地緣經濟工作坊

Contents:
1. Introduction
2. Some Features of Cross-Strait Economic Relations
3. “Normalization” as Political Rhetoric, Trade Policy and Economic Statecraft
4. One Caveat: China’s Capital
5. Conclusion: “Good fences make good neighbors”


Abstract
One of the harsh challenges to Taiwan is to find ways to capitalize on the opportunities presented by China while addresses uncertainties brought by China, especially the Angst for loss of sovereignty. Namely, how to ensure Taiwan’s sovereignty and to effectively manage the cross-strait economic relations, particularly under the circumstance of increasing economic integration between both sides and Beijing’s refusal to recognize Taiwan as a negotiation entity, not to mention as a sovereign state.
The Taiwanese subjectivity awareness (台灣主體意識) would not only merit the fortification of our sovereignty but also provide the operational advantages for domestic political process and economic development.
The reasons why “normalization of cross-strait economic and trade relations” is one of the best strategies for Taiwan are discussed, mainly including for its own sake in terms of economic efficiency and to free itself from the shadow of China regarding economic statecraft. However, Taiwan should proceed with extreme caution over the preferential trade deals with China, not to mention propose them, given China is blockading Taiwan’s FTAs with other countries in general and the participation in East Asia’s regionalism in particular.
Another caveat of the normalization of cross-strait economic relations is regarding how to deal with “China’s capital”. The principle of due diligence procedures is suggested since most part of China’s outward FDI is controlled by Chinese government.

1. Introduction
Faced with the rise of China, as well as intensified and accelerated globalization and regional integration, Taiwan indeed needs to reshape the way it sees the world, so-called Weltanschauung（世界觀）; Otherwise, it will not be able to promptly respond to changes of the international circumstances, let alone benefitting any opportunities presented within.
One of the harsh challenges is how to find ways to capitalize on the opportunities presented by China’s integration into the international production system, while also mitigating the impact that requires industrial adjustments in order to tap these opportunities and, perhaps, also passively responding to various uncertainties brought by China. One of the important issues is about the distribution concerns from closer economic integration. More importantly, it could lead to economic protectionism if the government does not offer compensation schemes and appropriate social security safety nets for the less competitive businesses due to the integration. (See Diagram 1: Challenges and Opportunities of the Cross-Strait Economic Relations) It is noteworthy that the concerns over national security tend to align with the protectionism ideology.
This paper, however, will be addressing another dilemma. The dilemma is about the classical dispute between interdependence and vulnerability: namely, how to ensure Taiwan’s sovereignty and to effectively manage the cross-strait economic relations, particularly under the circumstances of increasing economic integration between both sides and Beijing’s refusal to recognize Taiwan as a negotiation entity, not to mention as a sovereign state.
The first section of this article will characterize the current cross-strait economic relations and their effecting external variables or forces. Accordingly, it is argued the reason why Taiwan should be committed to normalization of cross-strait economic relations for its own sake in terms of economic efficiency and to free itself from the shadow of China regarding economic statecraft; Taiwan should proceed with extreme caution over the preferential trade deals with China., not to mention propose them, given China is blockading Taiwan’s FTAs with other countries in general and the participation in East Asia’s regionalism in particular.
The caveat of the normalization of cross-strait economic relations will be discussed in the second section of the article. It is suggested that it is beneficial for Taiwan to deal with “China’s capital” with due diligence procedures, since most part of China’s outward FDI is controlled by Chinese government. In fact, even a free and open economy like the United States enforces laws and instituted policies regulating ‘sensitive” foreign investment. The experience of the US demonstrates a well embodied lesson for Taiwan’s economic path.
In the final sections, rationales will be elucidated about establishing Taiwanese subjectivity awareness (台灣主體意識) would not only merit the fortification of our sovereignty but also provide the operational advantages for domestic political process and economic development.
I am convinced that the economic integration between China and Taiwan will not lead to, but rather can replace, the political unification for both sides. I may be biased, but such scenario is what I, as a Taiwanese, personally like the best.

Diagram 1: Challenges and Opportunities of Cross-Strait Economic Relations
2. Some Features of Cross-Strait Economic Relationships
Cross-strait economic relations will still be determined by cross-strait relations. The extent of the “mutual trust” of both sides of Taiwan Strait, the “consensus” (political processes including election) within Taiwan, and the pressure of external (global or East Asian) competitions together are crucial status-quo-changing forces.
Significant Politicization
Conceptually speaking, though not practical in reality, cross-strait economic relations can be divided into two primary areas: including the market-dimension, such as trade issue and FDI (foreign direct investment), the other involving the more complicated institutional/political dimensions, where issues like sovereignty, jurisdiction and bilateral negotiations are concerned.
Table 1 elucidates the fact that China has become an important trade partner of many countries including Taiwan. The common reasons behind this include three primary traits contributing to economic rise of China, which are its size, growth/performance and openness. The ever-blossoming cross-strait economic and trade relations, especially the increase of Taiwanese corporate investment China, mainly result from the differences between both sides in terms of production factor endowments and the technical level and the geographic proximity (including cultural and psychological distance).
Table 1: In 2006 China had become an important trade partner of many countries including Taiwan
Population
(per million) GDP
(USD 1 billion)
(PPP) Ave. GDP per capita
Major Export Market
(%) Import Mainly from
(%)
Taiwan 22.7 356
(712) 15,698 1.China (23.1)
2.H.K. (16.7)
3.US (14.5)
4. Japan (7.3) 1. Japan (22.8)
2. China (12.2)
3. US (11.2)
4. S. Korea (7.4)
China 1,314.5 2,719
(9,900) 2,069 1. US (21.0)
2. H.K. (16.0)
3. Japan (9.5)
4. S. Korea (4.6)
5. Germany (4.2) 1. Japan (14.6)
2. S. Korea (11.3)
3. Taiwan (11.0)
4. US (7.5)
5. Germany (4.8)
US 299.4 13,195 4,4071 1. Canada (22.2)
2. Mexico (12.9)
3. Japan (5.8)
4. China (5.3)
5.UK (4.4) 1.Canada (16.4)
2. China (15.5)
3. Mexico (10.7)
4. Japan (8.0)
5. Germany (4.8)
Japan 127.5 4,367
(3,964) 34,258 1. US (22.5)
2. China (14.3)
3. S. Korea (7.8)
4. Taiwan (6.8) 1. China (20.5)
2. US (11.8)
3. Australia (4.8)
4. S. Korea (4.7)
S. Korea



48.7 888
(1,118) 18,220 1. China (14.3)
2. US (13.3)
3. Japan (8.2)
4. H.K. (5.8)
5. Taiwan (4.0) 1. Japan (16.8)
2. China (15.7)
3. US (10.9)
4. Saudi Arabia (6.6)

ASEAN(6)
Indonesia 245.5 365
(928) 1,485 1. Japan (21.6)
2. US (11.2)
3. Singapore (8.9)
4. China (8.3) 1. Singapore (16.4)
2. China (10.9)
3. Japan (9.0)
4. US (6.7)
Malaysia 26.6 149
(302) 5,591 1. US (18.8)
2. Singapore (15.4)
3. Japan (8.9)
4. China (7.3) 1. US (12.5)
2. China (12.1)
3. Singapore (11.7)
4. Taiwan/Thailand (5.5)
Philippine 89.5 117
(442) 1307 1. US (18.3)
2. Japan (16.5)
3. China (9.8)
4. H.K. (7.9) 1. US (16.3)
2. Japan (13.6)
3. Singapore (8.5)
4. Taiwan (8.0)
Singapore 4.5 132
(166) 29,473 1. Malaysia (13.1)
2. H.K. (10.0)
3. China (9.8)
4. Japan (5.5) 1. Malaysia (13.1)
2. US (12.7)
3. China (11.4)
4. Japan (8.3)
Thailand 66.0 206
(599) 3,125 1. US (15.1)
2. Japan (12.7)
3. China (9.0)
4. Singapore (6.4) 1. Japan (20.1)
2. China (10.6)
3. US (6.7)
4. Malaysia (6.6)
Vietnam 84.9 62
(280) 725 1. US (19.7)
2. Japan (13.1)
3. Australia (9.2)
4. China (7.6) 1. China (16.5)
2. Singapore (14.0)
3. Taiwan (10.7)
4. Malaysia (10.5)
Note: 1. Based on market exchange rate/price; 2. Based on market price exchange rate/
Source: EIU (country report/forecast/2007); The APEC Region Trade and Investment (Department of Foreign Affairs and Trade/Australian Government/2007).
However, there is no such thing as “purely economic relations” between China and Taiwan. Both have highly politicized their economic and trade relations. China’s “unification via economy” attitude and Taiwan’s “discrimination” guideline (which should not be interpreted as “autarky policy” and is reduced to a great extent after May 20th 2008) against China are both considered politicization.
Problem of Asymmetric Dependence
Though Taiwan is far ahead of China in terms of economic development (which basically can be represented by average income per capita), there is a deep concern that Taiwan is asymmetrically dependent on China when it comes to cross-strait economic and trade relations. In 2007, for example, the market of China cum Hong Kong absorbed 40.7% of Taiwan’s products and an estimated 80-90% of its annual FDI. The accumulated value has, it is believed, reached USD100~150 billion. .
Such worry is not groundless. Considering the facts that China is not a democratic country and that it proprietarily claims its sovereignty over Taiwan, Taiwan’s asymmetric trade dependence on China may well result in political disadvantages including less negotiating leverage. Advocates for “Cross-strait Common Market”（兩岸共同市場）are faced with detractions primarily because the idea has failed to address this deep worry.
East Asian Production Network Intensifies the Cross-Strait Economic Connections
Under the driving forces of globalization (including advances in technology and trade liberalization), the East Asian production network (supply chain) has been intensified. China plays a significant role as an assembling factory, closely associated with Taiwanese enterprises’ enormous monetary investment in China that provides management know-how. In other words, cross-strait trade relations serve as a link in East Asia’s economic integration, and vice versa.
In corollary, the fact both Taiwan and China are a part of the East Asian production network limits Taiwan’s policy autonomy (or feasibility and validity despite the pro forma desirability).On the other hand, it does offer insurance and possibility to look at cross-strait trade relations outside Taiwan Strait.
However, most of final goods and consumer goods assembled in East Asia are imported to US and Western Europe. (See Picture 1: The Pattern of Production/Trade in East Asia)


Picture 1: The Pattern of Production/Trade in East Asia: Taking the IT Industry for Example: 1990s~ (Source: China’s Industrial Rise-East Asia’s Challenge, Australian Government, Department of Foreign and Trade, 2003)

Change of China policy of the US in the post-Cold-War Era
The change of US policies in favor of China after the end of the Cold War drastically changes the attitude and behavior of mainstream countries toward China.
If Taiwan’s cross-strait trade policies fail to keep up with the general trend (international situation, trade environment shifting), its economic development will be affected to a considerable extent. Market-system interaction will become a conditioning factor in policy implementation. It should be noted that in the 1990s former US President Clinton especially gradually aligned his engagement with China to the concept of strategic integration, emphasizing that trades are separable from the human rights issue, and even security issues. The alternative perspective is that through encouraging or helping China fortify its mutually dependent connection with international economic and trade systems, the concerns of the rest of the international community regarding the consequences “rise of China” can be appeased and ensure international economic prosperity in a broader sense.
3. Normalization as Political Rhetoric, Trade Policy and Economic Statecraft
In contrast to the “cross-strait economic cooperation mechanism” (on which the Chinese government and KMT in Taiwan appear to be in agreement) pronouncedly advocated by China since 2002, there is a general consensus on ambiguous “normalization of cross-strait economic and trade relations” among KMT, DPP and Beijing. From this point of view, the term “normalization” serves well as a kind of political rhetoric. The strategy of “normalization” is politically feasible and also in line with Taiwan’s long-term benefit in terms of trade policies and economic statecraft.
A tentative operational definition for “normalization of cross-strait economic and trade relations” can be described as a process loosely referring to the issues about how, given the special cross-strait relationship, Taiwan can maximize its national interests through negative economic integration, i.e. liberalization of trade and investment barriers, under bearable economic costs or by sacrificing economic benefits.
The reasons why “normalization of cross-strait economic and trade relations” is one of the best strategies for Taiwan are as follows:
1. China is a nation that shows aggression and hostility to Taiwan. However, there is no military conflict between both sides at this moment. Otherwise, Taiwan could enact Trading with the Enemy Act ( TWEA)to regulate the economic affairs between China and Taiwan.
2. Taiwan’s economy has the characteristic of “small and open” and will suffer most from the politicization of cross-strait economic and trade relations. One of consequences is that Taiwan will become weaker. Any hint to protectionism in the long run will be detrimental to Taiwan’s small, open economy.
3. As for the economic considerations, the main purpose of “normalization” is to neutralize the distortions from Taiwan’s discrimination against China in trade and policies. That is no discrimination and no favor to China. Therefore, the preferential trade deals such as FTA/CEPA/”Cross-Strait Common Market”（兩岸共同市場）should also be avoided for it produces extra “preferentiality” which will lock in Taiwan’s economy and future in China.
4. Before there is any breakthrough in cross-strait relations, especially in issues involving sovereignty or the “One China Policy”, we can first lift constraints on “issues that can be handled by Taiwan unilaterally, that does not involve major sovereignty controversies,” including investment cap, prohibition of importation of some products from China, investment of Chinese capital in Taiwan, and exchange of RMB and NTD.
5. From the economic perspective, China is not Taiwan’s panacea because being “big” is only an advantageous condition, not a sufficient condition, for becoming “good.” That is to say, the “normalization of cross-strait economic and trade relations” is beneficial to Taiwan per se. It is not targeted for China.
6. Moreover, the unilateral action for “normalization of cross-strait economic and trade relations” by Taiwan will leave no room for China to maneuver economic statecraft.
7. “Charm Offensive” proposed by KMT to establish FTA/Common Market with China does harm to Taiwan, unless China promises not to boycott Taiwan from signing FTA with important trading partners, especially in East Asian regionalism-oriented relations.
As the WTO multilateral negotiation sunk into a stalemate, and the organization is being weakened by proliferation of FTAs, Taiwan (or its private sectors) is haunted by the fear of being sidelined or marginalized by East Asian regionalism such as the “ASEAN plus One” FTA and the “ASEAN plus N” initiatives.
Riding the trend, China has been actively participating FTA or economic alliances with its neighboring countries, committed to forming the so-called strategic trade relationship, while preventing other countries from developing similar rapports with Taiwan. Taiwan has been excluded from the regionalism by China’s endeavor. China in effect has imposed economic sanctions indirectly to restrict Taiwan’s chance of signing FTA, intending Taiwan to follow the Hong Kong model for joining CEPA.
East Asian Regionalism, together with the boycotts of international organizations for Taiwan’ memberships, has resulted in “cumulative isolation”（Lampton, 2008）. FTA has become a new instrument with which China isolates Taiwan from the international community and forces it into a position of “compliance” in cross-strait relations.
The core spirit of “integration” is voluntary. Forced integration is something similar to “annexation.”
4. One Caveat: China’s Capital
Although calls for relaxation of restrictions on two-way investment between Taiwan and China are becoming de rigueur, concerns remain about how far and how fast the ban should be lifted. Other concerns include the nature of the international capital, the structure of China's foreign investments and the cross-strait relationship.
Recently, sovereign wealth funds up to US$2.5 trillion have been set up by China, Russia, Persian Gulf countries and Singapore, and they are at the same time have acquired financial assets in other countries -- particularly in developed countries – as well as merged with well-known enterprises or invested in strategically important industries. Such investing actions have raised economic and even national security concerns in free and open countries such as the US.
Former US Treasury secretary and noted economist Lawrence Summers has described this phenomenon as "cross-border nationalization." He has called on the IMF and other international organizations to work out a code of conduct. It is therefore evident that the problems are serious.
In recent years, China has become the largest recipient of foreign direct investment (FDI) among developing countries and the fourth largest in the world, after the US, the UK and France.
In 2006, China alone saw an FDI of US$78.1 billion, 6 percent of the global share. With accumulated foreign exchange reserves of approximately US$1.5 trillion -- mainly from the nation's trade surplus -- China has gradually been willing and able to invest abroad.
In 2006, China's foreign investment reached US$20 billion, ranking 13th in the world. Investments were mainly in Asia and Latin America, concentrated in the fields of energy and strategic materials.
Although investment performance has been rather good for a beginner, we can say China's foreign investment is still relatively small. It is because many countries are still wary of the "China threat" and, most importantly, because China still maintains strict controls on capital transfers and capital accounts, especially for private capital.
For instance, China forbids its nationals from directly investing abroad. In addition, private enterprises are still not active enough to support the relatively delicate overseas investments. In 2004, for example, non-governmental enterprises only accounted for one-fifth of the nation's listed companies. Despite their limited international experience, state-owned enterprises still play a primary role in China's foreign investment, while non-governmental enterprises only make up one percent of the nation's total investment.
China's blatant state control over the foreign investment structure has led several US lawmakers to urge the US Committee on Foreign Investment to be highly vigilant of Chinese investments as they could pose a threat to the nation's economic security.
In particular, China's political motivation is likely to be greater than its business incentives, which usually serve as a good cover for officials initiating an investment investigation. The US government is concerned about not only Chinese investment, but also China's industrial espionage, which could result in US state-of-the-art military technology being leaked to a third country if a company were later bought out.
However, this has led China to change its investment strategy when acquiring US enterprises. For example, Chinese companies intentionally grab less than 10 percent of market share to avoid holding management rights. They may have a third partner involved in the investment to diminish US concerns.
As far as Chinese capital investment in Taiwan is concerned, the real estate, securities and equities, and real business sectors have received a great deal of attention in recent years. Since August 2002, Taiwan has officially opened up to Chinese capital investment in real estate. Yet tedious application procedures for Chinese investment and strict restrictions on outgoing capital from China have hampered the process. As a result of these barriers, fewer than 10 transactions have been successfully completed over the years.
Until now, Taiwan has not deregulated short term Chinese investment in stocks and bonds, and long term investment in the manufacturing industries. Since two-way communication plays an important role in economic activities, it is expected that Taiwan will move toward further liberalization. Ideally, Chinese investment in Taiwan may cause personnel mobilization, services and trade opportunities, profit repatriation or taxation, and thus potentially balance the situation.
However, looking at global trends and past experiences in cross-strait relations and the nature of China's economy, it is wise to impose relatively strict regulations on Chinese investments through state-run enterprises and sovereign wealth funds. It is even more essential that Taiwan learns from how the US has handled foreign and Chinese investments through legislation and policies.

5. Conclusion: “Good fences make good neighbors”
With the deregulation of cross-strait trade, the only restrictions remaining are probably the ban on Chinese labors from being freely employed in Taiwan and the import restrictions on select Chinese products, which is not in line with WTO regulations. All other areas of trade, including education — allowing Chinese students to study in Taiwan — and broadcasting — allowing China Central Television to be aired in Taiwan — are part of the deregulation.

These will have an almost unfathomable impact on Taiwan. The decision between whether we take a proactive or a reactive approach to this, is imminent and can no longer be avoided.

The establishment of Taiwanese subjectivity does not necessarily contradict the deregulation of cross-strait trade. It is often said that good fences make good neighbors; by the same token, the concept of subjectivity, which also can be likened to good brakes that are critical for smooth operations of cars, which can be seen as the metaphor of the speed of deregulation. These concepts also apply rather well to the management of cross-strait economic and trade relations. If a country understands its own status and knows what it wants, it will find international exchanges a lot easier to conduct.

The gradual normalization of cross-strait trade is a good thing. For example, Taiwan can unilaterally deal with investment caps on Taiwanese businesses in China and partially resolve the issue of legally converting Yuan to NT dollars in Taiwan, while agreements on direct cross-strait flights and the promotion of Taiwan as the first tourist destination for Chinese tourists require bilateral negotiations. The reason this is good is that these deregulation measures are only tools; the goal is to strengthen Taiwan’s economy.

Take the deregulation of restrictions on the cap on investment in China for example: provided globalization has led to increased capital mobility, which often makes regulatory policies ineffective — even harmful — such deregulation can alleviate Taiwanese business people’s burden amidst unfair competition with other international enterprises in China. By doing so, Taiwanese business people’s capability to conduct cross-strait and regional planning could be enhanced, while the profit from these investments could more likely be transferred back to Taiwan.

From this perspective, no matter to what extent cross-strait economic and trade exchanges are opened up, Taiwanese subjectivity is obviously sufficient to become a bright light in a dark night. To the government, consolidating the nation’s leverage to attract talents and capital is indeed significant in terms of living quality, investment and taxation. In addition, Taiwanese subjectivity could enhance the open policy of cross-strait economic relations, for it reduces the worries of “sovereignty loss” to China.
As far as cross-strait economic and trade negotiations are concerned, avoiding double taxation should be the priority, as it will be conducive to the repatriation of profits for Taiwanese businesspeople and effectively boost the nation’s weak consumer demand instead of relying on the ideals of the cross-strait common market or any kind of preferential trade agreements.

Of course, due to the fact that there have been few cases of Chinese real estate investment in Taiwan, bilateral investment and taxation treaties are certainly not what the Chinese government is interested in. This situation will only get better after Chinese investment arrives in or when bilateral exchanges cause problems.

When the Straits Exchange Foundation and China’s Association for Relations Across the Taiwan Strait resumed negotiation in June on administrative and functional matters, the Chinese representatives simply removed the issue of chartered cargo flights —which is unfavorable to China — from the agenda, as they knew the Taiwanese government had to carry out President Ma Ying-jeou’s (馬英九) campaign promises of weekend chartered flights and opening up the nation to Chinese tourism by July 4.

From this, one can learn that China is a rational, tactical expert on setting the agenda for negotiations. Moreover it also implies that “rational” opponents’ behavior can be expected to some extent through preparation in advance.

This preparation requires analyses of cost and benefit over pros and cons that are applicable to Beijing, who uses such kind of analysis intensively though it is eager to push forward unification via the economy. Instead, Taiwan wishes to boost the economy by allowing Chinese tourists to travel to Taiwan, which is beyond the imagination.

The estimated total annual consumption in Taiwan by Chinese tourists is approximately US$1 billion, only accounting for a minimal portion of Taiwan’s GDP, which exceeds US$380 billion. Should both sides of the Taiwan Strait engage in political negotiations, Taiwan definitely can use better reasoning.

It is clear that the Chinese Nationalist Party (KMT) has attempted to stimulate Taiwan’s economy by improving cross-strait economic and trade relations. However, the realization of the benefits of relaxing restrictions on economic trade and reforming the economy is always time-consuming and unpredictable.

On the contrary, the burdens of social adjustment costs are more immediate and evident, including the worse income/wealth distribution and increased unemployment, at least in the short run. It is very important for the opposition parties to assist those disadvantaged groups in voicing their opinions in order to gain more resources to survive the impact and to update their discourses on national security, especially regarding China, to gain a majority of public support.

All in all, even if it is reasonable to relax cross-strait economic policies, the government cannot act in a rush. In particular, the government must be cautious about regulations concerning Chinese investment in Taiwan as it is going to be a sensitive and contentious topic.

How to map out pragmatic and open policies with a focus on Taiwanese subjectivity and allow Taiwanese to be able to feel comfortable and grab more opportunities for creating added value during the process should be the ultimate goal of the government.