Taiwan: Profit and Peril in China's Pull

For how long can the island steer its own path, despite growing economic dependence on its neighbor and testy relations with Beijing?

By Brian Bremner

The traffic jams are back in Taipei. And in many ways it appears that this dynamic, high-tech island -- which boasts world-class companies such as computer maker Acer and chipmaking foundries like Taiwan Semiconductor Manufacturing (TSM ) -- has really got its groove back after some economically subpar years. Its $280 billion economy is expected to clock 6% growth in 2004 -- one of the best showings in Asia -- and Taiwan also wins kudos for its robust, if sometimes raucous, democratic political system.

Yet despite the current run of prosperity, this remarkable society of 23 million is feeling pretty vulnerable as the year draws to a close. Relations across the straits with mainland China are as testy as ever, and rhetorically, at least, the Bush Administration seems more interested in keeping Beijing happy than it does in reassuring Taipei that the U.S. remains the island's stalwart ally.


  But while cross-straits political relations remain tense, economic linkages are tightening each year as Taiwanese semiconductor and consumer-electronics makers enjoy robust business with China. It could be decades before Taiwan is ever reunified with China politically, but a kind of de facto economic union may happen a lot sooner than Taiwanese President Chen Shui-bian and his government would like.

Still, Chen's government deserves some blame for drawing Beijing's wrath. Chen was reelected by the narrowest of margins in March in part because he's considered a fierce advocate of Taiwan's independence. True, Chen has twice this year called for a peaceful dialog to ease tensions, explore direct cargo flights from Chinese cities to Taipei, and set up military communication links to avoid misunderstandings that could quickly escalate into violent clashes.

However, he's also trying to push an $18 billion arms package through the Taiwanese legislature, and he insists that any move toward unification with China would require the consent of the island's voters. Such consent could be a very long time in coming -- if it ever occurs. Beijing views Taiwan as a renegade province and hasn't ruled out military force if Taipei ever gets the notion of trying to break away for good.


  That's why it's essential that Taiwan maintains military parity with China -- something that's getting increasingly difficult to do. In a recent interview with BusinessWeek, Taiwanese Premier Yu Shyi-kun pointed out that as things stand now, "Taiwan is capable of defending itself through 2006," adding that "from then…the military balance will gradually lean toward China." That's probably true, even assuming Chen gets approval to buy batteries of Patriot III missiles, diesel-fueled submarines, and antisubmarine aircraft, now under consideration by the Taiwanese legislature (see BW Online, 11/15/04, "In Taipei, Talk of Arms -- and Amity").

What the island really needs is high-tech defensive weapons such as the Aegis antiballistic missile technology. China has 600-plus missiles on its eastern seaboard pointed at Taiwan and is adding about 75 a year, according to Taiwanese defense estimates. Premier Yu points out that Taiwan has requested such a system but has been rebuffed so far by the U.S.

Another issue confronting Taiwan is how to make sure its economy is sufficiently diversified beyond the mainland. China is now its biggest trading partner, and Beijing has cleverly used tax incentives to lure more Taiwanese firms across the straits, particularly in the critical semiconductor field. "We don't want to put all of our eggs in the same basket," says Yu. But "China and Taiwan are growing more dependent on each other."


  Just how all this will play out is hard to say. Mainland China is just too attractive a market for Taiwanese businesses to ignore completely, regardless of the risk of economic dependence or blackmail by Beijing down the road. On defense and international diplomacy, U.S. support is critical.

Both President George W. Bush and outgoing Secretary of State Colin Powell have issued blunt warnings to Chen not to rock the boat, and the U.S. likely would defend Taiwanese interests should China launch a military attack to effect forceful unification. But the Bush Administration has made clear it considers Taiwan part of China, and that while unification should be peaceful, it's pretty much inevitable.

As China's military and economic might grows -- the mainland's economy is already about five times the size of Taiwan's -- observers wonder how long the status quo can endure. Hopefully, the Taiwanese will determine their own fate gradually -- and not under duress either from threat of a military invasion or a crippling economic embargo. But it's unclear how Taiwan could achieve that. As the gravitational pull from mainland China gets inexorably stronger, the need grows greater -- as does the challenge.

Bremner is Asia regional manager for BusinessWeek, based in Tokyo

Edited by Patricia O'Connell

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