CHAPTER 2
THE EVOLUTION OF CROSS-STRAIT ECONOMIC
RELATIONS AND GLOBAL ECONOMIC INTERDEPENDENCE
[Cross-Strait] economic ties have been suspended for many years. Now, construction
is going on vigorously in the motherland and we also wish Taiwan growing economic
prosperity. There is every reason for us to develop trade between us, each making up what
the other lacks and create economic interflow. This is our mutual need and will benefit
both parties without doing any harm.
-- The Standing Committee of Chinese National People’s Congress,
January 1, 19791
Faced with the global trend of going all out to develop the economy, Chinese should
supplement and benefit each other and share experiences with each other. Taiwan should
make Mainland China its hinterland in developing its economy, whereas Mainland China
should draw lessons from Taiwan in developing its economy.
-- Lee Teng-hui, Taiwanese President, April 8, 19952
Facing the development of the world economy in the 21st century, big efforts should
be made to accelerate the pace of cross-strait economic exchanges and cooperation, to
bring benefits for the common prosperity of the economies of both the Mainland and
Taiwan and happiness to the entire Chinese nation.
-- Jiang Zemin, Chinese President, August 19963
1
2
3
“N.P.C. Standing Committee’s Message to Compatriots in Taiwan,” Xinhua General Overseas News
Service, January 1, 1979.
President Lee Teng-hui’s comments were in response to President Jiang Zemin’s earlier eight-point
proposition. Mainland Affairs Council (Taiwan) (ed.), Dalu Gongzuo Cankao Ziliao [The Reference
Document of Mainland Work], vol. 1 (Taipei: Mainland Council, 1998), p. 425.
President Jiang Zemin’s comments were made after the 1995-96 Taiwan Strait crisis. “Chinese President
Says Political Differences Should Not Hamper Trade with Taiwan,” BBC Summary of World Broadcast,
August 31, 1996, FE/D2705/F.
18
[Taiwan and China] should leave alone the disputes and instead should step up
economic and trade exchanges.
-- Chen Shui-bian, Taiwanese President, March 20014
I. Statistical Issues of Cross-Strait Economic Relations
Before discussing the evolution and interdependence of cross-Strait economic
relations, we need to address the huge discrepancy between Taiwanese and Chinese
statistics on cross-Strait trade and investment. This discrepancy can be mainly attributed
to the following three reasons: First, the Taiwanese government officially prohibits
Taiwanese businesspeople from conducting “direct” trade and investment with China
despite the fact that, as of 2000, China had become the largest recipient of Taiwan’s
outward investment and Taiwan’s third largest trading partner, next to the United States
and Japan. The nature of this “indirect” trade and investment relationship results in
serious statistical problems. Second, triangular trade and investment, coupled with the
global division of labor, make the precise national origin of international trade and
investment even harder to distinguish using statistics. Many products undergo
value-added processing in several countries and areas. Third, Taiwan’s enterprises can
raise funds through international capital markets and invest in China through a shell
company in a third country.
Statistics on trade between Taiwan and China should include the transit exports
4
“Taiwan President Urges Mainland to Step Up Economic, Trade Exchanges,” Hong Kong AFP, March 26,
2001, in FBIS-CHI-2001-0326.
19
(re-exports) to China via Hong Kong, and other places, trans-shipment5, transit-shipment6,
direct trade (small-scale trade often conducted by fishermen, legal for China, but not for
Taiwan), and smuggling (illegal for both Taiwan and China). Some portion of Taiwan’s
exports to northern China transit through Japan and Korea, in particular through Japan’s
Ishigaki-jima (Shiyuan Islands). According to Kao Charng and Sung Yun-wing, in 1993
Taiwan’s exports to China via Japan’s Ishigaki-jima were valued at about $1 billion, or
one-tenth of Taiwan’s exports to China via Hong Kong. One estimate by the Chung-Hwa
Institution for Economic Research (CIER) shows that in the late 1980s direct trade of
Chinese goods to Taiwan (small-scale trade among fishermen) accounted for around
one-third of Hong Kong re-exports of Chinese goods to Taiwan. For 1989, this estimate
put the value of such direct trade at $195 million. According to China’s customs figures,
direct cross-Strait trade totaled $100 million in 1993, and gradually declined year by year
thereafter. With the gradual relaxation of Taiwan’s bans on Chinese imports and the “mini
three links” -- which legalized trade between the offshore islands and adjacent Chinese
ports in 2001 -- the discrepancy created by illicit “direct trade” between Taiwan and
China should be significantly reduced.7
In addition to the official customs figures reported from Taiwan, Hong Kong, and
China, there are two major estimates of cross-Strait trade -- one by Kao Charng and Sung
5
6
7
Transshipment means that goods are consigned directly from the exporting country to a buyer in the
importing country, though the goods are transported via Hong Kong and are usually loaded into another
vessel for further journey. In Taiwan’s statistics, such exports are put under exports to Hong Kong.
Transit-shipment means that the goods do not change vessels and they just pass through Hong Kong on
their way to the final destination. Exporters from Taiwan claim that their goods are going to Hong Kong
when they leave Taiwan, and then claim in Hong Kong that they are going to China.
Charng Kao and Yun-wing Sung, Liangan Shuangbian Maoyi Tongji Zhi Tantao [The Analysis on the
Statistics of Bilateral Trade between Taiwan and China] (Taipei: Mainland Affairs Council, 1998), pp.
1-13. Kwok Chiu Fung, Trade and Investment: Mainland China, Hong Kong and Taiwan. (Hong Kong:
City University of Hong Kong Press, 1997), pp. 34-37. K. C. Fung, “Accounting for Chinese Trade:
Some National and Regional Considerations,” NBER Working Paper Series, Working Paper 5595, May
1996, pp. 22-25.
20
Yun-wing and the other by Taiwan’s MAC. For example, in 1996 Taiwan’s exports to
China were $623 million reported by Taiwanese customs, $9.7 billion reported by Hong
Kong customs, and $16.2 billion reported by Chinese customs. Kao Charng and Sung
Yun-wing’s estimate was $20.3 billion, and MAC’s $20.7 billion. In that same year,
Taiwan’s imports from China totaled $3.1 billion reported by Taiwan customs, $1.6
billion reported by Hong Kong customs, and $2.8 billion reported by Chinese customs.
Kao Charng and Sung Yun-wing’s estimate was $4 billion, and MAC’s was $3.1 billion.
(See Table 2.1 and 2.2.)
Table 2.1. Comparison of Estimates of Taiwan’s Exports to China, 1994-96
Unit: $ million
Period
1994
1995
1996
Taiwan
Customs
132
377
623
Hong Kong
Customs
8,517
9,883
9,718
China Customs
14,085
14,784
16,182
Kao Charng &
Sung Yun-wing
15,575
19,020
20,260
Mainland Affairs
Council
16,023
19,434
20,727
Table 2.2. Comparison of Estimates of Taiwan’s Imports from China, 1994-96
Unit: $ million
Period
1994
1995
1996
Taiwan
Customs
1,859
3,091
3,060
Hong Kong
Customs
1,292
1,574
1,582
China Customs
2,242
3,098
2,803
Kao Charng &
Sung Yun-wing
2,896
3,686
4,014
Mainland Affairs
Council
1,859
3,091
3,060
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), p. 19.
Charng Kao and Yun-wing Sung, Liangan Shuangbian Maoyi Tongji zhi Tantao [The Analysis on the
Statistics of Bilateral Trade between Taiwan and China] (Taipei: Mainland Affairs Council, 1998), p.
28.
The Taiwanese and Hong Kong customs services routinely underestimate the levels
of Taiwanese exports to China. The MAC estimates that Taiwan’s exports to China are
21
equal to transit trade plus the difference between Taiwan’s exports to Hong Kong and
Hong Kong’s imports from Taiwan. (See Table 2.3.) Although Kao Charng and Sung
Yun-wing use a more comprehensive formula to estimate Taiwan’s exports to China, they
reach figures similar to those of the MAC. These two estimates should be better than the
figures from China’s customs service because China’s figures do not take different types
of Taiwan exports to China into account and thus underestimate the total amount. 8
Because the MAC has provided a consistent series of estimates since 1981, this study will
adopt its estimated figures for Taiwan exports to China.
Table 2.3. Estimation of Taiwan’s Exports to China by the Mainland Affairs Council,
1994-96
Unit: $ million
Period
1994
1995
1996
(1)
Transit trade from
Taiwan to China
via Hong Kong
8,517
9,883
9,718
(2)
Taiwan exports
Hong Kong
(F.O.B.)
21,263
26,124
26,805
(3)
H.K. imports
from Taiwan
(C.I.F.)
13,758
16,573
15,795
(4)=(2)-(3)
Difference
between
(2) and (3)
7,505
9,551
11,010
(5)=(1)+(4)
Estimation of Taiwan
exports to China
16,023
19,434
20,727
Note:
(1) and (3) are from Hong Kong (H.K.) Customs Statistics, and (2) is from Republic of China Customs
Statistics.
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), p. 20.
Taiwan’s customs statistics show Taiwan’s imports from China amounted to $3.1
billion in 1996 and $4.5 billion in 1999 while China customs statistics put these figures at
$2.8 billion for 1996 and $4 billion for 1999. Taiwan’s figures were only $257 million
8
Charng Kao and Yun-wing Sung, Liangan Shuangbian Maoyi Tongji Zhi Tantao [The Analysis on the
Statistics of Bilateral Trade between Taiwan and China] (Taipei: Mainland Affairs Council, 1998), pp.
14-27.
22
and $570 million larger than China’s in 1996 and 1999, respectively. Therefore, the
discrepancy between Taiwan customs and China customs statistics is very limited and can
be considered as statistical errors, including the differences between the price of the free
on board and that of cost, insurance, and freight. The MAC does not provide its own
estimate of China’s exports to Taiwan and simply adopts Hong Kong customs statistics
prior to 1993 and then Taiwan customs statistics thereafter.9 Kao Charng and Sung
Yun-wing provide a more sophisticated estimate by considering the gross revenue of
transit trade and adjusting the different import prices among Taiwan, Hong Kong, and
China. Their estimates are 20 to 30 percent higher than the equivalent Taiwan customs
statistics.10
Nevertheless, these differences do not significantly affect the general trend of
cross-Strait economic relations, in particular the degree of cross-Strait economic
dependence, because Taiwan’s imports from China are relatively small in comparison to
overall cross-Strait trade. Because the MAC has provided a consistent series of statistics
since 1981, this study will also adopt its figures for Taiwan’s imports from China.
Regarding investment, as Taiwanese enterprises have become more internationalized,
it has become harder for the Taiwanese government to track and control capital flows to
China. In addition to raising funds directly in Taiwanese capital market, there are at least
five approaches for Taiwanese enterprises to fund their projects in China: (1) raising
funds in the international or Chinese capital markets; (2) forming joint ventures with
Chinese or foreign partners; (3) re-investing foreign exchange earned from exports in
China; (4) investing by their branch companies or subsidiaries in a third country; and (5)
9
10
Both Taiwan and China began to register indirect cross-Strait trade via Hong Kong after 1990.
Charng Kao and Yun-wing Sung, Liangan Shuangbian Maoyi Tongji Zhi Tantao [The Analysis on the
Statistics of Bilateral Trade between Taiwan and China] (Taipei: Mainland Affairs Council, 1998), pp.
23
investing by offshore shell companies in tax-exempt countries, mainly the British Virgin
Islands and the British Cayman Islands.
According to various surveys, small-medium Taiwan-invested enterprises (TIEs) in
China acquired about 56 to 59 percent of their capital from Taiwan, 25 percent from
China, and 13 percent from a third country. It is plausible that large TIEs would have
more opportunity to raise funds in either China or a third country. For example,
Wong-Wong Cookie Company has raised more than $63 million in the Singaporean stock
market. In May 1996, China’s State Council approved the $3 billion investment project of
Formosa Plastics. Of the $3 billion investment, the parent company in Taiwan contributed
only $400 million, or approximately 14 percent of the total. It was Formosa’s overseas
subsidiaries that played the major role. In addition, it was reported in late 2000 that
Winston Wang, the son of Formosa Plastics Chairman Wang Yung-ching, and Jiang
Mianheng, the son of President Jiang Zemin, will establish a $1.63 billion cooperative
venture, the Shanghai Grace Semiconductor Manufacturing Corporation. Most Taiwan
investment in this project will be made through offshore shell companies. The U.S.
Silicon Storage Technology Inc. has taken a $50 million stake and the Chinese side
promised to provide two-thirds of the total capital, or $1.1 billion.11
Furthermore, it is very plausible that many TIEs, particularly beginning in the later
half of the 1990s, were investing in China through their capital holding companies in
tax-exempt countries. There is a coincidence between the increase of Taiwan’s investment
11
27-35.
Ralph N. Clough, Cooperation or Conflict in the Taiwan Strait? (Lanham, Maryland: Rowman &
Littlefield Publishers, Inc., 1999), p. 53. Tse-Kang Leng, “Dynamics of Taiwan-Mainland China
Economic Relations,” Asian Survey, vol. 38, no. 5 (May 1998), pp. 501-504. Craig S. Smith,
“Taiwan-China Plant Break Ground; Chip Factory Signals Shift in Industry and Growth in Cross-Strait
Ties,” International Herald Tribune (France), November 25, 2000, p. 16. “Silicon Invests $50 mln in
China Foundry,” Reuters, March 15, 2001, 5:51 am Eastern Time. Dehua Bai, “Shanghai Grace Acquires
NT$ 35 Billion Loan from Mainland,” Zhongguo Shibao [China Times], November 21, 2000.
24
in the Virgin Islands and the increase of the Virgin Islands’ investment in China in the
later half of the 1990s. Taiwan’s investment in British Central America (mainly the
British Virgin Islands and the British Cayman Islands) increased from $370 million in
1995 to $1.36 billion in 1999 with the share of Taiwan’s total outward investment
doubling from 15 to 30 percent. By comparison, the Virgins Islands’ outward investment
to China increased from $304 million in 1995 to $2.659 billion in 1999, with the share of
China’s total FDI inflow growing from 0.8 percent to 6.6 percent. (See Table 2.4.)
Table 2.4. Taiwan’s Investment in British Central America and the Virgin Islands’
Investment in China, 1995-99
Period
1995
1996
1997
1998
1999
Taiwan’s Approved Outward Investment in
British Central America
(Virgin Islands and Cayman Islands)
Amount
Share of Taiwan’s
($ million)
Total Outward FDI
370
15.1%
809
23.8%
1,051
23.3%
1,838
38.2%
1,360
30.1%
Virgins Islands’ Outward
Investment in China
Amount
($ million)
304
538
1,717
4,031
2,659
Share of China’s
Total FDI Inflow
0.8%
1.3%
3.8%
8.9%
6.6%
Source:
Investment Commission, Ministry of Economic Affairs (Taiwan) (ed.), Statistics on Outward Investment,
September 1999, pp. 7-8, 48.
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), pp. 27, 44.
Mainland Affairs Council (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 71 (July 1998), p. 48.
According to some reports, many famous TIEs invested in China through this
channel. For instance, in 1992 Taiwan Ting Hsin Group (whose Master Kang-brand
instant noodles have been a great success in China) invested in China through its
subsidiary, Tingyi Holdings, registered in the Cayman Islands. As of 1996, President
Enterprises Group invested $333 million in China through its holding company in the
25
Cayman Islands, in addition to its investment through Hong Kong. In late 2000, Taiwan’s
Yulon Motor Company announced plans to invest in China through their Yufa Investment
Company, also registered in the Cayman Islands. 12 D.C. Yang, former President of
Taiwan-invested Enterprises Association in Shanghai and some TIEs confirmed that the
majority of China’s inward FDI from the Virgin Islands are in fact Taiwan’s capital.13
Thus, it is not surprising that there is a huge gap between Taiwanese and Chinese
statistics on Taiwan’s investment in China. As of 1999, Taiwan’s cumulative investment
in China approved by Taiwan’s Ministry of Economic Affairs (MOEA) was $14.5 billion,
while China’s official data showed Taiwan’s cumulative realized investment in China was
$23.9 billion, almost two times Taiwan’s figure. Perng Fai-Nan, governor of Taiwan’s
Central Bank, estimated that in 2000 the real figure of Taiwan’s cumulative investment in
China was between $40 and $50 billion.14 This is due to the fact that many Taiwanese
businesspeople conducted investment in China without the approval of the Taiwan
government, or they underreported the value of their investments.15 Since it is mandatory
for TIEs to register their investment with the Chinese government, China’s statistics seem
more reflective of the real situation and provide a more consistent series of data.
Therefore, this study will use China’s official figures for Taiwan’s investment in China.
12
13
14
15
Ralph N. Clough, Cooperation or Conflict in the Taiwan Strait ? (Lanham, Maryland: Rowman &
Littlefield Publishers, Inc., 1999), p. 53. Chung-Hua Institution for Economic Research, Liangan Chanye
Fengong Zhengce Zhixing Chengxiao Pinggu [Assessment on the Implementation of Cross-Strait Policy
of Industrial Division of Labor] (Taipei: Bureau of Industry, Ministry of Economic Affairs, 1997), pp.
224-228. Guo-wei Chen, “Most of Taiwan Business’s Profit Is Remitted to Overseas Share Holding
Companies,” Gongshang Shibao [Commerce Times], November 10, 2000. Mei-xing Shen, “An
Investment Plan in China: Yulong Plans to Establish an Investment Company,” Zhongguo Shibao [China
Times], December 8, 2000.
D.C. Yang, former president of the TIEA in Shanghai, interview with author, June 20, 2001. A Taiwan
businessman in Shanghai, interview with the author, June 18, 2001. Jing-ren Ma, deputy
secretary-general of the TIEA in Chengdu, July 24, 2001.
Pei-xiou Liu, “The Central Bank: Capital Remitted to Mainland Is About $70 Billion,” Gongshang
Shibao [Commerce Times], November 10, 2000.
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998)
[Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait
26
II. Trade Relations Between Taiwan and China
Because of political and military hostilities, economic exchange between Taiwan and
China was virtually nonexistent between 1949 and 1979. On January 1, 1979, after
adopting reforms and open policy in late 1978, China proposed establishing the three
links between Taiwan and China. In 1980, China organized a mission to Hong Kong and
purchased $80 million worth of Taiwanese products. In the same year, to further
encourage trade, China announced a tariff-free policy on Taiwan-made imported goods.
However, the zero tariff lasted for only one year.
Beijing’s initiatives received no response from Taipei until the mid-1980s. In 1985
Taiwan for the first time responded to China’s request for cross-Strait trade by
announcing the “Non-interference Principle of Indirect Exports to the Mainland.” From
then on, cross-Strait trade started to grow rapidly along with China’s increasing economic
reforms and Taiwan’s gradual relaxation of limits on cross-Strait economic interaction.
Nevertheless, Taiwan’s imports from China are still under strict regulations. Only 56
percent (or 5,777 items) of 10,238 Harmonized Tariff Schedule (HS) system coded
10-digit trade commodities were permitted to be imported from China to Taiwan by
December 2000 and 73 percent (or 7,696 items) by March 2002, respectively.16
16
(1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 193-194.
Lee-in Chen Chiu, “The Economic Reunification of Taiwan and Mainland China: The Impact on
Industrial Development,” in Chien-nan Wang (ed.), Globalization, Regionalization, and Taiwan’s
Economy (Taipei: Chung-hua Institution for Economic Research, 1994), pp. 115-118. Guo-qing Yu,
“Dalu Wuping Deng Tai Hueigu” [Review on China’s Imports to Taiwan], Zhongguo Shibao [China
Times], December 5, 2000. Lee-in Chen Chiu, “Taiwan’s Economic Influence: Implications for
Resolving Political Tensions,” in Gerrit W. Gong (ed.), Taiwan Strait Dilemmas: China-Taiwan-U.S.
Policies in the New Century (Washington, DC: Center for Strategic and International Studies, 2000), pp.
131-133. Guo-qing Yu, “2058 Items of Mainland Goods Are Permitted to Be Imported,” Zhongguo
Shibao [China Times], February 16, 2002.
27
Taiwan’s indirect trade with China via Hong Kong was only $460 million in 1981
and $279 million in 1982. Thereafter, cross-Strait trade increased tremendously to $3.9
billion in 1989, $17.9 billion in 1994, and $31.2 billion in 2000. In the last two decades,
Taiwan’s trade with China has increased 112 fold, or an average annual growth rate of 26
percent, far exceeding the growth rate of Taiwan’s or China’s foreign trade during the
same period.
In addition, Taiwan has enjoyed a continuous and large trade surplus with China for
the past two decades. In 1981, Taiwan ran a trade surplus of $310 million, with $385
million of exports to, and $75 million of imports from, China. In 1989, Taiwan ran a trade
surplus of $2.7 billion, with $3.3 billion of exports to, and $587 million of imports from,
China. In 2000, Taiwan ran a trade surplus of $18.8 billion, with $25 billion of exports to,
and $6.2 billion of imports from, China. (See Table 2.5.)
Table 2.5. Trade between Taiwan and China, 1981-2000
Unit: $million
Period
1981
1985
1989
1990
1991
1992
Taiwan’s Exports to
China
385
987
3,332
4,395
7,494
10,548
Taiwan’s Imports Total Trade between
Taiwan’s Trade
from China
Taiwan and China Surplus with China
75
460
310
116
1,103
871
587
3,919
2,745
765
5,160
3,629
1,126
8,619
6,368
1,119
11,667
9,429
28
1993
1994
1995
1996
1997
1998
1999
2000
13,993
16,023
19,434
20,727
22,455
19,841
21,313
25,010
1,104
1,859
3,091
3,060
3,915
4,111
4,522
6,223
15,097
17,881
22,525
23,787
26,371
23,951
25,835
31,233
12,890
14,164
16,342
17,668
18,540
15,730
16,790
18,787
Note: These figures are estimated by Taiwan’s Mainland Affairs Council.
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 105
(May 2001), p. 22.
Since 1993 China has become Taiwan’s third largest trading partner, after the United
States and Japan. In 2000, Taiwan’s trade with the United States, Japan, and China was
$60 billion, $55.2 billion, and $31.3 billion, respectively. In addition, since 1993 China
has also become Taiwan’s second largest export market, next to the United States.
Nevertheless, if trade between Taiwan and Hong Kong was included in China’s share,
since 1994, China has been Taiwan’s largest export market. This is particularly true after
Hong Kong reverted to China sovereignty in July 1997. According to Taiwan customs
figures, in 2000, Taiwan’s exports to China (including Hong Kong), the United States,
and Japan were $41 billion, $34.8 billion, and $16.6 billion, respectively.
In comparison, since 1990 Taiwan has become China’s fourth largest trading partner,
next to Japan, the United States, and Hong Kong. In 2000, China’s trade with Japan, the
United States, Hong Kong, and Taiwan was $83.1 billion, $74.5 billion, $54 billion, and
$31.3 billion, respectively. In addition, since 1993 Taiwan has also become China’s
second largest supplier (Japan is its largest supplier). In 2000, China’s imports from Japan
and Taiwan were $41.5 billion and $25 billion, respectively.
29
The Merchandise Structure of Taiwan’s Exports to China
Based on Taiwan’s customs statistics, Taiwan’s exports to China were concentrated
in four of the 22 sections in the HS system: section 7 (plastics and rubber); section 11
(textiles); section 15 (base metals); and section 16 (machinery, mechanical appliances,
electrical equipment, parts, and accessories). These four sectors included 61 percent of
Taiwan’s total exports to China in 1992, 75 percent in 1994, 77 percent in 1996, and 79
percent in 1998. Moreover, between 1992 and 1998, the merchandise structure of
Taiwan’s exports to China was similar to that of Taiwan’s total exports and these four
sections were the same four largest sections of Taiwan’s overall exports.17
In particular, the share of both section 15 and section 16 has been increasing
exponentially. In 1992, section 15 represented 5 percent of Taiwan’s total exports to
China and section 16 represented 25 percent. In 1998, section 15 represented 13 percent
of Taiwan’s total exports to China and section 16 represented 33 percent. These two
sections accounted for about 46 percent of Taiwan’s total exports to China in 1998. By
contrast, section 12 (footwear, headgear, and artificial flowers) accounted for 16 percent
of Taiwan’s total exports to China in 1992, but then declined dramatically to 2 percent by
1998. (See Figure 2.1.) This trend is closely related to Taiwan’s investment in China. In
the late 1980s and early 1990s, most of Taiwan’s investment in China was in the shoe,
textile, apparel, and plastics industries (sections 7 and 12). By the mid-1990s, the bulk of
Taiwan’s investment in China was concentrated in electronic and electric appliances, and
basic metals industries (sections 15 and 16).
17
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998)
[Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait
(1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 212-219.
30
Figure 2.1. The Merchandise Structure of Taiwan's Exports to
China, 1992-98
Percent
35
30
25
20
15
1
2
3
4
5
6
7
8
9 10 11 12 13 14 15 16 17 18 19 20 21 22
1994
0
1992
Section
1998
5
1996
10
Year
Note:
Section 1. Live animals; animal products
Section 2. Vegetable products
Section 3. Animal or vegetable fats, oils, and waxes
Section 4. Prepared foodstuffs, beverages, and tobacco
Section 5. Mineral products
Section 6. Products of the chemical or allied industries
Section 7. Plastics and rubber, and articles thereof
Section 8. Hides and skins; leather and articles thereof; travel goods, handbags and similar containers
Section 9. Articles of wood, cork, or plaiting materials
Section 10. Wood pulp; paper, paperboard, and articles thereof
Section 11. Textiles and textile articles
Section 12. Footwear, headgear, and artificial flowers
Section 13. Articles of stone or ceramics; glass and glassware
Section 14. Pearls; precious stones and metals; jewelry; coin
Section 15. Base metals and articles of base metal
Section 16. Machinery and mechanical appliances; electrical equipment; parts and accessories thereof
Section 17. Vehicles, aircraft, and other transport equipment
Section 18. Optical, photographic, measuring, and medical apparatus; clocks and watches; musical
31
instruments
Section 19. Arms and ammunition; parts and accessories thereof
Section 20. Miscellaneous manufactured articles
Section 21. Works of art, collectors' pieces and antiques
Section 22. Special classification provisions
Source:
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998)
[Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait
(1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 216-218.
The Merchandise Structure of Taiwan’s Imports from China
According to Taiwan’s customs statistics, the merchandise structure of Taiwan’s
imports from China was also concentrated in four of 22 sections in the HS system: section
5 (mineral products); section 6 (products of chemical or allied industries); section 15
(base metals); and section 16 (machinery, mechanical appliance, electrical equipment,
parts, and accessories). These four sectors accounted for 61 percent of Taiwan’s total
imports from China in 1992, 61 percent in 1994, 69 percent in 1996, and 73 percent in
1998. These four sections were also the same four largest sections of Taiwan’s overall
imports between 1992 and 1998.18
In particular, section 16 (machinery, mechanical appliance, electrical equipment,
parts, and accessories) has increased rapidly, from 0.3 percent of Taiwan’s total imports
from China in 1992 to 37 percent in 1998. In addition, section 15 and section 16
accounted for about 57 percent of Taiwan’s total imports from China in 1998. By contrast,
in 1992, section 2 (vegetable products) accounted for 15 percent of Taiwan’s total imports
18
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998)
[Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait
(1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 213-225.
32
from China, then declined sharply to 3 percent in 1998. Furthermore, section 5 (mineral
products) also declined from 28 percent of Taiwan’s total imports from China in 1992 to 9
percent in 1998. Overall, Taiwan’s imports from China are no longer China’s basic
agricultural and industrial raw materials, but products closely related to Taiwan’s
investment in China (sections 15 and 16).19 (See Figure 2.)
Figure 2.2. The Merchandise Structure of Taiwan's Imports from
China, 1992-98
Percent
40
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22
Section
1994
0
1992
10
1996
20
1998
30
Year
Source:
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998)
[Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait
(1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 221-223.
III. Financial Relations Between Taiwan and China
19
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998)
[Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait
(1997/1998)], (Taipei: Mainland Affairs Council, 1999), p. 220. For more detailed classification of
Taiwan’s imports from China, see Taiwan Economic Research Institution (ed.), Cross-Strait Economic
Statistics Monthly (Taipei), various issues.
33
In 1987 Taiwan’s government deregulated the control of foreign exchange leading to
a rapid increase in outward investment by Taiwan entrepreneurs. Before the mid-1980s,
the majority of Taiwan’s foreign direct investment (FDI) focused on the United States,
accounting for $163 million (or 60 percent) of Taiwan’s total outward investment between
1952 and 1986. But as Taiwan’s labor-intensive industries began to lose their comparative
advantage after the mid-1980s, Taiwanese firms began investing in the member countries
of the Association of South East Asian Nations (mainly the Philippines, Indonesia,
Thailand, Malaysia, and Vietnam, hereafter ASEAN-5).20
By the 1990s, Taiwan’s investors rapidly shifted their attention to China. Such
investors were primarily attracted by China’s cheap labor (the most important reason) and
the potential local market (the second important reason). 21 In addition, the Chinese
government promulgated several regulations and laws to attract and protect Taiwan’s
investment in China, which is referred to investment by companies, enterprises, and other
economic organizations or individuals from Taiwan in China.22 In July 1988, in order to
attract Taiwan enterprises, China’s State Council promulgated the “Regulations for
Encouraging Investment by Taiwan Compatriots” (the so-called “22 clauses”). China
offered preferential treatment, with numerous cities and provinces setting up special
investment zones, which granted TIEs many privileges, including tax exemption or
reduction. In March 1994, China’s National People’s Congress promulgated the “Taiwan
Compatriot Investment Protection Law of the People’s Republic of China.” In December
20
21
22
Wen-chen Kuo, “The Review and Prospect of Taiwan’s Outward Investment” [Taiwan Duiwai Touzi de
Hueigu yu Qianzhan], Economic Outlook, no. 54 (November 1997), pp. 57-59.
Ministry of Economic Affairs (Taiwan), Zhizaoye Duojiaohua ji Guojihua Diaocha Baogao [The
Investigation Report on Diversification and Internationalization of Manufacturing Industry] (Taipei:
Ministry of Economic Affairs, 1995), pp. 380-391.
“PRC Law on Protection of Taiwan Investment” (in Chinese), Beijing Xinhua Domestic Service,
December 12, 1999, in FBIS-CHI-2000-0107.
34
1999, China’s State Council issued the “Implementing Rules for the Taiwan Compatriot
Investment Protection Law of the People’s Republic of China.”
At the same time, Taiwan’s government gradually relaxed the regulations on
cross-Strait economic exchange at a crucial moment (1987-88) when Taiwan exports were
suffering due to a strong New Taiwan dollar, high cost of labor, and environmental
controversies. Along with the relaxation of foreign exchange control, Taiwan’s
government liberalized its China policy by nullifying martial law and allowing Taiwanese
to visit China. In October 1990, Taiwan’s MOEA formally lifted the ban on indirect
investment in China by promulgating the “Regulations on Indirect Investment and
Technology Cooperation with the Mainland Area.” As a result, since 1992, Taiwanese
investment in China has surpassed its investment in the United States and ASEAN-5.
However, as of 2001, all Taiwanese outward investment to China is still subject to
the regulation and review of the Taiwan government. Every six months, Taiwan’s MOEA
reviews approximately 8,000 items of HS coded 8-digit commodities and classifies them
into either permitted items, prohibited items, or case-by-case evaluation items. By
September 1999, 6,658 items were classified as permitted and only 342 items were
prohibited.23
Although investment from Taiwan to China began to increase rapidly in the late
1980s, Taiwan’s Investment Commission did not compile formal statistics until 1991.24
According to Taiwan’s official figures, in 1991 Taiwan’s FDI into China was only $17
million. Since 1992, however, China has become the largest recipient of Taiwan’s
23
24
Lee-in Chen Chiu, “Taiwan’s Economic Influence: Implications for Resolving Political Tensions,” in
Gerrit W. Gong (ed.), Taiwan Strait Dilemmas: China-Taiwan-U.S. Policies in the New Century
(Washington, DC: Center for Strategic and International Studies, 2000), pp. 131-133.
On October 6, 1990, Taiwan government requested TIEs spontaneous registration and reporting of
previous investment in China by April 8, 1991.
35
outward investment. In 1993, the numbers increased dramatically to nearly $3.2 billion,
which was 66 percent of Taiwan’s total FDI for that year. By the end of 2000, Taiwan’s
cumulative FDI in China was $17.7 billion, or 39 percent of the $44.1 billion of total
Taiwan outward FDI. In just one decade, China became the destination with the most
accumulated Taiwan’s outward FDI. Overall, Taiwan’s FDI in the late 1980s and early
1990s involved mainly small-medium, labor-intensive enterprises looking for overseas
manufacturing bases, most of them focusing on China as well as ASEAN-5. After the
mid-1990s, Taiwan’s FDI in China involved more and more large enterprises with high
capital and technology intensities, companies looking for both overseas manufacturing
bases and access to China’s huge potential market.25
As discussed above, Taiwan’s official figures considerably underestimate the extent
of Taiwan’s investment and accordingly, this study will use China’s official data on
Taiwan’s investment in China. According to China’s statistics, the first TIE in China
opened in 1983, and by 1991 Taiwan’s total realized investment in China was $844
million divided among 3,446 projects, with a cumulative contracted amount of $2.78
billion and an average contracted amount of $0.81 million per project. Since 1991,
Taiwan’s investment in China has been increasing dramatically with an average annual
contracted amount of $5.1 billion or an average realized amount of $2.9 billion. By the
end of 2000, Taiwan’s accumulated contracted investment in China was $47.8 billion
(46,624 projects), of which $26.2 billion was actually utilized, with an average contracted
amount of $1 million per project -- average project size has grown by about 20 percent.
(See Table 2.6.)
25
Wen-Chen Kuo, “The Review and Prospect of Taiwan’s Outward Investment” [Taiwan Duiwai Touzi de
Hueigu yu Qianzhan], Economic Outlook, no. 54 (November 1997), pp. 57-59. Charng Kao, Dalu
Jinggai yu Liangan Jingmao Guanxi [Mainland Economic Reforms and Cross-Strait Economic
36
Table 2.6. Taiwan’s Investment in Chinaa, 1991-2000
Unit: $ million
Period
1991b
1992
1993
1994
1995
1996
1997
1998
1999
2000
Accumulated to 2000
Average between
1992 and 2000
Projects (Cases)
Contracted Amount
3,446
6,430
10,948
6,247
4,778
3,184
3,014
2,970
2,499
3,108
46,624
4,798
2,783
5,543
9,965
5,395
5,777
5,141
2,814
2,982
3,374
4,042
47,816
5,004
Average Contracted
Amount
0.81
0.86
0.91
0.86
1.21
1.61
0.93
1.00
1.35
1.30
1.03
1.04
Realized Amount
844
1,050
3,139
3,391
3,162
3,475
3,289
2,915
2,599
2,296
26,160
2,813
Note:
a: Data is from the Ministry of Foreign Trade and Economic Cooperation, PRC.
b: The 1991 figure includes data before 1991.
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 105
(May 2001), p. 26.
In addition, as of March 2001, the share of Taiwan’s cumulative realized investment
in China was 7.5 percent of total FDI in China. Taiwan was the fourth largest source of
FDI in China, next to Hong Kong (48.6 percent), the United States (8.6 percent), and
Relations], second edition (Taipei: Wu-Nan, 1999), pp. 168-171.
37
Japan (8 percent).26 Nevertheless, Chinese figures might underestimate Taiwan’s “real”
investment in China because many Taiwan businesspeople began in the mid-1990s to
invest in China through their holding companies in British Central America.27
Regarding Taiwan’s investment in China by industry, there is no available Chinese
data and thus this study will rely on Taiwan’s official data. As of 1999, according to
Taiwan’s MOEA Investment Commission, Taiwan’s total investment in China included:
$3.33 billion (23 percent) in electronics and electrical appliances; $1.24 billion (9 percent)
in basic metals and metal products; $1.24 billion (9 percent) in food and beverage
processing; $1.15 billion (8 percent) in plastic products; $1.0 billion (7 percent) in
chemicals; $867 million (6 percent) in non-metallic minerals; $787 million (5 percent) in
textile; $772 million (5 percent) in precision instruments; $671 million (5 percent) in
transportation equipment; and $467 million (3 percent) in machinery equipment. As of
September 1999, Taiwan’s investment was focused in the manufacturing industry, which
accounted for 91 percent of Taiwan’s total investment in China.28
Figure 2.3 illustrates the geographic distribution of Taiwan’s cumulative investment
in China as of 1999. Taiwan’s total investment in China included: $5.02 billion (35
percent) in Guangdong; $4.64 billion (32 percent) in Jiangsu (including Shanghai); $1.57
million (11 percent) in Fujian; $880 million (6 percent) in Hebei (including Beijing);
$655 million (5 percent) in Zhejiang; and $368 million (3 percent) in Shandong. Based on
26
27
28
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), p. 42.
A Taiwanese businessman in Shanghai, interview with author, June 18, 2001. D.C. Yang, former
president of the Taiwan-Invested Enterprises Association in Shanghai, interview with author, June 20,
2001. Jing-ren Ma, deputy secretary-general of the Taiwan-Invested Enterprises Association in Chengdu,
July 24, 2001. Li-qi Lin and Zhu-song Liu, “March to Mainland, Huayu Increases Investment in Its
Holding Company,” Gongshang Shibao [Commerce Times], October 12, 2001.
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), p. 26. Investment Commission, Ministry of Economic Affairs (Taiwan) (ed.), Statistics on
Indirect Mainland Investment, September 1999, pp. 65-68.
38
Taiwan’s statistics, these six coastal provinces comprised 92 percent of Taiwan’s total
cumulative investment in China. (See Figure 2.3.)
Figure 2.3 Taiwan's Cumulative Investment in China by Area,
1999
Shandong
3%
Zhejiang
5%
Others
9%
Guangdong
34%
Hebei
6%
Fujian
11%
Jiangsu
32%
Source: Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly
(Taipei), no. 92 (April 2000), p. 25.
Note: Jiangsu includes Shanghai.
In addition, TIEs tend to partner with local and foreign enterprises when they invest
in China. According to a 1993 investigation by the CIER, 69 percent of TIEs established
joint ventures with other partners. According to a 1996 report by Taiwan’s MOEA, which
included a sample size of 1,312 companies, 36 percent of TIEs established joint ventures
with other partners. Fifty-six percent (multiple choices) of TIEs who entered joint
39
ventures cooperated with local Chinese enterprises, 35 percent cooperated with Chinese
local governments, and 28 percent cooperated with foreign enterprises. According to a
1999 report by Taiwan’s MOEA, which included a sample size of 1,627 companies, 38
percent of TIEs established joint ventures with other partners. Fifty nine percent of these
TIEs held less than a 50 percent share in the joint ventures. Thirty one percent (multiple
choices) of these TIEs cooperated with local Chinese enterprises, 20 percent cooperated
with Chinese local governments, and 26 percent cooperated with foreign enterprises.29
The Taiwanese government began to compile statistics on individual remittances to
China on May 21, 1990, and on both Taiwan business remittances to China and
remittances from China to Taiwan on July 29, 1993.30 In 1993, Taiwan
remitted $254
million to China31 and China remitted $26 million to Taiwan. In 1999, Taiwan remitted
$843 million to China and China remitted $509 million to Taiwan. As of end-1999,
Taiwan had remitted a cumulative $4,543 million to China and China had remitted a
cumulative $1,298 million to Taiwan. Nevertheless, the Taiwanese government’s figures
hardly tell the truth of capital flow across the Taiwan Strait. For example, Taiwan’s
Central Bank estimated in late 2000 that Taiwan’s total capital flow to China was around
$70 billion, of which $40-50 billion was Taiwan’s FDI in China. That is, Taiwan might
have remitted as much as $20-30 billion in total to China, including portfolio flows to
29
30
31
Chung-Hwa Institution for Economic Research, Analysis on Cross-Strait Economic Situation [Liangan
Jingji Qingshi Fenxi] (Taipei: Mainland Affairs Council, 1997), p. 203. Ministry of Economic Affairs
(Taiwan), Zhizaoye Duiwai Touzi Shikuang Diaocha Baogao [The Investigation Report on Outward
Investment of Manufacturing Industry] (Taipei: Ministry of Economic Affairs, 1997), p. 77. Ministry of
Economic Affairs (Taiwan), Zhizaoye Duiwai Touzi Shikuang Diaocha Baogao [The Investigation
Report on Outward Investment of Manufacturing Industry] (Taipei: Ministry of Economic Affairs, 2000),
pp. 220, 223, 226.
Individual remittance figures include household remittance, donation, and other transfer payments,
excluding travel expenditures.
This number includes both individuals and companies.
40
China.32
IV. Cross-Strait Economic Division of Labor
Industrial Level: FDI-Driven Trade and Intra-Industry Trade
Essentially, the comparative advantage of resource endowment, capital, technology,
and management capability determines the basic pattern of the division of labor between
Taiwan and China. According to a 1997 study by Taiwan’s CIER, three types of division
of labor exist across the Taiwan Strait. Type I: China provides Taiwan with raw materials
for food, construction materials, petroleum-chemistry, and paper industries. Taiwan
typically processes these raw materials and exports final goods to other countries. Type II:
Taiwan provides China with raw materials and critical intermediate goods for plastics,
apparel, consumer electronics, information, and motor vehicle industries. Then China
manufactures, processes, and exports finished goods to other countries. Type III: Both
Taiwan and China, based on their particular production advantages, provide critical parts
for one another’s machinery industries, but only Taiwan exports finished machines to
other countries. 33 These types of division of labor can be further illuminated by
examining FDI-driven trade and intra-industry trade between Taiwan and China.
32
33
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), pp. 28-30. Pei-xio Liu, “The Central Bank: Capital Remitted to Mainland Is About $70
Billion,” Gongshang Shibao [Commerce Times], November 10, 2000.
Chung-Hua Institution for Economic Research, Liangan Chanye Fengong Zhengce Zhixing Chengxiao
Pinggu [Assessment on the Implementation of Cross-Strait Policy of Industrial Division of Labor]
(Taipei: Bureau of Industry, Ministry of Economic Affairs, 1997), pp. 54-63.
41
Along with the expansion of Taiwan’s outward investment beginning in the
mid-1980s, Taiwan began exporting more intermediate and capital goods (semi-finished
goods, equipments, parts, and machinery, etc.) and fewer consumer products. 34 The
proportion of intermediate goods to Taiwan’s total exports increased from 33 percent in
1987 to 49 percent in 1993. The share of capital goods (machinery and transportation
equipment) in Taiwan’s total exports increased from 8 percent in 1987 to 20 percent in
1993. By contrast, the share of non-durable consumer goods in Taiwan’s total exports
declined dramatically from 34 percent in 1987 to 18 percent in 1993. There was little
variation in other product categories.35
Kao Charng and Cheng Chu-yuan argue that the changes in Taiwan’s export pattern
were driven principally by overseas affiliates of Taiwan companies in China (and the
ASEAN-5). Taiwan’s MOEA Board of Foreign Trade also asserts that the boom of
Taiwan’s exports to China were driven mainly by TIEs purchasing Taiwan intermediate
and capital goods, such as raw materials, parts and equipments, and machinery. In
particular, in the initial stage of investment, the majority of TIEs heavily relied on the
supply of machinery and raw materials from Taiwan and re-exported finished goods
created with Taiwan inputs and low-cost Chinese labor.36
Indeed, China’s official figures also show that China’s imports were overwhelmingly
34
35
36
There are two types of intermediate goods. Type A intermediate goods refer to products that can be used
for consumer goods or producer goods after processing. Type B intermediate goods refer to products that
can be used for consumer goods or producer goods without processing.
Chen-yuan Tung, “Trilateral Economic Relations among Taiwan, China, and the United States,” Asian
Affairs: An American Review, vol. 25, no. 4 (Winter 1999), p. 225.
Charng Kao, Liangan Jingmao Guanxi zhi Tantao [The Review on Cross-Strait Economic Relations]
(Taipei: Tianyi, 1997), pp. 82-85. Chu-yuan Cheng, “Economic Relations Across the Taiwan Straits:
Mutual Dependence and Conflicts,” paper presented for the 16 th International Conference on Asian
Affairs at St. John’s University on October 3-4, 1998, pp. 2-5. Board of Foreign Trade, Ministry of
Economic Affairs, “Dalu Duiwai Maoyi Fazhan ji Liangan Maoyi Hudong Gaikuang [The general
Situation on the Development of Mainland’s External Trade and Cross-Strait Trade Interaction],” April
2000, http://www.moeaboft.gov.tw/prc&hk/trade-roc&prc-5.html, accessed December 5, 2000, p. 33 of
34.
42
driven by foreign direct investment. In 1995, the value of foreign goods imported by
foreign-invested enterprises (FIEs) in China was $62.9 billion or 48 percent of China’s
total imports, while it was $12.3 billion and 23 percent in 1990. The value of foreign
goods imported by FIEs in China was $76.7 billion or 55 percent of China total imports in
1998; $117.3 billion or 52 percent in 2000, respectively.37
The bulk of Taiwan’s exports to China are comprised of textile fabrics, plastic
materials, machinery and equipment, and electric machinery and electronic equipment,
which are intermediate and capital goods.38 In 1994, these four categories accounted for
67 percent of Taiwan exports to China, indicating that the export boom, to a great extent,
was investment driven. According to Chung Chin, as of 1995 the share of intermediate
products remained as high as 74 percent of Taiwan’s total indirect exports to China.
According to Taiwan and Hong Kong customs, in 1996 and 1998, two-thirds of Taiwan’s
exports to China were focused on three sections classified by the HS system, which are
basically intermediate and capital goods. In 1996, plastics and rubber, and articles,
accounted for 12 percent of Taiwan’s total exports to China; textiles and textile articles,
25 percent; and machinery and mechanical appliances, electrical equipment, parts and
accessories, 29 percent. In 1998, plastics and rubber, and articles, accounted for 12
percent of Taiwan’s total exports to China; textiles and textile articles, 22 percent; and
machinery and mechanical appliances, electrical equipment, parts and accessories, 33
percent.39
37
38
39
Nicholas Lardy, Integrating China into the Global Economy (Washington, D.C.: Brookings Institution
Press, 2002), p. 7.
For more detailed classification of Taiwan’s exports to China, see Taiwan Economic Research Institution
(ed.), Cross-Strait Economic Statistics Monthly (Taipei), various issues. Board of Foreign Trade,
Ministry of Economic Affairs (Taiwan), 1998 Nian Taihai Liangan Maoyi Xingshi Tongji [1998 Statistics
of Cross-Strait Trade Situations] (Taipei: Board of Foreign Trade, 1999), pp. 10-76.
Chin Chung, “Double-Edged Trade Effects of Foreign Direct Investment and Firm-Specific Assets:
Evidence From the Chinese Trio”, in Y.Y. Kuen (ed.), The Political Economy of Sino-American Relations
43
In 1998, Taiwan’s top export items to China were electric machinery, machinery and
parts, plastics, man-made filaments, iron and steel. These items amounted to $10.4 billion,
or 57 percent of Taiwan’s total exports to China. In 1999, Taiwan’s top exports to China
were electric machinery, machinery and parts, plastics, iron and steel, man-made
filaments, and textile articles for industry. These items accounted for $13.9 billion, or 66
percent of Taiwan’s total exports to China.40 These items are typical intermediate and
capital goods, which are driven by the need of TIEs.
According to a 1992 survey of 431 Taiwanese firms from different manufacturing
sectors, 71 percent of raw materials, components and parts necessary for their subsidiaries
in China were purchased from parent and other firms in Taiwan. A similar survey
conducted among 285 firms indicates, however, that sourcing from Taiwan had declined
to a mere 36 percent in 1995. The same studies showed TIEs procured 69 percent of their
machinery and equipment from Taiwan in 1995, as compared with 86 percent from
Taiwan in 1992. 41 According to a 1998 study by Kao Charng, 65 percent of TIEs
purchased raw materials from Taiwan. However, the trend for TIEs to import inputs from
Taiwan has been declining.42 According to two reports by Taiwan’s MOEA, Taiwanese
factories abroad preferred to obtain raw materials and intermediate goods from Taiwan. In
40
41
42
(Hong Kong: Hong Kong University Press, 1997), p. 143. Chung-Hua Institution for Economic Research,
Dalu ji Liangan Jingji Qingshi Baogao (1997/1998) [Report on the Economic Situation of Mainland
China and the Two Sides of the Taiwan Strait (1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp.
216-218.
Ministry of Economic Affairs (Taiwan), 1998 Dalu Jingji Qingshi Pinggu [Assessment on Mainland
Economic Situation in 1998] (Taipei: Minstry of Economic Affairs, 1999), pp. 33-34, 50-51. “Dalu
Duiwai Maoyi Fazhan ji Liangan Maoyi Hudong Gaikuang [The General Situation on the Development
of Mainland’s External Trade and Cross-Strait Trade Interaction],” Board of Foreign Trade, Ministry of
Economic Affairs, April 2000, http://www.moeaboft.gov.tw/prc&hk/trade-roc&prc-5.html, accessed
December 5, 2000, pp. 21-23 of 34.
Chin Chung, “Double-Edged Trade Effects of Foreign Direct Investment and Firm-Specific Assets:
Evidence from the Chinese Trio,” in Y.Y. Kuen (ed.), The Political Economy of Sino-American Relations
(Hong Kong: Hong Kong University Press, 1997), pp. 146-147.
Cited from Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao
(1997/1998) [Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan
44
1995 and 1998, Taiwan supplied 53 percent and 44 percent of the raw material for TIEs,
respectively. During the same period, 56 percent and 48 percent of parts and
semi-finished products also came from Taiwan, respectively. (See Table 2.7.)
Table 2.7. Sources of Inputs for Taiwan-Invested Enterprises in China, 1995-98
Unit: %
Period
Taiwan
Taiwan-invested
enterprises in China
Non-Taiwan-invested
enterprises in Chinaa
Other countries
a
1995
53
Raw Materials
1996 1997
46
49
1998
44
Parts and semi-finished products
1995
1996
1997
1998
56
51
53
49
17
21
17
19
18
21
20
23
18
21
22
23
19
21
19
22
12
13
13
13
7
7
8
8
Including Chinese enterprises and other foreign-funded enterprises.
Source:
Ministry of Economic Affairs (Taiwan), Zhizaoye Duiwai Touzi Shikuang Diaocha Baogao [The
Investigation Report on Outward Investment of Manufacturing Industry] (Taipei: Ministry of
Economic Affairs, 1997), pp. 89, 92, 95, 98.
Ministry of Economic Affairs (Taiwan), Zhizaoye Duiwai Touzi Shikuang Diaocha Baogao [The
Investigation Report on Outward Investment of Manufacturing Industry] (Taipei: Ministry of
Economic Affairs, 2000), pp. 29-30.
According to several studies by the CIER, MOEA, Charles H. C. Kao, Chu-chia
Steve Lin, Kao Charng, and Chung Chin, in the early 1990s, FDI-driven exports
accounted for approximately one-third of Taiwan’s total exports to China.43 According to
Chen Xiangming, in 1996, FIEs in China accounted for 67 percent of total cross-Strait
43
Strait (1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 198-200.
Chung-Hua Institution for Economic Research, Cross-Strait Economic Yearbook [Liangan Jingji
Nianbao], Taipei, 1993, p. 176. Kong-Lien Kao, Liangan Jingmao Xiankuang yu Zhanwang [The
Current Situation and Prospect of Cross-Strait Economic Relations] (Taipei: Mainland Affairs Council,
1994), p. 26. Charles H. C. Kao and Chu-chia Steve Lin, “The Economic Impact of Taiwan’s Investment
in the Mainland,” Issues & Studies, vol. 30, no. 6 (June 1994), pp. 19-20. Charng Kao, Dalu Jinggai yu
Liangan Jingmao Guanxi [Mainland Economic Reforms and Cross-Strait Economic Relations] (Taipei:
Wu-Nan, 1994), pp. 164-166. Chin Chung, “Double-Edged Trade Effects of Foreign Direct Investment
and Firm-Specific Assets: Evidence from the Chinese Trio,” in Y.Y. Kuen (ed.), The Political Economy
of Sino-American Relations (Hong Kong: Hong Kong University Press, 1997), pp. 143-144.
45
trade.44
To a lesser extent, Taiwan’s imports from China were also related to Taiwan’s
investment in China, especially in the electronics and electrical appliances, and basic
metals and metal products sectors. According to three reports by Taiwan’s MOEA, as of
1998 around 10 to 13 percent of products made by TIEs were sold back to Taiwan.45 In
addition, Taiwan’s imports from China were largely the products of those industries in
which Taiwan had invested most heavily. For example, in 1998, Taiwan’s top import
items from China were electric machinery, iron and steel, machinery and parts, mineral
fuel and oil, earth, stone, and cement. These items comprised 57 percent of Taiwan’s total
imports from China in 1998. In 1999, the main items of Taiwan’s imports from China
were electric machinery, machinery and parts, iron and steel, mineral fuel and oil, zinc
and articles, and earth, stone, and cement. These items accounted for $2.8 billion, or 62
percent of Taiwan’s total imports from China in 1999.46
The rapid increase of intra-industry trade between Taiwan and China also reflects the
division of labor between Taiwan and China at the industrial level, with particular
reference to type III division of labor across the Taiwan Strait. Intra-industry trade (IIT)
refers to simultaneous exports and imports of commodities in the same industry or
44
45
46
Xiangming Chen, “Business Over Politics,” China Business Review, March-April 1999, p. 9.
Ministry of Economic Affairs (Taiwan), Zhizaoye Duojiaohua ji Guojihua Diaocha Baogao [The
Investigation Report on Diversification and Internationalization of Manufacturing Industry] (Taipei:
Ministry of Economic Affairs, 1995), pp. 376-377. Ministry of Economic Affairs (Taiwan), Zhizaoye
Duiwai Touzi Shikuang Diaocha Baogao [The Investigation Report on Outward Investment of
Manufacturing Industry] (Taipei: Ministry of Economic Affairs, 1998), pp. 180, 183. Ministry of
Economic Affairs (Taiwan), Zhizaoye Duiwai Touzi Shikuang Diaocha Baogao [The Investigation
Report on Outward Investment of Manufacturing Industry] (Taipei: Ministry of Economic Affairs, 2000),
pp. 289, 292.
Ministry of Economic Affairs (Taiwan), 1998 Dalu Jingji Qingshi Pinggu [Assessment on Mainland
Economic Situation in 1998] (Taipei: Minstry of Economic Affairs, 1999), pp. 33-34, 50-51. “Dalu
Duiwai Maoyi Fazhan ji Liangan Maoyi Hudong Gaikuang [The general Situation on the Development
of Mainland’s External Trade and Cross-Strait Trade Interaction],” Board of Foreign Trade, Ministry of
Economic Affairs, April 2000, http://www.moeaboft.gov.tw/prc&hk/trade-roc&prc-5.html, accessed
December 5, 2000, pp. 21-23 of 34.
46
production group during a given time. The upsurge of the IIT index verifies that the
cross-Strait division of labor has rapidly emerged through Taiwan’s FDI in China due to
four reasons: (1) differentiation of commodity; (2) differentiation of production
technology; (3) labor intensity of production; and (4) economies of scale.47
According to a 1992 study by Yen Zong-da, Lin Yuh-Jiun, and Chung Chin, the
cross-Strait IIT index increased from 0.8 in 1980 to 28.8 in 1991 within the
manufacturing industry. Yen, Lin, and Chung derived these figures by examining
cross-Strait trade classified in the 3-digit descriptions of the Standard International Trade
Classification.48 Based on the classification of the HS system by section, the cross-Strait
IIT index for the manufacturing industry increased from 16 in 1992, to 16.2 in 1994, then
21.2 in 1996, and 30.4 in 1998. In particular, the IIT index for sections 16, 17, 18, and 20
increased tremendously between 1992 and 1998. The IIT index for section 16 was 0.5 in
1992 and 38 in 1998; that for section 17 was 1.5 in 1992 and 32.3 in 1998; that for section
18 was 0 in 1992 and 42.5 in 1998; and that for section 20 was 2.6 in 1992 and 78.5 in
1998. (See Table 2.8.)
47
48
Charng Kao, Dalu Jinggai yu Liangan Jingmao Guanxi [Mainland Economic Reforms and Cross-Strait
Economic Relations], 2nd edition, (Taipei: Wu-Nan, 1999), p. 219. Chonira Aturupane, Simeon Djankov,
and Bernard Hoekman, “Determinants of Intra-Industry Trade between East and West Europe,” working
paper, August 1997, http://www.worldbank.org/ecspf/html/papers/IIT-EJ.html, accessed January 10,
2001.
Charng Kao, Dalu Jinggai yu Liangan Jingmao Guanxi [Mainland Economic Reforms and Cross-Strait
Economic Relations], 2nd edition, (Taipei: Wu-Nan, 1999), pp. 218-219.
47
Table 2.8. Intra-Industry Trade Index for Cross-Strait Trade, 1992-98
Merchandise sections of the HS system
Section 6. Products of the chemical or allied
industries
Section 7. Plastics and rubber, and articles thereof
Section 8. Hides and skins; leather and articles
thereof; travel goods, handbags and
similar containers
Section 9. Articles of wood, cork, or plaiting
materials
Section 10. Wood pulp; paper, paperboard, and
articles thereof
Section 11. Textiles and textile articles
Section 12. Footwear, headgear, and artificial flowers
Section 13. Articles of stone or ceramics; glass and
glassware
Section 14. Pearls; precious stones and metals;
jewelry; coin
Section 15. Base metals and articles of base metal
Section 16. Machinery and mechanical appliances;
electrical
equipment;
parts
and
accessories thereof
Section 17. Vehicles, aircraft, and other transport
equipment
Section 18. Optical, photographic, measuring, and
medical apparatus; clocks and watches;
musical instruments
Section 19. Arms and ammunition; parts and
accessories thereof
Section 20. Miscellaneous manufactured articles
Section 6-20 Manufacturing goods
1992
67.2
1994
43.6
1996
43.4
1998
43.7
1.9
11.9
2.1
10.3
2.5
15.5
5.1
16.8
72.4
84.8
90.2
83.4
0.8
6.4
11.6
10.3
4.1
14.8
19.6
2.2
43.8
16.1
2.3
51.3
18.0
4.3
54.7
33.4
44.8
79.4
24.1
24.6
91.9
0.5
50.7
12.8
44.7
23.7
49.0
38.0
1.5
1.7
9
32.3
0.0
8.9
26.8
42.5
n.a.
n.a.
n.a.
n.a.
2.6
16.0
14.1
16.2
52.8
21.2
78.5
30.4
Note:
1.
For a good j with exports Xj and imports Mj, the level of Intra-industry trade (IIT) index, Bj is:
Bj={1-[|Xj-Mj|/(Xj+Mj)]}x100. Bj varies between 0 (complete inter-industry trade) and 100 (complete
intra-industry trade).
2.
Merchandise sections are classified by the Harmonized Tariff Schedule.
3.
Cross-Strait trade figures are from Chung-Hua Institution for Economic Research, Dalu ji Liangan
Jingji Qingshi Baogao (1997/1998) [Report on the Economic Situation of Mainland China and the Two
Sides of the Taiwan Strait (1997/1998)], (Taipei: Mainland Affairs Council, 1999), pp. 215-222. These
figures of cross-Strait trade are almost the same as the estimates of Taiwan’s Mainland Affairs Council.
Source: Calculated by the author.
48
Firm Level: Inter-Firm and Intra-Firm Division of Labor
Before the mid-1980s, Taiwan was characterized as a “dual economic structure” with
small-medium enterprises producing labor-intensive goods for export while large
enterprises made intermediate and capital goods for the domestic market. After 1987,
when Taiwan began to invest abroad heavily, the domestic economic structure changed
significantly: labor-intensive, small-medium enterprises migrated abroad and capital and
technology intensive large enterprises replaced small-medium enterprises as Taiwan’s
prime exporters. In 1987, the share of exports of small-medium enterprises to Taiwan’s
total exports was 67 percent; in 1997, the export share of small-medium enterprises
declined dramatically to 49 percent. Compared with the 1982 to 1987 period, the export
share of small-medium enterprises declined by only 2.6 percent. In the next decade, the
export share of small-medium enterprises declined by 18.3 percent.49
After the mid-1980s, the destination of Taiwan’s exports also changed dramatically.
Prior to that time, the main market for Taiwan’s exports was the United States. Following
Taiwan’s huge outward FDI, the export market shifted significantly to China and the
ASEAN-5, where Taiwan’s exports mainly consisted of FDI-driven sales of intermediate
and capital goods. That is, the inter-firm domestic labor division existing inside Taiwan
before the mid-1980s was transformed into an inter-firm international labor-division
driven by the FDI of Taiwan’s small-medium enterprises. Labor-intensive, small-medium
enterprises established production bases overseas (including in China), with the provision
49
Kai Ma, “Chanye Fazhan zhi Zhanwang yu Yenyeng Zhengce [Prospect and Policy of Industrial
Development],” in Chung-hua Institution for Economic Research (ed.), Woguo Maixiang Xianjin Guojia
de Chanye Zhengce zhi Yanjiu [Conclusion Report: Study on Taiwan’s Industrial Policies toward a
49
of intermediate and capital goods by large enterprises, and then the products of Taiwan’s
overseas affiliates were exported to the United States, Japan, and Europe. That Chinese
exports produced by TIEs will be elaborated upon later.
In addition to inter-firm (including both intra-industry and inter-industry)
international labor-division, there was an intra-firm international labor-division. 50
According to a 1998 report by Taiwan’s MOEA, which included a sample of 1,264
companies, 35 percent of Taiwan enterprises with FDI in China explicitly stated that their
products produced in Taiwan were superior or had more value-added than those made by
their overseas bases, and only 4 percent gave the opposite response. Divided by enterprise
scale, 44 percent of large enterprises with FDI said that their products in Taiwan were
superior or had more value-added, while only 2 percent took an opposite view; by
comparison, only 24 percent of small enterprises with FDI held the same view and 4
percent the opposite view. Therefore, the larger the enterprises, the more they tend to have
an intra-firm division of labor across borders, with Taiwan producing superior or more
value-added goods and China manufacturing labor-intensive products. Nevertheless, there
still exist some forms of intra-firm international labor-division for small enterprises,
although the degree is much less than that for large enterprises.51
50
51
Developed Economy] (Taipei: Chung-hua Institution for Economic Research, 1997), pp. 391-392.
FDI may result in three kinds of industrial restructuring: intra-firm, intra-industry, and inter-industry.
Tain-Jy Chen, Yi-Ping Chen, and Ying-Hua Ku, “ Taiwan’s Outward Direct Investment: Has the
Domestic Industry been Hollowed Out?” in Nomura Research Institute and Institute of Southeast Asian
Studies, compiled, The New Wave of Foreign Direct Investment in Asia (Singapore: Institute of Southeast
Asian Studies, 1995), pp. 103-104.
Ministry of Economic Affairs (Taiwan), Zhizaoye Duiwai Touzi Shikuang Diaocha Baogao [The
Investigation Report on Outward Investment of Manufacturing Industry] (Taipei: Ministry of Economic
Affairs, 1998), pp. 142-143.
50
Production Level: Inputs, Production, Marketing, and Technology
In addition to Taiwan’s provision of inputs for TIEs, as explained at the industrial
and firm levels, Taiwan’s parent firms also provide marketing service and production
technology for TIEs. For example, according to a 1995 study by Kao Charng and Ji
Sheng-guo, Taiwan’s parent enterprises provided export service for 46 percent of their
affiliates in China and provided production techniques for 54 percent of their China
branches.52 According to another 1995 study by Charles Kao, Chu-Chia Steve Lin, Cher
Hsu, and Wennie Lin, parent firms in Taiwan provided marketing and sales services,
including export service, for 81 percent (multiple choice) of TIEs while 35 percent of
TIEs also provided their own marketing service. In addition, parent firms in Taiwan were
in charge of information collection, product development, design, testing, and research
and development, for around 85 percent (multiple choice) of TIEs, while 25 percent of
TIEs also conducted these services for themselves.53
According to the 1999 report by Taiwan’s MOEA, Taiwan’s parent enterprises
provided marketing services for 68 percent (multiple choice) of TIEs while 57 percent of
TIEs also provided their own marketing services. Further, Taiwan’s enterprises provided
production techniques for 92 percent (multiple choice) of TIEs, while partners of TIEs
provided production techniques for only 12 percent of TIEs and 18 percent of TIEs
developed such techniques by themselves.54 In another report by Taiwan’s MOEA, the
52
53
54
Charng Kao and Thung-hai Hsu, “The Development of the Trend of Taiwanese Investment in Mainland
China and the Issue of ‘Three Links’,” East Asia Quarterly, vol. 27, no. 3 (January 1996), pp. 65-67.
You-tien Hsing, Making Capitalism in China: the Taiwan Connection (New York: Oxford University
Press, 1998), p. 68.
Ministry of Economic Affairs (Taiwan), Zhizaoye Duiwai Touzi Shikuang Diaocha Baogao [The
Investigation Report on Outward Investment of Manufacturing Industry] (Taipei: Ministry of Economic
Affairs, 2000), pp. 488-489, 509.
51
ratio of “Taiwan taking orders and mainland exporting goods [Taiwan Jiedan, Dalu
Chukou]” was as high as 26.3 percent in 1998, rising from 23.6 percent in 1997. That is,
26.3 percent of total orders received by Taiwan parent firms were exported by their
subsidiaries in China in 1998.55
V. Cross-Strait Economic Interdependence
Trade Dependence
Based on an estimate by Taiwan’s MAC, Taiwan has grown highly dependent on
China’s market, from 2.3 percent (the share of Taiwan’s exports to China as a percentage
of Taiwan’s total exports) in 1987 to 17.5 percent in 1999. Since 1993 China has been
Taiwan’s second largest market, next only to the United States. Partly due to Taiwan’s
unilateral restrictions against China’s imports, Taiwan’s dependence on China as a
supplier was only 4.1 percent (the share of Taiwan’s imports from China as a percentage
of Taiwan’s total imports) in 1999. Overall, Taiwan’s trade dependence on China was 11.1
percent (the share of cross-Strait trade in Taiwan’s total foreign trade) in 1999. In the
same year, China’s dependence on Taiwan as a supplier was 12.9 percent, and its
dependence on the Taiwanese market was only 2.3 percent. Since 1992 Taiwan has been
China’s second largest import supplier, second only to Japan. Overall, China’s trade
dependence on Taiwan was 7.2 percent in 1999. (See Table 2.9.)
Table 2.9. Trade Interdependence between Taiwan and China, 1987-99
55
Guo-qin Yu, “The Ratio of Taiwan Receiving Orders and Mainland Exporting Goods Is More Than 26
Percent,” Gongshang Shibao [Commerce Times], March 6, 2000.
52
Unit: %
Period
1987
1990
1993
1996
1999
Taiwan’s trade dependence on China
Export
Import
Total trade
dependence dependence
dependence
2.3
0.8
1.7
6.5
1.4
4.2
16.5
1.4
9.3
17.9
3.0
11.0
17.5
4.1
11.1
China’s trade dependence on Taiwan
Export
Import
Total trade
dependence
dependence
dependence
0.7
2.8
2.1
1.2
8.2
4.5
1.2
13.5
7.7
2.0
14.9
8.2
2.3
12.9
7.2
Note:
1.
All figures of cross-Strait trade are based on the estimation by Taiwan’s Mainland Affairs Council.
2.
Trade (export or import) dependence refers to the share of cross-Strait trade (exports or imports) in
Taiwan’s or China’s total foreign trade (exports or imports).
Source:
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), pp. 22-23.
Trade Economic Dependence
Nevertheless, the trade (export or import) dependence index can only indicate the
potential impact on Taiwan’s or China’s foreign trade if bilateral trade relations were
disrupted. Because Taiwan is a highly trade-oriented country, the trade dependence index
underestimates the impact on Taiwan’s economy of any disruption in cross-Strait
economic relations. Since the purpose of this dissertation is to study China’s economic
leverage and Taiwan’s vulnerability, it is better to measure the impact of disruption of
bilateral economic relations in terms of Gross Domestic Product (GDP) rather than
foreign trade. The ratio of bilateral trade (exports or imports) to one’s GDP will be called
the “trade (export or import) economic dependence.” Note that the ratio might exceed
100 percent because trade (exports or imports) is the aggregate value of sales while GDP
is the value-added of sales. For example, Hong Kong’s global trade economic dependence
53
was 252 percent in 1992, with $243 billion of trade and $96 billion of GDP.56
In 1987, Taiwan’s export economic dependence on China was 1.2 percent, import
economic dependence on China 0.3 percent, and trade economic dependence on China
1.5 percent. In 1993, these figures were 6.3 percent, 0.5 percent, and 6.8 percent,
respectively. In 1999, they were 7.2 percent, 1.5 percent, and 8.7 percent, respectively. By
comparison, in 1987 China’s export economic dependence on Taiwan was 0.1 percent,
import economic dependence on Taiwan 0.4 percent, and trade economic dependence on
Taiwan 0.5 percent. In 1993, these figures were 0.2 percent, 2.3 percent, and 2.5 percent,
respectively. In 1999, they were 0.5 percent, 2.1 percent, and 2.6 percent, respectively.
Relatively speaking, Taiwan’s economic dependence on cross-Strait trade was three times
that of China’s in the 1990s. The trade economic dependence figures show that Taiwan’s
dependence on cross-Strait trade is much more serious than China’s because of
asymmetrical economic sizes for Taiwan and China. (See Table 2.10.)
Table 2.10. Trade Economic Interdependence between Taiwan and China, 1987-99
Unit: %
Period
1987
1990
1993
1996
1999
Taiwan’s dependence on China
Export
Import
Trade economic
economic
economic
dependence
dependence dependence
1.2
0.3
1.5
2.7
0.5
3.2
6.3
0.5
6.8
7.6
1.1
8.7
7.2
1.5
8.7
China’s dependence on Taiwan
Export
Import
Trade economic
economic
economic
dependence
dependence
dependence
0.1
0.4
0.5
0.2
1.1
1.3
0.2
2.3
2.5
0.4
2.5
2.9
0.5
2.1
2.6
Note:
1.
All figures of cross-Strait trade are based on the estimation by Taiwan’s Mainland Affairs Council.
2.
Export (or import) economic dependence refers to the ratio of cross-Strait exports (or imports) to
Taiwan’s or China’s GDP.
3.
Trade economic dependence refers to the ratio of cross-Strait trade to Taiwan’s or China’s GDP.
56
World Bank, World Tables 1995 (Baltimore: Johns Hopkins University Press, 1995), pp. 340-343.
54
Source: Calculated by the author.
Financial Dependence
As a matter of fact, the most important interdependence between Taiwan and China
is the financial economic interdependence. Taiwan’s investment in China not only creates
cross-Strait trade economic dependence but also contributes to Chinese economic
development. Any disruption of cross-Strait trade or impact on the economic activities of
TIEs will shock China’s economic development. According to Thomas Chan, Noel Tracy,
and Zhu Wenhui, by 1994 some 20,000 TIEs employed more than 3 million Chinese
workers.57 According to a 1997 study by Kao Charng on the contribution of Taiwan’s
FDI to the Chinese economy, 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
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 3.4 billion Renminbi in taxes, or 1 percent of
the revenue collected by the central government.58
Based on the study by Kao Charng, we can deduce the estimate for 1999 based on
the assumption that the contribution of TIEs to Chinese economic development is in
proportion to Taiwan’s cumulative FDI in China. According to China’s statistics, Taiwan’s
cumulative FDI in China was $11.427 billion in 1995 and $23.864 billion in 1999.
Therefore, the multiplier to be used for the 1999 estimate is 2.09 (23864/11427). In 1999,
57
58
Thomas Chan, Noel Tracy, and Zhu Wenhui, China’s Export Miracle: Origins, Results and Prospects
(New York: St. Martin’s Press Inc., 1999), p. 65.
Charng Kao, Liangan Jingmao Guanxi zhi Tantao [The Review on Cross-Strait Economic Relations]
(Taipei: Tianyi, 1997), pp. 128-145.
55
Taiwan businesspeople invested $2.6 billion, or 0.7 percent of China’s gross capital
formation; employed 8.2 million Chinese workers (2.09 x 3.9), or 3.9 percent of China’s
urban labor force; produced $70.2 billion of output (2.09 x 33.6), or 4.6 percent of
China’s total industrial output; exported $44.7 billion (2.09 x 21.4), or 22.9 percent of
China’s total exports; and paid 9.8 billion Renminbi in taxes (2.89 x 3.4)59, or 1.7 percent
of central government collected revenue.
The Role of Hong Kong
The role of Hong Kong seriously complicates the calculation of cross-Strait
economic interdependence, in particular, after sovereignty over Hong Kong formally
reverted to China on July 1, 1997. Hong Kong has had a very close relationship with both
Taiwan and China and has been a very important player in facilitating the development of
cross-Strait economic relations.
According to China’s statistics, as of June 2000, Hong Kong was the largest source
of cumulative realized FDI in China, with a total of $161.4 billion or 49.7 percent of total
FDI in China. It is estimated that Hong Kong-invested enterprises in China employed 5
million workers by 2000.60 Moreover, according to Andrew Sheng, chairman of Hong
Kong’s Securities and Future Commission, Chinese firms raised $44 billion through the
Hong Kong Exchange and Clearing Limited (HKEx) in Hong Kong in 2000, accounting
for 74 percent of the total funds raised through the HKEx in that year. This compared with
59
60
In 1994, Taiwan’s cumulative investment in China was $8,265 million. Therefore, the multiplier to be
used for 1999 estimate of TIE tax contribution is 2.89.
Nicholas Lardy, Integrating China into the Global Economy (Washington, D.C.: Brookings Institution
Press, 2002), p. 57.
56
only $18 billion raised by Chinese firms from domestic stock markets in 2000. 61
Furthermore, in mid-1990s, the Hong Kong government estimates that 22 to 25 percent of
the total supply of the Hong Kong currency (roughly HK$ 17 billion) circulated in
China.62
Further, in 1997, China was the second largest source of FDI in Hong Kong,
reaching $18.3 billion or 19.4 percent of total FDI in Hong Kong. Its investment was
diversified throughout Hong Kong’s real estate, trade, transportation, and financial
enterprises. For instance, as of 1996, Bank of China was the second biggest bank in Hong
Kong, as measured by volume of deposits. According to the estimates by Hong Kong’s
mainland enterprises association and the media, as of December 1998, Chinese
entrepreneurs had invested more than $25 billion, with total assets of $183.3 billion, in
Hong Kong.63
In addition, in 1998, Hong Kong was China’s largest export market and fourth
largest import supplier. According to Hong Kong customs, in 1998 China was both the
largest export market and import supplier for Hong Kong. In essence, Hong Kong is an
entrepot for China. According to the World Trade Organization (WTO), in 1999 Hong
Kong exported $174.4 billion worth goods, of which $152 billion were re-exported from
China to other countries; at the same year, Hong Kong imported $180.7 billion worth
61
62
63
“China Said Playing Increasingly Important Role in Global Capital Market,” Beijing Xinhua, 13:21
GMT, February 15, 2001, in FBIS-CHI-2001-0215.
Yun-Wing Sung, “WTO and the Economy of Greater China,” in Y.Y. Kueh and Weimin Zhen (eds.),
Jingji Quanqiuhua yu Zhong Mei Jingmao Quanzi [Economic Globalization and Sino-U.S. Economic
Relations] (Beijing: Shehui Kexue Wenxian Chubanshe, 2001), p. 227.
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 92
(April 2000), pp. 42, 50. Department of Economic and Social Affairs, United Nations (ed.), 1998
International Trade Statistics Yearbook (New York: United Nations, 1999), pp. 187, 196. Chung-Hua
Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998) [Report on the
Economic Situation of Mainland China and the Two Sides of the Taiwan Strait (1997/1998)], (Taipei:
Mainland Affairs Council, 1999), p. 333. Gong Chen, “Capital Movement Between the Mainland,
Taiwan, and Hong Kong,” in Bin Yu and Tsungting Chung (eds.), Dynamics and Dilemma: Mainland,
Taiwan and Hong Kong in a Changing World (New York: Nova Science, 1996), p. 128.
57
goods, of which $152 billion were re-exported from other countries to China.64
More importantly, Hong Kong, as China’s window to the world, has contributed
considerably to China’s economic development. Hong Kong provides vital transportation,
storage, insurance, packaging, and processing services. Especially valuable is Hong
Kong’s considerable expertise in finance, trade and public administration – skills that
China sorely needs. Hong Kong is home to 405 banks and branch offices, 335 of them
foreign. By the end of 1996, about 90 percent of the syndicated loans for China were
arranged in Hong Kong. In addition, Hong Kong has about 1,300 accounting firms and
3,000 management consulting firms, and is the regional headquarters of nearly 800
foreign companies.65
As to Taiwan-Hong Kong economic relations, according to Taiwan’s statistics, in
1999 Hong Kong was the third largest export market for Taiwan, next to the United States
and China. Based on Taiwan’s statistics, as of December 1998 Hong Kong’s cumulative
investment in Taiwan amounted to $3.1 billion (or 9.5 percent) of total FDI in Taiwan.66
These complex and intimate economic relations among Taiwan, Hong Kong, and
China result in trilateral interdependence from two perspectives. On the one hand, any
impact on Taiwan’s and China’s economies by disrupting cross-Strait economic relations
will cause damage not only to both Taiwan and China, but to Hong Kong as well. In turn,
the damage to Hong Kong will further spillover into both Taiwan and China. The damage
to Taiwan’s and China’s economies by this spillover effect would incur further losses to
Hong Kong’s economy. Therefore, any disruption of economic relations among Taiwan,
64
65
66
“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.
World Bank, China 2020: Development Challenges in the New Century (Washington, D.C.: World Bank,
1997), pp. 86-87.
Investment Commission, Ministry of Economic Affairs (Taiwan) (ed.), Statistics on Overseas Chinese &
Foreign Investment, September 1999, pp. 5, 9.
58
Hong Kong, and China would trigger a downward spiral consequence for all three
economies. Moreover, China now has more of a stake in cross-Strait economic relations
because Hong Kong has been significantly contributing to China’s economic development
for decades and China has responsibility for Hong Kong, which is now officially a part of
China.
Nevertheless, the situation is too complicated to analyze fully because Hong Kong is
in part an intermediary between Taiwan and China and between China and other countries.
Much of Taiwan’s trade with and investment in China has been conducted through Hong
Kong as a result of Taiwan’s prohibition against cross-Strait direct trade and investment.
Because much value of trade and investment via Hong Kong could be double counted, it
is difficult to distinguish the real impact on both Taiwan and China by considering Hong
Kong’s role if China disrupted cross-Strait economic relations. However, the role of Hong
Kong is mostly to fulfill the global economic division of labor among Taiwan, Hong
Kong, China, and other countries. As a matter of fact, any disruption of cross-Strait
economic relations would not affect only Taiwan, Hong Kong, and China, but also other
major countries in the Pacific Rim. The following sections will further elaborate a
comprehensive map of the global economic division of labor and, hence, global economic
interdependence by incorporating Hong Kong’s role.
VI. Global Economic Division of Labor
Global Commodity Chains and Global Production Networks
No discussion of the cross-Strait economic division of labor would be complete
59
without mention of the extensive global economic integration of Taiwan and China that
results from global commodity chains (GCCs) and global production networks (GPNs).
Gary Gereffi, Miguel Korzeniewicz, and Roberto Korzeniewicz contend that the
production of a single commodity in the globalization of production often spans many
countries, with each nation performing tasks in which it has a cost advantage.
Globalization today thus entails the detailed disaggregation of stages of production across
national boundaries under the organizational structure of densely networked enterprises.67
Terence Hopkins and Immanuel Wallerstein describe such complex global economic
division in terms of GCCs. They define a commodity chain as a network of labor and
production processes whose end result is a finished commodity. A global commodity
chain consists of sets of inter-organizational networks clustered around one commodity or
product, linking households, enterprises, and states to one another within the world
economy. Each commodity chain includes the acquisition and/or organization of inputs
(e.g. raw materials or semi-finished products), labor power (and its provision),
transportation, distribution (via markets or transfers), and consumption.68
By examining the transformation of apparel and electronics commodity chains in
East Asia, Gary Gereffi argues that the perspective of GCCs is very important in
understanding the evolution of East Asia’s regional divisions of labor. For example, the
regional hierarchy for textile and apparel production in Asia has many levels, with Hong
Kong, Taiwan, and South Korea being the principal intermediaries for American and, to a
67
68
Gary Gereffi, Miguel Korzeniewicz, and Roberto P. Korzeniewicz, “Introduction: Global Commodity
Chains,” in Gary Gereffi and Miguel Korzeniewicz (eds.), Commodity Chains and Global Capitalism
(Westport, Connecticut: Praeger, 1994), p. 1.
Gary Gereffi, Miguel Korzeniewicz, and Roberto P. Korzeniewicz, “Introduction: Global Commodity
Chains,” in Gary Gereffi and Miguel Korzeniewicz (eds.), Commodity Chains and Global Capitalism
(Westport, Connecticut: Praeger, 1994), p. 2. Gary Gereffi, “Commodity Chains and Regional Divisions
of Labor in East Asia,” in Eun Mee Kim (ed.), The Four Asian Tigers: Economic Development and the
Global Political Economy (San Diego, CA: Academic Press, 1998), pp. 98-99.
60
lesser degree, European retailers and designers. In particular, the role of the East Asian
Newly Industrialized Economies (NIEs) suppliers in the apparel commodity chain shifts
in double facets: from finished to intermediate goods exporters, and from original
equipment manufacturing (OEM) to original brandname manufacturing (OBM)
producers.69 These East Asian NIEs, in turn, subcontract the majority of their orders and
provide a wide range of inputs to clothing factories in China, Southeast Asia, and other
parts of the world. Gereffi emphasizes that GCCs in Asia encompass coherent trade and
investment networks that lie “below” the aggregate picture for the entire region but
“above” the interactions between states.70
Gary Gereffi, Pan Mei-lin, and Chen Xiangming all use GCCs to explain the
emergence of the new international division of labor involving both Taiwan and China.
They conclude that overseas production by Taiwanese manufacturers has created a
vertical division of labor in the Pacific Rim. Taiwan supplies the raw materials, machinery,
and most important, orders from foreign buyers. The workers in China and other
low-wage Asian nations make the finished garments and export to developed countries,
mainly the United States. In particular, foreign direct investment by Taiwan (and Hong
Kong) is the catalyst that leads to the formation of various GCCs or GPNs in the region.
Within each GCC, the economic division of labor among China, Hong Kong, and Taiwan
is based on their comparative advantages: Taiwan’s capital, manufacturing technology
(including equipment, machinery, and intermediate goods), and management expertise;
China’s cheap land, raw materials, and labor; and Hong Kong’s links to world markets,
69
70
OEM refers to that contractors make goods to be sold under another company’s brandname. OBM refers
to that contractors make goods for export and sale under their own label.
Gary Gereffi, “Commodity Chains and Regional Divisions of Labor in East Asia,” in Eun Mee Kim (ed.),
The Four Asian Tigers: Economic Development and the Global Political Economy (San Diego, CA:
Academic Press, 1998), pp. 93-124.
61
international financial services, and transportation hub.71
In addition, Barry Naughton uses the term “China Circle” to describe the global
production network within the ethnic Chinese area driven by investment from both
Taiwan and Hong Kong. In the China Circle, Taiwan and Hong Kong businesspeople
moved the low-skilled labor-intensive stages of production into China, while retaining
other activities in Hong Kong or Taiwan. Production chains crossing political boundaries
were quickly formed and allowed Hong Kong and Taiwan to specialize in high-value
services and technology-intensive production, while much of the ordinary manufacturing
moved to the PRC.72
Trade Redirection of Taiwan, China, and Developed Countries
Since the late 1980s, the trade redirection of Taiwan, China, and developed countries
has reflected the reorganization of various GCCs among these countries. Basically,
intermediate and capital goods were exported from Taiwan to China, where Chinese
workers processed those intermediate goods into finished products and exported them to
the developed countries, especially the United States and Japan. In addition, Taiwan’s
71
72
Gary Gereffi and Mei-lin Pan, “The Globalization of Taiwan’s Garment Industry,” in Edna Bonacich,
Lucie Cheng, Norma Chinchilla, Nora Hamilton, and Paul Ong (eds.), Global Production: The Apparel
Industry in the Pacific Rim (Philadelphia: Temple University Press, 1994), pp. 126-146. Xiangming
Chen, “The New Spatial Division of Labor and Commodity Chains in the Greater South China
Economic Region,” in Gary Gereffi and Miguel Korzeniewicz (eds.), Commodity Chains and Global
Capitalism (Westport, Connecticut: Greenwood Press, 1994), pp. 166-186. Xiangming Chen, “China’s
Growing Integration with the Asia-Pacific Economy,” in Arif Dirli (ed.), What Is In A Rim?, 2nd ed.
(Lanham: Rowman & Littlefield, 1998), pp. 187-217.
Barry Naughton, “The Emergence of the China Circle,” in Barry Naughton (ed.), The China Circle:
Economic and Technology in the PRC, Taiwan, and Hong Kong (Washington, DC: Brookings Institution
62
exports to developed countries have been replaced by exports of TIEs and thus
dramatically declined. Therefore, after Taiwan’s huge FDI into China, there are three
obvious effects of trade redirection: the increase in Taiwan’s exports of intermediate and
capital goods to China, the increase in China’s exports of labor-intensive finished goods
produced by TIEs to developed countries, and the decline in Taiwan’s exports of
labor-intensive finished goods to developed countries.73 Taiwan has, in effect, exported
its trade surplus with developed countries to the PRC in a statistical (and political) sense.
Since the late 1980s, Taiwan’s trade with both the United States and China has
radically shifted. In 1986, Taiwan’s exports to the United States accounted for 48 percent
of Taiwan’s total exports while Taiwan’s exports to China accounted for only 2 percent. In
2000, Taiwan’s exports to the United States accounted for 23 percent of Taiwan’s total
exports while Taiwan’s exports to China accounted for 17 percent. In addition, Taiwan’s
global trade surplus has continued to decline from $18.7 billion at its highest point in
1987 to $8.3 billion in 1999 ($5.9 billion in 1998), but its trade surplus with China has
increased from $0.9 billion in 1987 to $18.8 billion in 2000.
Since the late 1980s China’s trade with the United States has increased tremendously.
According to U.S. statistics, China’s exports to the United States increased by about eight
times between 1989 and 2000. In 2000, the value of Chinese exports to the United States
73
Press, 1997), pp. 4-9.
Taiwan’s experience is similar to Japan’s early experience with investment in the newly industrialized
economies (NICs) and Southeast Asian countries. Outward FDI facilitated a new wave of international
labor division. Economists use the “Flying-Geese Paradigm” to explain FDI-driven economic relations
among Asian countries. Jonathan Morris (ed.), Japan and the Global Economy: Issues and Trends in the
1990s (London: Routledge, 1991), pp. 135-171. Partha Gangopadhyay, “Patterns of Trade, Investment,
and Migration in the Asia-Pacific Region,” in Grahame Thompson (ed.), Economic Dynamism in the
Asia-Pacific: the Growth of Integration and Competitiveness (London: Routledge, 1998). Kiyohiko
Fukushima and C.H. Kwan, “Foreign Direct Investment and Regional Industrial Restructuring in Asia,”
in Nomura Research Institute and Institute of Southeast Asian Studies, compiled, The New Wave of
Foreign Direct Investment in Asia (Singapore: Institute of Southeast Asian Studies, 1995), pp. 3-86.
Ku-Hyun Jung, “Foreign Direct Investment and Corporate Restructuring in East Asia,” The Pacific
Review, vol. 12, no. 2 (1999), pp. 271-290.
63
was $100.1 billion, and the value of Chinese imports from the United States was $16.3
billion -- a Chinese trade surplus of $83.8 billion.
As a matter of fact, in the 1990s FIEs in China have played a very important role in
promoting China’s exports. In 1995, the value of China’s exports of goods produced by
FIEs in China was $46.9 billion or 32 percent of China total exports, while it was $7.8
billion and 13 percent in 1990. In 1998, the value of China’s exports of goods produced
by FIEs was $81 billion (or 44 percent of China’s total exports), while it was 119.4 billion
(or 48 percent) in 2000. In addition, China’s processed manufactured exports, mainly
produced by FIEs, rose from $24.5 billion, or 40 percent of China’s total exports, in 1990
to $104.6 billion, or 57 percent of China’s total exports, in 1998. In 2000, the value of
China’s processed-manufactured exports was $137.7 billion or 55 percent of China’s total
exports.74
According to China’s white paper, “On the Issue of the Sino-U.S. Trade Balance,” in
1996 FIEs accounted for 64 percent of China’s processed-manufactured exports, most of
which were low-value, labor-intensive products such as toys, games, sporting goods,
electric machinery, garments, footwear, and textile products. In the same year, the
processed-manufactured exports, the most important source of China’s trade surplus with
the United States, amounted for 70 percent of China’s total U.S. exports.75
In particular, TIEs have been playing an outstanding role in increasing China’s
exports. According to a 1992 study by Yen Chong-da, 85 percent of the products
produced by Taiwan’s overseas enterprises were exported to third countries. Kao Charng
74
75
Chung-Hua Institution for Economic Research, Dalu ji Liangan Jingji Qingshi Baogao (1997/1998)
[Report on the Economic Situation of Mainland China and the Two Sides of the Taiwan Strait
(1997/1998)], (Taipei: Mainland Affairs Council, 1999), p. 38. Nicholas Lardy, Integrating China into
the Global Economy (Washington, D.C.: Brookings Institution Press, 2002), pp. 7, 38.
State Council (China), “Sino-American Trade Deficit,” Renmin Ribao [People’s Daily] (overseas edition),
March 22, 1997, p. 4.
64
found that in 1994 the average export rate was up to 85 percent for most TIEs; for some,
it was 100 percent, compared with a 27 percent average export rate for other FIEs in
China.76 According to Taiwan’s Board of Foreign Trade, 70 percent of the products
turned out by Taiwan factories in China in 1996 were shipped to the United States.77
According to several reports by Taiwan’s MOEA, as of 1998, 45 to 52 percent of TIE
products were shipped to third countries, including the United States.78
Several studies have tried to estimate the contribution of TIEs to China’s exports in
the 1990s. According to a 1997 study by Chung Chin, with $2 billion of Taiwan’s
cumulative FDI in China in 1992, the contribution of TIE production to China’s export
performance ranged from $4.9 billion to $5.3 billion, or between 7.3 percent and 7.9
percent of China’s total manufacturing exports in 1992.79 According to the estimate of
Chiang Ping-kun, then Taiwanese Minister of Economic Affairs, products made by TIEs
represented 20 percent of China’s exports to the United States in 1993.80 According to a
1997 study by Kao Charng, in 1995 TIEs exported 21.4 billion, or 14.4 percent of China’s
total exports.81 According to a 1998 study by the author, in 1996 TIEs exported $27.8
76
77
78
79
80
81
Charng Kao, Dalu Jinggai yu Liangan Jingmao Guanxi [Mainland Economic Reforms and Cross-Strait
Economic Relations] (Taipei: Wu-Nan, 1994), pp. 140-143.
Kelly Her, “Losses Loom as US Targets Mainland,” Free China Journal, May 24, 1996, p. 3.
However, the Chinese local market accounted for 60 to 70 percent of the market for food and beverage
processing products, chemical products, and machinery products. Ministry of Economic Affairs (Taiwan),
Zhizaoye Duojiaohua ji Guojihua Diaocha Baogao [The Investigation Report on Diversification and
Internationalization of Manufacturing Industry] (Taipei: Ministry of Economic Affairs, 1995), pp.
376-377. Ministry of Economic Affairs (Taiwan), Zhizaoye Duiwai Touzi Shikuang Diaocha Baogao
[The Investigation Report on Outward Investment of Manufacturing Industry] (Taipei: Ministry of
Economic Affairs, 1998), pp. 180, 183. Ministry of Economic Affairs (Taiwan), Zhizaoye Duiwai Touzi
Shikuang Diaocha Baogao [The Investigation Report on Outward Investment of Manufacturing Industry]
(Taipei: Ministry of Economic Affairs, 2000), pp. 492, 494.
Chin Chung, “Double-Edged Trade Effects of Foreign Direct Investment and Firm-Specific Assets:
Evidence From the Chinese Trio”, in Y.Y. Kuen (ed.), The Political Economy of Sino-American Relations
(Hong Kong: Hong Kong University Press, 1997), p. 149.
Xin-xing Wu, “Liangan Jingji Zhenghe de Qianjing yu Pinggu [Prospects and Assessment for
Cross-Strait Economic Integration],” in Mee-Kau Nyaw, Si-ming Li, and Charng Kao (eds.), Jingji
Zhonghua [Economic China] (Hong Kong: The Chinese University Press, 1998), p. 121.
Charng Kao, Liangan Jingmao Guanxi zhi Tantao [The Review on Cross-Strait Economic Relations]
(Taipei: Tianyi, 1997), pp. 136-141.
65
billion worth of goods, or 18.4 percent of China’s total exports. In addition, a reasonable
estimate of Chinese exports to the United States produced by TIEs would fall between
$7.2 billion and $11.2 billion, or 14 to 22 percent of China’s total $51.2 billion exports to
the United States in 1996.82
Consequently, the transplant of Taiwan’s export manufacturing bases has an
immediate impact on its share in the United States and Japanese markets. According to
the U.S. Department of Commerce, in 1987 Taiwan’s products accounted for 6.1 percent
of U.S. imports, compared with only 1.6 percent for China. Since then, the U.S. import
market share of Taiwan’s products has shrunk to 4.4 percent in 1993 and only 3.3 percent
in 2000. By contrast, the import market share of China’s products rose to 5.5 percent in
1993 and 8.2 percent in 2000. The same situation occurred in the Japanese market.
According to the Japanese Ministry of Finance, the import market share of Taiwan’s
products in Japan declined from 4.8 percent in 1987 to 4.1 percent in 1993 and 3.7
percent in 1997, although the Taiwan market share was up to 4.7 percent in 2000. Yet the
import market share of China’s products rose from 5 percent in 1987 to 8.5 percent in
1993, and then jumped further to 14.5 percent in 2000.83
In particular, between 1989 and 1999, Taiwan suffered a serious deterioration in the
Japanese and U.S. import markets for such labor-intensive items as toys, sports equipment,
travel goods, apparel, footwear, umbrellas, furniture and miscellaneous products. A
declining U.S. market share for Taiwan for these products has been frequently matched by
an increasing market share for the PRC. For example, as of 1994, more than 70 percent of
Taiwan’s shoe-making industry had been transplanted to China. As a result, in 1994 shoes
82
83
Chen-yuan Tung, “Trilateral Economic Relations among Taiwan, China, and the United States,” Asian
Affairs: An American Review, vol. 25, no. 4 (Winter 1999), pp. 229-235.
Taiwan Economic Research Institution (ed.), Cross-Strait Economic Statistics Monthly (Taipei), no. 105
66
made in China captured 45 percent of the U.S. market, a share similar to that of Taiwan
shoe makers in 1986. China’s share increased further to 77.5 percent of the U.S. market in
2000 while Taiwan’s share decreased to only 0.7 percent. In addition, Taiwan’s toys
exports in 1988 were valued at $3.4 billion, whereas Chinese toy exports amounted to
$394 million. By comparison, Taiwan’s exports of toys in 1995 declined to $2.7 billion,
whereas Chinese exports of toys rose to $3.4 billion, an almost ninefold increase in seven
years. Likewise, China’s exports of toys and sports equipment to the United States totaled
$1 billion in 1988 and $6.2 billion in 1995, an average growth rate of 30 percent per
year.84 As Nicholas Lardy points out, these trends are obviously closely related to the
migration of a great deal of labor-intensive production, including that from Taiwan to
China.85
The effects of trade redirection explain not only the pattern of the U.S. trade deficit
with Taiwan and with China, but also the deficits with other East Asian countries with
FDI in China. For instance, the total U.S. trade deficit with Taiwan, Singapore, South
Korea, and Hong Kong fell from $34 billion in 1987 to $7.8 billion in 1995. During the
same period, the U.S. trade deficit with China increased proportionally from $2.8 billion
to $33.8 billion. Those figures largely reflect the effects of diverted exports due to
84
85
(May 2001), pp. 59-60.
Chen-yuan Tung, “Trilateral Economic Relations among Taiwan, China, and the United States,” Asian
Affairs: An American Review, vol. 25, no. 4 (Winter 1999), p. 228. Chin Chung, “Double-Edged Trade
Effects of Foreign Direct Investment and Firm-Specific Assets: Evidence from the Chinese Trio,” in Y.Y.
Kuen (ed.), The Political Economy of Sino-American Relations (Hong Kong: Hong Kong University
Press, 1997), pp. 146-149. Chung-Hwa Institution for Economic Research, Analysis on Cross-Strait
Economic Situation [Liangan Jingji Qingshi Fenxi] (Taipei: Mainland Affairs Council, 1997), pp.
111-140. “Dalu Duiwai Maoyi Fazhan ji Liangan Maoyi Hudong Gaikuang [The general Situation on the
Development of Mainland’s External Trade and Cross-Strait Trade Interaction],” Board of Foreign Trade,
Ministry of Economic Affairs, April 2000, http://www.moeaboft.gov.tw/prc&hk/trade-roc&prc-5.html,
accessed December 5, 2000, pp. 23-33 of 34. “U.S. Footwear Imports: January – December 2000,”
conference memo, Footwear Distributors and Retailers of America Leadership Conference & Annual
Meeting, March 14-17, 2001.
Nicholas Lardy, Integrating China into the Global Economy (Washington, D.C.: Brookings Institution
Press, 2002), pp. 158-163.
67
investment in China by Taiwan, Singapore, South Korea, and Hong Kong. Most of the
growing U.S. deficit with China stems from China’s rapid displacement of alternative
foreign supply sources, primarily of labor-intensive manufactures.86
Case Study: Electronics and Information Industry
As of July 2001, according to Taiwan’s statistics, Taiwan had a cumulative
investment of $5.5 billion in the electronics and electrical appliance industry in China.
This industry represented the largest category (30 percent) of Taiwan’s FDI in China. In
addition, this industry has been the largest category for both Taiwan’s exports to and
imports from China since 1996. In 1998, $6.6 billion, or 33 percent, of Taiwan’s exports
to China were machinery and mechanical appliances; electrical equipment; and parts and
accessories (section 16 in the HS system), while Taiwan’s imports in this category were
$1.5 billion, or 37 percent of Taiwan’s imports from China. Given the importance of this
industry in cross-Strait economic relations, this study will further examine the
information industry to obtain a clearer picture of one of the GCCs or GPNs involving
both Taiwan and China.
According to Taiwan’s Institute for Information Industry, Taiwan’s total (both
domestic and offshore) production of information products was $39.4 billion in 1999
(estimated $48.1 billion in 2000). Since 1997, Taiwanese firms have been the third largest
producers of such products in the world, after American and Japanese. Further, Taiwanese
firms were the largest producers of more than fourteen products in the world, including
86
Nicholas Lardy, Integrating China into the Global Economy (Washington, D.C.: Brookings Institution
Press, 2002), pp. 158-160.
68
notebook computers, desktop computers, monitors, motherboards, power suppliers,
computer casings, scanners, computer mice, keyboards, network hubs, modems, computer
chips, and network interface cards, most with more than 50 percent of world market
share.87
Nevertheless, a considerable share of production by Taiwanese firms takes place in
Taiwan’s offshore facilities. Table 2.11 shows that production outside Taiwan accounted
for increasing shares of total production under Taiwanese control, more than half of the
total in 2000. In 1992, 90 percent of Taiwan’s information products were produced in
Taiwan while 10 percent were made abroad. The Institute for Information Industry
estimated, after Taiwan’s large-scale outward investment in the electronic industry in the
1990s, only 48 percent of Taiwan information products (in terms of value) were produced
in Taiwan while 52 percent were produced abroad in 2000.
In particular, the share of Taiwan information products manufactured by TIEs
increased dramatically. In 1995, the ratio of Taiwan information products produced in
China was only 14 percent. Along with the speedy pace of Taiwan’s investment in the
electronics industry in China after the mid-1990s, an estimated 39 percent of Taiwan
information products were produced in China in 2000. (See Table 2.11.) The most striking
example of reliance on China’s factories is in the production of computer casings. In 1997,
Taiwanese firms supplied 73 percent of the world market for that product, 70 percent of
which was produced by their subsidiaries in China. From China’s perspective, in 2000
87
Hung-ming Tsai, “Zixuen Keji Xieding Dui Zixuen Keji Guoji Fengong de Yingxiang [The Impact of the
Information Technology Agreements on the International Division of Labor of Information
Technology],” Jingji Qingshi ji Pinglun [Review of Taiwan Economics], vol. 6, no. 3 (February 2000),
pp.39-46. Zhi-cheng Lin, “Institute for Information Industry Warns: From Next Year on, Mainland’s
Computer Production Value Will Exceed Taiwan,” Zhongguo Shibao [China Times], October 27, 2000.
Jian-zhong Fu, Jing-lin Jiang, Xiao-ci Xu, and Nan-fen Hou, “New Thinking: Marching toward
Globalization Era,” Zhongguo Shibao [China Times], January 2, 2001.
69
China’s information technology hardware products valued at $25.5 billion, of which TIEs
produced $18.5 billion, or 72 percent of total.88
Table 2.11. Domestic and Offshore Production Value of Taiwan’s Information Hardware
Industry, 1994-2000
Unit: $ million
Production
1992 1993 1994 1995 1996 1997 1998 1999 2000(e)
Total production
9,364 11,384 14,582 19,543 25,035 30,174 33,776 39,398 48,076
Domestic production
8,391 9,693 11,579 14,071 16,999 19,036 19,223 20,880 23,209
Domestic/total
production
90
85
79
72
68
63
57
53
48
(percent)
China/total
production
n.a.
n.a.
n.a.
14
17
23
29
33
39
(percent)
Note: Total production by Taiwanese firms is equal to domestic production in Taiwan and offshore
production. The 2000 figure is estimated by the Institute for Information Industry.
Source:
Cited from Hung-ming Tsai, “Zixuen Keji Xieding dui Zixuen Keji Guoji Fengong de Yingxiang [The
Impact of the Information Technology Agreements on the International Division of Labor of
Information Technology],” Jingji Qingshi ji Pinglun [Review of Taiwan Economics], vol. 6, no. 3
(February 2000), pp.44-46.
Michael Borrus, “Left for Dead: Asian Production Networks and the Revival of U.S. Electronics,” in Barry
Naughton (ed.), The China Circle: Economic and Technology in the PRC, Taiwan, and Hong Kong
(Washington, DC: Brookings Institution Press, 1997), p. 153.
Although Taiwanese firms are the third-largest producers of information products in
the world, most of these products are exported to international markets other than Taiwan
and China -- mainly to the U.S. market. For instance, by 2001 forty-one percent of
Taiwan’s laptops and 38 percent of desktops were shipped to the United States. 89
According to a 1999 study by Chen Xiangming, Taiwan made 40 percent of IBM’s and 60
88
89
Ralph N. Clough, Cooperation or Conflict in the Taiwan Strait ? (Lanham, Maryland: Rowman &
Littlefield Publishers, Inc., 1999), pp. 54-55. “Mainland Computer Equipment Product Value: 70% Is
From Taiwan’s Investors,” Gongshang Shibao [Commerce Times], April 14, 2001.
Mark Landler, “These Days ‘Made in Taiwan’ Often Means ‘Made in China’,” New York Times, May 29,
2001, P. A1.
70
percent of Dell Computer’s desktop computers. According to Taiwan’s MOEA,
international orders for Taiwan’s electronic technological products totaled $33 billion, or
84 percent of Taiwan’s total electronics production in 1999. That year, Compaq, IBM,
Dell, and HP were the four largest computer companies to place orders, accounting more
than 63 percent of the $33 billion.90
According to a report by the Institute for Information Industry, international
procurement of information products in Taiwan reached $37.6 billion or 78.2 percent of
Taiwan’s total production in 2000. According to the statistics compiled by the Institute for
Information Industry, U.S.-based Compaq topped the procurement list with purchases
worth more than $10 billion, while Japan’s Toshiba, Hitachi, Sony, NEC, and Mitsubishi
made combined purchases worth $3.5 billion. The statistics also show that in 2000 the top
ten U.S. buyers, including Compaq, IBM, HP, and Dell, purchased a total of $29.6
billion-worth of products, or more than 78 percent of $37.6 billion of international
procurement from Taiwan. Additionally, in 2000 Taiwan became, for first time, Japan’s
largest supplier of semiconductors.91
According to China’s customs statistics, PRC exports of high and new technology
products reached $37 billion in 2000, surging 50 percent from the previous year, and
accounted for 15 percent of China’s total exports that year. These exports are mainly
information technology products, including computers, telecommunication systems and
90
91
Xiangming Chen, “Business Over Politics,” China Business Review, March-April 1999, p. 12.
Fang-yuan Zhou, “ Japanese Companies Expand Their Order, Amount Is Near American Enterprises,”
Zhongguo Shibao [China Times], November 13, 2000. Su-hua Ou, “Taiwan gradually becomes Japan’s
Main Supplier of Semiconductor,” Zhongguo Shibao [China Times], December 15, 2000.
Wen-hung Fang, “International Procurement in Taiwan Reaches $37.6 billion,” Central News Agency
(Taipei), January 11, 2001, in FBIS-CHI-2001-0111. Edward Chen, “Taiwan’s IT Parts Sales Reach
$34.64 Billion FY00” (in English), Central News Agency (Taipei), January 11, 2001, in
FBIS-CHI-2001-0111. Su-hua Ou, “Taiwan gradually becomes Japan’s Main Supplier of
Semiconductor,” Zhongguo Shibao [China Times], December 15, 2000.
71
accessories. Nevertheless, among these high-tech exports, 89 percent were processing
exports and 81 percent were produced by FIEs (including TIEs). In addition, around 53
percent of these products were exported to the United States, the European Union, and
Japan.92
In addition to the production division of labor between Taiwan and China, many
other countries play a particular role in the global information commodity chain. First, the
United States and Japan provide high-technology software and hardware for Taiwan and
other countries in the commodity chain. Generally speaking, the United States has the
lead in providing system software and special chip design while Japan has taken over
most of the key component market in the information industry. For example, Taiwan’s
electronics industry has been heavily dependent on component imports from Japan, thus
creating an enormous electronics trade deficit with Japan.93 In particular, in 2000 Taiwan
was the second largest market for semiconductor equipment, next to the United States.
The total shipments of semiconductor equipment to Taiwan rose from $4.5 billion in 1999
to $9.4 billion (19.5 percent of worldwide sales) in 2000, up 108 percent.94
Lower down the value chain of information products, Taiwan (and to some extent
South Korea and Singapore) is now assuming the role of a prominent hardware
manufacturer and original design manufacturing (ODM) and OEM subcontractor capable
92
93
94
“China’s Hi-Tech Exports Up 50 Percent,” Xinhua Economic News Service, January 22, 2001.
Dao-cheng Li, “China’s High and New Technology Products Surged Last Year,” Gongshang Shibao
[Commerce Times], February 7, 2001.
Chin Chung, “Division of Labor across the Taiwan Strait: Macro Overview and Analysis of the
Electronics Industry,” in Barry Naughton (ed.), The China Circle: Economic and Technology in the PRC,
Taiwan, and Hong Kong (Washington, DC: Brookings Institution Press, 1997), p. 197. Dieter Ernst,
“Partners for the China Circle? The East Asian Production Networks of Japanese Electronics Firms,” in
Barry Naughton (ed.), The China Circle: Economic and Technology in the PRC, Taiwan, and Hong Kong
(Washington, DC: Brookings Institution Press, 1997), pp. 241-243.
“Worldwide Semiconductor Equipment Shipments Increased 90 % in 2000,” press release,
Semiconductor Equipment and Materials International, March 1, 2001,
http://www.semi.org/web/wpress.nsf/33fa5…006d9c77/7631fc3501bce6b988256a02000e724e!OpenDoc
ument, accessed March 5, 2001.
72
of developing new peripherals and devices as the market progresses. For example, Taiwan
has become a production center for semiconductors, which are critical components in the
information industry. In 2000 the output of Taiwan’s semiconductor industry reached
$23.3 billion.95 That year, Taiwan provided nearly $4 billion of semiconductors to China
-- more than 15 percent of Taiwan’s total exports to China.96 In addition, Singapore and
Hong Kong compete as preferred regional headquarters and offer major support functions
like procurement, testing, training, engineering services, and some product design.
At the bottom of the global production network stand China, the ASEAN, and a host
of other developing countries that constitute the latest target for production redeployment
by first-tier, second-tier, and third-tier information industry firms. Malaysia, Thailand,
and the Philippines, are preferred locations for the volume production of mid-level and
some higher-end products. China competes primarily with Indonesia, India, and Vietnam,
as a base for low-end assembly and simple component manufacturing. Finally, the
finished products in China and other production bases are exported to the developed
countries, in particular to the United States.97
95
96
97
Xian-wen Zeng, “The Output of Semiconductor Industry Will Grow by 25 Percent This Year,”
Gongshang Shibao [Commerce Times], March 3, 2001.
Guo-qing Yu, “Taiwan’s Trade Surplus Registered Historical High Record Last Year,” Zhongguo Shibao
[China Times], February 28, 2001.
Chin Chung, “Division of Labor across the Taiwan Strait: Macro Overview and Analysis of the
Electronics Industry,” in Barry Naughton (ed.), The China Circle: Economic and Technology in the PRC,
Taiwan, and Hong Kong (Washington, DC: Brookings Institution Press, 1997), p. 197. Dieter Ernst,
“Partners for the China Circle? The East Asian Production Networks of Japanese Electronics Firms,” in
Barry Naughton (ed.), The China Circle: Economic and Technology in the PRC, Taiwan, and Hong Kong
(Washington, DC: Brookings Institution Press, 1997), pp. 236-239.
73
VII. Global Economic Interdependence
Trade Dependence
In the last decade, Taiwan, China, and their top trade partners (Hong Kong, the
United States, Japan, Singapore, and Korea) have developed a very close interdependent
relationship in the Pacific Rim. Nevertheless, the global division of labor has not only
complicated trade relationships among countries, but also trade statistics, in particular
figures for trade among Taiwan, China, Hong Kong, and the United States. Before we
discuss global trade interdependence, we need to clarify the statistical discrepancies
among these trading entities.
Discussing statistical discrepancies between the United States and China, Barry
Naughton argues that import figures for both the United States and China are
approximately “correct.” Each country’s imports (by their own account) are
approximately equal to the other country’s declared exports plus goods re-exported
through Hong Kong. He contends that, for simplicity and consistency, it is acceptable to
just use the import figures of each side.98
Nevertheless, if the figures for China’s exports to the United States and other
countries are adjusted by taking China’s re-exports through Hong Kong into account,
Hong Kong’s “real” imports from China need to be adjusted by using the figures of
China’s exports to Hong Kong. For example, in 1998 Hong Kong statistics show that
Hong Kong imported $75 billion from China while China’s statistics shows that China
98
Barry Naughton, “The United States and China: Management of Economic Conflict,” in Robert Ross
(ed.), After the Cold War: Domestic Factors and U.S.-China Relations (Armonk, New York: M. E.
Sharpe, 1998), pp. 150-153.
74
exported only $38.7 billion to Hong Kong. The difference could be attributed to China’s
re-exports to other countries via Hong Kong. Furthermore, we need to adjust the figures
of Hong Kong’s total exports since many re-exports from other countries to China and
re-exports from China to other countries are accounted in Hong Kong’s total exports. (See
appendix for the measure of estimate.)
With these adjustments, in 1998 Taiwan’s export dependence on the Asia-Pacific
region (Taiwan, China, Hong Kong, the United States, Japan, Singapore, and Korea) was
81 percent and China’s was 91 percent, while Taiwan’s import dependence on this region
was 58 percent and China’s was 71 percent. Both China’s export and import dependence
on this region was significantly higher than Taiwan’s. (See Table 12.)
In addition, the other five countries were also heavily dependent on this region for
both imports and exports. In 1998, the import dependence for Hong Kong on this region
was 77 percent while its export dependence was 68 percent. For the United States, the
import dependence on this region was 30 percent and the export dependence 23 percent.
For Japan, the import dependence on this region was 47 percent and the export
dependence 61 percent. For Singapore, the import dependence on this region was 51
percent and the export dependence 36 percent. For Korea, the import dependence on this
region was 50 percent and the export dependence 54 percent. Overall, the intra-regional
trade dependence (share of intra-regional trade to total trade among these seven countries)
was 44 percent. That is, in 1998 each of these seven countries had an average of 44
percent of their trade with the other six countries. (See Table 2.12.)
Table 2.12. Global Trade Dependence among Taiwan, China, and Their Important
Trading Partners in 1998
Unit: $ million
75
Taiwan
China
HK
Exporter
USA
Japan
Singapore
Taiwan
X
4,111
1,952 19,679
27,001
China
28,275
X
6,658 16,884
28,275
HK
13,343 38,742
X
13,848
23,359
Importer USA
33,123 75,095 10,935
X
125,090
Japan
10,156 37,089
1,732 67,480
X
Singapore
3,256
5,690
2,850 18,831
17,029
Korea
1,459
6,300
474 20,274
16,631
Share of
intra-regional to
81%
91%
68%
23%
61%
total exports
Share of intra-regional trade to total trade among these seven countries
2,697
4,235
8,116
18,654
4,719
X
1,687
36%
Share of
Korea intra-regional
to total
imports
5,669
58%
15,014
71%
9,434
77%
24,805
30%
12,076
47%
4,080
51%
X
50%
54%
44%
Note:
1.
All figures are the statistics of imports for each country, except Hong Kong (HK). Taiwan figures of
imports are based on Taiwan’s statistics.
2.
Hong Kong’s figure of imports from China adopts China’s statistics on China’s exports to Hong Kong.
3.
Regarding Hong Kong’s import and export dependence on this region, we use Hong Kong’s original
customs figures. Based on Hong Kong’s statistics, China, the United States, Japan, Taiwan, Korea, and
Singapore comprise 68 percent of Hong Kong’s total exports and 77 percent of Hong Kong’s total
imports.
4.
See appendix for the estimate of Hong Kong’s “real” total exports, which will be used to estimate the
share of intra-regional trade to total trade among these seven countries.
Source: Calculated by the author.
Intimate international trade interdependence has made political manipulation of
bilateral economic relations more difficult by any one country or society. “Bilateral”
economic relationships are no longer “bilateral” in nature, but essentially “multilateral”
and “global.” Any disruption of bilateral economic relations, or even turbulence in one
country’s economy, will have amplified, profound, region-wide, and even global
implications for major economic actors in the regions, as the 1997-99 Asian financial
crisis demonstrated.
For example, Taiwan’s deep involvement in China’s manufacturing exports to the
United States means an American imposition of trade sanctions upon China would spell
76
disaster for Taiwanese investors and for Taiwan’s economy. In February 1995, the United
States proposed $1 billion worth of tariff sanctions against Chinese exports. According to
Chung Chin’s estimate, it would have rendered an immediate loss of $274 million for
Taiwanese investors in the form of lost orders. TIEs produced about 27 percent of China’s
exports that would have been affected by the sanctions.99 In addition, after 1991 Taiwan’s
entrepreneurs joined China and Hong Kong in support of China’s most-favored-nation
trade status (MFN, now permanent normal trade relations status) because many of
China’s exports to the United States were produced by TIEs.100 Furthermore, despite
China’s military exercises and missile threats against Taiwan between July 1995 and
March 1996, in May 1996 Jeffery Koo, who has been called Taiwan’s “economic
ambassador,” even wrote an article in the Wall Street Journal calling for the United States
to extend China’s MFN status by saying that “MFN for China is also good for Taiwan.”101
Finally, among the first statements made by the new president of Taiwan, Chen
Shui-bian, after his election on March 18, 2000, was a call for “the normalization of
U.S.-China trade relations” and China’s accession to the World Trade Organization
(WTO).102 On April 12, 2000, through a video-teleconference sponsored by the Heritage
Foundation, President-elect Chen explicitly called upon the American legislators to help
both Taiwan and China enter the WTO, reminding them that “[U.S.] normal trade with
China does much more than promote China’s economic development. It also promotes
Chin Chung, “Double-Edged Trade Effects of Foreign Direct Investment and Firm-Specific Assets:
Evidence from the Chinese Trio,” in Y.Y. Kuen (ed.), The Political Economy of Sino-American Relations
(Hong Kong: Hong Kong University Press, 1997), pp. 150-152. Wayne Morrison and William Cooper,
China-U.S.-Taiwan Economic Relations, CRS Report for Congress (Washington, D.C.: Congressional
Research Service, 1996), p. 47.
100
Kong-Lien Kao, Liangan Jingmao Xiankuang yu Zhanwang [The Current Situation and Prospect of
Cross-Strait Economic Relations] (Taipei: Mainland Affairs Council, 1994), p. 20.
101
Jeffrey Koo, “MFN for China Is Also Good for Taiwan,” The Wall Street Journal, May 7, 1996, p. 22.
102
Jim Mann, “Taiwan’s New President Backs Sino-American Trade,” Los Angeles Times, March 22, 2000,
p. A1.
99
77
Taiwan’s economic growth.”103
Any serious disruption of bilateral economic relations among Taiwan, Hong Kong,
and China (greater China) will have a more serious impact on the world economy than the
1997-99 Asian financial crisis because Taiwan, Hong Kong, and China are much more
important actors in the world economic stage than Thailand, Indonesia, Malaysia, and the
Philippines. In 1995, China was the seventh largest economy in the world while Taiwan
the nineteenth and Hong Kong the twenty-seventh. In that year, the total GDP of these
three economies was $1,147 billion. In 1999, China was the ninth largest trader in the
world while Hong Kong the tenth largest trader and Taiwan the fifteenth largest trader.
The total amount of trade by these three economies was $948.4 billion, or 8.2 percent of
world trade. In the end of 1999, the total amount of foreign exchange reserve held by
these three economies was $357.1 billion. In comparison, in 1995 the total GDP of
Thailand, Indonesia, Malaysia, and the Philippines, which triggered the 1997-99 Asian
financial crisis, was only $500 billion, or 43.5 percent that of the greater China group. In
1999, the total amount of trade by these four economies was $400.1 billion, or only 42.2
percent that of the greater China three. At the end of 1999, the total amount of foreign
exchange reserve held by these four economies was $102.8 billion, or 28.8 percent that of
Taiwan, China, and Hong Kong.104
Financial Dependence
103
104
Chen Shui-bian, “A New Era of Opportunity for Taiwan,” Heritage Lectures, no. 664, April 28, 2000.
International Monetary Fund, International Financial Statistics Yearbook (Washington, D.C.:
International Monetary Fund, 2000). The Economist, World in Figures (London: Profile Books Ltd,
1997), p. 23. “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.
78
Global economic interdependence has trade as well as financial dimensions. Hong
Kong, the United States, Japan, Singapore, Korea, as well as British Central America
[mainly the Virgin Islands and the Cayman Islands], have tremendous investments in both
Taiwan and China. By the end of 1998, the United States, Japan, Hong Kong, Singapore,
British Central America, and Korea cumulatively invested $23.9 billion or 73.1 percent of
total FDI in Taiwan. As of 1999, Hong Kong, the United States, Japan, Taiwan, Singapore,
the Virgin Islands, and Korea were the top seven foreign investors in China, comprising
$262.2 billion or 85.3 percent of cumulative realized FDI in China.105
In essence, international financial interdependence is more sensitive to international
political fluctuations or conflicts, especially portfolio investment. By the end of 1999,
about $1.5 trillion moves around the world electronically every day while total foreign
direct investment was only $865 billion in the year of 1999.106 For example, when 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.107
On July 9, 1999, Taiwanese President Lee Teng-hui elaborated that the relationship
between Taiwan and China is a “special state-to-state” relationship, thus heightening
cross-Strait tension. On July 14, Taiwan’s weighted stock market index declined by 3.9
105
Investment Commission, Ministry of Economic Affairs (Taiwan), Statistics on Overseas Chinese &
Foreign Investment (Taipei), September 1999, pp. 9-13. Taiwan Economic Research Institution (ed.),
Cross-Strait Economic Statistics Monthly (Taipei), no. 92 (April 2000), p. 42.
106
Dita Smith, “How Global Are We?,” Washington Post, February 10,2001, p. A15.
107
“Chinese Officials Call for Maintaining Financial Stability” (in Chinese), Liberty Times, Eastern
America Version, May 12, 1999, p. 4. “Hong Kong Stock Index Declined by Near 300 Points,”
Zhongguo Shibao [China Times], May 12, 1999.
79
percent. Nevertheless, China’s stock markets also suffered a serious loss with the
Shanghai B share index dropping by 5.3 percent, the Shenzhen B share index by 1.4
percent, and the Hong Kong Hang Seng index by 2.9 percent. On July 16, after reports of
Chinese military mobilization, the Taipei Index declined by 6.4 percent, the Shanghai
Index 5.5 percent, the Shenzhen Index 4.3 percent, and the Hong Kong Index 1.6 percent.
On July 19 (the next day of trading), Taipei’s market stabilized thanks to government
intervention while the Shanghai Index declined by a further 9.5 percent and the Shenzhen
Index went down by 8.8 percent. These drops are especially notable given the relatively
closed nature of China’s financial markets.
On March 16, 2000, a day after Chinese Premier Zhu Rongji’s stern warning against
Taiwan independence, Taiwan’s investors began selling shares as soon as the Taipei stock
market opened, sending the index plunging by as much as 4.5 percent. The market
rebounded and blue chips closed up 0.5 percent after government funds stepped in and
started aggressively buying shares.108 However, on the same day stock markets in both
Hong Kong and China plunged heavily. Hong Kong’s Hang Seng index fell 2.3 percent.
Shenzhen’s hard-currency B shares and domestic currency A shares fell nearly 5 percent.
In Shanghai, A shares declined by 4.5 percent and hard-currency B shares fell by 2.5
percent.109
In early April 2001, the slew of earnings warnings for U.S. companies and the
heightened tension in U.S.-China relations over the spy plane incident110 created a chain
William Foreman, “Harsh Words from Beijing Send Taiwanese Stock Plunging,” Associated Press,
March 16, 2000.
109
Mure Dickie and James Kynge, “Taiwan Launches Fund for Market Stabilisation,” Financial Times,
March 17, 2000, p. 11.
110
On April 1, 2001, China held onto 24 U.S. military personnel and a U.S. Navy surveillance plane that
made an emergency landing in its territory after an airborne collision with a Chinese fighter jet. This
triggered a severe standoff between the United States and China.
108
80
reaction in Asian and American stock markets. The Dow Jones average fell 3.7 percent in
three days between April 2 and 4, the Nasdaq Composite index was down 11.3 percent,
the Hang Seng index was down 5.5 percent, Taiwan’s TAIEX was down 6.9 percent, the
Shanghai A-share index was down 1.1 percent, the Shenzhen A-share index was down 1.6
percent, and Shenzhen B-share index was down 4.5 percent. Since China will open its
financial markets wider after joining the WTO, China’s economy and financial markets
will be even more highly impacted by international economic and political fluctuations.
It is true that in the era of globalization it would be very difficult to measure in
advance the impact of disrupting bilateral economic relations and some effects would be
more long-lasting than others. Moreover, some dimensions of globalization have been
developed very quickly and it might be beyond the capacity of any nation-state to control
the damage of disrupting a significant bilateral relationship, much less to assess the
impact in advance. For example, by the end of 1999 the number of people worldwide
with access to the Internet rose to 250 million and continues to grow.111 On April 26,
1999, a computer virus written by a 25-year-old Taiwanese damaged hundreds of
thousand computers worldwide and 360 thousand computers in China, where total losses
reached $120 million.112 In addition, on May 4, 2000, an electronic virus disguised as a
love letter, believed to have originated in the Philippines, raged around the globe. In only
two days, the cost of the damage caused by the love letter and its variants was estimated
at around $2.6 billion in the United States alone with a total of some 2.5 million infected
files. Underscoring how interconnected the world’s personal computers have become, the
program even made an impact on U.S. government agencies, including the White House,
111
112
Dita Smith, “How Global Are We?,” Washington Post, February 10,2001, p. A15.
“Chernobyl Virus Caused $120 Mln Damage in China”, Reuters, May 9, 1999.
81
the Pentagon, Congress and the British House of Commons. Fortunately, Asia escaped
this virus relatively unscathed, in part because the virus was unleashed after the close of
the business day in the region.113
VIII. Conclusion
In last two decades, economic relations between Taiwan and China have developed
very rapidly. Before 1987, cross-Strait trade and Taiwan’s investment in China was trivial.
Nevertheless, since 1993 China has become Taiwan’s third largest trading partner and
second largest export market, with $31.2 billion in total trade in 2000 and a surplus of
$18.8 billion for Taiwan. If trade between Taiwan and Hong Kong was added to China’s
share, China would have become Taiwan’s largest export market since 1994. In
comparison, since 1990 Taiwan has become China’s fourth largest trading partner, next
only to Japan, the United States, and Hong Kong. In addition, since 1993 Taiwan has
become China’s second largest import supplier, next only to Japan.
Essentially, cross-Strait trade is driven by Taiwan’s investment in China. According
to China’s statistics, as of 2000 Taiwan’s cumulative utilized investment in China was
$26.2 billion -- about 8 percent of total FDI in China. TIEs play a very important role in
importing intermediate and capital goods from Taiwan and exporting finished goods to
developed countries, in particular to the United States and Japan. In the mid-1990s, about
one-third to two-thirds of Taiwan’s exports to China were driven by TIEs. In addition,
113
Jane Cheong, “Loveletter Computer Virus Causes Billions in Damage Worldwide,” Business Times
(Singapore), May 6, 2000, p. 1. John Markoff, “A Disruptive Virus Invades Computers Around the
World,” New York Times, May 5, 2000, p. A1.
82
Chinese exports produced by TIEs were estimated between 14 percent and 18 percent of
China’s total exports. Furthermore, around one-fifth of Chinese exports to the United
States were produced by TIEs.
As a matter of fact, Taiwan’s investment in China triggers a new wave of
international division of labor by establishing various GCCs and GPNs. Basically, in a
global commodity chain, such as in the electronics industry, the United States and Japan
provide high-technology software and hardware for Taiwan. In turn, Taiwan provides
intermediate and capital goods for TIEs, which produce and export finished goods to
developed countries. In addition, Singapore and Hong Kong serve as regional
headquarters providing supporting service for the GCCs across the Taiwan Strait.
In the 1990s, Taiwan’s economic dependence on cross-Strait trade was three times
that of China’s due to their asymmetric economic sizes. In addition, China’s economic
development has heavily depended on the production of TIEs, including capital formation,
employment, output, exports, and government tax revenue. However, the cross-Strait
economic division of labor is only part of broader GCCs and GPNs. Any impact on
cross-Strait economic relations would have interrelated and have wide-reaching global
effects. Within the framework of the global economic division of labor and global
interdependence, this study emphasizes four linkages in discussing cross-Strait economic
relations:
investment-trade,
internal-external,
bilateral-global,
and
production-consumption linkages.
First, the investment-trade linkage: Since most cross-Strait trade isdriven by
Taiwan’s investment in China, any impact on the production of TIEs will have significant
repercussions on cross-Strait trade. On the other hand, any disruption of trade between
Taiwan and China will also have a strong impact on the production activities of TIEs. In
83
turn, this impact on the production activities of TIEs will further influence Chinese
exports and other economic activities.
Second, the internal-external linkage: Because about 36 to 38 percent of Taiwan
entrepreneurs have broad partnership with Chinese local enterprises, local government,
and foreign enterprises, any internal sanctions on the TIEs will provoke protest from both
internal and external economic actors. In addition, because many Taiwan entrepreneurs
invested in China by their subsidiaries registering and raising funds in third areas, such as
Hong Kong, Singapore, the United States, and elsewhere. Chinese internal sanctions on
TIEs would trigger series of external disputes between China and these countries.
Moreover, because TIEs contribute significantly to China’s exports, China’s
imposition of import (internal) sanctions over Taiwan’s goods will interrupt the
production of the TIEs and thus result in the reduction of China’s (external) exports, and
vice versa. For example, according to a 1999 study by the CIER, the correlation
multiplier between Taiwan’s exports to China and China’s exports produced by TIEs was
20 percent in 1997. That is, if Taiwan’s exports to China were disrupted by one dollar,
China’s exports produced by TIEs would decline by five dollars.114
Third, the bilateral-global linkage: Since Taiwan’s provision of intermediate and
capital goods for TIEs and the production of TIEs is only part of larger GCCs, any
disruption of cross-Strait trade or production of TIEs, or even a disturbance in Taiwan’s
economy, will trigger a snowball effect on these GCCs. For example, Taiwan’s imports of
key electronics components and system software from Japan and the United States would
significantly decrease if the production of the electronics industry across the Taiwan Strait
114
Wen-long Lian, Su-wan Wang, Yu-jun Lin, Ze-yuan Jian, Liangan Chuko Liandong Guanxi zhi Yanjiu
[The Study on the Correlations for Cross-Strait Exports] (Taipei: Chung-Hua Institution for Economic
Research, 1999), p. 122.
84
were disrupted. Furthermore, Singapore and Hong Kong would lose tremendous business
opportunities providing support services for the GCCs involving both Taiwan and China.
Finally, any bilateral disruption of cross-Strait economic activities will have a heavy
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
1998, the average trade dependence for this region was as high as 44 percent. Moreover,
the other five countries have also immense stakes on both Taiwan and China in terms of
investment.
In addition, in 2000 Taiwan was the second-largest market of semiconductor
equipment, accounting for 19.5 percent of world semiconductor equipment sales.
Furthermore, Taiwanese firms were the largest producers in the world of more than
fourteen information products. In 2000 Taiwan was the fourth-largest supplier of IC
products in the world, next to the United States, Japan, and Korea. Specifically, according
to Taiwan’s MOEA, Taiwan’s production of mask read-only memories (ROMs) accounted
for 57.5 percent of the world market, integrated circuit (IC) design was 20.6 percent, IC
foundry 76 percent, and IC packaging 32 percent. That same year, Taiwan was the largest
producer in the world for the production of Mask ROMs, IC foundry, and IC packaging
and the second largest producer for IC design, next to the United States.115 Therefore,
any disturbance in Taiwan’s production of semiconductors-- the brains of personal
computers-- would have a severe impact on the world economy in terms of both
semiconductor equipment demand and semiconductor supply. For instance, fears that the
115
In 2000, Taiwan accounted for 5.5 percent of the world market share in the semiconductor industry.
Taiwan’s production of dynamic random access memories (DRAMs) accounted for 15.3 percent of the
world market and static random access memories (SRAMs) was at 6.1 percent. Xian-wen Zeng, “The
Output of Semiconductor Industry Will Grow by 25 Percent This Year,” Gongshang Shibao [Commerce
Times], March 3, 2001.
85
September 21, 1999 earthquake in Taiwan could interrupt the flow of computer chips and
other high-tech components to U.S. manufacturers triggered a broad sell-off in U.S.
technology stocks. On September 22 the tech-heavy Nasdaq composite index dropped
65.05 points, a loss of 2.3 percent.116
Fourth, the production-consumption linkage: Any disruption of GPNs will have an
immediate impact on global consumption. Most Taiwan products made in Taiwan
domestic facilities and by TIEs are exported to developed countries. Since 1997
Taiwanese firms have ranked as the third-largest producers of information products if the
output of both domestic and overseas factories is taken into account. Further, Taiwanese
firms were the largest producers of more than fourteen information products, most with
more than 50 percent of world market share. In 2000, $37.6 billion or 78 percent of
information products produced by both Taiwan domestic and offshore facilities (including
TIEs) were exported to third countries. That same year, the U.S. top ten buyers purchased
a total of $29.6 billion-worth of products from Taiwan. Moreover, in 2000 Taiwan became,
for first time, the largest supplier of semiconductors for Japan. Therefore, any disruption
of cross-Strait economic activities (including both trade and production of TIEs) will
seriously harm world consumers of electronics products and global economic
development.
Finally, although this study intends to sketch a comprehensive picture of global
division of labor and interdependence involving both Taiwan and China, this is far from
completion. In the era of globalization, it is a complex global division of labor that
explains global economic operations within a global commodity chain across political
116
Peter S. Goodman, “Tech Stocks Swoon in Wake of Taiwan Quake,” Washington Post, September 22,
1999, p. E1.
86
boundaries. Multinational companies, not nation-states, are the main actors in the process
of globalization. However, not a single multinational company could dominate the
process, much less a single nation-state. Any single nation state could not control or
manipulate the division of labor, which is based on comparative advantage of each
country. In addition, nation-states are hardly able to track the process of both international
trade and capital flow across borders.
This is the case in the economic relations between Taiwan and China. Essentially,
Taiwan’s investment drives the reorganization of the international economic division of
labor involving Taiwan, Hong Kong, China, and many other countries. As a result,
Taiwan is moving increasingly closer to China in terms of economic integration.
Nevertheless, we need to look at the cross-Strait relationship in the context of
globalization. Taiwan is only a bridge to integrate China into the GPNs and market, and
thus both Taiwan and China are becoming more closely integrated into the global
economy with broad global interdependence. In the end, China is moving relatively faster
than Taiwan in terms of global integration and thus progressively closer to Taiwan. For
example, share of trade in goods to China’s GDP was only 9.2 percent in 1978, but by
1996 this figure was 35.2 percent– an increase of 26 percentage points. In comparison,
share of trade in goods to Taiwan’s GDP was 69.4 percent in 1978 and 79.9 percent in
1996 – an increase of 10.5 percentage points.
87
Appendix:
The estimate for the “real” amount of Hong Kong’s exports, excluding the amount of re-exports via
Hong Kong, is shown as follows:
Hong Kong total exports = Hong Kong real total exports + Hong Kong re-exports
(1)
Hong Kong real total exports = Hong Kong total exports - Hong Kong re-exports
(2)
For Hong Kong’s re-exports to China from the rest of the world,
Hong Kong re-exports to China = China’s imports from world – world exports to China
(3)
For Hong Kong’s re-exports to the rest of the world from China,
Hong Kong re-exports to non-China = world imports from China - China’s exports to world
(4)
For Hong Kong’s total re-exports, (3) + (4)
Hong Kong re-exports = China imports from world - China exports to world + world
imports from China – world exports to China
(5)
For Hong Kong’s real total exports, substituting (5) into (2)
Hong Kong real total exports = Hong Kong total exports – China imports to world+
China exports from world - world imports from China + world exports to China
(6)
Based on this formula, in 1998 Hong Kong’s real total exports were $97.7 billion, in comparison to its total
exports of $174.9 billion.
Note:
1.
“China’s imports from world” refers to China’s imports from the world based on Chinese official
figures. “world exports to China” refers to world exports to China based on the exporters’ figures. The
rest will apply the same rule.
2.
Since China, the United States, Japan, Taiwan, Korea, and Singapore comprised 68.4 percent of Hong
Kong’s total exports in 1998, this study will estimate Hong Kong’s real exports in 1998 by referring
“world” to the above six trade partners for Hong Kong.
88