CHINA’S ECONOMIC LEVERAGE AND
TAIWAN’S SECURITY CONCERNS WITH RESPECT TO
CROSS-STRAIT ECONOMIC RELATIONS
VOLUME II
By
CHEN-YUAN TUNG
A dissertation submitted to the Johns Hopkins University
in conformity with the requirements for the degree of Doctor of Philosophy
Baltimore, Maryland
May, 2002
© Chen-yuan Tung 2002
All rights reserved
CHAPTER 8
ASSESSING THE COSTS OF SANCTIONS
It is the computing equivalent of mutually assured destruction [if bilateral economic
exchange were disrupted under the context of globalization]. You can’t hurt the other
party without hurting yourself.
- Andrew S. Grove, chairman of the Intel, May 20011
I. The Assessment of Direct Costs
China’s Comprehensive Economic Sanctions Against Taiwan
For China, because of the investment-trade linkage and the internal-external linkage
(discussed in Chapter 2), there is no essential difference between an embargo against
Taiwan, a boycott of Taiwan-made goods, or a freezing or expropriation of Taiwan’s
investment in China. Since most cross-Strait trade has been driven by Taiwan’s
investment in China, any impact on the production of TIEs will have significant
repercussions on cross-Strait trade. Any disruption of trade between Taiwan and China
will also have a strong impact on the production activities of TIEs. Therefore, it is
unrealistic to distinguish different elements of economic sanctions here. Although a total
1
Mark Landler, “These Days ‘Made in Taiwan’ Often Means ‘Made in China’,” New York Times, May 29,
2001, P. A1.
247
disruption of cross-Strait trade and investment would represent the worst-case scenario, it
is a possible scenario due to the chain reaction between cross-Strait trade and investment.
Should Beijing try to exploit any element of economic sanctions against Taipei, a total
disruption of cross-Strait economic activity would likely result.
As was discussed in Chapter 3, the short-term multiplier for China’s unilateral
sanctions against Taiwan could be at most 0.2 for both Taiwan and China. Regarding the
long-term effect, the multiplier could be between 0.05 and 0.1 for both Taiwan and China.
However, considering GCCs between Taiwan, China, and other countries, and possible
Taiwanese retaliation against Chinese sanctions, this study uses the multilateral short-term
and long-term multipliers for Taiwan and China, which could be between 0.14 and 0.35.
This is the most likely scenario if China imposes sanctions against Taiwan. Nevertheless,
this scenario does not include the impact of overall global interdependence and the effects
on China’s economy of possible retaliation from other countries, which is discussed in the
next sections.
Taiwan’s trade with China was $22.5 billion in 1995 and $25.8 billion in 1999. By
using the multipliers between 0.14 and 0.35, in 1995, China’s economic sanctions would
have reduced the welfare of both Taiwan and China by between $3.2 and $7.9 billion
annually in the short and long terms. In 1999 China’s economic sanctions would have
reduced the welfare of both Taiwan and China by between $3.6 and $9 billion annually in
the short and long terms.
However, the disruption of TIE operations in China would further incur costs for
China because TIEs significantly contributed to Chinese economic development. As we
demonstrated in Chapter 2, in 1995 Taiwan businesspeople invested $3.2 billion, or 1.1
percent of China’s gross capital formation; employed 3.9 million Chinese workers, or 2
248
percent of China’s urban labor force; produced $33.6 billion of output, or 3.1 percent of
China’s total industrial output; and exported $21.4 billion, or 14.4 percent of China’s total
exports. In addition, in 1994, TIEs paid RMB 3.4 billion in taxes, or 1 percent of the
central government collected revenue.
In 1999, Taiwan businesspeople invested $2.6 billion, or 0.7 percent of China’s gross
capital formation; employed 8.2 million Chinese workers, or 3.9 percent of China’s urban
labor force; produced $70.2 billion of output, or 4.6 percent of China’s total industrial
output; exported $44.7 billion, or 22.9 percent of China’s total exports; and paid RMB 9.8
billion in tax, or 1.7 percent of the central government collected revenue.
Assuming the value added of TIEs is 26 percent of output,2 value added by TIEs
would have been about $8.7 billion in 1995 and $18.3 billion in 1999. The rough direct
costs of economic sanctions for China in the short and long term would have been
between $11 and $15.7 billion in 1995 and between $21.9 and $27.3 billion in 1999,
which was two to six times what Taiwan’s costs would have been. Consequently, even
though in these two scenarios China’s GDP is approximately three times Taiwan’s,
China’s direct costs in terms of GDP should be no less than the potential costs to Taiwan.
(See Table 8.1.)
2
In 1999, gross industrial output value for enterprises funded by Hong Kong, Macao, and Taiwan, was
RMB 899.4 billion and value added of these enterprises was RMB 233 billion, rending the ratio of
value-added to output 26 percent.
249
Table 8.1. Direct Costs of China’s Economic Sanctions, 1995 and 1999
$ billion
1995
Trade losses
Investment losses
Total losses
GDP
Losses/GDP
Taiwan
3.2-7.9
0
3.2-7.9
257.4
1.2%-3.1%
1999
China
3.2-7.9
7.8
11-15.7
704.6
1.7%-2.4%
Taiwan
3.6-9
0
3.6-9
295.9
1.2%-3.1%
China
3.6-9
18.3
21.9-27.3
989.3
2.2%-2.8%
Note: Investment losses refer to direct losses of economic welfare due to Taiwan’s investment in China.
Taiwan does not directly incur losses from Taiwanese investment in China, but TIEs do. Nevertheless,
the above figures underestimate Taiwan’s losses of China’s sanctions against Taiwan. For example,
TIEs drive Taiwan’s exports to China, remit revenues from China to Taiwan, and expand the scale and
specialization of Taiwan’s industries. In addition, the above figures also underestimate China’s losses,
which are focused exclusively on the value added of TIEs. For example, TIEs have substantially
contributed to China’s production techniques, management skills, and efficiency gained from resource
allocation and competition.
In addition, in 1995 China’s urban unemployment rate would have increased by 2
percent and central government revenue would have declined by 1 percent; in 1999 they
were 3.9 percent and 1.7 percent, respectively. Furthermore, China would have lost large
amounts of future FDI from Taiwan (and other countries) because Taiwanese investors
(and foreign investors) would have lost confidence in Chinese policy. Obviously, China’s
overall costs in terms of GDP would have been no less than the costs to Taiwan if China
had disrupted cross-Strait economic relations in 1995 or 1999. This would be an
important reason for China not to have imposed sanctions against Taiwan in 1995 or
1999.
Literature on economic sanctions shows that in only one of the 114 cases is the cost
to the sender greater than the cost to the target. In all of the other events, the target’s costs
of sanctions are greater than or equivalent to the sender’s costs. That is, misperception
250
and miscalculation of decision-makers played a very limited role in the decision-making
of imposing sanctions. Therefore, China would tend to impose sanctions against Taiwan
only when sanctions would hurt Taiwan more than China after a cautious and thorough
calculation of costs for both Taiwan and itself.3
However, there is no comprehensive assessment of direct costs of sanctions against
Taiwan conducted by Chinese scholars or officials because China never intended to
impose sanctions.4 Generally speaking, Chinese officials and scholars perceive the direct
costs of sanctions against Taiwan for China as less than for Taiwan. That is, the Chinese
see Taiwan as more dependent on China than vice versa. For instance, on October 15,
2001, Premier Zhu Rongji told a group of TIEs, “The Mainland benefits less [than Taiwan
from cross-Strait economic exchange] because the Mainland has a trade deficit of $20
billion with Taiwan. If Taiwan had no trade surplus with the Mainland, Taiwan would
have a trade deficit of more than $10 billion.”5 A senior official of a Taiwan affairs office
in a town near Shanghai added, “The disruption of cross-Strait economic exchange will
have larger impact in Taiwan than the Mainland.”6 An international relations senior
scholar in Shanghai stressed, “The damage of the interruption of cross-Strait economic
exchange is asymmetric. It will hurt Taiwan more than the Mainland.”7 Many prominent
Chinese scholars have the same perception of direct costs.8
3
4
5
6
7
8
Daniel W. Drezner, The Sanctions Paradox: Economic Statecraft and International Relations (New York:
Cambridge University Press, 1999), pp. 108-128.
A senior economist in Beijing, interview with author, August 7, 2001. A Taiwan studies economist in
Xiamen, interview with author, June 7, 2001.
Xiu-mei Xu, “Zhu Rongji: Cross-Strait Economic Exchange, Mainland Benefits Less,” Gongshang
Shibao [Commerce Times], October 17, 2001. A former director of Taiwan Affairs Office under the State
Department expressed the same perception. A former director of Taiwan Affairs Office under the State
Department, interview with author, July 16, 2001.
A senior official of Taiwan affairs office in a town near Shanghai, interview with author, July 5, 2001.
An international relations senior scholar in Shanghai, interview with author, June 18, 2001.
A Taiwan studies senior scholar in Shanghai, interview with author, June 26, 2001. An American studies
senior scholar in Beijing, interview with author, August 10, 2001. An international relations senior
scholar in Beijing, interview with author, July 9, 2001. A senior economist in Beijing, interview with
251
Given its high motivation to coerce or deter Taiwan and the fact that Taiwan is
perceived as more dependent on China, why did Chinese leaders not impose sanctions
against Taiwan in 1995-2000? Many Chinese scholars and officials underlined that both
sides of the Strait are deeply interdependent and any disruption of cross-Strait economic
exchange will also have a severe impact on the Chinese economy. An international
relations senior scholar in Beijing pointed out, “Even though Taiwan is more dependent
on the Mainland, the Mainland would not disrupt cross-Strait economic exchange because
both sides across the Strait are interdependent. Taiwan’s products and investment are vital
for the Mainland’s industrial production and economic development.”9 An international
relations senior scholar in Beijing elaborated, “In terms of sustainability, the Mainland
will be better off than Taiwan if it imposes sanctions against Taiwan. However, China will
absolutely not pay a small price, but a very substantial price. In 1995-96, the Mainland
decided not to impose economic sanctions against Taiwan because the price was too
high.”10
Apparently, the fact that economic sanctions would gravely hurt China is another
consensus among Chinese officials and scholars.11 Many Chinese scholars characterized
the nature of China’s economic sanctions against Taiwan as a double-edged sword, which
could inflict significant damage on both sides. Basically, this means that China has grave
concerns about the absolute costs of economic sanctions, in addition to the relative
author, August 7, 2001. An international relations senior scholar in Beijing, interview with author, July
11, 2001. An economist of Taiwan economic studies in Xiamen, interview with author, June 7, 2001.
9
An international senior scholar in Beijing, interview with author, July 11, 2001.
10
An international relations senior scholar in Beijing, interview with author, July 9, 2001.
11
A senior official of the Taiwan Affairs Office in Shanghai, interview with author, June 19, 2001. A senior
official of the Taiwan Affairs Office of the State Council, interview with author, August 9, 2001. An
international relations senior scholar in Beijing, interview with author, July 12, 2001. An international
relations senior scholar in Beijing, interview with author, July 17, 2001. An American studies scholar in
Beijing, interview with author, July 10, 2001. An economist of Taiwan economic studies in Shanghai,
interview with author, June 13, 2001. A Taiwan studies senior scholar in Shanghai, interview with author,
252
costs.12
For instance, although China’s capital market is closed, cross-Strait tensions had a
huge impact on China’s stock market as discussed in Chapter 2, reflecting the close
interdependence between Taiwan and China. In interviews in Beijing the author had with
a Taiwan studies senior scholar, an international relations senior scholar, and a Taiwan
studies scholar, all three were fully aware that cross-Strait tensions between 1995 and
2000 had inflicted huge damage to China’s stock and financial markets. As a result, they
argued that cross-Strait economic integration would be conducive for the leaders of both
sides to adopt more mild and stable policies. They believed that the leaders of both sides
would be even very cautious in public rhetoric.13
Chinese emphasis on the absolute costs of economic sanctions can be further
exemplified by Chinese concerns over Taiwan’s economic development. An international
relations senior scholar in Shanghai said, “The Mainland does not hope for a gloomy
economy in Taiwan. Instead, the Mainland hopes both economies across the Strait can be
prosperous with Taiwan as an engine to Chinese economic development. If Taiwan has a
financial crisis, TIEs will run into difficulties. The Mainland should help TIEs and Taiwan.
This will also help the Mainland itself because eastern China’s economy benefits
tremendously from TIEs’ business activities. Whatever happens to Taiwan will have
12
13
July 3, 2001.
An international relations senior scholar in Beijing, interview with author, July 17, 2001. An economist
of Taiwan economic studies in Shanghai, interview with author, June 13, 2001. An American studies
scholar in Shanghai, interview with author, June 28, 2001. An economist of Taiwan economic studies in
Xiamen, interview with author, June 7, 2001. A senior economist of Taiwan economic studies in Xiamen,
interview with author, June 8, 2001. An American studies senior scholar in Shanghai, interview with
author, June 15, 2001. An economist of Taiwan economic studies in Beijing, interview with author,
August 3, 2001. An international relations senior scholar in Beijing, interview with author, August 2,
2001.
A Taiwan studies senior scholar in Beijing, interview with author, July 29, 2001. An international
relations senior scholar in Beijing, interview with author, July 17, 2001. A Taiwan studies scholar in
Beijing, interview with author, July 30, 2001.
253
strong impact on the Mainland economy.”14
Another international relations senior scholar in Shanghai agreed, “Taiwan’s
economic development is good for the Mainland because of interdependence. The
Mainland does not wish for Taiwan to fall into turmoil.”15 A former TAO senior official
pointed out, “The Taiwan dollar is circulating in southern China. If the Taiwan dollar
depreciates, it will impact China’s economy.”16 Both a Taiwan studies senior scholar in
Beijing and an American studies senior scholar in Shanghai had similar concerns about
Taiwan’s economy.17 Furthermore, some Chinese scholars even worried, “Taiwan might
use the economic card against China. For example, if Taiwan withdraws its capital from
the Mainland, it will bring severe impact on the Mainland.”18 This implies that these
scholars believe China will suffer more than Taiwan if Taiwan withdraws its capital.
With regard to Taiwan’s trade surplus with China, some Chinese scholars were more
objective than those previously mentioned. For example, an international relations senior
scholar emphasized, “TIEs contribute significantly to Mainland economic development.
Their contribution cannot be treated as a simple trade surplus or deficit with Taiwan.”19
An international relations senior scholar in Shanghai stressed, “Cross-Strait economic
exchange is reciprocal. It is neither an act of grace from Taiwan, nor an act of grace from
China.”20 An American studies scholar in Beijing explained, “The reason for Taiwan’s
trade surplus with the Mainland is that TIEs import capital equipment to China. Thus, if
cross-Strait economic exchange is disrupted, the impact on the Mainland will be huge
14
15
16
17
18
19
20
A international relations senior scholar in Shanghai, interview with author, June 25, 2001.
An international relations senior scholar in Shanghai, interview with author, June 29, 2001.
A former TAO senior official, interview with author, July 16, 2001.
A Taiwan studies senior scholar in Beijing, interview with author, July 16, 2001. An American studies
senior scholar in Shanghai, interview with author, July 2, 2001.
An international relations senior fellow in Shanghai, interview with author, June 21, 2001.
An international relations senior scholar in Beijing, interview with author, July 17, 2001.
An international relations senior scholar in Shanghai, interview with author, June 15, 2001.
254
without reference to the superficial figures of trade deficits.”21
China’s Blacklisting of Taiwan-Invested Enterprises
The coercion of firms is usually easier than the coercion of nation-states. As George
E. Shambaugh argues in his book, States, Firms, and Power, when firms were dependent
on access to American markets or suppliers, the U.S. government could often compel
them to alter their behavior by threatening to cut off this access.22 Compared to states,
businesspeople, as Daniel Drezner points out, do not care about relative gains or political
reputation; they care about profits. If the sanctions had stayed at the firm level, there is
every reason to believe that they would have been successful. However, when their
governments intervene and support sanctioned firms, as Drezner shows in the case of the
pipelines sanctions imposed by the United States in the early 1980s, these firms did not
give in.23
In the past, Beijing succeeded in punishing one Hong Kong company for its
chairman’s political position. On August 8, 1994, Giordano, one of Hong Kong’s most
successful retailers in the China market, was forced to close its Beijing outlet because,
Beijing said, certain licensing requirements had not been completed. However, many
observers believe the real reason was because Jimmy Lai Chee-ying, chairman of
Giordano Holdings, attacked Chinese Premier Li Peng in his Next Magazine calling him a
“monster” and “the shame of the Communist Party” and criticizing him by saying “not
21
22
23
An American studies scholar in Beijing, interview with author, July 12, 2001.
George E. Shambaugh, States, Firms, and Power: Successful Sanctions in United States Foreign Policy
(Albany, New York: State University of New York Press, 1999).
Daniel W. Drezner, The Sanctions Paradox: Economic Statecraft and International Relations (New York:
Cambridge University Press, 1999), pp. 80-87.
255
only are you a bastard but you are also a bastard with zero IQ.”24
Five days later, Jimmy Lai Chee-ying stepped down from his position as chairman of
Giordano Holdings and relinquished his voting control over 36.5 percent of the group’s
shares to his trusted lieutenants, newly installed Chairman Peter Lau Kwok-kuen and two
other directors. On September 8, the Giordano retail outlet in Beijing reopened for
business. In this case, Beijing succeeded in punishing Lai for his criticism but did not
permanently shut down the Beijing outlet of Giordano following Lai’s resignation as
chairman.25
In early 2001, the Credit Suisse First Boston (CSFB) helped organize meetings
between Taiwan Finance Minister Yen Ching-chang and money managers at an
international roadshow in Europe. Chinese officials were upset, and made accusations that
the roadshow was simply a ploy aimed at increasing Taiwan’s international recognition.
As a result, China Unicom Ltd, China’s second largest cellular carrier, dropped the CSFB
from a multi-billion dollar underwriting deal to help raise funds. Only after CSFB head
John Mack personally pledged to Beijing not to support Taiwan’s future international bid
did China stop blacklisting the CSFB from future deals in China. Beijing succeeded in
acquiring concession from the CSFB and demonstrating its political resolve on the
Taiwan issue to other foreign companies. Chinese Finance Minister Xiang Huaicheng said,
“As long as it is not related to political matters, the (Chinese) government will not
intervene.”26
24
25
26
Louise Lucas, “China Closes HK Store,” Financial Times, August 10, 1994, p. 3. “China Snubs
Businessman for Criticism of Li Peng; Daily,” Japan Economic Newswire, August 10, 1994. Lim Soon
Neo, “Giordano’s Outspoken Chairman Quits,” Business Time (Singapore), August 12, 1994, p. 1.
“No Special Deal for Girodano,” South China Morning Post, August 14, 1994, p. 4. “Giordano Store
Reopen,” South China Morning Post, September 9, 1994, p. 2.
Bill Savadove, “China May Let CSFB in from the Cold, Official Says,” Reuters, October19, 2001, 2:23
am Eastern Time.
256
Given Beijing’s strategy of yi shang wei zheng (exploit business to press politics),
people in Taiwan speculate Beijing would use the same tactics to influence the political
position of Taiwan investors in China. Indeed, Beijing has expressed its concerns on the
political position of “very particular individual important” TIEs in 2000-01. On March 10,
2000, Chen Shui-bian revealed his list of advisors for national policies, including Stan Shi,
chairman of the Acer Group; Shi Wen-lung, chairman of the Chi Mei Group; Chang
Yung-fa, chairman of the Evergreen Group; and Ying Qi, president of the Continental
Engineering Corporation. Zhang Zhiqun, director of Shanghai Taiwan Affairs Office,
soon summoned representatives of these companies in Shanghai, and expressed China’s
concerns about their support for Chen Shui-bian.27
On April 8, 2000, although reassuring Taiwan businesspeople that China would
continue to protect their legitimate interests in China, Li Bingcai, TAO deputy director,
said, “[V]ery particular individual important Taiwan businesspeople openly clamor for
‘Taiwan independence’ and advocate the ‘Lee Teng-hui’ line, which preaches the break up
of the motherland. Meanwhile, they scrabble for profits by engaging in business and
economic operations on the Mainland. Such a situation will not be allowed to continue.”28
Deputy Director Li Bincai’s remarks incited anxiety among TIEs and Beijing tried to
play down the anxiety of TIEs. On April 24, ARATS Vice Chairman Tang Shubei
emphasized that for the majority of TIEs, Beijing welcomes and encourages Taiwan
businesspeople to invest in China and protects their important interests. However, Vice
Chairman Tang pointed out, the Mainland has some opinions on only “very particular
27
28
Bin-zhong Song, “China Warns Taiwan Businesspeople who support Taiwan Independence,” Zhongguo
Shibao [China Times], April 9, 2000.
“On the Current Development of Cross-Strait Economic Relations: Questions Answered by the Leader of
the Central Taiwan Affairs Office and the State Council Taiwan Affairs Office,” Renmin Ribao [People’s
Daily], April 10, 2000, p.1.
257
individual” TIEs, who publicly support Taiwan independence. On May 7, one month from
his previous remarks, Deputy Director Li reassured TIEs that China would continue to
obey “Jiang’s eight points”29 and effectively protect all legitimate interests of TIEs. He
also clarified that Beijing was concerned only with “very particular individual” TIEs, who
publicly supported Taiwan independence. On September 23, Deputy Director Li, however,
emphasized that cross-Strait political divergence should not interfere economic exchange
and cooperation. He promised that China put TIEs in a very important position and would
protect various interests of TIEs under any circumstance.30
In early March, 2001, Chi Mei Group Chairman Shi Wen-lung’s controversial
comments about Taiwanese comfort women serving for Japanese military persons during
the World War II were published in a comic book, Taiwan Discourse, by Japanese
cartoonist Yohinori Kobayachi. As a result, on March 10, 2001, the Chi Mei
petrochemical plant in Zhenjiang, Jiangsu Province, was reportedly forced to shut down
under pressure from Beijing. In addition, China launched several rounds of tax probes at
Chi Mei’s Zhenjiang plant, which were widely seen as Beijing’s retaliation for Shi’s
comments.31
Immediately, TIEs expressed shock over the report and called on Chinese authorities
to handle the matter properly in compliance with the law in order to minimize the impact
on the increasingly close trade and economic relations between the two sides.
29
30
31
“Jiang’s eight points” refer to Jiang Zemin’s speech on January 30, 1995, entitled “Continue to Promote
the Reunification of the Motherland.”
Le-yi Yuan, “Tang Shubei: Mainland Never Agrees One China With Different Interpretation,” Zhongguo
Shibao [China Times], April 25, 2000. Le-yi Yuan, “Taiwan Affairs Office Reassure Taiwan
Businesspeople,” Zhongguo Shibao [China Times], May 8, 2000. Cuo-zhong Wang, “China Actively
Integrate Taiwan Business Associations,” Zhongguo Shibao [China Times], September 24, 2000.
Sofia Wu, “Mainland Official Denies Chi Mei Plant Closure,” Central News Agency, March 11, 2001.
Huei-xing Wang, “Chi Mei Builds A empire of Petrochemical Industry,” Zhongguo Shibao [China
Times], March 11, 2001.
258
Representatives of the ROC General Chamber of Commerce in Taiwan warned, “Should
the mainland authorities fail to provide adequate protection to Taiwan investors in the
mainland, and other Taiwan businesses are shut down at any moment without any legal
basis, it would very likely stir up a chain reaction among Taiwan businesses with
operations there.” Several local Taiwanese business community leaders urged Chinese
authorities not to meddle in different kinds of disputes over investment issues, so as to
avoid causing panic among foreign investors.32
Nevertheless, on the same day, both the Chi Mei Group and Chinese authorities
denied reports that the Chi Mei’s plant in Zhenjiang had closed. In addition, the TAO
issued a statement that China would protect the legitimate rights of Taiwanese investors in
China. The next day, a TAO spokesman reiterated China’s opposition to anyone making
money in China while at the same time advocating independence in Taiwan. However, he
also said that China would protect the rights of Taiwanese companies in China, but would
also take relevant measures against anyone who breaks the law.33
In fact, there was a voice within China’s policy-making circles, including officials
and scholars, which supported imposing sanctions against the Chi Mei Group. Chinese
authorities and the public in general resented Shi Wen-long’s comments, but sanctions
against the Chi Mei Group did not become a formal policy in the end and China
continued the policy of separation between politics and economics. 34 Many Chinese
32
33
34
Flor Wang, “News Report on Chi Mei Mainland China Plant Needs Verification: MOEA,” Central News
Agency, March 10, 2001.
“China to Close Plants Belonging to Taiwan Independence Supporter: Report,” Agence France Presse,
March 10, 2001. Sofia Wu, “Mainland Official Denies Chi Mei Plant Closure,” Central News Agency,
March 11, 2001. Jun-wei Lian and Zhang-rong Kang, “China Reportedly Demand Chi Mei’s Plant in
Zhenjiang Closed,” March 11, 2001, Gongshang Shibao [Commerce Times], March 11, 2001. “Taiwan
Chi Mei Denies China Plants Closed by Mainland Gov’t,” Deutsche Presse-Agentur, March 11, 2001,
6:07 Central European Time.
A Taiwan studies senior scholar in Beijing, interview with author, August 3, 2001. An international
relations senior scholar in Beijing, interview with author, July 9, 2001. A Taiwan studies senior scholar in
259
officials denied the report that China would impose sanctions against the Chi Mei Group
for political reasons. They stressed that China would continue to protect and deal with
TIEs from a legal perspective.35
Beijing’s costs to blacklist the Chi Mei Group were very high. As of 2001, the Chi
Mei Group was one of the ten-largest Taiwanese investors in China. More importantly,
the Chi Mei Group is the world’s largest manufacturer of the important plastic material
ABS and China is its major market. In 2000, the Chi Mei Group produced one million
tons of ABS, or one-fourth of the world supply, and 425 thousand tons of ABS was
produced by its plant in Zhenjiang. The output of the Chi Mei’s Zhenjiang plant was
worth about RMB 1 billion in 2000 and expected to reach RMB 2 billion in 2001. The
Chinese market represented 60 percent of the Chi Mei Group’s total production. In
addition, the Chi Mei produced 700 thousand tons of PS and 180 thousand tons of rubber.
The Chi Mei Group was the largest producer of these three products in the world.
Therefore, the closure of the Chi Mei plant in Zhenjiang would have had enormous
impact on China’s economic development and the production of plastic material ABS, PS,
and rubber in the world market.36
In addition, China would also face the Chi Mei’s retaliation. In March 2001, Shi
Wen-lung said in an interview, “This time China scares me! I will seriously consider
whether we should reduce or cancel the expansion plan of our investment in China.”37 If
35
36
37
Xiamen, interview with author, June 6, 2001.
A senior official of the Taiwan Affairs Office in Shanghai, interview with author, June 19, 2001. A
Taiwan studies senior scholar in Shanghai, interview with author, June 26, 2001. A senior official of
Taiwan affairs office in a town near Shanghai, interview with author, July 5, 2001. A senior official of
the Taiwan Affairs Office of the State Council, interview with author, August 9, 2001.
Huei-xing Wang, “Chi Mei Builds A empire of Petrochemical Industry,” Zhongguo Shibao [China
Times], March 11, 2001. Zhen Xia, “China Suppresses, Chi Mei Has A Worst Scenario,” Zhongguo
Shibao [China Times], March 11, 2001.
Zhen Xia, “China Suppresses, Chi Mei Has A Worst Scenario,” Zhongguo Shibao [China Times], March
11, 2001.
260
China closes the Chi Mei’s plant, the Chi Mei would definitely not invest in China
anymore. As of 2001, the Chi Mei plans to invest an additional $500 million in
petrochemical production and even invest more in high-tech information industry in
China over the next five years. In fact, Chinese authorities attach great importance to
these investments and this is a crucial reason for the Chi Mei to continue its investments
in China.38
Moreover, Taipei has also threatened to retaliate against Beijing if the Chi Mei is
sanctioned. On March 12, 2001, Taipei warned Beijing that any attempt to shut down the
Chi Mei’s plants in China would backfire. Taipei warned, “We have to remind the
Chinese communist authorities that once the Chi Mei Group is asked to close its
Zhenjiang plants in the mainland, there will be a very serious negative impact on
economic ties between the two sides of the Taiwan Strait.”39
In fact, there is a striking contrast of sanction costs between the Giordano and CSFB
cases on the one hand and the TIE cases on the other hand. China would suffer trivial
costs of sanctioning the Giordano and CSFB while China would suffer tremendous costs
of sanctioning the Chi Mei Group. Therefore, the consideration of sanction costs could
have been an important factor for Beijing not to blacklist the Chi Mei Group. A senior
official of the Taiwan Affairs Office in Shanghai emphasized that to deal with this issue
Chinese authorities needed to consider Chinese workers employed by the Chi Mei Group,
and the possible overall impact on the confidence of TIEs and FIEs.40 Many Chinese
38
39
40
Man-Wei Ren, “Hsu Chun-hua: The Chi Mei plant in Zhenjiang Still Operates Normally,” Gongshang
Shibao [Commerce Times], March 11, 2001. Sofia Wu, “Mainland Official Denies Chi Mei Plant
Closure,” Central News Agency, March 11, 2001. Huei-xing Wang, “Chi Mei Builds A empire of
Petrochemical Industry,” Zhongguo Shibao [China Times], March 11, 2001.
“Beijing Warned Against Threatening Taiwanese Businesses,” Agence France Presse, March 12, 2001,
3:12 AM, Eastern Time.
A senior official at the Taiwan Affairs Office in Shanghai, interview with author, June 19, 2001.
261
scholars voiced the same concerns. 41 Two international relations scholars in Beijing
stressed that the Chinese government worried that sanctions would influence overall
cross-Strait economic relations and therefore China’s economic development.42 A senior
economist in Beijing and a Taiwan studies senior scholar in Shanghai underscored the fact
that sanctioning the Chi Mei would endanger China’s image of opening-up, which would
then trigger a chain reaction from foreign investors and governments.43
A Taiwanese businessman added, “Zhenjiang has been bought by the TIEs,” which
significantly dominate local economic development, in particular employment. He
underlined that the Zhenjiang government would definitely oppose sanctions on the Chi
Mei Group because it feared that this might impact the Chi Mei Group and other TIE
investment there.44
To sum up, in the Chi Mei incident, although China as a state has in theory an
advantageous position in blacklisting the Chi Mei Group for its political position, several
concerns might have reversed Beijing’s calculation. Beijing would have faced very high
costs of imposing sanctions against the Chi Mei, including: (1) the losses of the
contribution of the Chi Mei’s Zhenjiang plant to Chinese economy, (2) the disruption of
the GCC of the petrochemical industry, (3) losing confidence of Taiwan and foreign
investors, and (4) the retaliation from both the Chi Mei Group and the Taiwanese
government. This damage would have exacerbated China’s staggering economic
problems and social instability, which is discussed in the next chapter. Therefore, Beijing
41
42
43
44
A Taiwan studies senior scholar in Shanghai, interview with author, June 26, 2001. A Taiwan studies
senior economist in Beijing, interview with author, August 3, 2001. An American studies senior scholar
in Beijing, interview with author, July 30, 2001.
An international relations scholar in Beijing, interview with author, July 19, 2001. An international
relations senior scholar in Beijing, interview with author, July 9, 2001.
A senior economist in Beijing, interview with author, August 7, 2001. A Taiwan studies senior scholar in
Shanghai, interview with author, July 3, 2001.
A Taiwanese businessman in Shanghai, interview with author, July 2, 2001.
262
kept this incident in low profile and repeatedly reassured Taiwan’s investors, including
the Chi Mei Group, that they would protect their interests in China.
Regarding other pro-independence TIEs, China has adopted an approach consistent
with the Chi Mei case. For example, on April 14, 2001, the Evergreen Group confirmed
that the Xiamen Municipal Government invited the Evergreen Marine to participate the
Haichang pier development project.
45
In addition, as of early 2002, Beijing has yet to
follow up on his threat with concrete action against pro-independence TIEs. This showed
that Chinese authorities have no intention at all to blacklist the Evergreen Group and
other TIEs from doing business in China because of their pro-independence political
stance.
II. Global Interdependence and China’s Interests
Based on the analysis presented in Chapter 2, any disruption of cross-Strait
economic relations would impose heavy costs on China’s external economic relations due
to the bilateral-global linkage and the production-consumption linkage. First of all, TIEs
contribute significantly to China’s exports to other countries, in particular to the United
States and Japan. Second, many Taiwan enterprises invested in China via their
subsidiaries or capital holding companies registered in third countries, such as Hong
Kong, Singapore, the Virgin Islands, and the United States. Chinese sanctions would
trigger a series of international disputes between China and these countries. Third, any
disruption of cross-Strait trade or production of TIEs would trigger a snowball of damage
45
“Evergreen Confirms Mainland Invitation to Participate Haichang Pier Development,” Central News
Agency, April 14, 2001.
263
to GCCs involving both Taiwan and China. This would have a severe impact on a number
of other countries – at least the United States, Japan, Hong Kong, Singapore, and Korea -within the GCCs in terms of both production and consumption, particularly in the
information industry.
Fourth, any bilateral disruption of cross-Strait economic activities would have a
strong impact on the Asia-Pacific region because of robust regional economic
interdependence among Taiwan, China, Hong Kong, the United States, Japan, Singapore,
and Korea, in terms of both trade and investment. This impact would be self-reinforcing
in two ways. First, the strong impact on both Taiwan and China due to China’s sanctions
would spread quickly to other economies in the region. The damage would not be less
than that done by the 1997-99 Asian financial crisis because both Taiwan and China are
much more important international economic actors than the Southeast Asian countries. In
particular, Taiwanese firms are the leading producers in the world of more than fourteen
information technology products, most with more than 50 percent of world market share.
Second, the impact on the global economy would have a feedback effect on both Taiwan
and China. In turn, this damage would further spread to other economies.
Therefore, any disruption of cross-Strait economic activities imposed by Chinese
economic sanctions would trigger a downward spiral effect on Taiwan, China, regional,
and global economies because of GCCs and global interdependence. The following
sections will further analyze Chinese interests in the global economy, China’s perception
of global interdependence, and the possible reaction of the United States to a hypothetical
Chinese sanction attempt.
264
China’s Interests in the Global Economy
In 1978, China was virtually a closed economy, with a trade-to-GDP ratio of 9
percent. Between 1978 and 1999, the annual growth rate of total trade averaged 16
percent. In dollar terms, trade in both goods and services increased almost twenty-fold
between 1978 and 1999, from $21 billion to $416 billion. By 1999, China’s trade in both
goods and services represented 42 percent of Chinese GDP. (See Table 8.2.) This figure
does not truly reflect China’s real economic dependence on foreign trade because of
undervalued non-tradable goods in China compared with the international price and
different calculation methodology of value between trade and GDP. 46 However, this
figure partly reflects the trend of China’s increasing interest in the global economy. In
addition, measured by the share of China’s trade in total world trade, China’s rank rose
sharply from thirty-second in 1978 to ninth in 1999, accounting for 3.3 percent of world
trade.47
Table 8.2. The Importance of Foreign Trade in China’s Economy, 1978-99
Year
Trade in goods as % of GDP
1978
1982
1985
1988
9.2
14.2
23.0
24.4
46
47
Trade in services as
% of GDP
n.a.
1.6
2.0
2.2
Trade in both goods and
services as % of GDP
9.2
15.7
25.1
26.6
China’s GDP based on the purchasing power parity is much larger than the nominal one based on the
market exchange rate. Therefore, Nicholas Lardy argues that China’s dependence on trade is smaller than
the nominal one suggests. In addition, trade is calculated by aggregate value while GDP is calculated by
value-added. This difference is significant because most of China’s trade is processed trade. China’s
trade sector has limited linkages to the rest of its domestic economy, which remains much more insulated
from the international economy. Nicholas R. Lardy, China in the World Economy (Washington, D.C.:
Institute of International Economics, 1994), pp. 14-18. Nicholas R. Lardy, Integrating China into the
Global Economy (Washington, D.C.: Brookings Institution Press, 2002), pp. 4-9.
International Monetary Fund, International Financial Statistics Yearbook (Washington, D.C.:
International Monetary Fund, 2000), pp. 344-347. “Table 1.5 Leading Exporters and Importers in World
Merchandise Trade, 1999,” World Trade Organization,
http://www.wto.org/english/res_e/statis_e/wt_overview_e.htm, accessed January 23, 2001.
265
1991
1994
1997
1999
31.3
39.5
35.9
36.4
2.8
6.0
5.8
5.6
34.2
45.4
41.7
41.9
Note:
1. Exports are F.O.B. figures and imports are C.I.F figures.
2. The GDP Figure for 1978 is gross national income figure.
Source:
International Monetary Fund, International Financial Statistics Yearbook (Washington, D.C.: International
Monetary Fund, 2000), pp. 344-347.
The exchange of commodities in foreign trade is quite advantageous to the Chinese
economy. To a remarkable degree, China imports two types of commodities. First, it
imports commodities that serve to ease constraints imposed on the Chinese economy by
its narrow domestic resource base. Second, a large proportion of imports might be
considered technology imports. In contrast, countries at a high level of industrialization
produce a large portion of their modern equipment at home, and, unlike China, have less
difficulty purchasing needed goods from abroad. Therefore, Thomas Robinson argues that
China’s real trade dependence is much higher than the nominal figures in terms of
resource and technology availability.48
The export sector contributes significantly to China’s economic development.
Reduced protection of the domestic market has forced Chinese firms to face competition
from the rest of the world, resulting in significant improvements in productivity and
product quality. In addition, according to Cheng Chu-yuan, in 1997 the contribution ratio
of exports to China’s economic growth reached 26 percent. According to Barry Naughton,
48
Barry Naughton, “The Foreign Policy Implications of China’s Economic Development Strategy,” in
Thomas W. Robinson and David Shambaugh (eds.), Chinese Foreign Policy: Theory and Practice (New
York: Oxford University Press, 1997), p. 54. Thomas W. Robinson, “Interdependence in China’s Foreign
Relations,” in Samuel S. Kim (ed.), China and the World: Chinese Foreign Relations in the Post-Cold
War Era, third edition (Boulder: Westview Press, 1994), p. 193.
266
in 1997, about 40 percent of China’s growth came from increases in net exports. The
Chinese media and Fortune magazine reported that 30 percent of China’s economic
growth is the result of exports.49
The large amount of capital inflow not only provided China with much-needed
investment for growth but also brought in advanced technologies and managerial skills.
From 1984 to 1997, annual foreign capital flows to China rose from $2.7 to $64.4 billion.
In 2000, China’s total capital inflow was $59.4 billion, of which $40.7 billion was FDI
and $10 billion was foreign loans. In addition, China’s balance of foreign debt was $116.3
billion in 1996 and $145.7 billion in 2000 (See Table 8.3.)
Table 8.3. China’s Foreign Capital Inflow, 1994-2000
Unit: $billion
Period
FDI inflow
Foreign loans
Other foreign investment
Total capital inflow
Balance of Foreign Debt
1994
33.8
9.3
0.2
43.2
92.8
1995
37.5
10.3
0.3
48.1
106.6
1996
41.7
12.7
0.4
54.8
116.3
1997
45.3
12.0
7.1
64.4
131.0
1998
45.5
11.0
2.1
58.6
146.0
1999
40.3
10.2
1.8
52.7
151.8
2000
40.7
10.0
8.6
59.4
145.7
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 108
(August 2001), pp. 43, 49.
In particular, FDI in China has played a very important role in China’s economic
49
Jun Ma, The Chinese Economy in the 1990s (New York: St. Martin’s, 2000), pp. 7-8. Chu-yuan Cheng,
“China’s Economy: Recent Development and Long-Term Prospects,” Issues & Studies, vol. 36, no. 5
(September/October 2000), p. 129. Barry Naughton, “China’s Economy: Buffeted from Within and
Without,” Current History, September 1998, p. 277. “No Optimism for Exports, Urgent Need for
Diversification” (in Chinese), Zhongguo Xinwen She, June 15, 1998, in BBC Summary of World
Broadcasts, June 16, 1998, FE/D3254/S1. Jim Rohwer, “China: The Real Economic Wild Card,” Fortune,
September 28, 1998, p. 106.
267
development. By June 2001, 375,876 foreign-invested enterprises were approved and
cumulative contracted FDI totaled $709.6 billion, of which $369.1 billion was realized.
The cumulative realized FDI was as much as 31 percent of China’s GDP in 1999. In the
1993-97 period, China was second only to the United States as a foreign capital recipient.
In 1997 FDI inflow into China reached $45.3 billion, accounting for 14.8 percent of gross
domestic investment. That year, foreign-invested enterprises (FIEs)50 accounted for 18.6
percent of industrial output, 17.9 percent of total industrial value-added, 13.2 percent of
tax revenues, and 17.5 million jobs (9 percent of China’s urban employees). FIEs
produced one-quarter of national industrial output in 1998 and 22.5 percent of total
industrial value-added in 1999. In addition, FIEs have become an increasingly crucial
source of China’s strong export performance. During the period from 1986 to 1999,
exports by FIEs grew rapidly from $0.6 billion to $88.6 billion, with their share of total
Chinese exports increasing sharply from 1.9 to 45.4 percent. (See Table 8.4.)
Table 8.4. The Importance of FDI in China’s Economy, 1994-99
1994
1995
1996
Item
FDI inflows ($ billion)
FDI as a ratio of gross domestic investment (%)
FDI stock as a ratio of GDP (%)
Exports by FIEs ($ billion)
Share of exports by FIEs in total exports (%)
Share of industrial output by FIEs in total
industrial output (%)
Share of value-added by FIEs in total industrial
value-added (%)
Number of employees in FIEs (million)
Tax contribution as share of total (%)
33.8
17.3
17.6
34.7
28.7
11.0
35.8
15.1
18.8
46.9
31.3
13.0
40.8
17.0
24.7
61.5
41.0
n.a.
1997
45.3
14.8
24.4
75.0
41.0
18.6
1998
45.5
13.0
28.1
81.0
44.1
25.0
1999
40.4
n.a.
30.9
88.6
45.4
n.a.
11.2
14.8
15.9
17.9
20.9
22.5
14.0
n.a.
16.0
10.0
17.0
n.a.
17.5
13.2
n.a.
n.a.
n.a.
n.a.
Note: FIEs stand for foreign-invested enterprises, including Taiwan, Hong Kong, and Macao invested
enterprises.
Source:
United Nations, World Investment Report 1998: Trends and Determinants (New York United Nations, 1998),
50
In this study, foreign-invested enterprises include Taiwan, Hong Kong, and Macao invested enterprises.
268
p. 204.
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), p. 41.
The
Economist
Intelligence
Unit,
Country
Profile
2000:
China,
November
3,
2000,
<hhtp://db.eiu.com/reports.asp?title=Country+Profile+China&Valname=CPACNB&doc_id=677125
>, accessed February 5, 2001, p. 6 of 15.
U.S. Department of State, “FY 2001 Country Commercial Guide: China,” July 2000, p. 83.
National Bureau of Statistics (PRC) (compiled), China Statistical Yearbook (1994-2000) (Beijing, China
Statistics Press, 1994-2000).
Based on an empirical study by Chen Yong-sheng, by 1999 FDI significantly
contributed to China’s economic development in terms of capital formation, trade
expansion, rising employment rate, and institutional demonstration effect. 51 Furthermore,
according to a study by Sun Haishun, by 1995 FDI significantly promoted the economic
growth of China by contributing to domestic capital formation, increasing exports and
creating new employment. During the 1983-95 period, according to Sun, FDI added a 2.1
percent to annual GDP growth in the coastal region. In other words, 17 percent of
economic growth in the coastal region over this period was the result of FDI.52
Additionally, foreign aid helps the central government carry out its priority investment
programs. By its very nature, such lending is made predominantly to the central
government and tends to strengthen the capabilities and influence of the central
authorities. In the late 1980s, about a quarter of the central government’s core priority
investment programs were funded through international concessionary lending. The most
important sources of foreign aid are the World Bank and the Japanese Development
Program. Both sources provide substantial concessionary terms for their loans and come
51
52
Yong-sheng Chen, “Foreign Direct Investment and Economic Development in China” (in Chinese),
Mainland China Studies, vol. 44, no. 3 (March 2001), pp. 17-43.
Haishun Sun, “Macroeconomic Impact of Direct Foreign Investment in China: 1979-1996,” World
269
with technical assistance.
In 1993, China became the World Bank’s largest borrower and this remained the case
as of 2001, excluding the large, exceptional liquidity loans made to South Korea and
some other countries in the wake of the 1997-99 Asian financial crisis. In addition to
advanced management expertise from the World Bank, in 2000 China received World
Bank loans totaling $1.67 billion, bringing cumulative lending to the country to almost
$35 billion as of June 30, 2000. Ninety-two percent of funds have gone to agricultural,
rural, infrastructure, energy, education, health, and environmental projects, where China
needs investment the most. By March 2001, the Japanese government had provided a
total of 2,667.7 billion yen ($22.9 billion) worth of loans to China. Whether Beijing is
able to obtain development loans from Europe, Japan, the United States, or from
international lending institutions, depends on the political attitudes of those nations and
the international institutions that they largely control.53
Furthermore, B shares on the Shanghai and Shenzhen stock exchanges have attracted
portfolio investment in foreign currency of about $2 billion in the sixty stocks on the
market as of 2001. Some Chinese companies are listed on the Hong Kong and New York
stock exchanges. By the end of 1998, 46 Chinese companies had issued about $11 billion
in equity in overseas markets. In 2000, China Mobile (Hong Kong), PetroChina, Unicom,
and Sinopec together raised more than $15 billion through equity-sales in New York and
Hong Kong. Finally, by the end of 2000, there were 6,296 Chinese-funded enterprises
53
Economy, vol. 21, no. 5 (July 1998), pp. 675-694.
Pieter Bottelier, “China: Dynamics of Economic Reform and Institutional Development,” mimeo, April
1999, p. 19. World Bank, “The World Bank and China,”
<http://wbln0018.worldbank.org/…/6049af06c4b92427852567d1006bf6f1?OpenDocumen>, accessed
February 19, 2001, p. 2 of 6. Barry Naughton, “The Foreign Policy Implications of China’s Economic
Development Strategy,” in Thomas W. Robinson and David Shambaugh (eds.), Chinese Foreign Policy:
Theory and Practice, paperback edition (New York: Oxford University Press, 1997), pp. 54-55. “China,
Japan Sign Documents for Yen Loans,” Beijing Xinhua, March 30, 2001, in FBIS-CHI-2001-0330.
270
overseas. China’s total outward direct investment through signed agreements added up to
$11.2 billion, with $7.6 billion actually realized.54
By the end of 2001, FDI, funds raised by Chinese enterprises listed overseas, and
Chinese foreign debts combined neared $600 billion. In the meantime, China’s foreign
exchange reserve, the investment made by Chinese enterprises overseas, and the net
overseas assets of Chinese financial institutions exceeded $350 billion. This indicates
how deeply China is integrated into the global economy.55
In addition, China also depends heavily on imports of some strategic resources, such
as oil and gas. Throughout the 1970-93 period, China was a net oil exporter, with exports
peaking at 0.66 million barrels of oil (mbo) per day in 1986. However, in 1993 China
became a net oil importer for the first time in more than a quarter-century. Starting at 0.26
mbo per day in 1993, net oil imports shot up to 1.4 mbo per day, or 30.1 percent of its
total consumption, by the end of 2000. According to some estimates, including those by
the Chinese media, this figure may increase to 3 mbo per day by 2010, nearly 42.5
percent of daily consumption, and 5.2 mbo per day in 2020, almost 60 percent of daily
consumption. In addition, according to Erica Strecker Downs at RAND, China is
projected to begin importing natural gas by around 2005. The share of imports in China’s
natural gas consumption is expected to be at least 30 percent by 2020.56
54
55
56
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), p. 91. “PRC Ministry Reports Overseas Investment in ’00 Surpassed $600 Million,” Beijing
Xinhua, February 1, 2001, in FBIS-CHI-2001-0201. Liqun Jin, Xin Guoji Jinrong Tizhi yu Zhongguo
[The New International Financial Regime and China] (Beijing: Jingji Kexue Chubanshe, 2000), p. 232.
Nicholas Lardy, Integrating China into the Global Economy (Washington, D.C.: Brookings Institution
Press, 2002), p. 5.
Dai Xianglong, “China’s Banking Industry After WTO Accession,” Hong Kong Ta Kung Pao (Internet
version), February 19, 2002, in FBIS-CHI-2002-0219.,
Kent E. Calder, “ Asia’s Empty Tank,” Foreign Affairs, vol. 75, no. 2 (March/April 1996), pp. 56-59.
“China Expects to Import 50 Million Tons of Oil in 2000,” Beijing Xinhua, November 21, 2000, in
FBIS-CHI-2000-1121. Chien Chung, “China’s Energy Strategy in the 21 st Century,” Peace Forum
(Taipei), http://www.dsis.org.tw/peaceforum/papers/2000-12/ES0012001e.htm, accessed January 9, 2001,
pp. 2-3 of 4. Erica Strecker Downs, China’s Quest for Energy Security (Santa Monica, C.A.: RAND,
271
Thus, the future of China’s economic development depends heavily not only on the
continuous flow of international capital and trade, but also on global energy supplies.
China is embedded in the international economy of global interdependence. Stability, in
particular in the Asia-Pacific region, is the minimal requisite to facilitate international
economic activities with China as an active participant. Beijing’s cooperative behavior is
necessary if China is to attract international capital inflow, facilitate international trade,
and solve the problems stemming from global interdependence.
Some simple examples will further demonstrate the degree of China’s
interdependence within global economy. Despite the closure of its capital account,
China’s capital market is still subject to international political and economic influence.
When the NATO mistakenly bombed the Chinese embassy in Belgrade on May 8, 1999,
and provoked two days of serious anti-American protests in China, the composite index
of the Shanghai Stock Exchange declined by 4.4 percent, and Hong Kong’s Hang Seng
Index decreased by 2.2 percent in a single day. Most investors worried that the situation
might deteriorate and seriously jeopardize U.S.-China relations.
In addition, China’s B shares on both the Shanghai and Shenzhen stock markets
slumped because of tensions across the Taiwan Strait. After President Lee Teng-hui’s
“two-state theory” statement, Shanghai’s B shares lost 20 percent over seven consecutive
days. Particularly, on July 19, 1999, Shanghai’s B-share market lost 9.5 percent. On the
same day, Shenzhen’s B-share market lost 7.9 percent.
The suicide plane attacks on World Trade Center and Pentagon on September 11,
2001, also reflected the close interdependence of the Asia-Pacific region. Nearly every
Asian stock market was seriously impacted. Hong Kong shares dropped by about 10
2000), pp. 8-9.
272
percent on the day after the attacks. China B shares fell about 15 percent in a four-day
slide after the attacks. One month after the assaults, Taipei’s index had declined by 15.6
percent, Shenzhen B-share market by 15.4 percent, Shenzhen A-share market by 11.4
percent, Shanghai B-share market by 9.8 percent, and Shanghai A-share market by 9.2
percent. The attacks knocked $350 billion out of the world’s economy in 2001 and
trimmed world growth by a full percentage point (from pre-September forecasts of 2.4
percent to 1.4 percent), according to the United Nations.57
Case Study: The 1997-99 Asian Financial Crisis
The 1997-99 Asian financial crisis (AFC) serves as a perfect case study for exploring
China’s interests and reaction to international economic interdependence. The AFC
erupted on July 2, 1997, when Thailand sharply devalued its currency, the baht. Within
less than one year, the currencies of Korea, Malaysia, the Philippines, and Thailand had
lost over 40 percent of their value against the U.S. dollar, while the currency of Indonesia
had lost over 80 percent. Equity markets in these countries also tumbled, losing between
60 and 80 percent of their dollar value.58
The AFC had a strong direct impact on China’s international trade and capital inflow
after mid-1997. Between 1987 and 1997 Chinese exports expanded at an average annual
rate of 16.5 percent. But between 1998 and 1999, export growth was far more modest,
averaging only a little over 3 percent annually. Similar, after watching FDI inflows soar
57
58
Irwin Arieff, “Attacks Knock $350 Billion Off World Economy – UN,” Reuters, October 10, 2001, 5:01
pm Eastern Time.
Jianping Zhou, “Roots of the Financial Crisis in Asia and Implications for China,” in Baizhu Chen, J.
Kimball Dietrich, and Yi Fang, Financial Market Reform in China: Progress, Problems, and Prospects
(Boulder, Colorado: Westview, 2000), p. 39.
273
from $3-4 billion annually in the late 1980s to $45 billion in 1997, Chinese leaders saw
realized FDI growth evaporate in 1998 and then witnessed a significant decline of 11
percent to $40 billion in 1999. This shrinkage in FDI was the first ever recorded in the
reform period. (See Table 8.5.) Parenthetically, on October 23, 1997, the AFC hit Hong
Kong, with the Hang Seng Index dropping 10 percent in a single day and another 23
percent during the last week of October.
Table 8.5. The Impact of Asian Financial Crisis on China’s Economy, 1997-2000
Year
Exports
Contracted FDI
Amount Growth rate Amount
Growth
($ billion)
(%)
($ billion) rate (%)
151.1
1.5
73.3
-19.7
182.7
20.9
51.0
-30.4
183.8
0.5
52.1
2.2
195.2
6.2
41.2
-20.9
249.2
27.7
62.4
51.5
1996
1997
1998
1999
2000
Realized FDI
Economic Retail price
index
Amount
Growth growth
($ billion) rate (%) rate (%) change (%)
41.7
11.2
9.7
6.1.
45.3
8.6
8.8
0.8
45.5
0.4
7.8
-2.6
40.4
-11.2
7.2
-3.0
40.7
0.7
8
-2.9
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), pp. 38, 41, 49.
National Bureau of Statistics, various Xinhua reports.
“Price Stagnation Persists,” China Economic Review, March 12, 2001.
Prior to the AFC, year after year foreign banks were willing to extend larger and
larger foreign currency loans to China. But in 1998, foreign lending to China began to
decline, and after January 1999, when the Guangdong International Trust and Investment
Company declared bankruptcy, loans declined sharply for the first time in more than a
decade. By the end of 1999, total foreign currency lending to China was down by $22
billion, or about one-fourth, compared to year-end 1997. In a period of just over two years
274
Chinese firms and their affiliates in Hong Kong had to repay loans and other external
obligations to banks of at least $34 billion.59
For the first time in its post-1949 history, China faced an external macroeconomic
shock that had a significant destabilizing impact on its domestic economy. According to
Chinese Finance Minister Xiang Huaicheng, the AFC resulted in lax taxation, insufficient
domestic demand, sluggish economic growth and the poor operations of SOEs in China.
The retail prices have been falling continuously since the fall of 1997-- falling by 2.6
percent in 1998 and by 3 percent in 1999. The underlying problem of price deflation has
been over-investment of SOEs in many sectors, leading to excess capacity and a tendency
for manufacturers to cut prices in an effort to sell enough products to cover the cost of
their labor and other inputs. Price deflation in China for some critical products, such as
steel, long predated the AFC, but the crisis significantly deepened the deflationary trend
since China’s fixed exchange rate against the U.S. dollar meant that deflation elsewhere
in the region was imported into China.60
In response, in August 1998, China shifted from a policy of tightening to one of
macroeconomic stimulus, through a proactive fiscal and monetary policy, which increased
fiscal outlays and expanded lending by state banks. These increased expenditures
represented about 2.5 percent of GDP. The state cut interest rates on both deposits and
loans to encourage consumption and investment, organized cartels to reduce production,
59
60
Nicholas R. Lardy, “Permanent Normal Trade Relations for China,” Brookings Institution Policy Brief
no. 58 (May 2000), <hhtp://www.brookings.edu/comm./policybriefs/pb058/pb58.htm>, accessed May 1,
2000, pp. 2-3 of 6. David M. Lampton, Same Bed, Different Dreams: Managing U.S.-China Relations,
1989-2000 (Berkeley: University of California Press, 2001), pp. 191-192. Nicholas R. Lardy, Integrating
China into the Global Economy (Washington, D.C.: Brookings Institution Press, 2002), p. 17.
“China: Xiang Huaicheng: Asian Crisis Affects Budget Plans,” Beijing Xinhua, June 24, 1998, in
FBIS-CHI-98-175. Nicholas R. Lardy, “Permanent Normal Trade Relations for China,” Brookings
Institution Policy Brief no. 58 (May 2000),
<hhtp://www.brookings.edu/comm./policybriefs/pb058/pb58.htm>, accessed May 1, 2000, p. 6 of 23.
275
and introduced price floors for many products in excess supply. Interest rates were
reduced on seven occasions between May 1996 and June 1999. In addition, in December
1997 the target for 1998 growth of fixed investment, originally set at 6 percent, was raised
to 15 percent. In fact, in 1998 investment by state-owned units increased by 19.5 percent.
In November 1999, in a further bid to stimulate consumer spending, withholding taxes on
savings deposits were introduced at a rate of 20 percent. Tax rebates of exports were
increased and, for the first time, private firms were authorized to trade directly in the
international market. Preferential tax policies for incoming foreign direct investment were
reinstated in a number of high-technology sectors. Finally, China’s leaders renewed and
stepped up structural reforms, especially in the financial sector.61
Despite significant devaluation of Asian currencies, China’s leaders maintained the
value of the Renminbi (RMB, Chinese yuan) and thus contributed to regional economic
stability. By maintaining a stable exchange rate of 8.3 yuan per U.S. dollar, China
witnessed a significant real appreciation of the yuan against other Asian currencies, and
the competitiveness of its exports declined to some extent. In addition, the widespread
recession in other Asian countries also contributed to a sharp fall in the growth of external
demand for Chinese products. In 1998, China’s exports grew by only 0.5 percent,
compared with a 21 percent increase in 1997. China’s deteriorating export performance
contributed to the slowing of GDP growth -- from 8.8 percent in 1997 to 7.8 percent in
61
Nicholas R Lardy, “When Will China’s Financial System Meet China’s Needs?” presented at the
Conference on Policy Reform in China, Center for Research on Economic Development and Policy
Reform, Stanford University, November 18-20, 1999, pp. 32-33. Zhong Min, “China Pursues an
Appropriate Monetary Policy” (in Chinese), Hong Kong Zhongguo Tongxun She, February 20, 1999, in
FBIS-CHI-1999-0223. Barry Naughton, “China’s Economy: Buffeted from Within and Without,”
Current History, September 1998, pp. 277-278. The Economist Intelligence Unit, Country Profile 2000:
China, November 3, 2000,
<hhtp://db.eiu.com/reports.asp?title=Country+Profile+China&Valname=CPACNB&doc_id=677125>,
accessed February 5, 2001, p. 3 of 15. Nicholas R Lardy, Integrating China into the Global Economy
(Washington, D.C.: Brookings Institution Press, 2002), p. 18.
276
1998 and 7.2 percent in 1999. Parenthetically, Thomas Rawski estimates that the growth
rates in 1998 and 1999 were between negative 2.5 percent and positive 2 percent.62 This
slowing was against the backdrop of mounting Chinese unemployment.
There is no denying that China’s economy has been integrated into the global
economy and China cannot be unaffected by economic difficulties abroad. China’s
decision not to devalue its currency was not a sacrifice, but primarily a realistic
assessment of its own interests. At that time, there was no need for China to devalue given
the country’s continuing balance of payments surpluses throughout the crisis. Moreover,
Beijing recognized that devaluation could create systemic instability contrary to its own
overall interests. In particular, Beijing feared that devaluation would catalyze domestic
bank runs and result in a loss of foreign investor confidence. 63 Premier Zhu Rongji was
reported to have said in August 1998 that “the negative impact on confidence at home”
was a leading reason behind the decision not to devalue the currency.64
Despite domestic economic difficulty after the eruption of the AFC in July 1997,
China promptly committed $1 billion to the IMF effort to assist Thailand. In three IMF
packages between 1997 and 1998, China contributed a total of $6.9 billion to assist South
East Asian countries, including $1 billion offered by Hong Kong. 65 China contributed to
these foreign loans primary because of a realistic assessment of its own interests. The
62
63
64
65
Thomas G. Rawski, “What Is Happening to China’s GDP Statistics?,” China Economic Review, vol. 12,
no. 4 (2001), pp. 347-354.
Pieter Bottelier, “WTO and the Reform of China’s State Banks,” CSIS China Economic Outlook, June
2000, p. 2. Thomas G. Moore and Dixia Yang, “Empowered and Restrained: Chinese Foreign Policy in
the Age of Economic Interdependence,” in David M. Lampton (ed.), The Making of Chinese Foreign and
Security Policy in the Era of Reform, (Stanford, CA: Stanford University Press, 2001), pp. 215-218.
Rudi Dornbusch and Francesco Giavazzi, “Heading Off China’s Financial Crisis,” mimeo, conference
paper, 1999, p. 56.
“Bank Governor on Monetary Policy, Thai Aid Package,” Xinhua, August 14, 1997, in FBIS-CHI-97-226.
“Spokesman Promises $5.5 billion Aid to Asian Countries,” Xinhua, November 17, 1998, in
FBIS-CHI-98-321. David M. Lampton, Same Bed, Different Dreams: Managing U.S.-China Relations,
1989-2000 (Berkeley: University of California Press, 2001), p. 192. “China: Spokesman Promises $5.5
Billion Aid to Asian Countries,” Beijing Xinhua, November 17, 1998, in FBIS-CHI-98-321.
277
following three examples should illuminate China’s motivation for assisting in the
bailout.
First, Taiwan’s economic loss caused by the September 21, 1999, earthquake was as
high as $9.2 billion, or 3.3 percent of Taiwan’s GDP. The earthquake caused more than
11,000 casualties. After the earthquake, the Taiwan public donated about $360 million to
relief efforts while international donors gave at least $13.7 million. The PRC government
and people, despite claiming that Taiwan is part of China and having $154.7 billion in
foreign exchange reserve at the time, only contributed $0.8 million to Taiwan, far less
than its contribution of $6.9 billion to non-China parties – Thailand and Indonesia –
during the AFC. The TIEs contributed $3.5 million to Taiwan’s quake victims through the
Straits Exchange Foundation.66
Second, because Japan was China’s largest trading partner in the 1997-99 period,
Beijing was particularly concerned that the Japanese currency not devalue below the
150-yen level. On the eve of President Bill Clinton’s June 1998 visit to China, Beijing
implied that if Washington did not intervene in the foreign exchange markets to stop the
yen’s slide, the PRC would reconsider its commitment not to devalue the Chinese yuan.
On June 12, China’s ambassador to the United States, Li Zhaoxing, asked the G-7 to
support the yen, and on June 15 NPC Chairman Li Peng criticized Japan for the yen’s
drop. In an interview before meeting President Clinton, President Jiang Zemin
complained, “The economies of the world are increasingly interrelated. So there ought to
be a common standard that it is inadvisable [for the United States]…to commend the
efforts of one country [China] for maintaining the value of its currency while giving tacit
66
Shi-ding Liu, “Big Earthquake Incurs NT$ 300 billion Loss Nationwide,” Zhongguo Shibao [China
Times], October 12, 1999. Shang-li Xu, “Mainland Red Cross Remits $500 Thousand of Contribution
for Earthquake to Taiwan,” Zhongguo Shibao [China Times], October 22, 1999. Personal correspondence
278
approval…to another country [Japan] which devalues its currency.” 67 On June 17, the
U.S. Federal Reserve and the Bank of Japan intervened in the foreign exchange markets
to the tune of about $4 billion, and the yen rose about 5 percent in response. Welcoming
this move, the PRC reciprocated by reaffirming its pledges not to devalue the Renminbi.68
Parenthetically, in early 2002, Beijing repeated its strong concerns over the
weakness of the Japanese currency. Dai Xianglong, governor of China’s central bank
asked Japan to halt the slide of the yen, warning that a further depreciation could put
pressure on the yuan. In addition, many articles in Chinese official media discussed the
negative impact of yen depreciation on the Chinese economy. Furthermore, the Chinese
Ministry of Finance urged Japan to take a “responsible attitude” towards the yen’s
value.69
Finally, on October 5, 1998, the Renmin Ribao criticized a U.S. interest rate cut as
inadequate by saying it was “like trying to douse a blazing cartload of kindling with a cup
of water.” It said, “The U.S. interest cut can help reduce the currency pressure on
developing countries [including China] and ease the spreading international financial
crisis.” Therefore, it urged the United States to cut interest rates further and called on
Washington to approve $18 billion of additional funding for the International Monetary
Fund.70
The three examples indicate that China helped Southeast Asian countries primarily
67
68
69
with Taiwan’s Strait Exchange Foundation through e-mail dated February 19, 2001.
“Upbeat Jiang On Asia’s Woes,” Washington Post, June 21, 1998, p. C1.
David M. Lampton, Same Bed, Different Dreams: Managing U.S.-China Relations, 1989-2000 (Berkeley:
University of California Press, 2001), pp. 242-243.
Christopher Swann, “Yen Rises After Chinese Warning,” Financial Times, January 16, 2002, p. 30. Chen
Huai, “Three Variables Worth Paying Attention to for China’s Economy in 2002,” Beijing Liaowang (in
Chinese), January 14, 2002,no. 3, pp. 4-5, in FBIS-CHI-2002-0123. Li Kun, “What Does Depreciation of
Japanese Yen Mean?,” Beijing Renmin Ribao (Overseas Edition) (in Chinese), January 26, 2002, p. 5, in
FBIS-CHI-2002-0126. Zhang Weimin, “Shift One’s Troubles onto Others, Drink Poison to Quench
Thirst,” Beijing Xinhua Domestic Service (in Chinese), January 14, 2002, in FBIS-CHI-2002-0114..
279
out of self-interest, not philanthropy. In fact, before and after the AFC, the Chinese
government barely contributed financially to help other regions or countries suffering
from financial crises that did not overtly affect China’s economy. In the context of
international economic interdependence, the AFC had a strong negative impact on China
and China’s huge contribution to Thailand and Indonesia helped stabilize the region
economically and thus benefited China. This concern was far more important than
assisting a quake-stricken Taiwan. In addition, Beijing recognized how the Japanese and
U.S. economies would influence the world economy and impact China’s economic
development in the context of global interdependence. Therefore, out of self-interest,
Beijing urged Japan and the United States to be “responsible”.
China’s Perception of Global Interdependence
In the 1990s, China’s leaders dramatically changed their perception of global
interdependence, largely shaped by the AFC. As Zhou Mingwei, director of the Shanghai
Foreign Affairs Office, explained in 1998, “In 1987, the last major world economic crisis,
most Chinese just watched and said, ‘This is not our business.’ Some people even said
that crisis proved the weakness of capitalism and was good for us. Now there is a sense
that if you have a problem, we have a problem too. A totally different mentality has come
about here within a decade.”71
Facing domestic economic transition and economic globalization, Chinese leaders
have constantly emphasized economic stability and sustainable development. They have
70
71
“China Paper Assails U.S. Rate Cut as Too Small,” Reuters, October 5, 1998, 1:06 Eastern Time.
David M. Lampton, Same Bed, Different Dreams: Managing U.S.-China Relations, 1989-2000 (Berkeley:
University of California Press, 2001), p. 159.
280
proposed the “new security concept” with economic security at its core. Beijing
emphasizes that every country should pursue peace and cooperation and establish an open
global economic system.72 Chinese strategist Yan Xuetong explains, “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’…. The primary
aim of China’s efforts to promote its defense modernization is to safeguard its economic
security interests.”73
Since the summer of 1998, beginning with President Jiang Zemin’s keynote speech
at the ninth conference of diplomatic envoys, Beijing has stressed the importance of
“economic globalization” as a central and enduring feature of the emerging world order in
the twenty-first century. Prompted in part by the AFC, Beijing has called for multilateral
steps by the economic powers to provide for “economic security” within an increasingly
interdependent world with computerized capital flows and rapidly shifting exchange
rates.74 For example, on November 23, 1998, in the Sino-Russian joint statement both
China and Russia recognized that “the interdependence of world economies has reached
the stage in which the protection of the economic security of sovereign states must
become a matter of paramount urgency.” [emphasis added]75
After the AFC, many Chinese officials and scholars attached great importance to
72
73
74
75
“China Calls for New Security Concept, Economic Stability,” Hong Kong AFP, December 15, 1997, in
FBIS-EAS-97-349.
Yan Xuetong, “In Search of Security After the Cold War,” World Affairs, vol. 1, no. 4
(October-December 1997), pp. 50-58.
H. Lyman Miller, and Liu Xiaohong, “The Foreign Policy Outlook of China’s ‘Third Generation’ Elite,”
in David M. Lampton (ed.), The Making of Chinese Foreign and Security Policy in the Era of Reform
(Stanford, CA: Stanford University Press, 2001), pp. 144-145.
“China, Russia Call for Mutual Support in Times of Difficulties,” Xinhua News Agency, November 23,
1998.
281
“national economic security” and had a strong sense of economic vulnerability in the
context of globalization. For example, on August 25, 1999, President Jiang Zemin said,
“The accelerated development of economic globalization has triggered an unprecedented
fierce international competition and increased financial and economic risks…how to
maintain the country’s economic security have more and more become a major agenda for
solution for many countries, particularly for developing countries [including China].”76
Wang Mengkui, president of the Development Research Center (DRC) under the State
Council, stressed that China is very vulnerable to globalization and that the Chinese
government must attach great importance to national economic security.77 Xie Fuzhan,
DRC vice president, warned that China has a serious potential economic security crisis in
the long run and needs to make long-term painstaking efforts to avoid a potential crisis.78
Many prominent Chinese scholars agreed with these official warnings.79
In addition, a series of books on the subject of national economic security were
published in the aftermath of the AFC. Some of these books include Jingji Anquan:
76
77
78
79
“Text of Jiang Zemin Speech at Bishkek” (in Chinese), Beijing Xinhua Domestic Service, August 25,
1999, in FBIS-CHI-1999-0825.
Mengkui Wang, “The Asian Financial Crisis and China” (in Chinese), in Kemio Li and Fuzhan Xie (eds.),
Shiji Mo de Chongji [The Shocks at the End of the Century] (Beijing: Zhongguo Fazhan Chubanshe,
1999), pp. 1-12.
Fu Fuzhan, “Macro-management and China’s Economic Security” (in Chinese), in Hong Ma and
Mengkui Wang (eds.), Zhongguo Fazhan Yanjiu [China Development Studies] (Beijing: Zhongguo
Fazhan Chubanshe, 2001), pp. 128-138. See also Peiyu Li, “Challenges Faced by China from the
Perspective of the Asian Financial Crisis” (in Chinese), in Kemio Li and Fuzhan Xie (eds.), Shiji Mo de
Chongji [The Shocks at the End of the Century] (Beijing: Zhongguo Fazhan Chubanshe, 1999), pp.
195-202.
Xuetong Yan, China & Asia-Pacific Security (Beijing: Shishi Chubanshe, 1999), pp. 261-265. Dexi Liu,
Waijiao Zhanlue [Diplomatic Strategy] (Nanchang, Jiangxi: Jiangxi Renmin Chubanshe, 2001), pp.
113-119. Zhongwei Lu, “Shiji zhi Jiao de Guoji Jingji Xingshi yu Jingji Anquan” [International
Economic Situation and Economic Security on the Eve of New Century],” Contemporary International
Relations, no. 116, pp. 1-6; and no. 117, pp. 1-6. Mengzi Fu, “On ‘Unconventional Security’ from the
Perspective of Economic Security,” Contemporary International Relations, no. 113, pp. 1-4. Li Shaojun,
“International Security Situation and China’s International Security Strategy on the Eve of the New
Century” (in Chinese), in Teng Teng (ed.), Deng Xiaoping Lilun yu Shiji zhi Jiao de Zhongguo Guoji
Zhanlue [Deng Xiaoping Theory and China’s International Strategy on the Eve of the New Century]
(Beijing: Renmin Chubanshe, 2001), pp. 427-446. Youwen Zhang and Jianming Zhou, Jingji Anquan:
Jinrong Quanqiuhua de Tiaozhan [Economic Security: Challenges of Financial Globalization] (Shanghai:
282
Jinrong Quanqiuhua de Tiaozhan [Economic Security: The Challenges of Financial
Globalization], Guojia Jingji Anquan Daolun [Introduction to National Economic
Security], Guowai de Guojia Jingji Anquan Yanjiu yu Zhanlue [Research and Strategy of
Foreign National Economic Security], Guojia Jingji Anquan Lilun yu Fangfa [Theories
and Methods of National Economic Security], and Wangluo Shidai de Jingji Anquan
[Economic Security in the Internet Era]. Such books reflect the awareness of Chinese
officials and scholars of the seriousness of the issue of China’s economic security within
the context of globalization.80
According to Hong Kong’s Ching Pao, President Jiang Zemin warned in an internal
meeting in early 2000 that the Chinese government should closely watch changes in the
world situation and initiate responsive measures because China has integrated itself into
the world economic system. He pointed out three significant factors of uncertainties,
which would influence the Chinese economy: U.S. economic development, fluctuations
of international oil prices, and potential risks in the international capital market.81
President Jiang Zemin’s concerns have been echoed by other Chinese senior officials
and the media. Addressing the Twelfth APEC ministerial meeting in November 2000,
Chinese Foreign Minister Tang Jiaxuan said that China is “very much concerned” about
high oil prices, which had risen by more than 30 percent since November 1999. He added
80
81
Shanghai Shehuei Kexueyuan Chubanshe, 1999).
Youwen Zhang and Jianming Zhou, Jingji Anquan: Jinrong Quanqiuhua de Tiaozhan [Economic
Security: The Challenges of Financial Globalization] (Shanghai: Shanghai Shehuei Kexueyuan
Chubanshe, 1999). Jiaxiao Lei (ed.), Guojia Jingji Anquan Daolun [Introduction to National Economic
Security] (Xian, Shanxi: Shanxi Renmin Chubanshe, 2000). Yongxian Wang (ed.), Guowai de Guojia
Jingji Anquan Yanjiu yu Zhanlue [Research and Strategy of Foreign National Economic Security]
(Beijing: Jingji Kexue Chubanshe, 2000). Jiaxiao Lei (ed.), Guojia Jingji Anquan Lilun yu Fangfa
[Theories and Methods of National Economic Security] (Beijing: Jingji Kexue Chubanshe, 2000). Yujing
Chen and Haixia Feng, Wangluo Shidai de Jingji Anquan [Economic Security in the Internet Era]
(Anyang, Henan: Zhongyuan Nongming Chubanshe, 2000).
Zhang-rong Kang, “Jiang Zemin: Mainland Economy Faces Three Big Factors of Uncertainties,”
Gongshang Shibao [Commerce Times], February 11, 2001.
283
that excessively high oil prices would undercut the growth of the world economy and
adversely affect the recovery and steady growth of the Asian economy.82 In addition, a
commentary article in Renmin Ribao on February 22, 2001, discussed the impact of a
recession in the United States on the Asian economies. It concluded that “a U.S. economic
slowdown indeed has a certain impact on Asia, and cannot be taken lightly.”83 On March
22, Shi Guangsheng, minister of Foreign Trade and Economic Cooperation, explicitly
said that Beijing is “deeply concerned about the possible impact on China’s economy
resulting from the slowdown of the U.S. economy.”84
Global interdependence has significantly changed Beijing’s perception of national
interests and thus restrained China’s foreign policy. As an international relations senior
scholar in Shanghai explained, “China and the world are highly interdependent. China’s
trade dependence is as high as 40 percent, and a great deal of foreign capital flows into
China. As a result, China would like to maintain normal relations, peace, and stability in
order to sustain trade and foreign capital inflow.”85 An international relations scholar in
Beijing expounded, “Some criticized Beijing was too weak in dealing with the U.S. and
Japan. But those critics did not see a historic change. China is heavily interdependent with
the U.S. and West. The interdependence has significantly constrained Chinese foreign
relations. China can not comprehensively antagonize the West.”86
An American studies senior scholar in Shanghai added, “In the post-Cold War era, it
82
83
84
85
86
“Tang Jiaxuan: China ‘Very Much Concerned’ About Oil Price Fluctuation,” Beijing Xinhua, November
12, 2000, in FBIS-CHI-2000-1112. “Unattributed Report on the Necessity of Adjusting China’s Energy
Structure in the Face of Oil Price Increase” (in Chinese), Beijing Renmin Ribao (Internet version),
September 5, 2000, in FBIS-CHI-2000-0905.
Hengjun Lu, “US Impact on Asia Is Weakening All the Time” (in Chinese), Beijing Renmin Ribao
(Internet version), February 22, 2001, in FBIS-CHI-2001-0222.
John Pomfret, “U.S. Economy Worries China,” Washington Post, March 23, 2001, p. A22.
An international relations senior scholar in Shanghai, interview with author, June 18, 2001.
An international relations scholar in Beijing, interview with author, July 19, 2001.
284
is very difficult to distinguish enemies and friends. The Mainland wishes Taiwan and the
U.S. to be prosperous and thus the Mainland will benefit. This is so-called ‘one is
prosperous, all prosperous; one is damaged, all damaged.’ [Yi Rong Ju Rong, Yi Sun Ju
Sun]”87
An American studies scholar in Shanghai further stressed that global
interdependence greatly constrains Beijing’s Taiwan policy. 88 Many prominent Chinese
scholars followed a similar argument. “The costs of the Mainland’s reaction to Taiwan’s
independence are increasing because more and more enterprises have their markets
abroad.”89 “If there are tensions in the Taiwan Strait, big companies will immediately
remind leaders on both sides across Strait.”90 “After globalization, international force
will restrain conflicts and provocations in the Taiwan Strait.”91
Regarding China’s possible economic sanctions against Taiwan, an international
relations senior scholar in Shanghai said, “If the Mainland loses Taiwan, it will lose the
whole world. The Mainland is heavily dependent on the world and cannot afford the cost
of economic sanctions against Taiwan.” 92 In addition, many Chinese scholars and
officials expressed their grave concerns on the impact of China’s economic sanctions
against Taiwan on the international economy and foreign investment in China. They
argued that sanctions would have a significant impact on China’s international reputation
and economic development.93
87
88
89
90
91
92
93
An American studies senior scholar in Beijing, interview with author, July 30, 2001
An American studies scholar in Shanghai, interview with author, June 28, 2001.
An American studies scholar in Beijing, interview with author, July 10, 2001.
An American studies senior scholar in Beijing, interview with author, August 10, 2001.
A senior economist in Shanghai, interview with author, June 19, 2001.
An international relations senior scholar in Shanghai, interview with author, June 21, 2001.
A senior official of the Taiwan Affairs Office of the State Council, interview with author, August 9, 2001.
A scholar of Taiwan economic study in Shanghai, interview with author, June 13, 2001. A Taiwan studies
senior scholar in Shanghai, interview with author, June 26, 2001. An international relations senior
scholar in Shanghai, interview with author, June 26, 2001. Another international relations senior scholar
285
III. The Reaction of Third Parties
This study explores the reaction of the United States to both Taiwan and China in the
case that China imposes economic sanctions against Taiwan. This is important because
the United States has strong interests and influence in its economic relationship with both
Taiwan and China. According to U.S. customs statistics, in 1999 China exported $81.7
billion, or 42 percent of Chinese total exports, to the United States (including those
transshipped through Hong Kong), making the United States China’s largest export
market. Simultaneously, the United States is an important source of FDI for the PRC,
supplying $4.4 billion, or 10.8 percent of total realized FDI in China, in 2000. That year,
the United States was the second largest investor in China. According to Chinese figures,
by March 2000 cumulative realized American FDI totaled $21.9 billion divided among
27,201 projects. Furthermore, 250,000 Chinese citizens worked in American-invested
enterprises by 1998 and several million Chinese workers produced exports for the United
States in indigenous firms. These figures, however, underestimate the importance of
investment by the United States. Chinese officials acknowledged that American-invested
enterprises in China, compared with investments from Hong Kong and Taiwan, have
consistently involved more modern, higher-technology, and longer-term projects.94
In addition, the United States has also significant stakes in its economic relationship
with Taiwan and the economic relationship between Taiwan and China. According to
94
in Shanghai, interview with author, June 15, 2001. An economist of cross-Strait economic relations in
Xiamen, interview with author, June 7, 2001. A senior economist of cross-Strait economic relations in
Xiamen, interview with author, June 8, 2001. A Taiwan studies senior scholar in Beijing, interview with
author, July 29, 2001.
David M. Lampton, Same Bed, Different Dreams: Managing U.S.-China Relations, 1989-2000 (Berkeley:
University of California Press, 2001), p. 116.
286
Taiwan customs statistics, in 1999 Taiwan exported $30.9 billion to, and imported $19.7
billion from, the United States, making the United States the largest export destination
and the second largest import supplier for Taiwan. Parenthetically, Taiwan imported $3
billion more from the United States than China did in 1999.
As discussed in Chapter 2, Taiwanese firms have been the world’s third largest
information products manufacturers since 1997. Meanwhile, Taiwanese firms have topped
the world in the output of 14 information products and have occupied half of the global
market for most of these products. A substantial number of these products were exports to
the United States. As a result, any impact on Taiwan’s economy would trigger significant
repercussions on the U.S. economy. In the mid-1990s around one-fifth of Chinese exports
to the United States were produced by TIEs. Moreover, any disruption of cross-Strait
economic relations would produce a region-wide, even global, contagion effect in the
Asia-Pacific region, including the United States, because of high trade and financial
interdependence.
As a matter of fact, the United States is legally committed to a peaceful solution of
disputes between Taiwan and China, including cross-Strait economic relations. The
Taiwan Relations Act of 1979 states that the United States will “consider any effort to
determine the future of Taiwan by other than peaceful means, including boycott or
embargoes, a threat to the peace and security of the Western Pacific area and of grave
concern to the United States.” [emphasis added]95
Although the United States has never faced a case of Chinese economic sanctions
against Taiwan, U.S. policy in the 1995-96 and 1999-2000 Taiwan Strait incidents sheds
95
Karen M. Sutter (ed.), Taiwan 2020 (Washington, D.C.: The Atlantic Council of the United States, 1996),
p. 216.
287
some light on Washington’s possible reaction should Beijing impose sanctions against
Taipei. Before the 1995-96 Taiwan Strait crisis, the United States basically adopted a
policy of strategic ambiguity on whether the United States would intervene if China were
to attack Taiwan by force. However, when China escalated the crisis with missile tests in
March 1996, Washington explicitly showed its resolve to maintain stability in the Asian
Pacific region by sending two aircraft carriers to the waters near the Taiwan Strait.
In the 1999-2000 incident, the United States reiterated its policy by saying, “We have
an abiding interest that any resolution be peaceful…we oppose any use of force and it is
our policy that any effort to determine the future of Taiwan by other than peaceful means
will be a threat to the peace and security of the Western Pacific and of greatest concern to
the United States.” [emphasis added]96 In addition, Washington often hinted that the
United States would help Taiwan defend itself from a Chinese attack based on the Taiwan
Relations Act, like it did in the 1995-96 Taiwan Strait crisis.97
On July 21, 1999, when asked if Taiwan were to proceed with separatism would the
United States provide military aid to Taiwan, President Bill Clinton answered, “[T]he
differences between [Taiwan and China] would be resolved peacefully. If that were not to
be the case, under the Taiwan Relations Act we would be required to view it with the
gravest concern.” [emphasis added] He also hinted that the United States had “a physical
expression” of its resolve in the 1996 Taiwan Strait crisis.98
In response to Chinese escalating threats against Taiwan in late February and early
96
97
98
James P. Rubin, Daily Press Briefing, U.S. Department of State, July 15, 1999,
http://secretary.state.gov/www/briefings/9907/990715db.html, accessed February 22, 2001.
“Albright: If Crisis Emerges in Taiwan Strait, the United States Will Help Taiwan,” Zhongguo Shibao
[China Times], July 28, 1999. “If China attacks Taiwan, Roth Uses 1996 Action to Warn China,”
Zhongguo Shibao [China Times], March 3, 2000. Jian-zhong Fu, “Albright: the United States Cannot
Accept China’s Threat against Taiwan,” Zhongguo Shibao [China Times], March 17, 2000.
William J. Clinton, “President William J. Clinton Holds News Conference,” Federal Document Clearing
House, Inc., July 21, 1999, p. 5 of 35.
288
March 2000, President Bill Clinton warned, “We will continue to reject the use of force as
a means to resolve the Taiwan question, making absolutely clear that the issues between
Beijing and Taiwan must be resolved peacefully and with the assent of the people of
Taiwan.” [emphasis added]99 This is first time the U.S. president emphasized that a
cross-Strait solution must have the assent of the people of Taiwan and reflects a firm U.S.
commitment to maintain peace and stability in the Taiwan Strait.
From the Chinese perspective, a U.S. intervention in event of a conflict in the
Taiwan Strait is generally expected. An international relations senior scholar in Shanghai
said, “The position of the U.S. to defend Taiwan is very clear. When there is a conflict
across the Taiwan Strait, the U.S. will intervene.”100 An American studies scholar in
Shanghai elaborated, “The U.S. will definitely intervene. Nevertheless, the way and
strength of U.S. intervention will depend on the relative strength of China and the United
States.”101
An American studies scholar in Beijing explained, “From the perspective of
Mainland decision-makers, they assume that the U.S. will definitely intervene in any
conflict in the Taiwan Strait. Whether the Mainland will use force against Taiwan will
depend on this prerequisite.”102 Two international relations senior scholars in Beijing
agreed that if China uses force against Taiwan, the U.S. would intervene in the end.103
Regarding hypothetical economic sanctions, an international relations senior scholar
in Shanghai pointed out, “If China imposes economic sanctions against Taiwan, the U.S.
Charles Babington, “Clinton Urges Trade, Shrinking U.S. Debt,” Washington Post, February 25, 2000, p.
A4. Herman Pan and Sofia Wu, “Clinton Urges Resumption of Cross-Strait Talks After Taiwan
Election,” Central News Agency, March 9, 2000.
100
An international relations senior scholar in Shanghai, interview with author, June 15, 2001.
101
An American studies scholar in Shanghai, interview with author, June 28, 2001.
102
An American studies scholar in Beijing, interview with author, July 10, 2001.
103
An international relations senior scholar in Beijing, interview with author, July 10, 2001. Another
international relations senior scholar in Beijing, interview with author, July 12, 2001.
99
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will adopt an intervention policy according to the Taiwan Relations Act. The U.S. might
impose sanctions against the Mainland, including financial sanctions.”104 An economist
in Shanghai argued, “Chinese boycotts and embargoes against Taiwan will stir worldwide
opposition.”105 An international relations senior scholar in Shanghai, a Taiwan studies
senior scholar in Beijing, and an international relations senior scholar in Beijing
concurred that sanctions would stir international retaliation.106
IV. Conclusion
Based on my assessment, China’s direct costs in terms of GDP should be no less
than the potential costs to Taiwan if China had disrupted cross-Strait economic relations
in 1995 or 1999. Both China and Taiwan would have suffered around 1-3 percent of GDP
losses with China’s economic sanctions. This would be an important reason for China not
to have imposed sanctions against Taiwan in 1995 or 1999. In particular, literature of
economic sanctions shows that misperception and miscalculation of decision-makers
played a very limited role in the decision-making of imposing sanctions. Therefore, China
would tend to impose sanctions against Taiwan only when sanctions would hurt Taiwan
more than China after a cautious and thorough calculation of costs of both Taiwan and
itself.
However, there is no comprehensive assessment of direct costs of sanctions against
Taiwan conducted by Chinese scholars and officials because in these incidents Beijing
104
An international relations senior scholar in Shanghai, interview with author, June 18, 2001.
An economist in Shanghai, interview with author, June 15, 2001.
106
An international relations senior scholar in Shanghai, interview with author, June 21, 2001. A Taiwan
studies senior scholar in Beijing, interview with author, July 13, 2001. An international relations senior
scholar in Beijing, interview with author, July 17, 2001.
105
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never intended to impose sanctions against Taiwan. The majority of Chinese officials and
scholars thought that Taiwan would suffer more than China if Beijing imposed economic
sanctions against Taipei. However, Beijing did not impose sanctions against Taipei,
including blacklisting of TIEs, in the 1995-96 and 1999-2000 incidents. All evidence
leads to the conclusion that Chinese leaders attached great importance to the absolute
costs of economic sanctions, in addition to the relative costs. They worried that economic
sanctions would bring a tremendous backlash against China’s economic development.
This will reinforce the argument of the next chapter on China’s concerns for domestic
instability.
In addition, as China becomes a critical link in the global commodity chain and
broad international interdependence, China’s imposing economic sanctions against
Taiwan would have disastrous results. As Andrew S. Grove, chairman of the Intel,
stressed, “It is the computing equivalent of mutually assured destruction [if bilateral
economic exchange were disrupted under the context of globalization]. You can’t hurt the
other party without hurting yourself.”107 If international economic interdependence and
the reaction of third parties, particularly the United States, were calculated into the
equation, Chinese perceptions of both the relative costs of economic sanctions against
Taiwan in the 1995-96 and 1999-2000 incidents would be reversed. China would suffer
enormously and more than Taiwan.
Apparently, foreign trade, capital, and technology have provided necessary factors to
sustain rapid and efficient economic growth in China. Within the context of globalization,
China as a developing country has a strong sense of vulnerability to global economic
107
Mark Landler, “These Days ‘Made in Taiwan’ Often Means ‘Made in China’,” New York Times, May 29,
2001, p. A1.
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shocks. Thus, China has not done anything, such as imposing economic sanctions against
Taiwan, to trigger a global shock, which would in turn have a disastrous impact on China,
Taiwan, and other Asia-Pacific economies. Indeed, China has made significant efforts and
shown its overarching concern to maintain stability and helped recover the Asian
economies during the AFC.
Moreover, with enormous economic interests and legal obligation, the U.S. has
shown its strong resolve to maintain peace and stability in the Taiwan Strait in the
1995-96 and 1999-2000 incidents. In particular, the Taiwan Relations Act states that the
United States will consider Chinese boycott or embargoes against Taiwan of grave
concern to the United States. The possible reaction from the United States in such
situations is a critical concern for Chinese decision-makers as they consider launching
any offensive action toward Taiwan, including economic sanctions. In Chapter 6, it is
made clear that Chinese leaders attach great importance to Sino-U.S. economic relations
in formulating their policy toward the United States. In this chapter, many prominent
Chinese scholars asserted that Chinese economic sanctions would stir significant
international retaliation. As long as Chinese economic interests are concerned, the
reaction of third parties, in particular the United States, will substantially erode Beijing’s
formula for the costs of imposing economic sanctions against Taiwan.
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