China fever (SCMP
China fever is raging in Taiwan.
The Bush administration may have underwritten the US commitment to the
island republic in less ambiguous terms than did Mr Clinton, and arms
sales has boosted its confidence in medium term security. But never
has Taiwan felt the gravitational pull of the mainland economy so strongly.
This translates into two
political factors. Firstly, it suggests that the economic price of quasi-independence
may be rising and that Taiwan may in the not too distant future have
to temper its position towards Beijing if its prosperity is to be further
enhanced. Secondly, it has partly re-opened the ethnic divide between
Taiwanese who put a high priority on Taiwanese identity and those of
mainland origin who find economic as well as emotional reasons for emphasising
links with the mainland.
Of course, the situation is
not cut and dried. Most people are of Taiwanese origin and most occupy
the middle ground of politics wanting to preserve the political status
quo, remaining very suspicious of an authoritarian Beijing but recognising
the necessity of economic ties. But there are some real policy issues
here, and they also reflect class as well as ethnic divides.
In very general terms central
and southern parts of the island are not only more self-consciously
Taiwanese and more likely to vote for the DPP, they also happen to be
suffering most from the shift of labour or land intensive industries
overseas, especially to the mainland. The mainland pull takes several
forms. Mostly they are not new.
Similar fevers have been
experienced in the past and been doused by events on the mainland ranging
from economic downturn to murder of Taiwanese to the hidden costs of
doing business there. So this may be yet another cycle. However it is
one which is coinciding with Taiwan's weakest economic performance since
the 1975 world oil crisis recession and the probable entry of China
and Taiwan into the World Trade Organisation, a step which in overall
economic terms is good for both but which has short term costs, and
in political terms is a mixed blessing for Taiwan.
The debate in Taiwan focuses
on whether the current restrictions on mainland links are economically
detrimental to Taiwan, as the majority of business interests insist,
or that Taiwan is already being damaged by a sheep-like rush by business
to invest in the mainland. There are in fact several quite distinct
issues to be considered. Firstly is the issue of direct air, sea and
telecommunications links. These would undoubtedly cut costs and make
life easier for Taiwanese businesses with mainland activities - just
as they would damage all those HK businesses, such as Cathay Pacific
which currently provide intermediation.
However, it is questionable
whether it would make much difference to the level of Taiwan investment
which has been driven by the hope of improved returns and for whom the
additional time and costs of going via Hongkong or Macau are not decisive.
Tourism might be another matter. Direct flights to Shanghai could entice
the Taipei elite, many with mainland relatives, to hop across to the
newly dynamic city across the strait just as many Hongkongers now shop
in Shenzhen. But the impact shouldn't be exaggerated.
Though it has been easy and
cheap for Taiwanese to visit the mainland for the past decade, with
only the briefest touchdown in Macau, 75% of the population has yet
to do so. Likewise it is doubtful whether mainland tourists would rush
to Taiwan which is expensive and poorly provided with tourist facilities.
Restrictions on Taiwan investment
in the mainland currently apply to high level technology, to very large
projects and to infrastructure. They have been partly successful - such
as in preventing Formosa Plastics from a huge mainland investment, delaying
the move of wafer plants and laptop manufacture to China and probably
slowing the process of investment.
However, most investment
has gone ahead regardless and lower end wafers and laptops are now moving
too. The fact is that investment is propelled either by the need for
lower costs for export, or the prospects (more questionable) of a growing
domestic market, or by Taiwanese parts manufacturers needing to be close
to big name end-users who themselves have set up on the mainland. In
reality most investment plans are approved, or routed via some offshore
This does not mean that the
attractions of the mainland are not to some degree a threat or competition
to Taiwan - merely that liberalisation of controls probably would not
make much practical difference at least until the next China boom or
next global TMT surge. There are signs that Taiwan are actually cutting
back mainland investment either because export demand has softened or
because they see gluts coming. The very same provincial governments
who in the mid-90s were dangling carrots before all and sundry auto
makers are now doing the same with semi-conductor industry.
Taiwan has of course been
surprised by the speed of the development of the mainland electronics
industry, especially in Shanghai and adjoining Jiangsu. It has been
due to a combination of foreign and Taiwan capital, big local incentives
(especially for Taiwanese) and the availability of engineers who have
been easy to attract to this prospering part of China from less favoured
regions. Tens of thousands of Taiwanese also now live in and around
Shanghai too now, an important contributor to local high life and night
Taiwan naturally fears that
its industries are being subjected to a "hollowing out", which is being
encouraged by Beijing for political reasons. In one sense that is true
- but it has been true since 1990. Easy access to cheap mainland labour
has resulted in a shift in Taiwan's economy away from manufacturing,
which now accounts for only 25% of GDP against 33% ten years ago. There
has been both a shift to services and to high value manufacturing which,
until this year, was sustaining per capita GDP growth at around 5% --
a much better performance than Hongkong over the same period.
Nor has the mainland been
the only beneficiary. They may be less attractive now, but southeast
Asia and Latin America have also attracted large amounts of Taiwan capital
and manufacturing know-how. The current focus on China and the suggestion
that Taiwan's salvation lies with the mainland is belied by the diversity
of its investments and the fairly stable level of its trade with the
The percentage of exports
to the mainland climbed rapildy in the early 1990s then flattened out
at around 22%. It has risen again recently but is still only 24 % in
2000 despite the boom both in China's domestic demand and the surge
in electronics exports by Taiwan owned mainland factories, which probably
source at least a third of their components from Taiwan. However, there
is also little doubt that the appeal of the mainland has for now overtaken
the speed of upgrading in Taiwan itself. The mainland in some respects
is now competitor as well as cheap labour source.
The problem for Taiwan is
not acute as for SE Asia. Top of the technology chain manufacturers
from Japan and the US continue to move high valued added activities
to Taiwan where manufacturing skills are often second to none the movement
outwards is at least as fast. But the ability of Taiwanese to move into
design and product development, and to adapt to rapid market changes,
is barely keeping up with losses of less sophisticated industries.
There is not much Taiwan
can do about this other than maintain its own steep learing curve. At
least much of the intellectual property is being retained by Taiwan
firms. However, there are things that Taiwan can do to offset the negative
impact. The first is to speed up the development of its service sector,
hamstrung, a little like Japan, by all kinds of regulations and cartels.
Next is to use it financial
resources to resolve banking sector problems as soon as possible. The
third is to open up further to foreigners, and mainlanders so that the
inflow of money and skills better balances the outflow. Those are not
"stroke of the pen" changes which will resolve problems overnight. They
would not provide the immediate investor confidence boost which major
cross straits progress would give, and perhaps push the stock index,
now 5,000, within striking distance of its record reached more than
a decade ago.
But in this moment of mainland
fever Taiwan does need to understand that in economic terms China is
neither saviour nor nemesis. Like the US and Japan, the mainland is
a major component in an economy which is a niche player in some leading
edge global markets. Ends
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