General Analysis of the Economic Relations
between Taiwan and China
---- The Tradeoff between Economics and Security
Chen-yuan Tung
School of Advanced International Studies
Johns Hopkins University
1308, N. Taft St., #8, Arlington, VA 22201
E-mail: Ctung@jhu.edu
Tel: 703-5224051
*Paper for delivery at the 14th annual conference of the Association of Chinese
Political Studies on CHINA ENTERING THE NEW MILLENNIUM in Washington,
D.C. on November 6-7, 1999.
[Revised on 11/25/1999]
1
I. Introduction
Currently, Taiwan and China, which are still in a state of hostility, both want to
harvest the greatest benefit through economic exchange, but, at the same time also want
to gain the upper hand in sovereign competition. Therefore, unequal benefit and
externalities stemming from economic exchange become negotiating chips for both
sides. Beijing uses economics as a bargaining chip in an attempt to win concession from
Taipei on sovereignty (i.e., peaceful unification under “one country, two systems”
model); Taipei, however, is willing to sacrifice economic advantage and interests for
the sake of maintaining sovereign autonomy (security). However, Beijing’s assertive
attitude and Taiwan businesses’ pursuit of their own economic interests makes Taipei
anxious. Next to Beijing, Taipei seems passive and conservative.
This paper tries to establish a model of general analysis of the economic relations
between Taiwan and China, analyzing complicated economic interests, security
considerations, and negotiating behavior between Taiwan and China from three
dimensions: economics, security, and negotiation.
From an economic perspective, due to the ongoing economic restructuring process
in Taiwan, which is probably the most important one in 20 to 30 years, cross-Strait
economic exchange will not only affect the distribution of economic interests (both
from trade and investment) between Taiwan and China, but will also accelerate the
restructuring of Taiwan’s internal economic system. So far, estimates of the effects of
cross-Strait economic exchange remain highly controversial and uncertain among
Taiwan’s academia and government.
2
From a security perspective, China’s military threat has always haunted Taiwanese.
Relative to China, Taiwan is small both in political and military terms. Facing China’s
pressure to increase economic cooperation, Taiwan naturally feels insecure. More
seriously, when Taipei cannot hold back the tide of economic exchange, Taiwan feels
anxious and powerless. Finally, Taiwan’s government has adopted the so-called “no
haste, be patient” policy in the hope that Taiwan will be able to control the situation of
cross-Strait economic exchange and therefore reduce its psychological anxiety. 1 In
addition, Taipei would like to utilize this policy to bargain with Beijing.
Finally, this paper attempts to combine economic and security dimensions to
construct a model for negotiation between Taiwan and China. Based on the analysis in
the economic and security sections, the paper will further examine Taiwan’s strategy
and the affects of the combination of these two forces on Taiwan’s overall national
interests.
II.
Economic Analysis
Large-scale economic exchange between Taiwan and China began in the late
1980s, and most trade was driven by Taiwan’s foreign direct investment (FDI) in China.
1
According to Taiwan’s Economic Ministry, approved Taiwan’s FDI in China in 1996 was $1.2 billion
and in 1997 it was $4.3 billion. From January to August 1998, it was $1.6billion, far exceeding the
amount in 1996. According to China’s statistics, the realized FDI by Taiwan’s entrepreneurs in 1996
was $3.5 billion, and $3.3 billion in 1997. From January to June 1998 it was $1.5 billion. Even though
the decline of Taiwan’s FDI was very limited. Luo Qi argues that the cross-Strait economic exchange
has been influenced mostly by China’s macro economic situations and policies since 1979, instead of
Beijing’s military exercises or Taipei’s policy of “no haste, be patient”. Luo Qi, Economic Interests VS.
Political Interventions: The Case of Economic Relations Between Mainland China and Taiwan
(Singapore: World Scientific, 1998), EAI Occasional Paper No. 8.
3
Therefore, it is necessary to analyze the overall situation of Taiwan’s FDI and its
possible impact on Taiwan’s economy.
Not until 1987 did Taiwan’s government deregulate the control on foreign
exchange, which led to a rapid increase in outward investment. (See Figure 1.) In the
beginning, Taiwan’s FDI focused on the United States. But as Taiwan’s labor-intensive
industries began to lose their comparative advantage, Taiwan firms began investing in
Southeast Asian countries (SEACs)2. According to the Taiwanese Economic Ministry’s
Investment Commission, Taiwan’s FDI into the SEACs was 15% of Taiwan’s total FDI
in 1987 and was 39% of total FDI at its highest point in 1991, far exceeding 16% for the
United States in 1991. By the end of 1997, Taiwan’s accumulative FDI in the SEACs
was $3.7 billion, 14% of Taiwan’s total FDI, exceeding $3.5 billion for the United
States.
Although Taiwan’s entrepreneurs began to invest in China in the late 1980s,
Taiwan’s Investment Commission did not compute formal statistics until 1991. In 1991,
Taiwan’s FDI into China was $0.17 billion according to Taiwan’s official figures. In
1993, it increased to nearly $3.2 billion, which was 66% of Taiwan’s total FDI for that
year. By the end of 1997, Taiwan’s cumulative FDI in China was $11.2 billion, 42% of
Taiwan’s total FDI. In a short 7 years, China became the place with the most
accumulated Taiwanese FDI. It’s worth noting that Taiwan’s FDI in both China and the
SEACs amounted to 56% of the total FDI. Altogether, the United States, China, and the
SEACs, accounted for 70% of Taiwan’s total FDI. Therefore, Taiwan’s FDI
significantly focused in these three areas. Overall, Taiwan’s FDI in the late 1980s and
2
Including the Philippines, Indonesia, Thailand, Malaysia, and Vietnam.
4
early 1990s involved mainly small-medium labor-intensive enterprises looking for
overseas manufacturing bases, most of them focusing on the SEACs and China.3
Taiwan’s enormous FDI outflows since 1987, however, did not provoke a
significant domestic debate in Taiwan over industrial upgrading and economic
development. In 1997, Taiwan’s FDI was $7.2 billion, bringing the cumulative total to
$26.5 billion. By that year Taiwan accounted for 1.7% of cumulative world FDI.
Taiwan became a big FDI home country and one of the few “developing countries” to
invest outward. Nevertheless, few international studies analyzing Taiwan’s FDI
experience were done.4 Until the early 1990s, because Taiwan’s FDI in China increased
very rapidly and domestic economic restructuring generated a lot of uncertainty,
various analyses of Taiwan’s FDI, especially in China, emerged swiftly. However, the
economic effects of Taiwan’s FDI are still debated by Taiwan’s economists.
Before the 1980s, the majority of FDI was conducted by developed countries.
Thererfore, most international literature focuses on the effects on the developed
countries (sources of FDI) and on the developing countries (recipients of FDI). As a
matter of fact, the current distrust or hesitancy in Taiwan mirrors that seen in the
Western countries in the 1950s, 1960s, and 1970s. For example, in the 1950s and 1960s,
Europe restricted FDI because of the belief that FDI would replace domestic investment
and generate an imbalance of payments. In the 1960s, there was also a vigorous debate
in the United States over whether multinational enterprises would generate an
imbalance of payments. In the 1970s, the focus in the United States shifted to the FDI’s
3
4
Wen-Chen Kuo, “The Review and Future Prospect of Taiwan’s Outward Investment”, Economic
Outlook, No. 54, 11/5/1997, pp. 57-59.
United Nations, Transnational Corporations from Developing Countries: Impact on Their Home
Countries (New York: United Nations, 1993). United Nations, World Investment Report 1995:
5
impacts on domestic employment.5 Nevertheless, according to several UN studies, the
overall impact of FDI on developed countries’ balance of payments, industrial
upgrading and restructuring, employment, and exports, were more positive than
negative.6
The same debates surfaced in Taiwan, such as industrial upgrading (industrial
“hollowing-out” effect and replacement of domestic investment), balance of payments
(capital outflow), and employment. Especially, given the sovereign competition
between Taiwan and China, the huge amount of Taiwan’s FDI going to China led many
on Taiwan to fear that the island’s economic strength would be hollowed out by China.
Because the United Nations Department of Economic and Social Development
believed that FDI from developing countries, especially in Asia, would be a trend that
could not be ignored in the future, it produced a special report in 1993 of the impacts of
the outward FDI from developing countries as home countries. Although the cited
literature and examples in the report, including Taiwan, are very limited, generally
speaking, the report concluded that outward FDI actually benefited the home countries’
balance of payments and industrial upgrading. In addition, the more open and dynamic
Transnational Corporations and Competitiveness (New York: United Nations, 1995), pp. 324-327.
J. H. Dunning, “The Political Economy of International Production”, in Theodore H. Moran (ed.),
Governments and Transnational Corporations, United Nations Library on Transnational
Corporations, Vol. 7, (New York: Routledge, 1993), pp. 313-314.
6
United Nations, Transnational Corporations from Developing Countries: Impact on Their Home
Countries (New York: United Nations, 1993), pp. 57-80. United Nations, World Investment Report
1995: Transnational Corporations and Competitiveness (New York: United Nations, 1995), pp.
147-148, 220-225, 227-262. United Nations, World Investment Report 1994: Transnational
Corporations, Employment and the Workplace (New York: United Nations, 1994), pp. 163-213.
Dunning, John H., Multinational Enterprises and the Global Economy (Wokingham, England:
Addison-Wesley Publishing Company, 1993), pp. 349-366, 385-414. Richard Florida, “Foreign Direct
Investment and the Economy”, in Cynthia A. Beltz (ed.), The Foreign Investment Debate: Opening
Markets Abroad or Closing Markets at Home? (Washington, D.C.: The AEI Press, 1995), pp.63-95.
Morris, Jonathan, ed., Japan and the Global Economy: Issues and Trends in the 1990s (London:
Routledge, 1991).
5
6
the developing countries, the more outward FDI can help these countries restructure
their economies and upgrade their technology. Regarding employment, the study
emphasized that FDI-driven economic restructuring does not generate a “net loss” of
domestic employment. However, these countries do have to pay significant costs of
restructuring their labor force. For small, export-oriented countries like Taiwan, these
adjustment costs of labor reallocation can be quite heavy.7
Taiwan began to invest abroad in significant amounts in the mid-1980s, therefore
the UN studies may not explain the specific experience of Taiwan. Furthermore,
Taiwan’s well-known economists have very deep suspicions about the benefits of
outward FDI.8 Therefore, there is a need to conduct a comprehensive review of the
impact of Taiwan’s FDI in China on both Taiwan’s balance of payments and its
industrial upgrading.
As a matter of fact, these two issues are inter-related. Many scholars, politicians,
and government officials believe that 1) because foreign countries, especially China,
have a cheaper labor force and/or large consumer market, FDI has a crowding-out
effect on domestic investment; 2) since enterprises can survive with minimum costs
overseas, they do not have enough pressure to continue upgrading; 3) the huge outflow
of Taiwan’s capital and the enterprises’ unwillingness to invest in Taiwan will lead to an
inability to upgrade and industrial hollowing-out.9 There are several questions that need
7
United Nations, Transnational Corporations from Developing Countries: Impact on Their Home
Countries (New York: United Nations, 1993), pp. 57-88.
8
Charng Kao and Shi-Ying Wu, “The Impact of Cross-Strait Economic Relations on Taiwan’s Industrial
Development”, and Tain-Jy Chen and I-Ping Chen, “Outward FDI impact on Taiwan’s Industrial
Development”, in Ya-Huei Yang (ed.), Taiwan’s Industrial Development and Policy (Taipei:
Chung-Hua Institution for Economic Research, 1995), pp. 391-462. Chin Chung, “Cross-Strait
Resource complementary, but not necessary industrial mutual benefit”, Economic Outlook, No. 61,
1/5/1999, pp. 16-20.
9
Chi-Chun Hong, “Taiwan’s Role and Development Strategy in the New International Economic Order”,
7
to be clarified here: 1) is Taiwan’s investment in China leading to a crowding-out effect
(i.e., what is the impact on balance of payments)? 2) is Taiwan’s investment in China
contributing to enterprises’ unwillingness to invest domestically? 3) is Taiwan’s
investment in China contributing to Taiwan’s inability or hesitancy to upgrade its
industry? and 4) what is the relationship between industrial upgrading and industrial
hollowing-out?
Taiwan’s FDI in China is Helpful for Its Balance of
Payments
According to China’s statistics, as of August 1998 Taiwan’s cumulative realized
FDI in China was $19.8 billion. Compared to Taiwan’s $7.7 billion trade surplus and
$83.5 billion of its foreign exchange reserves in 1997, this figure is significant.
According to the UN formula, the direct effect of Taiwan’s FDI on its balance of
payments can be estimated using the following formula10:
Balance of payments = (-outflow of FDI) + (FDI-driven exports) + (FDI income)
10
presented at a Democratic Progressive Party (DPP) seminar on industrial policy,
http://www.dpp.org.tw/domain/trade/chichunh.htm. I-Jen Chiou and Nai-Jen Wu, “Meeting the
Challenges of the New Era: Constructing Equal, Broad, Sound, Reciprocal Bilateral Relationship
between Taiwan and China”, presented at a DPP seminar of China policy, 2/4/1998. Tu-Fa Wang,
“Taiwan’s
Needed
Attitude
on
Economic
Exchange
with
China”,
http://www.nbut.org.tw/0zerngzheq/develop/Saturday/109310.htm. Kong-Lien Kao, The Current
Situation and Development of Cross-Strait Economic Relations (Taipei: Mainland Affairs Council,
1994). Po-Chih Chen, “Taiwan’s Role in the Global Economic Network”,
http://www.nbut.org.tw/0zerngzheq/develop/Saturday/109311.htm.
United Nations, Transnational Corporations from Developing Countries: Impact on Their Home
Countries. (New York: United Nations, 1993), p.59.
8
In the above formula, the Chinese figure for Taiwan’s FDI in China would be more
precise because Taiwan’s FDI has to register in Chinese authority and does not
necessarily report to Taiwan’s authority. From 1991 to 1997, Taiwan’s FDI in China is
$2.6 billion average every year.
Regarding FDI income (including payments of royalties, fees and salaries to the
patent and repatriation of dividends, equity interest and loan principal), Taiwan does
not keep any official statistics. Therefore, the income of Taiwan’s FDI in China can be
estimated by the income of Taiwan’s total FDI. For Taiwan’s total FDI, the
income-investment ratio is 0.71 dollar/ per dollar of investment. (See Figure 2.) The
amount of Taiwan’s FDI in China multiplied by this ratio would indicate that Taiwan’s
income from its FDI in China is $1.9 billion average for every year from 1991 to 1997.
(See Figure 3.) According to a 1995 investigation by Taiwan’s Economic Ministry, of
2066 enterprises with FDI, 56% of those which invested in China repatriated the profits
of their affiliates back to Taiwan.11 Therefore, the $1.9 billion figure is reasonable.
As for FDI-driven exports, there are many different estimates. According to the
Chung-Hua Institution for Economic Research, FDI-driven exports in 1990 accounted
for 34% of Taiwan’s total transit-exports to China. 12 According to the Economic
Research Section of Taiwan’s Economic Ministry, the figure was 32.9% in 1990.13
According to Charng Kao, it was 32% in 1990.14 According to S. Gao et al., it was 46%
Taiwan’s Economic Ministry, Investigation Report on the Diversification and Internationalization of
Manufacturing Industry, 1995, p. 66.
12
Chung-Hua Institution for Economic Research, Cross-Strait Economic Yearbook: Cross-Strait
Economic Relations, 1993, p. 176.
13
Kong-Lien Kao, The Current Situation and Development of Cross-Strait Economic Relations (Taipei:
Mainland Affairs Council, 1994), p. 26.
14
Charng Kao, Mainland Economic Reform and Cross-Strait Economic Relations (Taipei: Wu-Nan,
1994), pp. 164-166.
11
9
in 1991; according to Chin Chung et al., it was 41% in 1991. 15 According to various
investigations, 68% to 86% of the source of machinery and equipment of
Taiwan-funded enterprises in China was purchased from Taiwan and 36% to 71% of
raw materials, parts, and semi-finished products were purchased from Taiwan.16 Most
of Taiwan’s exports to China consists of raw materials, parts, machinery and equipment.
If we use 34% figure calculated by the Chung-Hua Institution for Economic Research
as a multiplier, we can derive a conservative estimate of Taiwan’s FDI-driven exports to
China at $5.4 billion every year.
To sum up, from 1991 to 1997, Taiwan’s FDI in China contributed $4.6 billion net
foreign exchange every year for Taiwan’s balance of payments. The UN study in 1993
also argues that Taiwan’s outward FDI contributed to its overall favorable balance of
payments.17 (See Figure 3.)
In addition, Taiwan had an average $13.6 billion trade surplus with China from
1991 to 1997. Subtracting the $5.4 billion of Taiwan’s FDI-driven exports to China,
Taiwan still enjoys a $8.2 billion trade surplus. (See Figure 3.) Although it’s hard to
analyze the direct relations between the surplus and Taiwan’s FDI, they should have
some kind of indirect relationship. The situation can also be seen in Taiwan’s trade
Chin Chung, “Double-Edged Trade Effects of Foreign Direct Investment and Firm-Specific Assets:
Evidence From the Chinese Trio”, in Y.Y. Kuen (ed.), The Political Economy of Sino-American
Relations (Hong Kong: Hong Kong University Press, 1997). p. 143.
16
Chin Chung, “Double-Edged Trade Effects of Foreign Direct Investment and Firm-Specific Assets:
Evidence From the Chinese Trio”, in Y.Y. Kuen (ed.), The Political Economy of Sino-American
Relations (Hong Kong: Hong Kong University Press, 1997). p. 147. Charng Kao and Chi-Tsung
Huang, “The Analysis on the Relationship between Taiwan’s Investment in Mainland and Cross-Strait
Trade”, in Kuang-Shen Liao (ed.), The Potential Danger and Opportunity in the Cross-Strait
Economic Interaction (Hong Kong: Hong Kong University Press, 1995), p. 105. Taiwan’s Economic
Ministry, The Investigation Report on the Outward Investment by Manufacturing Industry, 1997, pp.
89, 92, 95, 98. Taiwan’s Economic Ministry, The Investigation Report on the Outward Investment by
Manufacturing Industry, 1998, pp. 132, 135, 138.
17
United Nations, Transnational Corporations from Developing Countries: Impact on Their Home
Countries. (New York: United Nations, 1993), p.64.
15
10
surpluses with the SEACs. Taiwan’s trade surplus with the SEACs increased from $0.3
billion in 1988 to $1.2 billion in 1997 ($3.2 billion in 1996); Taiwan’s trade surplus
with China increased from $1.8 billion in 1988 to $18.5 billion in 1997. (See Figure 4.)
In recent years, Taiwan’s global trade surplus has continued to decline from $18.7
billion at its highest point in 1987 to $7.7 billion in 1997, but its trade surplus with
China has increased extraordinarily. In fact, Taiwan’s entrepreneurs are re-organizing to
take advantage of the international division of labor, shifting production of goods --which used to be produced in Taiwan and export to the United States, Japan, and
Europe --- to China. The final destination is still the same. China provides a place for
Taiwan’s entrepreneurs to expand labor-intensive production, and Taiwan’s large
enterprises continue to provide intermediate and capital goods to these same
downstream enterprises. In 1986, Taiwan’s exports to the United States accounted for
48% of Taiwan’s total exports, and Taiwan’s exports to both the SEACs and China
accounted for 5%. In 1995, Taiwan’s exports to the United States accounted for 24% of
Taiwan’s total exports, and Taiwan’s exports to both the SEACs and China were 26%.18
Re-organization of the international division of labor contributes to Taiwan’s huge trade
surplus with the SEACs and China and reduces its trade surplus with the United States,
which has the side-effect of reducing trade friction with Washington and exacerbating
Beijing-Washington conflict. (More details are given below.)
18
Taiwan’s experience is similar to Japan’s early experience with investment in the newly industrialized
economies (NICs) and the SEACs. Outward FDI facilitated a new wave of international labor division.
Economists use the “Flying-Geese Paradigm” to explain FDI-driven economic relations among Asian
countries. Jonathan Morris, ed., Japan and the Global Economy: Issues and Trends in the 1990s
(London: Routledge, 1991), pp. 135-171. Partha Gangopadhyay, “Patterns of Trade, Investment, and
Migration in the Asia-Pacific Region”, in Grahame Thompson (ed.), Economic Dynamism in the
Asia-Pacific: the Growth of Integration and Competitiveness (London: Routledge, 1998). Kiyohiko
Fukushima and C.H. Kwan, “Foreign Direct Investment and Regional Industrial Restructuring in
Asia”, in Nomura Research Institute and Institute of Southeast Asian Studies, compiled, The New
Wave of Foreign Direct Investment in Asia (Singapore: Institute of Southeast Asian Studies, 1995), pp.
3-86.
11
Taiwan’s FDI in China Does Not Affect Domestic Investment
The above section explains that Taiwan’s FDI in China did not create a so-called
capital crowding-out effect, on the contrary, it has increased foreign exchange earnings
by an average $4.6 billion per year, which was 60% of Taiwan’s trade surplus in 1997.
Therefore, if Taiwan’s domestic investment did not increase, Taiwan’s FDI in China is
not to blame.
Taiwan’s Economic Ministry has conducted two major surveys of enterprise
managers to determine their motivation to invest in foreign countries. In 1996 managers
from 2800 companies were asked to respond to a multiple choice questionnaire and the
survey was repeated with 3,280 enterprises in 1998. 50% to 60% of respondents
indicated they were motivated to invest abroad by cheap labor and market potential,
one-third of them want to invest outward because of a deteriorating domestic operating
environment, which is the third reason Taiwan’s firms conduct FDI. Furthermore, the
domestic operating environment further deteriorated between 1996 and 1998. The
smaller the enterprises are, the more sensitive they are to perceive deterioration of the
domestic operating environment. 35% to 50% of small enterprises with FDI in the
SEACs and China cited such deterioration versus 30% for large enterprises. (See Figure
5.) Looking at when the companies began to invest outward, 35% to 37% of the
enterprises that began to invest outward from 1987 to 1994 perceived a deterioration of
the domestic operating environment, far exceeding 10% of enterprises that began to
conduct FDI before 1986. Hence, although external attraction is a major reason for
12
Taiwan’s entrepreneurs to invest abroad (or not to invest domestically), the
deteriorating domestic operating environment is also an important reason.
Regarding Taiwan’s domestic investment, Taiwan’s gross domestic investment
was declining rapidly before 1986, from 33.8% of GDP in 1980 to 17.5% at its lowest
point in 1986. Thereafter, it increased slightly to 25.2% at its new high point in 1993
and 22.4% in 1998, still higher than the level in 1986. The annual rate of change in
private gross fixed capital formation was –3.5% in 1982 and –6.2% in 1985. It was an
average of 4.8% from 1980 to 1986. By comparison, although the annual growth rate
for private gross fixed capital formation was –7.7% in 1990, it was 10.7% on the
average from 1987 to 1998. (See Figure 6.) Hence, while Taiwan’s entrepreneurs were
investing heavily overseas, they did not halt their domestic investment; rather, they
expanded both FDI and domestic investment simultaneously.
According to the 1996 and 1998 Economic Ministry studies, after enterprises
began investing abroad, only some of small enterprises lessened their domestic
investment. The index of the FDI impact on domestic investment by small enterprises
was –5.8% in 1996 and –6.6% in 1998, and most (around 55%) of them still maintained
the original scale of their domestic operations.19 For the larger enterprises, the index of
the FDI impact was more positive, 11.7% and 18.2% for medium and large enterprises
in 1996, and 24.4% and 25% in 1998, respectively. (See Figure 7.) Hence, after
19
In addition, according to Chong-ta Yen et. al. (1992), only 12.8% of enterprises terminated their
business in Taiwan after investing in China. According to Charng Kao et. al.(1995) and His-Chung
Kao (1993), more than 80% of home enterprises in Taiwan continued to operate after investing in
China. Tain-Jy Chen and I-Ping Chen, “Outward FDI impact on Taiwan’s Industrial Development”, in
Ya-Huei Yang (ed.), Taiwan’s Industrial Development and Policy (Taipei: Chung-Hua Institution for
Economic Research, 1995), p. 442. Charng Kao, “Taiwan Entrepreneur Investment of Manufacturing
Industry in Mainland and Cross-Strait Industrial Labor Division”, in Mee-kau Nyaw et. al. (eds.),
Economic China (Hong Kong: Chinese University Press, 1998), p. 242.
13
investing abroad, small enterprises were forced to reduce or terminate domestic
operation because of a lack of capital and managers. However, for medium-large
enterprises, outward investment was done for the purpose of increasing
competitiveness by taking advantage of the international division of labor. They did not
sacrifice domestic investment but rather expanded both domestic and foreign
operations.
For enterprises that began to invest abroad before 1986, the index of the FDI
impact on domestic investment was 2.5%, -2.8% for those from 1987 to 1991, 0.9% for
those from 1992 to 1994, and 8.7% for those from 1995 to 1996.20 These results are
very consistent with the trend of Taiwan’s overall outward investment. From the
mid-1980s to the early 1990s, most enterprises with FDI were labor-intensive small
firms. Some of these smaller companies closed their Taiwan production bases and
shifted to overseas operation. This kind FDI can be called “defensive FDI”. After the
mid-1990s, the scale of the enterprises investing abroad grew larger and larger. This
investment can be called “expansionary FDI”, conducted to facilitate international
labor division, not to close domestic factories. This kind of FDI expanded such that the
index became 8.7% in 1995 and 1996. This kind of FDI did not reduce domestic
investment but rather increased it.
For all enterprises, the index was 1% in 1996, that is, after investing abroad, the
portion that continued to invest domestically and expand domestic production exceeded
the portion that reduced or terminated their domestic operations. In 1998, the index
reached 5.9%. Taiwan’s FDI expanded along with domestic investment. Looking at
20
Taiwan’s Economic Ministry, The Investigation Report on the Outward Investment by Manufacturing
Industry, 1997, p. 188.
14
FDI recipient countries, the index for Taiwan’s FDI in China was –3.5% in 1996, but
turned out to be positive 1.8% in 1998. Relatively, the indexes for Taiwan’s FDI in
Vietnam and Indonesia were still negative in 1998. 21 Taiwan should have more
concerns with these negative indexes.
To sum up, when Taiwan’s entrepreneurs conducted outward investment, except
for a few small-medium enterprises that reduced or closed domestic production and
thus reduced domestic investment, the majority of enterprises did not reduce domestic
investment. Some small-medium enterprises that did cut domestic investment were
mostly in labor-intensive industries that began to invest abroad from 1987 to the early
1990s because they perceived a deterioration of the domestic operating environment.
They could not help but to close or reduce their original factories because of a lack of
capital and managerial base. However, the impact was very limited. The annual growth
rate in private investment of this period was still higher than before 1987. In addition,
these migrating enterprises would acquire investment income and increase Taiwan’s
FDI-driven exports. It’s thus very hard to say that Taiwan’s FDI in China had a
crowding-out effect on domestic investment.
Taiwan’s
FDI
in
China
Facilitated
Taiwan’s
Industrial
Upgrading
The question of whether or not Taiwan’s FDI in China facilitates Taiwan’s
21
Taiwan’s Economic Ministry, The Investigation Report on the Outward Investment by Manufacturing
Industry, 1997, p. 188. Taiwan’s Economic Ministry, The Investigation Report on the Outward
Investment by Manufacturing Industry, 1998, p. 21.
15
industrial upgrading should be answered in two parts: First, did Taiwan experience
industrial upgrading? Second, if Taiwan had industrial upgrading, what was its
relationship with Taiwan’s FDI in China?
First, did Taiwan experience industrial upgrading?
According to “The Index of Manufacturing Industrial Upgrading” made by
Taiwan’s Economic Ministry, there are three concrete indexes to measure whether or
not Taiwan’s industries are upgrading: the ratio of the output of heavy-chemical and
technology-intensive industries to the total output of manufacturing industries (output
ratio); the ratio of the exports of heavy-chemical and technology-intensive industries to
the total exports of manufacturing industries (export ratio); and labor productivity in
manufacturing industries (productivity).
The output ratio was 56.5% in 1982 and 76.5% in 1997. The export ratio was
49.8% in 1982 and 73.6% in 1997. Thus, both the output and export ratios increased
dramatically in the last 15 years, rising 30% and 24% respectively. The productivity (in
constant 1991 dollars) was $9,600 in 1982 and $31,000 in 1997, increasing $25,000 or
2.6 times. These simple figures have explicitly shown how fast Taiwan’s industries
have been upgraded.22 (See Figure 8.)
Second,
what
was
the
relationship
between
Taiwan’s
industrial upgrading and its FDI in China?
22
Ya-Huei Yang et. al., “The Adjustment and Upgrading of Industrial Structure”, in Chung-Hua
Institution for Economic Research, The Study of Industrial Policy on Taiwan’s March toward a
Developed Country Conclusion Report, 1997, pp. 7-67.
16
A closer examination of the output and export ratios and productivity reveals a link
between Taiwan’s industrial upgrading and FDI: The output ratio increased 3.7% from
1982 to 1986, 5.8% from 1986 to 1990, 5.5% from 1990 to 1994, and 6.1% from 1994
to 1997 (assuming it continues to increase proportionally in 1998, the increased ratio
would have been 8.1% from 1994 to 1998). The export ratio increased 5.1% from 1982
to 1986, 9.1% from 1986 to 1990, 5.7% from 1990 to 1994, and 3.9% from 1994 to
1997 (assuming it continues to increase proportionally in 1998, the increased ratio
would have been 5.2 % from 1994 to 1998). Productivity (in 1991 prices) increased
$2,800 from 1982 to 1986, $8,600 from 1986 to 1990, $6,300 from 1990 to 1994, and
$3,700 from 1994 to 1997 (assuming it continued to increase proportionally in 1998,
the increased productivity would have been $4,900 from 1994 to 1998). (See Figure 8.)
Taiwan’s entrepreneurs began to invest heavily in China (and the SEACs) beginning in
the mid-1980s. Labor-intensive industries migrated to China (and the SEACs) in mass
between the mid-1980s and early 1990s. The period from 1986 to 1994 coincided with
the period when Taiwan’s industries were upgrading the most rapidly. Explicitly there is
a positive relationship between Taiwan’s FDI in China and industrial upgrading.
Before the mid-1980s, Taiwan always had a “dual economic structure”. That is,
Taiwan’s small-medium enterprises produced labor-intensive goods for exports and
large enterprises were in charge of supplying intermediate and capital goods in a
monopolized domestic market. After 1987 when Taiwan began to invest abroad heavily,
the domestic economic structure changed significantly: labor-intensive, small-medium
enterprises migrated, and capital- and technology-intensive large enterprises replaced
17
small-medium enterprises as Taiwan’s prime exporters.23 In 1987, the share of exports
of the small-medium enterprises to Taiwan’s total exports was 67%, and that of large
enterprises was 33%; in 1997 the share of the small-medium enterprises was only 49%,
and that of large enterprises increased significantly to 51%. Compared with the period
from 1982 to 1987, the share of the small-medium enterprises declined by only 2.6%,
and that of large enterprises increased by 2.6%. In the next decade, the share of the
small-medium enterprises declined by 18.3%, and that of large enterprises increased by
18.3%. Hence, there is a positive relationship between Taiwan’s FDI and the enormous
increase in the proportion of exports of large enterprises to Taiwan’s total exports.
Regarding Taiwan’s export structure: if divided into labor intensity, capital
intensity, technology intensity, heavy-industrial products, and high-technology
products, Taiwan’s export structure has shifted in the past decade to less labor-intensive,
higher capital-intensive, and higher technology-intensive products. Concretely, the
share of heavy-industrial and high-technology exports increased tremendously. From
1982 to 1988, the index of the labor intensity of Taiwan’s exports increased by 1.6, the
capital intensity decreased by 0.6, technology intensity increased by 5.7, the share of
the exports of heavy-industrial products increased by 7.4%, and the share of the exports
of high-technology products increased by 7.7%. In the next decade from 1988 to 1998,
the index of the labor intensity of Taiwan’s exports decreased by 7.8, the capital
intensity increased by 9.4, technology intensity increased by 18, the share of the exports
of heavy-industrial products increased by 21.6%, and the share of the exports of
high-technology products increased by 16.1%. (See Figure 9.)
23
Kai Ma, “Prospect and Recommendation of Industrial Development”, in Chung-Hua Institution for
Economic Research, “The Study of Industrial Policy on Taiwan’s March toward a Developed
Country” Conclusion Report, 1997, pp. 391-392.
18
In addition, there was another explicit change in Taiwan’s export structure.
According to the classification by the World Bank, from 1987 to 1998 the share of
intermediate goods in Taiwan’s total exports increased by 26.4% (to 60% in 1998); the
share of machinery exports increased by 7.8%. In the same period, the share of the
exports of Taiwan’s consumer goods declined by 31%. Especially the share of
consumer non-durable goods decreased significantly by 23.2%. By comparison, from
1981 to 1987, the share of the exports of intermediate goods decreased by 3%, that of
consumer goods decreased by 2%, and the share of machinery increased by 6.9%. (See
Figure 10.) Hence, there is a close positive relationship between Taiwan’s FDI on the
one hand, and the enormous increase in the share of exports of capital- and
technology-intensive intermediate and capital goods while the share of consumer goods
in Taiwan’s exports decreased on the other hand.
To sum up, the momentum of Taiwan’s industrial upgrading came from the
enormous export expansion of heavy-chemical, capital- and technology-intensive
products, or intermediate goods and machinery, which were mainly supplied by large
enterprises. As analyzed above, the destination of Taiwan’s exports changed after the
mid-1980s. In the past, the main market of Taiwan’s exports was the United States; after
Taiwan’s huge FDI, the market has shifted significantly to China and the SEACs, where
Taiwan’s exports mainly consist of FDI-driven sales of intermediate and capital goods.
That is, the labor division existing inside Taiwan before the mid-1980s has been
transformed into an international labor division driven by the FDI of Taiwan’s
small-medium enterprises. Labor-intensive, small-medium enterprises established
production bases overseas (including in China), with the provision of intermediate and
19
capital goods by large enterprises, and then the products of Taiwan’s overseas affiliates
were exported to the United States, Japan, and Europe. Therefore, the output ratio of
heavy-chemical and technology-intensive industries, which are primarily composed of
large enterprises, increased rapidly by 16.3% and the export ratio of these industries
increased by 18.7% from 1986 to 1997. The expanded demand by the small-medium
enterprises which invested overseas (including in China) for intermediate and capital
goods produced by the large enterprises emerged as a new international (inter-firm)
labor-division, which had considerable benefits for Taiwan’s industrial upgrading.24
In addition to inter-firm (inter-industry and intra-industry) international labor
division, there was intra-firm international labor division. 25 According to the 1998
investigation report by Taiwan’s Economic Ministry, 32% of Taiwan’s enterprises with
FDI explicitly stated that their products produced in Taiwan are superior or more
value-added than those made by their overseas bases, and only 4% saved the opposite
response. Divided by the scale of enterprises, 44% of large enterprises with FDI said
that their products in Taiwan were more superior or more value-added, only 2% took an
opposite view; by comparison, only 27% of small enterprises with FDI held the same
view and 5% the opposite view. Divided by major investment area, among Taiwan’s
Charng Kao and Shi-Ying Wu, “The Impact of Cross-Strait Economic Relations on Taiwan’s Industrial
Development”, in Ya-Huei Yang (ed.), Taiwan’s Industrial Development and Policy (Taipei:
Chung-Hua Institution for Economic Research, 1995), pp. 402, 408-411, 415-416. Kai Ma, “Prospect
and Recommendation of Industrial Development”, in Chung-Hua Institution for Economic Research,
The Study of Industrial Policy on Taiwan’s March toward a Developed Country Conclusion Report,
1997, pp. 383-419. Charng Kao, “Taiwan Entrepreneur Investment of Manufacturing Industry in
Mainland and Cross-Strait Industrial Labor Division”, in Mee-kau Nyaw et. al. (eds.), Economic
China (Hong Kong: Chinese University Press, 1998), pp. 237-253. Allen Y. Tso, “An Analysis of the
Trade-Investment Relationship across the Taiwan Strait”, Mainland China Studies, Vol. 39, No. 5,
May 1996, pp. 7-11. Ying-Yi Tu, “The Retrospect and Prospect of Industrial Internationalization
Policy”, Economic Outlook, No. 55, 1/5/1998, p. 98.
25
FDI may result in three kinds of industrial restructuring: intra-firm, intra-industry, and inter-industry.
Tain-Jy Chen, Yi-Ping Chen, and Ying-Hua Ku, “ Taiwan’s Outward Direct Investment: Has the
Domestic Industry been Hollowed Out?” in Nomura Research Institute and Institute of Southeast
Asian Studies, compiled, The New Wave of Foreign Direct Investment in Asia (Singapore: Institute of
Southeast Asian Studies, 1995), pp. 103-104.
24
20
entrepreneurs investing in China and the SEACs, 26% to 44% said that their products in
Taiwan were superior or more value-added, while at most 7% said the opposite.
Regarding small enterprises, there still exist some forms of internal labor division,
although the degree is less than in large enterprises. Moreover, according to the 1996
investigation report by Taiwan’s Economic Ministry (in a multiple choice question),
more than a quarter of enterprises said that their FDI was done in response to the era of
internationalization, and the larger the enterprises are, the ratio is higher: 45% of large
enterprises answered yes, and only 20% of small enterprises answer yes. 26 Therefore,
the larger the enterprises are, the more they tend to have an intra-firm division of labor.
That is, they manufacture labor-intensive products in China and produce superior or
more value-added goods in Taiwan.
According to the 1998 report, when enterprises with FDI were asked how they
respond to international competition, 47% to 61% of them answered that they
“reinforce personnel training”, “develop more value-added products”, “reinforce the
acquisition of raw material and marketing service”, and increase “automation of
production”; only 27% answered “enlarge outward investment.” These results were
true even for companies with major FDI in China.27 Therefore, “outward investment” is
a secondary response to greater international competition. Its goal is to increase
intra-firm labor division and international competitiveness so that enterprises can
utilize production factors (including capital, skilled labor, and technology) more
efficiently, expand production capacity, and exploit economies of scale in overseas
markets. Hence, FDI is not just a means to passively survive overseas, but is a
Taiwan’s Economic Ministry, The Investigation Report on the Outward Investment by Manufacturing
Industry, 1998, p. 140-141.
27
Taiwan’s Economic Ministry, The Investigation Report on the Outward Investment by Manufacturing
Industry, 1998, p. 13.
26
21
complementary factor to promote the whole enterprises’ competitiveness and
technological upgrading.
The third possibility is that after Taiwan’s labor-intensive industries invest heavily
abroad, they will release domestic resources (including labor, land, and capital) that
used to be employed in those industries. Adding investment income repatriated by
overseas production and FDI-driven export income, this will facilitate the more
efficient use of Taiwan’s factors of production and lead to expanded production
capacity. As general international trade theory argues, when a country opens up for free
trade, this country will specialize in industries where it has a comparative advantage,
and the industries where it has less comparative advantage will decline and their
resources will be absorbed by the more competitive industries. The opening country
thus acquires benefits at least from commodity exchange and specialization of
production. Similarly, when its “relative ratio of wage to rental cost” (wage ratio)
increases, Taiwan’s labor-intensive industries can no longer compete with those of the
SEACs and China, and hence lose their comparative advantage. Entrepreneurs and
managers can achieve higher returns by investing part of their capital and utilizing
limited technology in China’s export-processing industries. In turn, the entrepreneurs
repatriate investment income, which facilitates domestic capital accumulation. In
addition, FDI-driven exports expand foreign markets for domestic products
(intermediate and capital goods), which promotes economies of scale in domestic
industrial development.
On the other hand, a large amount of labors, land, and capital employed by the
original
labor-intensive
industries
can
22
be
transferred
into
capital-
and
technology-intensive industries. Because Taiwan’s wage ratio is higher than China’s
and the SEACs’, its capital rental cost, relatively speaking, is cheaper and the ratio of
highly trained technicians is higher. Therefore Taiwan’s enterprises would tend to
employ capital- and technology-intensive production factors.28 Of course, this process
involves transformation and re-training of the labor force, and Taiwan must pay certain
costs. However, if they do not migrate overseas, the labor-intensive industries would
face intense international competition and Taiwan would have to pay an even higher
price, including increased trade protection, subsidies for non-competitive business, and
consumer loss and reduced competitiveness of domestic enterprises. Finally, even if
protected, these industries might still have been eliminated in the long run. By contrast,
if these traditional labor-intensive industries can migrate overseas, Taiwan’s
government can relocate resources to promote industrial upgrading and transformation
of the labor force. At the same time, the migration of these industries would facilitate
forming a domestic environment in favor of technology- and capital- intensive
industries, and this in turn would attract foreign multinational companies (MNCs) in
such industries to invest in Taiwan. All of this would facilitate Taiwan’s industrial
upgrading. Basically, this conclusion is compatible with the conclusion of the UN
study.29
As for FDI of capital- and technology-intensive industries, Taiwan’s investment
style is similar to the FDI experiences of developed countries. Much international
literature has analyzed these experiences, and basically has concluded that outward FDI
makes a positive contribution to the home countries. In Asia, Japan is a good example.
Chu-Chia Lin, “The Comparison of Production Functions for the Cross-Strait Taiwan’s Entrepreneurs”,
in Mee-kau Nyaw et. al. (eds.), Economic China (Hong Kong: Chinese University Press, 1998), pp.
139-151.
29
United Nations, Transnational Corporations from Developing Countries: Impact on Their Home
28
23
For Taiwan, enterprises engaged in FDI are essentially large and medium enterprises.
Their FDI is intended to expand production capacity, expand market base, increase
competitiveness, and establish a global production network and labor division. These
FDIs can be called “expansionary” or “aggressive” FDIs, and would essentially
contribute to Taiwan’s economic development, especially industrial upgrading.30
Only Industrial Upgrading, No Industrial Hollowing-Out
There is yet no precise definition for the term “industrial hollowing-out”, and this
term easily leads to some misunderstanding. Taiwan’s industrial structure has
experienced a great transformation. One of the major characteristics of this change is
that the share of manufacturing industry’s output to GDP declined significantly and that
of service industry increased tremendously. From 1982 to 1986, the manufacturing
industry’s contribution to total GDP increased from 35.2% to 39.4%. Nevertheless, the
ratio declined after 1987, to 27% in 1998, with the reduction of 12.4% in the short
period of 11 years. Relatively, the service sector increased from 47.3% of GDP in 1986
to 63.1% in 1998, an increase of 15.8% over 11 years. It’s a very natural phenomenon
that the service sectors grows as an economy becomes more developed.
Deindustrialization is principally the result of higher productivity in manufacturing
than in services.31 Taiwan is not an exception. For example, the share of the output of
Countries (New York: United Nations, 1993), pp. 64-67.
Tain-Jy Chen and I-Ping Chen, “Outward FDI impact on Taiwan’s Industrial Development”, in
Ya-Huei Yang (ed.), Taiwan’s Industrial Development and Policy (Taipei: Chung-Hua Institution for
Economic Research, 1995), pp. 433-462. Chong-tse Lee and Fong-Chen Fu, “The Theory and
Practice of Cross-Strait Industrial Labor Division”, in Chung-Hua Institution for Economic Research,
“The Study of Industrial Policy on Taiwan’s March toward a Developed Country” Conclusion Report,
1997, pp. 5-6. Charng Kao, Mainland Economic Reform and Cross-Strait Economic Relations (Taipei:
Wu-Nan, 1994), pp. 219-227.
31
Robert Rowthorn and Ramana Ramaswamy, Deindustrialization --- Its Causes and Implications,
30
24
the service sector in the UK and the United States was over 70% of GDP in 1993, in
France near 70%, in Hong Kong (in 1994) 83%, and in Singapore (in 1995) 63%. In
addition, along with the rapid development of the service sector, trade in services has
increased more rapidly than trade in commodities. Currently, trade in services is 23% of
world total trade. Furthermore, Taiwan began to promote the “Asia-Pacific Regional
Operation Center” (APROC) plan and hoped to establish six major operation centers.
Five of these centers belong to the service sector.32 Therefore, we cannot assert that
Taiwan has an “industrial hollowing-out” syndrome just because the service sector’s
share of GDP has increased while the manufacturing sector’s share has gone down.33
Nevertheless, the dramatic change in economic structure leads to suspicions that
capital outflows are creating either an unwillingness to upgrade or non-competitiveness
without upgrading, which is reducing the manufacturing sector’s share. As explained
above, Taiwan’s industries have been upgrading over the past decade and Taiwan’s FDI
explicitly contributes to the upgrading process. In addition, Taiwan’s FDI is not causing
a net outflow of capital but is actually increasing foreign exchange inflows. Compared
with other countries, Taiwan’s performance is quite satisfactory: from 1993 to 1998, the
annual growth rate of Taiwan’s industrial output was 4.5%, slightly below that of the
United States, but far exceeding the –0.1% to 2% average for other industrial
countries.34 Therefore, Taiwan’s industries are still strongly competitive, and there is
Economic Issues 10, (Washington, D.C.: International Monetary Fund, 1997).
Including financial center, telecommunication center, media center, navigation transit center, and
aviation transit center.
33
Charng Kao and Shi-Ying Wu, “The Impact of Cross-Strait Economic Relations on Taiwan’s Industrial
Development”, in Ya-Huei Yang (ed.), Taiwan’s Industrial Development and Policy (Taipei:
Chung-Hua Institution for Economic Research, 1995), p. 415. Taiwan’s Economic Ministry, “The
Role
of
Service
Industry
in
the
Economic
Development”,
http://www.moea.gov.tw/~meco/paper/issue/15.htm.
34
Taiwan’s Economic Ministry, “Figure A-12 The Growth Rate of the Industrial Output in Major
Countries”, http://www.moea.gov.tw/~meco/stat/four/a-12.htm.
32
25
not a so-call “hollowing-out” syndrome.
Unemployment,
Economic
Risk,
and
Competition
in
the
International Market
In the past, there was always a doubt whether Taiwan’s FDI would increase the
domestic unemployment rate. As a matter of fact, Taiwan’s unemployment rate did not
increase along with its FDI overseas (including China). Taiwan’s unemployment rate
averaged 2.6% from 1982 to 1986, 1.6% from 1987 to 1994, and 2.5% from 1995 to
1998. The labor reallocation problem would have been most serious from 1987 to 1994,
when the migration of labor-intensive industries was at its peak, yet in this period
Taiwan’s unemployment rate was 1% lower than the average from 1982 to 1986. (See
Figure 6.) Hence, FDI did not have a direct negative impact on Taiwan’s unemployment
rate. As mentioned in the UN study, the real problem was labor reallocation.35
Furthermore, it is the declining of international competitiveness of some domestic
industries that creates the need for labor reallocation and FDI. It is not the case that FDI
leads to higher unemployment. We should not reverse the cause and the result.36
Many people suspect that close and rapid economic exchange between Taiwan and
China might bring extraordinary economic risks for Taiwan as a whole. 37 This belief
35
United Nations, Transnational Corporations from Developing Countries: Impact on Their Home
Countries (New York: United Nations, 1993), pp. 57-88.
36
United Nations, Transnational Corporations from Developing Countries: Impact on Their Home
Countries (New York: United Nations, 1993), p. 68. Allen Y. Tso, “An Analysis of the
Trade-Investment Relationship across the Taiwan Strait”, Mainland China Studies, Vol. 39, No. 5,
May 1996, pp. 21.
37
The so-called “economic risk” refers to the stability and sustainability of Chinese economic
development. Political risk will be discussed in the next section on “security analysis”. Although there
are many categories of political risk, this paper will focus on the special political risk stemming from
cross-Strait hostility, that is, China’s economic sanctions against Taiwan. The political risk stemming
from economic sanctions (cross-Strait hostility) includes: expropriation or nationalization of property
26
relies on the idea that China is currently experiencing two great transformations:
industrialization and marketization. Therefore, the argument goes, economic
interaction with China brings economic uncertainty to Taiwan. If Taiwan has too close
of an exchange with China, any variation in China’s economy would have a spillover
effect on Taiwan’s economic stability and development.
However, this issue of risk should be left to Taiwan’s entrepreneurs to handle
directly and Taiwan’s government should not intervene on their behalf but rather should
provide necessary information. From a purely economic-risk point of view, the
individual stake of Taiwan’s entrepreneurs in China’s economy should be bigger than
that of Taiwan as a whole. Although the loss to Taiwan’s entrepreneurs due to economic
risk in China would inflict damage on Taiwan’s economic strength, its impact on
Taiwan as a whole would be relatively limited. For any individual enterprise, the
absolute and relative amount of the loss would be very serious. Therefore,
entrepreneurs would be expected to have a more cautious assessment than the
government, otherwise they might lose a majority of their assets, especially for
small-medium enterprises investing in China.
Nevertheless, for some small enterprises, China is the only choice because of
limitations in management skill and language. Because of the high potential returns,
Taiwan’s entrepreneurs might invest in China despite the high risk. In addition, because
the scale of investment of Taiwan’s entrepreneurs is typically small, investors tend to
recoup their investment in a very short period. Even if China encounters instability, the
loss would most often be in the form of lost profit.
or resources, war damage, and inconvertibility of currency.
27
For large enterprises, FDI in China is only part of their global production network.
The impact of economic risk would be much smaller than for small enterprises. For
Taiwan as a whole, the damage inflicted by economic risk would be even smaller than
any individual enterprise. Since entrepreneurs can balance their long-term interests and
the aggregate impact on entrepreneurs is the impact on Taiwan, there is no reason why
Taiwan as a whole would have difficulty balancing its long-term interests. The most
Taiwan could lose would be its FDI stock and FDI-generated trade, but the contribution
FDI would have already made on industrial upgrading, advancement of enterprises’
competitiveness, and investment income would compensate for such losses.
Nevertheless, because Taiwan and China are still in a state of hostility, it’s natural
to be more sensitive to the economic risks of cross-Strait economic exchange for fear
that it might erode Taiwan’s economic foundation. In order to be more cautious, this
paper will further analyze the economic risks from five aspects: China’s past
performance, international assessment on China’s economic prospects, the
performance of the SEACs (alternatives), China’s policy of economic development,
and international labor division.
First, reviewing China’s past performance: after the economic reform and
opening-up in 1979, China experienced low economic growth rates for only a few years
---- 4.1% in 1981, 4.1% in 1989, and 3.7% in 1990. But these rates were still admirable
compared with other countries. Generally speaking, China’s economic growth has been
very stable with 10% average annual growth from 1979 to 1996 and 10.3% average
from 1987 to 1996, when Taiwan’s entrepreneurs invested heavily in China. Although
28
China achieved an economic “soft landing” in 1996 and escaped the worst of the Asian
financial crisis, China’s future development is still filled with uncertainty. It is
especially worth noting that there is much uncertainty surrounding China’s efforts to
reform its state-owned enterprises and banking system.38
Second, we turn to the international assessment of China’s economic prospects. In
September 1997, the World Bank published a series of books, China 2020, to
comprehensively analyze the prospects and challenges of China’s future economic
development. The series concludes: although China will have many challenges in the
future, she can meet these challenges and sustain rapid growth as she did in the past two
decades. 39 In 1998, an Organization for Economic Co-operation and Development
(OECD) study titled Chinese Economic Performance in the Long Run, by Angus
Maddison, emphasizes: though through the year 2015 China’s GDP growth would slow
down from 7.5% to 5.5% per year, nevertheless its per capita GDP average growth rate
of 4.5% would be the highest in the world, and China would probably match the United
States in total GDP by 2015.40 The country commercial guide for China issued by the
U.S. Department of Commerce argues that China’s economic growth in the past two
decades has brought great opportunities for foreign firms in almost every sector of the
economy.41
The objectivity of these assessments can be concretely tested by examining the
Nicholas R. Lardy, China’s Unfinished Economic Revolution, (Washington, D.C.: Brookings
Institution Press, 1998).
39
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World
Bank, 1997), p. ix.
40
Angus Maddison, Chinese Economic Performance in the Long Run (Paris: OECD, 1998) pp. 17,
97-98.
41
STAT-USA (Internet), U.S. Department of Commerce, “China: Executive Summary”,
http://www.stat-usa.gov/ccg.nsf/45…b3bf0825673c005dee51?OpenDocument, May 26, 1999..
38
29
FDI flow into China: China has been the second largest FDI recipient in the world since
1993, after the United States. In 1997, China had actual FDI of $45.3 billion. Including
other foreign investment and loans, total foreign investment in China was $64.4 billion
in 1997. At the end of 1997, cumulative foreign investment was $348.3 billion.
Although influenced by the Asian financial crisis in 1997 and 1998, the realized FDI in
China in 1998 still increased by 0.7% to $45.6 billion. Hence, the international
community remains relatively confident and optimistic with China’s economic
development.
Third, we review the performance of the SEACs (alternatives). From 1979 to 1997,
the average annual economic growth rate in Indonesia was 5.9%, Malaysia 6.5%, the
Philippines 2.5%, and Thailand 6.5%. From 1987 to 1997, the average rate in Indonesia
was 7.1%, Malaysia 8.4%, the Philippines 4%, and Thailand 8.6%. Although the
economic growth rates of the SEACs have been wonderful in the past two decades, they
still didn’t match China. In addition, the variation of the SEACs’ economic growth was
significant. From 1979 to 1997 there were negative economic growth rates in five
separate years among these four SEACs. Even worse, since July 1997, when the Asian
financial crisis broke out in the SEACs, their economic growth rates have fallen into
negative figures. It will take a long time for the SEACs to recover and Taiwan’s
entrepreneurs who invested in these countries have suffered tremendously.
Although the SEACs suffered from the Asian financial crisis, it does not mean that
Taiwan’s entrepreneurs should invest excessively in China. Because China retains
significant economic risk, Taiwan’s entrepreneurs should still diversify their FDI in
order to hedge the risk. However, the Asian financial crisis at least tells us that China’s
30
economic risk is not necessarily greater than that of the SEACs. According to Standard
& Poor’s August 1998 assessment of sovereign risk, China and Malaysia were ranked
as BBB+, Thailand BBB-, the Philippines BB+, and Indonesia CCC+.42 According to
the assessment of the sovereign (long-term bonds and notes) risk by Moody’s Investors
Service in May 1999, China ranked an A3, Indonesia B3, Malaysia Baa3, the
Philippines and Thailand Ba1, and Vietnam B1.43 Therefore, current assessment on
China’s long-term economic risk is not as high as we thought, and certainly not as high
as the SEACs.
Fourth, facing two trends of domestic economic transition and economic
globalization, Chinese leaders have emphasized economic stability and sustainable
development. Furthermore, they have proposed “new security concept” with economic
security at its core. China emphasizes that every country should pursue peace and
cooperation and establish an open global economic system.44 After the eruption of the
Asian financial crisis in July 1997, China promptly committed $1 billion to the IMF
effort to assist Thailand.45 By the end of 1998 China had committed $5.5 billion to
assist Asian countries through the IMF. 46 At the same time, Chinese leaders have
maintained the Renminbi’s value, thus contributing to regional economic stability. No
“Sovereign Defaults Continue to Decline In 1998”, Standard & Poor’s CreditWeek, August 12, 1998,
p.10.
43
Moody’s Investors Service, “Sovereign Ceilings for Foreign-Currency Ratings”,
http://www.moodys.com/repldata/ratings/ratsov.htm.
”Rating
Definitions”,
http://www.moodys.com/ratings/ratdefs.htm. World Bank, East Asia: The Road to Recovery
(Washington, D.C.: World Bank, 1998), p.125.
44
Chinese scholar Yan Xuetong also argues that China’s security interests have shifted from survival to
economic security. The primary task now is to prevent any aggressive war from damaging China’s
economic achievements, and to create a peaceful international environment for the country’s
modernization. “China Calls for New Security Concept, Economic Stability”, Hong Kong AFP,
12/15/1997, via World News Connection, document number: FBIS-EAS-97-349. Yan Xuetong, “In
Search of Security After the Cold war”, World Affairs, Oct-Dec 1997, Vol. 1, No. 4, pp. 50-58.
45
“Bank Governor on Monetary Policy, Thai Aid Package”, Xinhua, 8/14/1997, via World News
Connection, document number: FBIS-CHI-97-226.
46
“Spokesman Promises $5.5 billion Aid to Asian Countries”, Xinhua, 11/17/1998, via World News
Connection, document number: FBIS-CHI-98-321.
42
31
matter whether China keeps a stable Renminbi out of self-interest or to gain diplomatic
leverage, there is no denying that China’s economy has been integrated into the
Asia-Pacific, and even the global economy. China cannot be unaffected by economic
difficulties abroad.47
China’s economic stability is important for the world at large. Its economic
development not only influences Taiwan, but also Japan, Korea, the SEACs, the United
States, and the European countries. Regarding FDI in China, 8.2% is from Taiwan,
equivalent to that from the United States and Japan. Therefore, it is in the common
interest for every country to persuade China to adopt the policy of stability and
sustainable development, which is also in China’s long-term interest. At the same time,
the world community has the stake to assist China in its transition period and help it to
overcome the potential risks of economic reform.
Fifth, when assessing China’s economic risk, we must consider the international
division of labor of Taiwan’s entrepreneurs in China. Taiwan’s production bases in
China established in the late-1980s and early-1990s are basically export-oriented and
their major markets are the developed countries, including the United States, Japan, and
Europe. That is, the production activities of Taiwan entrepreneurs in China depend
more on the international economic cycle, not on China’s economy. For example,
China’s exports suffered due to the Asian financial crisis in 1998, but China’s exports to
the United States and Europe increased dramatically.48 Taiwan’s production in China
Chen-yuan Tung, “Renminbi would not devalue in the short term, it would depend on international
economic situation in long term”, Economic Outlook, No. 60, 11/5/1998, pp. 33-35.
48
In 1998, on the one hand, China’s exports to Japan declined by 6.7%, to Hong Kong by 11.5%, to South
Korea by 31.3%, and to Singapore by 9.1%. On the other hand, China’s exports to the United States
increased by 16.1%, to Germany by 13.2%, to the U.K. by 21.4%, to France by 21.1%, and to
Netherlands by 17.1%.
47
32
accounts for an estimated one-seventh of China’s total exports to the United States49, so
although slow economic growth in China will generate some losses for Taiwan’s
entrepreneurs, but international exchange rate fluctuations and the global economic
cycle would have a more serious impact on Taiwan firms in China.
Regarding the competition between Taiwan and China in international markets,
generally speaking, Taiwan’s exports have different factor intensities than China’s
exports. Therefore, Taiwan’s export structure is different from China’s. In the
international market, Taiwan has lost major share in the traditional labor-intensive
industrial market, which has been taken over by China and the SEACs. Regarding
competition in the United States market, Taiwan’s main exports of computer and
information products basically compete with those of the SEACs (especially Malaysia)
and South Korea. As to the competition in Japan’s market, the competition between
Taiwan and China is among different levels and industries.50
In addition, competition between Taiwan’s labor-intensive exports and China’s
exports which are manufactured by foreign-funded labor-intensive industries is
unavoidable. Nevertheless, this competition is between Taiwan’s affiliates in China and
enterprises operating in Taiwan51, which is benign and facilitates Taiwan moving to
more technology-intensive and capital-intensive industries.
Third, Taiwan’s export structure has changed dramatically since Taiwan began
Chen-yuan Tung, “Trilateral Economic Relations among Taiwan, China, and the United States”, Asian
Affairs: An American Review, Vol. 25, No. 4, Winter 1999, pp. 220-235.
50
Taiwan’s Mainland Affairs Council, Analysis on Cross-Strait Economic Situation, October 1997, pp.
114 to 139.
51
Taiwan’s Mainland Affairs Council, Analysis on Cross-Strait Economic Situation, October 1997, p.
140.
49
33
investing heavily abroad in 1987. In the past, labor-intensive consumer goods were
manufactured by small-medium enterprises and then were exported to developed
countries, such as the United States, Japan, and Europe. Now, it is very common for
small-medium enterprises to establish bases overseas to produce labor-intensive
consumer goods, with the inputs of intermediate and capital goods coming from
Taiwan’s large enterprises. The final product is exported to the United States, Japan,
and Europe. Therefore, Taiwan’s shrinking market share in developed countries is
because of the change in Taiwan’s role in the international division of labor, not because
Taiwan’s exports are less competitive.52
Fourth, most of Taiwan’s enterprises argue that the Taiwan government’s
restrictions on the “three direct links” and its policy of “no haste, be patient” lessen
their competitiveness. Therefore, Taiwan’s own government might be one of the
important reasons for making Taiwan’s enterprises compete at a disadvantage in the
international market.53
The following is the summary map of the international division of labor between
Taiwan and China around 1996:
Ya-Huei Yang et. al., “The Adjustment and Upgrading of Industrial Structure”, in Chung-Hua
Institution for Economic Research, The Study of Industrial Policy on Taiwan’s March toward a
Developed Country Conclusion Report, 1997, pp. 15.
53
As early as December 1993, Economics Minister P.K. Chiang, with support of the minister of
transportation and communication, publicly advocated establishing direct shipping links between
Taiwanese and Chinese ports on the grounds that it would reduce transportation costs and make
Taiwan’s industries more competitive. Ralph N. Clough, Cooperation or Conflict in the Taiwan Strait ?
(Lanham, Maryland: Rowman & Littlefield Publishers, Inc., 1999), p. 41.
52
34
The International Economic Labor-Division
between Taiwan and China
China
Taiwan
on the average $4.6 billion on its balance of payments,
subtracting the amount of Taiwan’s FDI.
expanding FDI, and enhancing
Taiwan’s entrepreneurs manufactured
labor-intensive products, most of them
were exported to the U.S. and reached to
about $7.2 billion to $11.2 billion in
Upgrading
technology-intensive products; overseas
1997.
Taiwan produced capital- and
techonology-intensive industries was 74% in
The export ratio of heavy- and
industries was 76% in 1997.
techonology-intensive
The output ratio of heavy- and
Taiwan’s exports to the advanced countries declined
bases labor-intensive products.
35
1996.
production, value-added products,
and marketing service, automatic
training, acquisition of raw material
Enterprises reinforced personnel
From 1991 to 1997, Taiwan’s FDI in China contributed
cooperation with foreign firms.
24% in 1995.
81% of Taiwan’s FDI concentrated in southeast coastal provinces.
intermediate and capital goods of large
enterprises and contributed $4.6 billion of
foreign exchange per year.
Resource was released from migrated
1997.
countries of the
U.S., Japan, and
Europe.
U.S. to its total exports declined from 48% in 1986 to
Therefore, Taiwan’s FDI had contributed enormously to their economies
exceeded $7.7 billion of Taiwan’s global surplus in
The advanced
significantly. The share of Taiwan’s exports to the
and led to very close trade interdependence with Taiwan.
trade surplus with China, which was $18.5 billion and
labor-intensive industry to those with
SEACs: their
international
economic
labor-division
with Taiwan was
similar to
China’s.
Taiwan’s entrepreneurs mainly invested in labor-intensive industries and
supply Taiwan’s affiliates in China. It generated huge
comparative advantage (high capital- and
technology-intensity).
including investment income, FDI-driven exports,
conducted processing exports. They employed 5 million of employees,
Taiwan exported intermediate and capital goods to
created $44 billion output and $27.8 billion of exports in 1996.
FDI in China was $19.8 billion.
Taiwan’s overseas enterprises imported
As of August 1998 Taiwan’s cumulative realized
III.
Security Analysis
Taiwan’s government and people worry that cross-Strait economic exchange will
threaten Taiwan’s national security. Nevertheless, “national security” is a very abstract
term and hence it needs to be clarified to facilitate discussion.
China’s ambition to reclaim Taiwan and its failure to renounce the use of force to
achieve so-called “peaceful unification” is a clear threat to Taiwan’s security. However,
this paper does not discuss this threat because it has existed for decades and is not a
product of cross-Strait economic exchange. Therefore, this section will address two
questions. First, on the fundamental level, would/could cross-Strait economic exchange
change China’s policy toward Taiwan? Second, on the instrumental level, would/could
China exploit cross-Strait economic exchange to threaten Taiwan’s fundamental values
(such as democracy, freedom, and sovereign independence)?
The Fundamental Level of Security Analysis
On the fundamental level, would cross-Strait economic exchange cause China to
be more likely to unify with Taiwan by force, or to peacefully co-exist with Taiwan in
the long-term? There is no sufficient international political-economic theory to
elucidate this problem. But, generally speaking, integration theory, based on the
experience of European integration, argues that economic exchange among nations
does lead them to solve disputes peacefully, even to the point of promoting political
integration. Nevertheless, we must further clarify one point: under the circumstances of
36
peaceful progress, and non-threat of force, various forms of political and economic
integration (including unification), so long as they include Taiwanese explicit consent,
cannot be considered against Taiwan’s national interests. Therefore, the measurement
of “reducing Taiwan’s national security threat” should refer to four categories: 1) China
renounces the use of force against Taiwan; 2) China reduces its threat of force against
Taiwan; 3) China states its willingness to resolve disputes peacefully with Taiwan; and
4) China promises not to force Taiwan to accept its proposal by force (or China agrees
that any proposal must be agreed by Taiwan without any threat of force). If China can
make concessions in these four categories, then cross-Strait economic exchange would
contribute to Taiwan’s security, and vice versa.
However, it is very hard to understand the real intention of China’s
decision-making, and the modification of China’s policy is very slow and difficult to
perceive. Unless China explicitly renounces the use of force against Taiwan, any act of
benevolence or reduced animosity on China’s part would be interpreted in Taipei as
either a political deception or united-front tactics, particularly given the miserable
experience of KMT’s defeat in China in the late 1940s. In addition, it’s very difficult to
judge objectively China’s political development with its many uncertainties. Given
China’s great international strategic clout and huge military force, it’s inevitable that
Taipei is highly suspicious of Beijing’s motives.
Under these limitations, can we predict that cross-Strait economic exchange would
contribute to cross-Strait peaceful co-existence in the long-term? Generally speaking,
after adopting its reform and open-up policies in 1979, China gradually has adopted a
more cooperative foreign policy and has grown more inclined to resolve international
37
disputes peacefully. Even in the sensitive sovereign disputes of the South China Sea,
Diaoyutai Islands, and human rights, China has demonstrated a willingness to adopt
cooperative and peaceful policies toward both neighboring and Western countries.
China has also participated in the ASEAN Regional Forum, a multilateral
confidence-building forum. From the 1960s to the 1980s, the Soviet Union was China’s
number one enemy, which presented both an ideological and military challenge to
Beijing. But in the 1990s, China reached a border agreement with Russia and five
Central Asian countries with a consensus based on peaceful co-existence. At the same
time, China established a “strategic partnership of coordination” with Russia. Needless
to say, China has mutually reconciled with the United States, despite America’s
protection of Taiwan, and tried to establish a “constructive strategic partnership” with
the United States.
The gigantic evolution in China’s diplomacy is not just a superficial change in
tactics, but reflects fundamental change in China itself. After the third plenum of the
Eleventh Central Committee of December 1978, China’s diplomatic strategy adopted
two main principles: 1) accelerating China’s economic modernization is the only way to
maintain the Chinese Communist Party’s legitimacy, and 2) China’s economic
modernization requires China to integrate itself into the broader international political
and economic order. When Nicolae Ceausescu was executed at the end of 1989, some
Chinese officials viewed this as confirmation that the decision to repress the
“reactionaries” in the Tiananmen Square had been the right one for insuring the Party’s
survival. Facing Western sanctions and the collapse of communism in the former Soviet
Union and East Europe, Deng Xiaoping, however, concluded that the Chinese
leadership would share Ceaucescu’s fate, “if we don’t carry out reforms and bring about
38
benefits to the people.”54
Not only has China’s national developmental goal changed, but also China’s
leadership style and foreign policy decision making has changed as well. From the
1950s to the mid-1970s, Chinese foreign policy was basically dominated by Mao
Zedong, with assistance of Zhou Enlai. From the late-1970s to the early-1990s, Deng
Xiaoping was the core of the second generation leadership, yet he had to consult other
elders in the Party before he made major decisions. In fact, if we use the power to
designate successors as an index of power, the power of the core of the Chinese
leadership has declined significantly. Mao appointed then ousted three successors --Liu Shaoqi, Lin Biao, and Deng Xiaoping before finally designating Hua Guofeng.55
By contrast, under the pressure of the conservatives, Deng had to oust his two
designated successors, Hu Yaobang and Zhao Ziyang, and select the compromise
candidate, Jiang Zemin, as his successor. In addition, in 1992, Deng, then 88, had to
travel to the booming southeast provinces and severely criticize the center’s
conservative economic policies in order to put economic reforms back on track.
In the era of Jiang Zemin as the core of the third generation leadership, major
decisions cannot be made unilaterally by Jiang alone. Rather, all in the senior leadership
must reach a consensus through different decision-making mechanisms. According to
David Lampton56, in Jiang’s era, there have been several clearly important changes in
China’s foreign policy decision-making system: the center is getting larger, peripheral
54
Benjamin Yang, Deng: A Political Biography (Armonk, N.Y.: M. E. Sharpe, 1997), p. 257.
Although Deng Xiaoping was never explicitly identified as a successor to Mao Zedong, Deng was then
a most possible candidate to succeed Mao in early 1970s.
56
David M. Lampton, “The Normalization of the Chinese Foreign Policy Process: Bigger Center, Closer
Periphery, and More Space in the Era of Reform”, in David M. Lampton (ed.), The Making of Chinese
Foreign and Security Policy in the Era of Reform, forthcoming.
55
39
actors are more numerous and more proximate to the expanding center, and there is
more space for peripheral actors to act internationally. These changes stem from four
fundamental processes underway in China: professionalization, pluralization,
decentralization, and globalization. That is, the third generation with Jiang at its core
must spend more effort to achieve consensus among leaders, among bureaucracies,
between the center and the local, between state and society, and between China and
international community. In addition, economic objectives have become the policy
focus, and Chinese leaders have recognized that national security must be promoted
through multilateral cooperation. Further, although the Chinese leadership in Deng’s
era was pragmatic compared to Mao, the third generation in Jiang’s era is even more
pragmatic because the majority of leaders are technocrats without revolutionary and
military experience. Therefore, with the significant evolution of the Chinese
decision-making system and process, Chinese foreign-policy behavior is more rational
and pragmatic, and constrained by broad domestic interests and the international
community.
Although we cannot say that China will hence “renounce the use of force against
Taiwan” or “reduce its military threat against Taiwan”, the willingness of China to
cooperate with the international community and multilateral regimes is increasingly
clear.57 Under such circumstances, Taiwanese entrepreneurs in China can play a role in
integrating China further into the international community and global market. Although
this may not make China renounce the use of force, it will contribute to the possibility
of “resolving cross-Strait disputes peacefully” and “not forcing Taiwan to accept
China’s proposal by force”. In addition, the role of Taiwan’s entrepreneurs will
57
Elizabeth Economy and Michel Oksenberg, China Joins the World: Progress and Prospects (New
York: Council on Foreign Relations Press, 1999).
40
strengthen the Western strategy led by the United States to facilitate China to be a more
open, prosperous, stable, and responsible member of the international community,
which will promote a peaceful resolution of cross-Strait disputes.58
The Instrumental Level of Security Analysis
On the instrumental level, can China exploit the different economic and social
effects on Taiwan and China stemming from cross-Strait economic exchange to achieve
China’s political goals? This kind of national security threat should be dealt with
directly by Taiwan. In May 1979, China promulgated the “Temporary Regulations
Regarding Opening Trade with Taiwan”. The first article of the regulation states:
“Trade with Taiwan is a special form of trade in the transitional period before Taiwan
returns to the motherland, to promote the economic linkage between mainland and
Taiwan, to obtain the support of Taiwan’s entrepreneurs, to create conditions for
unification of the motherland.” A Chinese internal document in 1990 pointed out:
“expanding cross-Strait economic exchange will create four effects: first, it will break
through the three noes policy of the Taiwan authorities; second, it will contain Taiwan’s
separatist trend; third, it will advance the four modernization; and fourth, it will break
through Western sanctions. The document also emphasizes that “interest groups
involved closely with the mainland will emerge in Taiwan’s politics in the future and
facilitate peaceful unification”.59
William Clinton, “Remarks by the President in Foreign Policy Speech”, The White House Office of the
Press Secretary, http://www.whitehouse.gov/WH/New/html/19990407-2873.html.
59
Charng Kao, Mainland Economic Reform and Cross-Strait Economic Relations (Taipei: Wu-Nan,
1994), p. 115.
58
41
Former Chinese President Yang Shangkun, during the “National Conference on
Taiwan Work” in December 1990, pointed out, “We should make efforts to develop
cross-Strait relations. The point should be put on economic and other exchanges in
order to exploit economics to press politics and utilize the private to urge the official.
We should lead cross-Strait exchange in the direction to facilitate unification of the
motherland and the four modernizations.” He also asked the cadres to understand
economic work on Taiwan through the strategic significance of peaceful unification
with the motherland. During a 1992 conference, Yang repeated that China should
“develop [cross-Strait] economic relations to influence politics and exploit the private
to urge the official.”60
Chinese President Jiang Zemin during the Eighth Conference of Chinese
Ambassadors and Consular Officials contended: “The most important approach to
realize the unification of the motherland is to expand cross-Strait exchanges, especially
by reinforcing economic linkages. We have to do more work on Taiwan’s large
enterprises and attract more of Taiwan’s capital to the mainland, especial large-scale of
Taiwan capital. Therefore, the mainland’s and Taiwan’s economies will integrate with
each other, that is, exploit economics to drag Taiwan and promote unification.”61
Thus, it is true that China’s economic policy toward Taiwan contains political
goals. In addition to advancing its economic development, China wants to exploit
economics as an instrument to promote peaceful unification. Chinese leaders
particularly emphasize that “economic work on Taiwan should be understood through
60
Mainland Affairs Council (Taiwan) (ed.), The Reference Document of Mainland Work, Vol. 2, 1998, pp.
56 &58.
61
Kong-Lien Kao, The Current Situation and Development of Cross-Strait Economic Relations (Taipei:
Mainland Affairs Council, 1994), p. 8.
42
the strategic significance of peaceful unification with motherland”. Economic
integration creates the risk that China might impose economic sanctions on Taiwan.
Therefore, Taiwan concretely describes China’s strategy as “utilizing the private to urge
the official” and “exploiting business to press politics”.62
To sum up, there are two approaches for China to exploit economic exchange to
achieve its political goals: first, by utilizing the threat of economic sanctions to press
Taiwan to agree to China’s unification proposals or to influence Taiwan’s policy; and,
second, to exploit interest groups in Taiwan to manipulate Taiwan’s politics.63
Economic Sanctions
The reason economic sanctions can work stems from the different degree of
economic dependence between Taiwan and China. As analyzed above, being rational
and pragmatic, Chinese leaders make decisions for China’s interests based on a
comprehensive assessment of costs and benefits. Therefore, there are two criteria to
judge whether or not China can successfully reach its political goals through the
imposition of economic sanctions: first, are the costs of sanctions less to China than to
Taiwan?; And, second, can China tolerate these costs?64
62
Kong-Lien Kao, The Current Situation and Development of Cross-Strait Economic Relations (Taipei:
Mainland Affairs Council, 1994), p. 8. Charng Kao, Mainland Economic Reform and Cross-Strait
Economic Relations (Taipei: Wu-Nan, 1994), p. 130-131.
63
Some believe that China might use Taiwan’s entrepreneurs in China as hostages to threaten Taiwan.
This paper argues this is not possible. Beijing defines Taiwan’s entrepreneurs in China not only as
“compatriots”, but as “compatriots loving their motherland”. It is impossible for Beijing to put their
lives, wealth, and security at stake to threaten “compatriots not loving their motherland” across the
Taiwan Strait. Even if Beijing does it, this would confirm Taiwanese resolution to confront China,
because Beijing can treat “compatriots loving their motherland” like this, “compatriots not loving
their motherland” might have more miserable treatment.
64
Although much literature discusses the effectiveness of economic sanctions, the focus is mainly on the
dimensions of trade and aid, which can hardly explain the phenomena of the cross-Strait
interdependence driven by FDI. For example, Hufbauer, Schott, and Elliott argue that there are three
forms of economic sanctions: limiting exports, limiting imports, and suspending aid. They conclude
43
There are two dimensions to the economic interdependence between Taiwan and
China: trade and investment. Regarding the trade dimension, according to the Taiwan
Mainland Affairs Council’s adjusted estimates of cross-Strait trade dependence, Taiwan
has grown highly dependent on China’s market, from 2.3% in 1987 to 18.4% in 1997.
Due to Taiwan’s unilateral restrictions against China’s imports, Taiwan’s dependence
on China as a supplier was only 3.4% in 1997. Overall, Taiwan’s trade dependence on
China was 11.2% of total trade in 1997. In the same year, China’s dependence on
Taiwan as a supplier was 15.8%, and its dependence on Taiwan’s market was only 2.1%.
Overall, China’s trade dependence on Taiwan was 8.1% of total trade in 1997. China
was Taiwan’s second largest export market in 1997, second only to the United States;
relatively, Taiwan was China’s second largest import supplier, second only to Japan. If
the $16 billion65 worth of goods Taiwan exported to Hong Kong in 1997 was included,
China was Taiwan’s largest market and Taiwan was China’s number one supplier.
Furthermore, in 1996 the ratio of trade to GDP in Taiwan was 93%, but for China
the ratio was 39%. Therefore, more people worry that China might threaten Taiwan
with economic sanctions due to asymmetric trade dependence. Although China’s
economic strength is double Taiwan’s, however, China’s cost of imposing economic
that if economic sanctions are to be effective or successful, the GDP of the home country which
imposes sanctions (i.e. China) must be at least ten times larger than that of the target country. In
addition, among their 119 cases, the difference in GDP is 50 times larger in more than half of the
successful cases. If China’s goal is to subvert Taiwan’s politics, the difference in GDP is 100 times
larger in more than 70% of the successful cases. Currently China’s GDP is two times larger than
Taiwan’s, therefore China cannot successfully reach its political goals through imposing economic
sanctions at all. However, Baldwin argues that China’s economic sanctions may not succeed, but it can
generate social unrest and collective insecurity in Taiwan. Hufbauer et al., Economic Sanctions
Reconsidered (Washington, D.C.: Institute of International Economics, 1990). David Baldwin,
Economic Statecraft (Princeton, N.J. : Princeton University Press, 1985). Cheng-Tian Kuo,
“Economic Statecraft Across the Taiwan Strait”, Issues & Studies, October 1993, pp. 19-37.
65
Taiwan exported $28.7 billion worth of goods to Hong Kong in 1997. According to the Mainland
Affairs Council’s estimate, $12.7 billion of these goods were re-exported from Taiwan to China.
Therefore, Taiwan exported only $16 billion worth of goods to Hong Kong.
44
sanctions on Taiwan will increase enormously due to the extremely unbalanced
regional development inside China. In 1996, Guangdong’s trade dependence was 160%,
far exceeding Taiwan’s; Shanghai almost 90%, equivalent to Taiwan’s; and Fujian 57%,
higher than the 39% average for all of China. The trade generated by these regions
accounts for more than one-half of China’s total trade; dividing by the GDP of these
three regions (one-sixth of China’s GDP), the trade dependence was still as high as
121%, far exceeding Taiwan’s. (See Figure 11.)
In 1996, the ratio of cross-Strait trade to Taiwan’s GDP (bilateral economic
dependence) was 8.7%, the ratio for China was 2.8%. Bilateral economic dependence
means the possible impact on both sides’ total economy (rather than just exports) with
the interruption of bilateral trade. Since most cross-Strait trade is driven directly or
indirectly by Taiwan’s FDI, Taiwan’s trade with each province in China should be
proportionate to Taiwan’s FDI in each province. According to Taiwan’s Economic
Ministry, as of October 1998, Taiwan’s FDI in Guangdong accounted for 34% of
Taiwan’s cumulative FDI in China, Jiangsu (including Shanghai) 32%, Fujian 12%, and
Zhejiang 4%. These four provinces account for 82% of Taiwan’s FDI in China. 66
Accordingly, we can derive the ratio of trade between Jiangsu and Taiwan to Jiangsu’s
GDP at 7%67, Guangdong 10.2%, and Fujian 8.9%. (See Figure 12.)
In addition, the majority of Taiwan’s exports to China are intermediate and capital
goods, therefore China’s domestic production system would suffer heavy damage
66
The Investment Commission of the Economic Ministry (Taiwan), Statistics on Overseas Chinese &
Foreign Investment/ Outward Investment/ Outward Technical Cooperation/ Indirect Mainland
Investment/ Guide of Mainland Industry Technology, October 1998, pp. 59-63.
67
The Investment Commission has only data on Jiangsu province, including Shanghai. If we calculate
the ratio of trade between Shanghai and Taiwan to Shanghai’s GDP, the ratio should be higher the ratio
of Jiangsu with Shanghai, because Shanghai’s trade dependence was 90% and trade dependence of
Jiangsu without Shanghai was only 35%.
45
should China try to ban imports from Taiwan. Such damage to production would be
several times larger than the superficial bilateral trade. The three coastal provinces
account for a quarter of China’s GDP and have been the main engines of China’s
economic growth. The damage that would be suffered by these provinces would impose
a serious threat to China’s overall economic development. If China were to try to
impose economic sanctions on Taiwan, China’s southeast coastal provinces would
suffer much more than Taiwan, and China’s economic development would also be
seriously jeopardized.
As a matter of fact, the most important interdependence between Taiwan and
China is the overall investment interdependence, which creates the cross-Strait trade
interdependence. According to Kao’s 1995 study on the contribution of Taiwan’s FDI to
the Chinese economy, we can deduce the estimate for 1996 using the proportion of
Taiwan’s cumulative FDI. In 1996, Taiwan’s entrepreneurs invested $3.5 billion, or
1.3% of China’s gross fixed capital formation; employed 5 million Chinese workers, or
5.2% of China’s labor force in manufacturing industry; produced $43.6 billion of output,
or 5.2% of China’s total output; and paid 6.1 billion Renminbi in tax, or 1.7% of central
government revenue. (See Figure 13.) Taiwan’s entrepreneurs have thus played a
significant role in China’s economy.
According to Chin Chung, with $2 billion of Taiwan’s cumulative FDI in China in
1992, the production of Taiwan’s entrepreneurs amounted to 7.9% to 7.3% of China’s
total manufacturing exports. 68 Assume that the ratio of exports of Taiwan-funded
68
Chin Chung, “Double-Edged Trade Effects of Foreign Direct Investment and Firm-Specific Assets:
Evidence From the Chinese Trio”, in Y.Y. Kuen (ed.), The Political Economy of Sino-American
Relations (Hong Kong: Hong Kong University Press, 1997), p. 149.
46
enterprises to the amount of FDI has not changed. With $15.1 billion worth of Taiwan’s
cumulative FDI in China in 1996, the production of Taiwan’s entrepreneurs should
have contributed 18.4% of China’s total manufacturing exports. According to Kao’s
study, Taiwanese entrepreneurs in China exported $21.4 billion, or 14.4% of China’s
total exports, in 1995. Multiplying Kao’s figure with the ratio of Taiwan’s cumulative
FDI in China, the exports of Taiwan’s entrepreneurs in China in 1996 have been about
$27.8 billion, or 18.4% of China’s total exports, which is almost the same result as are
reached using Chung’s estimate.
With most of Taiwan’s FDI in China’s southeast coastal provinces, the
contribution of Taiwan’s entrepreneurs has a multiplier effect. In 1996, the contribution
of Taiwan’s entrepreneurs to Jiangsu (including Shanghai) was 2.3% of gross fixed
capital formation for that year; 1.6 million laborers, or 13% of manufacturing workers;
$9 billion of exports, or 37% of its total exports; and $14.1 billion of output, or 13% of
its total output. The contribution of Taiwan’s entrepreneurs to Guangdong was 3.5% of
gross fixed capital formation; 1.5 million laborers, or 20% of manufacturing workers;
$8 billion of exports, or 13% of its total exports; and $12.5 billion of output, or 16% of
its total output. The contribution of Taiwan’s entrepreneurs to Fujian was 3.7% of gross
fixed capital formation; 0.7 million laborers, or 25% of manufacturing workers; $3.6
billion of exports, or 43% of its total exports; and $5.6 billion of output, or 18% of its
total output. (See Figure 13.)
After China’s economic reforms and opening-up, China’s central government has
given a great deal of its power to the localities. At the same time, the available resources
of the central government have significantly declined. In 1980 the ratio of the central
47
government’s expenditure to total government’s expenditure was 54%, and that of the
local government 46%. In 1996 the ratio of central government spending fell to 27%
and that of localities increased to 73%. Compared with the United States, the share of
the Federal government’s expenditure was 56% and the state and local government was
44%. Hence, Beijing’s imposition of large-scale economic sanctions against Taiwan
would meet with strong opposition from local governments who enjoy relatively
abundant resources and have close economic interests with Taiwan.
In 1980 the share of the central government’s expenditure to China’s GDP was
15%, and this figure fell to 3% by 1996. Total central and local government spending
was 27% of GDP in 1980 and fell to 12% in 1996. By comparison, the percentage in
France was 47%, the United Kingdom (1995) 42%, the United States (1995) 39%,
Taiwan 27%, Japan (1993) 24%, Russia 19%, Korea 18%, and Singapore 16%. China’s
state resource was far behind that of advanced countries and most East Asian countries.
Therefore, Beijing has relatively few resources to implement sanctions effectively.
In addition, the deterioration of the international situation (cross-Strait relations)
would have a significant impact on the overall economy of China (including Hong
Kong). For example, when NATO mistakenly bombed the Chinese embassy in
Belgrade on May 7, 1999, and provoked two days of serious anti-American protests in
China, the composition index of the Shanghai Stock Exchange declined by 4.4% and
Hong Kong’s Hang Seng Index decreased by 2.2% in a single day. Most investors
worried that the situation might deteriorate and seriously jeopardize U.S.-China
relations.69
69
“Maintain Financial Stability, Chinese Officials Call”, Liberty Times (Eastern America Version),
5/12/1999, p. 4. “Hong Kong Stock Index declined by Near 300 points”, China Times, 5/12/1999,
48
On July 9, 1999, Taiwan’s president Lee Teng-hui elaborated that Taiwan would
like to establish a “special state-to-state” relationship with China, thus heightening
cross-Strait tension. On July 14, Taiwan’s weighted stock market index declined by
3.9%. Nevertheless, China’s stock markets suffered a more serious loss with the
Shanghai B share index dropping by 5.3%, the Shenzhen B share index by 1.4%, and
the Hong Kong Hang Seng index by 2.9%. On July 16, due to reports of Chinese
military mobilization, the Taipei Index declined 6.4%, the Shanghai Index 5.5%, the
Shenzhen Index 4.3%, and the Hong Kong Index 1.6%. On July 19 (the next day of
trading), Taipei’s market was stabilized through government intervention while the
Shanghai Index declined by 9.5% and the Shenzhen Index went down 8.8%.
In addition, on April 26, 1999, a computer virus written by a Taiwanese caused
damage to 360 thousand computers in China with total losses reaching $120 million.70
Moreover, international conflicts would seriously affect the operation of foreign
entrepreneurs in China. Since foreign entrepreneurs have played a very important role
in China’s economic development 71 , China must consider the potential impact of
cross-Strait instability. Therefore, the integration of Chinese economy into the world
economy means China is becoming more vulnerable to international conflicts
(including cross-Strait conflict) and the impact cannot be measured simply in terms of
lost trade.
Furthermore, China must consider the cost of international politics and economics.
http://www.chinatimes.com.tw/papers/cchina/88051210.
“Chernobyl
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$120
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Damage
in
China”,
Reuters,
http://dailynews.yahoo.com/headlines/tc/s…tml?s=v/nm/19990509/tc/china_virus_3.html.
71
United Nations, World Investment Report 1998: Trends and Determinants (New York: United Nations,
70
49
China’s economic sanctions toward Taiwan would not only cause political instability in
the Asia-Pacific region, but would also involve direct economic interests of major
countries. Because Taipei still forbids direct trade with and investment in China, most
of Taiwan’s entrepreneurs operate in China under the names of subsidiaries registered
in third countries or location (e.g. Hong Kong) that enjoy investment protection
agreements with Beijing. Therefore, if China imposes economic sanctions
(expropriation or nationalization of property or resources, and new foreign currency
control) against Taiwan72, it would certainly trigger a series of international disputes.
As mentioned above, Taiwan’s entrepreneurs in China exported $27.8 billion worth of
goods in 1996 to the United States, Japan, and Europe. According to the author’s
estimate, about $7.2 billion to $11.2 billion of the $27.8 billion was exported to the U.S.
market. This would mean that Taiwan enterprises accounted for 14% to 22% of China’s
exports to the United States. 73 Moreover, the international labor-division network
would be seriously disrupted and thus cause large damage to major countries. In 1996
Taiwan’s imports from the United States amounted to $20 billion and exports $26.9
billion. The United States, Japan, Hong Kong, Germany, South Korea, and Singapore
were the six top trade partners for both Taiwan and China and they were among China’s
top ten sources of FDI. Once China imposes economic sanctions against Taiwan, the
whole international economic linkage would be seriously damaged.
Clearly, Taiwan, China, and their major trade partners have common economic
1998), p. 204.
As a matter of fact, China has regulations and laws to protect Taiwan’s investment in China. They
prohibit Beijing from expropriating or nationalizing of Taiwan’s enterprises, and Taiwan’s
entrepreneurs can remit their income out of China. However, the state of hostility makes Taipei doubt
China’s sincerity to implement these commitments. These commitments are included in the
Regulations on the Encouragement of Taiwan Compatriots’ Investment (1988) and the Law on the
Protection of Taiwan Investors (1994).
73
Chen-yuan Tung, “Trilateral Economic Relations among Taiwan, China, and the United States”, Asian
Affairs: An American Review, Vol. 25, No. 4, Winter 1999, pp. 220-235.
72
50
interests, and this can be further explained by the lobby in the United States in favor of
extending China’s MFN status (the normal trade relation status after 1998). Since 1989,
when the U.S. Administration and Congress debated whether or not to extend China’s
MFN status, not only did Hong Kong entrepreneurs, Hong Kong government, Hong
Kong opposition Democratic Party, and U.S. entrepreneurs74 lobby hard in favor of
extending China’s status, but also Taiwan’s entrepreneurs joined them in supporting
MFN after 199175. More surprisingly, right after China’s missile threats and military
exercises against Taiwan in 1995 and 1996, Jeffery Koo, who was called Taiwan’s
“economic ambassador”, wrote an article in the Wall Street Journal calling for the
United States to extend China’s MFN status.76 The support for China’s MFN on both
sides of Strait and the major trading powers reflects “the common-interest community
of international labor-division”. Whoever wants to ruin the community’s
common-interest will be strongly opposed by its members. The U.S. government is no
exception. Therefore, once China imposes economic sanctions, the trading powers
would face double trade losses (with both Taiwan and China). This would have a
serious impact on the global economy. The international community would thus react
negatively to any effort by China to sanction Taiwan.
Realistic interests would lead the United States and the major countries of the
Asia-Pacific region to adopt countermeasures to undermine China’s sanctions. The U.S.
administration and Congress have expressed many times that the United States has a
key interest in continued stability and peace in the Taiwan Strait. In addition, the
Taiwan Relations Act declares that the United States would “consider any effort to
Robert Dreyfuss, “The New China Lobby”, via Lexis-Nexis, The American Prospect,
January-February 1997, P.30.
75
Kong-Lien Kao, The Current Situation and Development of Cross-Strait Economic Relations (Taipei:
Mainland Affairs Council, 1994), p. 20.
74
51
determine the future of Taiwan by other than peaceful means, including by boycotts or
embargoes, a threat to the peace and security of the Western Pacific area and of grave
concern to the United States”, and “The President and Congress shall determine, in
accordance with constitutional processes, appropriate action by the United States in
response to any such danger.”77
Based on the above analysis, if China imposes economic sanctions against Taiwan,
Taiwan would suffer, but China would pay serious costs in four areas: 1) the direct cost
from China’s interruption of cross-Strait economic relations; 2) the cost from the
interruption of China’s production system; 3) the cost from the deterioration of the
international situation (cross-Strait relations); and 4) the international political and
economic cost of an interruption in the Asia-Pacific labor-division network. Overall,
the costs to China should exceed the costs to Taiwan.
In addition, China would be unable to tolerate them. For example, the clearest
costs would be five million jobs lost in Taiwan funded enterprises and a 13% to 18%
decrease in output in China’s southeast provinces. Such a huge economic impact would
cause chaos in China. Not only would the localities not cooperate with Beijing in
enforcing the sanctions78, but also Beijing lacks state capacity to implement effectively
this policy. Further, China’s decision-making system has grown more rational and
pragmatic so that the Center would not ignore the interests of the localities. At the same
time, the international community would greatly constrain Beijing’s choice. Therefore,
Jeffrey Koo, “MFN for China Is Also Good for Taiwan”, The Wall Street Journal, May 7, 1996, p. 22.
Karen M. Sutter, Taiwan 2020 (Washington, D.C.: The Atlantic Council of the United States, 1996), pp.
216-217.
78
Merle Goodman and Roderic Macfarquhar, “Dynamic Economy, Declining Party-State”, in Merle
Goodman and Roderic Macfarquhar (ed.), The Paradox of China’s Post-Mao Reforms (Cambridge,
Mass.: Harvard University Press, 1999), pp. 3-29.
76
77
52
it is highly unlikely for Beijing’s leaders to impose economic sanctions on Taiwan.
Interest groups
China’s leaders never say they might impose economic sanctions on Taiwan for
fear that it would scare Taiwan’s entrepreneurs away. However, Beijing explicitly hopes
that “in the process of economic exchange, interest groups with close relations with the
mainland would emerge in Taiwan’s politics” and “exploiting economics to press
politics and utilizing the private to urge the official”. Are Taiwan’s entrepreneurs an
interest groups that can be manipulated by China to influence Taiwan’s politics? Is
Taiwan businessman Jeffery Koo a spokesman for China because he writes an article in
the Wall Street Journal to support China’s MFN status?
Because the essence of international economics is mutual benefit and the essence
of sovereignty competition is zero-sum gain, one can argue, through a political lens,
that Taiwan’s entrepreneurs are selling out Taiwan’s national interest for the sake of
promoting cross-Strait economic relations and maintaining the common interests of
“the common-interest community of international labor-division.” As a matter of fact,
Taiwan’s entrepreneurs are trying to preserve what they see as their interests which they
tend to equate with Taiwan’s overall interests. This does not only happen in Taiwan, but
also in the U.S. domestic debate on the extension of China’s MFN status. Some voices
criticize U.S. entrepreneurs for placing economics above all other U.S. national
interests.
However, in an academic analysis, we need to clarify what Taiwan’s national
53
interests are and then analyze whether the interests of Taiwan’s entrepreneurs are in
conflict with Taiwan’s overall interests. For some Taiwanese, Taiwan’s national
interests are to declare independence while others want to unify with China as soon as
possible. But the majority of Taiwanese want to maintain the status quo (Taiwan’s
sovereign independence from the People’s Republic of China), delay unification with
China, and they oppose the “one country, two system” model.79 Second, Taiwanese
want cross-Strait stability and a peaceful resolution of disputes. Third, Taiwanese want
Taiwan’s economic development to continue. There are at least two categories of
interests for Taiwan’s entrepreneurs: first, cross-Strait stability and peaceful resolution
of disputes, and, second, protection of Taiwan’s entrepreneurs’ interests in China and
continued promotion of cross-Strait economic exchange. The first interest of Taiwan’s
entrepreneurs matches Taiwan’s second national interest. No entrepreneur would
welcome a war, which would devastate the business climate. Although there is no
formal poll to explain the opinions of Taiwan’s entrepreneurs about Taiwan’s future,
generally speaking, entrepreneurs should favor the status quo or at least prefer not to
change the status quo by force. Hence, in this regard, the interests of Taiwan’s
entrepreneurs are not incompatible with Taiwan’s first national interest.80 Whether the
second interest of Taiwan’s entrepreneurs is compatible with Taiwan’s overall interests
warrants further discussion.
In the past, whenever Taiwan’s entrepreneurs called for the “three direct links” or
79
According to polls sponsored by Mainland Affairs Council in recent years, more than 95% of
interviewees support the status quo (Taiwan’s sovereignty is independent of the PRC), and less than
5% support unification as soon as possible; 70% to 80% of interviewees oppose the application of
“one country, two systems” to Taiwan, and less than 10% support. According to the consensus formed
at the 1996 National Development Conference on cross-Strait relations, “The Republic of China is a
sovereign state…..Taiwan is not a part of the People’s Republic of China.”
80
Taiwan’s entrepreneurs usually ask Taiwan’s government to expand cross-Strait exchange, but few
support China’s unification goal. Cheng-Tian Kuo, “Economic Statecraft Across the Taiwan Strait”,
Issues & Studies, October 1993, pp. 34.
54
large entrepreneurs planed to invest in China, Taipei authorities argued that China’s
strategy of “exploiting economics to press politics” is effective. 81 But in reality,
Taiwan’s entrepreneurs lobby for such policies and invest in China out of self interest,
not because China tells them to. The next questions to explore are: first, does Taiwan’s
FDI in China harm Taiwan’s economy; second, would close economic exchange
between Taiwan and China generate external costs for Taiwan (for example, the risk
that China might impose economic sanctions); and third, can China use rent-seeking
activity to manipulate Taiwan’s entrepreneurs?
The first question is analyzed in the section on economic analysis in this paper.
Basically, cross-Strait economic exchange should be beneficial to Taiwan’s economic
development. The second question is analyzed above. The possibility for China to
impose economic sanctions against Taiwan is minimized. Even if Beijing’s leaders
would make such an irrational decision, their ability to impose sanctions would still be
restrained by China’s internal decision-making mechanism and the international
community. Regarding the third question, after China joins the WTO, it would be
impossible for China to discriminate against Taiwan’s entrepreneurs and still comply
with the WTO’s principles of national treatment and MFN.
As a matter of fact, the first interest of Taiwan’s entrepreneurs would contribute to
the second of Taiwan’s national interests. It would violate the first interest of Taiwan’s
entrepreneurs if China disrupts stability and peace in the Taiwan Strait. The economic
81
For example, many large entrepreneurs, such as Yung-Ching Wang, Ching-Yuan Kao, Si-Chung Wu,
and Yung-Fa Chang, asked Taiwan’s government to give up the policy of “ no haste, be patient”. In
addition, according to the investigation report of Taiwan’s Economic Ministry in mid-1998, more than
70% of enterprises have FDI in China and more than 50% of them hope the government will relax the
limitation on investment in China. Mei-Yun Shang, “More than 50% of enterprises ask to relax the ‘no
haste,
be
patient’”,
Commerce
Times,
http://www.chinatimes.com.tw/papers/commerce/mfocus/87090702.htm.
55
network between Taiwan and China creates not only common interests between Taiwan
and China (especially China’s southern coastal provinces), but also common interests
among Taiwan, China, and the other Asia-Pacific countries. Any action breaking the
status quo with force would be strongly opposed by any member of this
common-interest community. Therefore, the international community, China’s southern
coastal provinces, and Taiwan’s entrepreneurs would uniformly demand a peaceful
resolution of cross-Strait disputes. They would also call for establishing a structure for
steady and peaceful cross-Strait relations through more dialogue and mutual confidence.
Therefore, the self-interest behavior of Taiwan’s entrepreneurs in fact does not violate
Taiwan’s overall interests, but can even advance Taiwan’s national interests, including
facilitating Taiwan’s economic development and maintaining cross-Strait peace and
stability.
IV.
Negotiation Analysis
Unless Taiwan wants to continue the state of hostilities across the Strait, it’s
inevitable that Taiwan and China hold political negotiations in the future. However,
Taiwan must decide how to negotiate, what agenda to set, and what leverage it can use
vis-à-vis China. The remainder of this paper will use a two dimensional model, with
security and economics as the main variables. Then it will construct a model to analyze
the possible negotiation structure for Taiwan.82
82
Much literature has explored various models, especially game theoretic models, to explain
international negotiation from different approaches. See P. Terrence Hopmann, The Negotiation
Process and the Resolution of International Conflicts (Columbia, South Carolina: University of South
Carolina Press, 1998). Victor A. Kremenyuk (ed.), International Negotiation (San Francisco:
Jossey-Bass Publishers, 1991). Glenn H. Snyder and Paul Diesing, Conflict among Nations (Princeton,
N. J.: Princeton University Press, 1977).
56
According to the Guidelines for National Unification (GNU) of Taiwan’s KMT
government, Taiwan maintains a “three noes principle” as a condition for Taiwan to
open the “three direct links” (in the medium-term stage of the GNU). The “three noes”
are: China must not deny Taiwan states as an equal political entity, not contain Taiwan’s
international space, and not threaten the use of force against Taiwan. In fact, Taiwan
utilizes the “three direct links” (economic exchange) as a bargaining chip to gain
China’s concession on the “three noes principle”, but it proclaims that the “three direct
links” are harmful to Taiwan’s national security and calls for the cooperation of
Taiwan’s entrepreneurs. This can be further explained by the following examples:
First, in the design of the GNU, Taiwan defines the short-term stage as the
“exchange and mutual benefit stage”, with a goal of “promoting understanding through
exchange and reducing enmity through mutual benefit.” But Taipei places the “three
direct links” in the medium-term stage, even though the links would promote
exchanges and mutual benefit. Nevertheless, some on Taiwan suspect that the “three
direct links” may hurt Taiwan’s interests. But according to the GNU, Taiwan wants “to
promote understanding through exchange” and then “to reduce enmity through mutual
benefit.” Obviously, it believes that cross-Strait exchange is a “mutual benefit.”
Therefore, the “three direct links” is only a bargaining chip that Taiwan will exchange
for China’s assurances on the “three noes principle.”
Second, the cases of “Taiwan-Hong Kong flights” and “the offshore transshipment
center” fully demonstrate that the “three direct links” is a bargaining chip. While
negotiating a new agreement on airline flights with Hong Kong, Taiwan defined Hong
57
Kong as being outside the PRC, even though Hong Kong returned to Chinese
sovereignty in 1997. In addition, Taiwan made many concessions on the issues of
airplane companies and direct navigation. In the past, these issues were deemed as
obstacles to Taiwan’s national security; now, these can be solved technically. In the case
of “the offshore transshipment center,” Taiwan also used national security reasons to
defend its policy of no direct transport links with China. But under the double pressure
of shipping companies and pressure to develop Taiwan as the APROC, Taipei and
Beijing unilaterally proclaimed and indirectly negotiated the establishment of an
“offshore transshipment center.” Accordingly, Taipei’s so-called “national security
threat” can be solved technically; even through unilateral proclamation of both sides.
Taiwan’s behavior suggests that rather than representing a genuine national security
need, the ban on the three links is primarily a bargaining tool Taiwan hopes to use to
gain concessions from China, such as a pledge not to use force. At least the security
threat posed by the three links can be resolved through negotiation.83
Third, huge cross-Strait economic exchange has been underway for more than 10
years and is large enough for China to be Taiwan’s largest export market and FDI
recipient. Although most trade and investment is conducted through Hong Kong, the
significance of cross-Strait economic exchange cannot be denied. If Taipei believes
bilateral economic exchanges would hurt Taiwan’s national security (and economic
interests), then Taipei is justified in strictly prohibiting any cross-Strait economic
exchanges. But neither has Taipei done so, nor does Taipei have the capacity to do so.
83
Chong-Hai Shao, Cross-Strait Relations: Cross-Strait Consensus and Cross-Strait Disagreement
(Taipei: Wu-Nan, 1998), pp. 193-203. Julian Kuo, “Between Security and Economics: the Political
Logic of Cross-Strait Three Direct Linkage”, presented at the Annual Conference of the Taiwan
Political Science Association, Soochou University, 12/12-13/1998, pp. 8-16. Ralph N. Clough,
Cooperation or Conflict in the Taiwan Strait ? (Lanham, Maryland: Rowman & Littlefield Publishers,
Inc., 1999), pp. 41-45.
58
Therefore, Taiwan just wants more concessions from China in exchange for an
agreement to have “direct” economic exchange with China, instead of an “indirect”
one.
To explore whether Taiwan is right to utilize “three direct links” (cross-Strait
economic exchange) as a bargaining chip, the paper will use a “Cross-Strait Negotiation
Model” to help understand the factors of cross-Strait negotiation.
Cross-Strait Negotiation Model I
Assumptions:
A: The degree of economic benefit from the cross-Strait economic exchange is equal to
the degree of security threat from this exchange. The definition of “security threat”
is based on the section on security analysis in this paper, not the existing Chinese
threat toward Taiwan (e.g. China’s military intimidation or containing Taiwan’s
international space).
B: Decision-makers in both Taiwan and China are rational actors. That is, any
decision-maker would adopt the optimal decision after considering the composition
of economic and security interests, i.e. they seek to maximize gains and minimize
losses.
C: The index of the security threat goes from –10 to 10. “-10” means the largest security
threat, that is, cross-Strait economic exchange would cause a very large security
threat toward Taiwan or China. “10” means the largest degree to reduce security
threat, that is, it would facilitate maintaining security in Taiwan or China.
59
D: The index of economic benefit is from –10 to 10. “-10” means the largest economic
loss, that is, cross-Strait economic exchange would cause very big economic loss
for Taiwan or China by, for example, delaying Taiwan’s industrial upgrading,
harming Taiwan’s balance of payments, and resulting in high economic risk. “10”
means the largest degree of economic benefit, that is, it would facilitate economic
development in Taiwan or China.
E: Taiwan and China may adopt cooperation or confrontation in the cross-Strait
economic exchange. If Taiwan or China adopts cooperation, the value of
cooperation for each side is the sum of the security threat index and the economic
benefit index. If Taiwan or China adopts confrontation (i.e. no cross-Strait
economic exchange), the cooperation value for both sides is zero.
F: In the cross-Strait economic exchange, China’s security threat index is zero and
economic benefit index is 10. That is, cross-Strait economic exchange would bring
huge economic benefit without any security threat because Taiwan does not
threaten the use of force against China. Therefore, in the cooperation of cross-Strait
economic exchange, China’s cooperation value is 10.
G: The vertical axis is the economic benefit index (-10 to 10) and the horizontal axis is
the security threat index (-10 to 10).
Taiwan’s cooperation values under different scenarios
The first scenario (T1):
Taiwan’s security threat index is –10 and economic benefit index is 10, therefore,
Taiwan’s cooperation value is 0. That is, cross-Strait economic exchange generates
tremendous pressure on Taiwan’s national security; but the exchange contributes
60
greatly to Taiwan’s economic development (for example, by facilitating Taiwan’s
industrial upgrading, increasing foreign exchange, and promoting international
competitiveness of enterprises).
The second scenario (T2):
Taiwan’s security threat index is –10 and economic benefit index is –10, therefore
Taiwan’s cooperation value is –20. That is, cross-Strait economic exchange generates
tremendous pressure on Taiwan’s national security; at the same time, the exchange does
enormous damage to Taiwan’s economic development.
The third scenario (T3):
Taiwan’s security threat index is –5 and economic benefit index is –5, therefore
Taiwan’s cooperation value is –10. That is, cross-Strait economic exchange generates
pressure on Taiwan’s national security to some degree; at the same time, the exchange
does some damage to Taiwan’s economic development.
The fourth scenario (T4):
Taiwan’s security threat index is –5 and economic benefit index is 5, therefore
Taiwan’s cooperation value is 0. That is, cross-Strait economic exchange generates
pressure on Taiwan’s national security to some degree; but the exchange contribute to
Taiwan’s economic development to some degree.
The fifth scenario (T5):
Taiwan’s security threat index is 0 and economic benefit index is 0, therefore
Taiwan’s cooperation value is 0. That is, cross-Strait economic exchange does not
61
generate pressure on Taiwan’s national security, and the exchange has no effect on
Taiwan’s economic development.
The sixth scenario (T6):
Taiwan’s security threat index is 0 and economic benefit index is 10, therefore
Taiwan’s cooperation value is 10. That is, cross-Strait economic exchange does not
generate pressure on Taiwan’s national security; but the exchange greatly contributes to
Taiwan’s economic development.
The seventh scenario (T7):
Taiwan’s security threat index is 0 and economic benefit index is -10, therefore
Taiwan’s cooperation value is -10. That is, cross-Strait economic exchange does not
generate pressure on Taiwan’s national security; but the exchange does enormous
damage to Taiwan’s economic development.
The eighth scenario (T8):
Taiwan’s security threat index is -10 and economic benefit index is 0, therefore
Taiwan’s cooperation value is -10. That is, cross-Strait economic exchange generates
tremendous pressure on Taiwan’s national security; but the exchange has no effect on
Taiwan’s economic development.
The ninth scenario (T9):
Taiwan’s security threat index is 10 and economic benefit index is 0, therefore
Taiwan’s cooperation value is 10. That is, economic interdependence between Taiwan
and China would enormously restrain China’s willingness to use force in the Taiwan
62
Strait and contribute to a peaceful resolution of bilateral disputes; but the exchange has
no effect on Taiwan’s economic development.
The tenth scenario (T10):
Taiwan’s security threat index is 5 and economic benefit index is 5, therefore
Taiwan’s cooperation value is 10. That is, economic interdependence between Taiwan
and China would restrain China’s willingness to use force in the Taiwan Strait and
contribute to a peaceful resolution of bilateral disputes to some degree; at the same time,
the exchange would contribute to Taiwan’s economic development to some degree.
The eleventh scenario (T11):
Taiwan’s security threat index is 5 and economic benefit index is -5, therefore
Taiwan’s cooperation value is 0. That is, economic interdependence between Taiwan
and China would restrain China’s willingness to use force in the Taiwan Strait and
contribute to a peaceful resolution of bilateral disputes to some degree; but the
exchange damages Taiwan’s economic development to some degree.
The twelfth scenario (T12)
Taiwan’s security threat index is 10 and economic benefit index is 10, therefore
Taiwan’s cooperation value is 20. That is, economic interdependence between Taiwan
and China would enormously restrain China’s willingness to use force in the Taiwan
Strait and contribute to a peaceful resolution of bilateral disputes; at the same time, the
exchange would contribute greatly to Taiwan’s economic development.
63
The thirteenth scenario (T13)
Taiwan’s security threat index is 10 and economic benefit index is -10, therefore
Taiwan’s cooperation value is 0. That is, economic interdependence between Taiwan
and China would enormously restrain China’s willingness to use force in the Taiwan
Strait and contribute to a peaceful resolution of bilateral disputes; but the exchange
does enormous damage to Taiwan’s economic development.
If we combine China’s cooperation value (10) with the various scenarios for
Taiwan’s cooperative value, we can get the following figure:
Cross-Strait Negotiation Model I
T1 (0)
Economic benefit index 10
T6(10)
T12(20)
China (10)
T4 (0)
Taiwan’s cooperation IC
T10(10)
China’s benefit IC
-10
T8 (-10)
T9(10)
0 T5(0)
10 Security threat index
64
T3(-10)
T11(0)
Taiwan’s maximum
China’s concession IC
Because China’s cooperation value (composition interests) is 10 and confrontation
value 0, the maximum value at which China should make concession should be within
10. The curve from T6 through T10 to T9, on which the cooperation value at any point
is 10, can be called China’s “benefit indifference curve (IC)”. The curve from T1
through T4, T5, T11 and T13, on which the cooperation value at any point is 0, can be
called China’s “concession IC”. Between China’s “benefit IC” and China’s “concession
IC”, the distance of 10 should be the maximum value China might trade off through
negotiation to maintain China’s maximum overall national (security and economic)
interests.
The curve from T8 through T3 and T7, on which the cooperation value at any
point is -10, can be called Taiwan’s “maximum benefit IC” Because the cooperation
value of any point below this curve is smaller than –10 and China would not make
compensation for more than the value of 10, Taiwan and China would not cooperate. In
addition, China’s “concession IC” can also be called Taiwan’s “cooperation IC”,
because the value of any point above the curve is bigger than 0 and hence Taiwan would
tend to cooperate. Even if Taiwan would not cooperate through negotiation, Taiwan
65
might be pressed to cooperate if China adopted unilateral cooperative measures.
Therefore, the distance between Taiwan’s “cooperation IC” and Taiwan’s “maximum
benefit IC” is the possible concession that Taiwan could acquire from China through
negotiation. For any point above China’s “benefit IC”, Taiwan’s cooperation value is
bigger than China’s. Therefore, Taiwan needs to cooperate with China to maximize its
national interests (exceeding China’s), but not necessarily to acquire extra return from
China.
Cross-Strait Negotiation Model II
Assumptions
A: Except for the following changes, all other assumptions are the same as in model I.
B: Overall, the degree of security threat is two times that of economic benefit. That is,
the index of the security threat is from -20 to 20; the index of economic benefit is
from -10 to 10.
Cross-Strait Negotiation Model II
Economic benefit index
China (10)
A
-20
Taiwan’s maximum benefit IC
China’s benefit IC
0
20 Security threat index
China’s concession IC
-10
66
Because the range of the security threat index is increased to between -20 and 20,
Taiwan's “maximum benefit IC” would extend to the upper left. The triangular area
between Taiwan's “maximum benefit IC” and China's “concession IC” is labeled area A.
Area A represents the extra space of potential negotiation because the cooperation value
of any point in the right of the Taiwan's “maximum benefit IC” is bigger than -10.
Cross-Strait Negotiation Model III
Assumptions:
A: Except for the following changes, all other assumptions are the same as in model I.
B: Overall, the degree of economic benefit is two times that of security threat. That is,
the index of the security threat is from -10 to 10 while the index of economic benefit
is from -20 to 20.
C: China's economic benefit index is 20, its security threat index is 0, and its
cooperation value is 20.
Cross-Strait Negotiation Model III
China (20)
Economic benefit index
China’s benefit IC
-20
-10
10
0
20 Security threat index
67
Taiwan’s maximum benefit IC
China’s concession IC
Because the range of the economic benefit index is increased to between -20 to 20,
Taiwan's “maximum benefit IC” would shift down to the left and China's “benefit IC”
would move up to the right. This would expand China's overall concession space. The
space in which Taiwan cannot cooperate through negotiation is only area A, because its
cooperation value is smaller than 20 and China would not make concessions past the
value of 20.
Additional situations are discussed below: First, it is possible that the value of the
"three noes” principles might be bigger than that of China's cooperation because China
currently would not make more concession on Taiwan's “three noes” principles. For
example, in Model III (where economic benefit matters most), China's cooperation
value is 20, but the value might be 40 to 50 if China renounces the use of force, 30 to 40
if China agrees not to contain Taiwan's international space, and 20 to 30 if China
recognizes Taiwan as an equal political entity.
Second, the space where China could make a concession might shrink (shifting
from Model III to Model I) if the benefit from cross-Strait economic exchange
(especially Taiwan's FDI) declined for China (e.g. if large amounts of FDI from other
68
foreign entrepreneurs flowed into China, if China's trade balance remained positive, or
if China does not have any balance of payments concerns). In such a situation, Taiwan
would lose its bargaining chips. In 1990, China suffered from international economic
sanctions because of the Tiananmen massacre, and the importance of Taiwan's FDI for
China's balance of payments (Taiwan's FDI/ China's foreign reserve) increased to 0.7%.
In addition, China had a cumulative trade deficit of $45.1 billion from 1985 to 1989 and
foreign debt reached $52.6 billion. By 1993, the importance of Taiwan's FDI for
China's balance of payments was 14.6%. In addition, foreign debt reached $69.3 billion,
China’s trade balance was positive $4.4 billion, and the FDI inflow was increasing
rapidly. In 1997, the importance of Taiwan's FDI shrunk to just 2.4%. In addition,
China's trade surplus reached almost $140 billion, exceeding China’s total foreign debt,
and FDI continued to flood into China, reaching $45.3 billion in 1997. (See Figure 14.)
Therefore, the importance of Taiwan's FDI has declined year by year since 1993.
Third, if Taiwan's current cooperation value is between Taiwan's “maximum
benefit IC” and China's “concession IC”, Taiwan could win concessions from China in
negotiations. However, because the interests of individual Taiwan entrepreneurs might
exceed Taiwan's overall composition value, the entrepreneurs will lobby Taiwan's
government to open the “three direct links” (or expanding economic exchange). Under
such circumstances, this will form a virtual cooperation value for Taiwan, which
comprises Taiwan's composition value and the value of Taiwan's entrepreneurs. If the
value exceeds China's “concession IC” and falls in the area between China's
“concession IC” and China's “benefit IC”, Taiwan's virtual value will turn positive.
Then, if China unilaterally adopts cooperative measures, Taiwan might be forced to
cooperate. Taiwan cannot expect the cooperation of Taiwan's entrepreneurs who are
69
driven by their own economic interests. Taipei, thus, has good reason to feel anxious.
There are the consequences of China’s policy of “exploiting business to press politics”
and “utilizing the private to urge the official”. Under such conditions, it's better for
Taiwan to build an internal consensus and negotiate with China on the issue of
economic exchange as soon as possible. In turn, Taiwan might acquire some
concessions from China.
Fourth, if Taiwan's economic benefit from cross-Strait economic exchange is
getting bigger, Taiwan's overall cooperation value might increase and fall in the area
between China's “concession IC” and China's “benefit IC”, or even beyond China's
“benefit IC”. Therefore, China might not make any concessions because Taiwan's value
is positive or even bigger than China's. For example, Taiwan plans to develop the
APROC, which definitely needs China's cooperation. Taiwan’s need for bilateral
cooperation might be bigger than China's. Under this situation, it would be even less
likely that China would make huge concessions (such as agreeing to Taiwan's “three
noes” principle). Although China is not willing to make any concessions, Taiwan is still
pressed to cooperate unilaterally (such as establishing a “offshore transshipment
center” without the name of “cross-Strait direct navigation”) because cooperation is
overwhelmingly in Taiwan’s interest.
Fifth, following democratization in Taiwan, the support from both the public and
the opposition party might create bargaining chips for Taiwan. That is, the excessive
concerns of the public and the opposition party about the security threat would create a
lower virtual cooperation value and increase the need for more concessions from China.
However, this situation does not necessarily meet Taiwan’s overall interests or Taiwan’s
70
original objective cooperation value. Under such circumstances, this might create a
virtual cooperation value for Taiwan, which comprises Taiwan’s composition value and
a negative value to support non-cooperation from the public and the opposition party.
Therefore, this would reduce the possibility that Taiwan would cooperate with China,
where Taiwan's virtual cooperation value is between China's “concession IC” and
Taiwan's “maximum benefit IC”, or even lose any possibility for cooperation, where
Taiwan's virtual cooperation value falls below Taiwan's “maximum benefit IC”. This
could create two problems: first, it could possibly eliminate the possibility of China's
concession through bilateral negotiation; second, if the original cooperation value for
Taiwan is positive or even bigger than China's, Taiwan would stand to lose more in
terms of its interests.
Sixth, if Taiwan's cooperative value is down from and left of Taiwan's “maximum
benefit IC”, the pressure from Taiwan's entrepreneurs and the pressure to realize the
APROC might elevate the virtual value to the right of China's “concession IC” or even
China's “benefit IC”. Therefore, China might not make any concession to Taiwan but
could unilaterally adopt cooperative measures. In such a situation, Taiwan could not
help but to adopt cooperative measures based on its overall interests. However, Taiwan
would need to pay extra external costs for bilateral exchange, including a lack of
investment protection and a higher incidence of smuggling, drug trafficking, illegal
immigration. Transit and management costs would also be higher without “three direct
links”. Moreover, Taiwan's economy might be damaged by Taiwan enterprises that
move to China prematurely in order to reduce their transit and management cost.
Therefore, if Taiwan can negotiate with China, it might increase Taiwan's overall
national interest by acquiring concession from China and by avoiding external costs.
71
Seventh, cross-Strait economic exchange might promote political reforms and
“peaceful evolution” in China, therefore reducing the security threat to Taiwan. At the
same time, if China imposes economic sanctions, it will pay high costs in terms of its
domestic economy and international politics. Therefore, cross-Strait economic
exchange might reduce the security threat to Taiwan to some certain degree. That is, the
space for China to make concession would shrink (shifting from Model II to Model I).
V. Conclusion
The complexity of cross-Strait economic exchange has exceeded the effectiveness
of any international political economic theories. From the three dimensions of
economics, security, and negotiation, this paper proposes the structure of "general
analysis of the economic relations between Taiwan and China" to understand
cross-Strait economic exchange.
Regarding economics, this paper argues that cross-Strait economic exchange has a
net positive contribution to Taiwan's economic development. Cross-Strait economic
exchange does contribute to Taiwan's balance of payments and industrial upgrading. In
addition, it does not lead to industrial hollowing-out and does not increase
unemployment. Regarding the economic risk stemming from Taiwan's FDI in China
and cross-Strait trade, these risks for individual Taiwan's entrepreneurs are larger than
for Taiwan as a whole. Therefore, Taiwan's entrepreneurs have their own incentives to
limit their risks and Taiwan’s government should not try to minimize risk on their
72
behalf. Even with a cautious analysis of the economic risks faced by Taiwan's
entrepreneurs, the economic risks faced in China are no greater than those encountered
in the SEACs. Overall, the cumulative benefit of cross-Strait economic exchange is
bigger than the possible damage of economic risk. In addition, China and Taiwan do not
compete head-to-head in the international market because they basically produce
different types of products. To some degree, the competition is between Taiwan’s
entrepreneurs and their affiliates in China. This kind of benign competition helps
facilitate Taiwan's industrial upgrading through a more efficient division of labor
between Taiwan and China. At the same time, Taiwan’s shifting position in the system
of international labor-division --- i.e. its status as a major FDI provider --- explains why
Taiwan’s market share in developed countries is shrinking.
Regarding security, because of the transformation of China's internal political and
economic structure and the formation of "the common-interest community of
international labor-division" among Taiwan, China, and the international community,
cross-Strait economic exchange does not decrease Taiwan’s security. Neither could
China impose economic sanctions against Taiwan, nor are Taiwan's entrepreneurs an
instrument of China’s united front. Taiwanese and foreign entrepreneurs in China are
out to preserve their own interests. In turn, they might constrain China's capability to
use force against Taiwan and impose economic sanctions. Furthermore, if Taiwan can
coordinate with the international community, cross-Strait economic exchange should
facilitate China’s transition into a more open, prosperous, and responsible member of
the international community. This would, in turn, increase the probability that Taiwan
and China could solve their disputes peacefully.
73
Regarding cross-Strait negotiations, based on the above economic and security
analyses, Taiwan's possible cooperation value might not be less than China's. Therefore,
Taiwan should cooperate through bilateral negotiation to preserve Taiwan's maximum
national interests. Nevertheless, on the one hand, several measures adopted by Taiwan
have resulted in a lower virtual cooperation value. Taiwan has exaggerated the security
threat caused by the cross-Strait economic exchange and the negative impact on
Taiwan’s economic development. In addition, the Taiwanese public and the opposition
party have strong enmity toward China. On the other hand, the following situations
would increase Taiwan's virtual cooperation value: heavy lobbing by Taiwan's
entrepreneurs, Taiwan's plan to establish the APROC, and the peaceful Resolution
effect of cross-Strait economic exchange.
Analyzing the current situation, the composition of Taiwan's virtual cooperation
value might fall in the area between China's “concession IC” and China's “benefit IC”.
That is, if either side across the Strait chose to cooperate unilaterally without
negotiation, the other side could not help but adopt cooperation in the long term. In
contrast, Taiwan would suffer more damage to its overall interests because it has to pay
extra external costs. Under this circumstance, Taiwan might fail to win China's
potential concession and have to pay negative externality without bilateral negotiation.
To sum up, Taiwan should negotiate with China on the basis of using economic
cooperation to advance its optimal national interests.
Appendix:
74
(Figure 1)Taiwan's FDI by region or country
unit: $million
1952-1986 1987 1988 1989 1990
China
a
n.a.
n.a.
n.a.
n.a. n.a.
1991 1992
174
b
1993
247 3168
1994
1995
962 1093
1996
1997
Total
1229 4334
11208
SEACs
62
15
53 277 520 707 300 364
297 294
422 411
3722
The US
163
70 123 509 429 298 193 529
144 248
271 547
3524
Europe
4
2
12
2 96
60
46 256
22
60
12
59
630
Japan
1
3
2
0
2
3
5
63
23
8
7
32
151
Others
42
15
29 143 505 588 343 449 1131 747 1453 1845
7287
Total
272 103 219 931 1552 1830 1134 4829 2579 2450 3394 7228 26522
Note: a: excluding Hong Kong
b: including Philippines, Indonesia, Thailand, Malaysia, and Vietnam.
Source: Investment Commission, Ministry of Economic Affairs (ROC), Statistics on Overseas Chinese &
Foreign Investment, Outward Investment, Outward Technical Cooperation, Indirect Mainland
Investment, Guide of Mainland Industry Technology, May 97 and October 98.
75
(Figure 2) The income of Taiwan's Outward Investment
unit: $million
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Average
Direct investment
263
261
FDI outflow
-79
-65
FDI inflow
342
326
-46
71
0
-4
-46
75
-9
Investment income, credit
2115
2875
3759
Investment income, debit
-1000
Net investment income
1115
Portfolio investment
Assets
Liabilities
10 -3160 -5347 -3913
-734 -1088 -1694 -1265 -1424 -1979 -2974
-1772.6
-705 -4121 -6951 -5243 -2005 -1967 -2611 -2640 -2983 -3843 -5222
-2956.5
715
961
1604
1330
1271
879
917
1375
1559
1864
2248
1183.9
-372 -1712
-902 -1006
45
444
1067
905
493 -1112 -8283
-800.6
-363 -1171
-967
-937
-741
-705 -1332 -1997 -2236 -4368 -6729
-1657.7
-541
65
-69
786
1149
2399
2902
2729
3256 -1554
5260
6598
6878
7300
7327
6674
7007
7977
7586
857.1
7857
6093.3
-892 -1478 -1860 -2775 -2490 -2282 -2549 -2338 -2869 -3675 -3349 -4396
-2457.9
1983
2281
3400
3823
4388
5018
4778
4336
4138
4302
4237
3461
3635.4
Steps of estimation as following:
A: 1987 as base year, assume the income of the investment taken place before 1987 is $2875 million per year after 1987.
B: Cumulative direct investment was $38291 million from 1987 to 1997; portfolio investment assets was $21546 million;
total cumulative outward investment was $59837 million.
C: Total investment income (credit) was$74223 million from 1987 to 1997.
D: Net investment income (subtracting investment income for the investment before 1987) was $42598 million
(74223-2857x11) from 1987 to 1997.
E: Every dollar of outward investment from 1987 to 1997 was $0.71 (=42598/59837).
F: The annual average income of direct investment was $2478.1 million (=[0.71*38291]/11) from 1987 to 1997.
Source: Economic Research Department, The Central Bank of China (Taiwan), Balance of Payments Quarterly ,
February 1999.
76
(Figure 3) The Impact of Taiwan's FDI in China on Its Balance of Payment
unit: $millions
1985 1986
A: Taiwan's
FDI in Chinaa
n.a.
B: Investment
incomeb
n.a.
C: Taiwan's
trade surplus
with Chinac
870
D: Taiwan's
exports to
Chinac
986.8
E: the FDIdriven Exports
with the ratio of
34%d
336
F: Impact on
Taiwan's
Baance of
Paymentf
336
1987 1988 1989
1990 1991
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
667
937 1764 2745
811
1227 2242 3332
1992
-869 -1050
617
1994
1995
-3139 -3391
-3162
2229
2408
2245
1996
1997
e
Total Average
-3475 -3289 -18375
2467
2335
-2625
13046
1864
9429 12890 14164 16342 17668 18540 106013
13629
4395 7494 10548 13993 16023 19434 20727 22455 123668
15811
3629 6368
746
1993
276
417
762 1133
1494 2548
3586
4758
5448
6608
7047
7635
42047
5376
276
417
762 1133
1494 2296
3282
3847
4464
5691
6039
6681
36718
4614
Note:a:Use China's statistics about Taiwan's realized investment; the 1991 figure includes the investment before 1991.
b:See Figure 2. The income per dollar of investment is $0.71.
c:According to the estimate of Taiwan's Mainland Affairs Council.
d:According to the 1993 estimate of the Chung-hua Institution for Economic Research.
e:From 1991 to 1997.
f:A+B+E
Source: Taiwan Economic Institute, Cross-Strait Economic Statistics Monthly , No. 73, September 1998.
Economic Research Department, The Central Bank of China (Taiwan), Balance of Payments Quarterly ,
February 1999.
Chung-Hua Institution for Economic Research, Cross-Strait Economic Yearbook: Cross-Strait
Economic Relations, May 1993.
77
(Figure 4) Taiwan's Trade Surplus with China, the SEACs, and the world
unit: $million
Taiwan's global
a
b
Taiwan's trade surplus with China
Taiwan's Trade surplus with the SEACs trade surplus
share of Taiwan's global
share of Taiwan's global
amount
trade surplus (%)
amount
trade surplus (%)
amount
1985
871
8.2%
n.a.
n.a.
10624
1986
667
4.3%
n.a.
n.a.
15680
1987
938
5.0%
n.a.
n.a.
18695
1988
1764
16.0%
299
2.7%
10995
1989
2745
19.6%
1271
9.1%
14039
1990
3629
29.0%
1983
15.9%
12498
1991
6368
47.8%
1571
11.8%
13318
1992
9429
99.6%
1437
15.2%
9464
1993
12890
160.5%
1453
18.1%
8030
1994
14164
184.0%
1833
23.8%
7700
1995
16342
201.5%
3013
37.2%
8109
1996
17668
130.2%
3233
23.8%
13572
1997
18540
242.2%
1176
15.4%
7656
Note:a:according to the estimate of Mainland Affairs Council.
b:The SEACs includes Phillipines, Indonesia, Malaysia, Thailand, and Vietnam.
Source: Taiwan Economic Research Institution, Cross-Strait Economic Statistics Monthly , No. 73, September 1998.
The Department of Statistics, Ministry of Finance (Taiwan), Monthly Statistics of Exports and
Imports , December 1995 and December 1998.
78
(Figure 5) The Major Reasons of FDI for Taiwan's Business
a
Unit: %
exploiting
local cheap anf
abundant labor
force
Total
Divided by the scale of
firms
large enterprisesb
medium enterprises
b
small enterprises
the great
potential of
local market
deterioration of
responding the
domestic
responding to
Following
era of
operation
the request of Taiwan's clints internationaliz
environment foreign clients
to invest
ation
1996 1998 1996 1998 1996 1998 1996 1998 1996 1998 1996 1998
63.7 65.2 49.6 50.5 33.5 36.7 24.5 30.2 19.8 21.9 26.3 n.a.
55.5
56.5
67.4
60.8
62
67.8
59.8
50
46.9
65.8
54.4
42.8
26.3
30.4
36
29.8
31
41
25.4
23.4
24.4
27.8
29.8
31.4
14.8
14.1
22.3
25
18.4
16.7
44.9
34.8
19.6
n.a.
n.a.
n.a.
22.2
72.1
53.7
69.6
79
81.8
64.4
23.9
71.5
55.9
81.8
83.7
77.1
83.3
70.4
48.8
43.3
40.6
47.4
22.7
24.4
66.7
49.9
40.7
41.8
60.5
42.9
38.1
10.2
38.2
26.9
36.2
34.2
50
40
16.2
39.5
42.4
43.6
34.9
42.9
50
38.9
22.1
34.3
14.5
15.8
22.7
15.6
46.2
28.1
37.3
25.5
20.9
22.9
14.3
8.3
24.5
7.5
14.5
7.9
0
11.1
16.2
39.5
42.4
43.6
34.9
42.9
50
43.5
19.4
43.3
33.3
13.2
40.9
26.7
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
Divided by major FDI area
The U.S.
China
Malaysia
Thailand
Indonesia
Phillipines
Vietnam
Note:a:This question is of multiple choice and the sum is beyond 100%.
This table picks up only six most important reasons.
b:In the 1996 investigation, large enterprises were defined more than 300 employees and
medium enterprises between 100 to 299 employees; In the 1996 investigation, large enterprises
were defined more than 300 employees and medium enterprises were defined between
100 to 299 employees.
Source: Ministry of Economic Affairs (Taiwan), The Investigation Report on the Outward Investment
by Manufacturing Industry , March 1997 and August 1998.
79
(Figure 6) Taiwan's Major Economic Indicators
Nominal
GDP growth Gross
GDP (NT$ rate (%)
capital
billion)
formation
/GDP (%)
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1491
1774
1900
2100
2343
2474
2855
3237
3523
3939
4307
4811
5338
5875
6377
6892
7478
8131
7.3
6.2
3.6
8.5
10.6
5
11.6
12.7
7.8
8.2
5.4
7.6
6.8
6.3
6.5
6
5.7
6.7
1998
8747
6.5
f
Private gross fixed capital
formation
/GDP (%)
33.8
29.9
25.2
23.5
22.2
19.1
17.5
20.6
23.7
23.4
23.1
23.3
24.9
25.2
23.9
23.7
21.2
22
15.6
14.4
12.6
11.9
12.2
10.7
10.3
11.6
12.9
13.1
11.4
10.7
11.7
12.1
11.9
12.3
11.5
11.9
22.4
13.1
Gross
Foreign
Unemploym
national
reserves ($ ent rate (%)
savings (NT$ billion)
billion)
Annual rate /GDP (%)
of change
(%)
9.5
32.2
2.2
n.a.
5.3
31.2
7.2
n.a.
-3.5
30.1
8.5
2.1
4.2
32.2
11.9
2.7
14.4
34.2
15.7
2.4
-6.2
34.1
22.6
2.9
10.2
39.4
46.3
2.7
23.6
39.3
76.7
2
17.6
35.3
73.9
1.7
10.8
31.8
73.2
1.6
-7.7
30
72.3
1.7
3.5
30.1
82.4
1.5
19
28.8
82.3
1.5
10.6
28.2
83.6
1.5
7.9
26.4
92.5
1.6
8.3
25.6
90.3
1.8
5.6
25.1
88
2.6
14.1
24.7
82.9
2.7
f
14.6
24.3
n.a.
Note:f:The estimate by the Chung-Hua Institution of Economic Research.
Source: Chung-Hua Institution for Economic Research, Major Economic Indicators for Taiwan , December 1997.
Executive Yuan (Taiwan), "Figure E-2 Fixed Investment Rate",
http://www.moea.gov.tw/~meco/stat/four/e-2-1t.htm.
Executive Yuan (Taiwan), "Figure F-1 Labor Force and Employment",
http://www.moea.gov.tw/~meco/stat/four/f-1t.htm.
Council for Economic Planning and Development, ROC, Taiwan Statistical Databook , 1998.
80
2.7
(Figure 7) Domestic Investment Strategy after Outward Investment
Divided by the number of employees; unit: %
Suspending or
planning to
suspend
domestic
Year
Below 99 employees
Between 100 to 199 employees
More than 200 employees
a
a
Reducing the
Maintain the
scale of
current scale of
domestic firms domestic firms
(B)
(C)
Expanding the index of impact of
outward
scale of domestic
firms (D)
investment b (E)
1996
2.9
1998
2.5
1996
24.7
1998
26.7
1996
56.3
1998
54.7
1996
16.1
1998
16.1
1996
-5.8
1998
-6.6
1.1
0
12.5
5.1
49.4
41.1
37
53.8
11.7
24.4
1.7
0.9
9.8
4.7
40.7
38.9
47.9
55.6
18.2
25.0
Note: a:In 1996, the classifications are "between 100 and 299 employees" and "more than 300 employees".
b:Index of imapct of outward investment (E)= (D-A-B)/2
Source: Ministry of Economic Affairs (Taiwan), Investigation Report on the Divisification and Internationalization of
Manufacturing Industry , 1995.
Ministry of Economic Affairs (Taiwan), Investigation Report on the Outward Investment by Manufacturing
Industry , 1998.
81
(Figure 8) FDI and Industrial Upgrading
1982
1983
1984
1985
1986
1987
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Taiwan's FDI in non-China
areas ($million)
n.a.
n.a.
n.a.
n.a.
272a
103
219
931 1552 1656
887 1661 1617 1357 2165 2894
15314
Taiwan's FDI in China
($million)
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
247 3168
962 1093 1229 4334
11208
Taiwan's total FDI (first
and second items)
($million)
n.a.
n.a.
n.a.
n.a.
272
103
219
931 1552 1830 1134 4829 2579 2450 3394 7228
26522
The share of the industrial
output of heavy-chemical
and technological
industries to total output
(%)
56.5
58.4
59.5
59.5
60.2
61.1
64.3
64.9
65.8
66.8
67.5
69.2
70.5
73.3
74
76.5
n.a.
The share of the exports of
heavy-chemical and
technological industries to
total exports (%)
49.8
51.2
53.6
54.3
54.9
57.2
61.3
62.5
64.3
64.8
68.2
69.2
69.7
69.9
71.3
73.6
n.a.
The labor productivities of
manufacturing industry
(fixed 1991 price)($
thousand)
9.6
9.9
10.5
10.8
12.4
15.6
18.2
20.5
21.1
23
24.5
25.9
27.3
29.9
30.8
31
n.a.
n.a.
174
Approved investment by
overseas Chinese and
foreigners ($ million)
n.a.
n.a.
n.a.
n.a.
n.a. 7349b 1183 2418 2301 1778 1461 1213 1630 2925 2461 4267
Note:a:1952-1986.
b:1952-1987.
Source: Ministry of Economic Affairs (Taiwan), "Figure D-3 The Measure Index of Taiwan's Upgrading in the
Manufacturing Industry", http://www.moea.gov.tw/~meco/stat/four/d-3t.htm.
Investment Commission, Ministry of Economic Affairs (ROC), Statistics on Overseas Chinese & Foreign
Investment, Outward Investment, Outward Technical Cooperation, Indirect Mainland Investment, Guide
of Mainland Industry Technology , May 97 and October 98.
82
Total
28988
(Figure 9) The Classification of Taiwan's Exports Commodities
By input factor intension
Year
a
Heavy industrial products
Hi-teck Products
%
%
Labor intensity Capital intensity Technique intensity
1982
1985
1988
1991
1994
1996
1998
64.8
65.6
66.4
62.1
60.8
58
58.6
52.4
51.5
51.8
57.2
60
61.6
61.2
b
39.5
40.4
45.2
49.9
58.6
61.7
63.2
b
35.4
36.5
42.8
46.7
54.8
59.8
64.4
26
27
33.7
36.3
42.1
45.8
49.8
Note: a:scale from 10 to 100, and 100 is the highest level. This is weighted by author.
b:figure of 1983
Source: The Department of Statistics, Ministry of Finance (Taiwan), Monthly Statistics of Exports and Imports ,
March 1984 and December 1998.
Council for Economic Planning and Development, ROC, Taiwan Statistical Databook , 1998.
(Figure 10) Classification of Taiwan's Exports Commodities
unit: %
Agriculture, forestry,
fishery, livestock, and
hunting products
Processed food
Beverage and Tobacco
preparation
Energy and Minerals
Construction Meterials
Intermediate products
A
a
b
B
Consumer non-durable
goods
Consumer durable
goods
Machineries
Transportation
Equipments
1981
1984
1987
1990
1993
1996
1998
2.7
4.9
2
4
1.4
4.5
0.8
3.5
0.8
3.2
0.6
2.5
0.4
1.2
0.1
0.1
0.4
36.4
0
0
0.6
34.7
0
0.1
0.3
33.4
0
0.1
0.2
44.4
0.1
0.1
0.2
51.2
0
0
0.2
55.3
0
0
0.2
59.8
9.9
9.1
6.9
9.5
10
12.5
11.8
26.5
25.6
26.5
34.9
41.2
42.8
48
35.3
36.8
33.3
23.7
17
11.9
10.1
11.9
6.2
11
9
11.9
13.1
8.9
16.3
7.8
17.4
5.4
22.1
4.1
21.9
1.9
1.6
1.9
2.1
2.3
2
2.2
Source: Ministry of Finance (Taiwan), Report on the Characteristic Classifications of Tradable Commodities , 1993.
Ministry of Finance (Taiwan), Monthly Statistics of Exports and Imports , December 1995 and December 1998.
Note: a:Intermediate products A are the products that can be used for consumer goods or producer goods after processing.
b:Intermediate products B are the products that can be used for consumer goods or producer goods without processing.
83
(Figure 11) The Trade Dependence of Taiwan,
a
China, and its Southeast Provinces
year:1996
Taiwan
China Guangdong
b(
Fujian Jiangsu
Shanghai
Zhejiang
Trade $billion)
254
326.1
126
17.9
25.1
31.4
16.2
GDP ($billion)
272.3
835.9
78.6
31.4
72.4
35
50
Trade Dependence (%) 93.3%
39.0%
160.3% 57.0% 34.7%
89.7%
32.4%
Note:a:Including commodity and service trade.
b:Because of lack of data on the figures of commodity and service trade for China's provinces,
assume these are proportionate to the ratio of commodity trade among provinces.
Source: International Monetary Fund, International Financial Statistics , Vol. LII, No. 4, April 1999.
The Central Bank of China (Taiwan), Balance of Payment Quarterly , February 1999.
State Statistical Bureau (China), China Statistical Yearbook , No. 16, 1997.
84
(Figure 12) Trade Interdependence between Taiwan and China
year:1996
Trade between Taiwan and China (TBTC) ($ billion)
Taiwan's total trade ($ billion)
China's total trade ($ billion)
TBTC/Taiwan's total trade
TBTC/China's total trade
Taiwan's GDP ($ billion)
China's GDP ($ billion)
TBTC/Taiwan's GDP
TBTC/China's GDP
23.8
217.2
289.9
11%
8.2%
b
272.3
c
835.9
8.7%
2.8%
Trade between Taiwan and Jiangsu (TBTJ) ($ billion)
Jiangsu's trade ($ billion)
a
7.5
d
Jiangsu's GDP ($ billion)
TBTJ/Jiangsu's trade
TBTJ/Jiangsu's GDP
47.8
d
107.3
15.7%
7.0%
Trade between Taiwan and Guangdong (TBTG)($ billion)
Guangdong's trade ($ billion)
Guangdong's GDP ($ billion)
TBTG/Guangdong's trade
TBTG/Guangdong's GDP
Trade between Taiwan and Fujian (TBTF)($ billion)
Fujian's trade ($ billion)
Fujian's GDP ($ billion)
TBTF/Fujian's trade
TBTF/Fujian's GDP
a
a
8
109.9
78.6
7.3%
10.2%
2.8
15.5
31.4
18.1%
8.9%
Note
a: Assume most cross-strait trade is driven by FDI; that is, trade between Taiwan and China's province is
proportional to the ratio of Taiwan's FDI in this province to Taiwan's total FDI in China.
b: In 1996 Taiwan's GDP was NT$ 7477.54 billion and the exchange rate was 27.46 NT$/US$.
c: In 1996 China's GDP was 6936.6 yuan (Renminbi) and the exchange rate was 8.2982 yuan/US$.
The data in each provinces would convert into US dollar throught this exchange rate.
d: Including Shanghai.
Source: Taiwan Economic Research Institution, Cross-Strait Economic Statistics Monthly , No. 73, September 1998.
Chung-Hua Institution for Economic Research, Major Economic Indicators for Taiwan , December 1997.
International Monetary Fund, International Financial Statistics , Vol. LII, No. 4, April 1999.
State Statistical Bureau (China), China Statistical Yearbook , No. 16, 1997.
85
(Figure 13) The Contribution of Taiwan's Business to China's Economic
a
Development (year 1996)
b
34.8
Taiwan's realized FDI ($100million)
e
The contribution of Taiwan's FDI to fixed capital formation (%)
China's labor force employed by Taiwan's business (10 thousand)
Share of China's employees in manufacturing industry (%)
The exports by Taiwan's business ($100million)
1.3%
507
5.2%
278
Share of China's total exports (%)
18.4%
Imports by Taiwan's business ($100million)
53.9
Share of China's total imports (%)
3.9%
The output of Taiwan's business ($100million)
436.4
Share of China's GDP (%)
5.2%
Tax submitted by Taiwan's business (100million yuan)
60.8
Share of China's central revenue (%)
1.7%
c
11.2
Taiwan's realized FDI in Jiangsu ($100million)
The contribution of Taiwan's FDI to fixed capital formation (%)
Jiangsu's labor force employed by Taiwan's business (10 thousand)
Share of Jiangsu's employees in manufacturing industry (%)
2.3%
163.4
12.9%
The exports by Taiwan's business ($100million)
89.8
Share of Jiangsu's total exports (%)
36.5%
Imports by Taiwan's business ($100million)
17.4
Share of Jiangsu's total imports (%)
7.5%
The output of Taiwan's business ($100million)
141
The output of Jiangsu's business ($100million)
13.1%
10
Taiwan's realized FDI in Guangdong ($100million)
The contribution of Taiwan's FDI to fixed capital formation (%)
Guangdong's labor force employed by Taiwan's business (10 thousand)
Share of Guangdong's employees in manufacturing industry (%)
The exports by Taiwan's business ($100million)
3.5%
144.9
19.7%
79.7
Share of Guangdong's total exports (%)
13.4%
Imports by Taiwan's business ($100million)
15.4
Share of Guangdong's total imports (%)
3.0%
The output of Taiwan's business ($100million)
125
The output of Guangdong's business ($100million)
86
15.9%
(Figure 13, continued) The Contribution of Taiwan's Business to China's
a
Economic Development (year 1996)
4.5
Taiwan's realized FDI in Fujian ($100million)
The contribution of Taiwan's FDI to fixed capital formation (%)
Fujian's labor force employed by Taiwan's business (10 thousand)
Share of Fujian's employees in manufacturing industry (%)
The exports by Taiwan's business ($100million)
3.7%
65.4
24.6%
36
Share of Fujian's total exports (%)
43%
Imports by Taiwan's business ($100million)
7
Share of Fujian's total imports (%)
9.8%
The output of Taiwan's business ($100million)
56.4
The output of Fujian's business ($100million)
d
18%
2.5
Taiwan's realized FDI in Hebei ($100million)
The contribution of Taiwan's FDI to fixed capital formation (%)
Hebei's labor force employed by Taiwan's business (10 thousand)
Share of Hebei's employees in manufacturing industry (%)
The exports by Taiwan's business ($100million)
0.8%
36.6
4.5%
20.1
Share of Hebei's total exports (%)
65.3%
Imports by Taiwan's business ($100million)
3.9
Share of Hebei's total imports (%)
35.1%
The output of Taiwan's business ($100million)
31.6
The output of Hebei's business ($100million)
5.2%
1.5
Taiwan's realized FDI in Zhejiang ($100million)
The contribution of Taiwan's FDI to fixed capital formation (%)
Zhejiang's labor force employed by Taiwan's business (10 thousand)
Share of Zhejiang's employees in manufacturing industry (%)
The exports by Taiwan's business ($100million)
0.7%
21.7
3.2%
11.9
Share of Zhejiang's total exports (%)
14.8%
Imports by Taiwan's business ($100million)
2.3
Share of Zhejiang's total imports (%)
5.1%
The output of Taiwan's business ($100million)
18.7
The output of Zhejiang's business ($100million)
87
3.7%
(Figure 13, continued) The Contribution of Taiwan's Business to China's
a
Economic Development (year 1996)
Note: a: The following estimates are based on that Chang Kao's figures in 1995 multiply the ratio of Taiwan's
cumulative FDI; the figures of every province are based on that China's total amounts multiply
the ratio of Taiwan's FDI in these provinces to Taiwan's total FDI in China.
b: Based on China's statistics. Assume Taiwan's realized FDI in every provinces is proportional
to the amount registered in Taiwan's Ministry of Economic Affairs. Assume all Taiwan's FDI is
used in the fixed capital formation.
c: Including Shanghai.
d: Including Beijing.
e: The figures of the fixed capital formation for both China and every provinces were those in 1995.
Source: State Statistical Bureau (China), China Statistical Yearbook , No. 16, 1997.
Mainland Affairs Council (Taiwan), Cross-Strait Economic Statistical Monthly , No. 56, April 1997.
Chang Kao, "The Trend of Taiwan's Investment in China and Its Impact on Mainland's Economy",
Ministry of Economic Affairs (Taiwan), http://www.moea.gov.tw/~ecobook/season/ss203.htm.
(Figure 14) The Importance of Taiwan's FDI on China's Balance of
Payment
unit: $billion
Taiwan's FDI
China's realized FDIa
China's balance of debts
China's balance of trade
China's foreign reserves
The importance of Taiwan's FDI
on China's balance of paymentb
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
n.a. n.a. n.a. n.a. n.a.
0.2
0.5
1.1
3.1
3.4
3.2
3.5
3.3
4.6
7.3
8.5 10.2 10.1
3.5
4.4 19.2 27.5 33.8 37.5 41.7 45.3
n.a. n.a. n.a. -40 -41.3 -52.6 -60.7 -69.3 -83.6 -92.8 -107 -116 -131
-14.9 -12 -3.8 -7.8 -6.6
8.7
8.1
4.4 -12.2
5.4 16.7 12.2 40.4
11.9 10.5 15.2 17.5
17 28.6 42.7 19.4 21.2 51.6 73.6 105 139.9
n.a. n.a. n.a. n.a. n.a. 0.7% 1.2% 5.7% 14.6% 6.6% 4.3% 3.3% 2.4%
Note: a: Including foreign loans, foreign direct investment, and other foreign investment.
b: (Taiwan's FDI in China)/(China's foreign reserves)
Source: State Statistical Bureau (China), China Statistical Yearbook , various issues.
International Monetary Fund, International Financial Statistics Yearbook, (Washington, D.C.: IMF, 1998).
88