The basis of the socialist economic system of the People's Republic of China is socialist public ownership of the means of production, namely, ownership by the whole people and collective ownership by the working people. Article 6 – 1982 PRC Constitution
National economy shall be based on the Principle of People's Livelihood and shall seek to effect equalization of land ownership and restriction of private capital in order to attain a well-balanced sufficiency in national wealth and people's livelihood.
The timing and manner of China's unification should first respect the rights and interests of the people in the Taiwan area, and protect their security and welfare. It should be achieved in gradual phases under the principles of reason, peace, parity, and reciprocity.
While the political factor examined in Chapter 2 is a divisive force in Taiwan-China relations, the economic factor brings the two sides together. Trade and investment between Taiwan and China is exploding. Economic interdependence can serve as a positive dynamic to help prevent the use of violence that would be disastrous to both sides. The question is: Can economics be the deciding factor over political and security considerations in determining the overall relationship? In this chapter I will answer the following questions: Do ideological differences (capitalism versus socialism) contribute to the conflict? What is the scope and pace of the economic relationship between Taiwan and China? To what extent does economic interchange contribute to or create frictions in ongoing negotiations between the two sides?
After Deng Xiaoping changed China’s direction in 1978, economic policies became increasingly pragmatic and incorporated many features of a capitalist economy. Although China officially calls its economy “Socialism with Chinese Characteristics,” a case can be made that most of the economy is now more capitalist than socialist. As a result there are now few differences of economic ideology between China and Taiwan. There is and will continue to be major differences in perceptions about how various trade and investment laws of each country should be implemented, but the underlying ideology is not a major obstacle to better relations.
The critical importance of China’s 1978 transformation, changing the principal societal task from “class struggle” to “economic modernization,” required a major focus on the economic part of the ideology. China’s economy was, and still is, Marxist. But within Communist ideology there is a phenomenon, known as Hegel’s dialectic reasoning process, which allows the adaptation of the ideology to fit changing real-world circumstances.217That makes the ideologyvery dynamic.
This method of reasoning allows Chinese leaders to be orthodox Communists and adapt their ideology any way. They usually explain this process by saying they are adapting the propositions of Marx and Lenin to "Chinese conditions." After all, Marxism was conceived as a critique of political and economic conditions in 19th Century Industrial Europe and the conditions were not the same in 20th Century rural China.
The 1982 PRC Constitution sums up the economic system well when it says in Article 6:
The basis of the socialist economic system of the People's Republic of China is socialist public ownership of the means of production, namely, ownership by the whole people and collective ownership by the working people.
This is a major change from the 1954 PRC Constitution which identified four categories of property ownership: (1) state, (2) co-operative, (3) individual working people and (4) capitalist. The 1954 Constitution was written before the major collectivization and communization programs of the 1950's and 1960’s when the latter two were deleted as legal means of property ownership.
Before 1978 China’s economy was a Soviet-style highly centralized, planned and controlled command economy. Nearly all economic activity was nationalized and under the control of the Communist Party through the government apparatus. Industrial and agricultural production at all levels was determined by central planning and prices were fixed. Economic policies in the 1950s started out with success and China began to recover from over one hundred years of violent warfare -- from the Opium Wars (1842) to World War II and the Chinese Civil War (1949). In the 1950s Mao’s policies eliminated the landlords and turned the land over to those who worked the land. But as he began to tighten the government’s grip on the economy with disastrous policies, especially the Great Leap Forward and the movement from cooperative farms to communes, the economy stagnated. The land that was given to the farmers was taken back by the state. National economic priorities focused on heavy industry at the expense of other sectors including agriculture. The economy was also isolated from the world economy under the slogan of “self-reliance.”218
Central planning was, and still is to a certain extent, an important feature of China’s socialist system. Many Chinese leaders believe in strong centralized planning. There are a large number of national-level bureaucratic organizations designed to gather data, prepare plans, promulgate plans and monitor the implementation of plans. That means there is an attempt to coordinate all levels and all aspects of the economy so that it will move forward at what they perceive to be a reasonable and controlled rate.
There are at least four reasons for the belief that there is a need for strong centralized planning:
(1) elitist beliefs, (2) growth equality, (3) major national projects possible, and (4) diverse
First is the elitist belief that there are experts at the top who understand economics at the micro and macro levels better than anyone else in the society and that they should determine the direction of economic development. Part of this belief is that in the opposite of a "command economy", a "laissez-faire economy," economic decisions would lead to chaotic development of the economy and unequal development which would include man's exploitation of man.
The second reason for centralized planning is the belief that with centralized planning the economy can be developed without major inequities. For example, it is possible to control development so that some sectors do not get rich too quickly or at the expense of other sectors. Urban areas cannot get rich at the expense of rural areas or coastal areas cannot get rich at the expense of inland areas. The strong impulse of equality pervades all the thinking. In conventional Communist thinking, unequal development is a major problem that must be avoided even if it comes at the expense of overall development.
The third reason for centralized planning is that it allows major infrastructure projects to be developed. The macro view allows the development of large dams, irrigation systems and transportation systems that cross province boundaries.
The fourth reason is to assure that various diverse industries are coordinated properly. There is a severe competition for resources and according to those who promote centralized planning; there must be someone above them all to assure equitable distribution.
One of the problems with the first reason, or assumption, about centralized planning, is that few experts agree. Even in China key economic theoreticians do not agree with the ideal solutions for economic problems. But the big problem in socialist economies seems to have been that they are just too idealistic and that they remove incentive for work. There is also a strong tendency to push all decisions to the top or at least to the next higher level, thus absolving the basic unit of responsibility if things don't work out. This also stifles creativity or taking of initiative.
In other words, they create bureaucratic and systemic problems that outweigh the problems of market economies. This debate will continue in China. It is likely to be a perpetual element of the debate within the Communist Party. There are always going to be people who believe they know the ideal solution for the society.... economic or political.
During the pre-1978 Mao period, workers were pre assigned earned work points from the government based on their physical capabilities. A large strong man would receive 10 points and a weak woman might receive only 2 points. It was assumed that they would contribute based upon their physical capability. It didn't matter how much they worked, they received the same number of points, because they were pre assigned. The work points were important because they were used to obtain food, clothing, and the necessities of life. There was no incentive for extra work and most workers, agricultural or industrial, worked as little as possible to get by. The economy slowed almost to a standstill, food and light industrial products had to be rationed, and it became clear that the Marxist policies would have to evolve if China were to survive.
After Deng gained control, economic policies took an abrupt turn and the reforms began in the countryside as did the original communist revolution. Most of the reforms included ideas, like free markets, in the countryside, which could be construed as capitalist in nature. Over time new economic policies, a synthesis of Deng’s ideas and those of China’s economic theoretician, Chen Yun, began to allow market-determined prices and more choices for the peasants in agricultural production and marketing. New policies also allowed the progressive elimination of restrictions on peasant trade and business enterprises. A household contracting system, called the “household responsibility system,” replaced collectivization and that allowed the peasants to produce certain amounts for the state, but they could produce more and sell some of their production on their own. This effectively eliminated government power over the deployment of peasant labor and gave the peasants new sources of income over which the cadres had no control. In the Household Responsibility System the farmers signed a contract with the Government.
They leased the land from the Government with the promise to produce and sell certain commodities to the Government at fixed prices. They could then use the land or excess land for their own purposes -- to grow goods for private free markets.
Under the new policies peasants were also given the right to determine what to grow and sell in the private markets. In fact, diversification was encouraged. They could also develop side-line industries, beyond just doing their job for the state. The State also raised procurement prices so the peasants got more for their crops.
Finally, in various types of responsibility systems, income was more closely linked to production, even for goods produced for the State -- the more production the higher the reward. This was a radical departure from the past.
What is important is that as a result of the reforms, China made major strides in the rural sector in the early 1980's. Peasant incomes on average more than doubled and the number of peasants living in poverty was reduced drastically. Helped by good weather, there was a major surge in grain production; so much that by 1984 there was an excess and storage capacity was exceeded. By 1985 China was able to abolish the mandatory grain production quotas that were in existence. Another important result of the reforms was that unemployment and under- employment was reduced in major proportions.
The process was not without problems. In the mid 1980s, the government began to squeeze the peasant farmers to recover from a recession. Some authors use the term “price scissors.”219That is: the prices for the farmer’s cost of production (seeds, fertilizer, water, energy, etc.) went up rapidly at the same time the prices the farmer received for his crops began to increase more slowly as the government tried to control inflation to protect urban workers from inflation. The government also began to levy new taxes at this time. The farmers then, had been exhorted to get rich by the government and had in fact been given a taste of making money and accumulating money. But now his profits were being cut severely. At times the government even paid the farmers with IOU’s that could not be used to purchase consumer goods or buy materials for building new homes.
In the urban industrial sector economic policies also changed step by step by allowing more forms of small collective ownership, privatization of an increasing number of enterprises, and ultimately the development of a stock market. There are generally three types of enterprise ownership: state, collective and individual. State enterprises are those owned and run by the government. Collective enterprises are the shops in rural or urban areas that are run by a private group of people and all contribute part of the labor. Individual is as it sounds.
The most important evolution in the urban economy has been the privatization of “state- owned enterprises.” This effort comes under the rubric of “restructuring the economy” and adapting “Socialism to Chinese Characteristics. ”Seventeen guidelines were published for this activity and they reveal a great deal about the extent to which China is moving toward capitalism:220These guidelines are very revealing about the boundaries that are being debated. They indicate that the government wants to maintain control over key industries (number 7) that they consider to be critical to the economy. These would include utilities, natural resources and defense industries. At the same time they want to develop new forms of ownership that will allow cooperatives or even private ownership over medium- and small- sized enterprises that are not considered essential to the national economy. The guidelines also reveal the intent to maintain control over institutions (number 9) that can control theeconomy using macro economic tools such as the financial institutions. Finally, the guidelines
describe an early effort to include new methods to handle other economic issues by borrowing from
some capitalist ideas such as work incentives, competition, organizational effectiveness, bankruptcy,
role of market forces, and allowing returns on investment equity as opposed to work production.
While there is a desire to maintain public or government ownership of key parts of the economy,
these new guidelines allow the development of a private economy governed by market forces side
by side. It is an attempt to evolve Marxist socialism by maintaining enough public ownership to be
able to still call the system socialist, but to allow enough capitalism in to make the economy more
efficient. The combination can be called “Socialism with Chinese Characteristics.”
Public ownership of the means of production or the land is one of the major distinctions between socialism and capitalism. In China the state or collective has maintained absolute ownership of the land.221Although the government has maintained ownership it has begun to issue multi- year leases that are legally extendable, inheritable and even sellable.
In addition to Article 6 the 1982 Constitution includes other articles that clarify government ownership:
Article 9 also provides a basis for state ownership:
All mineral resources, waters, forests, mountains, grasslands, unreclaimed land, beaches, and other natural resources are owned by the state, that is, by the whole people, with the exception of the forest, mountains, grasslands and unreclaimed land and beaches that are owned by collectives in accordance with the law.
Article 10 makes land ownership clear:
Land in cities is owned by the state.
Land in the rural and suburban areas is owned by collectives except for those portions which belong to the state in accordance with the law; house sites and privately farmed plots of cropland and hilly land are also owned by collectives.
The state may, in the public interest, requisition land for its use in accordance with the law.
No organization or individual may appropriate, buy, sell or lease land or otherwise engage in the transfer of land by unlawful means.
All organizations and individuals using land must ensure its rational use.
Article 13 outlines just what can be privately owned:
The state protects the right of citizens to own lawfully earne income, savings, houses and other lawful property.
The state protects according to law the right of citizens to inherit private property
The conservative leaders had Article 17 of the Constitution to fall back on:
Collective economic organizations have decision-making power in conducting independent economic activities on condition that they accept the guidance of the state plan and abide by relevant laws.
The first part of this sentence makes it appear as though there is movement toward capitalism
because it appears as though the government might relinquish some decision-making authority... but it
is carefully circumscribed by the last half of the sentence.
When we review the 17 guidelines we do not find any indication that the government is likely to relinquish any ownership of the means of production. Rather it is being strengthened. There was some talk about that, under some circumstances, before Tiananmen, but Li Peng's 1990 speech ignores the topic totally. He recognized that there has been some accumulation of wealth when he discussed the need to level income distribution and avoid the development of a rich-poor gap.
Even though there is a lot of talk in the 1998 Work Report about "rectifying the economic order and deepening the reform," the real meaning has to do with changing the degree of decentralization and using other administrative means to manipulate the economy and to improve the efficiency of state-owned enterprises.
In the 1990 Work Report, Li Peng highlighted the attempt to find some type of compromise between a planned economy and market regulation. That is not too different from the tasks now confronting the U.S. congress in determining what should be regulated and what should not.
The point is, however, that in China the ideological bias is toward regulation and in the U.S. it is toward deregulation. The Chinese system then is closer to the socialist end of the scale with tendencies toward the capitalist end and the US system is the opposite.
We also saw several references in the 1990 Li speech about reinforcing the basic understanding of Marxist principles by improving the basic education of values of the citizens, students and intellectuals. There was much less in the 1995 report. Now the focus is on Deng's Socialism with Chinese Characteristics.
The other side of the coin is the constant attack on what the Chinese perceive to be the real threat to their idea of socialism and that is bourgeois liberalism which is often interpreted to mean capitalist values.
So there are constant tugs and pulls along the economic axis. Both hardliners and reformers want to move down the line a bit but they differ in scope and pace of change.... and under the current leadership group there is a line drawn which precludes movement beyond the practices that are outlined in the Constitution; that is, there is still some opposition to allowing any change in the precept that the means of production can be owned by private citizens. There has been some movement, however, when they allow the means of production to be owned by collective enterprises. In December 2003, the PRC national legislature proposed an Amendment to the Constitution to allow the ownership of private property.222This represents a major change in thinking and is part of the overall effort to draw industrialists and entrepreneurs into the Communist Party under the slogan "Three Represents."
We can say then the PRC Constitution supports the socialist character of the People's Republic of China, but it is open to change by the Communist Party and is indeed moving in a more capitalist direction.
Taiwan’s economic system is solidly in the category of laissez-faire capitalism. It was not always that way. When the Kuomintang (KMT) took over Taiwan on October 25, 1945 (Retrocession Day), Taiwan had been ruled by the Japanese for 50 years as a colony. The Japanese had ruled harshly but had improved the island’s economic situation by building an infrastructure (roads, railroads, dams, etc.), developing agriculture, and introducing Taiwan to capitalist industrialization. 223While the essentials of a capitalist economy were in place, the large Japanese monopolistic conglomerates (zaibatsu) controlled key tracts of land including forests, large industries, banks, and trading companies. So although the system was capitalist, the economy was sublimated as a dependent colony and from a purely Taiwanese point of view, very similar to a socialist economy. It was an imperialistic exploitation of a colony in the strictest sense.
After the KMT arrived and took over from the Japanese all holdings of the Japanese government and conglomerates were confiscated and placed under KMT control. While Taiwan had sustained much damage just before the end of the War, some capital equipment and natural resources remained and most were presumably sent to China to help with Chiang Kai-shek’s war effort. Factories were dismantled and in general the industrial part of the economy was plundered. Some of the spoils of war ended up in the Shanghai warehouses of corrupt KMT officials. In any case, there was not much left and the entire economy was a shambles when the KMT government retreated to Taiwan in 1949.
The rebuilding process in Taiwan began in April 1949 when KMT General Chen Cheng initiated a land reform program that ultimately proved to be extremely successful. The land reform began by confiscating all the land owned by the Japanese government and large Taiwanese landowners. The landowners were compensated in kind (rice and sweet potatoes), which they could market, and with stock shares in four large government enterprises: Taiwan Cement, Taiwan Paper
and Pulp, Taiwan Agriculture and Forestry, and Taiwan Industry and Mining.224Some of the landlords didn’t trust the government and sold their shares below par value. It was a big mistake because the companies became very successful later on.
Although the KMT, through the government, controlled much of the economy at the beginning, most economic processes were purely capitalistic. In time the government-owned economic activities were privatized and investment capitalism thrived. The combination of a capitalist economy, support from international agencies, and enlightened policies (like import- substitution, export orientation, direct foreign investment, and export processing zones) led Taiwan to become one of the most dynamic economies in Asia.225It became known as one of the “Four Tigers” in Asia and its economy was described as an economic miracle.226
All aid to Taiwan ended in 1964, but it benefited from the Vietnam War in the late 1960s and early 1970s as a support base. By the 1970s, Taiwan was fully integrated into the international economy. At first the major trading partner by far was the United States, but eventually trade with Japan, Europe, Latin America, Africa and the Middle East became important. By 2001, Taiwan became the world's 14th largest exporter, 16th largest importer, and had the third largest foreign exchange reserves.227
Taiwan’s constitution also includes a number of articles that shed light on the ideological leaning of the economy. The articles show a clear bias in the direction of capitalism, but they also include points that show the collective concern of the government. That concern is similar to American anti- monopoly or social welfare safety net laws. The Constitution also provides a legal basis for government participation in critical parts of the economy such as control of utilities, natural resources, or financial institutions which if not managed could lead to a weakening of national security, too much influence by individuals over national commerce, or an unstable economic imbalance in the society. This is similar to American government regulating the telephone companies or utilities before deregulation and control of the Federal Reserve.
In addition to Article 142 noted in the opening of this chapter, parts of several other articles give a feel for Taiwan’s economic ideology.
Article 143. All land within the territory of the Republic of China shall belong to the whole body of citizens. Private ownership of land, acquired by the people in accordance with law, shall be protected and restricted by law. Privately-owned land shall be liable to taxation according to its value, and the Government may buy such land according to its value.
Mineral deposits which are embedded in the land, and natural power which may, for economic purpose, be utilized for public benefit shall belong to the State, regardless of the fact that private individuals many have acquired ownership over such land.
If the value of a piece of land has increased, not through the exertion of labor or the employment of capital, the State shall levy thereon an increment tax, the proceeds of which shall be enjoyed by the people in common.
In the distribution and readjustment of land, the State shall in principle assist self- farming land-owners and persons who make use of the land by themselves, and shall also regulate their appropriate areas of operation.
Article 144. Public utilities and other enterprises of a monopolistic nature shall, in principle, be under public operation. In cases permitted by law, they may be operated by private citizens.
Article 145. With respect to private wealth and privately operated enterprises, the State shall restrict them by law if they are deemed detrimental to a balanced development of national wealth and people's livelihood.
Cooperative enterprises shall receive encouragement and assistance from the State.
Private citizens' productive enterprises and foreign trade shall receive encouragement, guidance and protection from the State.
Article 148. Within the territory of the Republic of China, all goods shall be permitted to move freely from place to place.
Article 149. Financial institutions shall, in accordance with law, be subject to State control.
Article 150. The State shall extensively establish financial institutions for the common people, with a view to relieving unemployment.
Article 152. The State shall provide suitable opportunities for work to people whoare able to work.
Article 154. Capital and labor shall, in accordance with the principles of harmony and cooperation, promote productive enterprises. Conciliation and arbitration of disputes between capital and labor shall be prescribed by law.
Article 155. The State, in order to promote social welfare, shall establish a social insurance system. To the aged and the infirm who are unable to earn a living, and to victims of unusual calamities, the State shall give appropriate assistance and relief.
Taiwan’s economic ideology is clearly capitalist but it is farther along the capitalist – socialist spectrum toward socialism than that of the United States. It is closer to some of the European countries. This means a potential clash with China if and when the two economies were to be integrated, but as China continues to move toward the capitalist end of the spectrum the differences will not be as great as they once were. As China is now quick to point out, under the slogan of “one country two systems” 一国两制), Hong Kong, which is perhaps the most capitalistic of all capitalistic areas in the world, has now been economically integrated successfully into China.228From a Chinese perspective, the same formula will work for Taiwan and without much difficulty.
In today’s world of global interdependence the case of trade and investment between China and Taiwan is an excellent test of the international relations theories of convergence and functionalism.229While the two polities are on the brink of war, they have accommodated an remarkable amount of bilateral trade and investment. Generally the theories state that when countries come to depend on each other economically, the likelihood of war is much less. As economic exchanges are increased, the weight of the economic factor in national security decision- making will also increase.
During the 1950s, 1960s and most of the 1970s China and Taiwan were in a state of war. The active war was symbolized by artillery exchanges between China and the island of Jinmen (Quemoy)… every other day. After the U.S. recognition of China on January 1, 1979, China’s National People’s Congress issued a “Message to Compatriots in Taiwan” to try to normalize the relationship. As part of that gesture they ordered the shelling of Jinmen to cease on that same day. Taiwan, having gone through other periods of “united front” with the Communist leadership did not trust the overture. On April 4, Taiwan’s President, Chiang Ching-kuo, issued a steadfast “Three No’s Policy”: no contact, no negotiation and no compromise. This policy highlighted the standoff relationship between the two and continued the wartime policy that made any trade with China illegal.
Some trade between China and Taiwan began before it became legal. At first fishermen from both sides met in the Taiwan Strait and exchanged Chinese herbs for watches or music CDs. In the 1970s and early 1980s the trade increased as Taiwan began to use Hong Kong as an entrepôt. Later some of the more daring businessmen began to take ships directly between Taiwan and China and only send the manifests through Hong Kong for authentication.230During this period the trade was illegal, but both governments generally turned a blind eye. The islands of Jinmen and Mazu played an important role.
It is clear that, economically, Taiwan has much of what China needs and vice versa. Taiwan has scientific expertise, capital for investment and well-educated and experienced mid and senior level managers and those managers speak the language and understand the culture. China, on the other hand, has many of the natural resources and less expensive labor needed by Taiwan. Economic cooperation is in the interest of both sides.
The year 1987 was a major watershed year in the development of legitimate cross strait trade. The first step in the process began on May 18th of that year when Taiwan’s government issued a statement reiterating the Three No’s Policy, but noted that if goods sold to another area found their way to China it was not a problem.231Hong Kong then became a major transshipment
point. Later, in July the government allowed Taiwan citizens to travel to Hong Kong to meet with relatives from China. That was considered subversive before. Then on November 2, the government lifted a ban on travel to China by Taiwan citizens, except government workers, to visit relatives. These were major changes in the Taiwan government’s policies toward China and they resulted in the initial contacts that developed into trade relationships.
Two years later, 1989, saw the first visit by Taiwan’s government officials.232Mail routes and direct telephone calls also began.233In 1990 low level government workers and elected officials
were allowed to visit relatives on the Mainland. All of these changes in Taiwan’s policy laid a foundation for trade and investment to begin. Statistics for this period are not very accurate because many individuals found ways to travel that did not show up on government records. These numbers also include individuals who made multiple trips. Nonetheless they still show trends as well as a larger number of travelers between Taiwan and China than is generally realized. The number of Taiwan citizens who have traveled to China and been exposed to the Chinese environment is significant.
The important question is what does it mean that so many of Taiwan’s citizens have visited China? Before the visits began both sides had propagandized their respective populations about living conditions on the other side of the Taiwan Strait. Chinese genuinely believed the Taiwanese were being severely exploited by Americans and had to eat banana peels to survive. Taiwanese believed the Chinese lived under unbearable repression, wore rags, and were all starving to death. The visits have begun to change the views and attitudes about living conditions on the other side and establish the conditions for future business and political accommodation. They have also caused the propaganda machines on both sides to become ineffective or at least change their basic approach to propaganda. They could no longer, as both were doing, manufacture false descriptions of life on the other side.
Many of the visitors have been visiting family members from whom they were separated for over forty years, and most of those were simply tourists. By the end of 2007 the Mainland Affairs Council had sponsored 643 graduate students and 578 scholars to study, give lectures or do research in China.234The number of Chinese graduate students and scholars in Taiwan have been fewer.
Four other areas of cross strait contact contribute to changing attitudes and perceptions about the other side of the Strait and creating a better climate for economic activity: mail links, telephone links, remittances and cultural exchanges.
Taiwan’s Directorate General of Posts began processing regular mail from China on March 19, 1988 and to China on April 18, 1988. Registered mail was added in June 1993. By May, 2002 they had processed more than 81 million letters to China and nearly 128 million letters from China.235
Telephone communication between China and Taiwan, routed mostly through Hong Kong, began in June 1989. From that time until September 2007 more than 2.o billion calls (5.4 billion minutes) were made to Taiwan and more than 2.3 billion (9.2 billion minutes) were made to
China.236These figures would include faxes and other data transfers through telephone lines.
The scope of the contact is clear.
Remittances between China and Taiwan include monies sent to relatives to help support their living expenses or to help them establish a business. It also includes donations and other transfer payments. This category does not include money that was hand-carried and passed to relatives without registering it with either government. From May 21, 1990 to the end of September 2007, Taiwan citizens had remitted over 4.6 billion US dollars to China and from July 29, 1993 to September 2007 indirect business remittances to Taiwan reached $2.3 billion US dollars.237
In addition to these methods of contact the Mainland Affairs Council in Taiwan had sponsored or co-sponsored over 3,000 cultural exchanges by the end of 2007.238This included everything from sports and drama teams to art exhibits. It is another area in which the citizens of both sides are exposed to each other.
This data set indicates that the scope of contact that began after it was legalized in 1987 has generally increased annually and is now a major influence in cross strait calculations. At the least it has given a first-hand and much clearer picture of the other side than existed prior to 1987.>
The number of Taiwan citizens who have traveled to China just to do business is not known. It is known that many of the nearly 25 million visits, especially the repeat visits, were for purposes of seeking business opportunities, often with relatives in China. We will be able to obtain a better picture of the scope of business activity by examining trade and investment statistics.
By 2002, Taiwan was the fourth leading investor in China after Hong Kong, the United States and Japan. Unapproved individual investing began in the early 1980s with the influx of Taiwan’s citizen’s visiting relatives. By 1992 China issued “The Statute Governing Relations between Peoples of the Taiwan Area and Mainland Area.” The next year this was promulgated as “Guidelines Governing the Entry of People of the Taiwan Area into the Mainland Area.” These documents provided the legal basis for issuing special travel certificates in Hong Kong so the visitors would not have to have their passports stamped.239
Even before the legitimized travel between Taiwan and China, China had anticipated that Taiwan would be a source of investment capital. In 1993 they enacted the “Guidance on Taiwanese Investments in Special Economic Zones and Related Favorable Policies.” This initiated a series of official proclamations designed to attract investment from Taiwan. In July 1988 they issued the “Regulations for Encouraging Investment by Taiwan Compatriots” and in 1994 they wrote laws to protect investment by Taiwan’s companies.240
The first effort by the government in Taiwan to regulate investment in China occurred in October 1990. It issued the “Regulations on Indirect Investment or Technical Cooperation in the Mainland Area.”242The thrust of the Taiwan regulations was to narrow the approved types of
investment and attempt to prevent investment that would be used to in businesses that would compete with Taiwan’s companies or would lead to the transfer of technology that was considered sensitive for defense purposes or part of an industry in which Taiwan had a strategic or economic advantage. The initial 1990 list of approved investments included 3,353 products and by 1996 it had expanded to 4,895.243The investments approved by Taiwan were also limited in amount of investment. Projects requiring over one million New Taiwan Dollars (NT)(US $28,637) had to be approved by the government and over $50 million (US $1.43 million) were not permitted. While Taiwan’s government has tried to limit and control the investment into China, the entrepreneurs have found ways to circumvent nearly all the regulations.
The earliest investments were small and often included the transfer of factory capital equipment to China to take advantage of labor costs which were less in China. Another advantage was weaker environmental laws. This was especially popular in the production of shoes and clothing. Eventually Taiwan began to transfer capital equipment for the production of earlier generation computer or information technology products as well as food processing and chemicals.
Investment in China has been a divisive issue in Taiwan for the most modern elements of the economy.244The dilemma is simply whether it is better to invest in China, taking the capital and technologies to China where it may ultimately be lost or become competitive to Taiwan, or not take it to China and risk losing the great China market. There are also sub arguments of national security implications, etc., but the crux is how to invest for profit while not doing harm to the economic base in Taiwan. Two forces are pushing these decisions in the direction of more investment: (1) Taiwan's weakened economy and (2) World Trade Organization pressures to reduce trade barriers. In any case, moving advanced semiconductor manufacturing from Taiwan to China is an excellent case study.245It shows how the decisions in Taiwan are not purely based on the marketplace and that politics are important. It shows how in the long run a number of domestic constituencies will be placing pressures on the government for increased business activity with China. This case study shows how the process evolves, contracts, and evolves further in fits and starts. The clear direction though is in the direction of increased economic interdependence.
Taiwan’s contribution of capital was extremely useful for China. Not only did they send competent managers which were sparse in China, they were able to compete effectively with others who were considered real foreigners, like the Japanese, Americans and Europeans. Further the nearness of Taiwan and the language and cultural similarity, especially in Fujian, made it a natural and cost-effective fit.
As Figure 3-2 shows, according to China’s statistics, by the end of 2001, as many as 50,838 projects had been considered. The Taiwanese and Chinese had agreed to US $54.73 billion worth of contracts and US $29.14 billion had been realized. The amount of investment from Taiwan exceeded US $100 billion in the year 2000. 246Taiwan’s statistics, showing approved projects, were considerably less which suggests that a great deal of the activity was either not known by Taiwan’s government, but much of it was in the many small investments that were made of less than NT$ 1 million (US $28,637).
While originally most of the investments went to Fujian, in recent years investments have begun to spread throughout China. Guangdong (US$6.8 billion), out of Hong Kong and Jiangsu (US$7.3 billion), out of Shanghai has absorbed by far the most investment. These are also the most developed and economically mature areas in China.
The large amounts of investments throughout China begin to suggest economic interdependence. Individuals in China from those areas hold key positions in the national government in Beijing and they understand that armed conflict with Taiwan would have disastrous economic consequences for their respective areas. In some cases they or their families are actually business partners with some of the joint enterprises.
Taiwan businessmen have invested in everything from small restaurants to major factories. By 2002, approximately 50,000 Taiwan companies, employing millions of Chinese, had set up manufacturing businesses throughout China.248
Many of the factories are an extension of successful factories in Taiwan, but as the cost of labor increased in Taiwan they moved the capital equipment to the mainland to take advantage of the lower labor costs and avoid Taiwan’s more stringent environmental laws. Initially many of the factories were textile, shoes and sports equipment, but later the focus was on investment in electronic and information technologies. In fact, by 2002 nearly 60% of China’s information technology exports were from Taiwanese-owned companies.
Figure 3—4 Taiwan Investment in China by Industry -- 1991-2000249(in million US dollars and percentage)
Trade between Taiwan and China shows a growth pattern similar to travel and investment. In 2006 alone the trade volume was 91.3 billion.250China exported US $16.6 billion to Taiwan and Taiwan exported US $74.9 billion to China. Taiwan became the fourth largest trading partner of China after the United States, Japan, and Korea. China is the second most important export market for Taiwan and the largest source of a favorable trade balance.
Trade with Taiwan is heavily in favor of Taiwan and that is primarily due to Taiwan’s restrictions and concern that China will gain too much influence in Taiwan’s economy but it is also partially due to the nature of what is traded; what China needs from Taiwan versus what Taiwan needs from China.
Cross strait trade has been heavily in favor of Taiwan from the time official statistics began to be collected. Figure 3-6 shows the dramatic increase in trade over the period from 1990 to 2001. The sharpest increase in trade began in 1993. The total amount of exports to Taiwan remains low compared to exports to China. This creates a favorable balance of trade for Taiwan.
The tables above show a clear preponderance of economic movement from Taiwan to China rather than vice versa. Today the young people in Taiwan expect to find or make their fortune in China rather than in the United States where their parents were oriented. The Chinese government welcomes them, at a rate of nearly 10,000 a day, by creating as hospitable environment as possible.253
The Chinese government gives priority to infrastructure development in the areas where there is much Taiwanese investment. They even pass laws to protect Taiwanese investment. It has been estimated that by the year 2001 nearly 300,000 entrepreneurs from Taiwan had established businesses in China.254By the beginning of 2004 more than one million Taiwanese were considered residents of China and there were more than 200,000 cross strait marriages.255
The migration of so many business managers to China is best seen in the small city of Kunshan, just 50 kilometers outside of Shanghai, where there is a concentration of Taiwanese. The businesses in Kunshan closely resemble the shops, boutiques, pubs, karaokes and restaurants in Taiwan. In fact, Kunshan has been called “Little Taipei.” In another city, Dongguan, in Guangdong Province, a school has even been established for the families of the 40,000 Taiwanese who work there. The school brings teachers from Taiwan to teach the 775 students and generally keeps them isolated from the Chinese system. The effort was a partnership with monies contributed by Taiwan’s businessmen organizations and the Chinese government. Another school will be opened in Kunshan. Businessmen have even established hospitals in China.
Links and Mini Links
China and Taiwan agreed to open direct trade for the first time on January 1, 2001.256China and Taiwan agreed to open direct trade for the first time on January 1, 2001. The trade was restricted to the areas of the two offshore islands, Jinmen and Mazu. This was called the “Three Mini-Links.” Between January 1, 2001 and April 2005, the governments recorded 3034 crossings by Taiwanese ships from Jinmen and Mazu to China and 3404 Chinese ships to those islands from China. The mini links carried a total of 433,028 passengers.257The mini links were intended to help in the economic development of the offshore islands and to begin to build cooperative relationships between China and Taiwan. While the agreement took national security into account, it allowed the ships to travel back and forth without prior approval. Although encountering some problems, it was another step in the direction of increased economic contact.258
The next major step in direct links came at the beginning of 2003.259President Chen Shuibian, in an attempt to restart cross strait political negotiations attempted to get talks started on the non- political “three cross-strait direct links” which included: transport, trade and postal services. Even though Taiwan’s military was opposed to the direct transportation (ship and air) links, President Chen, under pressure from business men on both sides of the Strait, wanted this to be a reason for restarting the cross strait talks that were interrupted in July, 1999 (See Chapter 6 for details).260
China's Vice-Premier Qian Qichen, on October 17, 2002, suggested to a Taipei-based newspaper, the United Daily News, that direct air and shipping links between the two sides could be called "cross-Straits" instead of "domestic" as previously proposed. This showed a degree of flexibility on the part of the Chinese.261
On January 4, 2003 the two sides agreed to allow direct charter flights between Shanghai and Taipei for the Chinese New Year, but they would have to stop in Hong Kong or Macao.262
Over 1,700 passengers would fly on six Taiwan carriers between January 26th and February 10 th .263This represented another minor step toward opening the direct links and both sides hoped it would provide incentive to reopen the political talks.
The Mainland Affairs Council in Taiwan issued a major report on August 15, 2003 entitled "Assessment of the Impact of Direct Cross-Strait Transportation." The report concluded that the question of direct cross-strait transportation links is not a matter of "when", but a matter of "how." The MAC stated that Taiwan must make sure that the environment is appropriate and that the process be controlled. At the beginning of 2004 the MAC was considering different ways to establish direct air links to include the establishment of a no-fly zone on the west coast of Taiwan. All air traffic would have to divert to the North or South of the zone before entering Taiwan’s air space. This would allow Taiwan to track airplanes more carefully.
China's Taiwan Affairs Office also issued a major report on cross-strait links on December 17, 2003. It was entitled: China's Policy on 'Three Direct Links' Across the Taiwan Straits." This report primarily explains how China has been working to establish the links and that Taiwan authorities have been an obstacle.
The opening of direct transportation links is the next major step in the cross strait accommodation process. Since they are functional as opposed to political talks, both sides hope the pressures for direct transportation links will help to reopen the cross strait dialogue between Taiwan’s Straits Exchange Foundation and China’s Association for Relations across the Straits.
China, Taiwan and International Organizations
After replacing Taiwan in the United Nations in 1971, China began to play a stronger role in all international organizations. In cases where the international organization was made up of independent sovereign states, Taiwan either withdrew or was forced out. In some International Government Organizations (IGO) Taiwan was able to maintain membership as a separate entity, but not as the Republic of China.264Over the years the issue of membership for both China and Taiwan in IGOs or Non Governmental Organizations (NGO) became important to the cross strait issue. By the mid-1990s Taiwan initiated a strategy to expand its participation on the world stage to gain more flexibility in dealing with other countries, especially in the economic realm. They have developed tactics like petitioning for membership under the rubric of “one country two seats.” In the case of the UN there are precedents such as the Soviet Union and the Ukraine.
China’s policy has been to restrain these efforts because it had the appearance of moving toward or contributing to independence. Whenever Taiwan tries to join an organization, China examines the criterion for membership to make sure that it is not based on sovereignty or nation state status. In cases such as the United Nations, China has been in a position to block Taiwan’s membership.
Since Taiwan was relying on trade to expand its economy it needed to engage in economic activity all over the world. Its political status as a “non-state” made it difficult for businessmen to travel and created some uncertainty on the part of other country’s businessmen about potential contract enforcement problems.
By the year 2007 Taiwan had formal diplomatic relations with only 24 nations and had 140 representative offices in other countries.265Most diplomatic relations were with small countries in Central America and Pacific Oceania. Most representative offices were designed to facilitate trade and travel. While they maintain most of the functions of an embassy, they are still limited in their activity. They are not allowed to participate in normal “diplomatic functions.” An example is the Taipei Economic and Cultural Office in the US which even has the functional equivalent of consulates in other cities -- New York, Chicago, San Francisco and Houston. In addition, in the year 2007, Taiwan participated in 18 IGOs and 2000 international NGOs.266
One important economic IGO that both China and Taiwan joined at the same time, in 1991, was the Asia Pacific Economic Cooperation (APEC) forum. Membership was defined by being a “separate economy,” not as an independent country so Taiwan was permitted to join.267In fact, both sides regarded the APEC forum as a potentially useful place for senior officials to come into
contact to begin to discuss a cross strait settlement. China insisted, however, that Taiwan’s representative be a person who had an economic portfolio, not a politician who might advance the cause of Taiwan’s separate political identity. For example, when Taiwan tried to send former a vice president, Li Yuan-zu, to the Shanghai 9th APEC summit in October, 2001, China insisted that Taiwan replace him with an official with an economic portfolio. Taiwan decided to boycott the meeting.268In October 2002, Taiwan sent a former Nobel Prize winner and head of Taiwan’s Academica Sinica, Lee Yuan-tseh, who had met China’s President Jiang Zemin before.
The most important IGO membership came when China and Taiwan petitioned for and were accepted into the World Trade Organization. The basic guideline for both was that there could not be two representatives for all of “China.” China joined the World Trade Organization (WTO) on December 11, 2001 and Taiwan joined on January 1, 2002. The entry of China came after initial opposition and then the reaching of a bilateral agreement between China and the United States in November 1999. The entries of China and Taiwan into the WTO will have a significant impact not only on China and Taiwan’s trade with the rest of the world, but also on trade and investment between the two. The principal consequences of WTO membership will be to standardize economic activity and increase certainty and rationality in economic relationships by providing both sides with a third-party process for more formal consultations and dispute settlement.269
During the period just prior to entry Taiwan supported China’s petition and China supported Taiwan’s petition to join the WTO. China insisted that it enter first and that Taiwan enter as “The Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu.”270WTO rules allow for
other than independent countries to become members if the entity can show that it controls its trade policies.
Initially the United States was the primary obstacle to China’s joining the WTO. Some in the US wanted to block China’s entry as a means to maintain leverage on issues such as human rights, proliferation and unfair trade practices. The US business community lobbied to get the US to support Chinese membership believing it would help them to penetrate the huge China market. China would have to make major changes by lowering trade barriers, treat foreign firms as “national firms,” make its trade laws more transparent and involve the WTO in dispute resolution.271After many rounds of negotiation, the US and China reached an agreement on November 15, 1999.272That paved the way for China’s accession on November 11, 2001. Taiwan became a member on January 1, 2002.
Both China and Taiwan had to adjust their laws on international commerce to abide by WTO regulations. The adjustment regularized the economic relationship and set the stage for increased cross strait trade and investment. This is another forum in which Taiwan can communicate with China directly.
China’s accession to the WTO could also have an opposite effect. It has been suggested that once China is a member of the WTO some leaders will believe that the WTO could help China minimize any sanctions imposed by the United States and/or its allies in the event of a conflict over the Taiwan Strait.273
Taiwan’s efforts to participate in more and more international nongovernmental organizations and academic conferences provides additional opportunities for direct contact with representatives from China on specific issues, but the principle means of contact for discussing cross strait relations will continue to be the meetings between China’s Association for Relations Across the Taiwan Strait (ARATS) and Taiwan’s Strait Exchange Foundation (SEF). This series of meetings will be discussed in detail in Chapter 6.
While the statistics available on the economic relationship between China and Taiwan are probably not very accurate they do provide an indication of trends and to some extent the scope of the economic activity. It is clear that the scope is now extremely large and expanding at a rapid rate. There have been more than 28 million visits, including repeat visits, from Taiwan to the Mainland since 1990. That is more than the population of Taiwan. Travel to Taiwan from the Mainland has reached over 760,000 visits. Before 1987, authorized visits were almost nil. These figures are indicative of the changed environment.
Taiwan has made a major contribution to the economies of various local areas in China and that in turn gives them some influence through local officials whose areas benefit from the investment. These same entrepreneurs who are becoming wealthy in China are likely to have an increasing influence on politics and political decision-making in Taiwan.
The degree of “interdependence” is open to question. The economic data indicates that at the macro economic level Taiwan is becoming much more dependent on China than vice versa. On the other hand, specific locations within China are becoming dependent on commerce managed by Taiwanese and tied to Taiwan’s economy. The fact that the amount of investment from Taiwan has now surpassed US $100 billion and annual trade has exceeded US $32 billion, suggests that China must consider the economic factor in any calculus of cross strait relations. The problem is that leaders concerned with the economic factor on both sides are not the same as those concerned with security or political factors. Nonetheless, there is clear movement. As Taiwan's MAC points out, the next step of direct transportation links will have a profound effect on the relationship. In its important August 15, 2003 report it states:
Direct cross-strait transportation would produce substantial changes in the network of economic exchanges and functions between Taiwan and mainland China. It would radically transform cross-strait flows of goods, people, capital, technology, and information, business investment and industrial development, people’s living and consumption patterns, and so on, and would thus exert a profound and extensive impact on all areas of Taiwan’s national life, including politics, society, national defense, and cross-strait relations.
During the past 10 years, as Taiwan has expanded its economic activity throughout the world by participating in various IGOs and NGOs, many lines of direct communication have been established. As a result when formal talks break down there are always literally hundreds of back up forums in which Beijing’s leaders can communicate directly with Taiwan’s leaders.
In the future more and more business people will have an increasing influence on political decision-making on both sides of the strait. There is also no doubt that this considerable influence will translate into political demands that the leaders of both sides settle the political questions relating to cross strait relations in a way that will have a minimum adverse impact on economic activity. It will take time for this wave of influence to be translated into action. There is no way to predict exactly how long it will take, but based on the experience within Taiwan where Taiwanese businessmen gained influence, it may take twenty to thirty years.
217 This thought process comes from Georg Wilhelm Friedrich Hegel (1770-1831), an early 19th Century German philosopher. Any issue starts with a proposition or idea and that proposition is necessarily opposed by an equally possible and contradictory proposition or idea. Once these two propositions are examined and negotiated it is possible to reach a higher level of truth or a compromise and that becomes a synthesis of the two ideas ... different from both of the first ideas. An example of a thesis might be: Urban workers using revolutionary and violent methods should be focus of the revolution. The antithesis might be: In China, urban workers are not reliable or not enough. Rural peasants must be considered. The synthesis might be: Maintain revolutionary methods, but use peasants to carry out the revolution.
218 Bill Brugger and Stephen Reglar, Politics, Economy and Society in Contemporary China (Stanford: Stanford University Press, 1994), Chapter 2.
219 See Brugger and Reglar, Ibid., pp. 26, 56, 91, 126, 127.
220 Li Peng , Premier of the State Council, Report on the Work of the Government (Delivered at the First Session of the Ninth National People's Congress on March 5, 1998).
221 For a detailed discussion of land ownership in China see: Peter Ho, “Who Owns China’s Land? Property Rights and Deliberate Ambiguity,” China Quarterly (No. 166, June 2001), pp. 394-421.
222 Joseph Kahn, "China Moves to Protect Property, but the Fine Print Has a Caveat," New York Times, December 23, 2003.
225 Two key agencies were the US-ROC Joint Commission for Rural Reconstruction and the US Agencyfor International Development. See Gold, Ibid., for a solid overview and footnotes to more detailed works.
226 The others were: South Korea, Hong Kong and Singapore.
228 Two systems means two economic systems; capitalist and socialist.
229 David Mitrany, The Functional Theory of Politics (New York: St. Martin’s Press, 1976).
230 During 1981 and 1982, I visited Fuzhou and Xiamen, Fujian Province just opposite Taiwan. I also visited Jinmen just off the coast of Fujian. I saw evidence in both areas of plentiful trade. When I took the ship, Gulangyu, from Xiamen to Hong Kong, I saw as many as 200 Taiwanese returning to Hong Kong and talking about the business they had just conducted in China.
236 Indirect Telephone Communications between Taiwan and Mainland China (1991-2002). Mainland Affairs Council, Republic of China (Taiwan) 1989-2002). Cross-Strait Economic Statistics Monthly No. 120. available online: http://www.mac.gov.tw/big5/statistic/em/178/18.pdf (accessed 4 August 2015)
237 Taiwan Indirect Individual Remittance to Mainland China (1991-2002). Mainland Affairs Council, Republic of China (Taiwan). Cross-Strait Economic Statistics Monthly No. 120. available at: http://www.mac.gov.tw/public/Attachment/1106921251.pdf (accessed 4 August 2015); Taiwan Indirect Business Remittance to Mainland China (1994 to 2002). Mainland Affairs Council, Republic of China (Taiwan). Cross-Strait Economic Statistics Monthly No. 120. available at: http://www.mac.gov.tw/public/Attachment/1106921421.pdf pdf (accessed 4 August 2015)
252 Karen M. Sutter, op. cit., p. 530. These figures are from Chinese sources. The figures from Taiwan’s sources are slightly lower as can be seen in Greg Mastel, “China, Taiwan and the World Trade Organization,” The Washington Quarterly, Summer 2001, p. 47. The statistics are relatively similar and the trends are the same.
258 Taiwan noted the need for some adjustments to the program citing problems in transshipments to or from Taiwan. See: Sofia Wu, “‘3 Links’ Program to be Adjusted: MAC Chief,” Taipei Central News Agency, April 23, 2001.
259 See: “Chen Urges Taiwan-China Talks over Direct Air Links,” Kyodo News Service, January 1, 2003 and “Qian pledges to Push Direct Links,” China Daily, January 1, 2003.
260 Mingjie Wu, "There are Eight Crises in Direct Transportation. The Military Firmly Opposes Direct Transportation", Tzu-yu Shih-Pao, October 22, 2002.
263 Kwangchun Huang, “Cross-strait Charter Flights Conducive to Direct Links: MAC,” Taipei Central News Agency, January 7, 2003.
264 Taiwan is a member of such inter-governmental organizations as the Asian Development Bank, the International Cotton Advisory Committee, the Asian Productivity Organization, the Afro-AsianRural Reconstruction Organization, and the Central American Bank for Economic Integration. Taiwan is also an active participant in the Organization for Economic Cooperation and Development (OECD), the Pacific Economic Cooperation Council (PECC), the Pacific Basin Economic Council (PBEC), and the Asia-Pacific Economic Cooperation forum (APEC).
267 Membership in APEC initially included twelve economies (Hong Kong and Taiwan are not considered to be countries) but grew to twenty-one. The founding members were the United States, Canada, Japan, South Korea, ASEAN (Brunei, Indonesia, Malaysia, Philippines, Singapore, and Thailand, but not Vietnam), Australia, and New Zealand. In 1991, the People’s Republic of China, Taiwan, and Hong Kong joined. In 1993, Mexico and Papua New Guinea were admitted, as was Chile in 1994. In 1997, APEC extended membership to Peru, Russia, and Vietnam (who became members in 1998) and declared a ten-year period of consolidation before additional membership applications would be considered. From Dick K. Nanto, “Asia Pacific Economic Cooperation (APEC), Free Trade, and the 2001 Summit in Shanghai,” CRS Report for Congress, Updated October 26, 2001, p. 4.