Taiwan's Misplaced Dread over China

The island should take the shackles off its high-tech businesses that want to relocate or invest in the mainland

Fear of being "hollowed out" plagues many areas. New York worries about losing jobs to New Jersey. The U.S. is concerned that as investment in Mexico increases, employers will move south, too. Nowhere, however, is the prospect of company relocations faced with quite the same sense of dread as in Taiwan.

When its businesses leave, they almost inevitably head across the Taiwan Strait and invest in the country that's still technically at war with the island state of 23 million people. As recently as 1996, China lobbed missiles over Taiwan in an "exercise" designed to stampede Taiwan's voters into steering clear of a presidential candidate Beijing didn't like. (The attempt backfired, and Lee Teng-hui was reelected handily.)

Taiwan's authorities first allowed its companies to invest in the mainland a little more than a decade ago. Thanks to some $60 billion or more spent on the mainland, Taiwan has helped China's economy post one of the world's hottest growth rates, averaging 9% annually since economic reforms began in 1978. When investment was first allowed in the late 1980s, umbrella makers and shoe companies went to China. Now it's notebook computer makers. Chipmakers are next.


  In 2000, China overtook Taiwan in total production of information-technology (IT) products, threatening the bedrock of Taiwan's competitiveness. The island still makes high-end products, but China is quickly moving up the value chain, now ranking behind only the U.S. and Japan in total IT production.

Despite the tension between the rivals, few countries are better positioned than Taiwan to take advantage of China's breathtaking development. The countries' businesspeople speak the same language -- literally. And their industries are complementary. As wages and costs rise in Taiwan, China is the ideal location for companies that want to shift production out of the country. Along the way, China will pick up the knowhow to move up the development ladder.

Is a strong China good news or bad for Taiwan? Will it be a more secure, more reasonable China that will give Taiwan some breathing space? Or will it be more nationalistic and use its newfound might to build up its military and threaten Taiwan's independent existence? Is the relocation of companies to China necessary for Taiwan's economic well-being or a threat to it? These aren't just academic questions because Taiwan's survival as an independent nation depends on the answers.


  Taiwan's entry into the World Trade Organization on Jan. 1 forced the country to think again about these issues. Under WTO rules, Taiwan could have prohibited imports of Chinese goods on national-security grounds. Fearing that cross-Strait relations would worsen, it didn't, but many items still face illegal restrictions. Discriminating against goods simply because they come from China isn't allowed.

Given that Taiwan is facing an unprecedented unemployment rate of more than 5%, it's understandable that it wants to slow the pace at which it opens up to China. To do so would be a mistake. Instead, Taiwan needs to speed up the integration. The risks of going too slowly outweigh those of going too fast. Taiwan's position as king of electronics manufacturing looks secure for now, but the brutal global IT market isn't going to wait for the country to sort out its political problems.

Taiwan will win some short-term comfort if it prevents its most competitive sector from moving cross-Strait, but at the cost of long-term competitiveness. To survive, Taiwan is going to have to shift increasing amounts of manufacturing to China and hope to keep at home more sophisticated product makers and high-end functions like advanced research and development.


 Taiwan's businesses want a more rapid rise in dealings with the mainland. After all, China is quickly taking over from Japan as Asia's regional economic locomotive. The business community was cheered last year by a blue-ribbon commission's recommendation that Taiwan abandon its "be patient, go slow" policy in favor of more integration with the mainland.

Meanwhile, increasing numbers of the remaining restrictions on Taiwan's investments in China are gradually being lifted in response to the commission's recommendations. Taiwan just announced that notebook computer makers could set up shop on the mainland, and a similar announcement regarding semiconductor production is expected soon.

Yet the changes aren't happening fast enough for Taiwan's corporate community. Most businesspeople don't want to be quoted as criticizing the government, but widespread frustration over the government's slow-pace policy is evident. One top exec with an American electronics producer frets that the government will wait two more years -- until President Chen Shui-bian's reelection campaign is under way -- before allowing direct flights to the mainland. "I can't wait that long," she complains.


  It isn't so clear how the public feels. The government cites surveys -- dating from 1997 through March, 2001 -- that say more than 25% of Taiwan's citizens actually want more restrictions on business investment in the mainland. Tsai Ing-wen, chairperson of the Mainland Affairs Council, says Taiwan's farmers and old-line industries need perhaps five years to adjust to competition from the mainland. She adds that giving Chinese products full market access will occur over that period. "In the short term, you cannot expect us to have a full opening," says Tsai, whose Cabinet-level council oversees relations with China.

Taiwan's policymakers are of two minds about increased access to the mainland. That's especially true in the President's administration. Chen, who took power two years ago, broke the nationalist KMT Party's half-century monopoly on the office. His Democratic Progressive Party has traditionally espoused independence for Taiwan, and many of its members are deeply suspicious about closer ties with the mainland. China has refused to talk to Chen's administration unless it accepts the so-called one-China principle. Many in Taiwan feel this precondition would amount to surrendering Taiwan's autonomy before negotiations even begin.

At least one recent arrival to Taiwan is betting that integration is going to happen sooner rather than later. Outspoken publishing tycoon Jimmy Lai has earned Beijing's ire with his publications' stinging attacks on its leaders, but he's convinced that a combination of opening to the mainland and the development of an increasingly democratic Taiwan will pay off for his business.

Lai moved from Hong Kong to Taipei just over a year ago to start a Taiwanese version of his Next Magazine. He's planning to start a newspaper later this year. "It's only a matter of time" before restrictions on investment in China are removed and direct air and sea links are put in place, he believes. "Then this place is really going to boom." But as Taiwan marks time, China marches on.

By Mark L. Clifford in Taipei

Edited by Patricia O'Connell

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