). These changes in the macroeconomic environment led to declines in domestic investment and export competitiveness. In 1988, while the domestic savings rate was 34.9 percent, the investment rate was only 23.3 percent.22 This great excess of domestic savings over domestic investment needs combined with the foreign exchange surplus to pressure Taipei to liberalize its foreign currency exchange regime. As part of a series of financial liberalization measures, each individual in Taiwan has

66

Conflict across the Taiwan Strait Table 3.2 Taiwan’s foreign currency reserves and exchange rates, 1982–2004 (unit: [reserve] US$1 billion, [exchange] US$1 to NT and RMB) Foreign currency reserves Year

Taiwan

1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

8.50 11.90 15.70 22.60 46.30 76.70 74.00 77.40 72.40 82.41 82.31 83.57 92.45 90.31 88.04 83.50 90.34 106.20 106.74 122.21 161.66 206.63 241.74

Mainland China –– –– –– –– –– –– –– –– –– 42.67 19.44 21.20 51.62 73.60 105.03 139.89 144.96 154.68 165.58 212.17 286.41 403.26 609.94

Exchange rate Taiwan

Mainland China

39.90 40.30 39.50 39.90 35.50 28.60 28.59 26.41 26.89 26.81 25.16 26.63 26.24 27.27 27.49 32.64 33.71 31.40 32.99 35.00 34.75 33.98 31.92

–– –– –– –– –– –– 3.72 3.76 4.72 5.32 5.51 5.77 8.45 8.32 8.30 8.28 8.28 8.28 8.28 8.28 8.28 8.28 8.28

Sources: Cross-Strait Economic Statistics Monthly, No. 146, Tables 44 and 45, March 2005, Mainland Affairs Council, Taipei, ROC.

been allowed to remit US$5 million, and each firm US$50 million, out of the island since 1987. Essentially, the long-term problem facing Taiwan is that its economy must restructure in order to meet changes in comparative advantage in the international division of labor. This poses a particularly serious challenge for a newly industrializing economy such as Taiwan, which lacks the firm grasp on advanced technologies needed to compete in the “up market” while the industries responsible for its past economic performance are already exiting the country. In order to prevent the exodus of laborintensive production from hampering the growth prospects of the economy, indigenous entrepreneurs must endeavor to upgrade their technology and explore the higher end of their product spectrum.23


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However, with inadequate financial and managerial resources to survive domestic industrial realignment and to upgrade their operations, many of Taiwan’s export-oriented SMEs were forced to relocate to places where they could rehabilitate their threatened competitiveness in the world market. This trend was demonstrated by Taiwan’s abnormally high direct foreign investment(DFI) to domestic investment ratios from the mid-1980s, and it is not surprising that outward investment flows surged at a time when domestic capital formation was at its lowest in almost twenty years. Between 1987 and 1992, there were 1,289 registered cases of overseas investment worth a total of US$5.34 billion, an annual average of 214.8 cases and US$893 million.24 In the 1990s, even though Taiwan had made some progress in upgrading its industries,25 its dependence on the U.S. market was still high. Efforts to venture into other markets met severe competition from Spain and Portugal in Europe, Singapore, South Korea, Malaysia and Thailand in Southeast Asia, and Mexico in the North American market. In contrast, Taiwanese investors not only have a shared language and cultural affinity in mainland China but also enjoy preferential treatment. Before 1990, most of Taiwan’s overseas investment went to Southeast Asia and North America. But that changed after 1991, following the lifting of the ban on indirect investment in the mainland in 1990. The apparent cost disparity between the two sides and their shared language and culture, which effectively lowered the entry barrier, made mainland China a popular site as both a cheap production base and a huge potential market. As they venture into the new territory of mainland China, Taiwanese entrepreneurs have been quick to adapt their technologies to an environment similar to the one they had experienced at home 15–20 years previously. Utilizing traditional subcontracting arrangements with firms relocated to the mainland, parent firms in Taiwan provide intermediate materials to subcontractors and pay processing fees only for qualified final products, which they then export to world markets through networks outside the mainland. This strategy of capitalizing on a combination of the cheap labor of mainland China and Taiwanese production efficiency has proved successful and promises handsome returns to both the investing and the invested parties. It seems clear in retrospect that, aside from their ample experience in original equipment manufacturing (OEM) and firmly established market outlets, dexterity in handling labor-intensive methods of production provides the ultimate point of advantage in the surging Taiwanese investment flows to the mainland.26

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Conflict across the Taiwan Strait Taipei’s Policy

As I argued in chapter 2, Taipei has attempted to restrict the outflow of investment capital to the mainland, fearing deepening economic integration between the two sides will allow Beijing to coerce Taiwan into submission to Beijing’s terms of unification under the “one country, two systems” formula. Until 1990, investments on the mainland were regarded as illegal under the decree for “Combating Rebels.” As late as May 1988, two Taiwanese businesspersons were found guilty by Taiwan’s high court of having business contacts and investments on the mainland, and were sentenced to three years and four months imprisonment and confiscation of all their property.27 Nevertheless, official restraints over capital flows to the mainland were being officially and practically phased out. In this sense, government policies to liberalize mainland-bound investment have almost always been developed after the fact and have been more a “show of the official position” than an effective regulation of actual events.28 As more and more investors moved to the mainland following the lifting of the ban on kinship visits, Taipei was finally forced to revamp its policy in order to maximize its profits and regulate more effectively the investment activities across the Taiwan Strait. In October 1990, Taipei formally lifted its ban on indirect investment on the mainland under the “Measures on Indirect Investment and Technical Cooperation with the Mainland.” By that time there were already over 2000 Taiwanese-invested firms in the mainland, with a total of more than US$2 billion (in contract). The new policy was designed to effectively “guide” and ensure the “soundness” of Taiwanese investment on the mainland. All investments were to acquire prior approval from the government. Late that same year, Taipei published its first “positive list” in order to better regulate investment flows to the mainland. Contrary to mainland China’s policy, Taipei sought to limit the scale of investment on the mainland. Accordingly, most sectors on the permissible list were industries that had already lost their competitive advantage on the island and were burdened with serious pollution problems. The new policy also attempted to gain influence over existing investment on the mainland by requiring Taiwanese investors to report investments already made there to the Ministry of Economic Affairs (MOEA) or face severe penalties. But despite an overall trend toward more openness, a cap of $50 million per project was imposed until it was abolished in 2001. But larger investment projects on the mainland still need to be approved on a case-by-case


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basis. Oftentimes, the procedure for approval of these investment projects can be extremely cumbersome and complicated, often taking much time and requiring detailed business information, which Taiwanese businesses are always reluctant to reveal. To begin with, the regulations stipulate that any request to put an investment project on the “permissible list” must be forwarded through the relevant industry association before it gets the approval of the Investment Evaluation Commission under the Ministry of Economic Affairs. Then there is a complicated coding system to determine which items Taiwanese businesses can invest in the mainland. Finally, there is a long list of finished and semi-finished products manufactured by Taiwanese firms on the mainland that cannot be imported into Taiwan.29 Investment is also discouraged by regulations continued from earlier times. The continuing ban on direct links has effectively raised the costs for transshipment of intermediate inputs between mainland-based subsidiaries and their parent companies in Taiwan. The absence of a bilateral investment treaty means that headquarters in Taiwan get no tax write-offs for their business losses in mainland China, and investors commit their funds at their own risk. Investments in mainland China also face stricter financial regulations by the Security and Exchange Commission. For example, listed companies are not allowed to earmark funds raised through new share-issues for mainland projects. Also, hoping to get business to “keep its roots” (zhi gen) in Taiwan, the government requires, in principle, that the annual sum of mainland investment by listed firms should not exceed their gross domestic investment in the same year.30 After Beijing issued a policy White Paper on “The Taiwan Question and the Unification of China,” in August 1993, which Taipei regarded as hostile to its interests, Taipei intensified its restrictions on investment flows to the mainland. According to the 1993 “Regulations Over Investments and Technical Cooperation with the Mainland,” all investment projects over US$1 million must obtain prior government approval and pass a rigorous review, and investments of any size must be reported to the Investment Evaluation Commission within six months. Also restricted are investments in the service sector, high-tech sectors, state-designated strategic and defense-related industries and agriculture receiving government R&D subsidies and assistance that would compete with domestic firms in the same sector. For example, Taipei still maintains a negative list of sectors in which Taiwanese investments in the mainland are restricted. They include chip-fabrication plants using more than 8-inch wafer technology, telecommunication, transportation, and other infrastructure projects like water supply and power generation.

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In addition to all these disincentives and restrictions imposed on mainland-bound investments, the government has also vigorously pushed a “southern policy” to divert investment flows from mainland China. Spearheaded by state- and KMT-controlled business groups, the government has provided soft loans and Overseas Economic Cooperation Funds (OECF) to the Philippines, Indonesia, and Vietnam to finance the development of major infrastructure projects like industrial parks and export-processing zones to meet the needs of Taiwanese investors.31 Through this strategy, Taipei also aimed to use Southeast Asia as an expanding market to counter the powerful pull of mainland China’s market for Taiwanese products in the long run. Finally, Taipei has imposed a ban on banks setting up branch offices in the mainland. Although it allowed business contacts between financial institutions via a third location in 1993, when it initiated its “exporting from the mainland, remitting money back to Taiwan” plan, prior approval from the Ministry of Finance was required under the “Provisions for Cross-Strait Financial Transactions” issued in April 1993, and the list of approved financial institutions was not made public until August 1994. As part of a new policy initiative in June 2001, Taipei adopted the “Regulations on Financial Exchange between Taiwan and the Mainland” that allowed banks to establish representative offices on the mainland even though full-fledged branches are still prohibited. By the end of 2003, there were already seven Taiwanese banks that had set up representative offices on the mainland, located in Shanghai, Beijing, Shenzhen, and Kunshan.32 Analysis of Investment Flows With more Taiwanese investors moving to the mainland, direct investment and trade flows have become the most important forms of economic interaction. Given the low entry barriers—that is, the small size of these investments, a shared language and culture and geographical proximity—Taiwanese investments on the mainland soon soared from US$520 million in 1989 to a total of US$41.25 billion by the end of 2004. As mentioned above, according to the estimate by Taiwan’s central bank, accumulated total Taiwanese investment in the mainland could be as high as US$70 billion—which approximates the total amount of contracted Taiwanese investment estimated in mainland statistics. There are now more than 63,000 Taiwanese-invested firms on the mainland. This amounts to nearly half (49.51 percent) of Taiwan’s total outward investment and has long surpassed total Taiwanese investment


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flows to any other areas, despite government incentives to encourage investment flows in that direction. Given that a large amount of Taiwanese investment goes to British Central America (19.8 percent of accumulated Taiwan’s outward investment between 1952–2003 and 18.74 percent in 2004), and that the British Virgin Islands has been one of the largest sources of foreign investment in mainland China (15.28 percent in 2002, 11.01 percent in 2003, and 12.42 percent in 2004), it is clear that these locations have been used as transit for Taiwanese investment on the mainland. So the real amount of Taiwanese investment in the mainland could be considerably larger than the statistics indicate (table 3.3).33 Taiwanese businesses invest in the mainland through various channels, depending on the size of their investments. For the majority of SME investors, given the liberalization of the foreign-currency exchange regime since the late 1980s, it is possible to simply send money out of the island to a third location from which it can be invested in the mainland.34 Large business groups have usually invested by controlling firms in third locations or through joint ventures with foreign firms. In 1991, there were only 237 individual investments reported, amounting to US$174.2 million, and in 1992, 264 cases were reported, making a total of US$265 million. However, when the government’s “Regulations over Investment and Technical Cooperation with the Mainland” of 1993 and the 1997 revision of the “Statutes Governing Relations Between the People of the Taiwan Area and the Mainland Area” made it clear that investors could report their mainland investments to the government within a certain period without penalty, these figures jumped to 9,329 in 1993 and 8,723 in 1997, with a total amount of investment of US$3.17 billion and US$4.33 billion, respectively. Unlike the Western and Japanese multinationals that possess sophisticated technologies, brand names, and oligopolistic market power in the world market, Taiwan’s investments on the mainland were spearheaded by SMEs oriented toward labor-intensive industries. In fact, it was the export of labor-intensive products under the auspices of Western and Japanese industrial conglomerates and trading companies that to a large extent accounted for the miraculous growth of the Taiwanese economy over the previous forty years. As one researcher observes, “throughout this period, Taiwan firms gained an international reputation in the OEM model in the burgeoning global technology sector, where tightly clustered relationships between individual producers and suppliers made Taiwan firms among the most efficient and reliable source for the world’s major technology producers.”35 Now that the mechanism of

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Table 3.3 Taiwanese investment in mainland China (unit: US$1 million) Taiwan statistics Year 1983–1988 1989 1990 1991 1992 1993*

Item

Amount

2004

237 264 1,262 (8,067) 934 490 383 728 (7,997) 641 (643) 488 840 1,186 1,490 (3,950) 1,837 (8,268) 2,004

520.0 990.0 174.16 246.99 1,140.37 (2,028.1) 962.21 1,092.71 1,229.24 1,614.5 (2,719.8) 1,519.2 (515.41) 1,252.8 2,607.1 2,784.2 3,858.8 (2864.3) 4,595 (3,103.8) 6,940.7

Total*

33,155

41,249.2

1994 1995 1996 1997* 1998* 1999 2000 2001 2002 2003

Mainland China statistics Average

0.73 0.94 0.90 (0.25) 1.03 2.23 3.21 2.22 (0.34) 2.37 (0.80) 2.57 3.10 2.35 2.59 (0.73) 2.50 (0.38) 3.46 1.24

Item

Contracted

Average

Realized

% 3.37 28.00 22.70 25.30 18.90 31.50

437 540 1,117 3,377 6,430 10,948

600 550 980 2,710 5,543 9,965

1.37 1.02 0.88 0.80 0.86 0.91

22 154 222 685 1,050 3,139

6,247 4,778 3,184 3,014

5,395 5,777 5,141 2,814

0.86 1.21 1.61 0.93

3,391 62.90 3,162 54.70 3,475 67.60 3,289 116.90

2,970

2,982

1.00

2,915

97.80

2,499 3,108 4,214 4,853

3,374.4 4,041.9 6,914.2 6,740.8

1.35 1.30 1.64 1.39

2,599 2,296 2,980 3,971

77.00 56.80 43.10 58.90

4,495

8,557.9

1.90

3,377

39.50

until 9/04

until 9/04

63,178

76,620

— 1.21

— 39,109

— 51.04

Notes: a. ( ) represents cases or number of registrations of previously unregistered investments, according to the revision of the “Statutes Governing Relations between the People of the Taiwan Region and the Mainland Region,” on May 14, 1997; b. * includes the number of registrations of previously unregistered investments; c. These figures do not add up to the total given due to rounding up. Sources: For Taiwanese statistics before 1991, see Steve Chan, “Peace by Pieces? Main-land–Taiwan Transaction Flows,” paper presented at the APSA Annual Conference in New York City, 1994, p.17; for mainland Chinese statistics before 1991, see Zhang Guanhua, et al. eds. 1993. Guidebook to Cross-Strait Trade and Investment (in Chinese), Beijing: Dongfang Press, p. 302; for both sets of statistics after 1991, see Cross-Strait Economic Statistics Monthly, No.146, MAC, ROC (Taipei), March 2005, Tables 10, 30.

comparative advantage has shifted against labor-intensive production at home, Taiwanese manufacturers have found the low-cost mainland an ideal destination, where they can benefit from their production know-how and well-established OEM networks in self-initiated DFI operations. Not surprisingly, before the early 1990s, most Taiwanese investments on the mainland fell into the labor-intensive category. Plastics


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and rubber products, electronic and electrical appliances, and garments and footwear were the top three in both numbers and contracted capital. Taiwanese investment in plastic and rubber products is heavily concentrated in Guangdong, while the garment and footwear industries are drawn to Fujian. Thus, the pattern of Taiwan’s DFI in the mainland, at least up until the early 1990s, fits nicely within the “defensive” model of foreign investment, which stresses cost-reduction in defending existing export markets as the underlying driving force of outward investment.36 Taiwanese investment in the mainland accelerated dramatically after a devastating earthquake in Taiwan in 1999 that temporarily shut down much of the computer-related industry on the island. The quake, together with the political and economic problems surrounding the suspension and then resumption of the construction of the island’s fourth nuclear power plant following the transition of power from the KMT to the DPP in May 2000, prompted many technology companies to relocate their manufacturing of the lower-end of technology products to the mainland. The shift of manufacturing base to mainland China for components assembly is also part of “a global trend of a mature technology sector which saw sales begin to decline and profit margins shrink,” especially following the burst of the bubble of the high-tech sector in the United States.37 As a result of this new wave of high-tech investment in the mainland, the value of mainland China’s information hardware production grew dramatically. Now about half of Taiwan’s high-tech products are made on the mainland, making the mainland surpass Taiwan to becoming the world’s third largest IT producer (after the United States and Japan).38 However, while mainland China has made some gains in the areas of IT production and exports, both production and exports are still largely controlled by Taiwanese investors and concentrated mostly in the low end of the supply chain. For example, out of the US$25.5 billion worth of IT hardware production in 2000, 70 percent was generated by foreign firms, and 70 percent of the foreign total was, in turn, generated by Taiwanese firms. In other words, Taiwanese-invested firms accounted for half of that US$25.5 billion.39 While most of Taiwan’s individual overseas investments are small, the scale factor is more apparent on the mainland than elsewhere for political reasons. For example, according to the MOEA, between 1987 and 1996 the average size of a Taiwanese investment in Malaysia was US$6.97 million, more than ten times the average of US$0.59 million for investments in mainland China between 1991 and 1996.40 Investments in Southeast Asia were led mostly by large business groups owned or controlled by the state and KMT business conglomerates. For example,

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in 1991, state-owned China Steel alone invested US$330 million in Malaysia. Mainland China depends, in contrast, on SMEs, but the frequency of investment is much higher than in Malaysia. For example, between 1991 and 1996, while there were 112 reported cases of investment in Malaysia, the figure for the mainland was 11,637. The mainland appears to be an ideal destination for the relocation of Taiwan’s threatened labor-intensive SMEs. Most of these early Taiwanese investors used cheap local labor to produce for export to a third market, and many of them relied on home sourcing of production inputs and equipment. According to Ouyang, Lin, and Chou, on average 86.6 percent of the machinery and equipment and 69.9 percent of the raw materials, semi-finished products, components and parts required in overseas production were shipped in from Taiwan. The remainder was procured from a variety of sources, including upstream DFI firms originating in Taiwan, and only a minimal amount was furnished by local mainland producers.41 This pattern of international sourcing was not new to Taiwanese investment on mainland China. It is frequently observed in DFI operations worldwide as it provides a ready channel for internal transactions between the parent firm and the overseas subsidiary when the two entities are vertically integrated in production. Since Taiwanese-capitalized firms import intermediate materials and equipment from Taiwan, they generate exports from Taiwan to the mainland. In the absence of viable local suppliers, especially in the early phase of Taiwanese investment on the mainland, reliance on long-standing networks of customer–supplier relationships at home seemed the best way to guarantee the quality and supply of inputs. From the vantage-point of Taiwan’s economy, as long as outward DFI is based on intra-firm subcontracting, the Taiwanese economy loses only a relatively small number of jobs involving unskilled labor. Since Taiwan is facing a shortage of unskilled labor, this could be considered beneficial. The Taiwanese economy also benefits from relocating those production processes that have lost international competitiveness because of rising wage rates. The machines used in such production would become useless if they stayed in Taiwan. However, transported to China and combined with its pool of cheap labor, they continue to produce goods that are internationally competitive. Thus, an “export shift” from home country to host country is at the heart of the defensive outward investment strategy. Even the transfer of exports is more apparent than real, since the lion’s share of foreign exchange earnings falls into the hands of the investors. In this regard, Taiwan has successfully duplicated the “export shift strategy” Japan has pursued since the 1960s, indirectly exporting to the


75

United States through production bases in the newly industrialized countries (NICs) and member states of the ASEAN. Taiwan has shifted its production base to the mainland and, to a lesser extent, other Asian countries. According to Chin Chung’s calculations, by 1991 Taiwan had shifted an estimated US$1.8 billion worth of exports from its own trade account to that of mainland China through a relatively minor investment of US$754 million. If a total of US$3.49 billion (at the end of 1991) of investment contracts had been realized, and if the same level of industrial distribution was assumed, the potential “export shift” would have amounted to US$8 billion.42 Since large-scale Taiwanese investments on the mainland have occurred since 1992, while the surplus China has incurred in its trade with the United States after 1992 has also risen sharply, one would expect the export shift effect to have been even more dramatic. Thus, if Taiwan has failed to avoid entanglements, Beijing’s efforts to promote economic and trade relations in order to undercut support for the independence movement and forestall the drift towards a de jure independence has carried an increasingly high price tag politically. For example, growing trade friction with the United States is fueled in part by Taiwan’s DFI on the mainland, most of the products of which have been exported to the United States. The injection of MIC (made in China) products into the U.S. market has exacerbated trade frictions between China and the United States while the lion’s share of the earnings from those exports remains outside the Chinese economy. China’s trade surplus with the United States grew rapidly from US$2.8 billion in 1987 to US$22.7 billion in 1993, at the same time as the combined surplus of Taiwan and Hong Kong in their trade with the United States dropped from US$23.1 billion to US$8.6 billion. But the total balance sheet has not changed nearly as much if we amalgamate the statistics from these three areas. Only the location of manufacture has changed. By 1997, when China’s trade surplus with the United States rose to US$49.7 billion, the combined balance sheets of Taiwan and Hong Kong dropped further to US$7.4 billion. Even in 2003, when mainland China’s trade surplus with the United States reached about US$124.1 billion, the combined surpluses of Taiwan and Hong Kong in their trade with the United States remained below ten billion dollars at US$9.48 billion, far below their 1987 levels.43 While U.S. statistics show only a surplus in its trade with Hong Kong, many of the benefits actually went to Taiwanese firms because many of them have invested in the mainland via Hong Kong. This situation is also reflected in the changing market shares of export goods from Taiwan and mainland China in the United States In 1992,

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Taiwan’s market share was 4.62 percent, while mainland China’s share was 4.83 percent. By the end of 2003, mainland China’s share jumped to 12.1 percent while Taiwan’s share fell to 2.51 percent.44 In the early days of this interchange of trade balance sheets, much of the growth in China’s export of shoes and toys to the United States was produced in factories capitalized from Taiwan and Hong Kong. For example, Taiwan’s shoe exports to the United States dropped by 23.2 percent in 1990, while China’s rose by 105 percent.45 In 1993 Taiwan’s shoe exports continued to fall by 30.7 percent and again by another 25.4 percent in January 1996. At the same time, the mainland’s shoe exports rose by 32.6 percent and 8.1 percent, respectively. More recently, Taiwanese high-tech firms have moved across the Taiwan Strait en masse, resulting in mainland China overtaking Taiwan to reach the number three position in global IT production in 2001. However, three-quarters of China’s IT exports are controlled by Taiwanese investors. In this process, local mainland firms have participated mostly at the low end of the supply chain, in components and basic assembly, while the high-end core technologies are still in the hand of Taiwanese investors.46 This situation was, at least in part, deliberately encouraged by a scheme involving firms in exporting from the mainland while depositing hard currency earnings in Taiwan (dalu chukou, Taiwan yahui), a plan officially sanctioned by Taipei after the government formally lifted its ban on indirect investment at the end of 1990.47 While mainland China has also benefited from these investments in terms of job creation and foreign currency earnings (processing fees and wages paid in hard currency), the price has been increasing trade friction with its major trading partners. As Taiwan’s investments have, at least in part, raised mainland China’s trade surplus with the United States, they have aggravated its trade deficit with Taiwan. As mentioned above, since 1994 mainland China has replaced the United States as the source of Taiwan’s largest trade surplus. Since then, Taiwan has incurred a persistent trade surplus with the mainland. As mentioned earlier in the chapter on Trade Relations across the Taiwan Straits, according to MAC’s own estimate, Taiwan’s trade surplus with the mainland in 2004 alone was US$28.28 billion or 460.7 percent of Taiwan’s global trade surplus, which means that, without its substantial surplus with the mainland, Taiwan would have incurred a huge trade deficit.48 This phenomenon is reminiscent of Japan’s foreign investment operations in Taiwan in the 1960s and the 1970s that resulted in Taiwan’s heavy surplus with the United States and a sustained deficit with Japan. As in the relationship between Japan and Taiwan, where technological


77

dependence and restricted access to the Japanese market accounted for a good part of Taiwan’s long-term deficit with Japan,49 mainland China faces a high level of import protection from Taiwan. If restrictions were removed, the current bilateral imbalance would no doubt be improved substantially, if not entirely reversed, by an increasing volume of return purchases of semi-finished and finished products produced by Taiwanese firms on the mainland. Modes of Taiwanese Investment in Mainland China Early investors, new to the mainland environment, mostly chose to participate in joint ventures. For example, of the nineteen Taiwanese firms in Xiamen before 1987, joint ventures accounted for 57.9 percent, wholly owned ventures 26.3 percent, and cooperative ventures 15.8 percent. But gradually sole ownership came to dominate, since most of the invested capital came from Taiwan, with little from the mainland. Also, Taiwanese investors soon found that cooperation with local managers was very difficult and local officials could more easily be dealt with by hired personnel. Mainland policy also influenced the shift. After the State Council issued the “Measures to Encourage Investment by Taiwanese Compatriots” in 1988, providing guarantees for the property rights of Taiwanese investors against nationalization, fears of confiscation diminished considerably. In 1992, Taiwanese investment in the form of sole ownership stood at only 22.9 percent. By early 1993, it had risen to 55.6 percent.50 Perhaps most importantly, though, whole ownership was preferred because most Taiwanese enterprises acquire their raw materials, capital, technology, and equipment and export their products through already established sourcing and sales networks. All they need locally is cheap labor and land for assembly and finishing.51 As I mentioned in the previous section, early Taiwanese investments on the mainland were mostly in labor-intensive and export-processing industries. Roughly 85–90 percent of their products were shipped to a third market, with only about 10 percent sold locally. This pattern is similar to earlier Japanese investment in export-processing zones in South Korea and Taiwan when they were well endowed with cheap labor. The main benefits to the Chinese economy are employment creation, foreign exchange earnings from processing fees and wages, and worker training under foreign management. From 1991, Beijing adjusted its policies to attract more and larger business groups to invest in the mainland. According to the new policy,

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only investment in designated sectors, that is, high-tech industries and infrastructure projects, was to enjoy preferential tax treatment. In addition to an across-the-board value-added tax on imports of materials and inputs, firms were required to pay back any taxes deducted as part of a preferential tax policy if a project was terminated within ten years.52 In addition, foreign firms intending to enter the Chinese market were strongly encouraged to invest directly in mainland China. As a special incentive to encourage large Taiwanese business groups to move to the mainland, Beijing has steadily opened more and more of its markets to Taiwanese investors by increasing the proportion of production that Taiwanese-invested firms can sell in the mainland market.53 Large businesses, worried that local suppliers and foreign competitors would begin to take downstream users away from them, started to move to the mainland market in a big way after 1992. This is reflected in the statistics. For example, in 1995 the number of reported mainland investment projects decreased by nearly half to 490, but the amount of capital involved increased by about 13.6 percent.54 Again, in 1996 the number of reported cases dropped by 22 percent, but the total amount of investment increased by another 12 percent. According to Taiwan’s Mainland Affairs Council, between 1990 and 1992 the average amount of individual Taiwanese investment in the mainland was US$365,000. By 2004, the average size of Taiwanese investment in the mainland rose to US$3.46 million. This shows a clear trend toward larger investments on the mainland.55 At the end of October 1998, the number of Taiwan’s listed firms with investment in the mainland was more than 143 listed firms or about onethird of all listed firms in Taiwan.56 By the end of 2004, the number increased to 462 or more than 70 percent of all Taiwan’s listed firms had investments in mainland China.57 According to a survey at the end of 2005 by China Credit Agency (Zhonghua Zhengxin Suo) of Taiwan’s 250 big business groups, 85.2 percent had invested in the mainland by 2004.58 In the early days, most investors were export-oriented processing industries with few links to the local economy. However, large business groups, which are more oriented toward the local market, have found home-sourcing for raw materials and intermediate inputs increasingly costly given the continuing ban on direct links across the Taiwan Strait. Taiwanese firms on the mainland are increasingly seeking intermediate supplies from local companies, especially other Taiwanese and foreign firms located there. According to one study, in 1994 imports of intermediate inputs from Taiwan had dropped to 52.3 percent of all the inputs of Taiwanese firms on the mainland. At the same time, local enterprises


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supplied 32.7 percent of these inputs.59 Surveys by the Federation of Industry in 1992, January 1994, and November 1994 show different figures, but a similar trend: home sourcing for inputs and parts by Taiwanese firms in the mainland dropped from 64 percent in 1992 to about 36.2 percent in 1994; the proportion of purchases from local firms rose to 40.2 percent, local Taiwanese firms accounted for 10 percent, and imports from other countries constituted 13.6 percent.60 According to a latest report released by Taiwan’s Ministry of Economic Affairs, in 2003 the ratio of local purchases by Taiwanese invested firms in the mainland rose to 49.93 percent.61 It is clear that local suppliers are catching up, and new networks of supply consisting of Taiwanese firms, local suppliers and other foreign firms are replacing the web of connections across the Taiwan Strait. However, since the majority of Taiwanese firms are still simple subsidiaries, more than 73 percent of equipment is still obtained from Taiwan, keeping exports from Taiwan to the mainland robust.62 Given the complex subcontracting networks among firms in Taiwan, the movement of a few soon dragged others along—hence the strength of investment flows to the mainland despite government restrictions. Thus, as SMEs relocated to the mainland, they gradually dragged along their upstream suppliers. After 1992, as more large business groups moved to the mainland, many of their subcontractors followed them. As a result, new supply networks have been recreated on the mainland with both Taiwanese firms and local companies. This dynamic has produced new centers of Taiwanese investment concentrated in particular industries, such as the bicycle industry clustered around Baoan, Guangdong; the motorcycle industry in Changzhou, Jiangsu; machinery in Yutao, Zhejiang; low-end electronics in Dongguan, Guangdong; and high-tech firms in the Shanghai–Suzhou corridor.63 The changing nature of Taiwanese investment, from small to mediumsized and large business groups, is also reflected in its geographical spread. As D.C. Yang, the former head of the Shanghai Association of Taiwanese Businesses, said: “With China entering the World Trade Organization, we are looking more at the domestic market here than at China as a base for export.”64 Because the new investors are mostly eyeing mainland China’s domestic market,65 they have expanded beyond their early concentration in the southeast coast region in Guangdong and Fujian into the Yangtze River Delta in eastern China around Shanghai, and Bohai Bay around Beijing and Tianjing. Again, according to Yang, “East China is now the hub of Taiwan investment radiating out to other parts of the country.”66 For example, according to statistics from Taiwan’s Mainland

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Affairs Council, Taiwanese investments in Jiangsu Province reached US$234.1 million in 1994, surpassing Guangdong’s US$ 230.9 million. Shanghai came third with a total of US$157.7 million, while Fujian Province was relegated to the fourth position, with US$96.6 million. By the end of 2004, Jiangsu had about 43.28 percent of total Taiwanese investment on the mainland, while Guangdong had 28.89 percent and Fujian only 8.45 percent.67 But according to the estimates of the mainland Ministry of Commerce, in 2004, Shanghai and Jiangsu had about 58.4 percent of all Taiwanese investment in the mainland and Zhejiang had about 9.3 percent. Together the Yangtze River Delta in eastern China had more than 60 percent of all Taiwanese investment in the mainland in 2004 with only about 20 percent left for the Pearl River Delta in southern China.68 As part of the new wave of investment by Taiwan’s high-tech firms after the 1999 earthquake and the political turmoil surrounding the construction of the island’s fourth nuclear power plant in 2000, this concentration in eastern China around Shanghai has accelerated. According to the Office of Taiwan Affairs of the Shanghai Municipal Government, by mid-2001 Taiwanese firms had invested in 3,900 projects in the city (second only to Hong Kong), with a total amount of investment of US$6.3 billion, fourth only after Hong Kong, Japan, and the United States. But given the habit of Taiwanese businesspeople of investing anonymously by going through a third location, the real figure could be considerably higher than official estimates.69 From the point of view of Taiwan’s economy, there is an important difference between the original type of investment based on processing and the relocation of intermediate-input production factories, especially upstream producers, to the mainland. Processing investments were essentially based on an international intrafirm division of labor in which only part of the production process was relocated to the mainland. The relocation of factories producing intermediate inputs and upstream industries, however, touches on the sensitive issue of the erosion of Taiwan’s industrial base and increased dependence on the mainland both economically and politically.70 Since investment-related exports tend to taper off as local supply networks of intermediate products (including those furnished by other foreign firms) get established, the current restrictions on direct shipment across the Taiwan Strait may turn against Taiwan. Continuing these restrictions is likely to lead to more vigorous Taiwanese capital flows to maintain production to the mainland market in order to preserve the original supply chain as downstream users have migrated to the mainland in search of low-cost production bases.


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For example, Cooke’s study shows that, with China emerging as the world’s lowest cost production platform, and driven by complex technological dynamics in the global market, Taiwanese IT firms have migrated to the mainland en masse, relying on their existing networks of suppliers and distributors to ensure quality and delivery. “Offshore, fragmented and largely invisible,” this new wave of investment was channeled mostly through third locations in Hong Kong, the British Virgin Islands, and the Cayman Islands in order to circumvent government restrictions. Eager to promote high-tech development, local governments in the Pearl River Delta and the Yangtze River Delta accommodated this wave of Taiwanese high-tech firms with industrial processing zones and polices tailored to the needs of Taiwanese investors.71 Currently, Taiwan supplies about 61.6 percent of the world’s laptop computers, and two-thirds of these are made on the mainland.72 It is increasingly clear that the future of Taiwan’s economy in the dynamic Asia-Pacific region will depend more and more on smooth economic cooperation with mainland China. The challenge Taiwan faces is not just to maintain competitiveness vis-à-vis mainland China but among East Asian competitors like South Korea, Singapore, Hong Kong, and Japan. This reality was widely accepted in Taipei policy circles around mid-1993, when economic technocrats under pressure from the business community began to work on plans to develop Taiwan into a site for regional operation centers in the Asia-Pacific region. Given the dynamics of regional growth at the time, it was hoped that Taiwan could become a regional center for research and development, finance, distribution, services, data-processing, and telecommunications. But this was unlikely to happen without the relaxation of Taiwan’s restrictions on cross-Strait economic interactions. With mounting pressure from the business community, some key economic officials began to vigorously promote the vision of regional operation centers from early 1994. During 1994, the minister of economic affairs, Chiang Ping-kun, on two occasions openly proposed the idea of developing “point-to-point” direct air and sea links with the mainland. And in late August, an influential shipping tycoon, Chang Yung-fa, the founder of the Evergreen Group and backer of the Center for National Policy Studies (an important think tank for former President Lee Teng-hui), openly called for a “separation of the economic from the political in dealing with cross-Strait relations.”73 However, the enthusiasm shown by these individuals put them on a collision course with agencies of the security establishment such as the MAC, which functions more like a gatekeeper rather than a facilitator of cross-Strait exchanges.

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The economic technocrats turned out to be the winners of this debate when, in September 1994, Premier Lien Chan endorsed a new policy emphasizing the economic and trade aspects of cross-Strait relations.74 According to Taiwan scholar Chu Yun-han, this new policy orientation also led to a reshuffling of the MAC, with the replacement of hard-liner Huang Kung-hui by a pragmatist, Vincent Siew. Vincent Siew soon advocated setting up offshore transshipping zones (OTZ) at Taiwan’s major ports, a plan that was officially introduced by the Executive Yuan in May 1995 as part of a response to Jiang Zemin’s eight points set out at the beginning of 1995, which Taipei regarded in a friendly light. According to this plan, cargo from mainland China can be transshipped by foreignregistered vessels through these special zones to any place in the world other than Taiwan. And cargo originating outside of Taiwan can be transshipped through these zones to any city along the mainland coast.75 However, the mainland was suspicious that Taipei was really trying to “internationalize” the sea lanes across the Taiwan Strait, since only foreign-registered vessels could operate between the OTZs and mainland ports. In addition, the approaching return of Hong Kong to China, and the prospect of entry into the General Agreement on Tariffs and Trade (GATT), and the World Trade Organization (WTO), by both Taiwan and mainland China, could pose a serious challenge to Taipei’s continuing ban on direct commercial links across the Taiwan Strait and its restrictions on mainland China’s imports into Taiwan. To deal with these challenges, the economic technocrats in Taipei offered a new initiative involving the development of a Regional Operation Special Zone (ROSZ). The ROSZ would upgrade the OTZs into fully fledged free-trade zones that would allow direct cross-Strait trade and financial services and even bring in mainland Chinese migrant laborers. Premier Lien Chan even instructed his economic officials to expand the scope of the proposed ROSZ to include point-to-point direct sea and air links with mainland China. All these proposals were part of the effort to keep upstream capital-intensive industries in Taiwan.76 With signs of restrictions easing on economic interactions across the Straits, many large business groups reactivated plans to move to the mainland. In the summer of 1996, Formosa Plastic started a new wave of investment fever by signing a deal to build a US$3.4 billion power plant in Fujian. The President Group also revealed its plan to build a large power plant in Wuhan. In early August, a blue-ribbon business delegation, led by the president of the Federation of Industry, visited mainland China, and during that trip some of the business leaders involved openly criticized government restrictions on economic interactions across the


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Taiwan Straits. Alarmed by the increasing assertiveness of the business community, President Lee Teng-hui intervened personally in August 1996 by issuing his motto: “don’t rush, be patient” ( jieji yongren). Designed to ensure that Taiwan would not become too economically vulnerable to mainland influence, this new policy forced the cancellation of many of the planned large investment projects and led to a revised policy, issued in July 1997, that further restricted the areas where Taiwanese investors were allowed to invest in the mainland and capped individual investments on the mainland at US$50 million. To ensure business compliance to the new policy, Taipei also threatened defiant business groups with tighter tax audits and recall of loans from stateowned banks. As expected, the policy shift also led to a growing rift between the political leadership and the business community, as the new regulations carried an increasingly high price tag for Taiwan as its business barometer plunged.77 The policy of “don’t rush, be patient” continued after the power transition from the KMT to the DPP in May 2000. For the most part, Chen and his supporters continued to emphasize the “Taiwan first” policy and remained hostile toward economic interactions with the mainland. However, amid mounting political and economic problems at home and under growing pressure from the business community, Chen’s government began to show more flexibility in developing crossStrait economic ties. Aware also that many businesses were skirting government restrictions over domestic ceilings via a third location, Taipei wanted to keep its policies realistic so as not to lose control. For this purpose, Chen set up an Economic Development Advisory Council in mid-2001 which recommended that Lee Teng-hui’s “don’t rush, be patient” policy be replaced by a new approach of “active opening, effective management” (jiji kaifang, youxiao guangli). This recommendation was later endorsed by Chen and adopted as the new government policy regarding cross-Strait economic relations at the end of the year. Under the new policy, Taipei lifted that cap of US$50 million per project imposed on investment to the mainland and an automatic screening system was put in place for investment under US$20 million. According to this system, an application for investment under US$20 million will be automatically approved if the regulatory authorities have not made a decision within a month. Mainland-bound investment was simplified into one general category that required approval on a case-by-case basis and a prohibited category which included investments in the service sector, high-tech sectors, state-designated strategic and defense-related industries, agriculture receiving government R&D subsidies, and other

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infrastructural projects. The government also expanded the list of categories permissible to invest in the mainland to include the lower-end production in the semiconductor sector. The government also allowed banks to set up representative offices on the mainland.78 In general, the new policy relaxed restrictions on Taiwanese investment on the mainland. In addition, in early 2001, Taipei had opened three “mini-links” between the two offshore islands of Kinmen and Matsu and the mainland. But this move was really nothing more than a symbolic gesture, merely legalizing the large-scale smuggling that had long operated between these islands and Fujian. The new policy was adopted because, with the imminent entry into the WTO of both sides, the ban on direct links with the mainland might prove difficult to maintain anyway. The opening of the three mini-links and the other minor changes to Taipei’s policy on economic relations with the mainland received only a lukewarm response from mainland China. At first, uncertain whether Taipei’s new policy reflected a genuine reorientation or just another move by Chen with an eye on the legislative election at the end of 2001, Beijing was extremely cautious. Beijing had no interest in rescuing Chen and his government from their mounting economic and political problems, and even less in helping the DPP gain control of the legislature. While the new policy on cross-Strait relations was a sign in the direction of normalizing cross-Strait economic linkages within the WTO framework, it was no more than recognition of events that had already taken place and was intended more as a means of effective regulation than to ease existing restrictions.79 But despite Taipei’s stated intention to reorient its policy, little was done until October 2003 when the Legislative Yuan passed a new “Statute Governing the Relations between People of the Taiwan Area and the Mainland Area.” However, even the new law was a mixed bag at best. While some restrictions were relaxed, others were tightened further. Under a new special screening mechanism that was implemented in May 2002 for mainland-bound investment over US$20 million, the cap of US$50 million per project was effectively retained. With the exception of a provision dealing with the residency status of mainland spouses married to Taiwanese, nothing concrete was done regarding the creation of direct links in shipping, aviation, and communications. Instead of “active opening, effective management,” the underlying principle of the new law remained the old watchword of “openness in principle, regulation as a necessity” (yuanze kaifang, biyao guangli).80 For example, to counter mainland China’s new charm offensive directed at the heartland of the pan-green supporters, Chen decided to


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throw another cold shower over the renewed China fever following visits to the mainland by opposition leaders and mainland China’s unilateral offer of tariff-free imports of fifteen types of Twainese fruits. The emphasis on regulation rather than openness has been reiterated again more recently when Chen called for tightening restrictions over cross-Strait economic relations. Given Taipei’s refusal to accept the “one China” principle, Beijing began to show more flexibility as part of a reorientation of its strategy on “placing hope on the Taiwanese people.” To achieve a breakthrough, Beijing dropped the “one China” principle as its political prerequisite and instead put forward a “cross-Strait routes” formula in negotiations over the three direct links.81 This new flexibility opened negotiations that successfully launched direct charter flights across the Strait for Taiwanese businessmen to return to Taiwan during the Lunar Chinese New Year. Following the momentum, Frank Hsieh, Taiwan’s premier at the time, proposed in 2005 to open negotiations with the mainland over the establishment of three mini-direct links between the island of Penghu and the mainland, cargo and passenger charter flights across the Strait, and permission for Taiwanese airlines to fly through mainland airspace in order to reduce rising fuel costs. But the plan was effectively aborted with the reshuffle of the cabinet and Chen’s reiteration at the beginning of 2006 of tightening control over economic interactions across the Taiwan Strait. Vacillation in Taipei’s policies reflects the perplexing situation facing the government there. On the one hand, growing economic dependence on the mainland market may provide Beijing with leverage over Taiwan as its economic future becomes increasingly linked to that of the mainland. In addition, deepening economic integration across the Taiwan Strait may shift the parameters of the debate over political identity in Taiwan, undercutting support for the incremental movement toward independence. On the other hand, despite these concerns, Taipei is under constant pressure to keep its policies realistic as many Taiwanese firms skirt official restrictions and invest in sectors regulated by government policies.82 More importantly, rapidly expanding cross-Strait economic interactions are part of a broad “globalization trend that ultimately puts crossStrait relations into a much larger scheme of regional and global economic interdependence.”83 The ASEAN Plus Three (Japan, China, and South Korea) dialogues have already provided impetus for the formation of various schemes of regional cooperation like the “free trade agreement” (FTA) to be realized in 2010 between ASEAN and China,

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“economic partnership agreement” between ASEAN and Japan and exploratory studies of a tripartite FTA between Japan, South Korea, and mainland China.84 Another development is the “closer economic partnership arrangement” (CEPA) between mainland China, Hong Kong, and Macao. Preferential treatment among members in terms of market access and favorable tariff rates and Taipei’s continuing resistance to being a part of this global and regional trend may put it at the risk of marginalization, especially as China’s commercial ties with its Asian neighbors deepen. As aforementioned, Taiwan faces not only the political challenges of economic integration from mainland China but also the mounting economic challenge of increasing competition from other East Asian countries, especially South Korea, Singapore, Hong Kong, and Japan. In addition, China’s deepening engagement with the rapidly expanding regional cooperation arrangements in East Asia and Taiwan’s peripheral status to these arrangements may also force more Taiwanese firms to relocate to the mainland in order to benefit from the various forms of preferential treatments that might incur. “Taiwanese firms producing local content goods can over time export under free trade terms to certain third-country markets. Additional incentive to relocate operations to mainland China would come from the greater imperative to improve cost competitiveness given the freer market access under FTA conditions now enjoyed by rival firms based in China’s FTA partner countries.”85 As Skanderup points out that given the importance of the mainland market to the continued competitiveness of Taiwan’s harbors, Taipei’s continuing ban on the three direct links, especially direct shipping links, with the mainland is already undermining its openly stated policy goal to build itself as a regional economic hub.86 “In the last two years, Kaohsiung harbor has dropped from the world’s third largest container harbor to the fifth largest, falling behind Pusan, South Korea in 2001 and behind Shanghai in 2002.”87 While many companies may not want to leave Taiwan, they would choose Hong Kong or Shanghai as the hub, not Taiwan because of the lack of the three direct links. Taipei’s continuing restrictions on mainland talents to work in Taiwan will certainly not help the competitiveness of Taiwan’s high-tech firms. As one Taiwanese IT elite says, “the sharp contrast between the cautious policies of Taiwan and the aggressive drive of China to attract talent may further weaken Taiwan’s international competitiveness.”88 To conclude, I have analyzed trade and investment flows across the Taiwan Strait and government policies relating to such flows in this chapter. Beijing has consistently made great efforts to promote cross-Strait


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trade relations and to woo Taiwanese investment into the mainland. Beijing hopes that deepening economic integration between the two sides will undercut support for the Taiwan independence movement and forestall Taiwan’s drift toward a formal separation with the mainland. In contrast, Taipei under both Lee Teng-hui and Chen Shui-bian has sought to restrict and control the pace of cross-Strait economic interactions and continued to prohibit direct trade, transportation, and postal services with the mainland. For them and their pro-independence supporters, unfettered flow of trade and investment relations with the mainland will create political and economic dependence leaving Taiwan vulnerable to Beijing’s unification campaign. Therefore, they argue for a balance between cross-Strait economic exchanges and protection of Taiwan’s political autonomy and security. Regardless of these considerations and government policies to restrict cross-Strait economic interactions, trade and investment flows between the two sides have been flourishing and quite resistant to politics. As aforementioned, currently mainland China is Taiwan’s largest export market accounting for about one-quarter of all its export. If Hong Kong is included, the proportion will go up to more than a third of all Taiwan’s export. Besides, mainland China is also the source of the largest trade surplus for Taiwan, without which Taiwan’s overall trade balance sheet will be in the red. Finally, mainland China is also the largest recipient of Taiwanese investment attracting more than half of all Taiwan’s overseas investment. This massive flow of Taiwanese investment to the mainland was led initially by Taiwan’s nimble small and medium-sized firms that are focused on short-term profits and very sensitive to changing costs. When the economic environment changed on the island, they were the most creative in evading government restrictions and invested in the mainland to reduce costs. Most these firms concentrated along the southeastern coastal provinces of mainland China engaging mainly in electronics manufacturing, base metal, chemicals, precision machinery, and plastics manufacturing. As downstream users, their migration to the mainland en masse, soon dragged the upstream big business groups into the mainland. With the mainland emerging as the world’s major export manufacturing platform and an important market, Taiwan’s high-tech firms are also allured to the mainland. This presents a huge challenge for Taiwan’s leaders. They fear that deepening cross-Strait economic interactions will eventually hollow out Taiwan’s own manufacturing industries to the mainland, especially the high-tech sectors that are the source of its economic strength. But there

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are practically no ways to stop such flows or even to regulate them effectively because they are part of the dynamics of a larger force of globalization and regionalization. While further economic entanglement with the mainland may lead Taiwan into Beijing’s unification trap, continued resistance to the dynamics of the market forces may put Taiwan at risk of being marginalized of the benefits of regional integration. Taipei’s dilemma is reflected in the stop-and-go cycles of its policy regarding cross-Strait economic relations. Through an analysis of the patterns, characteristics, and trends of these trade and investment flows, I have shown that while government policies have an impact on crossStrait economic interactions, their influence is far from determining. A deeper understanding of the complexity of this growing economic interdependence requires micro-analysis of the organizational characteristics of businesses and the institutional environment in which the private sector interacts with the state. This is the subject of chapter 4.

CHAPTER

FOUR

Industrial Organization and Cross-Strait Economic Interactions

This chapter examines industrial organization in Taiwan and the institutional basis of government–business relations in economic interactions across the Taiwan Strait. Drawing on insights from the New Institutional Economics, I discuss Taiwan’s dichotomous market structure and its dual financial system and their impact on the organization and behavior of Taiwanese businesses at the level of interactions between business and government and between business and business. Unlike previous analyses that concentrate on state policy and the structural power of big business, the focus here will be on the organizational characteristics of SMEs. My hypothesis is that the organizational characteristics of businesses and their institutional links with the state affect the strategies they choose in their interactions with the state. In turn, the successful implementation of state policies depends not only on state power, but also on its institutional links with the private sector and the “compliance mechanisms” at its disposal. To the extent that state policies comply with the legitimate interests of the private sector and dominant social institutions, its policies have a chance of success. In this sense, the state’s capacity to intervene in the private realm can be weakened not because of a lack of autonomy, but because autonomy can deprive the state of valuable institutional links with the private sector. Therefore, a nuanced understanding of government–business relations in economic interactions across the Taiwan Strait must not only account for state policies, but also for the institutional basis of the mobility and power of the private sector. The focus of this chapter is thus on the dynamics of government-business interaction within a given institutional context.

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Conflict across the Taiwan Strait Industrial Organization in a Dichotomous Market Structure

The capitalist economy of Taiwan is quite unlike the strongly hierarchical inter-firm networks found in Japan and Korea, where big firms control smaller ones through vertical subcontracting relations. Major firms in these networks seek to control the entire commodity chain and lead the market by actually creating the demand for the products they develop and produce. Within this all-encompassing environment, most components and services in the production sequence are delivered from within the network and each firm is an integrated unit in the interfirm network chains.1 These giant, vertically integrated organizations constitute what Gary Hamilton has called “demand-creating” networks. Accordingly, the success stories of Japan and Korea in the past few decades are located precisely in the stability and flexibility of these large vertically integrated networks of interfirm and intrafirm relations.2 In contrast to the vertically integrated keiretsu and chaebol, the familybased business groups of Taiwan have quite narrow and fragmented spans of effective control. On average, they are small in terms of capital, political connections, and the number of firms under their control. Also, since they are not vertically integrated, business groups in Taiwan are less concentrated than their counterparts in Japan and Korea. Instead of incorporating downstream users into a multidivisional corporation, they have a tendency to diversify once they are established in a principal line of business.3 This investment pattern leads to the creation of a loosely organized multicompany group called guanxiqiye (“related enterprises”) rather than a single multidivisional corporation.4 This is closely related to Taiwan’s dichotomous market structure and the vulnerability of the economy to external market variations. Since these business groups are dependent on the demand for intermediate goods and services from the large number of SMEs that produce for export, changes in downstream demand will often stir up the mix of top business groups. Given the rapid shifts of consumer taste in the export market and the constant change in production costs and technology, diversification is often a prudent strategy to reduce risks because it allows firms to easily shift technology or even product lines in response to external market changes. This form of organization in which firms are linked through horizontal networks responds to, rather than creates, external demand. Gary Gereffi calls them “demand-responsive” or “buyer-driven” networks.5 This unique feature of industrial organization in Taiwan is related to what Taiwanese economist Chou Tien-cheng has called a “dichotomous

Industrial and Economic Interactions

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market structure.” Under the “dichotomous market structure,” a competitive export-oriented sector dominated by a large number of SMEs exists simultaneously with a monopolistic domestic-oriented sector dominated by state enterprises and large business groups. Under this unique market structure, the export sector is quite distinct from the domestic-oriented sector.6 Thus, while in Japan and Korea large groups dominate final export products, in Taiwan the relationship between suppliers and users rarely develops into an alliance between the large business groups and SMEs because the two have fundamentally divergent market orientations.7 In this sense, industrial organization in Taiwan differs from that in Japan and Korea not only in degree but also in kind. While large groups control the upstream sectors producing intermediate goods and services, the SMEs dominate downstream production oriented toward exports. This is reflected in the higher share of export sales held by SMEs in Taiwan than their counterparts in Japan and Korea. Throughout the latter half of the 1970s, the share of export sales achieved by Taiwan’s SMEs was always above 55 percent, while the share of export sales by SMEs in Korea was below 34 percent. Between 1980 and 1987, the share of export sales by SMEs in Taiwan was between 63 percent and 76 percent, while in Korea this share fell below 16 percent. At the same time, in Japan the figure was between 20 percent and 38 percent.8 Given Taiwan’s dependence on exports, it is safe to say that large firms in Taiwan do not organize the economy, but rather are themselves driven by the export-oriented SMEs. Thus, to understand the political economy of government–business relations in Taiwan one must understand how these small and mediumsized firms actually work. Having grown from the bottom-up according to the dynamics of the forces at work in both the domestic and international political economies, the SMEs that dominate Taiwan’s economy were not created by government or big business and, therefore, are not controlled by them. On the contrary, given that Taiwan’s export sector is located in a commodity chain largely outside the domestic economy with linkages to foreign trading companies and mass buyers, it is the exports generated by SMEs that create the demand for intermediate goods and services that allow state enterprises and large firms to grow. The importance of SMEs in Taiwan is clear from the economic statistics. While the exact numbers vary depending on the definition used, SMEs constitute around 98 percent of the total number of firms in Taiwan, over one-third of the total sales values of the island’s industry, and employ over 60 percent of the labor force9 (table 4.1). More importantly, in one of the world’s more export-dependent economies,

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Taiwan’s SMEs produced more than 60 percent of its exports throughout the 1980s, more than half of all exports in the first half of the 1990s and slightly below 50 percent in 1996 and 1997 (table 4.2). Between 1979 and 1988, Taiwan’s export ratio to GNP was about 57.9 percent. In 1991, its total export value was US$76.2 billion, and it ranked twelfth in the world in terms of exports. In 1993, its total volume of trade Table 4.1 Small- and medium-sized enterprises in Taiwan’s economy (unit: %) Year

1976

1981

1984

1986

1989

1992

1995

1997

1999

Number Employee Sales values

99.1 61.0 44.9

99.1 62.2 44.8

98.3 –– 47.6

98.2 64.4 43.9

97.4 67.4 33.3

96.8 68.6 33.7

98.0 70.8 36.0

97.8 69.3 32.1

97.7 69.3 29.0

Sources: Compiled from Liu Bangdian et al. 1993. 61,64,65 (n.8); MOEA. SMEs White Book 1997. Taipei, ROC, Appendix: Table 1.1, 2.1, 3.1; MOEA. SMEs White Book 1998. Appendix: Table 1.1, 2.4, 2.5; MOEA. SMEs White Book 2000. Appendix: A.1, A.3, A.4.

Table 4.2 Small- and medium-sized enterprises’ share of total bank loans and export earnings, 1975–1997 (unit: NT$1 million; % of all firms) Share of SMEs’ total exports

Manufacturing companies

Trading companies

Year

Earning

%

Earning

%

Earning

%

% of bank loans

1975 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

–– 15,391 15,471 15,927 18,045 18,800 26,409 35,899 36,353 40,767 38,522 43,333 45,556 46,510 48,908 56,567 57,680 59,543

–– 68.1 69.7 63.4 59.2 61.2 66.4 67.1 60.0 61.6 57.3 56.9 55.9 54.8 52.6 50.7 49.8 48.8

–– 10,559 10,613 10,926 12,379 12,897 18,117 24,627 24,939 27,898 26,426 29,727 31,252 31,907 33,552 38,806 39,569 40,847

–– 71.8 73.5 66.9 62.5 64.6 70.1 70.8 63.3 64.8 60.5 60.0 59.0 57.8 55.5 53.5 52.5 51.5

–– 4,832 4,858 5,001 5,666 5,903 8,292 11,272 11,414 12,769 12,096 13,606 14,304 14,603 15,356 17,761 18,111 18,696

–– 61.1 62.5 56.9 53.2 54.9 59.5 60.2 53.8 55.1 51.4 51.0 50,2 49.1 47.2 45.4 44.6 43.8

21.64 31.8 32.3 33.5 35.2 35.7 36.4 35.1 37.8 35.9 36.8 27.5 39.4 38.8 37.2 35.5 33.8 31.4

Sources: Liu Bandian, et al. 1993, (fn.8), 71 (n. 8); MEA. SMEs White Book 1998. Taipei, ROC, Appendix: Table 2.6, 186–187; MOEA. SMEs White Book 2000. Taipei, ROC, 100.


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reached US$162 billion. At the same time, its foreign currency reserve soared to a high of US$83.5 billion, second only to Japan. Between 1978 and 1989, while the average export intensity of big groups was about 37 percent (and only 10.8 percent for state enterprises in 1985), the export intensity for SMEs was over 64.2 percent. In the early 1980s, 70 percent of the sales earnings of all SMEs came from exports. Between 1984 and 1988, in the five leading export sectors—precision instruments, textiles, plastics, leather products, and electrical machinery and appliances—the average export ratio of SMEs was 83.2 percent, 79.6 percent, 79.4 percent, 73.5 percent, and 73.4 percent, respectively. Given the significance of exports to the Taiwanese economy, it is no exaggeration to say that SMEs are the driving force of Taiwan’s economy.10 In an economy so dependent on export-oriented SMEs, the key to success is sensitive response and flexibility in adjusting to market variations. This constitutes a contrast with other economies in which large firms lead the economy as opposed to SMEs. The key to the dynamics of Taiwan’s small and medium-sized business environment is the omnipresent entrepreneurship, which, as Redding argues, is a cultural construct deriving from a deep sense of insecurity under conditions of scarcity. “The experience of the average Chinese person, and the folklore of the family, have commonly led to a perception of life being a matter of survival by one’s wit and energy under threatening conditions, and with no help from the state.”11 In Taiwan, this individual expression of entrepreneurship has fueled the explosion of small and medium-sized firms that actively search for and respond to business opportunities. In the booming years of economic take-off, entrepreneurship was relatively easy, given the rich density of networks in Taiwanese society and the low start-up costs and entry barriers. Under what Hamilton has called the “gold rush” effect, entrepreneurs are constantly looking for products that will sell in the market and, when news spreads that someone has found such a product, many others rush to fill the same space. “So common is this rush into the same area of production that Taiwanese called this sort of competition ‘a swarm of bees’ ” (yi wo feng). The swarming effect fuels constant but shifting demands for intermediate inputs and services necessary if large firms are to grow, and the industrial structure itself shifts as entrepreneurs rush into new lines of production.12 Entrepreneurship has been reinforced by a distinct pattern of business network organization in Taiwan. As most students of Chinese business have noted, the lack of either a credit system or effective enforcement of contractual relationships means that informal rules embedded in interlocking

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networks are the predominant regulators of business practices.13 The most important type of network centers on family. Within this network, family and kinship ties constitute the basic framework for interaction, and the organizational principle within this network is hierarchical. Thus, the family patriarch is usually also the chairman of the company. In this respect, the family functions as an effective governance structure that pushes transactions to personal levels through norms of reputation and personal relationships. Since most firms in Taiwan are primarily family firms, the organizational principle underlying them is similar across all family-based networks regardless of their size.14 Beyond the family, guanxi networks link firms together horizontally. Built on friendship, shared geographical origins and other attributes held in common, guanxi networks extend trust and reciprocity beyond the confines of the immediate family. While the family is enduring, however, these horizontal guanxi networks function more as situationally based “temporary coalitions rather than permanent alliances.”15 Firms in Taiwan strive for both intrafamily organizational control and extrafamily connections. The denser one’s network is, the better position one will enjoy in terms of access to information, capital, labor, and risk reduction.16 This is especially important in an economy so dependent on external market variations, because ready access to these strategic resources through networks can reduce transaction costs and allow flexibility and rapid response to new opportunities and change. Beyond family and guanxi networks, a cross-border subcontracting network links SMEs to the international market. In a peculiar international division of labor, Taiwan’s SMEs concentrate mostly on the production of goods manufactured on consignment under foreign brand names, leaving the marketing stage to foreign trade companies, Japanese sogo shasho or U.S. mass buyers, which are also suppliers of equipment or parts. In 1984, 57 percent of exports of electronic products was conducted through foreign companies, and 40 percent through the original equipment suppliers. In 1987, the ratios were 41 percent and 42 percent, respectively. It is estimated that exports through foreign trading companies could be as high as two-thirds of Taiwan’s total exports.17 This cross-border subcontracting between Taiwan’s SMEs and foreign trading companies could also explain why SMEs have been able to survive without linking up with Taiwan’s big business groups. By cooperating with foreign trading companies and mass buyers, SMEs have largely avoided being restricted by the need for economies of scale in international marketing, and have managed to sell their products through small-scale but constantly changing production (figure 4.1).

Subcontractor Subcontractor Subcontractor Subcontractor

Export–oriented SMEs


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Foreign import wholesalers Foreign retailers/ shops

Foreign manufacturers

Retail chains

Consumers

Marketing chains of foreign importers

Order and quality control Trading companies Figure 4.1

International subcontracting networks.

Source: Kuo-Wen-zheng et al. 1993. SMEs: Financing and Marketing. MOEA/Chung-Hua Institution of Economic Research, series on SMEs, No.3. Taipei: Bohaitang Press Ltd., 316.

This rich density of intrafamily networks, extrafamily connections and cross-border international subcontracting arrangements provide Taiwan’s SMEs with considerable flexibility and sensitivity in adjusting to new opportunities and market variations. For example, when there is demand for a product that goes beyond the capacity of the original contractor, part of the consignment can be subcontracted through his guanxi networks. When demand is insufficient, he simply keeps orders within his firm, thus avoiding production cuts and lay-offs. Unlike their counterparts in Japan and Korea, subcontractors in Taiwan usually do not enjoy long-term fixed contracts with their suppliers.18 However, this dependence on foreign markets and foreign trading companies also leaves Taiwan’s SMEs very vulnerable to variations in the domestic and international political economy. Once SMEs lost their comparative advantage as a result of the appreciation of the NT dollar and rising wages in late 1980s and early 1990s, the “snowbird” foreign contractors took their orders to cheaper locations, forcing the SMEs to move along with them. In addition, SMEs have always had difficulties in getting funds from formal financial institutions. This is related to both the nature of financial institutions in Taiwan and the irregular business and accounting practices of the SMEs themselves.

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Conflict across the Taiwan Strait Industrial Organization and the Dual Financial System

Related to Taiwan’s dichotomous market structure is its dual financial system under which formal financial institutions coexist with an informal financial market. While domestic-oriented industries dominated by state enterprises and large business groups receive most of the funds allocated by the formal financial institutions, the vast number of SMEs in the competitive export sector can obtain little credit because of their inability to provide the collateral required by the banks and their lack of creditworthiness. Under these circumstances, SMEs are often compelled to seek funds from the informal curb markets. Defined by Wade as an “unregulated, semi-legal credit market in which loan suppliers and demanders can transact freely at uncontrolled interest rates,”19 the informal curb market is estimated to account for one-third to two-fifths of the total investment needs of the private sector. And the smaller the firm, the more dependent it is on these informal sources (table 4.3). As in Korea, the stock market has only very recently been used as a source of investment capital for Taiwanese businesses. The formal capital market started in 1961, with the formation of the Taiwan Stock Exchange, and the emergence of the Fuh Hwa Stock Financial Company in 1980 legalized lending for the stock exchange. The revised Corporate Law of 1980 stipulates that incorporated companies with a capitalization over NT$200 million must go public. By 1990, there were 1,362 incorporated companies in Taiwan with a capitalization over that amount, but only 770 issued stocks and only 199 of those were publicly Table 4.3 Financial sources and size of private companies (unit: %)

Source Financial institution Stocks and bonds Curb market Total

Under NT$1 million

NT$ 1–5 million

NT$ 5–10 million

NT$ 10–40 million

NT$ 40–100 million

NT$ 100–500 million

NT$ 500 million– 1 billion

Over NT$ 1 billion

26.49

25.18

47.17

58.03

60.94

74.95

80.23

74.89

0.00

0.00

0.00

0.12

1.04

3.79

3.79

14.24

73.51

72.82

52.83

41.84

38.03

21.26

11.64

10.87

100

100

100

100

100

100

100

100

Sources: Xu Wenzhi, 1995. The Operating Strategies of Taiwan’s Small and Medium-Sized Corporations into the 21st Century, Taipei: Yangzhi Culture Press, 112.


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listed. By the end of 1993, there were only 285 listed companies (a mere 0.22 percent) out of a total of 130,000 incorporated companies in Taiwan.20 However, the advent of new security companies since 1988 coincided with the massive growth in monetary supply following the large-scale appreciation of the New Taiwan dollar (NT$) to create an explosively volatile stock market. In 1989, the total value traded reached a record of US$970 billion. But the total amount of capital raised by the 199 companies listed in 1990 was only NT$100 billion, a mere 2.2 percent of total loans from financial institutions. The fact that the trading value of Taiwan’s stock exchange was high while the capital raised from this market remained limited shows the speculative nature of Taiwan’s stock market.21 Under these circumstances, banks remain the most important medium for corporate finance, and traditional deposits and loans through commercial banks are still the major mode of financial intermediation. Given that hyperinflation and financial instability were two of the most important reasons for the Nationalists’ debacle on the mainland, the government has maintained extensive control of the formal financial sector and owns most of the major commercial banks in Taiwan. The most notable regulatory effort undertaken by the government is the special scrutiny it gives to bad loans as indicated by the ratio of nonperforming loans. The government also uses profitability as an important criterion to evaluate bank managers. Even bank clerks are civil servants, and approvers of bad loans can be punished according to civil service law. Pervasive state regulations and the absence of an effective credit system have made loan procedures very cumbersome, time-consuming and complicated, often requiring sufficient collateral or a second guarantor.22 The conservative lending behavior of the banks has been reinforced by the particularly creative business practices common among Taiwanese entrepreneurs. To maximize capital at minimum risk, firms, especially SMEs, frequently fabricate and forge invoices of their sales transactions or accounts receivable to be used as loan collateral. To conceal these illicit transactions, it is common for firms to keep several accounting books, one for the banks, one for tax officers and auditors, and one for themselves. Given the embedded nature of firms in complex networks, it is simply too costly for banks to investigate the true creditworthiness of firms. Under these circumstances, it is extremely difficult for banks to get the information needed to make rational decisions over credit rationing based on firms’ financial statements—a situation which only reconfirms the conservative convictions of lending officers. As a result, both collateral—often real property or other fixed assets to insure that

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loans are paid—and past relationships continue to be regarded as important factors in credit-rationing policy.23 In contrast to the financial system in developed economies where a credit system contains clear sanctions to help guarantee repayment of loans, banks in Taiwan cannot rely on such sanctions. Thus, state dominated or controlled banks do not make loans quickly or without sufficient collateral. Even foreign banks in Taiwan have learned this lesson very quickly. Burned repeatedly after making loan decisions on the basis of borrowers’ financial statements and failing to ask for collateral, foreign banks have experienced a relatively high ratio of bad loans and quickly remolded their loan policies after the pattern of local banks. Thus banks function very much as “mortgage shops,” and collateral has become the most important factor in loan policy. The pervasive regulation of formal financial institutions has had significant consequences for businesses in terms of access to and the cost of funds and opportunities to expand. Since state enterprises have government guarantees against bankruptcy and large businesses have substantial assets, banks prefer to lend to them. In contrast, lending, especially involving long-term loans, to SMEs accounts only for a small share of bank operations. This preference in credit allocation can be seen in the ratio of value-added contribution to GDP by firms of different sizes and ownership type to their share of bank loans. The ratio of value-added contribution by public firms in the whole economy was 18.4 percent in 1960 and 14.3 percent in 1985, but their share of bank loans was 40.8 percent and 28.6 percent of the total, respectively. A 1983 study shows that the top 600 private enterprises received over 50 percent of bank funds allocated to all manufacturers, whereas an estimated distribution based on GNP share would have allocated these firms less than 25 percent of the total.24 In contrast, while SMEs employed over 70 percent of the workforce, contributed to more than 60 percent of Taiwan’s exports in the 1980s and about 50 percent in the 1990s, produced about 45 percent of sales value in the 1980s and about one-third in the 1990s, their share of bank loans was only about 35 percent, and most of that consisted of short-term funds. In addition, according to two separate studies, during the ten years from 1976 to 1985 and the period 1988–1989, about 90 percent of the loans made to SMEs were short-term funds (working capital) while long-term credit accounted for only about 10 percent of SME borrowing. Over the same period, these ratios for large companies were 70 percent and 30 percent, respectively. Even in the mid1990s, the situation had not improved much. In 1994, 89.1 percent of all the loans made to SMEs were short-term loans, and in 1995, the ratio was still 87.1 percent.25 The mostly small, undercapitalized SMEs found it even


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80 70 60

%

50 40 30 20 10 19 75 19 76 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99

0 Year Share of total bank loans Share of sales value Figure 4.2

Share of export Share of employment

Comparison of SMEs’ share of bank loans, sales value, exports, and employment.

Sources: Wu Huilin et al. 1993. SMEs: Difficulties and Responses, MOEA/CIER, series on SMEs, No. 4, Taipei: Bohaitang Cultural Press Ltd., 80; C. J. Lee et al. 1993. SMEs: Account Management, MOEA/CIER, No. 2, 146, MOEA. SMEs White Books 1997–2000, Taipei, ROC.

more difficult to obtain capital from the international financial market.26 Thus, in terms of access to financial resources, it is often very difficult for SMEs to develop into large companies. This dual financial system is related to and mutually reinforces the dichotomous market structure in Taiwan. On the one hand, domesticoriented industries dominated by a few large state enterprises and big business groups receive most of the funds available from formal financial institutions. On the other hand, although SMEs constitute the vast majority of firms in Taiwan’s private sector and contribute the most in exports, they receive a much smaller share of total loans. Their small size, inability to provide sufficient collateral and lack of creditworthiness have all made them unwelcome customers for loan officers. Under these circumstances, SMEs are often compelled to seek funds in the informal markets where interest rates are much higher27 (figure 4.2 and tables 4.2, 4.3). Although the informal market has been most important to the vast number of small and medium-sized firms, which generally have nowhere else to turn, even large firms frequently rely on such sources, especially for operating expenses. The informal market is popular despite its higher interest rates because time is often a more urgent problem than costs for

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borrowers. Even when formal market funds are available, entrepreneurs have to calculate the costs in terms of expensive audits, lengthy and cumbersome loan procedures, the possibility of relinquishing ownership or control, and disclosure of confidential information—all of which often outweigh the benefits of significantly lower interest rates.28 Much of the informal market lending is made through unsecured loans channeled through a variety of creative forms and instruments that include private lending among family members, friends, business associates, lottery clubs (biaohui), and, most importantly, various mutual aid associations (hehui). Members of hui put money in the hands of those who need it, and families usually join several of these associations at one time. Because they are illicit, no formal laws or official agencies exist to enforce the obligations of hui members. Instead, the rights and duties of members are based on personal trust (xinren), which is invested in the individual and his reputation.29 The informal market is also laden with networks of intrafirm lending and interfirm cross-holdings. These include employee deposits within firms and cross-lending and cross-investment among firms. The familial context of corporate culture in Taiwan, combined with the pervasive system of state financial restrictions, has created an environment in which entrepreneurs have found it advantageous to turn to family and friends as a major source of financing. When the immediate family savings or retained earnings are insufficient to meet the capital requirements for new or existing business operations, an entrepreneur will often ask extended family members or trusted friends to participate as minority stockholders. This practice of “joint investment and separate management” (gongtong touzi, fenbie jingying) is a common method of corporate finance in Taiwan. These arrangements allow for mutual provision of debt and equity financing in an environment of relative trust and security, free from government monitoring and intervention.30 This back-up system embedded in guanxi networks gives entrepreneurs ready access to the investment capital, information, and technical know-how that give them the flexibility to respond to market variations or rapidly take up new lines of business. In this sense, trust functions very much as a mini-credit system among businesspeople operating within circumscribed parameters. What is unique about this dual financial system is that while the state has dominated the formal financial institutions, it has also tolerated the existence, and sometimes flourishing, of the informal market. Given the high transaction costs required to police piecemeal violations in a smallfirm economy, as Fields argues, the state has often enforced regulations


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with one eye open and one eye closed, leading to a game of cat-and-mouse which oscillates between pervasive state regulation and an almost equally extensive disregard.31 Industrial Organization and Cross-Strait Economic Interactions The above analysis of Taiwan’s industrial organization shows that while the state has maintained a prominent presence in the economy through control of a large state sector and financial institutions, its relationship with the private sector, for the most part, is precarious. The distance between the state and the private sector dates back to the distrust engendered by the regime’s early brutal treatment of the Taiwanese majority and “threatens the ability of the autonomous state to secure full information and count on the private sector for effective implementation.”32 So while economic regulation may be pervasive in Taiwan, the divergence of state priorities and private business objectives means that government influence has been neither direct nor predictable. Thus, Tu I-Ching points out that “Taiwan has many formal laws, but they are so numerous that they are generally forgotten and have little influence on the general population.”33 This compliance problem affects both the state’s ability to enforce its regulations and the legitimacy of these regulations among those whose behavior they are intended to constrain. Given this background, the prospect of an unlimited supply of cheap labor and mainland China’s huge market, combined with the inducements offered by local governments to attract foreign capital, has proved irresistibly attractive to Taiwanese businesses despite government restrictions. Under severe competitive pressure as a result of the appreciation of Taiwan’s currency, rising wages, the growing voice of the environmental movement, and a severe shortage of labor, Taiwanese businesspeople have simply rampaged through official investment bans to relocate to the mainland. Given that most of the early Taiwanese investors are small and medium-sized family firms with no clear separation between ownership and management, they could hardly afford to contemplate a fully fledged globalization strategy like the Japanese keiretsu and the giant American multinational corporations. Instead, they choose to relocate in a familiar environment, where investors, workers, and local officials shared a common language and system of values. For example, in 1990, Wang Jung-tuo went to Malaysia to look for investment opportunities. But he discovered that Malaysia’s market was much smaller than the mainland’s and its labor

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costs twice as high. More importantly, the lifestyle was too different and there was a language barrier. In the end, he decided that the mainland was a much better “fit” for him and his printed circuit board company. Within a decade, Wang’s firm of 20–30 workers had grown to 2,000, and the company was preparing for further expansion. While Taiwanese businesspeople did invest in Southeast Asian countries under the government’s “southward” policy, many later closed their factories as a result of the language divide, differences in lifestyle, political instability, and the anti-Chinese riots in Indonesia following the financial crises there.34 On mainland China, by contrast, Taiwanese investment is encouraged and the many irregular practices at the local level that make many foreign investors uncomfortable have turned out to be no barrier to small investors from Taiwan who are quite used to these informal ways of doing business.35 While still circumscribed by government regulations, their rich density of networks and the existence of an informal financial market provides private entrepreneurs, especially SMEs, with many opportunities to pursue business activities in the gray area between what is legal and what is illegal. For example, as part of the financial liberalization of the later 1980s, an individual was allowed to send US$5 million annually out of Taiwan. For firms, the ceiling was US$50 million. As a result, small investors found it easy to bypass government investment bans to mainland China by sending money through Hong Kong, ultimately forcing the state to adjust its policy by formally lifting the ban on indirect investments to the mainland in 1990.36 Investment in the mainland has also been facilitated by underground investment companies, which attracted an estimated total of more than NT$60 billion (about US$2,400 million) in the first five years of the 1990s. Officially, these “investment companies” are registered as ordinary companies, but in reality they function as banks. They receive deposits and pay very high interest. In turn, they invest their money in shady businesses such as the stock market and real estate and, most importantly, provide financial intermediation for the booming business of cross-Strait trade and investment. Since they operate mostly through personal networks and pay their customers “bonuses” instead of “interest,” the government finds it difficult to regulate these companies in the absence of clearly applicable rules. Given the government ban on services by formal financial institutions to investment on the mainland and the small size of the investment companies, these underground investment firms and other mutual credit associations have made a lucrative business of financial intermediation services. According to one recent study, about one-eighth of trade and investment across the Taiwan Strait


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is financed by underground investment companies and hui, and more than 90 percent of firms with investments in the mainland utilize funds from these informal sources.37 A recent report estimates that there are more than ten such underground companies in Shanghai alone, running financial services businesses worth tens of billions of yuan a year.38 Since, as we have seen, most Taiwanese firms are connected through extensive networks of subcontracting relations, the exit of a few soon led to the exodus of a large number of related firms. This “swarming” process occurred in almost every sector, from bicycles to computers. For example, in the bicycle industry, the relocated firms soon settled around two centers—Longhua near Shenzhen and Kunshan near Shanghai. In the later 1980s, one Taiwanese businessman, Wu Nenming, went to Longhua to set up the first plant to make bicycle parts. Within five years, more than 60 firms lined the streets of this township, making everything from chains, gears, pedals, seats, handlebars, frames, tires, and brakes to front and rear forks. In contrast to the “swarm of bees” that rushed into the small township of Longhua, the migration to Kunshan was very much on the model of “flying geese.” A later arrival to the mainland market, Taiwan’s leading manufacturer of high-grade bicycles, Giant Machinery, soon dragged along a group of more than 200 related firms to cluster around Kunshan. The same story was repeated in Changzhou, not far from Kunshan. In 1995, when Kymco Motor cycle moved to Changzhou, more than 23 subcontractors and parts suppliers followed, bringing a total investment of more than US$78.75 million.39 This swarming effect has also occurred in the electronics and computer industry. While many products in this sector face government restrictions on their relocation to the mainland, rapid changes in technology and competitive pressures on prices have driven the exodus of Taiwan’s electronics and computer manufacturers to Dongguan, which lies between Shenzhen and Guangzhou. Invoking the Taiwanese business battle-cry of “victory to those who strive the hardest,” more than 3,700 Taiwan firms and 30,000–40,000 Taiwanese expatriates—with their own elementary school—have turned Dongguan, a county of banana and lichee plantations, into an endless industrial park and a city whose exports have burgeoned to rank behind only Shenzhen and Shanghai in little more than a decade. The early arrivals here were assemblers of computers, but suppliers of parts (peripherals) followed quickly on their heels.40 Now, around 80 percent of Dongguan’s computer-related companies are from Taiwan, Hong Kong, or Macau. By early 1999, more than 2,800 firms in the electronics and communications industries had swarmed into Dongguan, turning out everything from power stabilizers,

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computer mice, keyboards, monitors, and modems to more sophisticated motherboards and laptop computers. In terms of production value, they account for at least half of the 50 billion yuan generated by local industry.40 Dongguan is also mainland China’s hub of furniture production and export. Most of the firms in the furniture business are from Taiwan and more than 100 of these Taiwanese firms export to the U.S. market. When the U.S. government launched an anti-dumping investigation in 2004 of Chinese furniture in the U.S. market, 54 firms from Dongguan were on the “black list.”42 Once begun, the migration of firms generated a dynamic of its own, creating what Gary Hamilton calls “a gold rush effect” where the news that someone has “hit it big” sets off a general scramble.43 One of the most successful “goldminers” is Wu Cankun, president of the Cankun Electrical Appliance Co. Ltd., a manufacturer of EUPA household appliances in Xiamen. Originally the owner of an SME in south Taiwan, Wu Cankun set out in 1987 with a Barbados passport to invest in Xiamen. Since such investments were illegal at the time, Wu and his wife were often anxious about being caught by the Taiwanese government and sent into exile. Five years later, the Cankun Electrical Appliance Co. Ltd. became the first Taiwanese-invested firm to be listed on China’s B stock market. By 1993, its sales had increased from US$500,000 in 1987 to US$64 million. In 1994, it collected a net profit of 65 million yuan.44 Another example is H.D. Yeh’s electronics firm, Primax. The company rented a factory in Dongguan in 1989 and at first produced only laborintensive surge-protectors. After three years, they began to invest massively in computer mouse production lines. Later, Primax was launching new products every year, from cellular phone parts, overhead projectors, and paper shredders to scanners. Constantly expanding its product lines and production capacity, Primax grew from a single plant with 25 workers in 1989 to its current nine factories with a workforce of more than 4,000. Its performance later pushed its parent company back in Taiwan to go public. The low cost of production on the mainland has helped the parent company both in terms of controlling costs and filling large orders.45 Although low land and labor costs are the major attraction, Taiwanese firms also choose a locality for its existing networks of Taiwanese people and producers, which can provide all sorts of services to entrepreneurs. For example, with 3,000 Taiwanese businesses in Dongguan, and 20,000 to 30,000 Taiwanese businesspeople and their dependents, the area has already developed a network that allows the Taiwanese firms established there to conduct most of their business among themselves.


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Once “all the upstream and downstream factories are there, you can assemble a computer completely from parts made within 50 kilometers. . . . When you deal with Taiwanese companies, you don’t have to endure a long contract process. Everything starts rolling with a single telephone call,” according to H.D.Yeh, who served as president of the Taiwanese Business Association in Dongguan for two terms.46 Within the network, a firm that finds itself short of operating funds can borrow from others who have been operating in the mainland for some time and have accumulated profits. They can choose to pay back these loans either in renminbi (Chinese yuan) on the mainland or in NT dollars back in Taiwan. These informal financial networks often operate in gray areas that state agencies would find hard to monitor and control.47 It seems clear that, in addition to ample OEM experience and firmly established business networks, experience in managing labor-intensive methods of production provides the ultimate attraction for the surge of Taiwanese investment to the mainland. As they venture into mainland China, Taiwanese entrepreneurs are quick to adapt their technologies to an environment that closely resembles the one they experienced at home 15–20 years earlier. Utilizing their traditional mode of subcontracting arrangements with firms relocated to the mainland, parent firms in Taiwan provide intermediate materials to their subcontractors in the mainland. This strategy of capitalizing on the abundant labor of mainland China, based on Taiwanese production efficiency, has proved successful and promises hefty returns. For example, one Taiwanese businessman from Harbin boasts that his auto plant in the northeast sits on a lot as vast as Taipei City. After one has invested on the mainland, the layout of factories in Taiwan seem exceedingly cramped. “There’s a totally different sense of space,” says Norman Hsu, vice-president of Dungguan Hsu Fu Chi Foods. Beginning production on the mainland in 1992, and formally opening their own plant there in 1994, by early 2000 the company had three factories in Dongguan, with a combined areas of 120,000 square meters, producing 200 tons of candy, 70 tons of Chinese-style cakes, and 180 tons of gelatin and pudding a day. Their products are sold in supermarkets “all the way from Guangzhou to Tibet.”48 Many Taiwanese companies have expanded into new business areas after investing in the mainland. For example, Ding Xin Group was originally a small mill making sesame oil in central Taiwan’s Zhanghua county when it relocated to the mainland early in 1989 to manufacture cooking oil. From 1992, it turned to the production of fast noodles. Soon its Kanshifu noodles became the most famous brand name in the

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food-processing industry on the mainland, taking up 23.5 percent of China’s fast noodle market. By 1996, the company had more than 7,000 employees working on over 58 production lines turning out a total of 2 billion packs of Kanshifu fast noodles, which were then shipped across the mainland to more than 27 of its own retail stores. The company’s sales soared from 27 million yuan in 1992 to 2 billion yuan in 1994, with a net profit of US$52.9 million in 1994, as it preempted other leading food-processing firms from Taiwan selling in the mainland market. In 1996, it was listed on the Hong Kong stock market, raising more than HK$1.36 billion.49 In January 2004, Ding Xin Group was recognized as the most competitive Taiwanese-invested firm in the lower Yangtze delta and its Kanshifu noodles are now the most recognized brand in the fast noodle business.50 Firmly established in the mainland market, the group has recently acquired Wei-Chuan, one of the oldest food industry groups back in Taiwan, thus returning to encroach on the home territory of other leading players in the industry. More recently, Ding Xin has attempted to consolidate its position in the mainland by teaming up with the Japanese food processing giant, Sanyo Food, to meet competition from Taiwanese competitors relocating to the mainland.51 Ding Xin’s success soon drew other elements of the food processing industry to the mainland market. Its fiercest competitor is the President Group, Taiwan’s largest group in the industry. As a late-comer to the mainland market, and reduced to a humiliating third place in terms of brand-name recognition and market share, the President Group has ambitions to lead the world in food processing. By mid-1996, the President Group had invested more than US$300 million in the mainland, setting up production lines in virtually every major city. While Ding Xin uses beautiful actresses in its ads to woo customers, the President Group relies on impressive images of its president, Kao Chingyuan,52 posed alongside Jiang Zemin, to sell its products. Today, the battle for the mainland fast noodle market has spread beyond the TV screen to the streets and crowded train stations.53 Given the dependence of Taiwan’s large firms on downstream SME users of intermediate inputs and services, the relocation of these downstream firms, combined with new mainland policies designed to attract investors, soon dragged Taiwan’s large business groups into the mainland market. Worried that demand from their downstream users would be filled by other suppliers and that they would lose out to potential competitors in the mainland market, big business groups began their march to the mainland since 1992.54 As aforementioned in chapter 3,


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that by October 1998, more than 143 listed firms, or about one-third of all listed firms in Taiwan had investments in the mainland.55 By the end of 2004, the number had reached 462 or more than 70 percent of all Taiwan’s listed firms had investments in mainland China.56 According to a survey conducted at the end of 2005 by China Credit Agency (Zhonghua Zhengxin Suo) of Taiwan’s 250 big business groups, more than 85 percent had already invested in the mainland by 2004.57 Unlike the early investors, who engaged mostly in quick-return and short-term projects in rented premises, the big business groups have long-term plans aimed at mainland China’s huge domestic market. As one Taiwanese investor in Shanghai, Steve Chou, comments: “The Taiwan market is too small, the US market is too far away, and the European market is too poorly understood.” Having outgrown their own home market and explored the globe, many Taiwanese companies, eager to establish their own brand names, are now turning around to find that the market they have always dreamed of—enormous, close, and familiar—a market that could serve as an ideal “home market,” is right there in the mainland.58 As K.Y. Lee, president of Acer Communications and Multimedia, put it: “If Taiwan firms do not put mainland resources to good use, exploit the power of the mainland market, and seize the various opportunities offered in the course of economic development there, then they are fools.”59 Having installed completely new production lines and ever more sophisticated technology, for Taiwan’s big and high-tech business groups investing in the mainland has become a crucial part of their globalization strategy. According to Steve Chou: “With a home market, companies can advance when possible, and pull back when necessary. They can build up their resources using the home market, and then expand step-by-step into the international market, without any need to rush.”60 Given their financial power and organizational resources, these major firms often benefit from special treatment offered directly from Beijing and local governments. For example, when the President Group signed an agreement to establish food factories, it was granted permission to sell 70 percent of its products in the mainland domestic market. As part of the deal for the—now aborted—Haicang petrochemical project, to which Formosa Plastics promised US$7 billion, the Fujian provincial government and Xiamen City provided 10,000 hectares of land at only 5 yuan per square meter (less than a US dollar), and at a mere 16,000 yuan in annual land tax (about US$2,000) for seventy years.61 Seeking ways around existing restrictions on investment to the mainland, Taiwan’s big business groups usually invest there through holding

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firms in a third location.62 For example, they can raise funds from Hong Kong and other financial markets with underwriting from their parent companies back in Taiwan. But increasingly more and more Taiwanbased large business groups investing in the mainland have registered holding firms in the British Virgin and Cayman Islands and then invest in the mainland through these firms. This may explain why, among mainland China’s major foreign investors, the average size of British investments is unusually large in contrast to those officially attributed to Taiwanese.63 The most interesting case is that of the Zhangzhou power plant invested in by Wang Yung-ching, Taiwan’s foremost business tycoon and chairman of the Formosa Plastics Group. When Lee Teng-hui adopted a new policy “don’t rush, be patient” in August 1996, Wang was pressured to cancel the investment project. Even today mainland-bound investment in power plant is still on the negative list and therefore is forbidden. But the construction of the project has never stopped. It turned out that Wang simply sold his stakes to an investment firm, Hua Yang Investment, founded by his friends and registered in the United States with an understanding that he could buy the stakes back once government restrictions were relaxed. Given that one of Formosa’s related enterprises (guanxiqiye), Nanya Plastics has a large subsidiary in Texas, United States, the ownership of this investment firm is extremely complicated. By the end of 2003, the first stage of the project with an investment of US$3.3 billion was already completed. After several secret visits to the site by Wang himself, Hua Yang Investment has decided to invest another TN$50 billion to add four more power generators to the existing six already in operation. When the second stage of the project is completed, the power plant will be one of the largest power plants south of the Yangtze River.64 Another high profile case is that of the Semiconductor Manufacturing International Corporation (SMIC, or Zhongxin). Founded in 2000, SMIC is registered in the Cayman Islands with its headquarters in Shanghai. While its chairman and CEO Richard Chang is a Taiwanese, the majority of its investment comes from the United States. But its largest shareholder is a Hong Kong-listed firm controlled by the Shanghai government. The company is listed in the stock markets both in the United States and Hong Kong. The SMIC’s rapid rise and opening of the fabrication plant using 12-inch wafer technology makes it meaningless for Taipei’s continuing ban on investment in 12-inch fabs on the mainland. But the complicated nature of SMIC makes it hard for Taipei’s regulatory authority to do anything about it. Eager to punish SMIC, Taipei recently imposed a fine of TN$5 million on Richard


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Chang himself based on provisions of the “Statute Governing the Relations between People of the Taiwan Area and the Mainland Area,” which forbids Taiwanese citizen to invest in the mainland without government permission.65 In an angry response, Richard Chang has threatened to renounce his ROC citizenship, a request that has so far been denied by the government.66 In addition, Taiwan’s big business groups often invest in the mainland jointly with multinational corporations in order to reduce risks. According to one study by Taiwan’s Federation of Industry, by 1996 more than fortyfive such groups had teamed up with American and Japanese companies in their investment in the mainland.67 For example, Yulong Motor, Taiwan’s largest automobile manufacturer has combined with Nissan to set up a joint venture with China’s Dongfeng in order to cut out a share of the growing automobile market on the mainland.68 Another Taiwanese invested firm Wangwang Food Group has recently joined hands with a subsidiary of the Japanese giant Mitsui to expand its rapidly growing business in the snack and convenient food market. Originally a food company in Ilan of east Taiwan, Wangwang became the first mainland registered brand by a Taiwanese firm. After an intensive advertising blizzard, Wangwang set up its first plant in the mainland in 1994 and became listed in the stock market in Singpore in 1996. [Its investment in Changsha, Hunan alone more than quadrupled from US$6 million in early 1990s to US$120 million in 2005. By late 2004, Wangwang already had more than 50 subsidiaries with an annual sale of 4 billion yuan. At the end of 2005, it announced an investment of another 100 million yuan to add three new plants in Shannxi.] Now it ranks next to Kangshifu of Dingxin Group and the President Group as the top three Taiwanese brands in the food industry in the mainland market.69 In sectors where large investments in the mainland were still banned, firms already began their work on building networks. One method is to sign an agreement for investment with a mainland partner or take a small stake in some mainland project. This largely explains the gap in mainland statistics between “contracted investments” and “realized investments.” For example, even before its US$280 million project in Zhenjiang, Jiangsu Province, was signed in 1995, Chia Hsin Cement acquired shares in two local cement firms in Jiangsu as part of a deal in which it supplied technology to those firms.70 Many were surprised at the speed with which Koo Chen-fu, who then headed Taiwan’s contact institution with the mainland, the Straits Exchange Foundation (SEF), established a foothold on the mainland. When Taipei lifted its ban on investment in cement in the mainland in July 1997, Koo’s Taiwan Cement Corp promptly acquired in October a 10 percent stake for

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HK$222 million in Anhui Conch Cement, a mainland state firm listed on the Hong Kong market. Nobody believed that such a deal could be struck so quickly without extensive advance work.71 Even Taipei’s chief shuttle diplomat, Jeffrey Koo, Sr., has been unable to resist the temptation of mainland China’s huge market. While a staunch public supporter of Lee Teng-hui’s “don’t rush, be patient” policy and also Lee’s advisor, his son Jeffrey Koo, Jr. has already built a network with powerful mainland business leaders and political families. His friends and golf partners include Wang Jun, chairman of China International Trust and Investment Corp. (CITIC, a conglomerate under the State Council), and son of China’s late vice-president Wang Zhen; He Ping, president of an army-run conglomerate, China Poly Group, and son-in-law of the late Deng Xiaoping; and Larry Yung (Rong Zhijian), who heads Citic’s Hong Kong subsidiary, and is the son of another former vice-president, Rong Yiren. This web of relationships helps explain why Citic and Poly each took a 5 percent stake, worth about HK$40 million (US$5.1 million) apiece, in the Hong Kong-listed China Development, a Koo family firm. In addition, Jeffrey Koo Jr.’s friendship with Larry Yung helped ensure that CITIC Hong Kong took a stake of about US$5 million of the US$100 million paid-in capital in KG Investment, the Koo’s new Hong Kong-based investment bank. While these investments are small in themselves, their potential is enormous. The participation of mainland China’s most powerful figures in KG Investment means that the Koo family business in financial services is well positioned to launch into the mainland as soon as Taipei allows banks to open branches there.72 These powerful political connections also extended into mainland China’s rapidly emerging high-tech sector. When Winston Wang, son of Taiwan’s foremost business tycoon Wang Yung-ching and Jiang Mianheng, son of China’s former president and head of the Communist Party Jiang Zemin, joined hands to build a US$1.6 billion Grace Semiconductor Manufacturing Corp. (GSMC), one of China’s largest semiconductor manufacturers, part of the capital was funded by Crimson Asian Capital and Crimson Velocity, both of which belong to the Crimson Fund founded by Jeffrey Koo, Jr.73 Once finished with his duty as the presidential advisor, Jeffrey Koo, Sr. has also made frequent visits to the mainland as the chairman of Taiwan’s prestigious China Trust Group and the head of several business associations in order to consolidate relations with his existing customers among the Taiwanese firms in the mainland and cultivate connections with local officials for future expansion of his financial business.74


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As an increasing number of big business groups invest in the mainland, they have begun to feel the toll of the continuing ban on direct links. In contrast to the first wave of small investors, who could bring little ostensible political pressure to bear on the government, big businesses participate directly in politics. As fears rose of being locked out of the mainland market and losing out to competitors from other countries,75 big business groups began to exert open pressure on the government to alter its mainland policy. “Taiwanese have to think carefully about a key question: In the process of globalization of production, what is Taiwan’s unique significance, and where is its unique value-added?” K.Y. Lee asked angrily in a 2001 interview. “This is not about betrayal. This is about facing the pressures of global competition.” In this context, Taiwan is being forced to choose between restricting its economic relations with mainland China or adopting more liberal policies at the risk of endangering national security. But the reality of Taiwan’s situation, according to the business community, is such that economic security is national security. Lee continues: “Yes, of course, ‘Taiwan first.’ But Taiwan’s most salient feature is that its economy is outwardoriented . . . and is linked to the global economy. . . . If Taiwan is not open, how can it be first?”76 This sentiment, and the demand by business to ease existing regulations, has partially converged with the policy agendas of the economic officials and institutions charged with sustaining Taiwan’s economic competitiveness and growth. These bodies tend to advocate a more liberal interpretation of the basic policy guidelines and more permissive policies toward cross-Strait economic interactions in order to foster what is, in their vision, a rational division of labor between the two economies. But their views are often regarded as imprudent by those institutions in charge of the security and political aspect of cross-Strait relations. Thus, the increasing rifts between business and government have often manifested themselves in the form of intrainstitutional conflict and power struggles among different state agencies. For example, in 1993, despite great pressure from the Mainland Affairs Council (MAC), Hsu Sheng-fa, vice-chairman of SEF and then president of Taiwan’s National Federation of Industry (NFI), led a factfinding group to Beijing that included the executive secretary of the Investment Evaluation Commission of the MOEA, Chen Ming-pang. After the trip, both Hsu and Chen openly advocated for an adjustment of current policy and closer cross-Strait economic interactions. In the same year, Wang Yu-tseng, president of Taiwan’s General Chamber of Commerce (GCC), openly criticized existing restrictions on cross-Strait economic

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exchanges, arguing that businesses made their own risk assessments for their investments and that the government should stay out of their business.77 In June 1993, conflicts between SEF, which oversees day-to-day negotiations with the mainland over non-political issues, and MAC, its supervising government agency, came into the open when each criticized the other through the media. Straits Exchange Foundation complained that MAC was imposing too many restrictions on its work, whereas MAC dismissed the SEF charges as a failure to recognize its proper role in the handling of mainland affairs (hai-lu da zhan). This conflict between government agencies surfaced again in April 1997 when MAC and the Economic Construction Council (Jing Jian Hui) openly disputed the question of restrictions on visits by mainland science and technology personnel to Taiwan.78 The increasingly outspoken business community alarmed the authorities in Taipei and, following mainland hostile reactions to Lee’s visit to the United States in 1995 and Taiwan’s first presidential election in March 1996, Taipei quickened its efforts to cool the new wave of mainland investment fever. Given the rifts among government institutions, the personal intervention of President Lee Teng-hui was often required to ward off the growing pressure from the business community. In August 1996, Lee issued a new policy statement of “don’t rush, be patient” (jieji yongren). Almost immediately, Formosa Plastics, which had already aborted its US$7 billion Haicang project, was again pressured to give up its US$3.3 billion plan to build a power plant in Zhangzhou, Fujian Province.79 Also put on hold were the President Group’s US$200 million power plant in Wuhan, Cheng Hsin Rubber’s US$50 million project in Shanghai, Hwa Roun Wire and Cable’s US$30 million project in Zhejiang and No.1 Copper’s US$20 million project in Fujian.80 Mainland Affairs Council and other agencies increased the pressure on those who have already invested in restricted sectors to report to the government and withdraw their investments. Violators would face severe penalties if they were discovered. Recognizing that businesses had used various channels to finance their mainland projects, the government instructed banks to raise the ratio between loans and savings by manufacturing companies and to report monthly on this ratio to the central bank and the Ministry of Finance. Banks were also instructed to take investments on the mainland into the evaluation of a company’s credit, thus allowing the banks to trace the end use of funds. If banks discovered plans to invest in the mainland, they were to lower the company’s credit line or refuse to extend loans when existing ones fall due.


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The central bank was to reevaluate major loans every six months as a way of tracking the flow of loans. According to a revelation in the media in 1997, the government even used intelligence agencies to trace the flows of funds by companies.81 This conflict between government and business continued following the transition of power in Taiwan in 2000. The combination of political and economic problems on the island, in the middle of a global economic slowdown and the entry into the WTO by both Taiwan and mainland China, accelerated the pace of business’s march into the mainland market. The policy of “don’t rush, be patient” was unable to resist the tide of economic logic. The opening of the market and the increasing size of a burgeoning middle class have lured numerous multinational corporations in a rush to the mainland. The massing of firms from many countries has generated a highly competitive environment which has drawn more and more Taiwanese firms to “go west” or risk not only missing out on a share of the market, but even losing existing OEM and other contracts to new companies set up by the multinationals themselves or mainland China’s own homegrown startups.82 As one Taiwanese investor comments, “Early on Taiwan was able to grab a lot of work from the US and Japan by sheer tenacity and hard work. But now the mainland can grab it from us. This is inevitable in the process of globalization of production.”83 In this new environment, Formosa Plastics was again planning a major investment in a huge petrochemical complex in Ningbo, south of Shanghai. And Yulong Motor, one of Taiwan’s largest automobile manufacturers, announced in October 2000 that it would invest US$10.9 million to acquire 25 percent of the Fengshen Automotive Co., an automobile maker on the mainland intending to manufacture a new line of Fengshen cars in the first half of 2001 in Xiangfan, Hubei province, in central China. In the IT sector, Acer Group, Taiwan’s leading computer company, planned to set up another production base in northern China with its operation headquarters in Shanghai, in addition to its existing plants in Guangdong and Suzhou in southern and eastern China, respectively. And Quanta Computer, another computer firm based in Taiwan, also confirmed that it would go ahead with a US$26 million investment in Shanghai. Growing business demands to relax restrictions over mainland-bound investment set off another round of bureaucratic brawls between MOEA and MAC. Cognizant of trends in industrial development, in early 2000, MOEA ordered a review of the possibility of relaxing controls on investment to the mainland. But the security conscious MAC

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objected and it turned out to be the winner again. Thus, the renewed business community’s enthusiasm for mainland investment was again given the cold shoulder when in August 2000 the government decided to postpone its planned relaxation of the “don’t rush, be patient” policy.84 The continuation of this policy again put the government in open conflict with business interests. Under pressure from MAC, MOEA decided to put Formosa Plastic’s major investment plan in Ningbo on hold for “technical reasons.” Subsequently, the angry company chairman Wang Yung-ching led the charge by sending President Chen a 10,000-word letter urging the government to ease the policy of “don’t rush, be patient.” In contrast to the past, more business powerhouses joined the fray including those who had previously cooperated with government policy such as Morris Chang, chairman of the Taiwan Semiconductor Manufacturing Co. (TSMC), Stan Shih, chairman of the Acer Group, and Wang Yung-tzai, the brother of Wang Yung-ching and president of Formosa Plastics.85 Under mounting pressure from the business community and serious economic problems at home, Chen’s government began to show more flexibility regarding cross-Strait economic exchanges. Aware that many businesses were skirting government restrictions over domestic ceilings via a third location, Taipei wanted to keep its policies realistic so as not to lose control. As aforementioned in chapter 3, in mid-2001 Chen endorsed the recommendation by the Economic Development Advisory Council and replaced the “don’t rush, be patient” policy with a new guideline of “active opening, effective management” (jiji kaifang, youxiao guangli). Under the new policy, Taipei lifted that cap of US$50 million per project imposed on investment to the mainland and put in place a much simplified screening system for investment under US$20 million. Mainland-bound investment has been classified into a general category and a prohibited category. Investment within the general category requires approval on a case-by-case basis. The prohibited category covers the service sector, high-tech industries, state-designated strategic and defense-related industries, agriculture receiving government R&D subsidies and other infrastructural projects. But the government later expanded the list of industries permissible to invest in the mainland to include the lower-end production in the semiconductor sector. With this generally relaxed atmosphere, Taiwan’s big business began to move full speed ahead with their mainland investment plans. Formosa Plastics again led the charge. After a long delay by the MAC, in October 2004 the MOEA finally approved Formosa Plastics’ application of a US$69 million petrochemical project in Ningbo, Zhejiang province,


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Naya Plastics’ (a Formosa Plastics related enterprise) US$26 million investment in a glass cloth plant, and a US$49 million steel mill by Formosa Heavy Industries Corp.86 But Formosa Plastics’ mainland ambition is much more greater than this. It has continued its huge petrochemical complex in Ningbo including a US$144 million ABS (acrylonitrile butadiene styrene) plant, a US$149 million gas and electricity plant and a US$76 million PVC (polyvinyl chloride) plant. With the completion of these projects, Formosa Plastics now has invested in a wide range of businesses in the mainland including more than 40 plants, hotels, and other businesses. More recently, it is reported to be in negotiation with Henan and Fujian provinces for setting up Chang Gung hospitals in the mainland.87 Similarly, Asia Cement, a corporate giant in the building material business, plans to invest a total of TN$20 billion in various projects in Sichuan, Wuhan, and Nanchang and the parent company alone will put in US$300 million in these projects. Likewise, the Evergreen Shipping Group under Chang Yung-fa, Taiwan’s shipping magnate, has also accelerated its investment in the mainland. Due to Chang’s longtime support of the Taiwan independence cause and friendship with both Lee Teng-hui and Chen Shui-bian, Evergreen Group was shunned in its attempt to expand business into the mainland. But after Chang distanced himself from Chen, his mainland business began to pick up pace. The group has already spent tens of million of US dollars to build container port facilities in Shanghai, Ningbo, and Qingdao. More recently, Evergreen Shipping has invested a whopping US$250 million through its overseas subsidiary Lloyd Triestino China to build two container ports in Ningbo, the largest of its kind so far by a Taiwanese investor. Evergreen’s future mainland plans include sea, air, land transportation business and storage facilities in the mainland market. Currently, 70 percent of Evergreen Shipping’s load is related to the mainland’s export-import business.88 The most dramatic case is Chi Mei Corporation. Chi Mei’s founder and former chairman Hsu Wen-long is a staunch supporter of Taiwan independence. But he stunned the world by an abrupt denunciation of the Taiwan independence stance on the eve of a planned rally by the pan-green supporters to protest against mainland China’s anti-secession legislation. In an open letter on March 27, 2005, Hsu emphasized that he supported the Anti-Secession Law and stated that any move toward Taiwan independence would only lead the island to war and bring disaster to its people. He added that his ancestors were from Fujian and both Taiwan and the mainland were parts of “one China.”

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Hsu’s change of stance caught everyone by surprise. As an open advocate of the Taiwan independence cause, Hsu was singled out by Beijing last year as the kind of pro-independence Taiwanese businessmen whose investments weren’t welcomed. Chi Mei has invested in several projects with about 40 percent of its business operations in the mainland.89 Subsequently, these operations were subjected to numerous inspections and other businesses were instructed not to do business with Chi Mei. The most severe blow came when Guangzhou municipal government transferred a valuable piece of land originally earmarked for Chi Mei to LG Chemical, a Korean corporate giant and one of Chi Mei’s most fierce competitors.90 Eventually, Chi Mei paid a huge price for Hsu’s support for the Taiwan independence cause. Chi Mei’s net loss in the first half of 2005 reached TN$3.653 billion.91 In an interview with Business Week in August 2005, Hsu admitted that his sudden change of stance was not really for his own sake but for the well-being of his more than 20,000 employees and their families. He said he did not have to go to the mainland but he could not let his employees lose their jobs. He attributed Chi Mei’s huge loss to its stunted business in the mainland because his competitors have much lower costs through their operations in the mainland.92 To shake off his green color, Hsu stated in the letter that “we don’t play Taiwan independence and because we don’t, Chi Mei’s development on the mainland will definitely blossom.”93 Indeed, Chi Mei’s business begins to blossom. Almost immediately after Hsu issued his open letter, Chi Mei announced its plan to invest a total of US$100 million in the mainland to build an ABS plant with an annual output of 100,000 tons, a PMMA (polymethyl methacrylate) plant with an annual output of 50,000 tons and a LCM (liquid crystal module) plant.94 Hsu’s distance from the pro-independence cause has triggered an “avalanche effect” among Taiwan’s business community. Soon after Hsu offered to resign as presidential advisor, Stan Shih, founder and former chairman of Acer Group handed in his resignation as well. Stan Shih has good reason to be wary. By openly denouncing Hsu, Beijing has already put the Taiwanese business community on notice that support for Taiwan independence will jeopardize their business on the mainland. Acer has extensive business interests in the mainland which are vital for its global strategy to compete with giant overseas rivals like Dell and I.B.M. Hsu’s sudden change of stance and a new wave of mainland fever following the visits by leaders of the opposition have prompted Chen Shui-bian to reimpose tighter control of the mainland-bound investment


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by Taiwan’s high-technology industries. Chen stressed that Taiwanese business community should “keep the political risks in mind” when investing in the mainland and relaxing the policy on cross-Strait exchanges could only be done when there was an effective management mechanism in place.95 This change of stance essentially reverts back to Lee’s policy of “don’t rush, be patient.” As a result, the MOEA and MAC have been working on policies to tighten the control over science and sensitive technologies from moving to the mainland and other measures to increase penalty over violations including indirectly investing in the mainland through a third location.96 These new restrictions have further inflamed the ongoing debate sparked by a new wave of mainland-bound investment involving Taiwan’s most advanced industrial sector, the integrated circuit (IC) foundries and other sensitive technologies. The semiconductor industry is the most important engine of growth in Taiwan’s high-tech industry. Taiwanese semiconductor companies like TSMC and United Microelectronics Corp. (UMC) have about 70 percent of the world’s foundry production (a foundry is a semiconductor manufacturer that produces chips for other brands). Given its vital role in Taiwan’s economy, Taipei barred Taiwanese semiconductor companies from setting up plants in the mainland. Taipei fears that opening mainland-bound investment in this sector will further hollow out Taiwan’s high-tech manufacturing sector. But with mainland China quickly emerging as the world’s fast-growing semiconductor market and facing competition from the Japanese, Korean, German, and Italian chip makers invested in there, Taiwan’s semiconductor manufacturers are under increasing pressure to move to the mainland in order to cut costs and get a slice of the market.97 In addition, Taiwan’s chip makers also face increasing competition from the rapidly growing local semiconductor industry in the mainland. There are already thirty-five semiconductor manufacturers in the mainland and twenty more are under construction. In addition, there are about 400 semiconductor design companies in the mainland making the mainland the world’s third largest semiconductor design hub.98 Mainland China’s leading semiconductor manufacturer is SMIC. Located in Shanghai’s Zhangjiang High-Tech Park, SMIC was founded in 2000 by Richard Chang who was former president of Taiwan-based Worldwide Semiconductor Manufacturing Corp until it was sold to TSMC. Registered in Cayman Island, SMIC is not subject to Taipei’s restrictions. Growing at a rate of 50 percent from last year, SMIC is projected to become the world’s third largest foundry producer by the end

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of 2005. Other major semiconductor producers in the mainland include U.S. registered GSMC and He Jian Technology. As aforementioned, GSMC was co-founded in 2000 by Winston Wang, son of the founder of Formosa Plastics Wang Yung-ching and Jiang Mianheng, son of China’s former president Jiang Zemin. Together, SMIC and GSMC have committed a total of more than US$3 billion in Shanghai’s Zhangjiang High-Tech Park. He Jian Technology was founded in 2001 by former UMC employees in Suzhou with 15 percent of its shares held by UMC. He Jian began its production of semiconductors in June 2003.99 Worried about being sidelined by their foreign competitors and the emerging local wafer manufacturers on the mainland, Taiwan’s chip makers increased their pressure on the government to lift the ban on investment in the semiconductor sector in the mainland. Under these circumstances, in 2002 Taipei finally agreed to allow Taiwanese semiconductor companies to build up three chip-fabrication factories in the mainland each by 2005. But they can only use comparatively less advanced 8-inch wafer technology and ship their old 8-inch equipment from Taiwan. At the same time, they must already have a 12-inch fabrication plant and have maintained operation for at least six months in Taiwan before permission can be granted for them to invest in the mainland.100 But even this limited opening is disingenuous. For example, almost immediately after the relaxation of the ban, TSMC filed an application to invest in an 8-inch wafer plant in Shanghai’s Songjiang Science Park. But it took TSMC more than two years before it finally received permission in mid-2004 to go ahead with the project. By that time, SMIC was already on the verge of opening its first state-of-the-art wafer manufacturing plant using the latest 12-inch wafer technology. Until today, only TSMC gets the permission to invest in one 8-inch fabrication plant.101 As aforementioned, Taipei has recently imposed a penalty of TN$5 million on Richard Chang himself in order to punish SMIC and also launched an investigation of UMC and filed a law suit against its boss Cao Xingcheng for allegedly making illegal investments in mainland China through He Jian Technology.102 On limiting investment to 8-inch wafer technology even though the mainland has already begun production using 12-inch technology, one Taiwanese producer in the industry commented, “People will laugh their teeth out.”103 Under the circumstances, not only Taiwan’s semiconductor manufacturers are putting increasing pressure on the government to further relax control of mainland-bound investment, companies in related high-tech


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sectors like semiconductor design, packaging and testing and thin-film transistor liquid crystal display (TFT-LCD) flat-screen technologies are also increasing their pressure on the government to ease restrictions on investment to the mainland. While Taipei’s economic technocrats are sympathetic, President Chen and his pan-green supporters are pushing for tightening control over investment by high-tech firms to the mainland to ensure that Taiwan’s sophisticated technology industry does not become hollowed out and to prevent Taiwan from becoming too dependent on the mainland market. To conclude, this chapter examines Taiwan’s unique market structure and industrial organization. Through such analysis, it has revealed the dynamics of state-business interactions in cross-Strait relations. Under Taiwan’s dichotomous market structure and dual financial system, the numerous SMEs that dominate the export sector lie outside the government-sponsored corporate nexus and, therefore, are not controlled by it. Depending largely on the informal market for financing, small investors have not been greatly bothered by government restrictions. Impelled by competitive pressures, the SMEs were among the first to relocate their production facilities to the mainland. Since most of these small investors are connected through extensive networks of subcontracting relations, the exit of a few soon drew along a large group of related firms. Given the lack of strong institutionalized ties between the SMEs and the state, the government has found it difficult to regulate, much less to control, the investment activities of the SMEs. As SMEs are significant downstream users of the products and services of the big firms, the exit of a large number of them has gradually dragged along Taiwan’s big upstream firms into the mainland market. Ironically, the exodus of the SMEs has left the large firms as more visible targets for government monitoring and control. Feeling the increasing toll of the bans on cross-Strait investment, the big firms mobilized the resources under their control to influence government policy. However, despite growing pressures from the business community, the government has tightened its control of the pace of cross-Strait economic interactions since 1996. Given their dependence on state-controlled financial institutions for funds and the scale of their investments—which, unlike the SMEs, cannot be funded by pooling resources garnered from relatives and friends—the large business groups have turned out to be quite vulnerable to government restrictions. Under these circumstances, government policy and regulations have had different impacts on the different types of businesses based on their organizational characteristics. While small investors have rarely been

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handicapped by government restrictions, the impact of official regulations on big business has been direct and quite effective given their reliance on government-controlled financial system for loans. But government restrictions have been made increasingly porous as more and more business groups invest in the mainland through a third location by registering in the British Virgin and Cayman Islands or through holding firms created by friends. Tight restrictions have also intensified the war of words between the government and business. Lured by a rapidly growing mainland market and an abundance of cheap labor and driven by fear of being sidelined by competitors there, most Taiwan business leaders have lined up behind calls for a separation of economics from politics. This battle involves not only disgruntled businessman like Wang Yung-ching of Formosa Plastics but also tycoons who have been friends and advisors to the highest office like Chang Yung-fa of Evergreen Group, Morris Chang of TSMC, and Jeffrey Koo, Sr. of China Trust. As aforementioned, the most dramatic case is the change of faith by Hsu Wen-long of Chi Mei Corporation, whose denunciation of the Taiwan independence cause stunned the island in the spring of 2005. The conflict of business interests and the government objectives for nation-building has led to constant oscillation of policies regarding cross-Strait economic relations between cycles of tightening and relaxation. Although efforts have been made on both sides to find a reasonable compromise these often end up creating more confusion than solutions. This partly reflects a deep dilemma for Taipei. The economic dynamics that pull the two sides across the Strait together are a market-driven force much larger than mainland China and Taiwan. “If Taiwan continues to view the mainland through the prism of economic threat, it is in danger of isolating itself and getting cut out of tomorrow’s deals,” said Douglas Paal, the former U.S. chief representative to Taiwan.104 Of particular concern to Taiwan is the fear of being locked out of the nascent formation of a free trade area including ASEAN, Japan, China, and South Korea. As Nicholas Lardy points out, “If such a regional arrangement went ahead, the island would lose out in a big way.”105 After all, for Taiwan, the economy is its security. However, the economic logic can hardly cool down the political passions. For Chen and his pro-independence supporters, allowing Taiwanese high-tech firms to invest in the mainland will further hollow out Taiwan’s prized high-tech sector and amounts to assisting the development of the mainland industry which will eventually compete with Taiwan. But more importantly, expanding economic ties and other forms of cross-Strait


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exchanges may erode the support of Chen’s government whose legitimacy, to a large extent, relies on staking out the independence option for Taiwan. Therefore deepening economic integration must be resisted otherwise it will lead to Taiwan’s increasing dependence on the mainland and eventually deprive Taiwan of the opportunity to seek a permanent separation from mainland China. But there are no practical ways to stop the ingenuity of the Taiwanese business community to do business in the mainland because if they do not get access to the mainland market now, they will run a very high risk of being sidelined by their competitors. Thus, the cross-cutting pulls of two contradictory forces lead to cycles of liberalization and tightening of policies over cross-Strait economic relations.

CHAPTER

FIVE

Taiwanese Investors and Local Government in Mainland China*

In chapter 4, I examined the industrial organization and institutional basis of government–business relations in Taiwan and economic interactions across the Taiwan Strait. But any study of economic interactions across the Strait remains incomplete without an explication of state–business relations on the mainland. The fact that so many Taiwanese businesspeople have been attracted to the mainland suggests that an inquiry is needed into the interactions between Taiwanese businesses and local governments on the mainland, and between small Taiwanese investors and local firms. This chapter analyzes the dynamics involved in the political economy of China’s contemporary transformation, and the nascent growth of state–business relations at the local level, especially between local governments and small investors from Taiwan. This analysis is reinforced with a case study of Taiwanese investment in Jiangsu, the Chinese province with the largest concentration of Taiwanese investment. Theoretically, it invokes the concept of the state as a disaggregated complex to provide a corrective to the traditional conceptualization of the state as a unitary entity. Culture plays a major role in many of the existing analyses of Taiwanese investment in mainland China.1 However, this chapter focuses on the organizational characteristics of Taiwanese businesses and local mainland firms and the institutional environment in which these firms interact with local governments. Cultural affinity, in this context, is understood as a means of lowering transaction costs and facilitating exchange. This is especially important given the rent-seeking environment * The research findings that underlie an earlier version of this chapter first appeared in article form as “Like fish in water: Taiwanese Investors in a Rent-Seeking Society,” Issues & Studies Vol.35, No.5, September/October 1999. 61–94. I am grateful for permission to reprint it here.

State–Business Relations across the Strait

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that has emerged as a consequence of some peculiar features of the economic reform policies of mainland China. “Particularistic Contracting” and Rents The core of China’s economic reforms since the late 1970s has been the “fiscal contractual responsibility system.” In 1980, this system took the form of “sharing revenues and assigning responsibilities according to levels of administration,” in which central and local governments divided revenues according to the revenue sources and ownership of enterprises. The key to this reform lay in profit retention and sharing arrangements. Like economic enterprises, local governments have been allowed to retain surplus revenue after paying a negotiated share of local taxes to the central government (mostly taxes on state and collective enterprises that constitute the core of the “within-budget revenues,” yusuannei zijin). By the mid1980s, all subnational levels of government were subject to a bottom-up revenue-sharing system that required localities to submit a certain portion of their revenues to the upper levels of government while retaining all, or at least most, of the remainder. Through this scheme, the central government endowed local governments with greater fiscal autonomy as well as financial responsibility. In a similar fashion, various profit-sharing arrangements were also made between local governments and firms, usually at a set rate and for a fixed period of time ranging from three to five years.2 Since not all revenues collected by a locality are subject to upward revenue sharing, the better the financial performance of enterprises and the faster the economic growth of the area, the greater the annual increase in revenues available to the local government. Thus, the fiscal contracting system has provided an economic foundation for rapid, local-government-led growth—especially at the county, township, and village levels—by giving officials both the incentive and the investment funds needed to become effective promoters of local industrialization. In addition to budgetary incentives, even stronger motivation is provided by extrabudgetary revenues (yusuanwai zijin), which are not shared with higher levels of government. Between 1987 and 1991, provincial extrabudgetary funds increased by almost 60%—from 202.88 billion yuan to 324.33 billion yuan. Equal to only 20% of the national budget in the early 1980s, extrabudgetary funds grew to match the national budget by the end of the decade.3 Before the 1980s, this revenue was primarily composed of depreciation funds—a fixed residual that remained with the locality and provided a pool of funds that could be

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recirculated to enterprises in the form of grants for the renovation of capital equipment. The fiscal reforms of the 1980s created new sources of funds not counted as part of the base to which fiscal contracts applied and, therefore, accruing wholly to the local jurisdiction. These included a new set of local taxes, a series of new nontax levies on local enterprises (such as management fees), aid to agricultural funds, and various miscellaneous charges and fees.4 Since tax returns are sent to the central government while the various fees and charges are kept within the locality, the level of taxation is described as “flexible” while the charges are “rigid.”5 While these reforms laid the foundation for rapid economic growth, the resulting investment and import hunger also created a desperate need for foreign exchange. In 1988, after five consecutive years of trade deficit, and encouraged by the success of special economic zones (SEZ) in Guangdong and Fujian, China decided to further liberalize its foreign investment regime for export expansion via the “grand international circulation” policy endorsed by then party general secretary Zhao Ziyang. As part of the shift, some of the special provisions to attract foreign direct investment (DFI) that had previously been applicable only to the four SEZs were made much more widely available. For example, special tax concessions, liberalized land leasing and other inducements now applied across the country. China also opened up sectors—such as retailing, power generation, port facilities, and property development—that had previously been off limits for foreign investors.6 The momentum of openness accelerated after Deng Xiaoping’s tour of southern China in 1992 and continues even after the 1997 financial crisis that wreaked havoc across East and Southeast Asia. In 1997, the central government formulated a strategy of “rejuvenating China through science and education” and, again, in 1999, the State Council issued its “Document 14” on enhancing technical innovation and development. These policies not only became slogans everywhere in the street, but were also translated into new dynamics in economic reform. As a result, over fifty-three previously approved national-level high-tech development zones began an all-out effort to attract investors to locate in them. The prospect of China’s entry into the WTO, combined with the further opening of the mainland market and the effect of the recruitment drive for foreign investors, has created an atmosphere in which companies from all over the world are making a beeline for mainland China to set up production bases there. Among them are a large number of Taiwanese investors.7 One peculiar feature of the Chinese reform policies is what Susan Shirk has called “particularistic contracting”: the preferential treatment given to selected localities and policies designed as ad hoc arrangements


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to be negotiated by different levels of governments. This type of selectivism can be identified in all the fiscal, industrial, and foreign trade and investment reforms introduced since 1978. For example, in the early 1980s, Guangdong and Fujian were granted extremely favorable fiscal contracts in which the central government agreed to accept a fixed amount of tax payments from the two provinces for five years. In addition, the two provinces and the SEZs (all located in these two provinces in the early years of reform) were granted unusually generous foreign-exchange retention rates. The SEZs were allowed to retain all the hard currency they earned from trade, in contrast to the average of 25 percent allowed in other localities.8 At the same time, Tianjin, Jiangsu, and Shanghai were reduced to acting as “milk cows,” required to turn over 60.5 percent, 61 percent, and 74 percent of their respective revenues to the central government. Other provinces signed a variety of contracts, usually including a fixed sum plus some formula for sharing revenues collected above a targeted level, based on their financial status and political connections (see table 5.1). This selectivism was widely regarded as unfair, and the granting of special rights has only fueled demands from less favored provinces. Since political patronage can generate lucrative rents, how a region fares under the policy can make a world of difference. Hence the popular saying “policy is money” replaced “time is money” in the 1980s and 1990s. Policy favoritism continued even after the introduction of the “tax assignment system” in 1994. For example, in 1994 Guangdong’s share of the national gross domestic product (GDP) was 9.4 percent, its provincial revenue income was 29.87 billion yuan, and its expenditures were 41.68 billion yuan. The deficit of 11.81 billion yuan was met by tax rebates from the central government to Guangdong. In the same year, Jiangsu’s share of the national GDP was 9.0 percent. Provincial revenue income was 29.34 billion yuan while expenditures were 20.02 billion yuan, less than half of those for Guangdong. Instead of receiving tax repayments from the central government, Jiangsu was required to hand over 9.32 billion yuan. This is a clear case of particularism generating totally incommensurate results. In the settlement for 1985–1990, Jiangsu was required to hand over 61 percent of its revenues to the central government. While the burden was slightly reduced in the 1988–1990 settlement, the province still had to turn 59 percent of its revenues over to the center. Some of Jiangsu’s major cities have fared even worse. For example, under the 1988–1990 formula, Suzhou city had to turn over 83.73 percent of its revenues; Wuxi, 86.36 percent; and Changzhou, 81.51 percent. In 1994, with almost the same level of GDP, per capita income in Guangdong was 25 percent higher than that of Jiangsu.9

126 Table 5.1 Revenue-sharing between the central and local governments, settlement for 1985–1990 and 1988–1990 Retention ratio of the budget revenue collected (%) Province Beijing Tianjin Shanghai Jiangsu Zhejiang Shandong Hebei Shanxi Liaoning Heilongjiang Annuli Henna Hubei Hunan Sichuan Guangdong Fujian Jilin Jiangxi Shaanxi Gansu InnerMongolia Guangxi Guizhou Yunnan Xizang Qinghai Ningxia Xinjiang Hainan

Amount transferred to/ from (-) the center (1 million yuan)

1985–1990

1988–1990

1985–1990

48.2 39.5 26.0 39.0 55.0 59.0 69.0 97.5 51.5 96.0 80.1 81.0 66.5 88.0 89.0 –– –– –– –– –– –– –– –– –– –– –– –– –– –– ––

50(4%)a 46.5 –– 41.0(5%) 61.5(6.5) –– 70(4.5%) 87.55 58.3(3.5) –– 77.5 80 (5%) –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– –– ––

–– — –– –– –– –– –– –– –– –– –– –– –– –– –– 772 235 397 239 270 246 1783 716 743 637 750 611 494 1450 ––

1988–1990 –– –– 10500 –– –– 289 –– –– –– 299 –– –– 4.78% 800(7%)b 10.7% 1413(9%) 50 107 45 120 n.a. 1842 608 742 673 898 656 533 1529 138

Extrabudget revenue as % of total budget revenue—1987 93.8 68.5 58.6 78.0 75.1 96.7 89.2 100.9 95.9 85.1 79.5 59.7 67.9 84.4 94.5 70.1 79.5 111.7 94.0 100.9 83.2 128.9 93.1 68.4 76.5 3550.0c 155.0 117.1 113.8 ––

Notes: a The policy of guaranteed revenue growth meant that the region had to make up the loss in the case of a shortfall; b annual growth rate; c Budget revenue was 4 million yuan and extrabudget revenue was 142 million yuan. Source: China: The Ministry of Finance, from Leroy Jin, 1994. Monetary Policy and the Design of Financial Institutions in China, 1978–90, St. Martin’s Press, 133–134.


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In the context of a weak legal contractual framework and increasing financial burdens, local governments and entrepreneurs could only resort to continuous bargaining with the central government and the seeking of policy patronage, since being chosen as a reform “experiment” or obtaining generous foreign-exchange retention rates would mean considerable windfall gains. As Shirk argues, officials from other provinces, seeing the economic benefits that Guangdong, Fujian, and the SEZs received from exports and joint ventures, knew that they could not compete for foreign business partners or export markets with the SEZs and the provinces in which they were located unless they were granted similar discretion over tax rates, preferential rates of revenue sharing and foreign exchange retention, and other special privileges.10 With few incentives to increase revenue, those without powerful patrons at the top had little choice but to devise ways of diverting revenues into extrabudgetary funds. While the central government complained loudly about these illicit practices, the blame should be laid on its own unprincipled policy-making procedures and the high-level corruption responsible for the opportunism that pervaded the various levels of government and Chinese society as a whole at that time. During the 1980s, the authority to approve and regulate foreign investments was gradually decentralized to local governments (especially in trade and investment zones). For example, the October 1986 provisions for the encouragement of foreign investment granted export-oriented and technologically advanced joint ventures the right to sell on the domestic market and convert renminbi earnings to foreign exchange. Local governments had the authority to interpret the guidelines establishing whether a particular joint venture qualified for placement in the favored categories. Local governments were also allowed to retain most of their foreign exchange earnings. In addition, the power to approve new projects often brought lucrative opportunities which could come in the form of free trips abroad, foreign-made gifts and even sponsorship for children’s study abroad.11 Under these reforms, local governments have engaged in a bidding war to attract foreign investors, offering generous tax breaks, export subsidies, access to the foreign-exchange swap market, and cheap land fees. For example, according to an internal report in 2004, a planned German investment of US$1 billion in Shanghai’s Zhangjiang High-Tech Park was foiled, after more than a year’s negotiations, by nearby Suzhou which offered a much better land deal at 80,000 yuan per mu (about 0.16 acre)—about a quarter of the price in Shanghai where land costs 300,000 yuan per mu. According to the same report, fierce competition to attract foreign investors often forces local governments to cut land prices. For example,

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in Suzhou the cost of developing farmland to industrial use is around 200,000 yuan per mu. To lure foreign investors, Suzhou has offered land to foreign investors at less than 150,000 yuan. To compete, other cities in the lower Yangtze Delta like Wujiang, Ningbo, and Hangzhou dropped their prices to less than 50,000 yuan per mu. In nearby Wuxi, the price of land is between 20,000 and 30,000 yuan per mu. In suburban Shanghai, prices often hover around 50,000 to 60,000 yuan per mu. Even in well-developed Kunshan, the local government has had to cut land prices year after year, from 95,000 yuan per mu in 2001, to 80,000 yuan in 2002 and 60,000 yuan in 2003 in order to stay in competition.12 Some places even offer free land to foreign investors.13 In some areas where foreign investment has been concentrated, land sales have also become a major source of revenue for local governments. Large areas of agricultural land have been transferred to industrial parks and commercial housing projects. In some coastal cities of south China, funds raised through land leases constitute more than 35 percent of total annual revenues. In the SEZs of Shenzhen and Zhuhai, the figure can be as high as 50 percent.14 In Haikou, investment in real estate development accounts for half of the fixed social investment, contributing 23 percent of the city’s total revenues.15 This phenomenon of land sales as a major revenue source has also spread to the interior provinces in recent years.16 Processing fees and foreign exchange can also provide income for local governments. A considerable amount of foreign currency is generated by processing fees that foreign investors are required to pay in rough proportion to the size of the labor pool they employ. Finally, before 1994, when multiple foreign exchange rates were the rule, local governments could retain a proportion of the foreign exchange earnings. Local governments unable to win special policy dispensations have resorted to the old tactic of “flexible application” of financial and tax regulations or have manipulated the letter of the law.17 In sum, competition for particularistic foreign economic benefits has produced an “open-door bandwagon” that has effectively turned local governments into “commercial republics” where rules can be bent and regulations ignored and laws are used only for reference. Local governments usually waive local taxes and land-user fees for firms involving foreign investors in their development zones. During the first nine months of 1992, almost two thousand such zones were set up across the country. By early 1993 the press was reporting that “nobody knows exactly how many such zones, which attract investment with a variety of tax breaks and other favorable policies, have been launched in China.”18 Just in 2003 alone, Shanghai added another four export processing zones to the two it already has.19


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Competition with other localities for foreign investment has given local officials and firms an incentive to collude with foreign businesses. It should be noted that many of these ostensibly foreign firms are actually set up by domestic investors eager to register their businesses as “sanzi” enterprises20 in order to gain tax exemptions, favorable financing, import/export autonomy and a sales-enhancing reputation.21 While these irregular practices at the local level make foreign multinationals uncomfortable, they do not pose major barriers to small investors from Taiwan, Hong Kong and other overseas Chinese communities where these informal ways of doing business are familiar. Finally, it is important to note that the frenzy to attract foreign investment has occurred within the context of a continuing erosion of the profitability of local firms. Illustrating the national trend, the profitability of rural industries in Jiangsu province fell from around 32 percent in the early 1980s to below 10 percent in the late 1980s and early 1990s.22 Local firms have strong incentives to team up with foreign investors because national tax policies discriminate in favor of joint ventures. Any firm with 25 percent foreign-equity participation qualifies as a foreigncapitalized firm and thus enjoys a much lower tax rate, free imports of equipment, and a quota of luxury cars. For example, before 1994 state and collectively owned enterprises were subject to a 55 percent income tax rate with an additional adjustment tax on profits above a certain level. In contrast, after a three-year exemption and two-year reduction period, Taiwanese firms were entitled to a 15 percent income tax rate if located in the SEZs and various development zones, and an even lower 10 percent if they were designated as technologically advanced firms and met certain export targets.23 Thus, under Deng Xiaoping’s new motto “development is paramount,” all levels of government have made great efforts to attract foreign investors. With the designation in the 1990s of Pudong in Shanghai as a “national economic bastion” and new strategies to develop its western region and to revitalize the northeastern region, China has become the new battleground fought over by foreign companies. Taiwanese firms, advancing northward from their bases along the mainland’s southeast coastal region, are in the vanguard.24 Taiwanese Investors in a Rent-Seeking Society In this rent-seeking environment, local officials have become the most important agents for Taiwanese investment in mainland China. They tend

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to be more flexible about regulations than higher levels of government. Bypassing formal bureaucratic procedures is a key part of keeping production and delivery moving as quickly as possible, and is particularly important for small investors from Taiwan with their limited operational capital. Lower-level officials, motivated by the new fiscal schemes, are eager to accommodate overseas investors’ needs by speeding up the application process for projects and by making flexible arrangements with individual investors. Such arrangements include more favorable tax breaks; land deals; relaxed customs inspection of imported materials and export-ready products; lax implementation of environmental and labor regulations; permission to sell a higher percentage of product in the domestic market; and, more recently, even the offering of honorary titles and citizenship rights.25 For example, in Dongguan’s Qishi district, “the factory rent was set at RMB 8.00 (about US$1.00) a square meter. The electricity charge was RMB0.87 a kilowatt hour, and there were various tax incentives,” explained one Taiwanese investor in Dongguan, who noted that there was still room for bargaining.26 In one village in suburban Zhengzhou, Henan province, the local party secretary, who was also chairman of the village business group, offered foreign investors 60 percent of the shares of any project in return for an investment of 40 percent of the capital. In one case, he even offered 60 percent of the shares for simply being allowed to use the brand names of one Taiwanese business group involved in the food-processing industry. At the same time, he also pledged to fend off harassment from a multiplicity of bureaucracies with a single office set up to deal with tax and labor disputes.27 Tax relief has been one of the most critical conditions for foreign investors. While the standard enterprise income-tax rate on foreign-funded joint ventures after 1994 has been a fixed 33 percent, local officials are free to exempt almost any percentage they wish of centrally mandated taxes on a temporary, annual basis. Foreign-invested firms are usually exempted from this tax for the first two to three profitable years. For the following three to four years, only half the tax is imposed. In many cases the tax-free period is extended, or tax rates are kept at 15 percent, even after the official tax-free period has passed. In some places, paid taxes are reimbursed to the investors. According to a recent internal report, most cities in the lower Yangtze delta have offered concessions extending far beyond the “two year free, three year half” (liang mian san jian ban) tax policy for foreign-invested firms. In a recent bid to attract a German hi-tech firm away from Shanghai, Suzhou offered a “ten year free, ten year half” (shi mian shi jian ban) tax policy, twice the official central government “five year free, five year half” (wu mian wu jian ban) policy for foreign-invested firms in the IC sector.28


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Local governments also have the authority to ease the way for foreignfunded ventures over the transfer of profits out of China, relax the rules on foreign exchange balances, reduce utilities fees and land prices, and exempt firms from import license requirements and social welfare contributions. Beneath the system of state policies, which are supposed to be applied universally, actual investment arrangements are usually tailormade for individual enterprises and investors, and the profitability of a given investment package is largely dependent on the relationship between the investor and local officials.29 In the absence of an effective legal framework to protect private property rights and to ensure the enforcement of business transactions, much depends on the flexible interpretation and implementation of regulations by local officials. The degree of flexibility tends to increase as one moves down the bureaucratic hierarchy. Thus, private businesses must seek the backing of local officials to gain access to needed licenses and credit. However, these same informal ties also render businesses vulnerable to levies and rent-seeking by officials. For example, foreign investors in Fujian recently complained about the various fees they were charged. One firm was asked to pay hundreds of thousands of yuan for a vaguely named “construction file guarantee fee.” After intensive “public relations” work, the fee was finally reduced to tens of thousands. In another case, a local utility charged tenants in an apartment built by foreign investors 1.6 yuan per kilowatt-hour of electricity instead of the standard 0.35 yuan. The power company argued that the 0.35 yuan rate applied only to apartment buildings with 100 percent occupancy—a rate which usually takes more than two years to reach. Some firms have been asked to buy products from companies with links to certain bureaucracies.30 Under these circumstances, private entrepreneurs often have to “lubricate all the joints” including the local police station, the customs service, the public health department, tax officers, and local banks and utility departments. The success of a particular business has come to depend largely on the relationship investors can cultivate with local officials and bureaucrats.31 In an environment full of illicit practices, the definition of efficiency for investors is often the level of cooperation gained from local officials. With the right connections and good relations, foreign investors can gain local complicity in underreporting or splitting their investments in order to avoid the involvement of higher levels of government. For example, while the Taiwanese Changzhou Kymco Motorcycle Company had a total mainland investment of US$40 million, the total reported to central government was only US$20 million, a figure within the purview of local government.32 This relationship is always mutually

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beneficial, of course. While foreign investors benefit from political protection and favorable deals, local officials can gain both in the form of rapid economic growth and more jobs within their locality and in personal benefits such as free trips abroad, luxury cars, and foreign-made gifts.33 The allure of Taiwanese investment capital has also contributed to the revival of long-forgotten local gods and religious practices. For example, between 1985 and 1993 local authorities in Fujian approved a series of conferences on the local deities of Fujian, which were also worshiped in Taiwan. Taiwanese money was behind most of these conferences and, in the local scramble for a slice of the Taiwanese money, popular religious practices have been virtually transformed into commercial opportunities.34 The commodification of local popular culture can also be seen in increased pilgrimages to ancestral homes. For example, Anxi county in Fujian province is the ancestral home of more than two million Taiwanese. One such Taiwanese is Hsu Sheng-fa, vice-chairman of Taiwan’s Straits Exchange Foundation (SEF) and former president of the National Federation of Industry (NFI). When Taiwan opened up visits to the mainland in 1987, Anxi county sent a folklore delegation to Taiwan to establish contacts, and in 1996 a photo collection of the county was sent to Hsu. Excited by this gift, Hsu visited Anxi the following year. These cultural contacts have brought a flow of investment funds in their train. Among the fourteen joint ventures in Anxi in 1997, five were set up by Taiwanese.35 More recently in June 2004, Anxi welcomed the visit of Wang Yung-ching, Taiwan’s foremost business tycoon and founder of Formosa Plastics. A native of Anxi, Wang was invited several times to visit his ancestor home. It is reported that Wang donated to local schools.36 It is also interesting to note that Anxi is a county under the jurisdiction of Zhangzhou where Wang has built one of the largest power plants in southern China. The ability to make flexible deals with local officials has certainly been a great advantage for Taiwanese investors. Cultural and language affinities have been effective tools of communication between Taiwanese investors and their local agents. As one researcher has noted: Although it is not the only tool with which to build trusting relationships, doors open more quickly when knocked on by someone speaking a familiar language. Sharing a common language does not mean simply effective communication in technical terms. More important is the understanding of hidden messages, which determines the effectiveness of the communication. On many occasions, what is spoken is not as important as what is unspoken.


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Therefore, it takes both technical understanding of the spoken words and cultural understanding of the hidden meaning to fully grasp the expectations of the participants in gift exchange.37 Of course, social networks are important in many cultures. The art of gift exchange, for example, varies between societies depending on specific historical and institutional contexts.38 But, while interpersonal connections are important across cultures, a plethora of rent-seeking opportunities can certainly inflate their value. This is especially so in a transitional economy in which the lack of an effective legal framework has made bureaucratic patronage a convenient alternative source of order. Local officials, acting as agents between the plan and the market, have the power to create favorable conditions for foreign investors. For Taiwanese investors in the mainland, a shared language and cultural affinity can reduce transaction costs by providing a ready set of tools to facilitate gift exchange and the establishment of interpersonal networks with local Chinese officials. Taiwanese Investors in Jiangsu Province The Southern Jiangsu Model and Foreign Capital Jiangsu province, adjacent to Shanghai in eastern China, is one of the most developed regions in China. In 2001, its GDP reached 951.191 billion yuan, the second largest in the nation. In the same year, its industrial output also ranked second in the nation. In terms of GDP, total industrial output, and service and exports, it accounts for about 10 percent of the national total (see table 5.2). Twenty-six of the top one hundred bestperforming counties are located in Jiangsu, and six of those rank in the top ten. Between 1979 and 2001, Jiangsu’s annual GDP growth averaged 12.6 percent.39 Since 1993, according to statistics released by Taipei’s Ministry of Economic Affairs, Jiangsu has also become the leader in Taiwanese investment. Between 1991 and 2001, Taiwanese investment in Jiangsu accounted for 36.8 percent of all Taiwanese investment in the mainland during the period. By October 2005, its share had increased to more than 44 percent. The essence of the success of what has become known as the “Southern Jiangsu” (Sunan) model of development is well captured by what Andrew Walder calls “local governments as industrial firms.”40 Unlike the Zhujiang model in southern Guangdong (where fast economic growth has been largely driven by foreign investment) and the Wenzhou

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Table 5.2 Jiangsu in the Chinese economy, 1994–2001 Item Population GDP Per capita income Agriculture (1st industry) Manufacturing (2nd) Services (tertiary industry) Revenue Expenditure Fixed Assets Investment Consumer spending Exports

Unit 10,000 Y 1 billion Yuan Y 1 billion –– –– –– –– –– –– –– US$1 billion

National 1994

Jiangsu 1994

%

National 2001

Jiangsu 2001

119850 4675.94 3923 945.72 2237.22 1493

7020.5 405.74 5779.3 67.194 218.68 119.87

5.9 8.7 147 7.1 9.8 8.03

127627.00 9593.33 7543.00 1460.99 4906.91 3225.43

7354.92 951.191 12922.00 108.243 490.746 352.202

5.8 9.9 171 7.4 10.0 10.9

521.81 579.262 1704.21 1626.47 121.01

29.341 20.02 133.11 128.79 9.024

5.62 3.5 7.8 7.92 7.46

1638.604 1890.258 3721.35 3759.52 266.15

106.499 78.264 330.296 286.899 28.878

6.5 4.1 8.9 7.6 10.9

%

Note: Yuan at 2001 prices. Source: Jiangsu Investment Guide, 4–5; Jiangsu Yearbook, various issues; China Statistical Yearbook 2002.

model (where rapid growth was linked to individual family businesses), Jiangsu’s success has largely been driven by collectively owned township and village enterprises (TVEs).41 For example, between 1979 and 1985, TVEs in Suzhou, Wuxi, and Changzhou grew at an average rate of 30 percent. By 2001, the total number of TVEs in Jiangsu had reached 938,500 with 9.04 million employees (a slight decrease from 9.52 million in 1994). In the same year, the total output value of TVEs was around 1290.3 billion yuan (in 1990 yuan). In 1996, the value of TVE output constituted 66.4 percent of Jiangsu’s total industrial output, and TVE exports reached 105.72 billion yuan, about one-fourth of all exports by TVEs nationwide. In 2001, exports by TVEs amounted to 145.38 billion yuan.42 However, rapid expansion of local industries also led to duplication and waste (see table 5.3). And duplication led in turn to heightened competition and declining profits. In Jiangsu, the profits of rural industries fell from around 32 percent in the early 1980s to below 10 percent in the late 1980s and early 1990s. In southern Jiangsu where the fastest economic growth in the province (and the country) occurred, profits further dropped to below 5 percent in the early 1990s.43 These statistics point to the limitations of local, state-led growth and the need for technological upgrading. Under the fiscal contract system, local governments seeking to maximize their revenues tend to support industries with short-term investment, minimum funding and quick returns, especially light industries (duan, ping, kuai). Also, because turnover taxes (liu zhuan shui) are included in the responsibility system, local


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Table 5.3 Structural similarities of TVEs in southern Jiangsu, 1990 (unit: %)

Suzhou Wuxi Changzhou

Machinery

Textile

Chemistry

Metal

B.material

Total

18.6 (2) 29.1 (1) 27.0 (1)

32.4 (1) 19.7 (2) 16.8 (2)

13.0 (3) 12.4 (3) 15.6 (3)

9.3 (4) 15.6 (4) 15.1 (4)

7.7 (5) 7.9 (5) 9.7 (5)

81.0 84.7 84.2

Source: Wan Jieqiu, 1993. The State and Economic Development: Theoretical Reflections on the Southern Jiangsu Model, Shanghai: Fudan University Press, 132.

governments prefer the production of goods with a higher output value (e.g. processing industries). For example, in southern Jiangsu, textile and light industries accounted for roughly one-third of total local output in the 1980s and early 1990s. In 1992, 53.1 percent of Jiangsu’s enterprises were labor-intensive.44 Under these circumstances, in the late 1990s the provincial government called for restructuring of the local economy in terms of ownership structure and technical upgrading.45 Even the governor of the province openly called for the abandonment of the Southern Jiangsu model in 1997. Since equipment upgrading is often beyond the technical and financial means of local governments and firms, Jiangsu turned to wooing foreign investors. From the mid-1980s, Jiangsu promulgated a series of laws, regulations, and rules to encourage foreign investment as part of its effort to upgrade industrial structures, improve management skills, and increase exports. In late 1986, the provincial government issued the “Provisions for Encouraging Foreign Investment.” In addition to the incentives provided in national policies, this document offered foreign investors an extra three-year exemption and a three-year reduction of local tax rates. Firms exporting more than 50 percent of their products were to enjoy exemption from all local taxes. Firms with an annual profit of more than 1 million yuan would pay only half the local tax rate and receive preferential treatment in terms of land fees and other imposts. To improve the investment environment and reduce red tape, the provincial government also delegated approval power over foreign investments below US$5 million to six major cities—Nanjing, Suzhou, Wuxi, Changzhou, Nantong, and Lian Yungang. All other cities in the province had the power to approve investments below US$3 million. In 1992, the provincial government further delegated power to approve investments below US$30 million to twenty-one cities (i.e., counties) and three economic development zones in Lianyungang, Nantong, and Kunshan. In 1996 and 1997, the provincial government twice issued new documents calling for further internationalization of the economy and a drive to attract more foreign investment.46

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To implement these policies, the province copied the well-established pattern of the SEZs by setting up development zones of its own. By 1996, a total of seventy-four such zones had been set up, with eleven at national level (guojia ji) and sixty-three at provincial level or below.47 By 2003, Suzhou Municipality alone had 163 development zones, with five as national-level development zones, and ten at the provincial level. The frenzy to attract foreign investment has gone so far that in some places it has become an integral part of the salary and promotion review for local cadres. For example, in Zhangguo Township, Xinghua City in Jiangsu, each cadre is required to attract 600,000 yuan investment annually, of which 5 percent goes to the cadre as a commission. Failure to achieve this target results in the cadre losing his or her basic salary. In Shuyang county, Jiangsu, all members of the civil service are given a quota to attract investment. Those who fail to fulfill their quota will first be “criticized” (pi ping), then “warned” (jie mian), and, if still unable to fulfill their quota, “fired” (li zhi). As of June 2003, nine directors at the township and bureau level have been dismissed in this way.48 From 1999 to 2001, the years for which statistics are available, Jiangsu ranked first and second in terms of contracted foreign capital and realized foreign capital (second only to Guangdong), respectively. In 2003 alone, Jiangsu’s realized foreign capital reached more than US$15.8 billion surpassing Guangdong to become the largest recipient of foreign capital in the country. By 2001, a total of 46,510 foreign firms (this figure includes those providing equipment) had been set up in Jiangsu, with a total contracted capital of US$105.53 billion and realized foreign capital of US$51.875. Between 1981 and 1995, DFI constituted about a third of the total fixed capital formation of the province. In 2001, realized foreign capital amounted to about 18 percent of the province’s total fixed capital formation. In 2000 and 2001, total revenues produced by foreign-invested firms were 305.636 and 331.373 billion yuan, respectively, or the equivalent of 35.61 percent and 34.84 percent of the provincial GDP in these years, respectively. Most of these foreign investments in Jiangsu have come from overseas Chinese communities— Hong Kong, Macao, and Taiwan49 (tables 5.4, 5.5, 5.6). Foreign investment has also played an important role in Jiangsu’s exports. In 1990, exports by sanzi firms were only 6.5 percent of the total exports of the province. The ratio increased to 13.1 percent in 1991 and 28 percent in 1992. In 2000, sanzi firms exported a total of $14.454 billion, constituting 56.1 percent of the total export value of the province. In 2001, the amount increased to $16.642 billion, or 57.6 percent of the province’s total exports. In 2001, more than 5,137 sanzi firms were engaged in the

137 Table 5.4 Foreign investment in Jiangsu (contracted), 1988–2001 (US$1 million) Number Year

Amount

Total

Joint

Co-op

Sole

1988 334 1989 353 1990 431 1991 1244 1992 8250 1993 10274 1994 5204 1995 4273 1996 2718 1997 2102 1998 1838 1999 1927 2000 2646 2001 3583

233 279 358 1046 7666 8816 4001 2827 1716 1100 908 918 1119 1381

11 8 8 32 271 414 325 265 235 168 139 109 116 112

3 3 29 64 257 802 697 964 748 819 769 897 1410 2088

Equipment 87 63 36 102 56 242 181 217 19 15 22 3 1 2

Total

Joint

CO-op

Sole

Equipment

338.7 217.3 249.3 804.3 7701 10085 8554 12987 9832 9279 7544 6985 10615 15094

293.8 183.7 144.8 596 5914 7312 5881 6622 5097 4528 2412 2475 3489 2889

6.64 8.05 66.4 115 1049 1028 632.6 675.2 981 900.7 662.7 517.3 554.3 573.3

1.50 2.86 33.0 76.5 726.6 1716 2008 5673 3754 3835 4411 3984 6568 11630

36.77 22.67 5.10 16.80 11.47 29.10 32.19 16.32 9.58 15.50 58.11 8.16 3.62 2.10

Source: Calculated from Jiangsu Yearbook, 1990–2002, various issues.

Table 5.5 Foreign investment in Jiangsu (realized), 1985–2001 (unit: US$1 million)

Year

Total amount

Joint ventures

Co-operative ventures

Equipment

Solely owned

Share holding

Ratio %*

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

33.463 33.976 81.765 127.72 122.42 150.22 240.52 1412.83 3014.32 4197.85 4867.56 5086.17 5814.68 6708.48 6417.31 6429.26 7136.27

11.403 16.55 39.738 84.22 72.93 137.87 200.99 1182.28 2304.38 2954.99 3321.66 3133.68 2971.97 3105.39 2860.10 2273.69 2271.66

0.506 1.56 9.907 18.81 20.71 2.49 8.96 97.75 275.20 331.55 276.84 328.57 394.31 578.72 559.60 357.55 261.80

21.554 15.866 32.12 24.69 27.78 9.12 7.28 9.90 12.47 21.15 86.98 14.09 22.17 56.47 18.16 5.68 14.26

–– –– –– –– –– –– –– –– –– –– –– –– –– 2900.57 2950.29 3789.46 4576.20

–– –– –– –– –– –– –– –– –– –– –– –– –– –– 29.16 2.88 12.35

–– –– –– 38.0 56.3 60.3 29.9 18.4 29.9 49.1 37.5 51.7 62.7 88.9 91.9 60.1 47.3

Notes: The category of “solely-owned” is missing from the data on realized foreign investment until 1998. Also from 1998, realized foreign capital includes a new item: “share-holding” companies. * Ratio realized investment to contracted investment. Source: Calculated from Jiangsu Yearbook, 1990–2002, various issues.

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Table 5.6 Leading investors in Jiangsu (contracted) (unit: Firms; US$1 million) Hong Kong/Macao Year

No.

Amount

Pre 1989 1989 1990 1991 1992

–– 190 233 688 4,656

–– –– 159.1 397.2 4,727

1993

5,204

5,640

1994

2,095

2,955

1995

1,462

3,320

1996

855

2,430

Taiwan No. 7 22 60(98)* 187 1,320 (1,472) 1,940 (1,964) 998 (1,400) 777 (908) 527 (500)

Japan Amount 2.07 9.31 28.4 122.8 1,344 (1,690) 1,790 (2,094) 960 (2,464) 900 (2,040) 810 (1,200)

United States No.

Amount

Singapore

No.

Amount

No.

Amount

–– 23 36 83 319

–– –– –– 66.5 282

–– 24 31 100 787

–– –– –– –– 627

–– –– 12 22 135

–– –– –– –– 212

557

582

1087

1037

265

464

469

843

571

897

200

763

440

1,860

459

1,230

232

2,040

243

760

354

1,460

111

210^

1997 1998

–– ––

1999

––

1,630

(593)

1,230

(549) (402) (719) (1,065) 1,100

2000

––

1,627 2,171

2001 2002

–– ––

3,009 ––

Total Actual Ratio

(1,300) 570 (1,240) 819 (1,282) 1,036 (3,275.34) 2,258 (5,818) 6,700*

(11,123) (29,800) –– 9,000 by 2,000 –– 52.1%

–– –– — ––

618 624

–– ––

804 568

–– ––

2,973 1,719

607

––

825

––

612

––

777

––

909

––

––

–– ––

1,276 ––

–– ––

1,604 ––

–– ––

–– ––

–– –– ––

–– –– ––

–– –– ––

–– –– ––

–– –– ––

–– –– ––

Notes: Investment from Korea surpassed Singapore in 1996, and in 1997 Korean investment was US$345 million. Since 1998 one of the largest foreign investment sources has been the British Virgin Island which functions as a transit location for Taiwanese investment to mainland China. In 1998, its investment in Jiangsu was US$857 million, in 1999 US$715 million, in 2000 US$1,421 million. In 2000, German investment in Jiangsu was US$1,346 million. Sources: Compiled from Jiangsu Yearbook, 1990–2002, various issues; data from Jiangsu Foreign Economic and Trade Commission 1997.9; Jiangsu Taiwan Affairs Office. Data in parentheses is from the Jiangsu Taiwan Affairs Office.50 * Songping Zhang, 2003.51.

139

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exporting business; forty-seven of these firms exported more than US$50 million worth of goods, and twenty-six of them exported more than US$100 million. In addition, these firms also provide supplies to other domestic exporters.51 It is important to note that TVEs have played an important role in attracting foreign investment to Jiangsu. The first Chinese–foreign joint venture with a TVE was set up in 1984 and by September 1994 more than 13,000 such joint ventures had been established, accounting for 54 percent of the total number of foreign joint ventures in the province. Realized foreign investment in these joint ventures was US$2.5 billion, or 32 percent of the total amount of realized foreign investment in the province. In 2001 alone, contracted foreign investment in the TVEs was US$1.599 billion and realized foreign investment was US$766 million. Among the 3,743 foreign joint ventures in Wuxi municipality, 213 are with TVEs. Virtually all townships and villages have their own joint ventures. For instance, one township alone—Dongjiang—has more than sixty joint ventures under its jurisdiction. In Zhangjiagang, 50 percent of the TVEs have joined up with foreign investors. Also, joint ventures at the township and village level show a high ratio of realized foreign capital, 17.25 percent higher than the provincial average.52 Taiwanese Investment in Jiangsu The first reported case of Taiwanese investment in Jiangsu—a relatively tiny US$50, 000—occurred in 1987, the same year that Taipei lifted the rule banning Taiwanese from visiting relatives on the mainland. The flow of investment from Taiwan increased steadily along with the stream of Taiwanese visitors to Jiangsu, the ancestral home of some 180,000 Taiwanese. A total of 174,703 people from Jiangsu, Zhejiang, and Shanghai had moved to Taiwan with the retreating Nationalist government in the late 1940s and early 1950s, and many of those migrants became important figures in the government and business communities in Taiwan. On the mainland side, more than 467,000 people in Jiangsu have relatives in Taiwan.53 Given these rich human connections, Taipei’s lifting of the ban on kinship visits to the mainland triggered a steady flow of Taiwanese visitors to Jiangsu. By the end of 2000, Taiwanese had made more than 2.6 million trips to the province. At the same time, more than 28,300 people from Jiangsu had been to Taiwan for kinship and business visits. During the same period, Taiwanese of Jiangsu origin donated a total of 420 million yuan to their home regions, setting up schools and helping the handicapped and victims of natural disasters (see table 5.7).


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Table 5.7 Taiwanese visitors and donations to Jiangsu

Year 1987,11–1990 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Total

Visits to Jiangsu

Visits to Taiwan

Donations (million yuan)

410,000 448,104 236,222 256,000 161,200 –– 75,220 70,000 132,139 –– –– ––

442 673 972 981 1,112 –– –– –– 3,906 –– –– ––

22.875 9.85 17.395 30.00 39.88 30.00 40.00 63.00 40.00 –– –– ––

2,600,000

28,313

420.000

Source: Jiangsu Taiwan Affairs Office, calculated from Jiangsu Year-Book, 1990–2001, various issues.

Many of the visitors combined kinship visits with a search for business opportunities. For example, the deal setting up the Kanghua Gas Company in Huaiyin in northern Jiangsu was brokered through a kinship visit to Taiwan in late 1990 by a mainlander, Wu Naiding. While in Taiwan, Wu got to know a Mr. Zhang, originally from Huaiying. Through him, Wu learned that Zhang’s nephew, Cui Xiangrong, was a Taiwan-based businessman interested in business information about Huaiying. Once back in Huaiying, Wu collected data about the local investment policy and environment and sent them to Cui. After four visits to Huaiying by Cui Xiangrong, the Kanghua Gas Company, with 1.6 million yuan, was set up in December 1993. Besides Cui, a further fourteen people whom Wu had met during his visit to Taiwan came to visit Huaiying and together they brought business deals worth more than US$1 million.54 The number of visits by business groups has also steadily increased. With few exceptions, these trips almost always include meetings and banquets with provincial and municipal leaders. This trend corresponds with a structural shift in Taiwanese investment to the mainland underway since 1993, when Taiwan’s large business groups began a concerted march to the mainland. Targeting mostly the mainland domestic market, these large business groups prefer to locate around major metropolitan centers. For instance, Taiwanese business groups usually open their offices in Shanghai (where land is expensive) while leaving their production operations in Jiangsu—mostly in southern Jiangsu (around Suzhou, Wuxi,

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and Nanjing) where around 85.5 percent and 95.6 percent of all Taiwanese investment is located in terms of the number of projects and amount of investment capital, respectively.55 Today the highway between Shanghai and Suzhou has become a technology corridor. With a total of 163 development zones under its jurisdiction (with five designated as national level development zones and ten as provincial level), including two high-tech parks, Suzhou is now home to more than one-third of all the Taiwanese firms in Jiangsu and more than two-thirds of all Taiwanese investment in the province in terms of contracted capital. By mid-2003, it alone had attracted a total of 4,273 Taiwanese-invested firms, with contracted capital of US$21.97 billion (realized, more than US$10 billion) which constitutes 37.82 percent of the city’s foreigninvested firms, and 41.92 percent of the total amount of contracted foreign investment capital (36.13 percent of realized foreign capital). Among these companies, 627 have an investment of over US$10 million, 68 of over US$30 million, and 18 of over US$100 million. A total of 41.9 percent of these firms are in the high-tech sector, with 915 in the IT-related sector and 876 in precision machinery. Almost all Taiwan’s major IT firms have investments in Suzhou. Within the jurisdiction of Suzhou, Kunshan has drawn most of the Taiwanese investment, with a total of 1,577 Taiwanese-invested firms by the end of 2002 and a total amount of contracted Taiwanese investment of US$9.4 billion (US$4.7 billion in realized capital). Altogether, Kunshan alone has attracted more than 10 percent of all Taiwanese investment to mainland China and has earned the nickname “Taiwan town.”56 As I have shown in chapter 4, the effort to attract Taiwanese investment has combined with the natural clustering tendency of Taiwanese firms, resulting in many cases where companies up and down the supply chain are all Taiwanese. For example, when Acer moved into Suzhou, a group of fourteen Taiwanese firms, originally suppliers of subsidiary materials for the Acer operation, settled in nearby Wujiang where costs were lower.57 In Suzhou’s New District, rows of company signs with the complex forms of Chinese characters (as used in Taiwan, but not in the PRC) adorned the city’s streets. A long line of major Taiwanese hightech firms—including Acer, Taiwan’s leading high-tech firm; Yageo Electronics, a resistor and capacitor giant; Asustek, Taiwan’s major motherboard manufacturer; Arima Computer, one of Taiwan’s leading makers of notebook computers; and Delta Electronics, a power supply leader—has dramatically raised the city’s IT output. By the end of 2004, more than 600 of the 2,100 Taiwanese-invested firms in Kunshan are in the IT business. According to one official, an IT firm can get about


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92 percent of the parts needed within half an hour, making it one of the nine most important new high-tech industrial cities in the world, as profiled by Newsweek in 2001.58 To encourage Taiwanese investment, the provincial government of Jiangsu has passed a series of laws and regulations since the early 1990s. Following the 1986 “Provisions for Encouraging Foreign Investments,” the provincial government promulgated and compiled a series of resolutions and policy guidelines on Taiwanese investors including the “Measures for Encouraging Investment from Taiwanese Compatriots” of January 1991, the “Temporary Measures Regarding Rewards for Attracting Investment from HK, Macao and Taiwan,” the “Jiangsu Investment Guide for Taiwanese Compatriots,” and an “Introduction to the Investment Environment in Jiangsu.” In addition to these initiatives, various cities within the province also passed measures to attract Taiwanese and other foreign investors. For example, in 1992 Nanjing passed its own “Measures for Encouraging Investment from Taiwanese Compatriots” and the “Temporary Measures for the Purchase and Construction of Houses by Taiwanese Compatriots.” These measures included a five-year exemption from land fees and payment of only half the standard rate for the next five years. In addition, Taiwanese firms were allowed to sell a certain proportion of their products on the domestic market so long as they could satisfy their own foreign currency needs.59 Jiangsu province uses Taiwanese investment—a kind of special foreign investment—as a tool for restructuring the local economy away from loan-based investment toward the utilization of foreign capital. It is hoped that Taiwanese investment will also help local TVEs upgrade their equipment, increase exports and economies of scale, and improve management skills. This is referred to locally as “emptying the cage and putting in new birds.” In addition to the various laws and regulations issued, the province and its cities have begun to host a series of trade and business shows every year, both within and outside the province, in order to attract foreign investment. Most of the shows at the local level are organized like farmers’ markets. Firms looking for foreign investment line up their tables very much like individual vendors selling home-grown produce. Few of the “vendors” speak English or any other foreign language, and few of the potential investors are really “foreign” in a strict sense of the word. Since similar events are also held in New York and Hong Kong, these occasions often become shopping bazaars for small investors from Taiwan and Hong Kong. These shows usually wind up with a reception hosted by

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provincial and municipal leaders in honor of the leading Taiwanese business people attending the event.60 All these efforts have helped facilitate the flow of Taiwanese investment to the province. Since 1992/1993, Jiangsu has surpassed Guangdong as the recipient of the largest amount of Taiwanese investment. By the end of 2002, there were more than 11,000 Taiwanese-invested firms in Jiangsu, with a total investment of more than US$29 billion constituting about 41 percent of all Taiwanese investment in mainland China. In 2002 alone, the ratio was more than 47 percent (see table 5.6).61 By the end of 2002, of all the Taiwanese firms in Jiangsu, over 600 had an investment of over US$10 million and more than fifteen of these firms had individual investments of over $100 million. More than sixty of Taiwan’s top one hundred business groups have investments in Jiangsu.62 In the province, Taiwanese firms are second only to investors from Hong Kong/Macao in number. In terms of the amount of contracted investment capital, Taiwan ranked behind only Hong Kong/Macao until 1995 when Taiwanese capital was surpassed by investment from the United States (see table 5.6).63 Since systematic data after 1996 is not available, it is impossible to compare investment from Taiwan and other locations. Most of the Taiwanese firms involved are small enterprises that have relocated to mainland China to take advantage of the low labor costs and cheap land. These firms tend to be concentrated in light industrial and consumer goods with a low capital/technology–labor ratio, and in many cases use only second-hand machinery. For example, between 1987 and 1991 around 85 percent of all the Taiwanese-invested projects in Nanjing had an investment of less than US$1 million. But the sizes of Taiwanese investments have been increasing steadily. By the end of 2002, the average size of Taiwanese-invested projects in Jiangsu had increased to US$6.09 million (table 5.8). In terms of sectoral distribution, according to statistics available for Taiwanese firms in Nanjing between 1987 and 1991, recreation and the restaurant trade ranked above all other sectors, accounting for 20.7 percent of all Taiwanese firms during the period. “A taste from Taiwan” or “Taipei fashion” are still advertised in most of the karaoke nightclubs, cake shops, and wedding houses in the city. The sector with the second largest Taiwanese investment was the electronics and electrical industry, with 13.4 percent. In third place, the textile and apparel industry accounted for 12.2 percent, while cosmetic and personal hygiene products and the chemical industry took fourth and fifth places, at 9.8 percent


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Table 5.8 Average size of Taiwanese firms in Jiangsu (unit: US$10,000) Year

Size

Pre-1989 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

29.57 42.30 47.36 65.65 101.8 92.27 96.19 115.8 153.7 180.4 225.9 318.9 455.5 546.3 609.1

Source: Calculated from data in table 5.6. For quality of data see fn.49.

and 8.5 percent, respectively. However, the sectoral distribution of Taiwanese investment has changed over the years, with increasing investment in the high-tech sector. For example, by the end of 2002, more than 1,000 Taiwanese-invested firms in Jiangsu were in the IT and IC industries. In Suzhou by mid-2003 more than 43.1 percent of all Taiwanese-invested firms were in the IT/IC sector and precision machinery including sixteen of the top twenty IT firms in Taiwan. Investment in light industry, service, and real estate accounts for 28.4 percent, 3.7 percent and 2.5 percent, respectively.64 In contrast to the predominance of enterprises in wholly Taiwanese ownership in Xiamen in the early 1990s,65 Taiwanese firms in Jiangsu province around the same time were predominantly joint ventures since most of them were targeting the mainland domestic market. For example, in Suzhou, until June 1997, wholly Taiwanese-owned firms accounted for only about 29.3 percent of a total of 2,057 Taiwaneseinvested firms (see table 5.9). The rest were either joint ventures or cooperative ventures—a marked contrast to an average 77.52 percent of Taiwanese-invested firms in Xiamen being wholly owned in the period 1983–1991. Between 1989 and 1991, in Nanjing, of the eighty-four firms with Taiwanese investment, only 13.1 percent were wholly Taiwaneseowned.66

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Table 5.9 Ownership and size of Taiwanese investment in Suzhou (unit: US$1 million)

Year By 1990 1991 1992 1993 1994 1995 1996 1997,1–6 Total

Wholly owned no.

Joint ventures no.

7 13 52 134 115 111 94 77 603

61 79 502 407 126 89 43 24 1331

Cooperative ventures no. –– 1 16 47 16 20 19 4 123

US$5–10 million 3 5 38 36 17 17 7 5 128

US$10–20 million 1 2 28 30 21 15 5 5 107

US$20–30 million –– –– 12 16 9 12 6 6 61

Above US$30 million 1 –– 7 7 15 15 2 1 48

Source: Suzhou Taiwan Affairs Office.

In addition, in the early 1990s Taiwanese firms in Jiangsu had a lower export ratio than those in Xiamen. In 1990, firms exporting less than half of their product accounted for only 4.37 percent of all the Taiwanese firms in Xiamen. In marked contrast, during the period 1990–1991, firms exporting less than half of their products constituted 36.49 percent of all the Taiwanese firms in Nanjing.67 The examples given here and above all illustrate the changing nature of Taiwanese investment from export-processing to production for the mainland domestic market. However, both the ownership structure and export orientation of the Taiwanese firms invested in Jiangsu have been changing recently as more and more large firms in the high-tech sector have invested in the province. In order to keep their proprietary technologies and production secrets and ensure quality control and timely delivery, Taiwanese high-tech firms have often migrated en masse to the mainland together with their existing network of reliable suppliers and distributors, with minimal involvement with local mainland partners.68 This is reflected in the increasing number of firms wholly owned by Taiwanese investors since the mid-1990s in Suzhou (table 5.9) and their export performance. According to Songping Zhang’s study, by early 2003 the majority of Taiwanese-invested firms in Suzhou were wholly owned. In 2001, twenty-two of them made the “top 100” list of large exporters of China, and in 2002, thirty-four made it onto the list. This is also part of a larger trend which includes all foreign-invested firms in Jiangsu. For example, in 1991 there were only ninety-one wholly-owned foreign firms in the province, with contracted capital of US$94.02 million. In 1993, 814 more were added to their number, with a total contracted capital of


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US$2.017 billion. In 1994, another 715 wholly owned foreign firms were approved, with contracted capital of US$2.052 billion, and in 1995, 964 wholly owned firms were approved, with contracted capital of US$5.67 billion. By the end of 1995, the total number of wholly owned foreign firms had reached 2,858, with contracted capital of US$10.662 or 25.8 percent of the total contracted foreign investments in the province. In 2001 alone, the total number of wholly owned foreign firms reached 2,088 or 58.3 percent of all foreign-invested firms, with a total contracted investment of US$11.63 billion or 77.02 percent of all the contracted foreign investment in the province. In terms of realized foreign investment, the figure was US$4.576 billion or 64.25 percent of all realized foreign investment.69 Initially, TVEs played an important role in attracting Taiwanese investors. Unlike state-run firms, TVEs are market-oriented and concentrated in processing industries such as textiles, garments, footwear, the chemical industry, machinery, electronics, and food. In 1990, for example, 32.4 percent of the local industries in Suzhou were in textiles, 13 percent were in chemicals, and 7.7 percent were in construction materials. These largely corresponded to the industries that had been exiting Taiwan since the later 1980s as a result of changing economic circumstances.70 By 1994, 871 Taiwanese firms in Suzhou, about 65 percent of the total, were involved in joint ventures with TVEs.71 TVEs offer special attractions for SMEs from Taiwan (and HK/Macao) because of their structural similarities to SMEs, especially in being flexible and small. In 1985, rural firms in Suzhou and Wuxi employed an average of eighty-two people, with fixed assets averaging about 180,000 yuan. Even in 2000, one survey showed that in south Jiangsu rural firms with an investment of more than 5 million yuan make up less than 17 percent of the total and the average number of employees is 37.66. The average capitalization of SMEs in Taiwan was around US$2–3 million. Both TVEs and SMEs developed by making use of surplus labor in rural areas, informal sources of finance, and subcontracting relations with large enterprises, either state firms or large multinational corporations.72 In addition to their similarities, both TVEs and SMEs face mounting difficulties due to their special characteristics. Since Taiwanese SMEs are export-oriented, the appreciation of the New Taiwan dollar, rising costs of labor and land, and the surging labor and environmental protection movements have all encouraged relocation to places where firms can rehabilitate their threatened competitiveness in the export market and find alternative market outlets.

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For the TVEs, increasingly onerous competition from home and abroad and declining profit margins have all pointed to the need to upgrade technologies and improve management skills. From 1984 to 1989, the technical level of two-thirds of the equipment used in TVEs in southern Jiangsu fell below the national average.73 Since costly research and development is simply beyond their capacity, many TVEs seek to join up with foreign investors to gain both technology and tax benefits. On both accounts, small Taiwanese investors with their equipment and management skills fill the need. Given a shared culture and a common language, Taiwanese investors have quickly adapted their technologies to amalgamate cheap local labor with Taiwanese production efficiency. With their rich OEM experience and established production networks and market outlets, the skill and efficiency of Taiwanese firms in labor-intensive modes of production promises handsome returns to both Taiwanese investors and their local partners. Even more than these factors, TVEs need foreign investment capital and outlets to export markets. Increasingly affected by government macroeconomic policies since 1989, TVEs have been faced with tremendous financial difficulties, as reflected in their rising debt–equity ratio. For example, the debt–equity ratio of TVEs in the jurisdiction of Suzhou at the end of 1995 was around 75–80 percent—meaning that almost all their fixed capital formation came from borrowing. In most of these TVEs, even operating capital was largely dependent on borrowing— with a debt-equity ratio of around 60 percent. This high debt–equity ratio has made TVEs increasingly vulnerable to government macroeconomic policies that, since the late 1980s, have been targeted at curbing inflation through tight monetary policy and high interest rates.74 In addition, local firms covet the tax exemptions and tariff-free imports of equipment and materials that come with “joint venture” status. Foreign investors can also provide trips abroad, foreign-made gifts and hard currency. Structural similarities and complementary individual needs have helped make SMEs and TVEs ready partners. Shared cultural understandings and interpersonal connections between Taiwanese investors and local officials facilitate the establishment of business operations. Looking for cheap labor, land, and access to mainland China’s huge domestic market SMEs meet with TVEs looking for investment capital and more advanced equipment. Thus contributions to joint ventures often take the form of land, at almost no cost to the TVEs, and outlets to China’s domestic market from the TVE; and equipment—obsolete and mostly useless in Taiwan—and access to export marketing networks from the SMEs. Deals are often sealed at banquets amid heavy smoking and expensive


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wines. Of all the foreign-invested projects in Jiangsu, about 70 percent of foreign contributions take the form of equipment. In some areas, this figure reaches as high as 90 percent. About 80 percent of the equipment has been previously used. Through joint ventures, TVEs gain tax benefits, more sophisticated—if second-hand—equipment, the right to export, and valuable international marketing experience. And for SMEs, joint ventures provide a chance to find a new market niche in which they can increase their economies of scale and develop and sell products with their own brand names. Finally, in a transition economy, local governments function very much like commercial republics. Since the local official is the boss, small investors can bypass lengthy approval procedures involving higher-level bureaucracies. Since successful investment in the mainland depends largely on the relationships made with local officials, the ability to make flexible deals with local officials works to the advantage of small Taiwanese investors.75 To conclude, this chapter uses a case study of Taiwanese investment in Jiangsu province to illustrate that the surge of Taiwanese investment into mainland China has been facilitated by the flexibility of Taiwan’s unique industrial organization, shared cultural understanding, and language affinity with their local agents. While not guaranteeing the success of the investment projects, these factors certainly help lubricate the establishment of interpersonal networks and lower transaction costs in negotiating business deals. These networks are especially important for small Taiwanese investors given the rent-seeking environment in mainland China as a result of some peculiar features of reform policies, especially “particularistic contracting.” Motivated by new fiscal schemes, rapid local development, foreign exchange earnings, and outright personal benefits, local officials have become the most important agents for Taiwanese investment in mainland China. These local officials tend to be more flexible than higher-level bureaucrats and more willing to accommodate overseas investor needs in terms of more favorable tax breaks, relaxed inspection of imported materials, and higher percentage of sales allowed in the mainland domestic markets. In the absence of routinely enforced business laws, the success of business depends largely on the flexible interpretation and implementation of regulations by local officials. With illicit practices prevalent, local official cooperation and the relationship the investors have cultivated with local officials have become the most important considerations for foreign investors. Being familiar with similar experiences back in Taiwan and with little cultural and language barriers, Taiwanese investors have a

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clear advantage over other foreign investors in the mainland in finding opportunities and cutting deals. This is especially true at the local level where the reach of the state is stretched to the limit and irregular practices are most prevalent.76 While likely to come under increasing scrutiny as China becomes more and more involved in various international organizations, these informal ways of doing business are unlikely to fade away soon given their prevalence at the local level.

CHAPTER

SIX

Conclusion

This book has explored the dual process of deepening economic integration and intense political rivalry in relations across the Taiwan Strait. In this paradoxical development, Taipei’s policy of restricting the pace and direction of trade and investment flows to the mainland has not been successful despite its reputation as a strong state. At the same time, Beijing’s policies—designed to stem the separatist drift on the island through engagement with trade and investment—has only driven the two sides further apart politically. In an attempt at capturing the dynamics of cross-Strait relations, I first analyzed the politics of strategic interactions between the two sides. I then examined the specific policy designs of both sides regarding the flow of trade and investment across the Taiwan Strait. Finally and most importantly, I analyzed state–business interactions with regard to deepening economic relations between the two sides. The analytical focus of the book is on the organizational characteristics of the private sector and the institutional foundations of state– business interactions. Special attention has been paid to the role of small and medium-sized firms and their interactions with the state and with large firms in a multilevel and multidimensional process. This approach not only adds richness to Hirschman’s elegant theoretical formulation of economic statecraft, but also contrasts with prevailing analyses of East Asian political economy in general—and relations across the Taiwan Strait in particular—that regard economic development and cross-Strait interactions as a top-down process and treat private actors as simply reacting passively to state policies and state-sponsored projects. In this final chapter I review the major arguments of the book and reflect on some of the major theoretical issues raised by this study.

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Conflict across the Taiwan Strait Power and Interdependence across the Taiwan Strait

This book analyzes the dynamics of economic statecraft and strategic interactions between the two governments and the conflicts between the political and economic objectives of the states and the interests of the private sector in the complex process of economic interactions across the Taiwan Strait. The dual process of economic integration and political divergence has raised some important questions about the debate over interdependence and its consequences. On the one hand, liberals of various stamps share the basic assumption that interdependence among states pacifies political relations and decreases international conflict, or at least decreases incentives for conflict. The central logic of most studies of conflict and interdependence is that states are less likely to fight if there are additional opportunity costs associated with the use of military force. The logic of this argument has been extended in the recent liberal literature on globalization. As trade increases and interdependence grows, war becomes a relatively costly way for states to pursue their interests. Trade and direct investment increase cross-border economic and other contacts and raise a state’s stake in maintaining these linkages. Through such interactions, states create a broad set of mutually beneficial economic and other ties. Because disruption of these linkages would work against a country’s self-interest, interdependence is, therefore, a valuable mechanism for deterring conflict.1 Also, interdependence may reduce conflict indirectly by transforming state preferences in such a way that states no longer desire to fight. Finally, interdependence creates domestic coalitions that prefer the maintenance of economic exchange to war.2 This liberal view echoes the sentiments of some analysts on relations across the Taiwan Strait. As Orville Schell, a long-time observer of East Asian affairs at the University of California at Berkeley argued recently, if the trend of increasing cross-Strait contacts continues, “Taiwan’s government will soon be unable to afford antagonizing China, and . . . the cost to China of attacking Taiwan may become prohibitive. . . . Simply put, the tension of politics may be cut by the imperatives of business and trade.”3 However, the findings of this study do not support this view. Increasing contacts and economic exchanges have so far failed to overcome the passions that inflame relations across the Taiwan Strait. These findings have gained new importance in light of the growing tensions among the major powers in the East Asian region over territorial disputes, historical memories, and textbooks despite deepening economic interdependence.

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This leads us to consider the counterarguments put by realist scholars on the question of interdependence. The different varieties of realists believe interdependence is in fact responsible for enhanced levels of conflict because interdependence, in time, engenders dependence. Since dependence creates vulnerability, interdependence may create distortions in the balance of state power as the result of asymmetric economic relationships. In this respect, Hirschman’s demonstration of the use of power in asymmetrical relations constitutes a sharp contrast to the harmonious trading relationships portrayed by liberal scholars.4 But, as I hope my book has shown, these generalizations by both liberals and realists on the relationship between economic interdependence and political behavior are one-sided and premature. As one realist commentator points out, interdependence may not have a systematic influence on issues of war and peace because the causes of war lie in political and strategic considerations.5 In this case, economic factors such as interdependence are important only in the sense that they confirm or contradict these wider political and strategic interests. The major point to be made in these matters is that trade and other economic relations are not in themselves critical to the establishment of either cooperative or conflictual international relations. . . . At times economic intercourse can moderate and at others aggravate these relations. What can be said with some justification is that trade is not a guarantor of peace. . . . In general, the character of international relations and the question of peace or war are determined primarily by the larger configuration of power and strategic interest among the great and small powers in the system.6 In this book, I have sought to demonstrate that cross-Strait economic integration has set in motion a complex process of interaction involving multiple forces. The first is the ongoing process of deepening economic integration and interdependence driven largely by market forces. This process has been reinforced by Beijing’s policies to promote stronger cross-Strait economic ties in order to undercut support for Taiwan independence. The second is the rise of “identity politics” in Taiwan determined mostly by the character of Taiwan’s domestic politics, especially the conscious efforts at nation-building by the governing elites. For Taiwan’s pro-independence advocates, deeper cross-Strait economic integration is viewed as a serious threat that may deprive them of the window of opportunity to seek a permanent separation from mainland China. Accordingly, they have been intensifying their efforts to harden

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a sense of “Taiwanese subjectivity” in order to keep Taiwanese people away from identifying with China or Chinese again. This has been reflected in government polices under both Lee Teng-hui and Chen Shui-bian to slow down or even reverse cross-Strait economic interaction and other forms of exchange. Both these forces are highly dynamic and destabilizing to the status quo. As shown in chapter 2, as economic ties deepen across the Taiwan Strait, Taipei has redoubled its efforts to reach out forcefully in the international arena in order to counter the gravitational pull of a seemingly unstoppable process of economic integration which may eventually compromise its political autonomy. On the other hand, creeping independence and gains in Taiwan’s international position have only prompted Beijing to increase its efforts to rein in Taipei internationally and to prevent it from spinning away from China’s orbit. But Taiwan’s international isolation has only added fuel to surging nationalist feeling on the island and boosted support for the Taiwan independence movement. Under such circumstances, the balance of the strategic triangle formed between Washington, Beijing, and Taipei has become extremely delicate. The input of a third force could determine the direction taken by the dynamic interactions of the other two forces. It can function either to contain the confrontational momentum or to inflame an already very tense situation. The zigzag path of cross-Strait relations involving economic integration and political divergence is largely entangled with the uncertain patterns of adjustment of strategic relations within this triangle. But a more fundamental problem with both the realist and liberal positions is their assumption that the activities of economic actors in the private sector are necessarily linked to state preferences and economic influence in an asymmetric relationship will automatically translate into political leverage. My argument is that a study of the mechanisms by which economic asymmetries are translated into political power (or not) requires analysis of state–society relations on a case-by-case basis. Beyond the State: Bringing Capital Back In In outlining the requirements for valid social science research, Skocpol et al. argue that “a complete analysis . . . requires examination of the organization and interests of the state, specification of the organization and interests of socioeconomic groups, and inquires into the complementary as well as conflicting relationships of state and societal actors.”7 Following this insight, in this book I have sought to capture the

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dynamics of state–business interactions in cross-Strait relations in the twin contexts of state versus society and state versus the market. As Yunhan Chu points out, in the first case, the state seeks to maintain its autonomy in making policies and to impose them on business through regulatory measures. However, in the second case, “the private sector can engage the state in an implicit bargain through a process of mutual adjustment, rather than confronting the state with direct pressure and negotiation. This is due to the fact that the state can only marginally modify private business decisions, much less control the economic consequences of its regulatory measures in an open economy. Thus, in the context of state versus market, the cumulative aggregate effects of private business decisions can divert the intended policy consequences”8—or render them irrelevant through strategies of evasion and carry on with “business as usual.” In the end “the state may be forced to modify its policy to accommodate the changing economic situation.”9 In this respect, globalization has also increased the capital mobility that has essentially changed the terms on which private actors can engage the state. This book shows that the political economy of state–business relations is a dynamic process of complex interactions in which multiple actors with different organizational characteristics and public–private connections interact with one another to produce a wide range of results. Unlike previous work that focuses more on state structures and policies, this book pays special attention to the role of industrial organizations, especially the role of small and medium-sized firms in state– business interactions across the Taiwan Strait. As chapters 3 and 4 have shown, in Taiwan the proliferation of SMEs has proved harder to control than the relatively small number of large companies because Taiwan’s SMEs are not dependent on the state. The analytical focus on the organizational characteristics of different types of firm in the private sector and their respective responses to state policies is meant to add an explicit institutional dimension to theories of economic statecraft and the post-statist critique that has concentrated mostly on the structural power of big business. In addition, my analytical focus on industrial organization is also intended to go beyond the ongoing debate between state-centric theoretical frameworks and neoclassical economics in the study of East Asian political economy. In this debate, one side holds that state institutions have their own policy preferences and under most conditions are able to pursue these preferences, while the other side maintains that state activity is constrained by societal and market forces. The main thrust of

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the literature on East Asian political economy is that later industrialization requires strong state institutions to accumulate capital, nurture entrepreneurship, respond to private business needs and, at the same time, insulate policymakers from societal pressures. As one scholar argues, “state policy and influence should now be accepted as the single most important determinant of the East Asian economic miracle.”10 According to this theory, rapid economic growth in East Asia, first in Japan and then among the newly industrialized countries (NICs) is the result of the direction provided by efficient bureaucracies, such as the famous Japanese Ministry of International Trade and Industry (MITI).11 East Asian states are described as strong, autonomous, and capable where bureaucracies have been insulated and effective in providing domestic producers with the support and guidance they need to achieve competitive advantage in the marketplace. While the state-centric approach takes us beyond the simplistic assumption of neoclassical economics that markets always operate efficiently, it also shares with the latter a neglect of the role of private actors in the process of development. As critics argue, while state policies are important in the formation of industrial organizations and in the cultivation of certain types of economic behavior, they are not determinate. Industrial organizations and the behaviors of private actors evolve from a process of complex interactions between public policies, social institutions, and normative rules. Once in place, these organizations and behaviors, in turn, form the institutional environment that constrains activity and policy in both the private and public realms. Since states have varying links with the private sector, private-sector responses to a given state policy can also vary widely according to its organizational characteristics, the environment, and the nature of the issues involved. In this respect, the process of democratization in Taiwan over the past two decades has injected a new dynamism into state– business relations on the question of cross-Strait economic interactions. First, as part of the process of transition from an authoritarian state to democracy, many of the features that had characterized the Taiwanese state in the earlier period have been transformed. Bureaucratic coherence and state dominance over society have become increasingly difficult to maintain. Together with the economic liberalization following changes in the international political economy, the state’s control over society in general and business in particular has been greatly weakened. While policymaking over cross-Strait economic interactions is still firmly in the hands of the highest authority, the state’s capacity to enforce these policies has been severely eroded by competitive party politics, factional

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conflict, and a lack of coherence and coordination among various bureaucratic agencies. As a result, government policies have become increasingly inconsistent and ineffective when they conflict with the goals of business interests. At the same time, these same changes have created new opportunities for businesses to pursue their interests and exert their influence. In current relations across the Taiwan Strait, SMEs are moving to the mainland market regardless of state restrictions. However, as more big business groups invest in mainland China, they are beginning to pressure the government to lift its ban on direct trade and investment and even to forge both formal and informal alliances with state bureaucrats across the Strait in order to protect their business interests. Given the extensive use of “black money” (heijin zhengzhi) in the political process, many Taiwanese legislators have become representatives of business interests, brokering deals for their clients on both sides of the Taiwan Strait. In this sense, the process of democratization has rendered the state increasingly porous and has created a new form of state–business nexus in cross-Strait interactions—a relationship of distrust and disregard.12 The creation of this relationship of distrust points to another fundamental weakness in the state-centric argument—its assumption that the promulgation of policies is the same as their implementation. Since the argument focuses almost exclusively on the state as policy initiator, the mechanisms of enforcement are often neglected. The existing accounts of East Asian political economy often list a whole array of government institutions and programs while leaving the implementation process in a black box. As this book demonstrates, just because policymakers have a desire to regulate economic activity, the effectiveness of their efforts cannot be taken for granted, even in a “strong” East Asian state such as Taiwan. In this sense, it is an error to equate state autonomy with state strength. A state may be strong or weak in different circumstances depending on its own organizational coherence and the configuration of power in the private sector. Whether state policies get implemented depends not only on the desires of policymakers, but also on the degree to which these policies are in harmony or in conflict with the interests of the private sector, the institutional links between them, and the compliance mechanisms at the disposal of the state.13 Given the constraining role of the informal structure, government policies can hardy be effective if they are not enforced by societal actors and reinforced through cultural practices. As Richard Samuels points out that the state’s effectiveness comes not just “from its own inherent capacity but from the complexity and stability of its interactions with market players.”14

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This book is intended to fill this analytical gap by focusing on the organization and interests of private actors and their institutional links with the state. It begins with a big question about the paradoxical development of economic integration and political divergence in relations across the Taiwan Strait, but ends with an analysis of the organizational dynamics of firms and the institutional foundations of state–business interactions in the highly volatile environment that characterizes contemporary relations across the Taiwan Strait.

Appendix: English Translations of the Names of Chinese Journals, Newspapers, Magazines and Websites

Journals Jingji Yanjiu (mainland China) Laozi Guanxi Yuekan (Taiwan) Taipei Yinhang Yuekan (Taiwan) Taiwan Jingji (Taiwan) Taiwan Jingji Yanjiu Yuekan (Taiwan) Taiwan Yanjiu (mainland China) Taiwan Yanjiu Jikan (mainland China) Taiwan Yinhang Jikan (Taiwan) Zhanlue Yu Guanli (mainland China) Zhongguo Nongcun Jingji (China)

Economic Research Industrial Relations Monthly Taipei Bank Monthly Taiwan Economy Taiwan Economic Research Monthly Taiwan Studies Taiwan Research Quarterly Taiwan Bank Quarterly Strategy and Management Chinese Rural Economy

Newspapers Gongshang Shibao (Taiwan) Guoji Ribao (United States) Jingji Cankao Bao (mainland China) Jingji Ribao (Taiwan) Lianhe Bao (Taiwan) Lianhe Zaobao (Singapore) Ming Pao (Hong Kong) Nanfang Ribao (mainland China)

Commercial Times International Daily News Economic Reference News Economic Daily United Daily United Morning Post Ming Pao Nanfang Daily

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Appendix

Pingguo Ribao (Hong Kong) Qiaobao (United States) Renmin Ribao (mainland China) Shijie Ribao (United States) Tsingtao Ribao (Singapore) Xiamen Ribao (mainland China) Zhongguo Shibao (Taiwan) Zhongshi Wanbao (Taiwan)

Pingguo Daily The China Press People’s Daily World Journal Tsingtao Xiamen Daily China Times China Times Evening News

Magazines Guang Jiaojing (Hong Kong) Haixia Guangjiao (mainland China) Huaxia Guangjiao (mainland China) Jingbao Yuekan (Hong Kong) Jingji Qianzhan (Taiwan) Jiushi Niandai (Hong Kong) Kai Fang (Hong Kong) Kuang Hua (Taiwan) Liangan Guanxi (mainland China)

Guang Jiaojing Monthly Haixia Guangjiao China Perspective Mirror Monthly Economic Outlook The 90s Kai Fang Magazine Kuang Hua (a bilingual monthly) Relations across the Taiwan Strait Liaowang Newsweek (mainland China) Outlook Maoyi Zhoukan (Taiwan) Trade Weekly Tianxia Zazhi (Taiwan) Tianxia Magazine Xin Taiwan (Taiwan) New Taiwan Magazine Yazhou Zhoukan (Hong Kong) Asia weekly Zhongguo Shidai (Hong Kong) China Era Zhongshi Zhoukan (Taiwan) China Times Weekly Zhuo Yue (Taiwan) Zhuo Yue (Outstanding) Magazine Websites Duowei Xingwen Wang (United States) www.chinesenewsnet.com Xinlang Wang (Hong Kong) www.sina.com

NOTES

1 Statecraft, Capital Mobility, and Institutions: Toward a Dynamic Interactive Model 1. Thomas J. Christensen. “PRC Security Relations with the United States: Why Things Are Going So Well,” Chinese Leadership Monitor, No. 8, Fall 2003. 2. 2. Michael D. Swaine. “Trouble in Taiwan,” Foreign Affairs, Vol. 83, No.2, March / April 2004. 40. 3. “Anti-Secession Law Adopted by NPC (Full Text),” China Daily, March 14, 2005. 4. Joseph Kahn. “Chinese General Threatens Use of A-Bomb if U.S. Intrudes,” The New York Times, on the web, July 15, 2005. 5. 5.For the theoretical formulation of this kind of situation, see David A. Baldwin. 1985. Economic Statecraft, Princeton: Princeton University Press. 121, 129. 6. 6.Yun-han Chu. “The Political Economy of Taiwan’s Mainland Policy,” in Suisheng Zhao, ed. 1999. Across the Taiwan Strait: Mainland China, Taiwan, and the 1995–1996 Crisis, New York: Routledge. 182. 7. Baldwin. 1985. 143. 8. Michael R. Gordon. “China Buildup Has Taiwan on Edge,” The New York Times on the web, April 8, 2001. 9. Baldwin. 1985. 100. 10. Klaus Knorr. 1975. The Power of Nations: the Political Economy of International Relations, New York: Basic Books. 9; also Suisheng Zhao. “Changing Leadership Perceptions: The Adoption of a Coercive Strategy,” in Zhao. 1999. 103. 11. Albert O. Hirschman. 1945. National Power and the Structure of Foreign Trade, Berkeley: University of California Press.14–16. 12. Robert O. Keohane and Joseph S. Nye. 1977. Power and Interdependence, Boston: Little Brown. 10–11. 13. Hirschman. 1945. 26–29. 14. Hirschman. 1945. 29; also see Keohane / Nye. Ibid. 15. Hirschman. 1945. 15–16. 16. David A. Baldwin. “The Power of Positive Sanctions,” World Politics, Vol. 24, No. 1, October 1971. 28–31; also Baldwin. 1985. 210–213. 17. Keohane and Nye. 11. 18. Thomas Risse-Kappen, ed. 1995. Bringing Transnational Relations Back In: Non-State Actors, Domestic Structures, and International Institutions, New York: Cambridge University Press. 293. 19. Robert Putnam. “Diplomacy and Domestic Politics: The Logic of Two-Level Games,” International Organizations, Vol. 42, No. 3, Summer 1988. 427–460. 20. Risse-Kappen. 299.

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21. Yung Wei. “From Functional Integration to Structural Readjustment: Taipei–Beijing relations and the role of the United States,” Journal of Contemporary China, 13, 40, August 2004. 438–441. 22. Susan Strange. “Protection and World Politics,” International Organization, Vol.39, No.2, Spring 1985. 234; see also Susan Strange. 1996. The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge University Press; Susan Strange, John M. Stopford, and John S. Henley. 1991. Rival States, Rival Firms: Competition for World Market Shares, Cambridge University Press; Susan Strange, 1988. States and Markets. London: Pinter Publishers. Strange’s formulation resembles closely Risse-Kappen’s conceptualization of a “three-level game” in which level I represents the realm of nongovernmental interactions, level II the sphere of intra-governmental bargaining over the results of level I, and level III—the area of domestic politics. Risse-Kappen, 300. 23. Robert Gilpin. 1975. US Power and the Multinational Corporation, New York: Basic Books. Stephen D. Krasner. 1978. Defending the National Interest: Raw Materials Investments and U.S. Foreign Policy, Princeton: Princeton University Press; “State Power and the Structure of International Trade,” in Jeffry A. Frieden and David A. Lake, eds. 2000, 4th Edition. International Political Economy: Perspectives on Global Power and Wealth, New York: Bedford/ St. Martin’s. 19–36. 24. Alexander Gerschenkron.1962. Economic Backwardness in Historical Perspective, Cambridge, MA: Belknap Press; Frederic C. Deyo. 1987. The Political Economy of the New Asian Industrialism, Ithaca: Cornell University Press; Alice Amsden. 1989. Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford University Press; Robert Wade. 1990. Governing the Market: Theory and the Role of Government in East Asian Industrialization, Princeton: Princeton University Press; Meredith Woo-Cumings, ed. 1999. The Developmental State, Ithaca: Cornell University Press. 25. Chalmers Johnson. 1982. MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975, Stanford: Stanford University Press. 26. Ronald J. Herring. “Embedded Particularism: India’s Failed Developmental State,” in WooCumings. 307. 27. David C. Kang. “South Korea and Taiwanese Development and the New Institutional Economics, International Organization, Vol. 49, No. 3, Summer 1995. 562. 28. Peter A. Hall. 1986. Governing the Economy: The Politics of State Intervention in Britain and France, New York: Oxford University Press. 17, 59. 29. Peter Evans. 1995. Embedded Autonomy: State and Industrial Transformation, Princeton: Princeton University Press, 12. 30. Joel S. Migdal, Vivienne Shue et al., eds. 1994. State Power and Social Forces, Cambridge: Cambridge University Press. 31. Jonas Pontusson. “From Comparative Public Policy to Political Economy: Putting Political Institutions in Their Place and Taking Interests Seriously,” ms. 1994; Richard Robison. 1986. Indonesia: The Rise of Capital. A Publication of the Asian Studies Association of Australia; Gary Gereffi. “Big Business and the State,” in Gary Gereffi and Donald Wyman, eds. 1990. Manufacturing Miracle: Paths of Industrialization in Latin America and East Asia, Princeton: Princeton University Press. 90–109. 32. Jeffrey Winters. 1996. Power in Motion:Capital Mobility and the Indonesian State. Ithaca: Cornell University Press. ix; also Geoffrey Garrett. “Capital Mobility, Trade, and the Domestic Politics of Economic Policy,” in Robert O. Keohane and Helen V. Milner. 1999. Internationalization and Domestic Politics, Cambridge: Cambridge University Press. 79–107. 33. Richard B. McKenzie and Dwight R. Lee. 1991. Capital Mobility: Challenges for Business and Governmen, Center for the Study of American Business. St. Louis: Washington University. 4; also 1991. Quicksilver Capital: How the Rapid Movement of Wealth Has Changed the World, Free Press. 34. Thomas L. Friedman. 1999. The Lexus and the Olive Tree: Understanding Globalization, New York: Farrar, Straus, Giroux, chapter 6; also Beth A. Simmons. “The Internationalization of Capital,” in Herbert Kitschelt, Peter Lange, Gary Marks, eds. 1999. Continuity and Change in Contemporary Capitalism, Cambridge University Press. 36–69.

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35. John B. Goodman and Louis W. Pauly. “The Obsolescence of Capital Controls? Economic Management in an Age of Global Markets,” in Frieden and Lake, eds. 2000, International Political Economy, 296. 36. John Gray. 1999. False Dawn: The Delusions of Global Capitalism, New York: New Press. 28. 37. Desmond King and Stewart Wood. “The Political Economy of Neoliberalism: Britain and the United States in the 1980s,” in Kitschelt, Lange, Marks. 374. 38. Yun-han Chu. “The Realignment of Business–Government Relations and Regime Transition in Taiwan,” in MacIntyre, ed. 1994. Business and Government in Industrializing Asia, Ithaca: Cornell University Press. 139. 39. Douglas C. North. 1990. Institutions, Institutional Change and Economic Performance, Cambridge: Cambridge University Press. 4. 40. Beth V. Yarbrough and Robert M. Yarbrough. “International Institutions and the New Economics of Organization,” International Organization, Vol. 44, No. 2, Spring 1990. 240–247. For an interesting discussion on this subject, see Joseph Heath. 2001. The Efficient Society: Why Canada Is As Close to Utopia As It Gets. Toronto: Penguin / Viking. 41. Ichiro Numazaki. “The Role of Personal Networks in the Making of Taiwan’s Guanxiqiye (Related Enterprises),” in Gary G. Hamilton, ed. 1996. Asian Business Networks, New York: Walter de Gruyter. 71–85. 42. Richard Doner. “Approaches to the Politics of Economic Growth in Southeast Asia,” The Journal of Asian Studies, Vol. 50, No. 4, November 1991.818–850; “Limits of State Strength— Toward an Institutionalist View of Economic Development,” World Politics, Vol. 44, No. 3, April 1992. 398–431. 43. Hall. 19. 44. Yun-han Chu. 172–173; also Tan Kong Yam. “China and ASEAN: Competitive Industrialization Through Foreign Direct Investment,” in Barry Naughton, ed. 1997. The China Circle: Economics and Electronics in the PRC, Taiwan, and Hong Kong. Washington, DC: Brookings Institution Press. 111–135. 45. Mainland Affairs Council, ROC, Taipei, The Cross-Strait Economic Statistics Monthly, No.146, March 2005, www.china biz.org.tw/maz/Eco-Monthly/home.htm; tables 5, 6, 7, 10; “Taiwan’s Trade Surplus with the Mainland Reaches More Than $50 Billion,” Commercial Times, online, February 27, 2005. Estimates of the real amount of Taiwanese investment in mainland China varies between US$40 billion and US$150 billion. The most recent estimates put the total amount of Taiwanese investment in mainland China at more than US$100 billion. 46. Hall. 165. 47. Chu. 1994. 134. For an interesting discussion of the dynamic relations of using exit and voice to exert influence, see an analysis of private response to organizational declines in Albert Hirschman. 1970. Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States, Cambridge. MA: Harvard University Press. 48. Peter J. Katzenstein, ed. 1979. Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States, Madison: University of Wisconsin Press. 17.

2 The Politics of Strategic Interaction across the Taiwan Strait 1. People’s Daily, October 1, 1981. 2. Deng Xiaoping. 1983. “Talk with Professor Yang Liyu,” in Cai Zhengwen and Lin Jiacheng. 1989. Taihai liangan zhengzhi guanxi (Political Relations Across the Taiwan Strait), Taipei. Zhiku Congshu. 33–34. 3. Jia Qingguo. “Changing Relations Across the Taiwan Strait: Beijing’s Perceptions,” Asian Survey, Vol. 32, No. 3, March 1992. 277–289; Wu Yushan. “Mainland China’s Economic

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4. 5. 6. 7. 8.

9.

10.

11.

12. 13. 14. 15.

16.

17. 18. 19. 20. 21. 22.

Notes

Policy Toward Taiwan: Economic Needs or Unification Scheme?” Issues & Studies, September 1994. 29–49; “Economic Reform, Cross-Straits Relations, and the Politics of Issue Linkage,” in Tun-jen Cheng et al., eds. 1995. Inherited Rivalry—Conflict Across the Taiwan Straits, Boulder: Lynne Rienner Publishers. 111–133. Zhou Shiyao. “Lee Teng-hui zhizheng hou ‘dalu zhengce’ de tiaozheng” (The Direction of Taiwan’s Mainland Policy under Lee Teng-hui), TYJ, Nos. 2–3, 1990. 85–87. Lin Jin “Shilun Guomintang dalu zhengce de shizhi zhuanbian” (The Substantial Changes in KMT’s Mainland Policy), TYJ, No. 1, 1991. 41–47. Tse-Kang Leng. 1996. The Taiwan-China Connection: Democracy and Development Across the Taiwan Straits, Westview Press. 40. Cai and Lin. 31; Kuo Li-min, ed. 1992. Zhonggong duitai zhengce ziliao xuanji (Selected Materials on Peking’s Taiwan Policy), Taipei: Yung-yeh Press. 914, 1147. “Shengwei Taiwan ren de beiai: Lee Teng-hui tong riben zuojia tanhua” (The Sorrow of Being Born a Taiwanese: Lee Teng-hui’s interview with Ryotaro Shiba); Li Jia-quan. “Zhongguoren de ganqing zai nali: ping Lee Teng-hui Ryotaro Shiba duihua” (Where is Lee’s Chinese Sentiment (gan qing)—On Lee’s Interview with Ryotaro Shiba), in Haixia Guangjiao, No. 4, 1994. 15–17, 12–14; also Suisheng Zhao. “Economic Interdependence and Political Divergence: A Background Analysis of the Taiwan Strait Crisis,” “Changing Leadership Perceptions: the Adoption of a Coercive Strategy,” in Suisheng Zhao, ed. 1999. Across the Taiwan Strait: Mainland China, Taiwan, and the 1995–1996 Crisis, Routledge: New York. 34–35; 110–111. Mainland Affairs Council (MAC). July 1996. “Promoting Cross-Strait Relations: the Conscious Efforts of the Republic of China (ROC) Government”; also Lin Jin. “Xianjieduan Taiwan dangju dalu zhengce de jiben mubiao jiqi yingxiang” (Current Objectives and Impact of Taiwan Authority’s Mainland Policy), TYJ, No. 3, 1994. 6–18. Su Chi, former chairman of Taiwan’s Mainland Affairs Council. “Domestic Determinants of Taiwan’s Mainland Policy,” a paper presented at the Peace Across the Taiwan Strait Conference, May 2–25, 2002, Asian Studies Center, Oxford University, UK. 2. Steven Goldstein, “The Crosss-Strait Talks of 1993—The Rest of the Story” and Yun-han Chu.1999, in Suisheng Zhao, ed. 1999. 201–204; 163–195; Li Jiaquan. “Haixia liangan guanxi de xianshi sikao” (Analysis of Cross-Strait Relations), TY, No. 4, 1992. 23–28. Yun-han Chu. “Taiwan’s National Identity Politics and the Prospect of Cross-Strait Relations,” Asian Survey, Vol. XLIV, No. 40, July/August 2004. 498. MAC, Taipei, Taiwan Mainland Policy White Paper, “Relations Across the Taiwan Straits,” July 6, 1994. 7, 6. Chu. 1999. 167–168. Chu. Ibid.; T.Y.Wang. “One China, One Taiwan: An Analysis of the Democratic Progressive Party’s China Policy,” Journal of Asian and African Studies—Special Issue: “Taiwan in Perspective,” Vol. XXXV, No. 1, 2000. 158–182. Hung-mao Tien and Yun-han Chu. “Building Democracy in Taiwan,” The China Quarterly. No. 148, December 1996. 1144; Yu-Shan Wu. “Taiwanese Elections and Cross-Strait Relations: Mainland Policy in Flux,” Asian Survey. Vol. XXXIX, No. 4, July/August 1999. 565–587; Chu, 1999. 167; Leng. 1996. 42–45. MAC Document. “Guidelines for National Unification,” approved by the Executive Yuan in Taiwan, March 1991; also Leng. 1996. 48. Robert G. Sutter. “Cross-Strait Relations and Their Implications for the United States,” Issues & Studies, December 1994. 79. Leng. 1996.47–48; People’s Daily, March 18, 1991, in Kuo Li-mi., 116–1168; Lin Ji., 1994. 10. Zhou Shiyao. 1990. 85–87. “The Meaning of China,” National Unification Council, Taipei, August 1,1992. MAC document; Leng. 1996. 48–49. Len. Ibid.; Li Jiaquan. “Yi nian lai liangan guanxi de jiben taishi he zhanwang” (The Trends and Prospects of Cross-Strait Relations), TYJ, No. 2, 1995. 9–15.

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23. Chu. 1999. 170; Chen Fumin. “Guomintang dalu zhengce yu dalu jingmao zhengce zhi guanxi” (Relations Between KMT’s Mainland Policy and Cross-Strait Economic Policy), TY, No. 3, 1992. 32–37, 75. 24. Chien-Min Chao. “One Step Forward, One Step Backward: Chen Shui-bian’s Mainland Policy,” Journal of Contemporary China, Vol. 12, No. 34, February 2003. 127–138; MAC document. February 1997. “Consensus Formed at the National Development Conference on Cross-Strait Relations”; also Leng. 1996. 44. 25. Sutter. 86–87; Leng. Ibid. 44–45; On the complexity involved in formulating mainland policy due to the rising influence of the DPP, also see Goldstein. 1999. 197–228. 26. Chu. 1999; Detlef Lorenz. “Regionalisation versus Regionalism—Problems of Change in the World Economy,” Intereconomics, January/February 1991.9; Peter J. Katzenstein and Takashi Shiraishi, eds. 1997. Network Power: Japan and Asia. Cornell University Press. Introduction. 27. Richard F. Doner. “Japan and East Asia: Economic and Institutional Dimensions,” paper prepared for the Conference on ‘Japan in Asia,’ Cornell University, May 19–20,1994. 28. Barry Naughton, ed. 1997. The China Circle: Economics and Electronics in the PRC, Taiwan, and Hong Kong, Washington, DC: Brookings Institution Press. 29. MAC. “Taiwan Mainland Policy White Paper,” July 6, 1994.14. 30. Robert Sutter.79; Chu. 1999. 165–167; Zhou Zhongfei, “Lengzhan hou meigo dui tai zhengce de tiaozheng” (The Post Cold-War Adjustment in US Taiwan Policy),” TYJ, No.2, 1996.18–23; Yan Shengyi/Liu Guofeng, “Taiwan wenti de guoji huangjing” (The International Environment of the Taiwan Question), TYJ, No.1, 1997. 39–44. 31. “PRC White Paper, ‘The Taiwan Question and Reunification of China,’ 31 August 1993,” Asian Affairs: An American Review. Vol. 26, No. 2, Summer 1999.77–93; also, People’s Daily, September 7, 1991, “Drift for ‘Taiwan Independence’ Must Be Checked”; September 12, 1991, “Foreign Ministry Spokesman: Attempts by Foreign Forces to Divide China Will Get Nowhere”; September 20, 1991, “Taiwan’s Push for UN Runs Against the Wishes of All Chinese People for Unification”; October 14, 1991, “Spokesman of the State Council’s Taiwan Affairs Office Warns: Taiwan Independence Is Playing with Fire,” in Kuo Limin, 1272 ,1311. 32. Liu Guoshen. “Haixia liangan ‘baipishu’ bijiao fenxi” (A Comparative Analysis of the Two White Papers Across the Taiwan Straits), TYJ, No.4, 1997. 1–7, 15. 33. Leng. 1996. 40–41. 34. “The Taiwan Question and Reunification of China,” Beijing Review, Vol. 36, No. 36, September 6–12, 1993. vii, viii. 35. Yu Keli. “Dui yingxiang liangan guanxi fazhan de jiben yinsu zhi tantao” (Factors Affecting Cross-Strait Relations), TY, No. 3, 1993. 1–5, 9; Li Jiaquan. 1992, 1995. 36. Z. Zhou. 1996; Yan/Liu.1997; also refer to Thomas J. Christensen. “Chinese Realpolitik,” Foreign Affairs, Vol. 75, No. 5, September/October 1996. 37–52. 37. Chu. 1999. 182. 38. “General Secretary Jiang Zemin, ‘Eight-Point Statement,’ 30 January 1995,” Asian Affairs: An American Review, Vol. 26, No. 2, Summer 1999.100–101; Liangan Guanxi, ARATS (Hai Xie Hui), 1997. 7; Leng. 1996. 41; You Ji. “Changing Leadership Consensus: The Domestic Context of War Games,” in Suisheng Zhao, ed. 1999. 80–81. 39. “President Lee Teng-hui, ‘Six Point Reply,’ 8 April 1995,” Asian Affairs: An American Review, Vol. 26, No. 2, Summer 1999. 101–102; also, Chu. 1999. 186–187. 40. MAC. “Taiwan Mainland Policy White Paper,” July 6, 1994. 8–9; also, “ROC White Paper, ‘Relations across the Taiwan Strait,’ (Concluding Statement), 5 July 1994,” Asian Affairs: An American Review, Vol. 26, No. 2, Summer 1999. 93–100. 41. MAC. Ibid.15–16; Zhou Zhihuai. “Xian jieguan liangan guanxi de shuangchong xingge” (The Dual Trends in Cross-Strait Relations), TY, No. 2, 1995. 23–29; Steve Chan/Cal Clark. “The Mainland China–Taiwan Relationship: From Confrontation to Interdependence,” in Tun-jun Cheng. 54; Leng. 1996. 50. 42. Interview, July 1997, Taipei.

166

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43. MAC. “Consensus Formed at the National Development Conference,” February 1997; Dai Shugeng “Pingxi Taiwan ‘guofahui’ jingji fazhan he liangan jingmao guanxi yiti” (An Analysis of the Topics at Taiwan’s National Development Conference over Economic Development and Cross-Strait Economic and Trade Relations), TYJ, No. 2, 1997. 49–56. 44. Chu. 2004. 499. 45. John Fuh-Sheng Hsieh.“National Identity and Taiwan’s Mainland China Policy,” Journal of Contemporary China, Vol. 13, No. 40, August 2004. 479–490. 46. International Crisis Group(ICG), “Taiwan Strait I: What’s Left of ‘One China,’ ” ICG Asia Report No. 53, June 6, 2003. 2. Beijing / Taipei / Washington / Brussels. 47. Ibid. 38. 48. Tu Weiming. “Cultural Identity and the Politics of Recognition in Contemporary Taiwan,” The China Quarterly, No.148, December 1996. 1117,1133; Daniel Lynch. “Taiwan’s Democratization and the Rise of Taiwanese Nationalism as Socialization to Global Culture,” Pacific Affairs, Vol. 75, No. 4, Winter 2002–2003. 557–574. 49. Chu. 2004. 498. 50. Lowell Dittmer. “Taiwan and the Issue of National Identity,” Asian Survey, Vol. XLIV, No. 4, July/August 2004. 481–482. 51. ICG Asia Report, No. 53. 37–39. 52. ICG Asia Report, No. 53. 39. 53. “Singapore as Taiwanese Youth’s Ideal Country,” Lianhe Zhaobao, online version, October 19, 2003. According to a survey in October, 2003 conducted by Taiwan’s Lianhe Bao (United Daily), 62% say they are Taiwanese, up from 16% in 1989, while those who identify themselves as Chinese dropped from 52% in 1989 to 19%. Washington Post, January 2, 2004; also refer to Macabe Keliher, “Who Cares About Taiwan? Not the Chinese,” Asian Times, online, www.atimes.com, December 24, 2003. 54. Chu. 2004. 498. 55. Chu. Ibid. 498–499. 56. Chien-min Chao. “Taiwan’s Identity Crisis and Cross-Strait Exchanges,” Issues & Studies, April 1994, 1–13; Leng. 1996. 49. 57. Chu. 1999.170; A political joke in Taiwan says that today the CCP is not like a communist party and the KMT is not like a nationalist party. Rather, the KMT is more of a K.M.T. with K standing for KMT, M for DPP (Min Jin Dang is the Chinese for DPP) and T for parties. Taiwan Tour, Summer 1997. There was constant contact between Lee and the DPP in the early 1990s over revision of the constitution. See China Times, online, October 26, 2003. 58. ICG Asia Report No. 53. 38. 59. Ibid. 2. 60. Dittmer. 2004. 480; Larry Teo. “We’re ‘Taiwanese’, Not ‘Chinese’,” Straits Times, September 22, 2003. 61. “Dancing with the Enemy: A Survey of Taiwan,” The Economist, January 15, 2005. 4–5. 62. Tu. 1117, 1122; Shelley Rigger. “Competing Conceptions of Taiwan’s Identity: The Irresolvable Conflict in Cross-Strait Relations,” in Zhao, ed. 1999. 229–240; Chien-Min Chao. “Will Economic Integration Between Mainland China and Taiwan Lead to a Congenial Political Culture?” Asian Survey, Vol. XLIII, No. 2, March/April 2003. 280–304. 63. Daniel C. Lynch. “Taiwan’s Self-Conscious Nation-Building Project,” Asian Survey, Vol. XLIV, No. 4, July/August 2004. 531. 64. Dittmer. 2004. 480. 65. Most estimates put the total amount of Taiwanese investment in mainland China at more than US$100 billion. 66. Chen En. “Xinshiji Taishang touzi xintai shanbian tanxi” (Analysis of the Changing Mentality of Taiwanese Investors in the New Century), TYJ, No. 2, 2003. 90–95. 67. Lam. 1988. “Guerilla Capitalism: Export Oriented Firms and the Economic Miracle in Taiwan (1973–1987),” paper presented at the annual meeting of the American Association for Chinese Studies, Palo Alto, CA, quoted in Tun-jun Cheng. 61.

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68. Yang Shangkun. “Speech at the National Conference on Taiwan Affairs,” (December 6, 1990), in Kuo-Li-min. 1138. 69. Weng Chengshou. “Cong shijie jingji quyu hua kan liangan guanxi” (Cross-Strait Economic and Trade Relations in a World of Regionalism), TY, No. 3, 1993. 10–14; Cheng Guoqiang. “Cong dongya jingji xingeju kan liangan jingmao guanxi” (Cross-Strait Economic and Trade Relations in the New Asian Economy), TY, No. 1, 1995. 13–18; Lin Changhua. “Yatai jingji quyu hua yu Taiwan ‘yatai yingyun zhongxin’ ” (Asian-Pacific Regionalism and Taiwan’s “Regional Operation Center”), TYJ, No. 1,1994. 51–55; “Liangan zhihang yu jingwai haiyun zhongxin” (Direct Sea Links and Taiwan’s Offshore Transshipment Center), TYJ, No. 2, 1995.16–19; Cao Xiaoheng. “Taiwan ‘yatai yingyun zhongxin jihua’ de beijing yu qianjing” (Background and Prospect of “Taiwan’s Plan of Regional Operation Center”), TY, No.4,1996. 43–49; Zhang Guanhua. “Yatai yingyun zhongxin yu liangan jingmao guanxi” (Asian-Pacific Regional Operation Center and Cross-Strait Economic and Trade Relations), TY, No. 1, 1995. 19–25. 70. Taiwan Tour, summer 1997. 71. Tan Lu. “Mainland Taiwan Business Pushes DPP Westward (towards the mainland),” Asian Weekly, February 16–22, 1998. 30–31; Goldstein. 1999. 210. “Communist China Wants to Lock Taiwan in a Birdcage,” World Journal, April 14, 1997. A–2. 72. Joseph Wong. “Deepening Democracy in Taiwan,” Pacific Affairs, Vol. 76, No.2, Summer 2003, 252–253; Lynch, 2002–2003. 570–571; Chao. March/April 2003. 280–304; John F. Copper. “Taiwan: Democracy’s Gone Awry?” Journal of Contemporary China, Vol. 12, No. 34, February 2003. 145–162. 73. “Tianxia Magazine Survey: Support for Independence Reaches 22%,” China Times, online, December 14, 2003; “Public Opinion Poll Shows Rise of ‘Pro-Independence’ Sentiment,” http://news.china.com/ zh_cn/hmt/1004/20041114//11963327.html, November14, 2004. 74. Chu. 2004. 510. 75. There is a serious debate over Taiwanese investment in the mainland and rising unemployment in Taiwan. While there is some relationship between the relocation of firms and the increase in unemployment, to blame investment on the mainland alone for rising unemployment levels is simplistic. Politically, however, it works to the advantage of those who oppose closer crossStrait economic relations. See Hou Shanlin, “Zhengshi riyi yanzhong de Taiwan shiye wenti” (Face the Worsening Unemployment in Taiwan), TJYY (Taipei), Vol.24, No.3, March 2001.51–57; Lang Ruofan. “Duiwai touzi hui shi shiye chao de yuanxiong?” (Is Outward Investment the Culprit for Rising Unemployment?) TJYY, Vol. 24, No. 5, May 2001. 29–33; You Mingjun. “Jiedu woguo shiye lu zhi chengyin” (Cause of Unemployment at Home), TJYY, Vol.24, No.5, May 2001. 35–40; Zhuang Chaorong. “Danqian laogong shiye wenti zhi yinying duice” (Measures to Deal with Current Labor Unemployment), TJYY, Vol. 24, No. 5, May 2001. 41–44; Liu Jinxing. “Gonggong fuwu kuoda jiuye jihua shi guojia zai shiye chao xia de yingyou zuowei” (Necessary Expansion of Public Service by the Government to Increase Employment), Jingji Qianzhan (Economic Outlook), (Taipei), March 5, 2003. 20. 76. 76. Wu Rongyi. “Jiakuai santong jiu jingji? Santong minyi diaocha” (Quicken Three Direct Links to Save the Economy? A Poll over Three Direct Links), TJYY, Vol. 25, No. 11, November 2002. 7. 77. “Poll Reveals Fear of Immigrants from China,” Taipei Times, online, November 2, 2003; “Scholars: Opening to New Chinese Immigrants Will Lead to Social Cleavages,” www.sina.com, October 26, 2003. 78. Chen Wenhong and Zhu Wenhui. “Jintui liangnan: Taiwan dui dalu jingji guanxi de xin tezheng” (Taiwan’s Dilemma in its Economic Relations with the Mainland), Strategy and Management, No. 3, 1997. 53. 79. Chu. 1999. 171; Goldstein. 1999. 206; Chen Kongli. “Taiwan dangju de juece xitong yu juece guocheng” (Taiwan’s Decision-Making System and Process), TYJ, No. 3, 1997. 1–10. 80. Goldstein., Ibid. 205; Zhang Guanhua et al. eds. 1993. Haixia liangan jingji maoyi touzi daquan (Guidebook to Cross-Strait Trade and Investment), Beijing: Dongfang Press, 637. 81. Zhang Guanhua. Ibid. 624–630.

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82. People’s Daily, overseas edition, March 7, 1994. 5; May 26, 1998. 5. 83. Chu. 2004. 506. 84. 84. This information is based on my interviews on the mainland. This situation has created tremendous difficulties for the collection of micro-level data on Taiwanese investment on the mainland. 85. Jia Qingguo. “The Making of Beijing’s Taiwan Policy,” in Tun-jun Cheng. 97–109; Susan L. Shirk. 1994. How China Opened Its Door: The Political Success of the PRC’s Foreign Trade and Investment Reforms, Washington, DC: The Brookings Institution. 86. Ramon H. Myers and Linda Chao. “Cross-Strait Economic Relations and Their Implications for Taiwan,” Issues & Studies, December 1994. 97–112. 87. Chu. 1999. 183–185. 88. “President Lee Teng-hui, Comments on a ‘Special State-to-State Relationship,” from Interview by Deutsche Welle, 9 July 1999, Asian Affairs: An American Review, Vol. 26, No. 4, Winter 2000. 223–224. 89. Su Chi. 3. 90. Gunter Schubert. “Taiwan’s Political Parties and National Identity,” Asian Survey. Vol. 44, No. 4, July/August 2004. 540. 91. “The One-China Principle and the Taiwan Issue,” released by the Taiwan Affairs Office and the Information Office of the State Council of PRC, China Daily, February 22, 2000; also, “PRC White Paper: The One China Principle and the Taiwan Issue,” Asian Affairs: An American Review. Vol. 27, No. 1, Spring 2001. 38–54. 92. “Taiwanese Business Feels Pressure of Mainland’s ‘One China’ Principle,” World Journal. June 21, 2000. A.2; also World Journal. June 26–27, 2000; Qiao Bao (The China Press). June 27, 2000; “Mainland China to Impose Economic Sanctions on Taiwan,” www.chinesenewsnet.com, June 3, 2004. 93. Sangwon Suh and Allen T. Cheng. “A Flash of Hope,” Asiaweek, June 2, 2000. 25. 94. Suh and Cheng. 26. 95. Chao. February 2003. 126, 139–142; also Chen-yuan Tung. “An Assessment of China’s Taiwan Policy Under the Third Generation Leadership,” Asian Survey, Vol. XLV, No. 3, May/June 2005. 344–348. 96. “Taiwan Continues ‘Two State’ Policy,” www.chinesenewsnet.com, May 14, 2001; World Journal online, May 14, 2001; “Chen Shui-bian: NUC Only In Name, Power Goes to ‘InterParty Group,’ ” http://dailynews.sina.com/taiwan/ttimes/2000/1204/2336636.html; Macabe Keliher, “China and Taiwan: Whose Status Quo?” Asian Times, www.atimes.com, December 24, 2003. 97. Chen Shui-bian. “Five Nos Have Long Ceased to Exist,” www.chinesenewsnet.com, December 22, 2003; MAC Chairwoman, Tsai Ing-wen. “Referendum and Constitutional Initiatives Not Include ‘Five Nos’ ” China Times, online, November 6, 2003; “President Chen Repeated ‘Five Nos’ Pledge,” China Times, online, July 7, 2003; “Chen Repeated ‘Five Nos’ ”, Lianhe Zhaobao, online, October 26, 2003. 98. Suh and Cheng. 25–26; “Chen Shui-bian: To add ‘Taiwan’ to ROC Passport,” The Ottawa Weekend, June 22, 2001; also “Change of Passport Name towards Independence,” www. chinesenewsnet.com, May 16, 2001. 99. Zheng Kaifang and Wu Huilin. “Jinnian Taiwan laodong wenti mianmian guan” (A Look at Taiwan’s Employment Situation), Jingji Qianzhan, January 5, 2003. 41; Dennis Engbarth. “Taiwan GDP Hits 26-Year Low,” “Taiwan Follows Value Path to Recover From Milestone Contraction,” South China Morning Post, August 18, 21, 2001; Bei Hu and Peggy Sito., “Fortunes Highlight Cross-Strait Divide,” South China Morning Post, August 18, 2001; Maureen Pao and Tom Holland. “Taiwan: Wishful Sinking,” Far Eastern Economic Review, August 21, 2001; David Lague. “Taiwan: Money Speaks,” Far Eastern Economic Review, August 23, 2001; Assif Shameen. “Webfiles: Taiwan: It’s Time for Some Real Pain,” Asiaweek, August 23, 2001; Allen T. Cheng. “Taiwan’s Tough Times,” Asiaweek, August 31, 2001.

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100. Maureen Pao. “Taiwan: Behind the Darkness,” Far Eastern Economic Review, online, January 21, 2001; Maureen Pao, “Taiwan’s Troubles,” Far Eastern Economic Review, online, March 15,2001; Maureen Pao and Michael Vatikiotis. “Just a Pawn in the Superpower Game,” Far Eastern Economic Review, April 26, 2001. 4–18; Allen T. Cheng. “No More Cheers,” Asiaweek, online, January 23, 2001; “Taiwan’s Financial System: Too Many Debts to Settle,” The Economist, November 11, 2000; “Taiwan’s Stock Market Crash,” www.sina.com, November 20, 2000; also World Journal, online, November 20, 2000. 101. Michael R. Gordon. “China Buildup Has Taiwan on Edge,” The New York Times, on the web, April 8, 2001; “Spy Plane Episode Sharpens Debate Over Taiwan Arms,” The New York Times, on the web, April 15, 2001; “Military Analysis: Taiwan’s Guppy-Size Force,” The New York Times, on the web, April 18, 2001; “Military Analysis: U.S. Weapons Help Taiwan Stave off Threat,” on the web, April 25, 2001; David E. Sanger. “Bush Is Offering the Taiwanese Some Arms, but Not the Best,” The New York Times, on the web, April 24, 2001; “Bush Tells Beijing the U.S. Is Ready to Defend Taiwan,” The New York Times, on the web, April 26, 2001; “Policy Adjustment on Taiwan,” The New York Times, on the web, April 27, 2001. 102. According to a poll by Pingguo Ribao in September, support for Lien Chan for president was 41% while that for Chen Shuibian was only 28.4%. Another poll by Lianhe Bao showed that satisfaction with the KMT was 49%, PFP 40% and DPP only 31%. 103. Francesco Sisci. “Taiwan: Chen’s Dream, World’s Nightmare,” Asia Times, www.atimes.com, December 24, 2003; also see Yu-Shan Wu. “Taiwanese Nationalism and Its Implications: Testing the Worst-Case Scenario,” Asian Survey, Vol. 44, No. 4, July/August, 2004. 622–624. 104. Taipei Times, online, October 26, 2003; November 12, 2003. 105. Joseph Kahn. “Beijing Warns That Taiwan Referendum Could Lead to War,” The New York Times, on the web, December 3, 2003; Lianhe Zhaobao, online, November 25, 2003; Laurence Eyton. “The Real Significance of Taiwan’s Referendum Law,” Asian Times, online, www.atimes.com, December 11, 2003. 106. “Legislature Passes Referendum Law,” Taipei Times. December 9, 2003; The New York Times, December 9, 11, 2003; Lynch, 2004. 531–532. 107. “Dancing with the Enemy: A Survey of Taiwan,” The Economist, January 15, 2005. 6. 108. “Anti-Secession Law Adopted by NPC,” Full Text, China Daily, March 14, 2005. 109. For example, Thomas Christensen, “How Old Problems Trumped New Thinking? China’s Relations with Taiwan, Japan, and North Korea,” China Leadership Monitor, No.14, Spring 2005. 110. Jianwei Wang. “China’s Law Preempts Taiwan Independence,” Asia Times, www.atimes. com, January 12, 2005. 111. “Chen: Agricultural Exports to the Mainland, Simply ‘United Front’ Tactics,” China Times Evening News, online, July 25, 2005. 112. “Four stages” theory: the nation’s first stage was the establishment of the ROC in China in 1912. The second stage was when the ROC moved to Taiwan in 1949. The third stage was former President Lee Teng-hui’s formulation of “the ROC in Taiwan.” And the fourth stage is what Chen calls “the ROC is Taiwan.” “Bian: ROC is Taiwan,” China Times Evening News, online, August 2, 2005; “Chen Urges Unity to Deal with China,” Taipei Times, online, August 14, 2005. 113. “Chen Updates Cross-Strait ‘Guidelines,’ ” Taipei Times, online, August 7, 2005; “President Chen, Cross-Strait Relations and National Sovereignty: One Principle, Three Insistences and Five Opposition,” China Times, online, August 7, 2005; “Taking Economics and Security into Account,” Taipei Times, August 1, 2005. 114. “Chen’s Strategic Plans May Put Taiwan at Risk,” China Post, (Taipei), July 7, 2005; also refer to “Japan Defense Plans Critical to Taiwan Security,” Taiwan News, July 8, 2005. 115. Yu-Shan Wu. 2004. 624–625.

170

Notes 3 Government Policies and Cross-Strait Trade and Investment

1. Zhang, Guanghua et al., eds. 1993. Haixia liangan jingji maoyi touzi daquan (A Guidebook to Cross-Strait Trade and Investment), Beijing: Dongfang Press. 284. 2. Following the relaxation of legal constraints on exports to the mainland, Taipei passed a series of decrees to regulate trade relations with the mainland; see Charles H.C. Kao et al., 1992. Taiwan tupo: liangan jingmaozhuizong (An Empirical Study of Taiwan Investment on Mainland China), Taipei: Tianxia Culture Press. 217–218. 3. Barry Naughton, “Economic Policy Reform in the PRC and Taiwan,” in Barry Naughton, ed. 1997. The China Circle: Economics and Electronics in the PRC, Taiwan, and Hong Kong, Washington, DC: Brookings Institution Press, 83. 4. Li Fei. 1993. Haixia liangan jingmao guanxi (Economic and Trade Relations Across the Taiwan Strait), Beijing: Foreign Trade Education Press. 86. 5. Li Fei. Ibid. 141; Also Huang Tianzhong, (Taiwan) “On Cross-Strait Relations,” paper presented at the Third Conference on Cross-Strait Relations. Ningbo, August 2–6, 1993. 7. 6. Mainland Affairs Council, The Cross-Strait Economic Statistics Monthly, No. 146, March 2005, www.china biz.org.tw/maz/Eco-Monthly/home.htm; Tables 5, 6, 7, and 8. 7. “Taiwan Incurs a Trade Surplus with the Mainland of More Than US$50 Billion,” Commercial Times, online, February 27, 2005. 8. MAC. Ibid. However, the balance sheet of cross-Strait trade might be more apparent than real. According to economist Li Fei of Xiamen University in mainland China, mainland China’s actual deficit in its bilateral trade with Taiwan was about 60% of what the statistics reveals because a large part of Taiwan’s exports to mainland China consists of equipment and other intermediate materials and inputs that were not actually paid for by the mainland side. According to one study by CIER, between 40% and 45% of Taiwan’s indirect exports to the mainland were “investment induced” (Chin Chung et al. 1993. “Impact of Mainland China’s Export Promotion Policy on Taiwan’s Trade Performance: Macro Perspectives and Sectoral Analysis,” Chung-Hua Institution for Economic Research). Also, by the end of 2004, accumulated Taiwanese investment on the mainland amounted to more than US$70 billion. Foreign currency earnings generated through exports of products made by Taiwanese firms on the mainland could balance out a large part of the deficits incurred by the import of equipment and intermediate inputs and materials from Taiwan. In addition, by the end of 2004, more than 33 million Taiwanese had visited the mainland, and foreign currency earnings from these tourists were considerable. Finally, by the end of 2004 Taiwanese individual remittances to mainland China amounted to more than US$8 billion. Taking these factors into account, the overall balance sheet of bilateral economic relations is less skewed than it appears statistically. See Li Fei. 1993. 121. Ceng Rouying and Liu Bohong. 1997. “A Study of Taiwan’s Overseas Investments and Division of Labor,” Taiwan Economy, No. 241, Taipei: 8; MAC. Cross-Strait Economic Statistics Monthly, No. 146, table 14. 9. Li Fei. 1993. 10. For mainland China’s foreign investment policy, see Du Shao-ping et al., eds. 1992. Neilu kaifang chengshi yonghao guojia youhui zhengce baizhao (Hundreds of Ways for Inland Cities to Utilize State Preferential Policies), Shanxi Economic Press, 30–31, 40–45; also Zhang Guanghua. 1993. 624–630; Gao Chang. “Xian jieduan dalu waizi zhengce yu taishang touzi qushi” (Current Mainland Foreign Investment Policies and the Trend of Taiwanese Investment in the Mainland), Taipei jinhang yuekan (Taipei Bank Monthly), Vol. 27, No. 7, 1997. 11. Chen Guoqiang. 1995. Kuayue haixia: liangan jingmao guanxi yanjiu (A Study of Economic and Trade Relations Across the Taiwan Straits), Unpublished Ph.D. dissertation, Institute of Taiwan Studies, Nanjing University. 8.

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12. Xiangming Chen. “The New Spatial Division of Labor and Commodity Chains in the Greater South China Economic Region,” in Gary Gereffi and Miguel Korzeniewicz, eds. 1994. Commodity Chains and Global Capitalism. Westport, CT: Greenwood Press, 179–180. 13. “Local Governments Offer to Extend Tax Holidays to Attract Foreign Investments.” Commercial Times, Taipei, February 25, 1999; “Wang Yung-ching: ‘Don’t Rush, Be Patient’ Policy Should not Last for Ten Years,’ ” World Journal, online, September 24–30, 2000; “Wang Yung-tsai: Formosa Plastics Has to Invest in Rapidly Growing Mainland,” World Journal, online, October 25, 2000; January 20, 2001. 14. People’s Daily, overseas edition, March 7, 1994. 5; Lin Xun. “Guanyu Taiwan tongbao touzi baohu fa de jige wenti” (On The Law over Protection of Investments by Taiwanese Compatriots), TYJ, No. 4, 1994; Peng Li. “Lun Taiwan tongbao touzi baohu fa zhong de ruogan wenti” (Comments on “The Law over Protection of Investments by Taiwanese Compatriots), TYJ, Nos. 3–4, 1995; Zhan Xiaojun. “On the Investment Guarantees over Taiwanese Investments in the Mainland,” a paper presented at the Third Conference over Cross-Strait Relations, August 2–6, 1993, Ningbo, P.R.C. 15. Li Fei. 1993. 90; Cheng Guoqiang. 1995. A Study of Economic and Trade Relations. 9; Fu Yuneng. 1997. Taishang zai dalu touzi de quyu yanjiu: yi Guangxi wei gean (A Regional Study of Taiwanese Investments in Mainland China: the Case of Guangxi). Unpublished Ph.D. dissertation. Institute of Taiwan Studies, Nanjing University. 27. 16. Xiangming Chen. “Taiwan dui zhongguo dalu he dongnanya de touzi” (Taiwan’s Investments in Mainland China and Southeast Asia), TYJ (translated into Chinese by Xu Bin), No. 1, 1997. 25; Liangan jingmao tongxun (Newsletter on Cross-Strait Economic and Trade Relations), No. 67, October 7, 1997. 36; Charles Kao. 1992. 216; Commercial Times, online, July 27, 1998. 17. “Fujian Invests 400 Billion to Build New Taiwanese Investment Zone,” World Journal, online, January 18, 2005; “Xiamen to Build Largest Taiwanese Investment Zone,” Commercial Times, online, October 3, 2004. 18. Xiangming Chen. 1994. 178. 19. Chin Chung. 1991. “Impacts on Domestic and Host Economies of Taiwan’s DFI Toward Mainland China,” a revised paper presented at the Third Annual Conference of Chinese Economic Association (UK), London School of Economics, December 1991. 19. 20. Xiangming Chen. 1994. 179–180. 21. Tianxia Magazine. (Taipei) No.148, September 1993. 36; also see Wei Min, “Laozi wenti shi yingxiang guonei touzi zui zhongyao de yinsu?” (Is Labor the Most Important Factor Hindering Domestic Investment?) Industrial Relations Monthly. (Taiwan), No. 143, March 1994. 36–48; on the other hand, according to Charles Kao’s study, labor costs on the mainland were only about 10% of those in Taiwan (Charles Kao, 1992. 112). 22. In 1987, Taiwan’s domestic investment rate in terms of GDP was 18.77% while its savings rate in terms of GDP was 40.31%; in 1988, the rates were 22.76% and 34.45%, respectively; in 1989, they were 22.8% and 30.6%; in 1990, 22.4% and 27.9%; in 1991, 23% and 28%; in 1992, 24.1% and 27.9%; in 1993, 24.8% and 27.8% and for 1994, 23.6% and 26.1%. See Asian Development Bank, Asian Development Prospect, 1992, and 1994 Report. Translated by Wang Muheng into Chinese in TYJ, No.1, 1993; and Nos. 3–4, 1995; Also see Deng Lijuan. “Taiwan touzi buzu yu zijin wailiu” (Taiwan’s Insufficient Investment and Capital Outflows), TYJ, No. 4, 1990. 52–60; Cao Xiaoheng, “Taiwan duiwai zhijie touzi de yuanyin” (Factors Driving Taiwanese Overseas Investments), TY, No. 4, 1993. 42–51. 23. Chin Chung. 1991. 30. 24. Wang Minghui. “Cong Taishang dalu touzi tantao liangan de jingmao hudong” (Taiwanese Investments in the Mainland and Cross-Strait Economic Interactions), Taiwan yinhang jikan (Taiwan Bank Quarterly), Vol. 48, No. 2, 1997. 87. 25. See Chin Chung. “Division of Labor across the Taiwan Strait: Macro Overview and Analysis of the Electronics Industry,” in Barry Naughton, 1997. 164–209.

172

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26. Chin Chung. 1991. 28. 27. Charles Kao. 1992. 86. 28. Cai Hongming. “Dalu jingmao zhengce yu liangan fengong celue” (Mainland China’s Economic and Trade Policy and Strategies of Division of Labor Across the Strait), Taiwan jingji (Taiwan Economy), (Taipei) No. 235, July 1996. 78. 29. See Zhang Guanghua. 1993. 638–642; Also, Ministry of Economic Affairs, Taipei. “Regulations over Investments to the Mainland,” June 3, 1997. By the end of 1994, only 2,637 products (out of a total customs list of more than 9,000 items) were permitted to be imported into Taiwan from the mainland. By the end of 1999, on the eve of WTO entry by both sides, only 5,640 out of 10,610 items (or 53.2%) were permitted. Even today, only 72.6% of products imported into Taiwan are open to the mainland market. Lianhe Zaobao, online, September 24, 2004. 30. Yun-han Chu. “The Political Economy of Taiwan’s Mainland Policy,” in Suisheng Zhao, ed. 1999. 172–173. 31. Chu. Ibid.; Tan Kong Yam. “China and ASEAN: Competitive Industrialization Through Foreign Direct Investment,” in Naughton. 1997. 130; “Southward Investment: Taiwanese Business Has to Think More Carefully,” “New Moves in Cross-Strait Relations and Southeast Asia,” Asia Weekly. January 12–18,1998. 24–25; “Taiwan Launches a Lifeboat,” The Economist, January 24, 1998; Wang Muheng. “Taiwan dangju de ‘nanxiang zhengce’ pingxi” (Analysis of Taiwan Authority’s Southward Policy), TYJ, No. 1, 1999. 36–40. 32. Commercial Times, November 5, 2003; Deng Lijuan. “Liangan rushi hou jinrong jiaoliu yu hezuo wenti de tantao” (A Study of Financial Exchange and Cooperation across the Taiwan Strait after Entry into the WTO), TYJ, No. 3, 2002. 67. 33. Cross-Strait Economic Statistics Monthly, No. 146, March 2005, MAC, ROC (Taipei), tables 10, 13, 29, and 30. 34. According to Li Fei, although the government still maintains its ban on direct investments, more and more investments to the mainland are actually conducted in a direct fashion. In principle, investments below US$1 million are regarded as indirect so long as investors fill out the correct forms and send the money via a third location. Li Fei. 1993. 163. 35. Jane Skanderup. “Taiwan’s Cross-Strait Economic Strategy and the WTO,” paper for Pacific Forum, Center for Strategic and International Studies, January 2004. 7. 36. Kiyoshi Kojima. “A Macroeconomic Approach to Foreign Direct Investment,” Hitotsubashi Journal of Economics. Vol.14,1973. 1–21; 1978. Direct Foreign Investment: A Japanese Model of Multinational Business Operations, New York: Praeger Press. 37. Skanderup. 7. 38. Craig S. Smith. “Signs in China and Taiwan of Making Money, Not War,” The New York Times on the web, May 15, 2001; “Economics Over Politics,” www.chinesenewsnet.com, May 15, 2001; Maureen Pao. “Taiwan: Behind the Darkness,” Far Eastern Economic Review, online, February 22, 2001; “Taiwan To Lose Third Place in IT Production,” China Times, October 26, 2000; “Mainland China SurpassesTaiwan in IT,” World Journal, online, October 27, 2000. 39. Laura Li and Jimmy Lin. “Shanghai or Bust: Taiwanese High-Tech Descends on Eastern China,” Kuang Hua (Chinese–English Bilingual Monthly, Taiwan) Vol. 26, No. 7, July 2001. 15. 40. The average size of Taiwanese investments in Malaysia between 1991 and 1996 was about US$7.06 million. Investment Commission, Ministry of Economic Affairs, Taipei, Monthly Statistics on Outward Investment, May 1997. 41. According to one mainland source, by 1993, the average size of major foreign investments by region was: Taiwan: US$879,000; Hong Kong and Macao: US$1.32 million; United States: US$1.22 million; Japan: US$1.24 million; Singapore: US$1.553 million; Canada: US$1.178 million; Germany: US$2.562 million. China Golden Coast Yearbook 1994. 91, quoted in Fu Yuneng, 1997, p. 26, n. 1. 41. According to a survey based on 153 Taiwanese DFI firms in 61 different industries, in 1990, 85–90% of the output produced in the mainland was shipped to a third market, about 6% was shipped back to Taiwan and less than 10% was retained for sale in the mainland. C.S. Ouyan,

Notes

42. 43. 44. 45. 46.

47.

48. 49.

50. 51. 52. 53. 54. 55. 56.

57. 58. 59. 60. 61. 62. 63.

173

Y.J. Lin, and W.S. Chou. “A Trade Warning System for Monitoring Taiwan–China Economic Interdependence and its Implications,” Chung-Hua Institution for Economic Research, 1991. Chin Chung. 1991. 35. U.S. Census Bureau: Foreign Trade Statistics, www.census.gov/foreign-trade/balance/c5700/ c5820/ c5830.html, July 3, 2004. Compiled from MAC, ROC, (Taipei), Cross-Strait Economic Statistics Monthly, January 2004, table 42. Xiangming Chen. 1994. 182. Merritt T. Cooke. “The Politics of Greater China’s Integration into the Global InfoTech (IT) Supply Chain,” Journal of Contemporary China, Vol. 13, No. 40, August 2004. 499–502. Yang Mingxian. “Changshang fu dalu touzi ji liangan jianjie maoyi dui Taiwan jingji zhi fenxi” (An Economic Analysis of Taiwanese Investments to Mainland China and Cross-Strait Trade), Taipei Bank Monthly, Vol. 27, No. 7, 1997. 38; Also, according to Charles Kao. over 92% of the firms he studied in 1995 adopted this form of operation in their mainland investments. See Charles H.C. Kao, et al. 1995. Taishang jingyan: touzi dalu de xianchang baodao (The Taiwan Investment Experiences in Mainland China: A First-hand Report), Taipei: Tianxia Culture Press, 167. See n.7. As aforementioned, according to mainland Ministry of Commerce, Taiwan’s trade surplus with the mainland in 2004 amounts to US$51.23 billion. Taiwan’s trade deficit with Japan almost parallels its surplus with mainland China. Its deficit with Japan was US$7.6 billion in 1990, US$9.7 billion in 1991, US$12.9 billion in 1992, US$14.22 billion in 1993, US$14.57 billion in 1994 and, in 1995, it reached US$17.1 billion. See Li Hongshuo, “Haixia liangan jingmao guanxi qiusuo” (On Economic and Trade Relations Across the Taiwan Strait), TY, No.1,1997.13; Chen Wenhong and Zhu Wenhui, (Hong Kong) “Yatai yingyun zhongxin de kunjing” (Difficulty of the Plan of Asian-Pacific Regional Operation Center), Strategy and Management, No. 4, 1996. 111. Wang Minghui. 1997. 99. Xiangming Chen. 1994. 177. Gao Chang. 1997. 2–4. Yang Mingxian. 1997. 39. Japan Trade Promotion Commission: White Paper: “1995–1996 Foreign Investments in Taiwan and Taiwan Outward Investments,” TYJ, No. 2, 1997. 59. According to another report, the average size of Taiwanese investments increased from US$800,000 in 1989 to US$1.6 million in 1997. International Daily News, December 13, 1998. International Daily News, December 13, 1998. However, according to a study by the Taiwan Comprehensive Research Council, a think tank run by KMT business interests, by early 1999 the total number of listed firms with investments on the mainland was 224. In the electronics sector alone, more than 52 listed firms had investments on the mainland. International Daily News, March 6, 1999. “70% of Taiwan’s Listed Firms Have Invested in the Mainland,” Commercial Times, online, February 26, 2005. “More than 85% of Taiwan’s Big Business Groups Have Invested in the Mainland,” Commercial Times, obtained from www. chinesenewsnet.com. December 21, 2005. Charles Kao. 1995. 167. Cai. 1996. 91–92. “Local Purchases by Taiwanese Invested Firms Rise to 49.93%, More Than From Taiwan,” Commercial Times, online, February 26, 2005. Cai. 1996. 91–92. Zheng Shengli. “Taishang zai zuguo dalu touzi de ‘jiqun’ tezheng fenxi” (The ‘Clustering Effect’ of Taiwanese Investments in the Mainland), TY, No. 2, 2002. 71–75.

174

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64. Craig S. Smith. “Signs of China and Taiwan of Making Money, Not War,” The New York Times, on the web, May 15, 2001. 65. According to a MAC study in 2000, Taiwanese-invested firms now sell about 44% of their products to the local mainland market; see MAC study, October 16, 2000 at: http:// china.management.org.tw/ T&C-Economic/table/table-2.3.5.htm. 66. Smith, May 15, 2001. 67. Cross-Strait Economic Statistics Monthly, May 1997. 55–59; No. 146, March 2005, table 11. 68. “Moving North: Trend of Taiwanese Investment in the Mainland,” Liaowang Newsweek, February 8, 2005. obtained from www.zaobao.com/speical/newspapers/2005/02/lothers080205.html. 69. Laura Li and Jimmy Lin. 9. 70. Wang Minghui. 1997. 71. Cooke, 2004. 500–501. 72. Lianhe Zaobao, online, September 8, 2004. 73. Commercial Times, August 24, 1994. 74. Cai Hongming. 1996. 78. 75. Chu Yun-han. 1999. 176–177; Cai. Ibid. 78–81; Gao Chang. “Haixia liangan shuangbian maoyi fazhan qushi fenxi” (Analysis of the Trend of Cross-Straits Trade Relations), Taipei Bank Monthly. Vol. 3. No. 27, 1997. 14. 76. Chu. Ibid. 178; Charles Kao. 1995. 99–100; Chen and Zhu. 1996. 119–120. 77. There was a sharp decline in shipping volumes at Kaohsiung between 1994 and 1996 as a result of a continuing recession in the service sector. In its annual end-of-year survey on the economic prospects for the following year, China Times pollsters found more people (32.2%) who predicted the economy would get worse in 1997 than those (30.9%) who thought it would improve. This was the first time that pessimists outnumbered optimists since the survey began in 1992. China Times, January 7, 1997. 78. Karen M. Sutter. “Business Dynamism across the Taiwan Strait: The Implications for CrossStrait Relations,” Asian Survey, Vol. XLII, No. 3, May/June 2002. 535–536. 79. Mainland Affairs Council. “Report on the Preliminary Impact Study of the ‘Three MiniLinks’ Between the Two Sides of the Taiwan Strait,” October 2, 2000: www.mac.gov.tw/ english/MacPolicy/em1002e.htm; Craig S. Smith. “Taiwan Boats Land in China: First Direct Legal Link Since ’49,” The New York Times, on the web, January 2, 2001; “Signs in China and Taiwan of Making Money, Not War,” The New York Times on the web, May 15, 2001; “Taiwan Quickens Pace Over Three Mini-Links,” www.chinesenewsnet.com, December 6, 2000; “Taiwan Delays Opening of Investment Controls,” World Journal, online, October 17, 2000; March 26,2001; Maureen Pao and Michael Vatikiotis, “Just a Pawn in the Superpower Game,” Far Eastern Economic Review, April 26, 2001. 16–17; Bei Hu and Peggy Sito. “Fortunes Highlight Cross-Strait Divide,” South China Morning Post, August 18, 2001. 80. Commercial Times, online, October 10, 2003; China Times, online, October 9, 2003. 81. Chen-yuan Tung. “An Assessment of China’s Taiwan Policy under the Third Generation Leadership,” Asian Survey, Vol.XLV, No.3, May/June 2005. 355–358. 82. Karen Sutter. 2002, 535; China Times, online, October 26, 2003; November 9, 2003; November 13, 2003. 83. Karen Sutter, 2002. Ibid. 534. 84. Skanderup. 2004. 21. 85. Christopher M. Dent. “Taiwan and the New Regional Political Economy of East Asia,” The China Quarterly, No. 182, June 2005. 402. 86. Skanderup. 2004. 19; also “ASEAN Plus Three Expected to Hurt Taiwan Business,” World Journal, online, August 7, 2005. 87. Skanderup. Ibid. 88. Ibid. 20.

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4 Industrial Organization and Cross-Strait Economic Interactions 1. William Zeile. “Industrial Policy and Organizational Efficiency: The Korean Chaebol Examined”; Okumura Hiroshi, “Intercorporate Relations in Japan”; Marco Orru, “Practical and Theoretical Aspects of Japanese Business Networks”; Yoshiaki Ueda, “Types and Characteristics of Interlocking Directorates in Japan”; Eun Mee Kim, “The Industrial Organization and Growth of the Korean Chaebol: Integrating Development and Organizational Theories,” all in Gary G. Hamilton, ed. 1996. Asian Business Networks, New York: Walter de Gruyter; also Karl J. Fields. 1995. Enterprises and the State in Korea and Taiwan. Ithaca: Cornell University Press; Michael Gerlach, 1992. Alliance Capitalism: The Strategic Organization of Japanese Business. Berkeley: University of California Press. 2. Gary G. Hamilton. “Networks and Entrepreneurship in Demand-Responsive Economies: the Case of Taiwan,” paper presented at the Symposium on the Great Transformation in South China and Taiwan: Markets, Entrepreneurship, and Social Structure. Cornell University, October 16–18, 1992. 5; also Gary G. Hamilton and Robert C. Feenstra. “Varieties of Hierarchies and Markets,” in Marco Orru, Nicole Woolsey Biggart, and Gary G. Hamilton. 1997. The Economic Organization of East Asian Capitalism. Thousand Oaks, CA: Sage Publications. 55–96. 3. Hamilton. 1992. Ibid. 12–13. 4. Most business groups in Taiwan prefer to establish new member companies rather than acquiring or merging existing ones to expand their business. This is reflected in the drastic changes in the number of member companies within individual groups. From 1972 to 1976, there were 65 groups with the same name, and between 1976 and 1982 there were 50 groups. During 1972–1976, the number of new companies amounted to 130 and only 21 groups did not increase their member companies. Two groups each added 10 companies during this period. From 1976 to1982, the number of new companies in the 50 groups totaled 120. Given that many member companies folded during this period, these figures show that Taiwanese business groups adjust their activities through establishing new companies and/or closing existing ones, rather than through mergers and acquisitions as do their counterparts in Western industrial countries. In Chou Tien-chen. 1995. Industrial Organization in a Dichotomous Economy, Aldershot, England: Avebury. 211–212; also refer to M. A. Utton. 1979. Diversification and Competition. Cambridge: Cambridge University Press; Alfred D. Chandler. 1977. The Visible Hand: The Managerial Revolution in American Business, Cambridge: Belknap Press. 5. Hamilton. 1992. 5–6; Hamilton and Feenstra. 1997. 82. 6. Chou. 1995. Industrial Organization. 7. Hamilton. 1992. 1996; Chou Tien-chen. 1995. Quyu zhuyi xia de Taiwan jingji (Regionalism and Taiwan’s Economy), Taipei: Zhengzhong Press. 52. 8. Liu Bangdian et al. 1993. Zhongxiao qiye de chanye jiegoumian, jishu jingbu, ji renli ziyuan (SMEs: Structure, Technical Improvements and Human Resources), Ministry of Economic Affairs (MOEA)/ Taiwan Institution of Economic Research (TIER), Series on SMEs, No.5. Taipei: Bohaitang Cultural Press, Ltd. 81. 9. In 1979, an SME was defined as a business with a total capitalization of over NT$20 million (which by 1982 was increased to NT$40 million) and more than 300 employees in the manufacturing sector and over 50 employees in the commercial sector. According to the new criteria introduced in 1996, it is defined as having a total capitalization of over NT$60 million and employing more than 200 people in the manufacturing sector, and over NT$80 million and over 50 employees in the commercial sector. See Ministry of Economic Affairs (MOEA). SMEs White Book 1997, Taipei, ROC. 2–3,2–7; C.J. Lee et al. 1993. Zongti huanjing yu zhongxiao qiye zhi fazhan (SMEs: Overall Environment and Development), MOEA/ Chung-Hua Institution of Economic Research (CIER), series on SMEs, Nos.1, 43, 45–55; also Li-Wei Liu. 2000.

176 10.

11.

12.

13.

14.

15. 16.

Notes

The Growth and Transformation of Small and Medium Enterprises in Taiwan: Reassessment and Analysis from a Spatial Perspective. Ph.D. dissertation, Cornell University. 10, 39, 183. C. J. Lee. Ibid. 29, 81–83, 223; Huang Baokui.1995. Taiwan jinrong zongheng tan (A Survey of Taiwan’s Financial System), Beijing: China Economic Press. 21. However, the importance of SMEs to Taiwan’s exports has been declining given the structural change of the economy that forced many SMEs to relocate to mainland China and ASEAN countries. For example, in 1995 and 1996, SMEs’ share of total exports was only 50.65% and 49.75%, respectively. This is partly because supplies of intermediate goods and services by big firms to SMEs, previously categorized as domestic trade, have now become exports as a result of the relocation of SMEs. See MOEA. SMEs White Book 1997, Taipei. 2.1; 2.7. S. Gordon Redding. 1996. “Weak Organizations and Strong Linkages: Managerial Ideology and Chinese Family Business Networks,” in Hamilton. 1996. 32. While most scholars attribute this type of entrepreneurship to cultural traits idiosyncratic to Chinese (“rather be a chicken’s head than a cow’s tail”), Redding points to more plausible structural constraints. He further argues that under conditions of scarcity, people are essentially reduced to competing with one another for survival. “Insecurity is exacerbated by a long standing inability of the Chinese government to provide for more than the most primitive needs of the majority of the population,” as a result of the decline of the state and population pressures (also refer to John K. Fairbank, 1987. The Great Chinese Revolution: 1800–1985. New York: Harper and Row; Philip C. Huang. 1985. The Peasant Economy and Social Change in North China, Stanford University Press). In the case of Chinese communities overseas, Wong Siu-lun argues that underpinning the prevalence of entrepreneurship is a “refugee mentality” that, given a precarious social background, turns into an obsession with personal control and assurance of security for one’s family. Wong Siu-lun, 1996, “Chinese Entrepreneurs and Business Trust,” in Hamilton. 1996. Asian Business Networks. 20. Gary Hamilton. “Organization and Market Processes in Taiwan’s Capitalist Economy,” in Orru et al. 1997. 253–254; C.J. Lee. 1993, SMEs: Overall Environment. 77–79; Xu Wenzh, 1995. Maixiang 21 shiji: Taiwan zhongxiao qiye jingying celue (The Operation Strategy of Taiwan’s Small and Medium-Sized Enterprises into the 21st Century), Taipei: Yangzhi Culture Press. 27. As S. Gordon Redding ably argues: “personalism is a response to the problem of establishing reliable horizontal relationships across social interactions in a context where trust cannot be assumed and where institutionalized law is inadequate for underpinning transactions with any sense of reliability. Transactions come to be guaranteed by bonds of interpersonal trust.” Redding, in Hamilton, ed.1996. 32. This echoes the New Institutionalist argument—see my chapter 1. Susan Greenhalph. 1988. “Families and Networks in Taiwan’s Economic Development,” In Edwin A. Winckler and Susan Greenhalgh, eds.1988. Contending Approaches to the Political Economy of Taiwan. Armonk, NY: M.E.Sharpe, 228–234; Tu I-Ching, 1991. “Family Enterprises in Taiwan,” in Gary G. Hamilton ed. 1991. Business Networks And Economic Development in East And Southeast Asia, Hong Kong: University of Hong Kong Press. 114–125; Sun Zhiben. “Taiwan jiazu qiye de neibu zhenghe jiqi lingdao fengge” (Internal Integration and Management Style of Taiwan’s Family Firms), Strategy and Management, No.5, 1996.112–120. For business groups, see Chou. Industrial Organization. 211; Han Qinghai. 1992. Zhanhou Taiwan qiye jituan (Taiwan’s Business Groups After WWII), Xiamen: Lujiang Press. 75–76. Robert H. Silin. 1976. Leadership and Values. Cambridge: Harvard University Press. 128. Quoted in Fields. 1995. 73. Hamilton. 1992. 33–34; Greenhalgh. 1988. 234–235; Numazaki. (Translated into Chinese by Lei Huiying). “Taiwan laoban qiye de fanzhan” (The Development of Taiwan’s Laoban (Boss) Firms), TYJ, No. 2, 1997. 65–67.

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17. Liu Jingqing, (Japan). “Taiwan de zhongxiao qiye wenti yu guoji fengong” (Taiwan’s SMEs and International Division of Labor: An Analysis of the Nature of Chinese Capitalism), translated into Chinese by Lei Hui-ying, TYJ, No.1, 1991. 27–28; Kuo Wen-Zheng, Yang Yahui et al. 1993. Zhongxiao qiye rongzi ji shichang xingxiao yanjiu (SMEs: Financing and Marketing), MOEA/CIER, series on SMEs, No.3. Taipei: Bohaitang Cultural Press Ltd., 307–331; Xue Qi, (Chi Schive). “DFI and Transfer of Technology,” in Liang GuoDong, ed. 1994. Taiwan jingji fazhan lunwenji-Jinian Huayan jiaoshou zhuanji (Essays on Taiwan’s Economic Development: A Special Collection in Memory of Professor Hua Yan), Taipei: Shibao Press. 296–322; Denis F. Simon. “Taiwan’s Strategy for Creating Competitive Advantage: The Role of the State in Managing Foreign Technology,” in N.T. Wang, ed. 1992. Taiwan’s Enterprises in Global Perspective. Armonk, NY: M.E.Sharpe. 97–122; Fields. 1995. 223. 18. Kuo Wen-zheng, Yang Ya-Hui et al. 1993. 291–293; also Chen Jiexuan. 1994. Xieli wangluo yu shenghuo jiegou (Cooperative Networks and Modes of Business Activity: A Socioeconomic Analysis of Taiwan’s SMEs), Taipei: Lianjing Press. 19. Robert Wade. 1990. Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton, NJ: Princeton University Press. 160. 20. Huang Baokui. 1995. 21. Huang. Ibid. 270–276; Chou. 1995. Industrial Organization. 76. For a review of the most recent problems with the capital market in Taiwan, see the latest series of reports on Taiwan’s financial crisis. “Who Is to Blame?” China Times Evening News, online, November 4, 1998; “A Special Report on Taiwan’s Financial Crisis,” China Times, online, November 29,1998; “Financial Crisis Comes from Vicious Competition,” Commercial Times, online, November 29, 1998; “Finance Minister Qou Zhengxiong: New Regulations Over Cross Shareholding,” Commercial Times, online, December 14, 1998; “Scholars: Stop the Use of Stocks as Loan Collateral,” Commercial Times, online, December 14, 1998; “Security Commission Exposes Misconduct by Troubled Firms,” Commercial Times, January 4, 1999. 22. Kao Cheng-shu. “ ‘Personal Trust’ in the Large Businesses in Taiwan: A Traditional Foundation for Contemporary Economic Activities,” in Hamilton. 1996. 65–67; Chou. 1995, Industrial Organization. 83, 91. Interestingly, under totally different circumstances, despite the liberalization that has been in place since the late 1980s, the same conservative lending behavior and pervasive state regulations turned out to be a blessing to Taiwan in the late 1990s. While most of the East Asian economies were hit hard by a severe financial crisis, these retrograde factors help explain the limited impact of the crisis on the Taiwan economy and its continuing robust performance. 23. C. J. Lee et al. 1993. Zhongxiao qiye zhi caiwu guanli (SMEs: Account Management), MOEA/CIER series on SMEs, No.2. 259–264; Kao. Ibid.; Thomas B. Gold. 1986. State and Society in the Taiwan Miracle, Armonk, NY: M.E.Sharpe, Inc.111; Chou, ibid. 94. 24. Chou.1995.Industrial Organization. 102–103. 25. Kuo and Yang. 1993. 134; Liu Jinqing. “Taiwan’s SMEs and International Division of Labor.” 86; MOEA. SMEs White Book 1997. 4–21. 26. Wu Hui-lin et al. 1993. Zhongxiao qiye de kunjing yu yinying jiqiyu kaifa gongye yongdi de guanlianxing (SMEs: Difficulties and Responses).MOEA/CIER, series on SMEs, No. 4. 58, 65. Taipei: Bahaitang Cultural Press. 27. Since the energy crisis of 1973, the government has paid more attention to the problems of financing for SMEs and in 1977 it formed special SME banks. By 1986, there were eight SME banks altogether, of which one was state-owned, with a capitalization greater than the combined total of the seven private banks. However, in general, SMEs banks are undercapitalized. For example, during the three-year period 1987–1989, while SMEs banks allocated more than 70% of their loans to SMEs, this constituted less than 25% of the total bank loans to SMEs. While other banks allocated only about 30% of their loans to SMEs, that figure usually constitutes more than 75% of all loans to SMEs (Yang Ya-hui, “A Study of SMEs’ Financial System

178

28. 29.

30. 31. 32.

33.

34.

35. 36.

37.

38. 39.

Notes

in Taiwan,” Chung-hua Institution of Economic Research, Occasional Paper, No.9401, January 1994.74; Liu Jinqing, “Taiwan’s SMEs and International Division of Labor.” 87–90). In addition to SME banks, an SME Credit Insurance Fund was set up by the government to provide credit insurance on loans to SMEs, and in 1990 this amounted to NT$1 billion. From 1974 to 1985, the fund provided credit insurance for more than 42,000 SMEs, with an insured amount of loans up to NT$313.2 billion. Though this scheme alleviated the credit shortage for SMEs somewhat, the scale of its operations still fell short of the financial needs of SMEs, and to date only 10.4% of all SME financing is covered under this scheme (Huang Baoqui, 1995. 56–74; Liu Jinqing. Ibid. 89–90). Kuo and Yang.1993. 31; Yang Ya-hui. 1994. Ibid. Lin Pao-an. “The Social Sources of Capital Investment in Taiwan’s Industrialization,” in Hamilton. 1991. 106; Gao QunFu. “Taiwan dixia jinrong xianxiang toushi” (A Study of Taiwan’s Underground Finance), TYJ, No. 2. 1995. 87–90. Fields. 1995. 167–168; Wade. 1990. 161–163. Fields, ibid. 136, 242. Peter B. Evans. “The State as Problem and Solution: Predation, Embedded Autonomy and Structure,” in Stephan Haggard and Robert Kaufman, eds. 1992. The Politics of Economic Adjustment, Princeton: Princeton University Press. 147. Tu I-Ching. “Family Enterprises in Taiwan,” in Hamilton, ed. 1991.124; also Kao Cheng-shu. 1996. 67; Chen Jiexuan. 1994. Kao, Tu, Chen, and Lin are affiliated with the East Asian Socioeconomic Development Research Center at Donghai University, Taiwan. They are all part of the research team investigating Taiwan’s business groups and SMEs under the directorship of Kao Cheng-shu. Chen Shumei. “Dongguan Gets Down to Business—Taiwan Firms Embrace a Cantonese Boomtown.” Kuang Hua (Chinese-English Bilingual Monthly), Taipei, Vol. 25, No. 3, March 2000. 83–84, 89. On the impact on Taiwanese investment in Southeast Asia and Taipei’s “southward” policy, see Bi Feng. “Liangan guanxi xin dongxiang yu dongnanya” (Cross-Strait Relations and Southeast Asia), Asia Weekly, January 12–18, 1998. 5. For a fascinating account of the business network in action, see You-tien Hsing, 1998. Making Capitalism in China: The Taiwan Connection, New York: Oxford University Press. See Christina Y. Liu. “Liberalization and Globalization of the Financial Market,” in N.T.Wang. 1992. 123–149; Huang. 1995. 285–323. From my interviews in Taiwan with officials from the Government Information Agency and the Mainland Affairs Council, a consensus emerged that, as a result of financial liberalization, government restrictions over capital flows to the mainland would not work. Branches of foreign banks located in Taiwan and Hong Kong have also played an important role in providing financial services for cross-Strait business transactions. For example, the Hong Kong–Shanghai Bank and the Leon Bank of France have branches in both Taipei and Xiamen. See Wu Yingcun, “Yazhou xin jingji zhengduo zhanqi” (A New Round of Economic Competition in Asia), Tianxia Magazine, June 1, 1997. 88–96. Lei Wenping. “Shilun Taiwan ‘hehui’ zai liangan jingmao jiaowang zhong de zuoyong” (Taiwan’s He Hui in Cross-Strait Trade and Investments), TY, No.4, 1995. 47–52; Kao Cheng-shu. 1996. 66–67; Li Fei. 1994. Haixia liangan jingmao guanxi (Economic and Trade Relations across the Taiwan Strait), Beijing: Foreign Trade Education Press. Even in 1999, forty-one people from Taiwan and Hong Kong were charged in Taipei for illegally channeling funds across the Taiwan Strait, involving a total of NT$14 billion. Commercial Times, online, March 11, 1999. “Currency Exchange in the tens of billions yuan between Shanghai and Taiwan,” World Journal, online, September 26, 2004. Charles Kao et al.1995. Taishan jingyan: Touzi dalu de xianchang baodao (The Taiwanese Investment Experience in Mainland China: A First-hand Report). Taipei: Tianxia Culture Press. 86–93; 112–118; These arrangements match the satellite assembly systems (weixing gongchang) described by Gary Hamilton. Under one manifestation of this system, a group of

Notes

40.

41.

42. 43. 44.

45. 46. 47.

48. 49. 50. 51.

52.

53. 54.

55.

179

independently owned firms join together to produce a product that has been ordered either by an overseas buyer or a large final manufacturer. Each firm will produce one part or set of parts of the final product, and these parts are then delivered to an assembly firm which is usually a larger concern. In another manifestation of this system, the parts producers are larger than the final assembler. The bicycle industry is more like the former, while the electronics/computer industry better fits the latter model. Hamilton. 1997. 284–285. For Changzhou Kymco, see Jiangsu Yearbook, 1996. 189. According to one survey, the costs of production on the mainland are 30% to 50% lower in the electronics/computer industry than in Taiwan. “Move by the Electronic Industry to the Mainland Can No Longer be Stopped,” Commercial Times, online, April 15, 1999; Zhu Yan, “Taiwan zixun chanye zai zhongguo dalu de chanye jijiedi” (The Clusters of Taiwanese Electronic Firms in mainland China), TYJ, No.1, 2002. 63–64. Charles Kao. 1995 79–85; “Taiwan Electronic Business Builds ‘A Silicon Valley’ in Dongguan,” Listed Firms (electronic edition in Chinese) (108), No.1, 1999; Chen Shumei. 2000. 81–83; Zhu. Ibid. “Moving North: Trend of Taiwanese Investment in the Mainland,” Liao Wang, February 8, 2005. obtained from www.zaobao.com/speical/newspapers/2005/02/lothers080205.html. Hamilton. 1997. 253. Charles Kao. 1995. 134–139; “Taiwan zai zhongguo dalu de touzi” (Taiwanese Investments in Mainland China), translated by Wang Muheng. TYJ, No.3, 1997. 54–55; Zhao Ju. “Cankun: Expanding Household Appliance Group,” in Shijie huashang qiye nianjian 1996–1997 (Yearbook of the World Chinese Enterprises 1996–1997), Beijing: Enterprise Management Press. 403–406. Chen Shumei. 2000. 85. Ibid. Wang Minghui. “Cong Taishang dalu touzi tantao liangan de jingmao hudong” (Taiwanese Investments to the Mainland and Cross-Strait Economic Interactions), Taiwan Bank Quarterly, Vol. 48, No.2, 1997. 98. Chen Shumei. 83, 85. Far Eastern Economic Review, Vol. 159, No. 7, February 15, 1996; Economic Daily (Taipei) March 13, 1995; April 4, 1995; April 15, 1995; July 11, 1995; July 23, 1995. Commercial Times, online, January 9, 2004. China Times, January 21, 1999. In May 1998, the Ding Xin Group acquired 35% (with the support of its guanxi firms, more than 50%) of the shares of the Wei Chuan Group, resulting in a change of management from the Huang family, the original owners, to the Wei family. Commercial Times, online, June 16, 1999. Kao is also the president of Taiwan’s National Federation of Industry (NFI), a member of the standing committee of the ruling KMT in Taiwan, and a trustee of Taipei’s Straits Exchange Foundation (SEF). As a result of these links, he has access to the top leadership in Beijing. Far Eastern Economic Review, February 15, 1996; Charles H.C. Kao. 1995. 103–111; Commercial Times, online, April 28, 1999; June 16, 1999. Guo Tingyi. “Taiwan caituan zhulu zhongyuan: touzi dalu xin ushi” (Taiwan Big Businesses Rush to the Mainland: New Trends in Investments in the Mainland), Zhongguo shidai (China Era), No. 8, October, 1996; Lin Lixue. “Taiwan fuhao touzi dalu xiankuang” (Taiwan’s Tycoons Move to the Mainland), Zhuo Yue Magazine (Outstanding)(Taipei), June 1996; “Power, Capital and Sustainability: The Basis of Taiwanese Business Competition in Mainland China,” Commercial Times, February 3, 1999. International Daily News, December 13, 1998. However, according to a study by the Taiwan Comprehensive Research Council, a think tank run by KMT business interests, by early 1999 the total number of listed firms with investments on the mainland was 224. In the electronics sector alone, more than 52 listed firms had investments on the mainland. International Daily News, March 6, 1999.

180

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56. “70% of Taiwan’s Listed Firms Have Invested in the Mainland,” Commercial Times, online, February 26, 2005. 57. “More than 85% of Taiwan’s Big Business Group Have Invested in the Mainland,” Commercial Times, obtained from www.chinesenewsnet.com. December 21, 2005. 58. Laura Li and Jimmy Lin. “Shanghai or Bust: Taiwanese High-Tech Descends on Eastern China,” Kuang Hua, (Chinese-English Bilingual Monthly) (Taipei), Vol.26, No.7, July 2001.13. 59. Laura Li and Jimmy Lin. “If You Don’t Get in the Game, You Can’t Win: An Interview with Acer’s K.Y.Lee,” Kuang Hua.Iibid. 31. 60. Laura Li and Jimmy Lin. “Shanghai or Bust,” ibid. 61. Tse-kang Leng. “State, Business, and Economic Interaction Across the Taiwan Strait,” Issues & Studies November 1995. 47; Wang Jianmin. 1997. Taiwan zhengshang jiazu (Taiwan’s Political Business Families), Beijing: China Yanshi Press. 117. 62. The most well known of these holding firms are the Hong Kong Hua Long Groups, President Corp. Hong Kong, Nan Ya Plastics, Hong Kong, the He Xin Groups and the Run Tai Group. See Li Fei. 1993. Haixia liangan jingmao guanxi (Economic and Trade Relations across the Taiwan Strait), Beijing: Foreign Trade Education Press. 164–165; 63. Guo Tingyi. 1996. 75; According to China Golden Coast Yearbook, investment from the U.K. averages US$4.89 million per project, the highest figure of all foreign investment in China, while Taiwanese investment on the mainland averages only US$879,000 per project. Quoted from Fu Yuneng. 1997. Taishang zai dalu touzi de quyu yanjiu: yi Guangxi wei gean (A Regional Study of Taiwanese Investments in Mainland China: the Case of Guangxi), unpublished Ph.D. dissertation, Institute of Taiwan Studies, Nanjing University. 26. 64. “Secret Visits to Zhangzhou Power Plant, Adding another TN$50 Billion,” China Times, September 16, 2003. 65. “Dancing with the Enemy: A Survey of Taiwan,” The Economist, January 15, 2005, 10; “Richard Chang: Taiwan Government a Big Help,” Commercial Times, online, February 27, 2005; “Heavy Fine on Richard Chang for Illegally Investing in the Mainland,” Commercial Times, online, April 1, 2005. 66. “SMIC CEO to Renounce ROC Citizenship,” World Journal, online, August 22, 2005. 67. See Cai Hongming. 1996. 7. These Taiwanese business groups include the President Enterprises Corp., Dacheng Great Wall, Jiu Jin, Gui Ge, Li Da, Qi Mei, and You Mei Furniture. 68. China Times, online, October 21, 2003. 69. “Wangwang Joins Hands with Japanese Firm to Sell Snacks in the Mainland,” “Wangwang Teams up with the Japanese to Challenge Kangshifu,” Commercial Times, online, July 25, 2005; “Towards Diversified Business, Firm to Achieve another Miracle,” “Wangwang Group’s Mainland Strategy, Win in Every Market,” Commercial Times, online, February 18, 2005; “Taiwanese Invesstments in the Mainland Grow Bigger Involving More Business Groups,” World Journal, online, January 9, 2006. 70. Material from the Taiwan Affairs Office, Jiangsu Province. 71. Bruce Gilley, “Mainland Mates—The Koos Capitalize on Contacts in China,” Far Eastern Economic Review November 13, 1997; Wang Meng. “The Westbound Strategy of Taiwanese Business,” The 90s, No.12, 1997. 46. 72. Bruce Gilley. Ibid.. While banks and insurance companies are still prohibited from setting up fully fledged branches in the mainland, they are now allowed to establish representative offices. By the end of 2003, seven Taiwanese banks had set up representative offices in the mainland located in Shanghai, Beijing, Shenzhen, and Kunshan. Commercial Times, November 5, 2003. 73. Szu-yin Ho and Tse-kang Leng. “Accounting for Taiwan’s Economic Policy toward China,” Journal of Contemporary China, Vol. 13, No. 41, November 2004. 743–744. 74. “Jeffrey Koo Shows Determination to Expand into the Pearl River Delta,” World Journal, online, June 6, 2004; “Taiwan Business Tycoons’ Frequent Visits to the Mainland,” www. chinesenewsnet.com/gb/MainNews/SinoNews/Taiwan/2004 6 3 15, June 3, 2004.

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75. “Taiwanese, Japanese and Koran Firms Battle for the Chinese Market,” China Times, online November 7, 2003. 76. Laura Li and Jimmy Lin. “Shanghai or Bust.” 31. 77. Tse-kang Leng. 1995. 48. 78. Chi Huang and Samuel S.G.Wu. “Inherited Rivalry: A Chronology,” in Tun-jun Cheng, et al. eds. 1995. 257; “The ‘Amphibious’ Operation” Asia Weekly. Hong Kong (in Chinese) February 16–22, 1998. 28–29; World Journal. April 21, 1997; Yun-han Chu. “The Political Economy of Taiwan’s Mainland Policy,” Steven Goldstein. “The Cross-Strait Talks of 1993 – The Rest of the Story,” in Suisheng Zhao, ed. 1999. 163–196; 204–219; Tse-Kang Leng. 1996. The Taiwan–China Connection. 55–77. 79. On Zhangzhou power plant, see page 108,109 of this chapter. The project initially required a total investment of US$3.4 billion, the combined resources of Formosa’s three related companies, Formosa Plastics, Taiwan Chemicals and Nan Ya Plastics, could put together only US$700 million. The rest has either to be raised from the capital market or borrowed as bank loans. Given the government ban on the use of funds raised from these sources for investment in the mainland, Formosa Plastics was forced to give up the deal. Because of this, Lee Tenghui singled out Formosa Plastics in announcement of the “don’t rush, be patient” policy. He said, “Formosa Plastics had already borrowed more than NT$200 billion from banks in Taiwan. If such sums were to go on investment in the mainland, he asked, what would become of Taiwan?” World Journal, online, January 16, 1998.2; International Daily News, online, August 22, 1998. My interviews with government officials in Taiwan confirmed the government’s deep concern over the transfer of public funds raised in Taiwan for use in mainland projects. 80. China Times, online, August 15, 1996; World Journal, online, January 19, 1997. 81. Jiang Yafang. “Jinyue leichi: Taishang touzi dalu xin xianzhi” (New Forbidden Areas to Taiwan Business Investment to the Mainland), Yazhou zhoukan (Asian Weekly), July 28–August 3, 1997. 39–40; World Journal, online, January 19, 1997; March 18,19, 21, 1997. 82. Laura Li and Jimmy Lin. “Shanghai or Bust.” 11, 14; “China and Taiwan: Business Trumps Politics,” The Economist, July 28, 2001. 83. Laura Li and Jimmy Li. Ibid. 84. Nanfang Daily, August 7, 2000. 85. Commercial Times, online, November 11, 29, 2000; World Journal, online, October 15, 25, 27, 29, 2000; Ming Pao, (Hong Kong), October 30, 2000; China Times, online, October 27, 2000. 86. “Green Light for Formosa Plastics Group’s US$140 Million Mainland Investment,” World Journal, online, October 14, 2004. 87. “Wang Yung-tzai Back to Taiwan, Formosa Invested Mainland Projects to Begin Operation,” Commercial Times, online, October 22, 2004. 88. “Evergreen Mend Fences with Mainland After Shunned for Supporting Chen,” World Journal, online, November 6, 2003; “Evergreen Invest to Build Container Ports in Ningbo,” Commercial Times, online, January 20, 2005. 89. “Gov’t Blasts Beijing as Tycoon Drops Independence Stance,” China Post, March 28, 2005. 90. “Taiwan Stunned by a Changing Dragon,” Lianhe Zaobao, online, April 3, 2005. 91. “Chi Mei Disappointing Quarterly Report,” Commercial Times, online, July 30, 2005. 92. “Hsu Wen-long: Investing in the Mainland for Employees,” World Journal, online, August 4, 2005. 93. “Taiwan Stunned by a Changing Dragon,” Lianhe Zaobao, online, April 3, 2005. 94. “Chi Mei to Add US$100 Million to its Mainland Petrochemical Business,” Lianhe Zaobao, online, August 10, 2005; “Chi Mei Plans LCM Plant in the Mainland,” World Journal, online, July 19, 2005. 95. “President Cautions on Many Dangers of China Investment,” Central News Agency, June 29, 2005, obtained from http://taiwansecurity.org/News/2005/CNA-290605.htm; “Chen Shui-bian: Effective Management is the Foundation of Active Opening,” Commercial Times, online, April 29, 2005.

182

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96. “MOEA Four Measures to Effectively Manage West-Bound Investment,” Commercial Times, online, April 29, 2005; “Penalty to Increase Sharply over Sensitive Science-Technology Transfers,” World Journal, online, April 13, 2005; “Penalty Guidelines on Illegal MainlandBound Investment Announced,” Commercial Times, online, March 16, 2005; “Indirect Investment in the Mainland to Be Controlled,” Commercial Times, online, May 9, 2005. 97. In 2004, semiconductor sales in the mainland reached US$40 billion, a 40% increase from 2003. Out of this, local manufacturers only had about US$7 billion. Duowei Xinwenwang, www.chinesenewsnet. com, August 13, 2005; “Semiconductor Giants Consolidate in China,” Asia Times, online, www.atimes. com, February 7, 2004. 98. Duowei Xinwenwang, ibid.; “Mainland Surpassing Taiwan as the Third Largest Semiconductor Hub,” China Times, online, August 3, 2005; “Battle for the Mainland Semiconductor Market,” World Journal, online, August 22, 2005. 99. “Wang Jianmin: Taiwan Semiconductor Firms in the Mainland,” Duowei Xinwenwang, www.chinesenewsnet.com, June 14, 2004. 100. Macabe Keliher. “China Set to Flood the World with Chips,” Asia Times online, www.atimes.com, February 7, 2004; Mac William Bishop. “Chips, Cheap Labor Bridging the Taiwan Strait,” Asia Times, online, May 31, 2004; Chyan Yang and Shiu-Wan Hung. “Taiwan’s dilemma across the Strait: Lifting the Ban on Semiconductor Investment in China,” Asian Survey, Vol. XLIII, No.4, July/August 2003. 688. 101. “Nightmare of Marginalization due to Lack of Three Direct Links,” China Times, Series 6 on Taiwan’s Economy, September 8, 2004; “TSMC Plans US$10 billion Project In Shanghai in 10 Years,” China Times, online, October 26, 2003; “Morris Chang Meets Shanghai Major on Business,” World Journal, online, November 7, 2003; “Dancing with the Enemy: A Survey of Taiwan,” The Economist, January 15, 2005. 10. 102. “TSU Lawmaker: UMC Investment in He Jian at Least TN$300 billion,” “UMC Searched due to SMIC Informant,” China Times, online, February 18, 2005; “Storm over UMC, Chip Espionage Across the Strait,” Commercial Times, February 18, 2005. 103. “Huang Chongren on Restricting Semiconductor Investment in the Mainland: People Will Laugh Their Teeth Out,” China Times, online, July 21, 2005. 104. “Dancing with the Enemy: A Survey of Taiwan,” The Economist, January 15, 2005. 11. 105. Ibid.

5 Taiwanese Investors and Local Government in Mainland China 1. Wu Jieh-min. “Guanxi Across the Balance Sheet and the Taiwan Strait: Political Connections, Economic Structures, and Chinese Societies.” Paper presented at the Annual Meeting of the Association of Asian Studies, Chicago, March 13–16, 1997; Cen Huang. “The Organization and Management of Chinese Transnational Enterprises in South China,” Issues & Studies, Vol. 34, No. 3, March 1998. 51–70. 2. Jean C. Oi. “Fiscal Reform and the Economic Foundations of Local State Corporatism,” World Politics, Vol.45, No.1, October 1992. 103, 111, 113, 118; “The Role of the Local State in China’s Transitional Economy,” The China Quarterly, No. 144, December 1995.1137, 1145. 3. Wang Shaoguang. 1995, “The Decline of Central State Fiscal Capacity in China,” in Andrew G.Walder, ed. The Waning of the Communist State: Economic Origins of Political Decline in China and Hungary, Berkeley: University of California Press. 87–113; Deng Yingtao, Yao Gang, Xu Xiaobo, and Xue Yuwei. 1990. Zhongguo yusuanwai zijin fenxi (An Analysis of China’s Extrabudgetary Funds), Beijing: People’s University Press.

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4. Jean C. Oi. 1992, 1995, and 1999. Rural China Takes Off: Incentives for Industrialization, Berkeley: University of California Press; Christine Wong. “Fiscal Reform and Local Industrialization,” Modern China, No.18, 1992. 97–227; Wan Jieqiu. 1993. Zhengfu tuidong yu jingji fazhan: Sunan moshi de lilun sikao (The State and Economic Development: Theoretical Reflections on the Southern Jiangsu Model), Shanghai: Fudan University Press. 107–108. 5. China News Analysis, No.1508, April 15, 1994. 3. 6. Nicholas R. Lardy. 1994. China in the World Economy, Washington, DC: Institute for International Economics. 63–71; “The Role of Foreign Trade and Investment in China’s Economic Transformation,” The China Quarterly, No. 144, December 1995. 1067. 7. Laura Li and Jimmy Lin. “Shanghai or Bust: Taiwanese High-Tech Descends on Eastern China,” Kuang Hua (Chinese English Bilingual Monthly) (Taipei), Vol. 26, No. 7, July 2001. 17. 8. Susan L. Shirk. 1994. How China Opened Its Door: the Political Success of the PRC’s Foreign Trade and Investment Reforms, Washington, DC: The Brookings Institution. 32–38. 9. Hu Angang. “Tax Assignment System: Evaluation and Suggestions,” Strategy and Management, No. 5, 1996. 2; Ni Jiazhu and Yan Yinglong. 1993. Difang zhengfu touzi xingwei yanjiu (An Analysis of Local Government Investment Behavior), Beijing: China Economic Press. 115. 10. Shirk. 1994. 33. 11. Shirk. Ibid. 4–47. 12. “Fierce Competition to Lure Foreign Investors in the Lower Yangtze Delta,” Commercial Times, online, January 6, 2004. 13. “Focus on quantity in attracting foreign capital may lead to industrial hollowing out,” Commercial Times, online, January 7, 2004. 14. China Times Weekly. (September 1992), 36. See You-tien Hsing. “Building Guanxi Across the Straits: Taiwanese Capital and Local Chinese Bureaucrats,” in Aihwa Ong and Donald M. Nonini, eds. 1997. Ungrounded Empires: The Cultural Politics of Modern Chinese Transnationalism, New York: Routledge. 147. 15. World Journal, December 23, 1992, quoted in Hsing. Ibid. 16. This has been mocked as the “model of two pi” (the Guangdong model of development) namely, lips (zui pi) and land (di pi ). Local governments achieve crude capital accumulation by selling or leasing land to foreign investors and then using the money to build up infrastructure to attract more investors. 17. Outlook (Liao Wang), No. 42, 1993. 16; China News Analysis, No.1508, April 15, 1994. 2–3. 18. Shirk. 1994. 41, 38; also Du Shao-ping et al., eds. 1992. Neilu kaifang chengshi yonghao guojia youhui zhengce baizhao (Hundreds of Ways for Inland Cities to Fully Utilize State Preferential Policies), Shanxi Economic Press; Lora Sabin. “New Bosses in the Workers’ State: The Growth of Non-State Sector Employment in China,” The China Quarterly. No.140, December 1994. 954–959. 19. Commercial Times, November 15, 2003. 20. The term refers to joint ventures (JVEs), cooperative enterprises (COEs) and sole foreign investment enterprises (SFIEs), an expression also sometimes translated as “foreign enterprises.” 21. Foreign direct investment flows have increased in part because of the phenomenon of recycled capital of Chinese origin. Given the special tax and other incentives provided to foreigninvested firms, local governments and local firms move money off-shore and then recycle it back into China disguised as “foreign investment.” Since most provincial and municipal governments run firms in Hong Kong and other outside locations, information about the extent of such practices is hard to obtain. My own contacts with the business community and my interviews on the mainland confirm that this is a serious problem. The World Bank has estimated that these sources comprised as much as 25% of gross investment inflows in 1992. (Lardy. 1995. 1067; Shirk. 1994. 47; my interviews in Henna, September 1997); Even the official media has openly condemned the “large number” of such “sham businesses.” See Sabin. 1994. 957. One Western source has gone so far as to claim that two-thirds of current foreign investment in

184 22. 23.

24. 25. 26.

27. 28. 29.

30. 31. 32. 33. 34.

35. 36. 37.

38. 39.

40.

41.

Notes

China may actually originate from within the country itself (see Sheryl WuDunn. “Booming China is Dream Market of West,” The New York Times, February 15, 1993. 6). Barry Naughton. 1995. Growing out of Plan: Chinese Economic Reform, 1978–1993. New York: Oxford University Press. 150–151; Wan. 1993. 117. Chu Baolan and Dong Weiyuan. 1993. Taiwan tongbao dao dalu touzi zhinan (Mainland Investment Guide for Taiwanese Investors), Beijing: China Economic Press. 12. The 1994 tax reform leveled off tax rates for domestic firms to 33% in a new–value-added tax. For the wildly varying character of these preferential treatments at the local level, see chapter 3 on local government policies on Taiwanese investment. Laura Li and Jimmy Lin. 2001. 9–14. “Local governments offer honorary citizenship to attract Taiwanese investors,” Commercial Times, December 12, 2003. Chen Shumei, “Dongguan Gets Down to Business—Taiwan Firms Embrace a Cantonese Boomtown,” Kuang Hua (Chinese-English Bilingual Monthly), Taipei, Vol. 25, No. 3, March 2000. 83. My interview in Zhengzhou, September 1997. See n.12. Shirk. 1994; Gao Chang. “Xian jieduan dalu waizi zhengce yu taishang touzi qushi” (Current Mainland Foreign Investment Policies and the Trend of Taiwanese Investment in the Mainland), Tapei Bank Monthly, Vol. 27, No. 7, 1997. “Foreign Investors Complain about Investment Environment,” Economic Reference News, (in Chinese), October 7, 1997. Dorothy J. Solinger. 1993. China’s Transition from Socialism—Statist Legacies and Market Reforms 1980–1990. Armonk, NY: M.E. Sharpe. 127–128. My interview with an official from the local Taiwan Affairs Office, Nanjing, August 1997. Shirk. 1994. 47. Kenneth Dean. “Conferences of the Gods: Popular Cults Across the Taiwan Straits” paper presented at the conference on Economy and Society in Southeastern China, Cornell University, October 2–3, 1993. 3, 17, 19. Xiamen Daily, October 31, 1997. 11. “Taiwanese Business Tycoons Visit Mainland,” Duowei Xinwen, www.chinesenewsnet.com, June 3, 2004. You-tien Hsing. 1997. 15–157. For an interesting account of how Taiwanese investors are networking and making deals at the local level, see You-tien Hsing. 1998. Making Capitalism in China: The Taiwan Connection,. New York: Oxford University Press. Hsing. Ibid. Jiangsu Yearbook, 1997–2001, various issues; State Council Third National Industrial Survey; Jiangsu Provincial Government, 1995. Touzi Zhongguo dashichang: Jiangsu sheng zhuanji (A Guide to Investment in China: Jiangsu Province Section), Hong Kong: Dagong Pao Press. 4. Andrew G. Walder. “Local Governments as Industrial Firms: An Organizational Analysis of China’s Transitional Economy,” American Journal of Sociology, Vol. 101, No. 2, September 1995. 263–301. The difference between the Southern Jiangsu model of “getting rich collectively” and the more laissez-faire Zhujiang model can be seen simply by taking a train ride between Shenzhen and Guangzhou and between Shanghai and Nanjing. In southern Guangdong, one often sees a few grand houses surrounded by a scattering of dilapidated housing. In southern Jiangsu by contrast, rows of almost identical two-story houses line clean streets in the townships and villages. While the area between Shenzhen and Guangzhou is dotted with foreign-invested firms in leased factories, what dominates the economic landscape in southern Jiangsu are the tens of thousands of TVEs. See Gu Songnian, “ ‘Sunan moshi’de zhengyi he butong moshi guan” (Sunan Model’: Debate and Different Perspectives), Zhou Chunping, “Sunan moshi yu Wenzhou moshi de

Notes 42.

43.

44.

45.

46. 47.

48. 49. 50.

51. 52. 53. 54. 55.

56.

185

chanquan bijiao” (Comparative Ownership Structure between Sunan Model and Wenzhou Model), Zhongguo nongcun jingji (Chinese Rural Economy), No. 8, 2002. 36–38; 39–46. Jiangsu Yearbook, 1997. 260; Jiangsu Yearbook 2002. 188–189; Jiangsu Investment Guide, 1995. 53. There is tremendous confusions and inconsistency in the statistics reported by the yearbooks. In the Jiangsu Yearbook 1997. 260, the value of TVEs’ output in 1996 was calculated in 1990 prices, while the provincial GDP for that year was calculated at current 1996 prices. But in the Jiangsu Yearbook 2002. 189, while it is claimed that the total value of the TVEs’ output was calculated in 2001 prices, this figure is much greater than the total value of the provincial GDP which is also calculated in 2001 prices. Wan. 1993. 117; Naughton. 1995. 150–151; Zhou Hucheng. “Jiangsu xiangzhen qiye fazhan luohou yu Zhejiang de yuanyin fenxi (The Analysis of Why Jiangsu’s TVEs Falling Behind that of Zhejiang), Zhongguo nongcun jingji (Chinese Rural Economy), No. 3, 2002. 45–51. William A. Byrd and Alan Gelb. “Why Industrialize? The Incentives for Rural Community Governments,” in William A. Byrd and Qingsong Liu, eds. 1990. China’s Rural Industry: Structure, Development, and Reform, New York: Oxford University Press. 359–360. Jiangsu Provincial Government. “Suggestions on Economic Restructuring,” September 29, 1997; “Suggestions on Deepening Reform of TVEs,” November 3, 1997; “Suggestions on Accelerating Reform and Development of TVEs,” May 1, 1998, Jiangsu Yearbook. 1998, 1999. 570–579; 560–563. Jiangsu Investment Guide. 1995.120–121, 154, 120–168; Jiangsu Yearbook. 1997, 1998. 722–724; 579–581. By the end of 1994, these development zones had attracted more than 2,705 foreign firms, accounting for 10.6% of the total number of foreign firms in the province. Contracted foreign investment was US$7.91 billion, 28.4% of the total foreign investment in Jiangsu. Realized foreign investment in these zones was US$2.39 billion, accounting for 25.6% of the provincial total. (See Jiangsu Investment Guide. Ibid., 59; Jiangsu Yearbook, various issues.) The average size of foreign investments in these zones is larger than the provincial average. Also refer to Cheng Jiming, ed. 1996. Dongya jingji yu Jiangsu jingji bijiao yanjiu” (A Comparative Study of the Economy of Eastern Asia and Jiangsu in China), Nanjing: Jiangsu People’s Press. 111. See n.13. Jiangsu Yearbook. 1990–2002, various issues; “On ‘Outward Oriented’ Jiangsu,” Liaowang Newsweek, April 1, 2004; Cheng. 1996. The table includes statistics from both the Jiangsu Taiwan Affairs Office (in parentheses) and the Jiangsu Foreign Economic and Trade Commission. Figures from the former are sporadic before 1997, while statistics from the latter are inconsistent from 1997. These statistics are supplemented by data from a report by the Jiangsu Taiwan Affairs Office, “Report on Taiwanese Invested Firms in Jiangsu Province,” July 1997. Jiangsu Yearbook. 2001, 2002. 240–242; 149–150; Cheng. 1996. 111–112; Jiangsu Investment Guide. 1995. 56–57 Jiangsu Yearbook. 2002. 188; Cheng. 1996. 109. Cui Zhiqing. 1993. Dangdai Taiwan jingji cidian (An Economic Dictionary of Contemporary Taiwan), Nanjing University Press; also Jiangsu Yearbook. 1990. 211. Zhou Jinming, “Guxiang yiqu yinlai baiwan yuan touzi” (A Home Tune Attracts Investment of Millions), Haixia Guangjiao, No. 4, 1994. 40. Jiangsu Taiwan Affairs Office. “Special Report on Jiangsu’s Economic Relations with Taiwan,” No. 10, 2002, quoted in Songping Zhang. 2003. Jiaru WTO dui Su Tai liangdi jingmao hezuo yu fazhan de yinxiang ji duice yanjiu (An Analysis of the Impact and Policy Responses of WTO Entry on Economic and Trade Relations between Jiangsu and Taiwan), Ph.D. Dissertation, Nanjing University. 52. Suzhou Taiwan Affairs Office. “Newsletter on Taiwan Affairs Work,” No. 28, 2001, No. 1, 2002, Nos. 1–2, 2003; Kunshan Statistical Yearbook 2002, all quoted in Songping Zhang. Ibid. 113–131.

186

Notes

57. Sang Dengping (of Jiangsu Provincial Taiwan Affairs Office). “Jiangsu yu Taiwan jingmao hezuo de yiyi, xianzhuang, chengyin he qushi” (Economic and Trade Cooperation Between Jiangsu and Taiwan: Implication, Current Situation and Trend), paper presented at the Conference on Cross-Strait Economic and Trade Relations, Nanjing 1997. 3; Songping Zhang. Ibid. 58. Laura Li and Jimmy Lin. 2001. Also, “Suzhou: A Tale of Two Parks,” Kuang Hua (ChineseEnglish Bilingual Monthly) (Taipei), Vol. 26, No. 7, July 2001. 24–28; “Moving North: New Trends of Taiwanese Investment in Mainland China,” Liaowang Newsweek, February 8, 2005. 59. Jiangsu Yearbook, various issues; Nanjing Yearbook, 1993. 123; Jiangsu Investment Guide. 1995. 120–145. 60. Ibid.; and my visit to the Nanjing Golden Autumn Trade and Investment Festival, 1997. 61. According to statistics issued by Taiwan’s Ministry of Economic Affairs, by the end of 2002 there were 7,133 Taiwanese-invested firms in Jiangsu, with a total investment of US$10.484 billion. 62. Jiangsu Taiwan Affairs Office, “Special Report on Jiangsu’s Economic Relations with Taiwan,” No. 12, 2001, quoted in Songping Zhang, 2003. 51. 63. The year 1993 was one in which Taiwan’s big business groups began their large-scale march to the mainland. Given government restrictions and the need for sharing investment risks, these big business groups have often registered in a third country that has investment guarantees with mainland China, or simply teamed up with foreign MNCs on their march to the mainland. While this may reflect a declining amount of investment from Taiwan, the true picture could be quite different. For example, the Roma Ceramic Tile Company in Nanjing, with an investment of US$45 million, is registered as a solely owned American firm although the investment capital, management team, and equipment all came from Taiwan (source: personal interview in Nanjing). 64. Nanjing Yearbook, 1987–1996, various issues; Zhang. 2003. 115; “Taiwanese Investors Like Jiangsu more than Zhejiang?” www.people.com.cn/GB/paper40/9390/869747.html 65. Qi Luo and Christopher Howe. “Direct Investment and Economic Integration in the Asian Pacific: The Case of Taiwanese Investment in Xiamen,” The China Quarterly, No.136, Special Issue: Greater China, December 1993. 746–769; Guo Zhemin. 1995. Xiamen jingji tequ jianshe yu fazhan yanjiu (A Study of the Development of Xiamen Special Economic Zone), Xiamen University Press. 66. Nanjing Yearbook, 1989–1991. 67. Nanjing Yearbook, 1990–1991; Qi and Howe. 1993. 68. Merritt T. Cooke. “The Politics of Greater China’s Integration into the Global Info Tech (IT) Supply Chain,” Journal of Contemporary China, Vol. 13, No. 40, August 2004 499–500. 69. Jiangsu Yearbook, various issues; Cheng Jiming. 1996. 108, and Songping Zhang. 2003. 113. However, the precise number of wholly-owned Taiwanese-invested firms in both Jiangsu and Suzhou, and their ratio of exports, is not available. 70. Cheng. 1996. Ibid. 109. 71. Haixia Guangjiao, No. 4, 1994.28. 72. For the financial sources of TVEs, see Xu Zhiming and Zhang Jianlang, “Xiangzhen qiye zijin de gaosu cengzhang ji xiaoyi xiahua” (TVEs: Rapidly Rising Investment Funds and Declining Profit Margins: An Empirical Analysis of the TVEs in Suzhou, Jiangsu Province), Zhongguo nongcun jingji (Chinese Rural Economy), No.3, 1997. 5–58; Yuan Jieping and Wang Rong. “Sunan xiangzhen gongye jingzheng li xianzhuang, yingxiang ji tisheng duice” (TVEs in South Jiangsu: Competitiveness, Causes and Strategies for Upgrading), Zhongguo nongcun jingji (Chinese Rural Economy), No. 10, 2002. 50–51. For a comparison with Taiwan’s SMEs, see chapter 4 of this book. 73. Yuan and Wang. Ibid. 51; Chai Junying et al. “Jiangsu xiangzhen qiye jiyuehua guimo jingying zhuangkuan pingjia” (An Evaluation of Conglomeration of TVEs in Jiangsu), Zhongguo nongcun jingji (Chinese Rural Economy), No. 10, 1998. 26–29.

Notes

187

74. Shi Xunru, You Jingbai. “Sunan xiangcun qiye fuzhai jingying de xiangzhuang fenxi yu duice yanjiu” (Analysis of the Debt Problems of TVEs in Southern Jiangsu and Policy Responses),” Zhongguo nongcun jingji (Chinese Rural Economy), No. 1, 1997. 10–16. 75. Charles H.C. and Kao et al.1995. The Taiwan Investment Experience. 64–75. 76. See Vivienne Shue. 1988. The Reach of the State: Sketches of the Chinese Body Politic. Stanford: Stanford University Press.

6

Conclusion

1. For a review of the literature, see Susan M. McMillan. “Interdependence and Conflict,” Mershon International Studies Review, Supplement to the International Studies Quarterly, Vol. 41, Supplement 1, May 1997. 33–58; also Katherine Barbieri and Gerald Schneider. “Globalization and Peace: Assessing New Directions in the Study of Trade and Conflict,” Journal of Peace Research, Vol. 36, No. 4, July 1999. 387–404 and other articles in this Special Issue on Trade and Conflict. 2. Erik Gartzke, Quan Li, and Charles Boehmer. “Investing in the Peace: Economic Interdependence and International Conflict,” International Organization, Vol. 55, No. 2, Spring 2001. 395. 3. Craig S. Smith. “Signs in China and Taiwan of Making Money, not War,” The New York Times, on the web, May 15, 2001. 4. Barbieri and Schneider. 389. 5. McMillan. 41. 6. Robert Gilpin. 1987. The Political Economy of International Relations, Princeton: Princeton University Press. 58. 7. Theda Skocpol et al., eds. 1985. Bringing the State Back In. New York: Cambridge University Press. 20. 8. Yun-han Chu. “The Political Economy of Taiwan’s Mainland Policy,” in Suisheng Zhao, ed. 1999. 168–169. 9. Ibid. 10. Richard P. Applebaum and Jeffrey Henderson, eds. 1992. States and Development in the Asian Pacific Rim. Newbury Park: CA: Sage. 23. 11. The chief exponents of the strong state thesis with regard to the East Asian political economy are Chalmers Johnson. 1982. MITI and the Japanese Miracle. Stanford: Stanford University Press; Alice Amsden. 1989. Asia’s Next Giant: South Korea and Late Industrialization. New York: Oxford University Press; Robert Wade. 1990. Governing the Market: Theory and the Role of Government in East Asian Industrialization, Princeton: Princeton University Press. 12. For detailed analyses of the evolution of the Taiwanese state under democratization and its impact on state–society relations and cross-Strait economic interactions, see Yun-han Chu. “Realignment of Business–Government Relations and Regime Transition in Taiwan,” in Andrew MacIntyre, ed. 1994. Business and Government in Industrializing Asia, Ithaca: Cornell University Press and Tse-Kang Leng. 1996. The Taiwan–China Connections: Democracy and Development Across the Taiwan Strait, Boulder, CO:Westview Press. For more recent literature on democratization in Taiwan, see Hung-mao Tien and Yun-han Chu. “Building Democracy in Taiwan,” The China Quarterly. No. 148, December 1996; Shelley Rigger. 1999. Politics in Taiwan: Voting for Democracy, New York: Routledge. 13. David Friedman. 1988. The Misunderstood Miracle: Industrial Development and Political Change in Japan, Ithaca: Cornell University Press. 4. 14. Richard J. Samuels. 1987. The Business of the Japanese State: Energy Markets in Comparative and Historical Perspective, Ithaca: Cornell University Press. 262.

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INDEX

Acer Group, 113, 114, 116, 142 Stan Shih, 114, 116 Dell, 116 I.B.M., 116 Air and naval forces, 3 amphibious operations, 3 military capability, 4 military exercises, 4 military showdown, 3, 4 naval blockade, 3 American Formosa Foundation, 54 Anti-secession law, 2–3, 36, 51, 52, 55, 115 Arima Computer, 142 Arms sales, 3, 48 Asia Cement, 115 Asia-Pacific, 81 Asian-Pacific Economic Cooperation, 26 Association of Southeast Asian Nations (ASEAN), 12, 27, 67, 75, 85–6, 102, 120 ASEAN Plus Three, 85 Indonesia, 12, 70, 102 Malaysia, 67, 73, 74, 101 Philippines, 12, 70 Singapore, 21, 67, 81, 86, 109 Thailand, 67 Vietnam, 12, 70 Association of Relations across the Taiwan Strait (ARATS), 21, 44 Asustek, 142

Baldwin, David, 4, 6 Big business, 9, 10, 13, 16, 31, 87, 89, 91, 93, 94, 99, 106–7, 109, 111, 114, 119, 120, 155, 157 guanxiqiye, 90 large business, 71, 73, 77–8, 79, 82, 91, 96, 106, 108, 119, 141 multicompany group, 90 multidivisional corporations, 90 multinational corporations, 7–8, 101, 109 Bohai Bay, 79 Tianjing, 79, 125 Capital mobility, 9–10, 13, 14, 155 Center for National Policy Studies, Taiwan, 81 Central America, 71 Barbados, 104 Cayman Islands, 81, 108, 117, 120 Virgin Islands, 71, 81, 108, 120 Central bank, 113 Changsha, Hunan, 109 Chen, Shui-bian, 2, 21, 35, 45–9, 50, 51, 52, 53, 55, 83, 84, 85, 87, 114, 115, 116, 119, 120, 121, 154 “active opening, effective management,” 83, 114 four-stage theory, 2, 53, 55 “five-nos,” 45, 47 “one country on each side,” 2, 46, 49

Index Cheng Hsin Rubber, 112 Chiang Ching-kuo, 19, 22 Chiang, Ping-kun, 81 Chin, Chung, 75 China Credit Agency, 78, 107 China Steel, 74 Chinese Civil War, 18, 33 Chinese Communist Party (CCP), 19, 28 Chou, Steve, 107 Chou, Tien-cheng, 90 Chu, Yun-han, 82, 155 Cold War, 18, 26, 28, 54 Compensation, 62 Constitution, 50, 51, 52 constitutional initiative, 47, 49, 50 Cornell University, 43 Cultural affinity, 16, 26, 67, 122, 132, 133 Czechoslovakia, 26 Delta Electronics, 142 Democratic alliance, 54 Democratic Progressive Party (DPP), 2, 19, 20, 22, 23, 24, 25, 27, 28, 33, 34, 38, 43, 44, 45, 48, 49, 50, 53, 73, 83, 84 Formosa faction, 25 “independence clause,” 25 New Tide faction, 25 pan-green politicians / camp / supporters, 33, 34, 50, 53, 84, 119 “Resolution on Taiwan’s Future,” 44 self-determination, 23 Democratization, 2, 22, 25, 29, 32, 33, 35, 39, 63, 156, 157 Deng, Xiaoping, 19, 59, 110, 124, 129 De-Sinicization, 2, 33, 35, 36, 53, 55 Dichotomous market structure, 16, 89, 90–1, 96, 99, 119 dichotomous industrial structures, 10 Ding Xin Group, 105–6, 109 Kanshifu, 105–6, 109 Sanyo Food, 106 Wei-Chuan, 106 Zhanghua, 105

205

Direct charter flight, 52, 85 Dual financial system, 10, 16, 89, 96, 99, 119 family savings, 10, 100 formal financial institutions, 10–11, 95, 96, 98, 99, 100, 102 informal market, 96, 99, 100, 102 retained earnings, 10, 100 East Asian political economy, 7, 16, 26, 151, 155, 156, 157 Economic Construction Council, 112 Economic Development Advisory Council, 83, 114 Economic integration, 1, 4, 11, 14, 15, 18, 31, 35, 36, 37, 38, 39, 40, 41, 43, 53, 55, 56, 68, 85, 87,121, 151, 152, 153, 154, 158 economic dependence, 27, 56, 85, 87 Economic reform, 16, 123 decentralization, 16, 63 extra-budgetary revenue, 123, 127 fiscal contracting responsibility system, 123, 134 particularistic contracting, 16, 123, 124, 149 rent-seeking, 16, 122, 129, 131, 133, 149 revenue sharing system, 123 tax assignment reform, 125 within-budget revenue, 123 Economic sanctions, 45 negative sanctions, 5, 6 positive sanctions, 5, 6 Economic statecraft, 5–6, 14, 15, 16, 152, 155 Egypt, 20 Moses, 20 Entrepreneurship, 8, 93, 97, 100, 156 entrepreneurs, 10, 66, 93, 100, 104, 105, 127 European Union, 26, 54, 107 Portugal, 67 Spain, 67

206

Index

Evans, Peter, 8 “embedded autonomy,” 8–9 Evergreen Group, 81, 115, 120 Chang, Yung-fa, 81, 115, 120 Lloyd Triestino China, 115 Executive Yuan, 82 Export market, 12, 37, 60, 87, 90 Export shift, 74, 75 transfer of export, 74 Federation of Industry, 79, 82, 109, 111, 132 Hsu Sheng-fa, 111, 132 Foreign currency reserve, 65, 93 Foreign exchange, 43, 59, 62, 65, 71, 77, 124, 125, 127, 128, 131 Formosa Plastics, 63, 82, 107, 108, 112, 113, 114–15, 120, 132 Chang Gung Hospital, 115 Formosa Heavy Industries Corp, 115 Haicang petrochemical project, 107, 112 Hua Yang Investment, 108 Nanya Plastics, 108, 115 Wang Yung-ching, 108, 114, 118, 120, 132 Wang Yung-tzai, 114 Zhangzhou Power Plant, 108, 112, 132 Free trade agreement (FTA), 85, 86 “closer economic partnership arrangement” (CEPA), 86 “economic partnership agreement,” 86 Friedman, Thomas, L., 9 “fast world,” 9 Fruit imports, 53 Taiwan External Trade Development Council, 53 Fujian, 33, 37, 43, 59, 62, 63, 64, 73, 79, 80, 82, 84, 107, 112, 115, 124, 125, 127, 131, 132 Anxi, 132 Fuzhou, 63, 64 Meizhou, 64

Xiamen, 43, 63, 64, 77, 104, 107, 145, 146 Zhangzhou, 108, 112, 132 General Agreement on Tariffs and Trade (GATT), 82 General Chamber of Commerce, 111 Wang Yu-tseng, 111 Gereffi, Gary, 90 Giant Machinery, 103 Goodman, John, and Pauly, Louis, 9 Government–business relations, 11, 14, 16, 89, 91, 122 Government regulations, 14, 15, 102 general category, 114 Measures on Indirect Investment and Technical Cooperation with the Mainland, 1990, 68 negative list, 12, 69, 108 permissible list, 68, 69 positive list, 58, 68 prohibited category, 114 Provisions for Cross-Strait Financial Transactions, 1993, 70 Regulations on Financial Exchange between Taiwan and the Mainland, 2001, 70 Regulations over Investments and Technical Cooperation with the Mainland,1993, 69, 71 Stature Governing the Relations between People of the Taiwan Area and the Mainland Area (revised) 1997, 71 Stature Governing the Relations between People of the Taiwan Area and the Mainland Area 2003, 84, 109 Stature on Taiwan-Mainland Civilian Relations 1992, 25, 42–3 Government-to-government negotiations, 19, 25, 43, 53, 56 party-to-party negotiations, 20

Index Grace Semiconductor Manufacturing Corp (GSMC), 110, 118 Grand international circulation, 124 Greater China, 26, 38, 52 Guangdong, 33, 59, 63, 73, 79, 80, 105, 113, 124, 125, 127, 133, 136,144 Baoan, 79 Dongguan, 79, 103–5, 130 Guangzhou, 63, 103, 105, 116 Longhua, 103 Shantou, 63 Shenzhen, 70, 103, 128 Zhuhai, 63, 128 Guanxi networks, 10, 94–5, 100 Guerilla capitalism, 37 Haikou, Hainan, 128 Hall, Peter, 8, 11, 12 Hamilton, Gary, 13, 90, 93, 104 Harbin, 105 Henan, 115 Zhengzhou, 130 He Ping, 110 China Poly Group, 110 High-tech sector, 56, 63, 69, 73, 76, 78, 79, 80, 81, 83, 86, 87, 107, 110, 114, 116, 117-19, 120, 142, 143, 145, 146 chip-fabrication, 12, 69, 108, 118 integrated circuit foundries (IC), 117, 130, 145 information technology (IT), 73, 76, 81, 86, 103–4, 113, 142, 145 semiconductor, 84, 114, 117, 118, 119 TFT-LCD, 119 wafer technology, 12, 69, 108, 118 Hirschman, Albert, 5, 6, 56, 151, 153 Hsieh, Frank, 54, 85 Hsu, Norman, 105 Hsu Fu Chi Foods, 105 Hsu, Wen-long, 45, 115–16, 120 Chi-Mei Corporation, 45, 115–16, 120 Hu, Jintao, 52

207

Huang, Kung-hui, 82 Hubei, 113 Wuhan, 82, 112, 115 Xiangfan, 113 Hwa Roun Wire and Cable, 112 Industrial organization, 11, 15, 16, 90, 91, 101, 119, 122, 155, 156 Interdependence, 5, 8, 14, 15, 16, 17, 18, 37, 88, 152, 153 asymmetrical interdependence, 5 complex interdependence, 7, 18 International isolation, 15, 19, 21, 35, 154 diplomatic isolation, 4, 21, 22, 29, 55 International organization, 27, 28, 29 International space, 26 Investment, contracted investment (capital), 109, 142, 147 investment cap, 12 Law on the Protection of Investments by Taiwanese Compatriots, 1994, 43, 64 Measures to Encourage Investment by Taiwanese Compatriots, 1988, 43, 62, 77 realized investment (capital), 109, 142, 147 Japan, 23, 26, 28, 29, 48, 54, 73, 74, 76, 77, 80, 81, 85, 86, 90, 91, 93, 95, 113, 120, 156 Keiretsu, 90, 101 MITI, 156 Sino-Japanese relations 5, 26 Sogo shasho, 94 Jiang, Zemin, 29–30, 82, 106, 110, 118 eight-point statement, 29 Jiang Mianheng, 110, 118 Jiangsu, 16, 59, 79, 80, 109, 122, 125, 129, 133, 134, 135, 136, 140, 141, 142, 143, 144, 145, 146, 148, 149

208

Index

Jiangsu––continued Changzhou, 79, 103, 125, 131, 134, 135 Huaiyin, 141 Kunshan, 70, 103, 128, 135, 142 Lianyungang, 135 Nanjing, 64, 135, 142, 143, 144, 145, 146 Nantong, 135 Shuyang, 136 Suzhou, 79, 113, 118, 125, 127, 128, 130, 134, 135, 136, 141, 142, 145, 146, 147 Wuxi, 125, 128, 134, 135, 140, 141, 147 Wujiang, 128, 142 Xinghua, 136 Zhangjiagang, 140 Zhenjiang, 109: Chia Hsin Cement, 109 Johnson, Chalmers, 8 Kaohsiung, 50, 86 Katzenstein, Peter, 14 Keohane, Robert, 5, 6 Kinmen, 21, 84 Kinship visits, 59, 62, 68, 140, 141 Knorr, Klaus, 4 Koo, Chen-fu, 21, 43, 46, 109 Anhui Conch Cement, 110 SEF, 21, 42, 109, 112, 132 Taiwan Cement Corp, 109 Koo, Jeffrey, Jr., 110 China Development, 110 Crimson Fund, 110: Crimson Asian Capital and Crimson Velocity, 110 KG Investment, 110 Koo, Jeffrey, Sr., 110, 120 China Trust Group, 110, 120 Korean nuclear crisis, 49 Kuomintang (KMT), 19–20, 22, 23, 24, 27, 28, 32, 33, 34, 44, 45, 48, 70, 73, 83 Ma, Ying-jeou, 48 pan-blue alliance, 49, 50, 52 Siew, Vincent, 48, 82 Kymco Motorcycle, 103, 131

Lardy, Nicholas, 120 Lee, K. Y., 107, 110, 111 Acer Communications and Multimedia, 107 Lee, Tenghui, 1, 20, 21, 24, 25, 30, 31, 32, 33, 34, 44, 47, 48, 53, 81, 83, 87, 108, 110, 112, 115, 116, 154 alien regime, 20 “divided-nation” model, 22, 23, 24 “don’t rush, be patient,” 31, 83, 108, 110, 112, 113, 114, 116 “special state-to-state relations,” 1, 44, 46 “two-states theory,” 44, 45, 46, 47 visit to the United States, 1, 43, 112 Legislative Yuan, Taiwan, 2, 24, 25, 27, 43, 48, 50, 52, 53, 84 Li, Fei, 59 Lian, Chan, 31, 82 Local government, 16, 20, 43, 63, 64, 81, 101, 107, 122, 123, 127, 128, 131, 133, 135, 149 commercial republics, 128, 149 local industrialization, 123 Mainland Affairs Council (MAC), 12, 42, 60, 76, 78, 79–80, 81, 82, 111, 112, 113, 114, 116, 117 Mainland policy, 21, 23, 24, 31, 34, 110 divided-nation, 22, 23, 24, 26, 30 equal political entity, 22, 23, 24, 25, 27, 30, 44 international space, 26, 43–4 “Taiwan first,” 31, 83 Martial law, 21, 59 Decree for “Combating Rebels,” 68 Matsu, 21, 84 Middle East, 49 Iraq, 49 Ministry of Commerce, 12, 57, 60, 80 Ministry of Economic Affairs (MOEA), 47, 59, 68, 69, 73, 79, 111, 113, 114, 116, 117, 133

Index Investment Evaluation Commission, 69, 111: Chen Ming-pang, 111 Security and Exchange Commission, 69 Ministry of Finance, 70, 112 Ministry of Foreign Trade, 59 Mulvenon, James, 4 Rand Corporation, 4 Nanchang, 115 National Chengchi University, 33 National Development Conference, 31 National People’s Congress (NPC), 19, 57 National Unification Council (NUC), 24–5, 42, 46, 54 National Unification Guidelines, 23–4, 46, 54 Networks, 11, 13, 14, 74, 93, 100, 102, 103, 104, 109, 119, 133, 148, 149 “buyer-driven” networks, 90 “demand-creating” networks, 90 “demand-responsive” networks, 90 extra-family connections, 95 family-based networks, 94 guanxi networks, 10, 94, 100 inter-firm networks, 90 interlocking networks, 93–4 intra-family networks, 95 “significant human relationships,” 10 subcontracting networks, 67, 74, 79, 94 New Institutional Economics, 10, 14, 89 collective action, 8, 10 complex interactions, 10 formal structures, 10 incentive structures, 10, 11, 14 norms of behavior, 10 New Party, 22, 49 New Taiwan dollar, 65, 95, 97, 105, 147 Newly Industrialized Countries (NICs), 75, 156 No.1 Copper, 112 North American Free Trade Agreement (NAFTA), 26 Mexico, 67

209

Nuclear power plant, Taiwan, 47, 73 Numazaki, Ichiro, 10 Nye, Joseph, 5, 6 Office of Taiwan Affairs, 80 Offshore Transshipping Zones, 82 “One China,” 21, 22, 23, 24, 25, 27, 28, 29, 30, 32, 35, 44, 45, 46, 52, 54, 85, 115 Original equipment manufacturing (OEM), 67, 71, 72, 105, 113, 148 Overseas Economic Cooperation Fund, 70 Party-to-Party negotiations, 20, 25 Also see government-to-government negotiations Peaceful evolution, 22 Pearl River Delta, 37, 80, 81 Zhujiang model, 133 Penghu, 21, 85 People First Party, 49 People’s Liberation Army (PLA), 45 Political autonomy, 15, 18, 56, 87 self-determination, 23, 44, 49 Political dependence, 5–6 Political integration, 46 Political tensions/rivalry, 1, 5, 11, 17, 18, 151 Potential adjustment difficulties, 5–6 Pragmatic diplomacy, 21, 54 “alternative diplomacy,” 48 “trans-stop visit,” 48 “vacation diplomacy,” 27 President Group, 82, 106, 107, 109, 112 Kao Chingyuan, 106 Product cycle, 37 capital-intensive industries, 14, 82 capital-intensive investment, 56 downstream production, 91 downstream users, 80, 87, 106, 119 higher value-added production, 37 labor-intensive industries, 14, 71, 77, 135 labor-intensive manufacturing, 37

210

Index

Product cycle––continued labor-intensive production, 67, 72, 105, 148 labor-intensive sector, 65 low-cost production, 80 lower-end production, 84 low-value-added agricultural product, 58 upstream industries, 80, 119 upstream sectors, 91 Property rights, 77, 131 Putnam, Robert, 7 two-level game, 7 Qian, Qichen, 29 Qingdao, 115 Quanta Computer, 113 Referendum, 46, 49, 50, 51, 52 “defensive referendum,” 50, 51 “preventive referendum,” 51 Regional Operation Special Zone, 82 Regional Operational Center, 31, 81 Republic of China (ROC), 2, 25, 30, 44, 46, 47, 51, 52, 109 Republic of China is Taiwan, 51, 55 Republic of China on Taiwan, 25 Samuels, Richard, 157 Schell, Orville, 152 Semiconductor Manufacturing International Corporation (SMIC), 108, 117, 118 Richard Chang, 108–9, 117–18 Worldwide Semiconductor Manufacturing Corp, 117 Shanghai, 59, 64, 70, 79, 80, 86, 102, 103, 107, 108, 112, 113, 115, 117, 118, 125, 127, 128, 130, 133, 140, 141, 142 Pudong, 129 Shanghai Association of Taiwanese Businesses, 79 Shanghai Municipal Government, 80, 108

Songjiang Science Park, 118 Zhangjiang High-Tech Park, 117, 118, 127 Shannxi, 109 Shenyang, 64 Shiba, Ryotaro, 20 Asahi Daily, 20 Shirk, Susan, 124, 127 particularistic contracting, 16, 123, 124 Sichuan, 115 Sino-centrism, 32, 34 Small and medium-sized firms, 10, 13, 16, 38, 67, 71, 74, 79, 87, 89–99, 102, 104, 106, 119, 147, 148, 149, 151, 155, 157, South Korea, 67, 77, 81, 85, 86, 90, 91, 95, 96, 116, 120 Chaebol, 90 LG Chemical, 116 Pusan, 86 Southern policy, 70, 102 Soviet Union, 1, 26 Special administrative region, 19 Special Economic Zones (SEZ), 43, 63, 124, 125, 127, 128, 129, 136 development zones, 43, 63, 124, 128, 129, 135, 136, 142 export-processing zones, 12, 70, 77, 128 high-tech development zones, 124 high-tech parks, 142 industrial park, 12, 70, 103 special investment zones for Taiwanese investors, 64 Special trading companies, 59 State-centric theories, 7, 8, 9, 155, 156, 157 liberals, 152, 154 realist theory, 7–8, 153, 154 developmental state literature, 7–8 state autonomy, 14, 16, 157 state capacity, 13, 16 State Council, 57, 59, 62, 64, 77, 110, 124

Index State-society relations, 11, 14, 154 Strait Exchange Foundations (SEF), 21, 42, 109, 112, 132 Strange, Susan governing firm, 7 “web-of-contacts” model, 7 Swaine, Michael, 2 Taiwan Advocates, 40 Taiwan Independence, 1, 2, 18, 20, 25, 27, 28, 30, 33, 37, 39, 47, 49, 50, 51, 52, 53, 55, 75, 86, 87, 115, 116, 120, 153, 154 creeping independence, 35, 50, 154 cultural hegemony, 34 nation building, 1, 26, 34, 44, 54, 120, 153 national identity, 22, 32, 34, 53 rectify Taiwan’s names, 36, 55 Statehood, 22 Taiwanization, 34 Taiwanese identity, 2, 15, 23, 32, 33, 34, 35, 36, 37, 44, 49, 55 Taiwanese subjectivity, 32, 33, 36, 53, 55, 154 Taiwanese consciousness, 32, 34 Taiwanese nation, 35, 44 Taiwanese nationalism, 35 Taiwan Independence Party, 50 Taiwan Semiconductor Manufacturing Co, 114, 117, 118, 120 Morris Chang, 114, 120 Taiwan Solidarity Party, 50, 53 Taiwan Stock Exchange, 96–7 Fuh Hwa Stock Financial Company, 96 Corporate Law 1980, 96 Tariff, 53, 57, 59, 62, 85, 86, 148 Tax, 12, 57, 62, 63, 64, 69, 78, 83, 123, 124, 125, 127, 128, 129, 130, 131, 148, 149 tax assignment reform, 125 Thin-film transistor liquid display (TFT-LCD), 119 Also see high-tech sector

211

The 1992 consensus, 21, 35, 46, 52, 54 Three direct links (santong), 4, 11, 12, 13–14, 19, 21, 22, 24, 25, 30, 38, 39, 41, 42, 57, 59, 78, 82, 84, 85, 86, 87, 111 “cross-Strait route,” 85 “keep roots” in Taiwan, 69 “mini-links,” 84, 85 “point-to-point” direct links, 81, 82 Tibet, 2,105 Township and Village Enterprises (TVEs), 134, 140, 143, 147, 148, 149 Trade, 3, 5, 6, 7, 10, 12, 15, 31, 37, 38, 57, 59, 60, 61, 70, 75, 76, 86, 87, 88, 102, 151, 152 trade frictions, 15 trade surplus, 12, 37, 60, 65, 75, 76, 87 Transaction, 16, 122, 131 Tsai, Ing-wen, 44 Tu, I-Ching, 101 Unification strategy, 5 Defense White Paper 2000, 45 National Conference on Taiwan Affairs, 37 national unification, 1,18 non-peaceful means, 3 “one country, two systems,”1, 4, 19, 21, 22, 27, 68 peaceful unification, 19, 27, 38, 51 United Microelectronics Corp, 117, 118 Cao Xingcheng, 118 He Jian Technology, 118 United Nations, 26–7, 28, 47 United States, 1, 3, 15, 19,23, 26, 28, 29, 48–9, 50, 54, 60, 64, 65, 67, 73, 74, 75, 76, 80, 104, 108, 113, 120, 144 American foreign policy, 1 American military intervention, 3 Bush Administration, 47, 48, 49 Douglas Paal, 120 Guam, 3

212

Index

United States––continued Mass-buyers, 94 New York, 143 Pentagon, 48 Sino-U.S. relations, 5, 26, 47 Texas, 108 U.S. Congress, 43 U.S.-Japan Security Alliance, 54 White House, 43 Use of force, 20, 23, 30, 45, 52 threat of war, 4

Window of opportunity, 21–2, 36, 37, 53, 54, 153 Winters, Jeffrey, 9 World Health Organization, 47 World Trade Organization (WTO), 79, 82, 84, 113, 124 Wu, Cankun, 104 Cankun Electrical Appliance Co. Ltd., 104 EUPA, 104 Wu, Nenming, 103

Wade, Robert, 96 Walder, Andrew, 133 Wang, Daohan, 21, 43, 44, 46 Also see Association of Relations across the Taiwan Strait (ARATS), 21, 44 Wang Jun, 110 China International Trust and Investment, 110 Wang Zhen, 110 Wang, Jung-tuo, 101–2 Wang, Winston, 110, 118 Crimson Fund, 110 Crimson Asian Capital and Crimson Velocity, 110 Grace Semiconductor Manufacturing Corp, 110, 118 Jiang Mianheng, 110 Wang Yung-ching, 108, 114, 118, 120 Wangwang Food Group, 109 Ilan, 109 Mitsui, 109 Wei, Yung Linkage communities, 7 Wen, Jiabao, 49 White House, 43 White Paper Beijing 1993, 27, 69; Beijing 2000, 45 Taipei 1994, 30

Yageo Electronics, 142 Yang, Shangkun, 37 Yangtze River Delta, 37, 79, 80, 81, 106, 128, 130 Ye, Jianying, 19 “nine-point proposal,” 19 Yeh, H. D. 104–5 Primax, 104 Taiwanese Business Association in Dongguan, 105 Yugoslavia, 26 Yulong Motor, 109, 113 Dongfeng, 109 Fengshen, 113 Nissan, 109 Yung, Larry, 110 CITIC, Hong Kong, 110 Rong, Yiren, 110 Zhang, Songping, 146 Zhao, Ziyang, 124 Zhejiang, 59, 63, 64, 79, 80, 112, 114, 140 Hangzhou, 128 Ningbo, 63, 113, 114, 115, 128 Wenzhou model, 133–4 Xiaoshan, 64 Yutao, 64, 79 Zhu, Rongji, 45

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