For Business, The Taiwan Strait Narrows

As tension subsides, the island reaches out to China

Peter Wu will be listening closely to Taiwan President Lee Teng-hui's inaugural address on May 20. Wu, president of Taipei-based China Synthetic Rubber Corp., hopes Lee will advocate direct investment and transportation links with China. Many of his customers have moved operations there, but without formal ties, he worries that an investment of his own might not be safe. "To sustain the economy, Taiwan has to find new areas of growth," says Wu. "China is a natural place."

Two months after Chinese missile tests had many Taiwanese worrying about war, the pressure is on Lee to repair relations. China has cooled its belligerence for now, but it has other means to get Lee's attention. In April, Beijing-run companies acquired large stakes in Hong Kong's two airlines, one of which routinely flies to Taipei. The move served as a blunt reminder that Taiwan, which relies so much on Hong Kong for ties with China and the rest of the world, needs to come to terms with Beijing before it takes over the British colony a year from now.

NO DRAMA. So even though Lee's May 20 address is likely to offer no major concessions to the mainland, behind the scenes, the Taiwanese are starting to map out ways in which direct trade might develop. With China still reserving the option of military force against Taiwan, Lee won't make dramatic moves. The goal instead is to take small economic steps that advance Taiwan's business interests while keeping Beijing calm. In the weeks since his March election, Lee and his surrogates have floated trial balloons including direct trade with China, a resumption of talks, and even a summit meeting.

Some of the signals are coming from such key Lee strategists as Koo Chen-fu. The 80-year-old head of a $4.6 billion group of companies--including Peter Wu's--was the chief Taiwan negotiator in talks with the mainland before they were broken off after Lee's visit to the U.S. last June. Koo says Lee wants to resume the dialogue and has suggested the two sides consider exchanging offices in Taipei and Beijing.

But Taiwan already is blurring the distinction between direct and indirect trade. Lee's new Vice-President, Lien Chan, recently told the legislature that the government will study opening special zones on the island that could trade directly with China. In other cases, Taiwanese simply sail straight to the mainland. Some economists estimate that illicit direct trade accounts for as much as 5% of Taiwan's total exports, or $5.5 billion. "It seems that everything is indirect, but in fact it's very close to direct," says Wu Rong-yi, president of the Taiwan Institute of Economic Research.

There's some sleight of hand in the airline business, too. Air Macao has been operating flights from Taipei that touch down briefly in Macao, change their flight numbers, and continue on to Shanghai and Beijing--a direct flight in everything but name. On the mainland, the Shanghai government is talking about setting up a second municipally owned airline to serve Taiwan. The planes would not carry any Chinese insignia.

JIANG SUMMIT? To maintain his delicate balancing act, Lee will likely resist pressure to move faster. He has said he welcomes the chance to meet China's President Jiang Zemin, but only if Jiang manages to remain in office after Deng Xiaoping dies. In a possible effort to stall further, Lee has called for a July meeting of all Taiwanese political parties to reach a consensus on how quickly to open direct trade--a difficult task, given the sharp differences in Taiwan.

Despite dallying at the political level, the business community remains optimistic that economic ties will improve. In March, United Parcel Service Inc. signed a contract to develop a $400 million hub outside Taipei that could take advantage of direct flights to China. Taiwan shipping giant Evergreen Marine Corp. is continuing a huge expansion, investing $50 million in port facilities in Shanghai, Qingdao, and Tianjin. Meanwhile, Taipei's stock market has climbed 21% since Lee's election. "It's in the interests of both sides to come to terms with each other," says Peter Kurz, manager of ING Barings in Taiwan. At the end of the day, business leaders are betting that both Taipei and Beijing understand self-interest.

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