Publication: China Brief Volume: 3 Issue: 10

By Li Thian-hok

Taiwan once enjoyed a growing and prosperous economy. Taiwan’s GDP was US$314 billion in 2000, which ranked nineteenth globally. Per capita GDP was US$14,180 that year, and the economy’s annual growth rate was 5.9 percent. Taiwan’s trade volume was US$288 billion, making the island the world’s fourteenth largest trading nation. By contrast, China’s GDP is about US$1 trillion, or three times larger than that of Taiwan, while China’s population is sixty times larger. China’s per capita GDP is about US$800.

Starting in the spring of 2001, however, Taiwan’s economy fell into a state of acute distress. Almost all electronics exports suffered sharp falls. GDP in the second quarter of 2001 contracted by 2.35 percent, the first such contraction in twenty-five years. The unemployment rate rose to 4.92 percent in July 2001, and then to a record high of 5.31 percent by October 2002. By June of 2001, the non-performing loan ratio of Taiwan’s financial institutions reached 7.44 percent; in 2002 it rose to 8.85 percent. Stock prices have fallen by nearly two-thirds from the peak levels recorded in February 2000, one month before Chen Shui-bian won the presidency. Taiwan’s per capita income has fallen 10 percent from 2000 to 2002. Taiwan has become poorer virtually overnight.

The onset of economic hardship in Taiwan has been caused in part by the downturn in the global economy. But by far the largest factor is the exodus of Taiwan’s manufacturing base to China, and the accompanying massive outflow of capital, technology and management talent. Since 1987, Taiwan’s cumulative investment in China has grown to over US$140 billion. In 2000, government approved investment in China soared by 108 percent over the preceding year. Japan and the United States annually invest 0.04 percent and 0.05 percent, respectively, of their GDP in China. The corresponding figure for Taiwan is 4 percent. As a fraction of GDP, Taiwan’s investment in China is 100 times greater than Japan and eighty times greater than the United States. Less than 1 percent of this capital outflow has been repatriated to Taiwan in the form of profit.

After a quarter century of economic growth and prosperity, Taiwan’s economy has reached a crossroads at which basic structural changes are needed to sustain continued economic development. Taiwan needs to shift from manufacturing to service industries, to raise the level of its manufacturing base to higher value added products and to invest in research and development for new knowledge based industries. To prevent a further exodus of businesses to China, the government needs to improve the investment environment so as to retain domestic industries and entice foreign investments. The necessary measures are well known to economists. They include offering public land at a reasonable price, lowering business income taxes, improving the skills of the labor force through education and training and providing such necessary infrastructure as cheap water and power. Also needed are more efficient government assistance to business in environmental assessment, automation to replace labor, and the achievement of vertical economic integration with the advanced countries in lieu of over-reliance on a developing country such as China. The proper solutions will take time and hard work.

In August 2001, the ruling DPP administration convened the Economic Development Advisory Council (EDAC) to solicit recommendations for improving Taiwan’s ailing economy. All political parties were invited, as were government officials and representatives of business, labor and academia; the gathering was heavily weighted in favor of pro-unification business people and scholars.

The EDAC’s five panels reached consensus on 322 proposals. Three of these have most preoccupied both the media and the DPP administration. The first is a call to discard the “Go Slow, Be Patient” policy on investment in China, which was initiated by former President Lee Teng-hui, in favor of a new “Active Opening and Effective Management” policy. The second calls for implementation of direct trade, transportation and communications links with China as soon as is feasible. The third seeks to facilitate Chinese investment in Taiwan’s business and real estate.

Taiwanese businessmen have been clamoring for the removal of the “Go Slow, Be Patient” policy on the grounds that they need China’s cheap land and labor to remain globally competitive. So the US$50 million ceiling on single investment projects was lifted. Removing the ban on investment in Chinese infrastructure, however, has had a negative impact on Taiwan’s national security. After all, why should Taiwan help China build roads and airbases which could be used to attack Taiwan? Similarly, encouraging high tech industries from Taiwan to move to China created a business competitor and increased the number of jobless in Taiwan. Some Taiwanese businesses may have benefited from the policy change, but Taiwan’s economy as a whole was weakened and became increasingly dependent on the Chinese economy. Drinking poison to slake thirst was suicidal.

Establishing direct links with China will lower costs for Taiwan’s businessmen. However, direct links can be implemented only through negotiation with Beijing, which has consistently refused dialog with Taipei unless the DPP government first accedes to Beijing’s One China Principle–that is, agrees to surrender Taiwan’s sovereignty. How far will the Chen administration bend in order to achieve direct links? Direct links will definitely imperil Taiwan’s security. A U.S. Sinologist has estimated that China has already smuggled 6,000 special forces personnel into Taiwan. Once direct trade and transportation are in place and Taiwan’s door is opened to tens of thousands of Chinese tourists each year, the number of such Chinese troops can be expected to grow by many times that number. Taiwan could then be brought to its knees by a combination of blitzkrieg and internal subversion.

As for encouraging Chinese investment in Taiwan, this is also a foolhardy idea. All Chinese capital is public capital. If the People’s Republic is allowed to buy Taiwanese business, real estate and media at will, it will soon be able to control the Taiwanese people’s livelihood and to manipulate public opinion.

The three EDAC proposals together represent a giant step toward Taiwan’s economic and political integration with China. These proposals also signify a drastic departure from the National Unification Guidelines, which were espoused earlier by the Kuomintang (KMT). The Guidelines stipulate three stages in relations with China. In the first stage, China must become a democracy and achieve a standard of living comparable to that of Taiwan. Direct links with China will be considered only after these preconditions are met. The DPP administration, with the support of the EDAC, has apparently abandoned these preconditions. Does this mean that the DPP government has now embarked on a policy of giving up Taiwan’s democracy and free way of life in exchange for doubtful prospects of economic recovery and peace with the People’s Republic? This is a question that merits serious scrutiny.

In retrospect, the adoption of the “Active Opening” policy of economic integration with China and the discarding of the “Go Slow, Be Patient” policy can be seen as a devastating blunder on the part of the DPP administration. James Lilley, former U.S. ambassador to China at the time of the Tiananmen Square massacre, once observed that “while the Taiwanese love freedom and democracy, they love money even more.” Business people in Taiwan will always seek profit, regardless of any adverse impact that such actions might have on their country’s overall economy or its political future. But the DPP government is charged with the task of preserving the life, liberty and property of the 23 million Taiwanese. Opinion surveys have repeatedly shown that 75 percent of the Taiwanese people prefer outright independence or the maintenance of the status quo. The government must therefore develop a viable economy while simultaneously safeguarding the nation’s sovereignty and freedom.

If the ultimate aim of the Chen administration is perceived to be the sacrifice of Taiwan’s democracy in return for peace with China and a promise of economic security, then the electorate has little reason to support the DPP. Under such conditions, the “pure Chinese” Kuomintang/People’s First Party opposition may be better equipped to negotiate a higher degree of autonomy for Taiwan. Persisting in a suicidal policy of economic and political integration with China will doom not only the DPP, but also Taiwan’s freedom. The Chen administration needs to implement effective measures to stem the tide of “China fever.” That is, it must reverse the accelerated hollowing out of Taiwan’s economy and build up the people’s confidence in the nation’s future. That is perhaps the only way for Chen Shui-bian to rise above the 39 percent ceiling of voter support for the DPP and to hold on to the reins of power in next year’s presidential election.

Li Thian-hok is a Taiwanese-American commentator based in Pennsylvania.