Taiwan Under Seige

Even after the vote, Beijing will bully Taipei and punish its economy

As day broke on Mar. 13, China fired its fourth M-class missile in less than a week into the waters near the coast of Taiwan. Beijing's immediate goal is clear. It is to discourage millions of anxious Taiwanese from voting for candidates in the Mar. 23 presidential elections who favor Taiwan's independence from China. But heavy-handed Chinese actions clearly aren't working. On the streets of Taiwan, anger and resentment are hardening, making the idea of unifying with China even more remote. "This makes me want independence all the more," says Kenny Lee, a Taipei resident.

China's approach is also rippling across the economies of East Asia. Although no investment is running off, there's a caution light flashing about how much new money to put in. The irony is that Taiwan's election ought to be a crowning moment for an Asian state's transition from dictatorship to democracy. But worried that Taiwanese President Lee Teng-hui will further push away reunification, Beijing has launched the most provocative military campaign in decades.

The Taiwanese economy has been the victim of China's campaign. In the face of Beijing's announcement that it would conduct live-ammunition exercises off the coast, shipping and airline companies scrambled to preserve Taiwan's transportation contacts with the world. The island's mighty foreign currency reserves are shrinking. The stock market has been falling since Lee's visit to the U.S. last year first infuriated China. "Taiwan," says H.H. Michael Hsiao, sociologist at Academia Sinica in Taipei, "is a society under siege."

The news may just get worse for Taiwan. While the U.S. decision to send two aircraft carriers and about a dozen other ships to the region may lead Beijing to take a step back from the brink after Lee's likely election, some analysts suspect China has written Lee off as a negotiating partner. Instead, Beijing's leaders may be hell-bent on a long-term policy to create upheaval within Taiwan, bringing the economy to near-collapse.

FRIENDLY HINTS. That might confront Washington with the problem of how to maintain significant military forces in the Taiwan theater for the long haul. At first, the Americans hoped that missile tests would end quickly and there would be little need for a military response. But China's exercises, including amphibious landings and naval maneuvers, raised the ante. President Clinton sent in the ships to show the depth of American concern. The move won bipartisan approval on Capitol Hill, including support from Clinton's likely rival, Senator Bob Dole.

The hard line from Beijing will challenge Taiwan's ability to maintain a diplomatic balancing act. Lee has encouraged greater contact with China, including the first talks between the two sides since 1949. At the same time, Lee has pursued his own agenda to win votes at home, launching a drive to win greater international recognition, including membership in the U.N. After the election, Taiwanese officials hint, he'll make some conciliatory gestures to Beijing. "The new government will further open the door," says Economics Minister Chiang Ping-kun. But few expect a return to the peaceful days of the early 1990s, when China and Taiwan seemed to be moving closer together.

China's economic gains are also at risk. Taiwanese have invested an estimated $25 billion in China, and two-way trade hit nearly $21 billion last year. But since tensions began to flare last summer, new Taiwanese investments have dropped by 48%, and 25 companies have withdrawn investment applications worth $10 million for China. "It's a lose-lose situation," says William Reinfeld, the Taipei-based director for Greater China at Andersen Consulting. "This hurts China as much as Taiwan." China could also run the risk of losing fresh Western investment.

The ramifications for the region are equally ominous. Countries such as Indonesia and the Philippines, which have their own territorial disputes with China, take little comfort in watching Beijing settle its differences in this fashion. China's military pressure also creates a serious challenge for Japan. Prime Minister Ryutaro Hashimoto has kept his comments to a minimum, but members of his party are calling for a freeze on aid and loans. China's actions also undercut growing Japanese opposition to U.S. military bases in Japan.

For Taiwan, the crisis is a painful reminder of its economic vulnerability. Foreign-currency reserves, the largest in the world last summer, have dropped 13% as the currency has weakened and nervous Taiwanese have moved billions overseas. With some 20% of Taiwan's exports going to China, the health of the economy is now in doubt. In the short term, the outlook isn't good for Formosa Plastics Group, one of Taiwan's largest private-sector companies. The petrochemical giant looks to China for 40% of its sales. Some 10% of the group's total revenues are at risk, says Benny Y. Chang, the company's corporate financial officer. "Some customers in mainland China aren't placing orders now as they would have in the past," he says.

If China's economic war on Taiwan continues, the island's high-tech companies may no longer be able to smoothly obtain the imported components they need to survive. Taiwan is the world's third-largest producer of information-technology products, behind only the U.S. and Japan. The island's companies produce 65% of all motherboards for personal computers and more than 60% of all computer monitors.

HEALTHY GROWTH. The crisis with China is taking an especially heavy toll on Taiwan's financial sector. The stock market is down 17% since last June, when China first started making threatening noises following Lee's visit to the U.S. As a result, the government has created a $7.2 billion stabilization fund to keep the bourse from collapsing.

Taiwan still has many advantages. Growth is moving along at a healthy 6% clip. Education standards in Taiwan are high, enabling the island to produce a skilled workforce. Taiwan continues to climb the technological ladder, with high-tech goods accounting for 25% of total exports. And many high-tech companies, including Acer Inc. and Taiwan Semiconductor Manufacturing Co., are proceeding with their investments--even in China.

Lee has said his priority after the election will be to calm cross-strait tensions. But Taiwan and China remain far apart on many issues. With the island enjoying unprecedented prosperity and democracy, Taiwan has become a pluralistic society with its own aspirations. Taiwan boasts a per capita income of $13,000--compared with a mere $450 in China. A new Taiwanese identity has taken shape, defined mainly by native-born Taiwanese, who make up 85% of the population. Until the late 1980s, when Lee became the first native-born president, the island was ruled by mainlanders who fled with Chiang Kai-shek in 1949. Beijing's leaders doubt that native Taiwanese have the same yearning for reunification that the mainlanders had. Many residents of Taiwan agree. "China is a real foreign country," says Hsiao. "I don't mind going there, but it is not my home."

Responding to such sentiments, Lee, 73, wants his legacy to be a Taiwan that is democratic, prosperous, and recognized in the global community through membership in the U.N. and World Trade Organization. Reunification has never been a top priority for him, though he publicly hasn't veered from the ruling Kuomintang (KMT) line on reunification. Some critics charge that he has been too focused on trying to breathe life into the creaking KMT, a party that is losing power with every election. In December legislative polls, the corruption-tainted KMT eked out only 85 seats of 164, barely a majority. If he and his running mate Lien Chan win with less than half of the vote, Lee will not have the mandate needed to push bills through the legislature. The KMT will have to form coalitions with opposition groups to avoid political gridlock. Making concessions to China then may be even more difficult.

If anything, Beijing is now doing more to alienate the Taiwanese than to bring them into the fold. "The military exercises just push people away from China," says Antonio Chiang, publisher of the respected weekly The Journalist. Similar sentiment is building in the U.S., as China steps up tensions with Taiwan.

PULL THE PLUG? The U.S. clearly has compelling strategic and economic imperatives for maintaining stable relations with China--but it also has crucial economic and political reasons to support Taiwan. The Clinton Administration is already upset with Beijing for its dismal human-rights record, its sales of nuclear and chemical weapons technology to Pakistan and Iran, and its poor progress in protecting intellectual property rights. In the coming weeks, the numerous congressional critics of China will probably wage a vocal fight to pull the plug onBeijing's most-favored-nation trade status, which comes up for renewal in June.

Administration officials hope that after the Mar. 23 vote, China's campaign will end. Beijing has privately indicated to Washington that it does not intend to invade Taiwan. But many experts believe that the U.S. will have to work aggressively to keep the peace for the foreseeable future.

The immediate goal for the Americans, the Taiwanese, and other Asians is to get relations with China back on track. In the best of circumstances, that would be a difficult task. When aircraft carriers are on the move and missiles are flying, it's even more daunting. And if a stray missile lands in the wrong place, it may become impossible.

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