Taiwan’s Economy: Missing a Needed “Link” to China and the World

Publication: China Brief Volume: 6 Issue: 20

A maxim of globalization holds that all economics are global, all politics local. From the vantage point of early autumn 2006, this formula captures both the persistence of ongoing cross-Strait economic activity as well as the current stasis of political relations between Beijing and Taipei. Yet economics is never entirely independent of politics, no less across the Strait of Taiwan than elsewhere in the world. Instead of separate vectors—the economic and the political—heading in different directions and at different speeds, we have a composite view of halting and fitful progress, a trajectory which tends to show one jarring step backward for every two cautious steps forward.

To mark the current point in the trajectory of cross-Strait economic integration (and to understand how we arrived here), five signposts of the evolving relationship are particularly noteworthy:

(1) Taiwan’s Economy Continues a Steady, Albeit Less Breathtaking, Ascent

Taiwan’s economy ducked the Asian Financial Crisis but not the bursting of the dot com bubble. With an economy heavily dependent on linkages to the global information technology supply chain, the March 2000 “Tech Wreck” forced Taiwan’s economy into a lower-growth gear. Despite that, and the ensuing slow-down in the world economy, Taiwan’s performance in recent years has been fully appropriate for a mature economy with a per capita income in 2005 of close to US$15,000 [1].

In 2006, the fundamentals of Taiwan’s economy appear sound. The growth rate for the year is projected to exceed 4.25%. Unemployment is stable at around the 4% level [2]. Taiwan continues to expand its foreign exchange reserves among the world’s top tier, behind China and Japan. Foreign Direct Investment (FDI)—although well short of the “Golden Year” levels of the 1990s—is picking up thanks to strength in LCDs, mobile devices and other sectors.

(2) Taiwan’s Economy Transforms, with Increasing Dependence on the Mainland

The most clear-cut feature of Taiwan’s economic transformation during the past six years has been its growing economic dependence on, and integration with, the mainland. Three key indicators have been the following:

Ranking of Taiwan’s Export Markets: From January 2000 through March 2002, Taiwan’s exports to China and Hong Kong were in rough parity with its exports to its traditional top trading partner, the United States. Over the two-year period from March 2002 to March 2004, however, the U.S. Department of Commerce noted that Taiwan’s exports to China and Hong Kong roughly doubled to the level of $5.0 billion per month, while exports to the United States remained stagnant at under the $2.5 billion per month level.

Asymmetrical Trade Dependence: By 2003, Taiwan had allowed China to become far more important to Taiwan’s economy (absorbing 23% of Taiwan’s total exports) than Taiwan was to China’s economy (absorbing only 2.4% of China’s total exports).

True Share of Taiwan’s FDI Stake in China: While most official sources place Taiwan’s “reported share” of FDI into China in the 7-8% range, the “estimated true share” of Taiwan’s FDI contribution has emerged closer to the 20-22.5% range when adjustment is made for “round-tripped” money and for investment via British Virgin Islands (BVI) and Cayman structures. This level of FDI participation falls just short of Hong Kong (25-27.5%) and is significantly ahead of the United States (9.0%), Japan (8.0%) and Europe (5.5%) [3].

(3) “Three Links,” Cross-Strait Policy, and the Mainland Affairs Council Lose Steam

Since mid-2006, the Chen Administration has slipped dramatically in its efforts to have cross-Strait policies keep pace with the strengthening domestic economy and, particularly, with Taiwan’s increased integration with the mainland economy. Previously, throughout 2005 and early 2006, two factors had been working broadly in favor of a reinvigorated cross-Strait policy: (1) high-profile and economically-oriented visits to the mainland by opposition leaders James Soong of the People’s First Party (PFP) and, more successfully, Lien Chan of the (Kuomintang) KMT; and (2) growing “popular support for direct cross-Strait passenger-flight links” (70% favorable) and for “an open policy on tourism from China” (62% favorable) [4]. In recent months, though, a rising chorus of corruption allegations against Chen’s administration and family members, repeated attempts to organize a presidential recall vote by the opposition Pan-Blue parties and persistent street protests organized by Chen’s erstwhile ally, Shih Ming-teh, have all combined to force the Chen Administration onto the defensive. With less than a 20% approval rating, Chen is now largely dependent upon his “deep-green” base and has become highly susceptible to pressure from Lee Teng-hui’s Taiwan Solidarity Union (TSU) party, which ardently opposes closer economic interaction with the mainland. As a result, no breakthrough beyond the limited charter activity has occurred with the crucial “missing link” of direct cross-Strait passenger-flights. More generally, as the Chen Administration battles for its own survival and its ability to serve out the remainder of its term, much of the previous momentum for implementing a forward-looking agenda to reposition Taiwan’s economy vis-à-vis that of China’s and a globalizing world has been lost.

Even minor components of a more forward-looking agenda, which were enacted earlier, are now being implemented in counterproductive ways. Companies that registered with the government for purposes of cross-Strait investment have become the focus of audits and increased scrutiny. Instead of making it easier for multinational enterprises (MNE) to hold regional meetings in Taiwan by raising the number of Chinese nationals allowed to participate, the red tape of the visa procedures has prompted leading MNEs to openly question whether it is worth the effort to bring their Greater China and Asia meetings to Taiwan.

This situation can be contrasted with the still cautious, but more confident approach to cross-Strait affairs pursued during Chen Shui-bian’s first term of office from 2000 to 2004. Then, as now, the policy watchword formulated for the purpose of managing cross-Strait relations was “active opening, effective management” (jiji kaifang, youxiao guanli). As pursued by Tsai Ing-wen, then-director of the Mainland Affairs Council and the originator of this policy, this formula was not in danger of ringing hollow in either aspect. On the political ascendancy, Chen was then trying to find new political balance-points in sensitive areas of cross-Strait relations ranging from managing the rapid expansion of the Taiwan Semiconductor Manufacturing Company (TSMC), United Microelectronics Corporation (UMC) and the island’s foundry chip industry to meeting Washington’s concerns in export control policy. While muscular in its exercise of an effective veto in Cabinet votes on cross-Strait policy, the Mainland Affairs Council was attuned to the challenges that Taiwan faced in adjusting its economy to the demands of a rapidly globalizing economy. It appeared able to engage in the “effective management” of cross-Strait links to the extent that it sought proactively to create a new “opening.” This “opening” was predicated on striking a balance between newly emergent forces of domestic politics and the demands of globalization for the freer movement of people, goods, capital and ideas.

(4) Taiwan Struggles to Avoid Bilateral and Regional Marginalization

Following its accession to the multilateral World Trade Organization (WTO) on January 1, 2002, Taiwan began looking more actively for additional avenues to end its effective isolation in the area of bilateral trade agreements. Initially, this was largely a reflection in the economic sphere of active resistance to China’s efforts to diplomatically isolate Taiwan wherever possible. This took on more concrete relevance, however, as bilateral trade agreements—led by China—began to proliferate, picking up the slack from the faltering of the five-year Doha Round of WTO talks.

In mid-2006, Taiwan has real reason to be concerned about its lack of participation in bilateral trade agreements. It is the only Asian economy of any size not to be a signatory to a significant agreement with a bilateral trading partner in the region.

On a global scale, the major exception to Taiwan’s position in economic diplomacy has been the resumption of Taiwan’s economic dialogue with the United States through the U.S.-Taiwan Trade and Investment Framework Agreement (TIFA) talks. Initially established in September 1994 as a high-level forum for consultation on a broad range of trade, investment and economic issues, the TIFA talks were subsequently suspended in October 1998. Suspension was due principally to U.S. dissatisfaction with Taiwan’s slow progress in protecting a broad range of intellectual property rights, as well as with a mixed (and changing) bag of more sector-specific concerns, including agricultural licensing and import requirements; pharmaceutical testing, labeling and certification; telecommunications market barriers; and financial service constraints. Despite the boost provided by Taiwan’s WTO accession in 2001, the TIFA forum remained stalled until Deputy U.S. Trade Representative Karan Bhatia’s visit to Taipei in late May of this year.

While these talks did not, and were not expected to, clear the docket of outstanding issues between the countries, Taiwan did hope to use the successful resumption of TIFA talks as the springboard toward rapid consideration of a U.S.-Taiwan Free Trade Agreement (FTA). In a practical sense, this is all but impossible under President Bush’s current Trade Promotion Authority (TPA). At most, the resumption of TIFA talks means that a necessary box has now been checked to potentially allow for a more deliberate evaluation of the merits of a U.S.-Taiwan FTA, subject to renewed TPA legislation [5].

(5) Taiwan’s Business Community Votes with their Feet

A final perspective worth examining is the response of Taiwan’s business community (taishang) to the current lack of progress in cross-Strait ties. While the government encourages the business sector to devote additional attention and capital to established markets in the West and to the emerging market of India, Taiwan’s businesses remain focused on the opportunities on the mainland. Yet because of restrictions that Taipei has placed on the share of business that a Taiwan-based company is permitted to conduct in the mainland (the so-called “40%” rule), many companies are now moving to list separately in Hong Kong as a way to circumvent this restriction. By raising capital in Hong Kong to support separate business operations in Hong Kong and the mainland, Taiwanese companies are essentially voting with their feet in favor of the long-term prospects of the mainland economy and against the economic policies of the Taiwanese government.

From any perspective, this development does not portend well for Taiwan’s future trajectory of globalization. The trendline is perhaps apparent in the shift of Taiwan’s competitiveness relative to that of both Hong Kong and China. A comparison of the World Economic Forum’s national competitiveness rankings over the past five years reveals that in 2001, Taiwan’s economy was ranked 7th in the world with Hong Kong 13th and China 39th; in 2006, Hong Kong had risen to 11th, while Taiwan had slipped to a tie with a surging China at 13th.


In the heat of their partisan battles, Taiwan’s politicians are again losing sight of a simple truth that both Taiwan’s business community and China’s political leadership in Beijing have fixed firmly in their sights. In today’s world, the strength of a national economy is only as strong as that economy’s ability to adapt to a changing world. That adaptation requires decisive moves to open up economies to the freer movement of people, goods, capital and ideas across national borders. China continues to do just that and the world continues to respond. With its geographic proximity and economic complementariness, Taiwan could be positioned advantageously at the crest of this global wave, successfully riding China’s emergence as a regional super-economy.

Instead, Taiwan seems to be falling back into a defensive and blinkered position. Rather than forging an approach that shows confidence in win/win outcomes, politicians are again acting in ways to effectively constrict cross-Strait economic commercial interaction. Part of this is simply the result of distraction stemming from Taiwan’s current political crisis. Yet politicians have also increasingly played to the economic insecurities of their constituents. Neither factor, however, works in Taiwan’s long-term economic interests. The litmus test of a sound economic policy in Taiwan should be the clear understanding that better economic links to China mean better economic links to the world. While this view is now being lost from the sight of a badly weakened Chen Administration, China and the global economy continue to move forward.


1. The OECD recognized Taiwan as joining the ranks of the world’s advanced economies in December 2001. Taiwan’s per capita income of $15,000 is estimated as $27,600 on a PPP basis, according to the CIA’s World Factbook.

2. 2006 Taiwan White Paper in Taiwan Business Topics, May 2006, p. WP6 (American Chamber of Commerce in Taipei).

3. “Greater China in Global Crossroads,” a presentation by Dr. Komal S. Sri-Kumar, Managing Director & Chief Global Strategist, Trust Company of the West at Annual Shareholders’ Meeting of the AsiaVest Partners, TCW/YFY Ltd, Los Angeles, April 2004.

4. 2006 Taiwan White Paper in Taiwan Business Topics.

5. For more detailed analysis, see the author’s “Taiwan’s FTA Bid: Process and Prospects from the Global IT Supply Chain Perspective,” appearing as chapter 10 in The Shifting Paradigm in U.S., China, and Taiwan Relations, edited by Peter C.Y. Chow (Edward Elgar Publishing Ltd., forthcoming).