Despite the political hostility between the two sides of the Taiwan Strait, economic exchanges are extremely close. As a result, many Taiwanese are worried that such business exchanges could bring risk and uncertainty to Taiwan’s economic security. However, cross-strait economic exchanges are dominated by market forces, which cannot be unilaterally controlled by the government, and it must find ways to handle this kind of risk.
Furthermore, the Chinese economy is a key global production resource, so Taiwan must find a risk management and control method to take advantage of Chinese talent, techniques and capital.
There are at least three ways to manage and control risk and uncertainty in cross-strait economic exchanges: an incremental approach, a leverage approach and a pilot approach. First, reviewing the past gradual opening to cross-strait economic exchanges, Taiwan can gradually expand deregulation within a controllable range of risk. For example, the deregulation of cross-strait trade and opening up to Chinese tourism has expanded progressively from a small scope to allow a gradual assessment of risk management and control.
However, it might be difficult to reverse certain policies once they have been implemented, and some Taiwanese industries might not trust the opening up, while other local industries are impatient with the gradual opening approach, making that approach increasingly infeasible. For example, some local enterprises in the service sector might have to close down if Taiwan allows Chinese enterprises to invest in the sector, and that might be irreversible. In addition, Taiwan’s high-tech industry often complains about the slow deregulation of restrictions on Chinese talent, but if the opening up process moves too fast, society in general might have concerns, thus creating a dilemma for cross-strait policy.
The second method is a leverage approach. Taiwan could leverage the security and defense mechanisms of the US and other countries as a safety valve.
During the Democratic Progressive Party’s first two terms in government, it opened the door to Chinese visitors with a business or tourist visa to a third country and for those with a student visa or permanent residency in a third country. Such a method could help reduce economic risk and increase cross-strait economic exchanges.
If Taiwan is to open up further to Chinese talent and business, perhaps it could use US security mechanisms as a safety valve for economic security. For example, the nation could grant work or resident visas to Chinese talent with a degree from a top US university, while large Chinese enterprises that have operated in the US for a certain period of time could be allowed to invest here.
The third method is a pilot approach. Taiwan could gradually implement cross-strait economic deregulation within the scope of certain policies, economic sectors or regions to assess the risk and effect of economic exchanges.
For example, Taiwan could allow Chinese companies at different levels to invest in Taiwan, allowing the following categories of enterprise to have the same treatment provided to other foreign enterprises investing in Taiwan: private Chinese companies that have invested a certain amount of money overseas over a certain period of time; Chinese high-tech companies; and Chinese companies setting up their global operations or research and development centers in Taiwan. The risk to the economy with the deregulation of these areas is relatively low, while the benefits would be relatively high, so it would be less controversial domestically.
Moreover, Taiwan could selectively open different sectors to China. Chinese enterprises could be allowed to invest in strategic new industries, while cutting-edge Chinese high-tech companies could be permitted. The nation could also open itself to investment from specific regions in China. It could start with enterprises in Shenzhen, Xiamen and Hangzhou, whose international investment exceeds US$100 million, and then move on to other provinces and cities.
The risks would be fewer and external benefits higher if Taiwan were to open to large international companies in economically developed pilot areas. After a concrete risk assessment, Taiwan could decide whether to expand the scope of deregulation.
If a domestic consensus cannot be reached on these approaches, Kinmen might be the best experimental spot for a variety of policies for cross-strait economic integration. Besides Kinmen, there are many other policies for cross-strait trade integration that could be partially or gradually implemented in some cities and counties and then extended to other areas depending on the results. This would offer a good way to maximize policy efficiency and minimize risk. For example, Taiwan could allow Chinese investment in budding new industries in designated cities, counties and science parks.
Taiwan should emulate well-known international tax paradises by choosing an outlying island, such as Kinmen, Matsu or Penghu, to function as an international free-capital market, including opening up to Chinese capital and the establishment of a US dollar-denominated stock market. The Cayman Islands has an area of 264km2 and a population of 57,000, but global hedge funds worth US$2.3 trillion are registered there, and it is the world’s fifth-largest banking center, with total assets of more than US$1.5 trillion. Taiwan’s outlying islands cannot become a new Cayman Islands overnight, but the potential is there if the nation could learn from the Cayman experience and system.
Tung Chen-yuan is a visiting academic at the University of California at Berkeley.
Translated by Eddy Chang
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