Taipei Is Tasting The Mainland's Wrath

After decades of banning transportation links with China, Taiwan was all set to allow ocean-going freighters from the mainland to join the stream of ships from Hong Kong flowing in and out of its southern port of Kaohsiung. With indirect trade between the two countries booming, Taiwanese companies have long been clamoring for such a move. But Beijing officials, angered by Taiwan's latest attempts to gain international recognition, won't allow the plan to go forward. "Our facilities are all in place," says a dejected David Lai, a Kaohsiung port official. "Only political problems keep us from getting it going."

The sudden souring of relations adds to growing doubts in Taiwanese executive suites about doing business on the mainland. Already squeezed by rising costs on their China ventures, many executives were thinking about avoiding risk by investing in friendlier Southeast Asian nations. "Most larger companies are waiting to see how the political situation changes before putting more into China," says Kao Charng, research fellow at the Chang-Hua Institution for Economic Research, a Taipei think tank.

VEILED THREATS. Right now, the situation doesn't look good. High-profile trips abroad by President Lee Teng-hui and other Taiwanese officials and continuing efforts by Taiwan to gain diplomatic recognition have led to veiled threats by Beijing to use its military against the island. On July 19, Taiwan's stock market dropped 4%, after China said it would conduct missile tests in the East China Sea--north of the island. "The mainland Chinese government seems ready for action," says Chih-yu Shih, a political scientist at National Taiwan University.

Business is caught in the crossfire, with Beijing calling off talks on investment protection for Taiwanese companies and other economic issues. As a result, few new deals are being done. "Every decision has to be postponed," says J.T. Wang, president of Acer Sertek, a marketing arm of computer maker Acer Inc. His company has delayed an aggressive promotional effort planned for major Chinese cities.

Even before Lee's U.S. trip prompted such a harsh response from Beijing, many Taiwanese executives were upset by the treatment they were receiving. In May, the Chinese angered Taiwanese companies by suddenly enforcing the collection of value-added taxes of 17% on imported raw materials. Around the same time, new tariffs on textiles and plastics increased import fees for many Taiwanese manufacturers by 27%. The higher taxes, along with a 50% jump in labor costs in China's coastal provinces, are hurting profits.

Faced with such problems, Taiwanese companies are expanding elsewhere. Their investment in Vietnam and in the six members of the Association of Southeast Asian Nations quadrupled last year and now totals more than $24 billion, nearly as much as their investment in China.

"PRAGMATISM." Taipei is encouraging more such ventures. When CIS Technology Inc., a computer-peripherals maker in suburban Taipei, was deciding last year where to set up a $12 million floppy-disk factory, it didn't seriously consider China. "The quality of workers there isn't so good," sniffs David Liu, the finance manager. Instead, CIS chose an industrial zone in Vietnam being developed by a company run by Taiwan's ruling party, the Kuomintang.

To be sure, China is still part of the long-term strategy for many of Taiwan's biggest companies. One of the largest investors in the mainland, food-and-beverage giant President Enterprises Corp., is forging ahead uith plans to expand manufacturing throughout China. Many companies have become used to the uncertainty of relations across the Taiwan Straits. "Taiwanese businessmen are the epitome of pragmatism," says Nick Chen, Taipei branch manager for Perkins Coie, a U.S. law firm. "In the end, they'll be able to subordinate [political worries] to economic interests."

But the current tensions may last much longer than earlier ones. In the struggle to succeed Deng Xiaoping, no Beijing politician wants to be seen as soft on Taiwan. And with Taiwan's first-ever presidential elections set for early next year, the Taiwanese government isn't backing down. Beijing "can't bully us around," says government spokesman Jason C. Hu. With that kind of bravado from Taiwanese leaders, ships from the mainland may not be heading to Kaohsiung harbor for a long while.

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