As the newly-formed Democratic Progressive Party (DPP)-led government in Taiwan settles in, the international media continues to hypothesize how Beijing will react. Much has been written on how Republic of China (ROC) President Tsai Ing-wen differs from her predecessor, Ma Ying-jeou, in her approach to China, especially as regards relations across the Taiwan Strait. Ma, it will be remembered, is credited with overseeing eight years of relatively good relations between the two neighbors, having promoted the signing of several pacts between the two erstwhile enemies, including his tentpole accomplishment, the Economic Cooperation Framework Agreement (ECFA), an ersatz trade deal between Taiwan and the People’s Republic of China (PRC). With the ascendance of Tsai, analysts and commentators are speculating as to whether this momentum towards stronger cross-strait ties has been lost. At best, some argue, not much will change; at worst, it will be a return to the dark days of the nation’s last DPP administration, that of Chen Shui-bian.
Chen, who was in power (albeit without the benefit of Tsai’s legislative majority) from 2000 to 2008, is largely remembered today as a cross-strait troublemaker: someone who took every opportunity to promote Taiwanese localization and count coup on Beijing. These memories are selective, however, and it is worth revisiting that era to examine the cross-strait dynamics under a DPP-ruled ROC, and the initial economic and trade conditions that existed at the outset of the Chen presidency that, more than anything else, informed policy direction.
Throughout the 1990s, the ROC government attempted to divert outgoing investment away from an over-concentration on China, but those efforts found little purchase. Taiwanese businesses were attracted by the incentives offered in China by the central and provincial governments to lure foreign investment — and in those years, “foreign investment” was synonymous with “investment from Taiwan.” Tax breaks, investment fairs, and the establishment of industrial zones in coastal areas such as Fuzhou and Xiamen contributed to the relocation of much of Taiwan’s industry across the strait (Rubinstein, 2013). Only about half of the IT products manufactured by Taiwanese companies were actually manufactured in Taiwan by the end of the 1990s (Chase et al., 2004, p. 8).
In the eyes of ROC government officials, the breakneck pace of economic investment in China had to be slowed down. Many feared that there was an overly high concentration of Taiwan investment in one location, and putting all of one’s eggs in a single basket is never a secure investment strategy. This is especially true if you are still technically in a state of hostility with the nation that is the recipient of the majority of your investment dollars. Despite the fact that the ROC’s desire to retake the mainland had long ago died with Generalissimo Chiang Kai-shek, for its part, Beijing remained intent on annexing Taiwan and finally ending what it sees as the final battle of the Chinese Civil War. Successive Chinese Communist Party (CCP) leaders from Mao Zedong onward had effectively put the Taiwan Problem on the backburner, mostly because the lack of capital, military expertise, and amphibious equipment made moving enough men across the strait a logistical impossibility. Nevertheless, no CCP leader wanted to be the man who “lost Taiwan.”
The plan instead was to “conceal abilities and bide time,” quietly building up its economy — and from thence, its military — and convince the region of its intention to be a “good neighbor” (hence the policy of the same name) and a responsible international stakeholder, using buzzwords such as “peaceful rise.” Even many Western analysts were convinced that a new day was dawning in which China could and would eventually experience political liberalization — all but inevitable under the modernization theory and the belief that economic liberalization leads to political freedoms. Since 2010, however, the direction taken by the PRC leadership, especially as evidenced by China’s increasing aggressiveness in the South and East China seas, has spurred a re-evaluation of that assessment. Nevertheless, in the early years of the 2000s, Taiwanese investors and those of the region’s other nations were willing to give China the benefit of the doubt and help contribute to China’s own miraculous economic growth (Fung, 1998).
As the world’s manufacturers beat a path to China’s door seeking low labor costs and higher profit margins, Taiwanese companies reasoned that they must get ahead of the trend, especially as they had the benefit of a shared language and similar cultural roots. Nevertheless, many political leaders in Taiwan remained wary of China’s meteoric rise, and sought to forestall the condition of economic dependence on China. President Lee Teng-hui (1988-2000) launched the “Go South” and “Slow Down, Be Patient” policies in part to diversity Taiwan’s investment portfolio, but also because he was acutely aware of the potential for economic integration to open the door to forced political integration. In the year 2000, for the first time in 55 years, the Kuomintang (KMT) lost power in Taiwan, with another party, the DPP, winning that year’s presidential elections. Former maritime lawyer Chen Shui-bian, who made his bones as a defender of anti-authoritarian dissidents in the Kaohsiung Incident, became the leader of Taiwan, and cross strait relations would never be the same.
There were some successes worth taking note of, including the establishment of the “three mini links” — postal, trade, and communications links between China and Taiwan’s outlying islands of Kinmen and Matsu.
Chen is often accused of being a troublemaker regarding China. This is a narrative that tainted Taiwan’s international image and that also helped Ma and his KMT retake the presidency in 2008. But it is a narrative that is largely false, enabled by both the KMT and CCP, both of which feared a native Taiwanese political movement on Taiwan. In fact, Chen’s administration made great efforts — some successful, most not — to improve relations with the PRC. Most of the cross-strait olive branches proffered by the Chen administration were roundly rebuffed by Beijing, as the CCP prefers to deal directly with the KMT on matters involving unification.
Meanwhile the KMT continued to control the legislature during the eight years that the DPP held executive office, and it worked actively to block passage of legislation (Diamond, 2001, p. 7).
Despite these hurdles, there were some successes worth taking note of, including the establishment of the “three mini links” — postal, trade, and communications links between China and Taiwan’s outlying islands of Kinmen and Matsu. The policy opened the doors for the residents of those islands to travel to China and engage in trade in a number of goods. Despite the apparent success of the endeavor, in reality much of the increased trade and reduction in smuggling that looked so good on paper were the result of the fact that the policy legalized illicit trade that was already taking place. Domestically, this success was a PR win for Chen, who was keen to show that he was not averse to a constructive relationship with China, despite efforts by the KMT and the Chinese themselves to sabotage his image. Relatively little note was taken overseas, however.
Moreover, while Chen has been invariably castigated for his China-unfriendly policies and their adverse impacts on the economy, the economic relationship between the two sides flourished during the Chen years. DPP policy consisted of three principles: balancing national security with economic interests; actively managing what had until then been a passive policy; and entering into negotiations with Beijing about cross-strait economic issues. Taiwan saw an increase of 79.5 percent in indirect trade (via Hong Kong) from the 1999 level of USD 25.8 billion to USD 46.3 billion in 2003. During that same period, Taiwan’s trade surplus with China ballooned from USD 16.8 billion (USD 21.3 billion in exports, USD 4.5 billion in imports) to USD 24.4 billion (USD 35.4 billion in exports, USD 11 billion in imports), according to numbers provided by the ROC Mainland Affairs Council (MAC).
Despite these gains, it is important to note that a reliance on official figures can lead to an underestimation of the growing economic ties between the two countries. For example, one of the major sources of Foreign Direct Investment (FDI) in China has been the Virgin Islands, whose percentage of total FDI in China grew from 0.8 percent in 1995 to 6.6 percent in 1999, and by 2004 had become its fifth-largest investor with a cumulative FDI of USD 34 billion. (Tung, 2005, p. 4) There seems little reason for such a tiny country so far away to be such a keen investor in the Chinese economy until one considers that most of these figures represent Taiwanese businessmen channeling their China investments through holding companies in the Virgin Islands, as well as the Cayman Islands and other economies in British Central America, where they can benefit from the tax exempt status afforded by these third-countries’ banking laws, as well as getting around ROC regulations on investments in China.
Unfortunately for the DPP, it took the reins of power in Taipei just as the world was reeling from the impact of the dot-com crash of late 2000. Taiwan’s economy was hit particularly hard, as it relied so heavily on the IT sector. During the fourth quarter of 2000, GDP growth dropped from 6.73 percent to 3.82 percent (Chase et al., 2004, p. 8). The KMT seized the opportunity to maneuver itself and its image to that of the party of fiscal responsibility and paint the DPP as clumsy amateurs and a regional irritant which was offending Beijing with its efforts to de-Sinicize the island and inch towards formal independence (Lynch, 2002). Despite the fact that economic gains were being derived from continued trade and investment with China during the Chen years, this narrative predominated, and in 2008, the KMT regained the presidential office, and Chen was put in prison, ostensibly on charges of corruption.
When Ma Ying-jeou assumed the ROC presidency in 2008, he embarked on policies designed to integrate the economy of Taiwan with that of China to a much greater degree than had ever been seen before. The centerpiece of his economic vision was the aforementioned ECFA, which is essentially a cross-strait free trade agreement (FTA). The Taiwanese have failed in their ongoing efforts to sign FTAs with countries other than China, mostly because China did not allow those countries to enter into such deals with Taiwan (Tanner, 2007). Arguing that ECFA was the only way to avoid the continued marginalization of Taiwan as the region’s economies coalesced into trade blocs, Ma promised the populace that the deal with China would result in Beijing allowing Taipei a greater degree of freedom in such matters, but by the end of his second (and final) term in office, this still had not materialized.
The ECFA trade deal has caused the nation’s trade surplus with China to decline since its passage in 2010, according to official data from the ROC Ministry of Audit and the Ministry of Finance. The Customs Administration of the ROC Ministry of Finance reported that the total export of goods to China was valued at USD 83.9 billion in 2011, USD 80.7 billion in 2012 and USD 81.7 billion in 2013, with respective trade surpluses of USD 40.3 billion, USD 39.8 billion and USD 39.1 billion (Lee, 2014, p. 3) Moreover, this represented an increasing reliance on the China market in 2013, with 62 percent of approved overseas investment and 39 percent of Taiwan’s total exports going across the strait. It can therefore be argued that the Chen administration performed better in terms of cross-strait trade than did the Ma administration. This fact only serves to highlight that the issue is not trade and economic development, as is often stressed by the KMT, but ideology.
Beijing wields its propensity to be offended as a passive-aggressive weapon. During the Chen administration, when America was embroiled in wars in the Middle East, Washington was all too happy to buy into this narrative and paint a DPP-led Taiwan as the cross-strait troublemaker. But geopolitics have changed, and this tactic might not be so effective this time around. Especially as the nations of the Asia-Pacific region find themselves the victims of China’s bullying tactics in the South China Sea, there is less widespread hope that placating China will lead to peace.
Moreover, by the end of the Ma presidency, economic integration between Taiwan and China was well developed at the expense of Taiwan’s other neighbors. However, Taiwan’s voters have become more sophisticated, and no longer believe that the only economic solution to Taiwan’s problems is hitching their economic wagon to China. The election of Tsai and the DPP party may be viewed less as a return to the days of Chen Shui-bian and more as a repudiation of Ma’s governance, and a desire by the populace to move forward in confidence rather than fear.
Chase, M., Pollpeter, K. L., & Mulvenon, J. C. (2004, June). Shanghaied? The economic and political implications of the flow of information technology and investment across the Taiwan Strait. RAND National Defense Research Institute.
Diamond, L. (2001, April). How democratic is Taiwan? Five key challenges for democratic development and consolidation. Paper, symposium on The Transition from One-Party Rule: Taiwan’s New Government and Cross-Straits Relations, Columbia University.
Fung, K. C. (1998). Accounting for Chinese trade: some national and regional considerations. In Baldwin, R.E., Lipsey, R. E.& Richardson, J. D. (Eds.), Geography and Ownership as Bases for Economic Accounting. University of Chicago Press, pp. 173-204.
Lee, H.-f. (2014, August 17). ECFA benefited trade little: ministries. The Taipei Times.
Lynch, D. (2002). Taiwan’s democratization and the rise of Taiwanese nationalism as socialization to global culture.Pacific Affairs,75(4), 557-574.
Rubinstein, M. A. (2013). The evolution of Taiwan's economic miracle 1945-2000: personal accounts and political narratives. In Fuller, D. B. & Rubinstein, M. A. (Eds.), Technology Transfer Between the US, China and Taiwan. Abingdon, Oxon: Routledge, pp. 36-58.
Tanner, M. S. (2007). Chinese Economic Coercion against Taiwan: A Tricky Weapon to Use. Santa Monica, CA: RAND Corporation.
Tung, C.-y. (2005). The evolution of cross-strait economic relations in the first Chen Shui-bian administration. Presentation delivered at the Conference on the First Chen Shui-bian Administration, sponsored by the Harvard University and the University of London, Annapolis, Maryland, USA, May 5-8, 2005.