Taiwan Under Siege

Even after the election, Beijing will pressure 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 intimidate scores of anxious Taiwanese from voting for candidates in the Mar. 23 presidential elections who favor Taiwan's independence from China. But the heavy-handed Chinese actions clearly aren't working. On the streets of Taiwan, anger and resentment are hardening against China, making the idea of unifying with China more remote than ever. "This makes me want independence all the more," says Kenny Lee, a Taipei resident.

China's heavy-fisted 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 in its transition from dictatorship to democracy. With voters freely electing the island's President, for the first time in 5,000 years a Chinese society will have a ruler chosen by the people. But worried that a democratically elected Taiwanese President Lee Teng-hui will further push away his professed goal of reunification with China, Beijing has launched the most provocative military campaign in decades.

For now, the biggest victim has been Taiwan's economy. Shipping and airline companies scrambled to preserve Taiwan's transportation contacts with the world in the face of Beijing's announcement that it would conduct live-ammunition exercises off the coast in mid-March. The stock market continued its fall, down 3% in a week. The island's mighty foreign currency reserves are shrinking. "Taiwan," says H.H. Michael Hsiao, research fellow at the Institute of Sociology at Taipei's Academia Sinica, "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 and forcing Taiwan into its embrace without having to start an actual war. The view from the mainland seems to be that military intimidation works.

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 announcement that it would close part of the Strait of Taiwan for 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 (R-Kan.).

BIG TEST. The Chinese rhetoric was heated in response. Foreign Minister Qian Qichen lashed out at American "interference." With so many trade and economic issues flaring at the same time, the stage has been set for the most crucial test of the Sino-American relationship since the Tiananmen Square massacre in 1989.

At a bare minimum, the hard line from Beijing will challenge Taiwan's ability to maintain the diplomatic balancing act it has performed over the past decade. Since Taiwanese first started traveling to China in 1987, the island has become linked to the mainland through huge flows of trade and investment. 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. To steal the thunder from the opposition Democratic Progressive Party (DPP), which supports independence for Taiwan, Lee has launched a drive to win greater international recognition, including membership in the U.N.

Lee still hopes to stick to the old formula. After the election, officials hint, he'll make some conciliatory gestures to Beijing--possibly even lifting Taiwan's ban on direct trade and transportation with the mainland. That's something that China has long sought. "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. "There's no going back," says Diane Yowell, director of Hong Kong Bank China Services Ltd. "China's Taiwan policy is forever changed."

One of the big surprises for China-watchers has been Beijing's willingness to put its own economic gains at risk. Conventional wisdom has long held that China would not resort to military force, because critical foreign trade and investment ties might be affected. Taiwanese executives have invested an estimated $25 billion in China. Total trade between the rivals hit nearly $21 billion last year. But since tensions began to flare last summer, the number of new Taiwanese investments has 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."

LITTLE COMFORT. If China keeps up its belligerent posturing, it could also risk losing fresh Western investment. Companies already operating in China probably won't be affected, "but if you are trying to start a new business in China, this might make people back in the States think twice," says Carl Walter, director and chief representative of CS First Boston's Beijing office.

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 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, which were 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. For Taiwanese investors in China, the tensions are forcing reconsideration of new projects there while they figure out how to live in an environment where missiles are flying.

In the short term, the outlook isn't good for giants such as Formosa Plastics Group, one of Taiwan's largest private companies. The petrochemical company 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. A deeper crisis could also delay a plan to build a $3 billion coal-fired power plant in Fujian province.

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.

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 that could help it in the tough times ahead. 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. "We are moving forward as planned with our China-based production," says George Hsu, chief of staff to Acer Chairman Stan Shih, who remains confident that the antagonists will settle their problems and the matter will blow over.

Lee has said his first priority after the election will be to calm cross-strait tensions. It's possible that a gesture such as direct talks could defuse military tensions. But Taiwan and China remain far apart on many fundamental issues. With the island enjoying unprecedented prosperity and democracy, Taiwan has become a pluralistic society with its own aspirations--a direct challenge to China as it confronts its internal critics.

Setting the scene for "Taiwanization" has been the island's economic success. 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 now 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 China with Chiang Kai-shek in 1949. Native Taiwanese were forbidden to use their dialect in schools, government, or the military. With democracy, that has changed. Taiwanese culture--as distinct from that of the mainland--has steadily gained in popularity among politicians, writers, singers, and intellectuals.

China's comfort level was much higher when mainlanders ran Taiwan by controlling the ruling Kuomintang (KMT). Even though the mainlanders were old enemies, they could nonetheless be counted on to maintain the hope of eventually reunifying with China. Beijing's leaders doubt that native Taiwanese have that same feeling. 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."

NARROW MARGIN. Responding to such sentiments, Lee, 73, wants his legacy to be a Taiwan that is democratic, prosperous, and pluralistic. He has worked to get global recognition for Taiwan's achievements through membership in the U.N. and World Trade Organization. Reunification with China has never been a top priority for him, though he publicly hasn't veered from the long-standing KMT party line on reunification. Some critics, however, charge that he has been too focused on domestic politics, trying to breathe new life into a political party that is losing power with every election. In the December legislative polls, the corruption-tainted KMT eked out only 85 seats of 164, barely a majority. Thus, the KMT's grip on power could be coming to an end.

If so, China will have an even more difficult time making sense of Taiwan. Lee's critics blame him for the downturn in relations. "Taiwan must go to the negotiating table and work out a truce agreement with Beijing and come back to its one-China policy," says Shaw Yu-ming, a former cabinet member who is now director of the Institute of International Relations at Taipei's National Chengchi University.

But if Lee 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 if it wants to avoid political gridlock--and that may mean that making concessions to China will 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 continues to step 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. This spring, the numerous congressional critics of China will probably stage a vocal fight to pull the plug on Beijing's most-favored-nation trade status, which comes up for renewal in June. That would be disastrous for overall relations.

Clinton 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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