Commentary: Taiwan's Best Defense Against Beijing

These are gloomy days for Taiwan. Just a few months ago, the island was successfully holding out against the worst effects of the Asian crisis. But now devalued regional currencies are making Taiwan's goods less competitive, and each downward tick of the Japanese yen makes recovery seem that much further away. More important for the island's psychological state, there's the sting of political news. With a few pointed remarks in Shanghai, U.S. President Bill Clinton nudged America closer to full acceptance of China's Taiwan policy, which calls for reunification on Chinese terms. Clinton's trip undermined Taiwan's self-confidence and deepened its anxiety over the future.

Yet there's an opportunity for Taipei to take bold action. It won't be able to counter newly cozy U.S.-Beijing ties. Instead, it should play to its strengths. Since Taiwan's survival depends largely on its economic might, it can benefit politically by increasing its regional economic clout.

WORST FEAR. Taiwan can do this in two ways: by loosening restrictions on local companies investing in China and by encouraging multinationals to use Taiwan as a jumping-off point for investing in China, especially now that expensive Hong Kong is in trouble. A Taiwan that is plugged into the region's fastest-growing economy and that becomes a regional center for multinationals can't help but be more relevant in the eyes of the world. It is already a world player in semiconductors, an indispensable part of the global PC business. Thus, Taiwan can insure itself against what it fears most--political dominance by, or forcible integration into, mainland China.

Leaders in Taipei, especially in the military, argue that closer economic ties would make the island all the more vulnerable to political pressure from Beijing. The fear is justified, and Taiwan should move carefully. But it can get closer to China economically without capitulating or acquiescing to Beijing's political demands. More links will encourage understanding between the sides, which can lower tensions. "China can influence Taiwan, and Taiwan can also influence China," says Cheng Tuan-yao, a political scientist at National Chengchi University. "You need to engage them first before you can exercise your influence."

To become an entrepot, Taiwan must lure foreign investors by revising outdated banking laws, attracting seasoned financial professionals, and slashing investment red tape. "We need foreign expertise to help us establish an international financial role," says Wu Chung-shu, an economist at Academia Sinica think tank. "Then, foreign firms would feel comfortable coming to Taiwan to invest in mainland China."

There are signs of movement in this direction. Following Clinton's visit to China, Taiwan's Economic Affairs Ministry indicated it may relax its "go slow, be patient" policy aimed at restricting direct investment in China. Taiwan companies have indirectly invested more than $35 billion, but Taipei continues to prohibit big projects. Taiwan's Formosa Plastics, which foraged into China despite the restrictions, is even being forced to sell its mainland power plant.

But instead of moving backward, Taiwan should forge ahead in promoting direct trade and transport links. While Taipei planners have long dreamed of the island replacing Hong Kong as a regional hub, it won't happen until managers can fly directly from Taipei to Shanghai.

Taiwan will need to open trade links with China anyway because it hopes to enter the World Trade Organization, which unlike the United Nations and World Bank does not require statehood for membership. By taking the initiative now, Taipei can take credit with Beijing for promoting good will. That would counter Beijing's attempt to paint it as the obstructionist in cross-strait relations. It also will help Taiwan as the two sides edge toward unofficial talks later this year. While Beijing's agenda is to push Taiwan under its sovereignty, an economically stronger Taiwan will be better able to resist.

Taipei has played hard to get with China for so long it will take a supreme effort to overcome political conservatism and inertia. But with Washington and Beijing inching closer, Taiwan must take strong measures to make sure its interests don't slip through the cracks.