Balancing power across the Strait

By Russell Hsiao 蕭良其  / 

Thu, Feb 28, 2013 - Page 8

The thaw in cross-strait relations over recent years has taken many observers by surprise. The perceived trajectory of Taiwan-China relations is shifting and raising concerns about Taiwan’s susceptibility to the People’s Republic of China’s (PRC) increased ability to coerce and compel unification.

Taiwan’s close economic cooperation with China, while necessary, is drawing the nation deeper into a dependent economic relationship with the PRC that some argue will make it more vulnerable to Chinese political demands.

While the nation has long enjoyed a massive trade surplus and advantageous economic relationship with China, the trend-line is moving downward for Taiwan as China’s economy grows and gradually diversifies from Taiwan’s investments.

This changing dynamic leaves Taipei more exposed to Beijing’s coercive strategies as the former becomes more dependent on the latter.

Indeed, in recent years China has demonstrated that it will not hesitate to use its economic leverage to attain political objectives (ie, its limitation of rare earth exports to Japan).

Given the special relationship between Taiwan and China, the former’s diminishing leverage in cross-strait relations may leave its leaders with less capacity to resist coercion and intimidation over a final political settlement to the long-standing cross-strait dispute.

In order to maintain US interests in preserving a stable “status quo,” and more importantly a non-violent and voluntary resolution to the situation, Washington needs a comprehensive strategy that includes both hard and soft balancing tactics that can offset China’s ability to use coercion to intimidate and force Taipei into a final political resolution.

While the US “pivots” toward Asia, there is an economic as well as a security imperative for a stronger and closer partnership with Taiwan.

Robust trade between Taipei and Beijing is becoming a permanent fixture in cross-strait relations as the trade volume between the two nations has been increasing at a rapid pace ever since China lifted restrictions on trade with Taiwan in the late 1970s.

In January 1979, after Chinese leader Deng Xiaoping (鄧小平) had initiated economic reform and the country’s opening up, Beijing proposed establishing the “three links” (direct trade, postal services and transportation) between Taiwan and China.

While it took almost three decades for such links to come online, Taiwanese businessmen from seeking to increase their profit margins by taking advantage of the abundant low-cost labor market in China for manufacturing-intensive exports to developed economies flocked to the major coastal cities.

In spite of the tense political and military relationship, trade between the two nations grew by leaps and bounds over the following decades.

Between 1981 and 2002, Taiwan’s trade with China increased 134-fold.

Even during the Democratic Progressive Party’s (DPP) administration from 2000 to 2008 — during which time cross-strait relations were frequently punctuated by political boxing matches — trade relations grew faster than in any other period in the previous two decades.

More specifically, “mini links” were created to allow travel and trade between Kinmen and Matsu and China’s Fujian Province in 2001.

The total volume of trade between the two nations increased threefold since Taiwan lifted its ban on direct trade and transport links between the two sides in 2000 — increasing from US$31 billion in 2000 to US$105 billion in 2008.

After the Chinese Nationalist Party (KMT) regained power in 2008, in part due to running on a pro-China trade platform, the momentum behind a comprehensive trade regime across the Taiwan Strait began to pick up steam.

The 2008 election result reflected growing concern among Taiwanese voters that the country’s economic progress was stagnating and they were losing out to their Asian neighbors because their political leaders were not capitalizing on China’s growth.

After multiple rounds of talks, the two sides signed the Economic Cooperation Framework Agreement (ECFA) in 2010. President Ma Ying-jeou (馬英九) argues that the ECFA will enhance the institutionalization of the flow of trade, investment and people between the two sides.

Ma’s supporters argue that such agreements are key to maintaining parity with other countries in the region, including ASEAN countries, which are moving ahead with deeper trade arrangements with China.

While the ECFA and other economic agreements will surely bring the two sides of the Taiwan Strait closer through increased interaction on economic cooperation and trade, the jury is still out on whether such closer economic ties will eventually lead to closer political integration.

Proponents of this theory tend to point to the increasing trade volume between Taiwan and China as an indication of inevitable political integration.

The argument goes that increasing trade volume is one manifestation of economic integration that will invariably lead to political integration.

Yet the deterministic outlook warrants asking: What specifically accounted for the increased trade volume between Taiwan and China?

Could it have been largely attributed to Taiwanese manufacturing companies based in China importing high-tech components from Taiwan? If that is the case, then there may not be as much economic integration as one may think between Taiwan and China.

Since Deng opened up the nation, the Chinese economy has grown increasingly reliant on exports to increase its GDP growth.

According to the World Bank, export accounts for 31 percent of China’s GDP. Indeed, between 2000 and 2007, the value of Chinese exports more than quadrupled, rising rose from 20 percent to 35 percent of GDP.

Additionally, in 2008, the value of China’s high-tech exports surged to US$415.6 billion, accounting for 28.6 percent of its total exports.

In 2002, 76 percent of the value of China’s high-tech exports was achieved by firms with at least 25 percent foreign ownership. (On the import side, the share of foreign-invested enterprises was 67 percent).

That means a significant percentage of China’s GDP is generated by foreign-owned companies.

In 2002, Taiwanese companies produced 47 percent of their value of electronic hardware in China. In 2006, they were responsible for 60 percent of China’s electronics exports.

Yet the leverage that Taipei currently enjoys from its asymmetric economic relationship with China is diminishing.

In 2007, China’s trade deficit with Taiwan reached US$78 billion. This deficit grew during the period 2001 to 2007 (China’s deficit is due to the buying of large quantities of semi-finished products from Taiwan).

However, this advantage is diminishing as China’s economy attracts direct investment from other countries and diversifies away from Taipei’s current lock on its IT supply chain. Indeed, the nation’s trade surplus with China contracted in 2011.

As the balance of power shifts as China rises, it behooves leaders in Washington and Taipei to utilize all elements of power and influence to offset Beijing’s growing coercive capabilities over Taipei.

Strengthening economic ties with Taiwan through the Trade and Investment Framework Agreement (TIFA) and purposeful movement toward a bilateral investment treaty has been an understudied element of US leverage in preserving peace and stability in the Taiwan Strait.

This method is arguably the most beneficial and least politically sensitive means to prolong stability in the Taiwan Strait.

As the US pivots toward Asia, there is a clear understanding that Washington’s overall strategy toward Taipei needs to be supported not only by greater defense capabilities but also economic cooperation with a key Asian partner.

Nowhere are the benefits of closer economic cooperation for “soft balancing” more apparent than in the case of the Taiwan Strait.

A stronger trading relationship between Taiwan and the US would offset the nation’s increasing dependence on the Chinese market.

The resumption of the TIFA talks next month is a step in the right direction, but in order to enhance security in a non-violent and voluntary manner, Washington and Taipei need to offset China’s ability to use coercion to intimidate and compel Taiwan to unify with China on its terms.

This is an economic as well as a security imperative for the US.

Russell Hsiao is a senior research fellow at the Project 2049 Institute in Arlington, Virginia.