The New Rules of Cross-Strait Economic Engagement

Publication: China Brief Volume: 8 Issue: 15

Taiwan's Vice President Vincent Siew (L) and China's President Hu Jintao (R)

Three months ago, on April 11th, Taiwan’s Vice-President-elect Vincent Siew sat down together with Chinese President Hu Jintao at the Boao Forum, held annually on Hainan Island off China’s southern coast. The Boao Forum had never fulfilled its original promise as a Chinese-hosted global conference on par with the World Economic Forum’s Annual Meeting in Davos but the Siew-Hu meeting immediately grabbed the world’s attention. While Siew had not yet assumed the formal office of vice-president [1] following the Kuomintang’s (KMT) landslide victory in Taiwan’s March presidential election, the Hainan meeting was unprecedented in the post-1949 history of both the Chinese Communist Party (CCP) and the KMT. For the first time since the Chinese civil war fought between the KMT and the CCP, high-ranking elected officials from Taiwan were meeting directly with their PRC government counterparts to start discussions on charting a new course for the future of cross-Strait relations. This historic meeting signaled a major shift in the political impetus given to cross-Strait economic engagement by the governments in Beijing and Taipei. Both sides committed publicly and in symbolic unison to a structural revitalization of their economic relationship. Since Boao, Taipei has unveiled a variety of measures designed to achieve this restructuring over the course of the next year. While specific measures undertaken since April suggest that cross-Strait relations are likely to continue stabilizing somewhat over the near-term, major obstacles to longer-term and more fundamental transformation of the relationship remain on the road ahead for both Beijing and Taipei.

The Backdrop: Feuding Politics and Globalizing Economies

Over the six decades since Chiang Kai-shek and his KMT followers fled Mainland China for Taiwan, a sparring match for political and military advantage has kept the KMT and the CCP constantly circumventing one another and unwilling to sit down together at the negotiating table. Only once, in 1992, have the KMT and the CCP edged close to a high-level cooperative dialogue. The so-called “1992 consensus,” never fully articulated, was based on a purported understanding that the ruling KMT government claims was reached in Hong Kong between the respective governments’ surrogate organizations [2]. According to the terms of that consensus (which was reciprocally exchanged by fax, never publicly validated, and still remains contested), both China and Taiwan agreed that there was only ‘one China’ while each side reserved the right to interpret the meaning of ‘one China’ separately.

In the 16 years since 1992, globalization has proceeded apace. East Asia has emerged as the global economy’s most successful region and China has emerged as that region’s primary engine. Over the past decade and a half, China more than quadrupled its economic output, increasing its share of global output during this period from the low single digits to 15 percent (as measured in PPP terms) [3]. Separately, Taiwan established itself as the outsourcing manufacturer-of-choice for high-value global brands, enjoying a “Golden Decade” of growth in the 1990s and joining the OECD ranks of advanced economies. In December 2001, China and Taiwan both acceded—separately but within 24 hours of one another—to the World Trade Organization (WTO), reinforcing their positions as separate but proximate pillars of the global economy.

While at political loggerheads throughout this period, China and Taiwan did manage to keep their own economic engagement generally on pace with the ongoing economic integration occurring in the region and globally. Particularly with regard to Taiwanese business participation in China’s economy, Taiwanese investors quietly worked their way to the top rank of foreign investors in China and became the dominant player in the IT industry while carving out a strategic role in other key sectors of the mainland economy. The current scale of Taiwan’s cross-Strait economic trade with China can be inferred through preliminary statistics from the Mainland Affairs Council for the month of April 2008: total volume (imports and exports) of cross-Strait indirect trade—$9.9 billion (USD); amount of indirect investment—$960 million (USD); and number of Taiwan visitor arrivals in the Mainland— 334,000 [4].

The First Act: ‘Spring Thaw’

During the first week of May, President Ma in Taipei and President Hu in Beijing drew attention to the new script for cross-Strait engagement with an exchange of public pronouncements. On May 2nd, President Ma announced in broad-brush a sweeping plan to re-energize the economic relationship with China (CENS [Taiwan Economic News], May 2). While omitting details and timelines, Ma’s announcement was widely understood to build on the KMT-CCP ‘cross-Strait common market framework’ that had been previously laid out by Vincent Siew’s Cross-Strait Exchange Foundation and further explored during a high-level KMT party visit to China in 2005. Key elements of this broad framework included proposals: to liberalize direct flights and other transport links between the two geographies; to ease restrictions on Taiwan investment in the mainland (i.e., relaxing the so-called “40 percent limit”); to encourage greater investment and business activity in the mainland by financial service firms (through IOSCO and other mechanisms) and to encourage the possibility of Taiwan firms listing on mainland exchanges; to put the regulatory framework governing cross-Strait economic interchange on a more objective footing (e.g., improving the 3-tier classification system governing Taiwan investments on the mainland); to normalize economic and trade ties at the policy level (e.g., to allow state-owned firms to open offices in the mainland and to grant city-and county-level government officials permission to travel to China) and to make the issue of cross-Strait economic ties an explicit priority in national security and other inter-agency governmental deliberation; and to further open the Taiwan market to Chinese tourists, agricultural products, and capital in-flows (especially via mergers & acquisition and real estate development mechanisms). Timed closely with Ma’s proposal, a statement by Chinese President Hu Jintao was publicized on May 4th stating that China and Taiwan should “seek to build mutual trust, shelve disputes, seek common ground while reserving differences, and create win-win development” (China Brief, May 21).

The Second Act: ‘Early Summer Blossoming’

On cue with this new direction, a pair of globally-seasoned KMT stalwarts took over at the Economics Ministry and the Straits Exchange Foundation (SEF) to support the veteran leadership triumvirate of president, vice president and premier. More controversial was Ma’s appointment of Lai Shin-yuan as the new head to the Mainland Affairs Council. Long the key position for cross-Strait economic policy under the earlier Chen Administration, Ma’s pick was a former legislator of the pro-independence Taiwan Solidarity Union (TSU) who had previously played background roles in national security and international trade negotiation. This surprise move was likely calculated to broaden the base of political support for the new administration’s cross-Strait policies and served to give renewed importance to the role of the Straits Exchange Foundation. On the Chinese side of the strait, the new head of the key Taiwan Affairs Office was also named in early June.

With new faces in these important positions and new direction from their top leadership, a series of ‘direct link’ breakthroughs were achieved in a landmark agreement on June 13th. In the area of passenger air transport, regular weekend charter flights have been instituted effective July 5th. Songshan Airport in Taipei and three other airports across the country have been designated specifically for the purpose of cross-Strait air passenger links. Additionally, Taiwan carriers have entered into discussions with their mainland counterparts to explore joint business opportunities. In the area of freight transport, cargo charter talks have been accelerated; legislation has been put into place to facilitate cross-Strait cargo transport; and so-called ‘new link’ sites for direct shipping and freight have been expanded. In the area of tourism, cabinet action has led to the lifting of ferry restrictions for China-bound travelers; policies on visa issuance have been clarified for in-bound tourists and safeguards put in place against tourists who might overstay in Taiwan. Heralding the implementation of these changes, the first tourist group from the PRC under this plan arrived in Taiwan on July 4th.

Acts to Follow Will Be the Tough Ones

Trade figures show that early anticipation of, and subsequent response to, this new state-of-play has been positive. According to firstt quarter statistics for 2008, China-bound exports from Taiwan are up 24 percent over the prior year. The KMT’s strong performance in the pre-Presidential round of elections in January as well as Ma Ying-jeou’s front-running position in the run-up to the March Presidential elections are generally credited for improved business confidence and this immediate boost in economic performance. Second quarter measures are expected to be equally robust despite the deepening turmoil in global financial markets.

Throughout the remainder of 2008, Taipei can be expected to continue rolling out measures for strengthening cross-Strait engagement to further realize the cross-Strait restructuring promised during President Ma’s campaign (China Brief, March 14). Over the near term, Beijing can be expected to support this trend. Preoccupied with the demands of hosting the Olympics next month, Beijing is anxious to show a counterbalance to the tense situation in Tibet and faltering dialogue with the Dalai Lama. Beijing is evidently relieved by the departure of Chen Shui-bian and the Democratic Progressive Party (DPP), and by the resumption of power by the more familiar, ‘One China’-oriented KMT. Additionally, Tzu Chi and other Taiwan civic organizations have earned gratitude and some wary respect on the mainland for their extensive relief efforts following the Sichuan earthquake in mid-May. Cross-Strait relations with Taiwan may even benefit from the renewed national and cultural pride in China expected to accompany the convening of the Olympics in August. A case in point: UniPresident, headquartered in southern Taiwan, is the official Olympics sponsor for instant noodles, a mainstay staple of the post-quake relief effort.

However, despite these favorable factors, huge obstacles remain on the path ahead, both for the bold economic restructuring required of a “cross-Strait common market” as well as for the continued alignment of political support in Beijing and Taipei on which such economic restructuring ultimately depends. Among many long-standing hindrances, three currently stand out as paramount:

(1) President Ma has made clear that no fundamental economic restructuring with China is possible unless Beijing first removes the threat to Taiwan’s survival represented by the large and growing battery of PRC missiles on the mainland directly targeting Taiwan. Equally, Ma has called for Beijing to end its efforts to isolate Taiwan internationally as a precondition for economic ‘normalization’ with the mainland. To date, Beijing has shown no inclination to address either demand.

(2) Despite the recognized expertise and clout of the Taiwan Affairs Office, there is reason to believe that Beijing suffers from a ‘same bed, different dreams’ problem regarding the KMT. Put simply, the KMT party behind Ma Ying-jeou has been transformed during the eight-year DPP interregnum (2000-2008), both generationally and in terms of democratic responsiveness. Despite the familiarity of many faces at the Minister-level and up and the on-going dialogue with KMT stalwart Lien Chang, Beijing may find itself fundamentally challenged and caught off-guard in efforts to cooperate politically with this new KMT. An on-going irritant which could quickly hobble support among KMT rank-and-file (and the wider Taiwanese public) is nomenclatural undermining (e.g., ‘China, Taipei’) of the tentative, first joint-steps to separate politics and economics

(3) Finally, the upcoming U.S. election represents a huge question mark for the continued trajectory of cross-Strait reengagement in 2009 and beyond. Clearly, both Democratic and Republican candidates support cross-Strait economic engagement as a stabilizing force in a tense and vitally important region. Beyond that, contrasts are pronounced on a range of issues from the economic (e.g., attitudes toward FTAs and the traditional structures of free trade) to the political/military (e.g, open questions regarding the proper mix of diplomacy and deterrence in world affairs). Nor does either candidate have a well-defined and clearly communicated policy approach toward East Asia generally or China specifically. Whether the U.S. responds creatively and successfully to the on-going global power shift toward Asia remains to be seen following the November elections.

Fundamental restructuring of the cross-Strait economic relationship will require sustained alignment of strategic goals and political will in Beijing and Taipei as well as steady support in Washington DC. While the economic gains of economic integration have been powerful and increasingly necessary for both sides, there are reasons to doubt that the early gains of cross-Strait economic reengagement realized so far in 2008 can easily be extended through the middle-and long-term. In addition to the three mid-term obstacles listed above, some fundamental long-term impediments also stand in the way of full normalization of cross-Strait economic relations: diverging political values and cultural identities; incompatible ideas of sovereignty; and habits of distrust ingrained through a divided history. None of these mid-term or long-term obstacles will be easily or quickly bypassed. Full and complete economic integration across the Taiwan Strait will require real progress in reconciling all these differences.


1. Protocol made clear that Siew officially attended the April 11th meeting in his capacity as Chairman of the Cross-Straits Exchange Foundation

2. Taiwan’s Straits Exchange Foundation (SEF) and China’s Association for Relations Across the Taiwan Straits (ARATS)

3. National Institute of Economic and Social Research, National Institute Economic Review April 2007, (2007), United Kingdom: National Institute of Economic and Social Research.

4. Mainland Affairs Council, Executive Yuan. “Preliminary Statistics of Cross-Strait Relations April 2008,” June 30, 2008.