Eying China Warily from Taiwan

Political veteran P.K. Chiang discusses how the island can best weather the lowering of its trade barriers with the export powerhouse

By Bruce Einhorn

P.K. Chiang is one of Taiwan's elder statesmen. A stalwart of the Kuomintang (KMT, or Nationalist) Party, Chiang served under former President Lee Teng-hui as a top economic adviser, first as chairman of the Council on Economic Planning & Development and later as Economic Affairs Minister.

In 2000, the Kuomintang lost power for the first time since what remained of the Nationalist government fled to Taiwan, after the communist takeover of the mainland in 1949. But Chiang has remained a force in local politics -- he's the No. 2 official in the Legislative Yuan, Taiwan's parliament. KMT lawmakers and other critics of current President Chen Shui-bian's government have been putting the spotlight on Chen's rocky relations with Beijing.

I recently talked to Chiang in his Taipei office about cross-strait relations and the importance of liberalization for Taiwan's technology sector and other industries. Edited excerpts of our conversation follow:

Q: How does Taiwan's business environment compare with China's?


The investment climate has worsened in Taiwan, and China has more actively improved its working climate [especially] in the past two years.

Q: What has changed in Taiwan?


The new government [of President Chen Shui-bian's Democratic Progressive Party] was too quick in implementing Chen's campaign promises. Shorter labor hours, Saturdays off -- all of this affected the cost of production, so I can see more rapid outflow to mainland China.

Q: Now that both Taiwan and China are members of the World Trade Organization, Taiwan has been opening up to imports of such Chinese-made products as beer, steel, and household appliances for the first time since the communists took control of the mainland in 1949. What will be the impact for Taiwan's economy?


After they became a member and we became a member, it has become an obligation to give them most favored nation status. [But] this will be a severe [blow to Taiwain's economy] because products from China are so cheap. It will definitely affect our agriculture and our labor-intensive industries here. We're worried that [liberalization] will affect our local industries, so the government will reduce [the number of blocked Chinese products] one by one. Taiwan has a $16 billion or $17 billion trade deficit with Japan but a big surplus with China. If we give them the same treatment as Japan, then we will suffer much more than other countries.

Q: What areas of investment in Taiwan should remain off-limits to China?


From China to here, the government is planning to open capital inflows, but it won't be as free as Taiwanese investment to China. We should welcome [long-term] investment [by Chinese companies] in manufacturing, real estate, hotels, and department stores. But short-term capital like in the stock market we have to monitor. Investments in the financial sector, in the insurance industry, or in the futures market -- those we have to watch carefully.

Q: Some KMT lawmakers have been pushing to lift the ban on direct transportation links between Taiwan and the mainland. Why is it so necessary?


If we can have direct links, then Taiwanese factories can maintain their competitiveness. China is the production center for the whole world. Nobody can avoid that trend. If we keep indirect links, then costs will increase, and Taiwanese companies will be forced to go to China because the downstream companies are already there. But if Taiwanese manufacturers can ship [goods] from Taiwan to China in just one day, they can continue their [main] operations here and supply materials and components to factories in China.

Also, if we can have direct links, we can bring in components from China and assemble [high-end] products in Taiwan. Made-in-Taiwan products, image-wise, still command a much higher price than made-in-China products. And if you have direct air transport, then I'm sure that Taiwanese businesspeople would keep their base here -- since it would be so easy to fly to China.

Q: With both Taiwan and China in the WTO, why is direct transportation still an issue?


China says they can be [negotiated] through the shipping companies or the airlines [rather than by the two governments]. This is the Hong Kong-Taiwan model. But our government says: "No, this is government business. It has to be done by the government." So it has become a deadlock. But from the business point of view, direct transportation is necessary.

Einhorn covers technology from Hong Kong for BusinessWeek. Follow his weekly Online Asia column, only on BusinessWeek Online

Edited by Patricia O'Connell

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