Wed, Jan 24, 2007 page8

• The paradoxes of cross-strait policy

  • By Lin Cho-shui 林濁水
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  Taiwan's average annual investment in China decreased from NT$3.138 billion (US$95 million) between 1993 and 1999 to NT$2.981 billion in 2000 after President Chen Shui-bian (陳水扁) liberalized trade with China. This decline cannot be explained by either the ban on direct transport links across the Taiwan Strait or the 40 percent investment cap on China-bound investment. For some competitive hightech Original Equipment Manufacturers (OEM), these restrictions do not affect their ability to move to China.

  Hon Hai Group, for example, has 140,000 employees in China and just a few thousand managerial and research employees at its headquarters in Taiwan. Although Hon Hai has relocated all of its production facilities to China, it has not hit its 40 percent investment ceiling. That's because OEMs like Hon Hai have high annual capital turnover rates of at least five or six times their equity. As a result, these firms have high working capital requirements of up to 70 percent of equity, but invest just 30 percent in plant. As long as operating costs are booked in Taiwan, their investments in China will never hit the 40 percent cap.

  If they repatriate profits, they can set them against the 40 percent cap. In other words, the 40 percent cap essentially means nothing to these companies.

  This is why the Investment Commission approved record levels of investment in China in 2004, yet executed investments in China hit a record low in 2005.

  In contrast, semiconductor manufacturers have extremely high equipment costs up to 70 percent of equity. But because the industry is so technology intensive, manufacturing costs in Taiwan are actually lower than in China. As a result, Taiwan's foundries are in no rush to go to China. Japan's Elpida Memory Inc, for example, chose to set up fabrication facilities in Taiwan as part of a joint venture with Powerchip Semiconductor Corp instead of heading to China and cooperating with Semiconductor Manufacturing International Corp there. There is simply no need to impose a 40 percent investment cap on semiconductor companies.

  While opening direct transportation links or relaxing the 40 percent investment cap won't have much effect on the high tech industries Taiwan badly wants to keep, maintaining these restrictions hurts Taiwanese manufacturers in traditional industries who started out dependent on domestic markets like cement, glass, food, paper and rubber.

  Former national policy adviser Huang Tien-lin (黃天麟) claims that I am only concerned about Taiwan's high tech industry and that I do not value traditional industries. This is not the case. Former president Lee Teng-hui (李登輝) was the first one to neglect traditional industries during his presidency and in my new book, Community (共同體), I have criticized him for doing just that.

  Huang also argues that the 40 percent investment cap is not an issue because firms can increase the amount they can invest in China by increasing their capital. In reality, though, the 40 percent cap applies to companies with a net value of less than NT$5 billion. The investment cap on companies with a net value between NT$5 billion and NT$10 billion is 30 percent, while companies with a net value of over NT$10 billion are limited to just 20 percent. Taiwan's traditional manufacturers, moreover, have saturated the nation's domestic markets. There is no space left for them to increase capital and production domestically.

  It should also be kept in mind that when OEM tech manufacturers like Hon Hai move to China, they tend to move all of their production facilities. But traditional manufacturers don't need to close their existing facilities in Taiwan when they enter the Chinese market. The 40 percent investment cap doesn't restrict firms that do leave, but it does, rather perversely, hold back traditional manufacturers who will stay. Investment restrictions should therefore be applied based on industry characteristics rather than having a 40 percent investment cap that applies across the board.

  The ban on direct transportation links with China is another paradox. The ban was originally imposed out of fear that the direct links would undermine Taiwanese identity. Yet during the 1990s, when cross-strait trade was expanding the fastest, Taiwanese identity was strengthening with equal vigor. In less than 10 years, people supporting a separate Taiwanese identity increased from less than 10 percent to around 45 percent. At the same time, those who said they wanted to unify with China fell from 65 percent to 35 percent. These polling results demonstrate the fallacy of the proposition that Taiwanese investment in China weakens the Taiwanese independence movement.

  Lin Cho-shui is a member of the Democratic Progressive Party and a former legislator.

  Translated by Michael Fahey
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