In Taipei, Talk of Arms -- and Amity

Premier Yu Shyi-Kun hopes economic ties to the mainland will guarantee peace. If not, Taiwan has to have the ability to defend itself

On Nov. 10, Taiwan's President Chen Shui-bian called for peaceful dialogue regarding a host of issues with his adversaries in Beijing, the second such attempt to ease cross-strait tensions since his reelection on Mar. 20. Chinese President Hu Jintao and Beijing's officialdom view Taiwan as a renegade province and are particularly distrustful of Chen's intentions, regardless of the rhetoric. Taiwan is facing a legislative election on Dec. 11, and Chen's Democratic Progress Party and its coalition partner hope to pick up a majority of seats. That would strengthen Chen's hand in winning approval for a bill authorizing $18 billion to buy batteries of Patriot III missiles, eight diesel-electric submarines, and a squadron of antisub aircraft -- all of which would help Taiwan deter any attempt to reunite it with China by brute force.

Defense isn't Taiwan's only concern. Newly reelected U.S. President George Bush needs China's cooperation to persuade North Korea to abandon its designs on developing a nuclear weapons and in fighting global terrorism. That has led some in Taiwan to suspect Washington is less interested in looking out for Taipei's interests. Meanwhile, Taiwan's economy is clocking 7% growth and prospering from the mainland's boom. The strengthening economic links between the two may bring about a unification of sorts -- regardless of whether Beijing and Taipei reach any political agreement.

To sort out the issues and challenges facing this island's dynamic, high-tech economy, BusinessWeek Assistant Managing Editor Robert Dowling and Asia Regional Editor Brian Bremner engaged in a wide-ranging conversation with Taiwanese Premier Yu Shyi-Kun in Taipei on Nov. 12. Here are the edited excerpts:

Q: Bush Administration officials have reminded President Chen in blunt terms that the U.S. views Taiwan not as a sovereign state but part of China, while urging a peaceful settlement of the issue later. Do you expect any change in tone during the Bush Administration's second term?


The Bush Administration has been friendly toward Taiwan...and we hope [it] will provide us assistance in the future. Our Democratic Progressive Party envies Mr. Bush's successful reelection, because his party also won the majority in Congress. In his second term, he will have more power to do what he can. Taiwan and the U.S. belong to the same alliance of core values -- freedom, democracy, peace, and human rights.

Q: Past efforts to strengthen ties with Beijing have failed. What does President Chen hope to achieve this time?


President Chen on Nov. 10 mentioned that the next two years are an opportunity for both sides. If both leaders can express the highest good will and creativity, we will be able to build a win-win situation. President Chen has suggested the establishment of some direct [air flights] to avoid transit stops in third countries. In addition, President Chen has also called for military confidence-building mechanisms between both governments. We will build a code of conduct across the straits -- and we don't have any preconditions.

Q: Yet, at the same time, Taiwan is pursuing a major arms purchase that must look provocative to Beijing. Do ordinary Taiwanese feel this is a necessary thing to do?


In terms of peace of stability across the strait, that is not only in Taiwan's interest but also in the interest of the U.S., Japan, and other nations in the region. We have a responsibility to maintain peace and stability. As such, President Chen has mentioned that we are willing to engage in dialogue with China, because he has peace in mind. We're proceeding with our arms-purchase deal because China has been pursuing a military threat against Taiwan. For instance, they have deployed more than 600 missiles along the coast, targeting Taiwan.

Also, according to the U.S. Defense Dept., China has spent $50 billion to $70 billion dollars on its national defense budget in 2004 and is developing offensive weaponry. China has also conducted military exercises. These behaviors have posed serious threats -- not only to Taiwan, but also to the stability of the Asia Pacific region. Taiwan has to have to ability to defend itself. Right now, Taiwan is confident it can.

According to military experts, Taiwan is capable of defending itself through 2006. From then...the military balance will gradually lean toward China. That is why Taiwan needs to purchase enough weaponry to defend itself. For example, the Patriot missile systems we are planning to purchase are defensive -- they only can intercept missiles. We are also planning to purchase equipment to detect potential submarine attacks.

Q: The Taiwan economy remains robust, but it seems to be ever-more dependent on investment and trade flows on the mainland. Is that a worry?


We don't want to put all of our eggs in the same basket.... The fact is that China and Taiwan are growing more dependent on each other in terms of our economy and trade exchanges. There is a strong linkage.

We are also trying to diversify these risks and trying to avoid the scenario you envision. However, in the third quarter, the growth between Taiwan and China has been slowing down compared to past quarters. And our [economic] exchanges between Asian countries and Europe are speeding up.

Q: There is talk of a revaluation of the Chinese yuan that would raise the value of that currency against the dollar. How would that impact Taiwan?


The U.S. hopes or expects the Chinese currency to appreciate in the future. The results would be mixed for Taiwan. On the one hand we are competitors with Chinese on the world markets. On the other, many Taiwanese businessmen have their establishments in China, and they also exports goods and services from there to other countries.

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