Taiwan and China: Drifting together

["Ulhas Joglekar" <uvj@xxxxxxxx>]

Economist.com

Taiwan and China

Drifting together

Jan 3rd 2002 | TAIPEI
>From The Economist print edition

Economics is slowly uniting Taiwan and China

JANUARY 1st saw Taiwan's entry into the World Trade Organisation (WTO),
after a decade of effort. In the coming weeks, details are to be released of
new measures allowing direct investment by Taiwanese companies in mainland
China and the easing of restrictions on the import of mainland goods. Both
events will help to make economic relations between Taiwan and China more
normal.
Taiwan badly needs a new economic relationship with the mainland. Its
manufacturing industries have invested more than $60 billion in China in the
past few years, using indirect routes, mainly Hong Kong. Yet partly because
of the Taiwanese government's restrictions on such investments, only a
trickle of profit has returned. Taiwan still bans most direct trade,
transport and communication links (known as the three direct links) with
China-thus pushing up costs for the 50,000 Taiwanese businesses established
there. For an economy that recorded its worst recession ever in 2001, these
are heavy burdens.
The WTO will not force Taiwan and China to establish direct links. China
particularly would be reluctant to involve the WTO in any politically
sensitive dealings with Taiwan. But pressure is bound to grow on Taiwan to
grant China, which joined the WTO three weeks ago, the same privileges as
its other trading partners, all of which can freely use Taiwan's ports and
airports. President Chen Shui-bian of Taiwan has said he would like talks
with China on the three links. The difficulty is that China insists that
Taiwan must accept in advance the principle that only one China exists, and
that Taiwan is part of it. Mr Chen refuses.
Taiwanese officials predict the island's economy will grow by over 2% this
year, after shrinking by about 2% in 2001. But the recovery will be hard to
sustain unless the island can restructure its economy by moving
manufacturing offshore to exploit cheap labour and land elsewhere-such as
China-and developing new strengths in areas such as services and research
and development. "The mainland is catching up. So Taiwan must upgrade
quickly," says the economics minister, Lin Hsin-i.
Having strengthened his political mandate in the parliamentary elections
held on December 1st, Mr Chen says he is turning his attention to the
economy. To do so effectively, he will need to go against the instincts of
some of his Democratic Progressive Party's Chinaphobic members and break
down barriers to closer economic ties with the mainland. In July his own
deputy, Vice-President Annette Lu, remarked that China's efforts to attract
Taiwanese business were intended to "increase its economic clout against
Taiwan to complement its military intimidation."
Many in Taiwan say that opening up to China is exacerbating unemployment,
which reached a record 4.5% last year. In the short term, WTO membership
will make matters worse. Officials predict the loss of another 20,000 jobs
in the first 12 months, mainly in agriculture, as Taiwan lowers import
barriers.
Mr Chen, however, seems to be moving in the right direction, encouraged by
business and the relatively pro-China opposition. His government now accepts
that protecting increasingly uncompetitive industries could push Taiwan into
long-term decline. Mr Chen convened a cross-party forum in August and backed
its view that a freer flow of trade across the Strait would help Taiwan
restructure and encourage the repatriation of profits.
At the August forum, Mr Chen accepted that the previous "go slow, be
 patient" policy towards investment in China should be replaced by one of
"active opening, effective management". Since then, Taiwan has allowed
offshore banking units of Taiwanese banks to deal directly with their
mainland counterparts. It has also lifted a ban on certain high-tech
mainland production, such as notebook computers, mobile phones and DVD
players. These changes will not necessary lead to more new investment. Many
companies had been flouting the restrictions anyway. But they amount to an
admission by Taiwan that closer integration with China is inevitable.
WTO membership will also help Taiwan make needed economic changes at home.
The island's ailing banking sector needs a serious shake-up to resist the
onslaught of foreign competition. Bad loans rose to another record high at
the end of September, amounting to nearly 8% of the total, according to the
Ministry of Finance. Some experts say the real figure could be twice as
high. In recent months the government has forced the takeover of insolvent
financial institutions and taken steps to encourage consolidation of
Taiwan's fragmented financial-services industry.
But Taiwan needs more of the mainland's money. The Taiwanese government,
citing reasons of economic security, remains reluctant to allow extensive
Chinese investment in Taiwan, although the restrictions are expected to be
eased a bit now that both are WTO members. From January 1st Taiwan began
accepting mainland tourists for the first time in 50 years-but only those
living in third countries. Last week a cabinet committee decided to renew
for another year the island's year-old experiment with "mini-direct links"
between the tiny offshore islands of Quemoy and Matsu and mainland China.
Links with the main island of Taiwan are not yet on the cards. But both
countries' economies need them.

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