Taiwan’s China Dilemma: Contested Identities and Multiple Interests in Taiwan’s Cross-Strait Economic Policy

By Syaru Shirley Lin

China and Taiwan share one of the world's most complex international relationships. Although similar cultures and economic interests promoted an explosion of economic ties between them since the late 1980s, these ties have not led to an improved political relationship, let alone progress toward the unification that both governments once claimed to seek. In addition, Taiwan's recent Sunflower Movement succeeded in obstructing deeper economic ties with China. Why has Taiwan's policy toward China been so inconsistent?

Taiwan's China Dilemma explains the divergence between the development of economic and political relations across the Taiwan Strait through the interplay of national identity and economic interests. Using primary sources, opinion surveys, and interviews with Taiwanese opinion leaders, Syaru Shirley Lin paints a vivid picture of one of the most unsettled and dangerous relationships in the contemporary world, and illustrates the growing backlash against economic liberalization and regional economic integration around the world.

• Language: English
• Publisher: Stanford University Press
• Release date: Jun 29, 2016
• ISBN: 9780804799300

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Library of Congress Cataloging-in-Publication Data

Names: Lin, Syaru Shirley, author.

Title: Taiwan’s China dilemma : contested identities and multiple interests in Taiwan’s cross-strait economic policy / Syaru Shirley Lin.

Description: Stanford, California : Stanford University Press, 2016. | Includes bibliographical references and index.

Identifiers: LCCN 2015041885 (print) | LCCN 2015048007 (ebook) | ISBN 9780804796651 (cloth : alk. paper) | ISBN 9780804799287 (pbk. : alk paper) | ISBN 9780804799300 (ebook)

Subjects: LCSH: Taiwan—Foreign economic relations—China. | China—Foreign economic relations—Taiwan. | Nationalism—Taiwan. | Taiwan—Economic policy—1975–

Classification: LCC HF1606.Z4 C653 2016 (print) | LCC HF1606.Z4 (ebook) | DDC 337.51249051—dc23

LC record available at http://lccn.loc.gov/2015041885

TAIWAN’S CHINA DILEMMA

Contested Identities and Multiple Interests in Taiwan’s Cross-Strait Economic Policy

Syaru Shirley Lin

Stanford University Press

Stanford, California

Publication of this book was supported by generous grants from The Epoch Foundation and The Fubon Cultural and Educational Foundation

In loving memory of Stacey Kuo

October 7, 2002–December 22, 2010

Contents

Interviews

Abbreviations

Acknowledgments

Preface

1. Introduction

2. Conceptual Framework

3. No Haste: The 1996 National Development Conference

4. Active Opening, Effective Management: The 2001 Economic Development Advisory Conference

5. Active Management, Effective Opening: The 2006 Conference on Sustaining Taiwan’s Economic Development

6. Prosper Again: The 2008–2010 Campaign for the ECFA

7. Conclusions

Appendix: Sources Related to Public Opinion Surveys and Polls on Taiwan

Notes

References

Index

Interviews

Note: For personal names, the spelling most commonly used or preferred by the individual in question is used. Chinese names usually appear in the order of last name followed by first name. For place names, the most commonly accepted form is used, usually the spelling preferred by the ROC government.

List of Interviewees (in alphabetical order by surname), with Interview Location and Date

Emile M. P. Chang, acting executive secretary, Investment Commission, Ministry of Economic Affairs; Taipei, June 27, 2014

Chang Jung-feng, vice president, Chung-Hua Institution for Economic Research; former advisor, National Security Council; Taipei, June 18, 2008

Morris Chang, CEO, Taiwan Semiconductor Manufacturing Co., Taipei, April 3, 2009

Richard Chang, CEO, Semiconductor Manufacturing International Corp.; Shanghai, January 4, 2008

Chang Sheng-han, member, National Taiwan University Labor Union; student participant in Wild Strawberry and Sunflower Movements; Taipei, June 28, 2014

Chao Chien-min, deputy CEO, Foundation on International and Cross-Strait Studies; professor, Chengchi University; Taipei, August 17, 2006

Henry Chen, chairman, MassMutual Mercuries Life Insurance; Taipei, July 12, 2009

Sean Chen, chairman, Financial Supervisory Commission; Taipei, April 3, 2009

Chiang Pin-kung, chairman, Straits Exchange Foundation; former head of Council for Economic Planning and Development; Taipei, April 9, 2009

Chiu Chui-cheng, assistant professor, National Kinmen University; former staff member, Mainland Affairs Council; Taipei, June 18, 2008

Fan Yun, professor, National Taiwan University; Taipei, April 2, 2009

Fu Don-cheng, deputy minister, Mainland Affairs Council; Taipei, April 3, 2009

Earle Ho, CEO, Tung-Ho Steel Enterprise; former chairman, Chinese National Federation of Industries; Taipei, April 2, 2009

Ho Mei-yueh, former minister, Ministry of Economic Affairs; former chairwoman, Council for Economic Planning and Development; Taipei, July 30, 2008

Paul S. P. Hsu, founding chairman, Epoch Foundation; Taipei, August 11, 2007

Hsu Wen-fu (also known as Khou Bunhu), member and officer, Taiwan Association of University Professors and Taiwan Engineers Association; Taipei, July 29, 2008

Hu Chung-ying, deputy minister, Council for Economic Planning and Development; Taipei, April 7, 2009

Huang Shou-ta, member, National Taiwan University Labor Union; student participant in Wild Strawberry and Sunflower Movements; Taipei, June 28, 2014

Huang Tien-lin, former national policy advisor to President Chen Shui-bian; Taipei, July 30, 2008

Stan Hung, CEO, United Microelectronics Corp.; Taipei, April 3, 2009

King Pu-tsung, representative, Taipei Economic and Cultural Representative Office in the United States; former secretary-general, Kuomintang; Washington, DC, December 20, 2012

Edward Ku, general counsel, Yue Yuen Industrial Holdings; Hong Kong, November 29, 2007

Kung Min-hsin, director, Taiwan Institute of Economic Research; Taipei, August 15, 2007

Jimmy Lai, CEO, Next Media Group; Hong Kong, June 23, 2009 Lee Jin-yi, CEO, Fubon Bank (Hong Kong); Hong Kong, August 28, 2009

Lin Yi-hsiung, former chairman, Democratic Progressive Party; Taipei, April 1, 2009

Tsai Horng-ming, former senior advisor, National Security Council; former deputy secretary-general, Chinese National Federation of Industries; Taipei, July 31, 2008

Robert Tsao, honorary chairman, United Microelectronics Corp.; Taipei, April 3, 2009

Tseng Chao-yuan, CEO, Awakening Foundation; Taipei, April 2, 2009

Tung Chen-yuan, former deputy minister, Mainland Affairs Council; Taipei, August 15, 2007

Richard Vuylsteke, former chairman, American Chamber of Commerce in Taiwan; Hong Kong, May 26, 2009

Gerald Warburg, former vice president, Cassidy & Associates; Charlottesville, VA, December 18, 2012

Jaushieh Joseph Wu, secretary-general, Democratic Progressive Party; former chairman, Mainland Affairs Council; Taipei, June 27, 2014

Wu Rong-i, chief executive, Taiwan Brain Trust; former president, Taiwan Institute of Economic Research; Taipei, October 25, 2011

Yang Chao, chief editor, The Journalist; Hong Kong, July 24, 2009

Jeff Yang, director general, Bureau of Hong Kong Affairs, Mainland Affairs Council; Hong Kong, July 23, 2008

Yang Yi-feng, director, National Teachers’ Association of the Republic of China; Taipei, June 17, 2008

Yen Cheung Kuang, director general, Taipei Economic and Cultural Office (Hong Kong); Hong Kong, June 19, 2014

You Mei-nu, legislator Democratic Progressive Party; Taipei, November 28, 2014

Yufu (pen name of Lin Kuei-you), former producer, TVBS and Sanlih Entertainment Television; political commentator; Taipei, April 1, 2009, and Hong Kong, July 19, 2014

Abbreviations

Acknowledgments

Writing a book and teaching university classes while raising a family and keeping up with business obligations has been a challenge like no other I have ever experienced. The four parts of my life ran at different speeds: the decadelong timeline of a major research project, the semester-to-semester pace of teaching undergraduate and graduate students, the quarter-to-quarter responsibilities of corporate board service, and the minute-to-minute demands of my daughters rushing to school, attending gymnastics meets, and practicing the piano. I was able to sustain this multitrack journey because of my family. My grandmothers taught me the importance of hard work, initiative, and endurance. They epitomized the indomitable spirit of generations of Taiwanese who came to the island from different places and fought to create a modern community with democratic values. My father taught me the importance of learning and independent thinking ever since I was a young girl growing up in authoritarian Taiwan. My mother’s unwavering support gave me the confidence that I could complete any task I set my mind to. My loving daughters, Stefani the writer, Samantha the designer, and Stacey the artist, managed to accept my busy schedule for so many years, all the while stimulating me with their writing and artwork. Our home seemed like a dorm, with all four of us attending school and sharing the joy of creative work.

The opportunity to take up this second career was also made possible by the encouragement of my siblings—Suzette, Susan, Tom—and wonderful friends who tolerated my periods of seclusion while writing in Hong Kong, New York, Charlottesville, and Washington.

I would not have begun this research had it not been for Professors Richard Hu and Hsin-chi Kuan, both of whom believed that everyone should follow his own path and reach her own conclusions. Professors Wu Nai-teh and Leng Tse-kang and my mentors Paul Hsu and Miron Mushkat gave me invaluable advice. My friends Viviane Lee, Vic Li, Edy Liu, and Jerry Yang were generous with their assistance and support during my research. Geoffrey Burn of Stanford University Press patiently waited for the completion of my manuscript, and several reviewers and editors greatly improved the quality and clarity of my work. Teaching courses on international political economy and cross-Strait relations in Hong Kong and the United States strengthened my desire to continue my research and complete the book. My students from around the world motivated me in innumerable ways, as did my colleagues at the Chinese University of Hong Kong and the University of Virginia. I owe much of my understanding of Taiwanese society to all the people I interviewed over the years, many of whom gave me hours of their precious time and offered insights that extended far beyond what the academic literature and journalistic accounts had provided.

This book’s publication was supported by the Epoch Foundation and the Fubon Cultural and Educational Foundation. Both of these organizations are working to improve education and career opportunities for Taiwanese students and encourage research on a dynamic and multicultural Taiwanese society. It is a community where so many people are dedicated to improving the lives of others.

The greatest part of any discovery often is the companionship. No one can be a more rigorous critic and exuberant cheerleader than Harry, who made the intellectual and emotional journey of writing this book all the more satisfying. Being able to share so many of my personal and intellectual interests with Harry has given me great joy.

Finally, this book is dedicated to my irrepressible Stacey. Coming home from school every afternoon, she would quietly peek into the study and ask, How’s the book? She showered me with beautiful works of art throughout her short life, from notes and sketches to large collages and oil paintings. Stacey’s optimism that hope, love, and peace would change the world continues to inspire me every day.

Preface

As an erstwhile social studies major at Harvard, I became fascinated by the question of why some developing countries had successfully shaped their economic futures while others had not. That early interest in different patterns of economic development was reinforced by my experience in privatization and foreign investment, where I saw national economic policies at work during the early years of China’s reform and opening. In 1993, during the Koo-Wang talks in Singapore, the first meeting between Chinese and Taiwanese leaders since 1949, I volunteered as a translator for Taiwanese nongovernment organizations while I was working on the privatization of Singapore Telecom. I saw firsthand how cross-Strait negotiations might be conducted and how long and difficult they would be. My subsequent participation in making early-stage technology investments in companies such as Alibaba, Sina, and SMIC enabled me to see how Taiwan’s cross-Strait economic policy affected Taiwanese investments in China.

When I left finance to take up research and writing, I therefore had a very clear idea about both the topic I wanted to research and the analytic framework I would employ. The puzzle was one I had seen frequently in business: Why was Taiwan’s policy toward China so inconsistent and so seemingly irrational? Initially, I believed economic logic alone would explain the alternation between economic liberalization and restriction that had occurred repeatedly during the more than two decades covered in this book. Liberalization appeared inevitable as Taiwan integrated economically with a dynamic neighbor with a similar culture. By contrast, domestic groups that were losing out from interdependence with China would predictably try to exert political pressure to limit those losses through protectionism. Both perspectives, whether focusing on the irresistible attraction of economic integration or the unavoidable backlash against globalization, seemed to provide compelling accounts of the political economic basis of each policy.

Drawing on years of business experience across the Strait, I set out to prove that the oscillation in Taiwan’s economic policy toward China was driven by rational calculation of economic interest. But after a few years, I realized that purely economic analysis and rational choice methodology overlooked many of the important changes occurring in Taiwan’s society and could not fully explain the twists and turns in Taiwan’s policy toward China.

I came to understand that although economic variables were important, they must be part of a more comprehensive analysis that includes factors beyond material interests, such as national identity. National identity had often been described as a kind of false consciousness that prevented a rational assessment of economic interest. That interpretation, however, was not supported by the numerous interviews I had with opinion leaders in Taiwan, or by my own observations in business. Reviewing the scholarly literature on identity and on economic interests, examining additional primary sources, and conducting interviews with Taiwanese leaders, analysts, and businesspeople finally led me to the answer that had eluded me for so long: economic interests and national identity were not mutually exclusive, but combined to shape Taiwanese preferences on economic relations with China. I found that Taiwan’s cross-Strait economic policy oscillated because the controversy over policy was linked to an underlying debate over national identity.

I hope this book will give readers the opportunity to appreciate a common challenge faced by many countries today, although to varying degrees: in an increasingly globalized world, as the need to integrate with the international economy grows, so does the desire to maintain a distinctive identity with one’s own values. Taiwan is not the first example of a society coping with this dilemma, and will not be the last.

1

Introduction

Small countries with large neighbors can face powerful military threats or irresistible market forces. China presents Taiwan with both simultaneously.¹ Taiwan faces a rare dilemma in that its most important economic partner is also an existential threat, politically and economically. Its prosperity depends on its economic interdependence with China, now the world’s second-largest economy. But China explicitly intends to undermine Taiwan’s sovereignty and to achieve unification. China not only seeks beneficial economic relations with Taiwan, but also sees them as a way of promoting unification. It has drawn on its burgeoning economic resources to invest in its military capabilities, deploying advanced fighters and medium-range ballistic missiles, more than a thousand of which are aimed at Taiwan. Most importantly, China continues to threaten to use force to prevent Taiwan from declaring independence and has never renounced the use of force to promote unification.

Commercial ties with China therefore pose both challenges and opportunities for Taiwan that are qualitatively different from those presented by any other country; to Taiwan, China is both extremely attractive and uniquely dangerous. The dilemma is obvious: cross-Strait economic ties will carry many benefits, but they will also produce growing economic dependence on a country that is threatening to incorporate Taiwan, possibly by force.

Understandably, Taiwan has responded inconsistently to these contradictory pressures. Overall, it has lowered barriers to trade and investment across the Taiwan Strait; more than a million Taiwanese are now estimated to work and live in China and Taiwanese investments in China and two-way trade with China have both exceeded $130 billion. However, the evolution of Taiwan’s cross-Strait economic policies has not been smooth and continuous; it has been characterized by liberalization at some times and restriction at others. Until very recently, Taiwan banned direct shipping and air, postal, and telecommunications links with China.

Taiwan began allowing direct investment into China in 1991, taking advantage of China’s 1979 decision to set up special economic zones. But in 1994, in an early policy reversal, the Taiwan government started encouraging investment to flow toward Southeast Asia and away from China. Two years later, the government instituted formal restrictions on large-scale and strategic investments in China with the No Haste policy. In 2001, the newly elected Democratic Progressive Party (DPP) government replaced the No Haste with a policy of Active Opening, which liberalized some aspects of cross-Strait economic relations, only to reverse course again in 2006 by adopting the more restrictive policy of Active Management. In 2008, the Kuomintang (KMT) returned to liberalization by establishing regular and direct air links between Taiwan and China and relaxing previous restrictions on investment in China. It also conducted negotiations on an Economic Cooperation Framework Agreement (ECFA), a preferential trade agreement with China ultimately signed in 2010. But as of 2014, Taiwanese direct investment projects in China still needed case-by-case approval if they involved sums of more than $50 million or restricted industries or products. Furthermore, Taiwanese companies were allowed to invest only a maximum of 60 percent of their net worth into China. A trade in services agreement, a follow-on to the ECFA, even led to the largest sustained public protest in many decades.

This pattern of controversy and oscillation calls into question the prevailing explanations for economic relations between nations. Some scholars believe external or structural factors to be particularly important in explaining small states’ foreign economic policies (Rosenau 1966). And the external pressures on Taiwan all point in the direction of liberalization, not restriction or even oscillation. Taiwan’s security guarantor, the United States, has made clear its desire for cross-Strait stability through more economic cooperation. China has likewise used generous economic incentives to encourage liberalization. In addition, the general process of globalization has also produced pressure for liberalization, especially given the natural complementarity between the two economies. Most countries in Asia and elsewhere have relied on China for low-cost labor, primarily for manufacturing; Taiwan has done so more than others, given its geographic proximity, cultural similarities and export orientation. In addition, the world is vying to export goods and services to China’s vast domestic market and growing middle class; Taiwan’s service industry is particularly well positioned to meet such demands as well. Given these structural characteristics of the contemporary global economy, it would be reasonable to expect Taiwan to be compelled to liberalize far more than to restrict.

Other scholars focus on domestic political pressures exerted by the interest groups that have emerged in a newly pluralistic society seeking to maximize their economic gain. Taiwan’s political process has become democratic since the mid-1980s, with highly competitive local and national elections virtually every year, often centering on Taiwan’s policy toward China. This approach would focus on the two main competing political parties in Taiwan: the KMT, which is seen as pro-unification, and the DPP, viewed as pro-independence. It would be plausible to predict that a DPP government would therefore adopt more restrictive economic policies toward China and that a KMT government would liberalize those restrictions. However, both the KMT and the DPP have championed liberalizing cross-Strait economic policies in some periods and restricting them in others. During the period covered in this book, there has been little correlation between the identity of the party in power and the content of cross-Strait policy. The oscillation has occurred regardless of which party has held the presidency.

The main purpose of this study is to offer a better perspective on Taiwan’s choice of economic policy toward China, especially its oscillation between liberalization and restriction, than can be provided by either of these familiar approaches. Some of the fundamental forces shaping Taiwan’s oscillating policy history actually echo similar changes in other countries. Diverging from forecasts of ever-closer economic integration among trade and investment partners, globalization has actually been accompanied by the resurgence of populism, labor movements, demands for greater economic equality, and quests for economic stability at the expense of liberalizing trade and investment policy (Garrett 1998). Local forces driven by divergent identities and interests are countering the forces of political and economic integration. In short, markets are global but politics are national—and therefore trade and investment policies are often more restrictive or more inconsistent than pure economic logic or structural pressures would predict.

The tension between economic growth and other values is more apparent all around the world; Taiwan’s dilemma is distinctive because of the combination of existential threat and economic benefit in its relations with China. In this book, I argue that national identity provides the missing key to understanding the oscillation in Taiwan’s cross-Strait economic policy. Identity is the foundation on which a community prioritizes its collective interests and formulates economic policy toward other communities. When that foundation is weak and identity is contested, prioritizing interests becomes difficult and policy may fluctuate from one extreme to another, as has happened in Taiwan. When the foundation is more consolidated and identity is uncontested, policy may still be debated among groups with differing economic outlooks and priorities, but the range of policies under consideration becomes more limited even if the intensity of the discussion remains high. This, too, has been the pattern in recent years in Taiwan.

Development of Cross-Strait Economic Relations

Taiwan’s economy is now structurally much more reliant on China, both as a market and as a manufacturing base, than it has ever been on any other country. Economic relations between Taiwan and China, including both trade and investment flows, have increased dramatically over the last two decades, as shown in Table 1.1.

Approved Taiwanese investment in China went from a negligible amount in 1991, when it was first allowed, to a cumulative total of $144 billion as of year end 2014, exceeding the combined total of Taiwan’s outbound investments to all other countries (Fig. 1.1).² Unofficial estimates are several multiples of the recorded approved amount. Since China began to liberalize its economy, Taiwan has always been one of its top sources of foreign direct investment (FDI), whether estimated by Beijing or Taipei. Indeed, many would claim that Taiwan is by far the leading FDI investor in China, since much of the FDI attributed to Hong Kong, the Cayman Islands, and the British Virgin Islands has actually come from Taiwan. Estimates that include investments transferred through third countries are likely to be more than double the official figures. Moreover, few doubt that, if policies were more liberal, the total investment amount would be even higher.³

TABLE 1.1. Cross-Strait Economic Statistics, 1990–2014.

Sources: 1. For PRC GDP and growth rate, see International Monetary Fund, http://www.imf.org/external/pubs/ft/weo/2013/02/weodata/weoselgr.aspx; data for 2013 and 2014 are estimates. For ROC GDP and growth rate, see Directorate of Budget, Accounting and Statistics for ROC data, http://eng.stat.gov.tw/mp.asp?mp=5; 2014 data are preliminary.

2. All trade data from Taiwan Institute of Economic Research, Cross-Strait Economic Statistics Monthly, no. 263, http://www.mac.gov.tw/ct.asp?xItem=111110&ctNode=5934&mp=3.

3. All FDI data from Investment Commission, MOEA, http://www.moeaic.gov.tw/; also available from Cross-Strait Economic Statistics Monthly. Includes values of previously unreported investments that were added onto totals originally reported for 1993, 1997, 1998 and all years after 2002.

FIGURE 1.1. Taiwan’s Cumulative Outbound FDI to the World and to China, 1990–2014 (US$ billion)

Source: FDI data from Investment Commission, MOEA; also available from Cross-Strait Economic Statistics Monthly. Includes values of previously unreported investments that were added onto totals originally reported.

As for trade, two-way flows between China and Taiwan reached $130 billion in 2014, representing 22 percent of Taiwan’s total foreign trade and up to 30 percent if trade through Hong Kong is included (Fig. 1.2). Since 1999, China has replaced the United States as Taiwan’s top export market.⁴ Taiwan’s exports to China have grown dramatically since 1990, from none to 26 percent ($82 billion) of Taiwan’s total exports in 2014, or nearly 40 percent if Hong Kong is included. Similarly, China has been the only country from which imports have consistently risen every year from 1996 onward. In 2006, China became Taiwan’s second-most-important source of imports after Japan, and since 2014 China has become the leading source of Taiwan’s imports, reaching $48 billion or 18 percent of the total (BOFT 2014).

The increase in cross-Strait interdependence reflected in these trends has three characteristics. First, the relationship is focused primarily on long-term capital investment, rather than trade. Up to 85 percent of Taiwan’s information and communication technology exports are manufactured outside of Taiwan—mainly in China—as part of a vertically integrated supply chain. These investments in China are therefore an integral part of many global Taiwanese companies’ strategy and cannot easily be relocated once they have been made. This is a very different pattern from commodity trade, where alternative sources can be found if one country can no longer supply a certain commodity.

A second characteristic is the qualitative change in the type of Taiwanese trade and investment. Initially, Taiwanese invested in export-oriented factories, often relocating factories previously situated on Taiwan. However, Taiwanese companies and entrepreneurs in China, known as Taishang, now want to sell their finished products in China, one of the fastest-growing domestic markets in the world. Making the products in China for the Chinese market gives the manufacturer a just in time advantage—as well as a cost advantage—over exports from Taiwan. In addition to components and raw materials, a large amount of the most advanced technology and machinery for these factories, especially for Taishang in the technology sector, is imported from Taiwan.

Third, Taiwan’s most competitive sectors also are moving parts of their operations to China, not just companies seeking low labor costs. The migration of low-value-added and labor-intensive assembly business, starting in the mid-1990s, initially gave Taiwanese the impression that opening up to China would mainly hollow out Taiwan’s sunset industries. Early on, however, it became clear that many of Taiwan’s most advanced companies were going to China in order to stay competitive. Electronic parts, computer components, and optical products, considered Taiwan’s leading industries and the backbone of its economy, continued to be at the top of the list of industries investing in China.⁵

FIGURE 1.2. Taiwan’s Trade with China, 1990–2014 (US$ billion)

Source: All trade data from Taiwan Institute of Economic Research, Cross-Strait Economic Statistics Monthly.

As a result, economic interdependence with China has become unavoidable if Taiwan wishes to continue to reap the benefit of a growing global economy. China’s economic opening has restructured the regional and the global economies; it has become the factory of the world and, importantly, one of the world’s largest consumer markets. China has become an integral part of the global supply chain and the most important economic engine for Asia and the world. Therefore, Taiwan has very few alternatives if it wishes to diversify its outbound investments and trade flows away from China in order to hedge against economic and political risks. Taiwan’s main competitors, from Korea and Japan to Thailand and Indonesia, have all become dependent on investing in and trading with China. As an economy dependent on trade, which represents more than 100 percent of its GDP, Taiwan cannot be an exception.

The changing economic balance between China and the United States has also shifted Taiwan’s economic activities away from the latter and toward the former. Whereas China and Hong Kong constituted nearly 30 percent of Taiwan’s total trade and nearly 40 percent of Taiwan’s exports in 2014, the United States, which constituted 24 percent twenty years before, now represented only 11 percent of Taiwan’s total trade and exports (BOFT 2014).

A final implication is that the economic balance of power between Taiwan and China has shifted dramatically, again in China’s favor. At the beginning, Taiwan’s investments and subsequent trade were extremely important for China. Taiwan was unique in its interest in China, especially after the 1989 Tiananmen crisis, when many multinational firms reduced their presence. Taiwanese companies expanded their global manufacturing capability by providing the capital, technology, and marketing that could leverage China’s low-cost labor. When cross-Strait trade and investment began, Taiwan was growing faster than China. This changed in 1991. Between 1990 and 2014, China’s GDP grew more than twenty-fivefold, whereas Taiwan’s grew by only three times (Fig. 1.3). In 1990, China’s economy was only a little more than twice the size of Taiwan’s, despite the huge discrepancy in population, whereas in 2014 China’s was more than eighteen times larger (Table 1.1). In terms of FDI, China has become one of the world’s leading investment destinations, reaching the top position in the world for inbound investment in 2003 and attracting nearly $124 billion of FDI in 2013 compared with Taiwan’s inflow of less than $4 billion.⁶ Foreign trade also shows great disparity, with China’s global trade exceeding Taiwan’s by more than seven times in 2014 (TIER 2015). Taiwan’s comparative advantage relative to China has continued to erode, as demonstrated by the decline of Taiwan’s share of China’s total trade to only 3 percent by 2014.⁷ In short, China has become a global economic powerhouse with a far more diversified international trade and investor base than Taiwan’s.

FIGURE 1.3. Comparison of the GDP of Taiwan and China, 1990–2014 (US$ billion)

Source: For PRC GDP and growth rate, see International Monetary Fund; data for 2013 and 2014 are estimates. For ROC GDP and growth rate, see Directorate of Budget, Accounting and