E-Notes

Business and Politics Across the Taiwan Strait

by Terry Cooke

October 24, 2002

Terry Cooke is a Senior Fellow at the Foreign Policy Research Institute and Project Leader of the Cross-Straits Information Technology Project. Currently on leave from the Senior Foreign Service, Mr. Cooke previously served as a Commercial Officer at the U.S. Consulate in Shanghai and, most recently, as Chief of the Commercial Section at the American Institute in Taiwan. The views in this article are of a private capacity and non-official.

For more on the China-Taiwan issue, see the Fall 2002 issue of Orbis, FPRI’s quarterly journal of world affairs, featuring Jacques deLisle on “Law’s Spectral Answers to the Cross-Strait Sovereignty Question”; Cal Clark on “Growing Cross-Strait Economic Integration”; Alan Wachman on “A Cold War of Words”; and Byron Weng on “‘One Country, Two Systems’ From a Taiwan Perspective.”

High on the agenda when President Bush meets with Chinese President Jiang Zemin in Crawford, Texas this Friday will be the alignment of common interests in two world trouble-spots— Iraq and North Korea. The challenge there will be to disentangle secondary, and divergent, economic interests from a set of overriding, and shared, security concerns.

In their discussions of a third world hotspot— the ninety-mile strait separating Taiwan from China— a radically different balance of political and economic interests will have to be weighed. For while the political relationship between Beijing and Taipei across the Strait of Taiwan is still mired in stasis and static, business has been moving fast to stabilize relations and prod politicians on both sides of the Strait to focus on practical and productive issues. This development deserves closer attention in the U.S. for two reasons. First, closer commercial integration between Taiwan and China supports U.S. policy goals of peaceful resolution through dialogue and people-to-people exchange. Second, the U.S. has a strategic stake in two globalization dynamics at work in this process— the extension of established U.S.-Taiwan supply chains into China as well as the guided integration of post-WTO China into the global economy.

The sector which best captures the scale and speed of these developments is information technology (IT). For well over a decade, Taiwan supported the rapid growth of U.S. IT brands by serving as their partners for Original Equipment Manufacturing (OEM). Relying on an unrivalled OEM track-record of continually bringing US brand-products to market “cheaper, better, faster,” tiny Taiwan rode the IT boom for over a decade, holding down the number three-spot in global IT production behind only the US and Japan. But on the heels of the Nasdaq’s fall in March 2000 and the global downturn in tech markets, Taiwan manufacturers were forced to vary their traditional formula to keep it a winning one. To maintain margins, Taiwan manufacturers were forced to take advantage of cheaper land, facilities and labor in the mainland. Significantly, as Taiwan investors poured investment dollars into China, their business model differed from North American, European, and Japanese investments in one crucial respect: rather than allow dependency on an underdeveloped supply and distribution infrastructure in China, major Taiwan IT investors finessed logistics and supply chain bottlenecks by bringing their entire, established network of upstream and downstream suppliers with them from Taiwan. As a result, Taiwan IT manufacturers have been able to operate profitably in China, continuing to lower costs while still ensuring quality and timeliness of delivery for their US and global customers.

The scale of this mass migration of IT production from Taiwan to China is consequential. For example, as China overtook Taiwan for the number three spot in global IT production in 2001, Taiwan investors became equity owners of as much as three-quarters of China’s IT export production. Yet, Taiwan investors still retain control of virtually all their own fourth-ranked $23.5 billion of IT production in Taiwan.

Why has an economic flow representing tens of billions of dollars annually in the technology heart of the global economy not attracted more attention? There are four main reasons. First, large-scale IT investment by Taiwan into China is a recent phenomenon, driven by complex technology dynamics in the global market. More important, however, is the fact that throughout the 1990s and until mid-2002, most high-tech investment in the mainland was technically barred by the Taiwan government. Skirting these prohibitions, Taiwan investors became adept at channeling their investments into the mainland through off-shore subsidiaries in Hong Kong, the British Virgin and Cayman Islands, and other locales with limited transparency. Offshore, fragmented, and largely invisible, this pattern of investment deprived Taiwan government officials, PRC customs officials and traditional macro-economists an easy handle by which to assess its overall dimensions or underlying dynamics. A third factor is the natural reticence of the Taiwan investors themselves, the most knowledgeable group of experts on this subject. While some observers link this reticence to concerns over the technical illegality of their early investments or to a potential “double taxation” liability, the Taiwan government has in large measure already dismantled both of these sets of sanctions. Not surprisingly, though, Taiwan investors still show markedly little appetite for inserting their companies into a direct line of political crossfire even after legal disincentives have been removed.

The fourth and perhaps most important reason involves the zero-sum nature of the cross-strait political debate itself. So long as no one really knows who is gaining political leverage as a result of cross-strait commercial integration, each constituency can project its own hopes and fears on the issue like a Rorschach test. Cross-currents of public discussion and commentary in this “dialogue of the deaf” tend to obscure, rather than highlight, the basic fact that the U.S., Taiwan, and China all share growing interests in the extension of global IT supply chains across the political fault-lines of the Taiwan Strait. These interests need, of course, to be carefully managed especially in the areas of high technology transfer and security. They cannot be managed, however, unless they are first understood.

When Presidents Bush and Jiang turn their attention to the China/Taiwan security issue, neither is likely to mention the dynamism of cross-strait commercial integration. This dynamism, however, will shape discussion in forms as varied as Jiang Zemin’s “Three Represents” doctrine (which calls for private sector “capitalists” to be eligible for membership in a CCP more broadly representative of contemporary society in China) and President Bush’s policy inputs from the U.S. private sector. The cross-strait security situation they will discuss is without precedent. Contested sovereignty and military stand-offs have long waxed and waned as between the Koreas or the Cold War Germanys. But between post-WTO Taiwan and China there is a novel element— a vital commercial interaction and guarded economic embrace more typical of regional partners such as the UK and EU. Most intriguing of all across the Taiwan Strait is the possibility that global forces of commercial integration may be transforming a political legacy of division in ways not commonly thought of, much less understood.

You may forward this email as you like provided that you send it in its entirety, attribute it to the Foreign Policy Research Institute, and include our web address (www.fpri.org). If you post it on a mailing list, please contact FPRI with the name, location, purpose, and number of recipients of the mailing list.

If you receive this as a forward and would like to be placed directly on our mailing lists, send email to FPRI@fpri.org. Include your name, address, and affiliation. For further information, contact Alan Luxenberg at (215) 732-3774 x105.