(Archived document, may contain errors)

No. 121 March 18,1992

STRAIT TALIUNG: MEAT SMVES . AMERICAN MERESTS AS TIES ACROSS THE TAIWAN STRAIT EVOLVE

DURODUCTION

"No contact, no negotiations, no compromise."

With this triptych of negation, the Republic of China on Taiwan (ROQ has tried to seal itself from its mainland communist enemies for four decades. But times pass, gen- erations 6hange-and eVen c'oihrriWsts eventually promote economic reform. These days, those three standard of denial-Taipei's so-called "Three Noes"-increasingly seem like an ancestral heirloom M- a modern Chinese home: respected as the filial leg- acy of departed patrons, but rapidly anomalous amid'bright new decor. Taipei still chants the slogan, but qu'ilifiers echd ever more loudly. No contact? Since late 1087, every month some 15,000 Chinese from Taiwan avail themselves of eased travel restrictions to the mainland, bearing with them several bil- lion dollars of foreign exchange. Taiwan tourists have overtaken the Great Wall. ROC journalists cover the motherland without restriction from Taipei. There even is a boom in cross-Strait romance, as Taiwan travel' agencids,offer the island's eligible bachelors $2,500, seven-day matchmaking trips to the mainland. No negotiations? Maybe not across th@jable. But Taipei did dispatch an official del- egation to Beijing for a May 1989 Asian bevelopment Bank meeting. The ROC's Inter- national Telecommunications Agency this past November solicited and received an in- p vitation to a Beijing briefing for potential investors into the Japan-mainland China sea- bed cable now under construction. And both sides have established non-governmental institutions to manage the flood of private knd unofficial contacts across the Taiwan

I See "Looking for Love Amu thi Straits," Asiaweek. January 24,1992, p. 30.

Strait: Taipei's Strait Exchange Foundation was established on November 26, 1990, and Beijing's Association for Relations Across the Taiwan Strait (ARATS) opened for business this past December 16. After some compromise, each plans to locate private offices in the other's capital. No ConWromise? Taipei's ultimate fear in having any truck with the communists has been that any "compromise" between the island and the continental communist be- hemoth might be construed as concession. Yet look where events are heading. In cheery indifference to officialdom on both sides of the Strait, the mainland and Taiwan are being commercially stitched together ever more tightly. A ban on direct trade scarcely stopped some $7 billion worth of raw materials and assorted products from passing through Hong Kong last year, the majority destined for the approximately 3,000 ROC-owned factories in China's southern provinces. The trade links have multiplied so fast, in fact, that talk of a so-called "Greater Chi- nese Economic Zone" lured mom than 100 academics, industrialists, and politicians from the mainland and Taiwan to a d=-day January symposium in Hong Kong. Noted S.F. Lee, one of five ROC legislators to attend the conference: "The most im- portant thing is to reduce the political interference to cooperation on both sides.',2 Bold StrokeL Although the eventual shape of any cross-Strait comity remains to be seen, its outlines are being drafted now, with increasingly faster and bolder strokes. It is in Washington's interest that the process of reconciliation, however haphazard and informal, continue. But it also is a process that is best determined by the Chinese themselves. In such light@ the current American policy of noninvolvement toward China's reunification best serves U.S. interests and should be maintained. American policy makers should applaud any moves to relax tensions across the Taiwan Strait, but should not pressure either side toward reconciliation. Taiwan's future relationship with the mainland hence is for the Chinese to decide. The U.S. should insist only that it be decided peacefully.

MOLDING BRIDGES ACROSS THE TAIWAN STRAIT

No more than five years ago, when mainland Chinese wanted to see their capitalist brethren in Taiwan, they had to climb a steep hill in Xiamen, a city along the coast of Fujian province, and, for about twenty cents a minute, peer through a powerful tele- scope trained on the enemy-held territory across the I 00-mile-wide Taiwan Strait. Today, it's easier. Indeed, in Xiamen, and all across Fujian province, the Chinese from Taiwan have landed. Making the most of relaxed attitudes at home and China's desperate need for investment and foreign exchange, over one million people have crossed the Taiwan Strait to tour, visit relatives, and most important, invest.

2 hfichael Duckworth, "Political Differences Cloud Prospects for Greater Chinese Economic Zone," The Asian Wall Street Journal Weekly, January 27. 1992, p. 3. Take, for instance, the ....... story of Chen Han-fu. This Beijing ...........

.............. ............. ............ 42-year-old president of the .... ... ... ................ . ............................. .. ..... .... New Asia Jewelry Company .................. ...............

.... .. . ... ............ ....... shut his factory in Taiwan PEOPLE'S .... ................ and moved his family and ........ . .. .......... ..... .......... ...... ........... ........................................ business to Xiamen from REPUBLIC Shanghai .......... Taipei in 1987 to make sea- .... ........................ ............. shell and jade trinkets. OF ....... .. ......... . ....... .. .. .. ......... ............. ...................... Today, Chen speculates in Fuzh ............

...................... ..................... land in Xiamen. "High labor CHINA ................... ............ ....... .... costs initially drove me xi n .................... .......... ........... .... .......... hem," he told The Heritage Shan U . ......... Foundation last October. . . ......... .... .. ...

................................ ....................... ...... ... . ........ . ..... ............................. . ....................... "But now I hire some 150 ............................. KONG .......................................... ... .................... ................... workers at about $40 a month-just one-thirtieth Taiwan Investment Dollars Flow into China my Taiwan costs. With the 600 Miles I ----i savings, I buy land here in M Areas of Heavy Taiwanese Investment Xiamen, watch its value S Special Economic Zones daily rise, @ I I nice profit."fri deal it for a That such activity takes place in the People's Republic of China is revealing: some parts of the mainland are today more capitalist than communist. "Socialist China doesn't sell its land," clarifies one Xiamen city official, "but Xiamen does sell so- called 'land-use rights' and purchasers can resell those rights." He then adds: "Ibe pro- 9A cess attracts foreigners and accounts for much of our growth. He speaks the truth. In 1985, Xiamen was a dead city, with one foreign-owned fac- tory and no street lights. Today, units in a high-rise office block still going up in the middle of town have been sold so quickly that the ROC developer never had to draw down die loan he had arranged with a Hong Kong bank to finance it.5 Peaceftd Invasion. In one of the post-Cold War's great ironies, the small, break- away island of Taiwan, whose anti-communist Chinese rulers once devised plans for militarily retaking the mainland, now is launching a peaceful invasion that is helping prop up China's ailing socialist economy. Even when tourist revenue and foreign in- vestment plummeted in the wake of Beijing's 1989 political upheaval following the Tiananmen Square Massacre, the flood from Taiwan continued to surge. Observed a foreign diplomat in Beijing: "Taiwan no longer tries to forcefully recover the main- land. It tries to buy it back.',6

3 Conversation in China, October, 1991. Chen Han-fu also was featured in Adi Ignatius, "Going Home," The Wall Street Journal, August 2,1990, p. Al. 4 Conversations in China, October 199 1. 5 "Mm South China Miracle," The Economist, October 5,1991, p. 19. 6 Discmions in Beijing, May 1990. Ile low-tech and labor intensive ROC businesses that for years produced the clothes, shoes, and toys that carried the famous "Made in Taiwan" label are a case in point. Four decades of spectacular economic growth helped push the average income of Taiwan's some 21 million people to more than $10,000, one of the highest levels in Asia. And it pushed the ROC's foreign exchange reserves to about $82 billion, the world's largest reserve. But the runaway development and new-found wealth also led to steep land prices on Taiwan, rising labor costs and a strong local currency. The re- sult: some of the industrial prosperity radiated outward, particularly toward a cheap China. Today, under the tutelage of entrepreneurs from Taiwan, goods once produced in the ROC increasingly are turned out by mainland Chinese. Cornnion Language and Culture. That the some 28 million mainland Chinese of neighboring Fujian province would become the focus of ROC commercial interests should come as no surprise. Most everyone on both sides of the Strait speaks the regionally predominant Minnanhua Chinese dialect. And local family connections, strained since 1949, when the Nationalist Chinese fled the mainland to set up a govern- ment in Taipei, remain strong. But where common language and culture make doing business on mainland China easy, market forces make doing business there irresistible. The example of Chen Han- fu is illustrative: for most ROC entrepreneurs, the mainland's twin lures of land and labor are too promising to pass up. For one thing, land is cheap. A Taipei businessman tells The Heritage Foundation that a square meter of land in some parts of Fujian can be rented for 35 cents a year on a 70-year lease. In Taiwan, the square meter can run a thousand times higher. For another thing, the average factory wage in Fujian is less than $800 a year, about one-tenth the rate in Taipei. "And it's quality labor, too," observes Kayser Sung, the publisher of Texdle Asia. "Friends with factories all over Asia say that Thailand and Malaysia just cannot compare with China. If you want high grade products and quick delivery, you go to the mainland.',7 Enterprising Mainland. Almost $3 billion of ROC investment in the mainland, some by Taiwan's most prestigious businesses, confirms Sung"s observation. The Hualon Group, one of the ROC's leading textile manufacturers, operates one of Shanghai's leading garment factories. Shihlin Electric and Engineering Corporation, a large Taipei-based producer of heavy electrical equipment and auto parts, sells trans- formers to-Beijing factories. President Enterprises Incorporated, the ROC's largest food manufacturer, grows tomatoes for ketchup in China's far western Xinjiang prov- ince, along the border with Kazakhstan. Some 70 percent of the Nan Ya Plastic Corporation's output of polyvinyl chloride sheeting and almost 90 percent of its poly- urethane production is sold to Hong Kong companies that ship it to China. Meanwhile, Nan Ya's parent corporation, the Formosa Plastics Group, conducts environmental studies for a spate of future projects in Fujian. Some 8 percent of the petrochemical giant's output already heads for the mainland. And its founder and Taiwan's most suc-

7 "AsWs Emerging Economies," The Economist, November 16,1991, p. 12. cessful entrepreneur, Wang Yung-ching, even has toyed with the idea of setting up a $7 billion petwhemical complex in Xiamen. The understandable consequence of such enterprise is that business booms across the Taiwan Strait. Cloth, machinery, electronics, chemical fiber, and raw materials for chemical industries constitute the principal Chinese mainland imports from Taiwan. The mainland exports large amounts of coal, petroleum, cotton, and minerals like mer- cury, tin, and tungsten to Taiwan. Traditional Chinese medicinal herbs and animal and plant products used in Chinese art supplies many of which can only be found on the mainland, also do brisk business in TaipO Obviously, the formal ban on direct dealings scarcely impedes indirect trade be- tween the mainland and Taiwan. Expanding at an average of 40 percent a year each of the past four years, trade through Hong Kong between the mainland and Taiwan unof- ficially reached $7 billion last year. In 1979, ROC trade with China accounted for less than one quarter of one percent, or some $80 million, of Taiwan's $31 billion trade . 9 pie. Now it is 5 percent of $138 billion-and growing. Taipei Concems. Equally star- tUmg is the fact that the ROC's $2.8 billion trade surplus with China in the first ten months of Indirect Trade Ties Between Taiwan, 1991 represents nearly one-third Mainland China Boomed in 19809 of the $9 billion global surplus Willone of Current I.I.B. Dollars chalked up by the island over that period. Under normal cir- Taipei cumstances, such a competitive edge in trade would delight most governments. But this trade 1111411- boom actually troubles some in Taipei. The reason: it could cre- 64- Now Koas XXX ate a commercial dependence on ........... 43- the mainland that one day might ..... ....... .. make Taipei a hostage to the old 62- men in Beijing. The Taiwan Insti- .......... tute for Economic Rese=h, a -X. ............... government think tank, predicts so the mainland's share of IM 1982 111164 111111116 sea 'NOOVIS Taiwan's exports in 1992 will ex- 10 Taiwan Exports = Taiwan Imports ceed 10 percent. At this level, UUMN& says the Institute, Beijing would Nobb Totals represent trade conducted throUgh Hong Kong. be in a position to derail the 1111169resi Ministry of Economic Affairs, Taipei: The Economist. ROC's economy by ap I ing Heritage Datachart sudden trade sanctions.

8 See blitchell A. Silk, "Special Report: China-Taiwan Commercial Links," The China Business Review, September-Ocuber 1990, p. 32. 9 Statistics provided by ROC and PRC governments. See also "China's Snare," The Economist, January 4, 1992, p. 30. Such lamentations, however, fall on deaf ears in the island's business community. "Why buy coal from Indonesia or Australia, when I can get it from China at a fraction of the price?" a manager of a brickworks in central Taiwan recently told the Economist magazine. The Economist, in fact reports that of the top twenty items coming into Tai- wan from the mainland, fifteen have not been approved by the ROC's Board of For- eign Trade and thus compete directly with Taiwan's own products. The ROC officially allows only 164 items, mostly foodstuffs and industrial raw materials, to be imported from China.

TAJ1PEI9S POLICY OF CONSTRUCTIVE ENGAGEMENT

The enthusiasm for the renewed contacts is not easily contained on either side of the Strait. When proposals to set up free-trade zones (FrZ) along Taiwan's west coast for mainland trade recently surfaced in the ROC press, the idea, though quickly shunned by official Taipei, gained immediate favor among local politicians, shippers, and busi- nessmen not only on Taiwan but also on the mainland. In an FT7, Chinese traders would agree to eliminate restrictions, such as tariffs, that impede free trade. ROC ship- pers happily identified Taichung harbor on Taiwan's west coast as an ideal FIZ pros- pect. Mainland businessmen meanwhile suggested Meizhou Bay just south of Fuzhou in Fujian province. "If it were ever allowed," a senior executive at Evergreen Marine Company recently observed, "direct shipping via an FrZ @ould reduce costs up to fifty percent simply because it would avoid Hong Kong." I The growing trade links obviously are giving rise to ideas and expectations once con- sidered heretical in the region. The links also are challenging some hallowed truths. Principal among them for the Chinese of Taiwan may be the notion that the govern- ment in Taipei is really the sole legitimate government of all China, temporarily pre- vented from exercising its authority by a communist rebellion. Foreigners, in fact, who speak of Taiwan as an independent country separate from China rather than as a prov- ince of China are still chided by ROC government officials for their ignorance. Dramatic Action. But the notion that there is a communist rebellion was officially ended by ROC President Lee Teng-hui on April 30, 199 1. He ended the so-called Pe- riod of Mobilization for Suppression of the Communist Rebellion which had been de- clared in 1948. Lee's dramatic action signified the ROC's desire to formally halt the state of cold war across the Taiwan Strait that began in 1949 when communist forces drove then-ROC President Chiang Kai-shek and his government from the mainland into their island enclave. Taipei's rulers now recognize what few ever doubted: that the Middle Kingdom, in- divisible motherland though it may be, has been divided politically since 1949 into thirty poor communist-ruled provinces and one Nationalist-ruled province that has be- come rich and successful-Taiwan.

10 Ibid. 11 Ibid. 12 Conversations in Taipei and Taichung, March 1990 and October 1992. Also see Julian Baum, "Strait Expectations," Far Eastern Econondc ReWew, June 6.1991, p. 40. Lee's ending the state of war with the communists has caused problems for Taipei's ruling elite. Debate has arisen among some government officials and intellectuals about accepting dual recognition of Taipei and Beijing and acknowledging the reality of the long forbidden expression "the two Chinas." By casting relations across the Tai- wan Strait roughly in the same light as those between East and West Germany from 1945 to 1990, advocates contend that the one state/two governments approach is the only way that Taipei can break its diplomatic isolation. Today, only 29 countries have formal diplomatic ties with the ROC. Even more troubling for Taipei has been the opposition Democratic Progressive Party's (DPP) call for an independent Republic of Taiwan. Inspired, in part, by the break-up of the Soviet empire, DPP candidates ran for office in the December 21 Na- tional Assembly election on a platform that adv%ated Taiwan's independence. The DPP won 24 percent of the vote in that election. I Alarm in Beijing. Beijing, whose communist rulers share with their Nationalist Tai- pei counterparts the conviction that Taiwan and the mainland belong together, watches all this with growing alarm. Beijing has said that it will use force to stop Taiwan from becoming independent. In recent months it repeatedly has warned the Nationalist gov- ernment to silence the calls for independence. In early October, mainland China's Pres- ident Yang Shangkun bluntly threatened: "Those who play with fire will be burned to ashes."14 But what surely scares the old guard in Beijing the most is Taipei's amazing success. Unlike the mainland, the ROC is an example of a dictatorship that grew up. Even the harshest critics of Taipei's political past readily acknowledge that the island's authori- tarian concentration of power is being diluted rapidly under the influence of a success- ful, market-based economy. "China has 4,000, maybe 5,000 years of history, but it has never had an era like Taiwan today:' observes the renowned Chinese social critic Bo Yang, who once spent a decade in a Taiwan prison for promoting democracy in the ROC. 'Mere has never been a time when [the Chinese] @e ple were so wealthy or so free. Living conditions are so great!... It is a golden age. 5 In the past few years alone, the ROC's leadership has permitted the formation of new political parties, freed the press, relaxed foreign exchange controls, allowed strikes and the formation of unions, and lifted all bans on its citizens' travel. Measured even against the frantic change of 199 I's global democratic revolution, the speed of Taiwan's passage into democracy is equaled by few countries. And none have so suc- cessfully combined their political miracles with economic ones. Inescapable Taiwan. For Chinese on either side of the Taiwan Strait, it is this mix- ture of economic and political miracles that matters most. "It used to be laughable to think of Taiwan as a beacon of hope for the mainland," recently observed a mainland Chinese academic in conversations with The Heritage Foundation. "But that proposi-

13 Public Opinion and the Mainland Policy, October 1991, Mainland Affairs Council, The Executive Yuan, Taipei, ROC. Government polls indicated that 12 percent of the ROC populace approved Taiwan's independence. 14 See Renndn Ribao, October 3, 1991, in Foreign Broadcast Information SerWce (FBIS), October 20,1991, pp. 31-32. 15 Nicholas D. Kristof, "A Dictatorship That Grew Up," The New York Times Magazine, February 16,1992, p. 16.tion is no longer a fantasy. You go to the Great Wall and all you see are well dressed Chinese finom Taiwan. You go to any mainland hotel, and it is filled with successful Chinesg businessmen from Taipei. Their freedom and prosperity simply is inescap- 610.991 Inescapable as well is the force of the Taiwan example. In southern China, local offi- cials seem to measure their progress against Taiwan's 7 percent annual growth rate and 1.4 percent unemployment. When one Xiamen city official recently was asked about Taipei's plans to spend $300 billion over the next six years on infrastructural projects ranging fiun highways, railroads and subways to power plants and sewage systems, he succinctly responded: "Awesome.',17 Studying Taipei's Example. There also is growing, though understandably dis- creet, interest among some mainland officials in Taipei's experience in making the tran- sition from an authoritarian system, in which bureaucrats hold sway over the economy, to a more freewheeling, less regulated system. Taipei's ruling Kuomintang, while and- communist, for years built its power on Leninist principles of dictatorship and party or- ganization. For some mainlanders, particularly governing officials on China's economi- cally booming east coast, Taiwan is a worldng example of how communist China might transform itself into a market economy based on small enterprises. It is mainland China's transformation into a successful, market-oriented economy that immediately is most important to Taipei. Like the other so-called Asian "miracle" economies of Singapore or South Korea, the Chinese from Taiwan well know that eco- nomic freedom leads to political freedom. A dedication to free markets and trade in- creases prosperity; prosperity diffuses economic power and thus challenges dictatorial authority. This then brings popular demands for democracy. So, where possible, Taipei encourages its entrepreneurs to do business with their mainland counterparts. It does so because it knows that the mainland, for all its fits and starts, is committed irreversibly to economic reform. China's economy simply is out- growing communism, even if China's leaders are not. There are no models of success- ful centrally planned economies anywhere; China's economy will never again be com- manded from Beijing. Instead, Taipei-like the rest of Asia-is betting that economic reform will continue spontaneously to rise through local initiatives in provinces and special economic zones, like Fujian and Xiamen. Reinforced by a cross-pollination of ideas and wealth among the people who work there, the Chinese thus naturally will draw together. And the local government the mainlanders will be most eager to listen to will be the prov- ince of Taiwan.

16 Conversations in Hong Kong, October 199 1. 17 Conversations in China, October-November 199 1. CMA9S REUNIFICATION AND U.S. POLICY

The implicit message from Taipei to Washington thus is clear: Where possible, let China grow. Treat Beijing in as hard-headed a manner as a good Shanghai business- man, but keep in place policies of constructive engagement. It is absurd for the United States to put obstacles in the way of rapprochement. This especially is so if that rapprochement is between Taipei and Beijing. Though the situation between the two sides of the Taiwan Strait has not, and likely will not, M main static, American policy, for now, should remain constant. Meaning: The pace and content of reunification should be determined by the Chinese themselves, free of out- side pressure. Washington should insist only that the issue of China's future be decided peacefully. And this has been American policy for two decades. The U.S. wisely has disclaimed a role in China's reunification and left the matter to the Chinese to decide. Consider- able evidence suggests that this policy of noninvolvement has been sound and remains so. For one thing, the policy allows Washington simultaneously to pursue constructive relations both with Beijing and Taipei. American businessmen actively trade with and invest in both the mainland and Taiwan. The U.S. did some $25 billion worth of busi- ness with mainland China last year and some $36 billion with the ROC. Almost 80,000 Chinese students and scholars from both sides of the Taiwan Strait, meanwhile, routinely meet on U.S. campuses and in American research institutions. For another thing, the policy is both firm in principle and flexible enough to respond to threatening security changes in the Taiwan Strait. By insisting that American inter- ests are tied to a peaceful settlement of the differences between Beijing and Taipei, the U.S. deters China's proclaimed option to use force to resolve the issue of Taiwan's fu- ture. In such light, the Bush Administration should reaffirm those American assurances that Taipei sees as essential to defend its interests. Specifically, Washington must con- .tinue to uphold strictly the 1979 Taiwan Relations Act (TRA). Comniltment to Taipei. For decades, as the ROC has feared invasion from the mainland, American support has been key in ensuring the island's security. From 1954 until 1979, Washington gave Taipei almost $4 billion in military aid and stationed some 3,700 American troops under the terms of the 1954 U.S.-ROC Mutual Security Treaty. When Jimmy Carter unilaterally renounced this treaty, the Senate on April 10, 1979, enacted and forced Carter to accept the Taiwan Relations Act. Under it, though no U.S. forces remain on Taiwan, Washington is committed to assisting Taipei in main- taining its defense against possible threats from mainland China. Moreover, the TRA makes clear that the U.S. decision "to establish diplomatic rela- tions with the People's Republic of China rests upon the expectation that the future of Taiwan will be determined by peaceful means." States the TRA: "It is the policy of the United States to maintain the capacity ... to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people of Taiwan."13