Can Taiwan survive in the shadow of China?

Author: Peter Drysdale, East Asia Forum

In the past decade and a half, despite some ups and downs, economic and then political relations between Taiwan and mainland China have gone from strength to strength. The election of Chen Shui-bian as President of Taiwan in 2000 saw a period in which political relations were tense, even though trade shares multiplied rapidly. Chen was pro-Taiwan independence. The turning point came when Chen, nonetheless, lifted the ban on direct trade with the mainland in 2001 and with Taiwan’s and China’s accession to the WTO at the end of 2001.

Taiwanese students wear colourful hats during the national day anniversary in front of the Presidential Palace in Taipei on 10 October 2014. (Photo: AAP).

Before WTO accession, roughly a third of Taiwan’s exports were shipped through Hong Kong (either to China, or other destinations), another quarter to the United States, followed by the European Union, ASEAN, Japan and South Korea. Ostensibly for political-security reasons, Taiwan had limited economic relations with mainland China, and it maintained higher, discriminatory tariff barriers against imports from the mainland even after accession to the WTO and commitment to its most-favoured-nation principles in trade. Taiwan imported very little from China and Hong Kong (6 per cent). Instead its largest source of imports was Japan, followed by the United States, ASEAN members, the European Union and South Korea.

Now China is Taiwan’s largest export market (with direct exports and exports through Hong Kong accounting for around 40 per cent of Taiwanese exports) and its second largest source of import supplies (after Japan), although the import share is less than half the export share. The underlying economics of the relationship — given Taiwan’s location and the scale and structure of the Chinese and Taiwanese economies — would predict these very large trade shares (in fact they predict that trade shares should be somewhat larger, suggesting that there is some remaining drag of the political on the economic relationship).

Taiwanese trade has thus reoriented towards a more natural pattern with China, as its trade has grown more and more important to Taiwan’s prosperity and the share of Western industrial countries in Europe and North America has receded (to half its previous shareover this time).

Despite Taiwan’s geographic proximity to China, politics and residual restrictions on direct trade, air and postal links had limited the opportunities for Taiwan to benefit from China’s enormous growth in the way that similar countries (like South Korea, for example) had done — maintaining artificial distance between the two as barriers collapsed on trade with its competitors.

The opening of cross-strait economic relations was given another fillip in 2008 after the election of Ma Ying-jeou as president and a Kuomintang (KMT) majority in the Taiwanese legislature. There followed a series of high-level exchanges between then Chinese President Hu Jintao and Taiwanese leaders that laid the foundations for a series of steps that saw a major breakthrough in the relationship with the eventual signing of Cross-Straits Economic Cooperation Framework Agreement (ECFA) on 29 June 2010. The conclusion of the ECFA was the first time since 1949 for the mainland and Taiwan to send official agencies to hold direct negotiations with each other.

Significantly, the ECFA agreement effected the normalisation of trade between the mainland and Taiwan as WTO members, removing discriminatory treatment rather than putting in place a comprehensive preferential free trade agreement. While it has not been followed by a structural change in the two partners’ trade share (which peaked the year the agreement was signed) it was crucial in securing the relationship with China in a framework that opens more options in China–Taiwan and third party trade (especially with countries that have bilateral agreements with China) and broadens the scope for Taiwanese participation in regional trade and production networks involving China and other trading partners.

Implementing follow-on arrangements to give effect to the agreement, however, hasn’t all been smooth sailing. In March and April last year, the passage of the Cross-Strait Service Trade Agreement through the Taiwanese legislature was disrupted by the emergence of the Sunflower Student Protest Movement. The movement gave vent to concerns about incomplete disclosure regarding the nature and potential costs of the agreement (as it related to telecommunications and other issues) and gained backing from the opposition Democratic Progressive Party (DPP) and among students and young people, exposing the underbelly of anxiety about the deepening economic relationship with Beijing and its political implications.

So does the massive swing against the governing KMT in last November’s local government elections portend a retreat from the trajectory of cross-strait economic integration over the past decade and more?

Not according to Fu-Kuo Liu, author of this week’s leads essay, who argues that, while the scale of the shift away from the KMT came as a big surprise (in Taipei and Beijing as well as in Washington) and has ‘significantly changed Taiwan’s political landscape… (it) should not be considered a referendum on cross-strait relations’.

Liu agrees that the Sunflower Movement clearly reflected the public’s concerns about the future of national independence and how to reconcile it with growing institutionalisation of cross-strait relations. But, he points out, the government seriously mismanaged the occupation of the Legislative Yuan by students for over a month last year and has still not responded to their legitimate concerns. As Jennifer Chen explains, there were other issues in play. The legislature’s decision not to ratify the Cross-Strait Service Trade Agreement (CSSTA) between China and Taiwan has been misinterpreted as emblematic of increasing anti-China sentiment in Taiwan society. The crux of the political debacle, Liu argues, lies elsewhere: in the rivalry between President Ma and the speaker of the Legislative Yuan, Wang Jin-pyng, who is also a vice chairman of the KMT. The poisonous relationship within the KMT between the executive and the legislature has infected the openness and effectiveness of the government. More than anything, Liu concludes, the recent election results were a vote of no confidence in the Ma administration and a failure of its leadership. The opposition DPP itself was quick to make clear that the election shouldn’t be seen as a referendum on cross-straits relations.

Liu’s assessment is persuasive but, as he also notes, the political changes under way in Taiwan may add more unpredictability to cross-strait relations. There is no question that Taipei has a profound interest in moving forward quickly on deepening the economic relationship with Beijing although Ma’s style of making progress is unlikely to carry the people with him. The big question that both sides of politics confront is how their leaders can persuade Taiwan’s people to support cross-strait economic integration and reassure them about the political risks.

Peter Drysdale is Editor of the East Asia Forum.