July 11, 2001
You can make a case that while Taiwan is mentioned often as a key player in US-China relations, relatively little current reporting is done about the island itself. That’s the impression I got from talking with Ambassador John R. Malott, a retired career diplomat who is currently President of the World Affairs Council of Orange County. Mr. Malott visited Taiwan in May along with 10 other WAC leaders. He reported to our local council in late June and I talked with him a bit afterward.
John noted that while Taiwan is the United States’ 7th largest trading partner, Yahoo had not updated its economic coverage site on Taiwan in six months at the time he made the trip, and that during that time economic problems had been building in Taiwan. "Academics and foreign policy pundits focus on China and tend to think of Taiwan only as an appendage of that ‘Big Picture,’" Malott said. "Their framework for analysis is the Shanghai Communiqué of 1972 – to which Taiwan, of course, was not a party – and they seem oblivious to the major political, economic, and social transformations that have taken place on Taiwan."
Malott says that democracy is alive and well in Taiwan, but that, as usual, it is a messy business and that the system seems to reflect fairly accurately some deep divisions within the body politic. Taiwanese President Chen Shui-bian was elected in March 2000 as the candidate of the Democratic Peoples’ Party (DPP) after decades of virtual one-party rule by the Kuomintang (KMT). The peaceful transfer of power to an opposition-party winner was an important moment in Taiwan’s history, but it has led, more than a year later, to something resembling political gridlock.
The DPP, Malott believes, "has no more experience in governing than the KMT has as an opposition party." His impression, after talking with numerous people on the island, is that the DPP hasn't learned much in a year about how to govern effectively and that it "seems short on talent, especially in the economic area." There will be legislative elections in December that might or might not sort out the political landscape with more clarity.
Although the DPP holds the presidency, the KMT still holds the legislature.
The KMT, Mr. Malott believes, will appeal to the "mainlander" vote on the island in an effort to win back members of the Peoples’ First Party, formed by KMT dissidents, and remind Chinese that the economy was in better shape when the KMT ran things. But most of the observers he talked to expect the KMT to lose its majority in December, with President Chen counting on yet another split in the old KMT ranks.
But even a partisan realignment is unlikely to break the governance gridlock in Taiwan. The divisions about the island’s future are too deep, unless an unexpected dose of inspirational leadership emerges.
Meanwhile, the Taiwanese economy, for so long one of the wonders of Asia and the world, is in trouble. In the first quarter of 2001 the economy grew at its slowest pace in 26 years. Unemployment has almost tripled – from 1.5 percent to 4 percent, which is low enough by world standards but much higher than Taiwan is accustomed to. Exports could decline by 5 percent this year. Malott notes an estimate that some 15 percent of all bank loans are non-performing, but nobody wants to talk about it or do anything about it.
While the downturn in the US economy has played a role, longer-term trends are at work. Taiwan’s manufacturers are shifting production to lower-wage Asian countries, notably to mainland China. Of Taiwan’s 80,000 manufacturers, 24,000 have plants in the mainland. Some 300,000 Taiwanese managers are now working at Taiwanese subsidiaries on the mainland. About 30 percent of Taiwan’s production of semiconductors is likely to be done on the mainland by the end of this year. "Some Taiwanese businessmen say they find it easier to do business there than at home," Malott told me. "Not only are costs lower, they say there is less red tape and bureaucracy."
An active debate is underway, as happens in many countries that move from low-wage havens to centers of higher-value design and capital provision, as to whether Taiwan’s manufacturing sector is being "hollowed out" or this is simply a natural progression toward becoming an upscale center that farms out low-wage work. The question is whether enough research and development is being done to sustain such a transition. "Taiwan’s government, universities and businesses together spend less on R&D than IMB," Mr. Malott claims.
For the most part Taiwan’s manufacturing companies are small to medium-sized enterprises with little or no experience or expertise in international marketing. Furthermore, the infrastructure of business and financial services is something short of world-class, so it is unlikely that in the near future Taiwanese firms can make profits exporting services as well as goods.
The situation doesn't resemble an imminent crisis, Malott says, but the possibility of stagnation that would be difficult to overcome for a while is quite real. Such an outcome is more likely if the leadership is unable to muster the necessary political will to enact reforms that would make various firms, especially banks, more open, honest and "transparent" in their dealings and more likely to acknowledge bad loans and other problems before they become too big to handle.
The outsourcing of manufacturing to the mainland is just part of an increasingly intricate web of relationships that have developed between Taiwan and the mainland, largely off the radar screens of international observers and reporters. Taiwan’s Central Bank estimates Taiwan’s cumulative investment in the mainland at between $70 and $80 billion. That would make Taiwan, as a political entity, the largest foreign – if it is foreign – investor in mainland China.
But that’s just the beginning of formal and informal ties across the Straits that John Malott found striking in their extensiveness. Every day about 500,000 phone calls are exchanged through direct dialing. Marriages between mainland women and Taiwanese managers stationed on the mainland are becoming common, "by one estimate over 50,000." Transportation, postal services and telecommunications are not governed by formal agreements between the two – er – political entities. Despite that – or perhaps because of it – they are extensive and growing.
The National Palace Museum in Taipei hosts both visitors and curators from the mainland. Chinese academics visit with Taiwanese think tank and universities, sometimes for fairly extended periods. A Taiwanese religious group provided earthquake disaster relief to the mainland. One poll showed that 25 percent of the Taiwanese responding said they have visited the mainland. If true that would amount to some 5 million people.
All this is occurring while formal political discussions about possible new political links have been suspended since 1995.
Many observers believe Taiwan can’t wait to declare formal independence from China and could do so as soon as it thinks the risk of military retaliation is low, whether through a US guarantee or mainland lack of interest. But Malott believes Taiwanese are split about as evenly – in about four directions – on this issue as they seem to be on almost every other issue. Indeed, many Taiwanese seem to be concerned that the United States, with its desire for clarity and its aversion to ambiguity, could push Taiwan in the direction of de facto independence before the people on the island are ready to consider that a real option.
However that political question plays out, cross-straits relationships are likely to continue to grow. Taiwanese are fully capable of arguing among themselves about who really benefits from increased investment in the mainland, but it is likely to continue whether the Taiwanese public approves of it or not.
John Malott, whom I have known long enough to believe he has generally good judgment and pretty good observational skills, suggests that almost all outside observers have fallen into the habit of viewing Chinese-Taiwanese issues from an essentially external framework. The focus has been on foreign policy, questions about what the United States might do if various alternative scenarios developed, military security and official government pronouncements.
He believes that it will be essentially domestic considerations within each country – political, economic and social dynamics on either side of the Straits of Taiwan – that dominate future relationships
The fact that Taiwanese-mainland ties on the level of economic, travel, tourism and subsidiary manufacturing interests are more extensive than most Western observers realize, suggests that resolution of political issues could come about in surprising or unexpected ways. It might not be strictly true that, as Frederic Bastiat observed, when goods do not cross borders armies will. But it does seem likely that the more extensive the economic and social ties, the greater the deterrence – from economically and therefore politically influential elements within each country – against future military adventures there will be.
Does this mean that without US involvement the Chinese-Taiwanese issues will eventually resolve themselves peacefully? Not necessarily. But it does suggest that more extensive US involvement might not be helpful and might even precipitate unnecessary violence or bitterness. The Chinese and Taiwanese might not work things out perfectly, but they might have a better shot at it with minimal US meddling. And they might find, somewhere down the road, that some sort of cultural, economic and personal unification has already occurred and the main political question will be whether to put a political stamp on it or not.
That's hardly a prediction. But it might not be a bad guess.
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