THE EVOLUTION AND ASSESSMENT OF CROSS-STRAIT ECONOMIC RELATIONS IN

Transcription

1 THE EVOLUTION AND ASSESSMENT OF CROSS-STRAIT ECONOMIC RELATIONS IN THE FIRST TERM OF THE CHEN SHUI-BIAN ADMINISTRATION CHEN-YUAN TUNG Chen-yuan Tung, 2008, The Evolution and Assessment of Cross-Strait Economic Relations in the First Term of the Chen Shui-bian Administration, Steven Goldstein and Julian Chang (eds.), Presidential Politics in Taiwan: The Administration of Chen Shui-bian (Norwalk, CT: EastBridge, 2008), pp SHORT BIO Chen-yuan Tung is an assistant professor at the Sun Yat-Sen Graduate Institute of Social Sciences and Humanities, National Chengchi University (Taiwan). He received his Ph.D. degree majoring in international affairs from the School of Advanced International Studies (SAIS), Johns Hopkins University. His expertise focuses on economic relations between Taiwan and China, Chinese economic development, Taiwan-U.S.-China trilateral relations, and international economics. 1

2 I. INTRODUCTION In September 1996 the Kuomintang (KMT) government of Taiwan adopted the no haste, be patient policy to restrict Taiwanese investment in China, particularly in high-tech and infrastructural industries. Given the antagonistic atmosphere created by China s military threat, Taiwan thereafter put into place several restrictive measures on cross-strait economic exchanges while desisting from adopting further opening measures. The KMT government s major concern was that, if the underlying trend of expanding economic exchange across the Taiwan Strait continued, Taiwan would become overly-dependent on China s market and production facilities. This would increase the risk to the island s national security posed by its powerful political rival, China. 1 In reality, Taiwan s policy restrictions were ineffective in monitoring and managing cross-strait economic exchanges, not least because many Taiwanese businesspeople invested in China through third countries to avoid Taiwan s official restrictions. Moreover, Taiwan s restrictions seriously undermined its ambitious plan to develop Taiwan into an Asia-Pacific business operation center. Finally, there was the possibility that if both Taiwan and China joined the World Trade Organization (WTO) in the early 2000s, Taipei would have to adjust its trade policy toward China under the WTO regulations. As a result, during the presidential campaign of , candidate Chen Shui-bian of the Democratic Progressive Party (DPP) advocated normalization of cross-strait economic exchanges; a policy that significantly deviated from the past 1 Kong-Lien Kao, Liangan Jingmao Xiankuang yu Zhanwang [The Current Situation and Prospects of Cross-Strait Economic Relations] (Taipei: Mainland Affairs Council, 1994), p. 8. Lee Teng-hui, Speech Excerpt, in Mainland Affairs Council (ed.), Dalu Gongzuo Cankao Ziliao [The Reference Document of Mainland Work], vol. 1 (Taipei: Mainland Affairs Council, 1998), p

3 approach of his party. In addition, Chen proposed a policy of active management to replace the passive approach of no haste, be patient. After he was elected president in March 2000, Chen adopted many opening measures with respect to cross-strait economic relations. Indeed, cross-strait economic policy became a major initiative of the first Chen Shui-bian administration s China policy. Therefore, despite continuous political confrontation between Taiwan and China from 2000 to 2004, economic relations across the Taiwan Strait developed very rapidly. This paper presents an overview and assessment of the evolution of cross-strait economic relations in the first term of the Chen Shui-bian administration between 2000 and First of all, it sets out the basic statistics of the growing economic exchange across the Taiwan Strait from 2000 to 2004 (plus 2005). This is followed by an analysis of the policies of both Taiwan and China with respect to cross-strait economic relations after Thirdly, the paper addresses two important issues of cross-strait economic relations in the era of the first Chen Shui-bian administration: China s policies towards Taiwan s businesspeople and arrangements for cross-strait charter flights. It concludes with a discussion of the four salient features of cross-strait economic relations. Finally, this paper provides a postscript to elaborate new development and prospects of cross-strait economic relations in the second term of the Chen Shui-bian administration. II. STATUS OF CROSS-STRAIT ECONOMIC EXCHANGES A. TRADE RELATIONS BETWEEN TAIWAN AND CHINA Taiwan s Mainland Affairs Council (MAC) of the Executive Yuan estimates that the island s exports to China are equal to transit trade plus the difference between Taiwan s exports to Hong Kong and Hong Kong s imports from Taiwan. This estimate 3

4 is likely to be more reliable than the figures from customs services of Taiwan and China because the latter data do not take different types of Taiwan s exports to China into account and thus underestimate the total amount. Based on the MAC s estimates, Taiwan s indirect trade with China via Hong Kong was US$ 31.2 billion in 2000 and US$ 65.7 billion in 2004, recording an increase of 110 percent in four years. In addition, Taiwan enjoyed a continuous and large trade surplus with China. In 2000, Taiwan ran a trade surplus of US$ 18.8 billion, with US$ 25.0 billion of exports to, and US$ 6.2 billion of imports from, China. In 2004, it enjoyed a trade surplus of US$ 32.1 billion, with US$ 48.9 billion of exports to, and US$ 16.8 billion of imports from, China. (See Table 1) Table 1. Taiwan s Trade Relations with China: Unit: US$ billion Exports Imports Trade Trade Balance Source: Mainland Affairs Council (Taiwan), accessed on May 17, By 1993 China had already become Taiwan s third largest trading partner, after the United States and Japan. After 2002, China became Taiwan s largest trading partner. In 2003, Taiwan s trade with China, Japan, and the United States was US$ 46.3 billion, US$ 44.6 billion, and US$ 42.8 billion, respectively. In addition, by 1993 China had become Taiwan s second largest export market, following the United States. 4

5 After 2002, China became Taiwan s largest export market. In 2002, Taiwan s exports to China, the United States, and Japan were US$ 29.4 billion, US$ 26.7 billion, and US$ 12 billion, respectively. In comparison, between 1990 and 1999 Taiwan was China s fourth largest trading partner, following Japan, the United States, and Hong Kong. Between 2000 and 2004 Taiwan became China s fifth largest trading partner, following Japan, the United States, Hong Kong, and Korea. In 2004, China s trade with the United States, Japan, Hong Kong, Korea, and Taiwan was US$ billion, US$ billion, US$ billion, US$ 90.1 billion, and US$ 78.3 billion, respectively. In addition, in 1993 Taiwan was China s second largest source of imports (Japan has been its largest source). By 2004, China s imports from Japan and Taiwan were US$ 94.4 billion and US$ 64.8 billion, respectively. B. FINANCIAL RELATIONS BETWEEN TAIWAN AND CHINA According to Taiwan s official figures, after 1992, China became the largest recipient of Taiwan s outward foreign direct investment (FDI). By the end of 2000, Taiwan s cumulative FDI in China was US$ 17.1 billion; by the end of 2004, Taiwan s cumulative FDI in China had reached US$ 41.3 billion, or 49.5 percent of Taiwan s total outward FDI. Note that the figure for 2004 includes retroactive registration of Taiwan s previously unregistered investments to China. Between 2002 and 2003, there were 12,218 cases of such registration. In comparison, according to official Chinese sources, by the end of 2000, Taiwan s realized FDI in China was US$ 26.2 billion; by the end of 2004, Taiwan s realized FDI in China was US$ 39.6 billion, or 7.1 percent of total realized FDI received by China. Taiwan was the fourth largest source of FDI in China, next to Hong Kong (43.1 percent), the United States (8.6 percent), and Japan (8.4 percent). (See Table 2) 5

6 Table 2. Taiwan s Annual FDI in China: Unit: US$ million Taiwan s 1,229 1,615 1,519 1,253 2,607 2,784 3,859 4,595 6,941 6,007 statistics (2,720) (515) (2,864) (3,104) China s 3,475 3,289 2,915 2,599 2,296 2,980 3,971 3,377 3,117 2,152 statistics Source: Mainland Affairs Council (Taiwan), accessed on May 17, Note: Figures in parentheses represent the amount for retroactive registration of Taiwan s previously unregistered investments to China. However, both Taiwan s and China s official figures considerably underestimate the extent of Taiwan s real investment in China because many Taiwan businesspeople began in the mid-1990s to invest in China through their holding companies in tax-exempt third countries such as the Virgin Islands and the Cayman Islands (British Central America, BCA). 2 Perng Fai-nan, Governor of Taiwan s Central Bank, estimated that by the end of 2002 the real figure of Taiwan s cumulative investment in China was about US$ 66.8 billion, including investment through tax-haven countries. 3 In mid-2006, the MAC estimated that Taiwan s real investment in China was about US$ billion. 4 As for other capital flows between Taiwan and China, the Taiwanese government began to compile statistics on individual remittances to China (including household 2 Chen-yuan Tung, China s Economic Leverage and Taiwan s Security Concerns With Respect to Cross-Strait Economic Relations, PhD Dissertation (Baltimore, M.D.: Johns Hopkins University, 2002), pp Ming-cheng Lin, Perng Fai-nan: Capital Remitted to Mainland Amounted US$ 66.8 Billion, Zhongguo Shibao [China Times], January 17, Miao-rong Lin, MAC Estimates: Taiwan s Investment in China Reaches US$ 150 Billion, Jingji Ribao [Economic Daily], June 16,

7 remittances, donations, and other transfer payments, but excluding travel expenditures) beginning on May 21, 1990; and on both Taiwan business remittances to China and remittances from China to Taiwan beginning on July 29, In 2000, Taiwan remitted a cumulative US$ 5.7 billion to China, while China remitted a cumulative US$ 2.1 billion to Taiwan. By the end of 2004, Taiwan had remitted a cumulative US$ 26.7 billion to China, and China had remitted a cumulative US$ 23.3 billion to Taiwan. (See Table 3) Table 3. Taiwan s Remittance to and from China: Unit: US$ million Period To China 2, ,209 1,700 2,520 6,077 10,677 18,184 From China ,250 2,255 3,022 14,657 23,846 Source: Mainland Affairs Council (Taiwan), accessed on May 17, III. TAIWAN S POLICY ON CROSS-STRAIT ECONOMIC RELATIONS A. MOTIVES From a strategic perspective, the Chen Shui-bian administration s policy regarding cross-strait economic relations was intended to serve two goals: first, to construct a normal relationship with China; second, to develop Taiwan s own economy. In his White Paper on China policy unveiled on November 15, 1999, DPP presidential candidate Chen Shui-bian stressed the need to establish a normal relationship between Taiwan and China and contended that such normalization of cross-strait ties should begin with economic and trade relations. The document 7

8 suggested that the development of cooperative economic and trade relations between Taiwan and China should be based on three principles: balance between national security and economic interest; a comprehensive strategy of economic security and development which would be achieved by replacing a passive policy with one of active management; and negotiation with China over cross-strait economic issues. 5 After Chen Shui-bian was elected president in March 2000, the most salient feature of Taiwan s cross-strait economic policy became the so-called integration theory. On December 31, 2000, President Chen announced that the integration of the two economies, bilateral trade, and culture across the Taiwan Strait should be a starting point from which gradually to strengthen faith and confidence in each other. This, he suggested, could be the basis for a new framework of permanent peace and political integration. 6 President Chen explained the integration theory on many occasions over the next three years. For instance, on May 10, 2002, he reiterated that the normalization of cross-strait relations must begin with the normalization of economic and trade relations. He emphasized that the first step toward political integration across the Taiwan Strait was economic and cultural integration. 7 On January 1, 2003, he urged both sides to strive towards building a framework of interaction for peace and stability. In particular, President Chen stressed that consultation and promotion of direct transportation links, as well as exchange on other relevant economic issues, could constitute a first step forward and set the stage for further economic and cultural interaction. 8 5 Kua Shiji Zhongguo Zhengce Baipishu [Across-Century China Policy White Paper], in Mainland Affairs Council, Executive Yuan, Republic of China (ed.), Zhengfu Dalu Zhengce Zhongyao Wenjian [Important Documents of the Government s Mainland Policy] (Taipei: Mainland Affairs Council, 2004), p President Chen s Cross-century Remarks, Mainland Affairs Council, accessed May 7, President Chen s Remarks during His Stop on Titan Island, Office of the President, Republic of China, May 10, President Chen s New Year Day s Message (excerpt: cross-strait relations), Mainland Affairs Council, 8

9 B. POLICIES AND ACTIONS In terms of concrete policy measures, the Chen Shui-bian administration formally adopted a new approach to cross-strait economic relations after the Economic Development Advisory Conference (EDAC) of August 26, Specifically, the administration discarded the no haste, be patient policy and adopted instead a new policy of proactive liberalization with effective management. Key conclusions reached during the EDAC included: 9 1. the decision that Taiwan first, global management, mutual benefits, and risk control management should be the pivotal principles guiding trade and commercial activities across the Taiwan Strait; 2. the adoption of a policy of proactive liberalization with effective management to replace the previous no haste, be patient policy in regard to China-bound investment; 3. the establishment of flexible mechanisms to monitor movements of capital between the two sides; 4. a plan for the introduction of Chinese capital to Taiwan s real estate market at the first stage, the manufacturing sector at the second stage, and the financial market at the third stage. 5. the establishment of the three links (direct trade, postal, and transportation links between Taiwan and China); 6. the gradual liberalization of Chinese exports to Taiwan; 7. the active opening of the Taiwan tourist market to Chinese visitors under accessed May 7, Jingfahui Lianganzu Zungjie Baogao [Conclusion Report of the cross-strait Session at the EDAC], in Mainland Affairs Council, Executive Yuan, Republic of China (ed.), Zhengfu Dalu Zhengce Zhongyao Wenjian [Important Documents of the Government s Mainland Policy] (Taipei: Mainland Affairs Council, 2004), pp

10 the principle of national security. Within the parameters of these guidelines, the first Chen Shui-bian administration implemented the following measures in respect to cross-strait relations between 2000 and a. The Mini Three Links On January 1, 2001, the Chen Shui-bian administration opened up the so-called mini three links, which legalized trade and travel between Taiwan s offshore islands, Quemoy (Kinmen) and Matzu, and adjacent ports in China. Thereafter, Taiwan gradually expanded bilateral flows of commodities, people, ships and financial exchange (such as bilateral financial remittance and currency exchange). In the beginning, China contended that Taiwan had unilaterally liberalized the mini three links without bilateral consultation and thus China did not cooperate with Taiwan in the initiative. However, the Chinese government gradually adopted a cooperative attitude toward these measures. As a result, cross-strait exchange through the mini three links increased exponentially during the next four years. Taiwanese statistics show that the number of Taiwan s ships to China increased from 137 in 2001 to 1,221 in 2004; the number of Taiwan s people traveling to China increased from 11,729 in 2001 to 202,371 in In addition, the number of Chinese ships to Taiwan increased from 45 in 2001 to 1,808 in 2004; the number of Chinese citizens traveling to Taiwan increased from 1,041 in 2001 to 12,409 in 2004 (See Table 4). 10

11 Table 4. Mini Three Links between Taiwan and China: Period Total Taiwan's Ships to China ,221 1,595 4,164 Taiwan's People to China 11,729 28,087 81, , , ,189 China's Ships to Taiwan ,808 2,681 5,259 China's People to Taiwan 1,041 1,358 3,760 12,409 18,607 37,175 Source: Mainland Affairs Council (Taiwan), accessed on July 4, b. Liberalizing Chinese Exports to Taiwan After 2000, Taiwan rapidly moved to liberalize its controls on Chinese exports to Taiwan. In July 2001 only 56.9 percent of trade commodities were permitted as Chinese imports to Taiwan. After the EDAC in August 2001, this figure jumped to 75.8 percent by December 2002 and to 78.3 percent by December This partly reflects the impact of the WTO accession on both Taiwan and China by the end of 2001 to liberalize trade for each other. (See Table 5) Table 5. Ratio of Chinese Commodities Permitted as Imports to Taiwan: Time Ratio 0.2% 2.2% 18.2% 52.6% 56.5% 56.9% 75.8% 78.3% 79.6% Source: Bureau of Foreign Trade, Ministry of Economic Affairs, Republic of China (Taiwan), accessed July 1, c. Liberalizing Taiwanese Investment to China After the EDAC, the Taiwanese government relaxed restrictions on Taiwan s investment in China s high-tech industry except for items like wafer and upstream petrochemical products. It also did away with the investment ceiling of US$ 50 11

12 million for each project. Instead, it established a review commission armed with clear criteria on the basis of which to assess investment projects of over US$ 20 million and stipulated that Taiwanese investing an amount lower than US$ 200,000 could simply register by declaratory procedures. Finally, on August 2, 2002 it allowed Taiwanese enterprises directly to engage in investment in China rather than going through third countries. d. Liberalizing Chinese Investment in Taiwan Taiwan put forward a three-stage schedule that provided for the implementation of Chinese investment on Taiwan. In the first stage, beginning on August 8, 2002, the government permitted Chinese investment in the real estate sector. In addition, there were plans to open up to Chinese investment in manufacturing industry in the second stage, and in the capital market during the third stage. Nevertheless, as of July 2006 there had been only one case of Chinese investment in the real estate sector due to Taiwan s failure to put in place comprehensive supplementary measures and regulations to support Chinese investment. e. Expanding the Offshore Transshipment Center In April 1997, the offshore transshipment center of Kaohsiung was established. Chinese cargoes were not allowed to enter Taiwan customs but could be trans-shipped at Kaohsiung for onward passage to third countries. Similarly, Taiwanese cargoes at Kaohsiung could not be put abroad ships planning to cross directly to China. The Taiwanese government continued its support for the offshore transshipment center of Kaohsiung harbor after 2000 and further announced the Cross-Strait Sea Freight Facilitation Measures on May 7, This would, for example, allow Taiwan registered vessels to sail to Chinese ports to collect cargos and 12

13 ship them elsewhere. In addition, the government expanded the application of these Facilitation Measures from Kaohsiung harbor to Taichung and Keelung harbors. As a result, the scale of offshore transshipment increased by 56 percent from 432,668 cargos in 2000 to 674,775 cargos in 2004 (See Table 6). Table 6. The Operation of the Offshore Transshipment Center of Kaohsiung Port: Unit: cargo Period Unloading Loading Total Loading/Uploading Operation Growth Rate , , ,765 n.a , , , % , , , % , , , % , , , % , , , % , , , % , , , Source: Mainland Affairs Council (Taiwan), accessed on July 4, f. Facilitating Air Links Taiwan and China first reached agreements on passenger charter flights during the Lunar New Year holidays in In that year the flights were operated only by Taiwan s airlines, with two routes between Taipei and Kaohsiung on the Taiwan side and Shanghai on the China side with a stopover in Hong Kong required by the Taiwanese government. The details of negotiations on the charter flight issue are 13

14 discussed further in the section V. In addition, on September 10, 2003, the Taiwanese government announced the Cross-Strait Air Freight Facilitation Measures. These measures promoted one-way (Taiwanese carriers operate the flights first) restricted and indirect cargo charter flights to solve the urgent need by Taiwan businesspeople for freight transportation. However, the result was far from satisfactory. As a result, in January 2004, President Chen announced that Taiwan would seek, through negotiations with China, to expand the current uni-directional cargo charter flights into bi-directional charter flights. g. Facilitating Financial Transactions After July 2001, Taiwan allowed offshore banking units (OBUs) of Taiwanese banks to engage in direct trading with Chinese financial institutions. As of the end of 2004, 70 banks in Taiwan were engaged in OBU operations and had assets of US$ 69.2 billion. After May 2004, Taiwan s central bank eased regulations on lending by OBUs of Taiwanese banks to Taiwan-invested enterprises abroad and in China, allowing the use of Taiwan dollar-denominated assets as collateral. Between July 2001 and August 2004, financial transactions across the Taiwan Strait through OBUs amounted to US$ billion. h. Allowing Taiwan s Financial Institutions to Establish Branches in China Since 2001, Taiwan has gradually allowed Taiwan s banks, securities firms and insurance companies to set up representative offices, branch offices, or subsidiaries, in China. On April 19, 2004, Taiwan allowed Taiwan s insurance companies to invest in Chinese local companies. Furthermore, on March 3, 2005, Taiwan allowed overseas subsidiaries of Taiwan s financial holding companies to establish 14

15 representative offices in China. As of mid-2004, Taiwan s Ministry of Finance had approved the plans of 17 securities firms, 15 family insurance companies, and 10 banks to set up representative offices in China. Nevertheless, China only approved the applications of Taiwanese insurance companies to set up branch offices or subsidiaries in China. As of July 2006, China have not approved Taiwan s banks and securities firms to set up branch offices or subsidiaries because of the lack of the signatures of bilateral financial supervisory agreements and because of the absence of reciprocity for Chinese financial institutions to set up their offices in Taiwan. i. Opening Taiwan to Chinese Tourists Since January 1, 2001, Taiwan allowed 600 and 80 Chinese citizens daily to visit Kinmen and Matsu, respectively, for sightseeing. However, by mid-2004, thanks to Chinese restrictions there were only 165 and 283 Chinese traveling to Kinmen and Matsu as tourists. In September 2004, the Chinese government began to permit sightseeing from China s Fujian Province to Taiwan s Kinmen and Matsu. In addition, since January 1, 2002, Taiwan has allowed category-3 Chinese (those residing abroad) to visit Taiwan for sightseeing. A second-phase relaxation was implemented on May 10, 2002, allowing Chinese citizens who have resided abroad for at least four years and who have acquired a work permit at their place of residence abroad to visit Taiwan for sightseeing with their spouse and direct relatives. This relaxation also applied automatically to the residents of Hong Kong and Macao as well as to those Chinese citizens who had received approval to go abroad for sightseeing or for business trips. The number of Chinese visiting Taiwan for sightseeing totaled 26,190 by August 2004 and reached 107,023 by March

16 j. Relaxing Restrictions on Chinese Professionals Entering Taiwan Since January 2002, Taiwan has significantly simplified and relaxed measures for the entry applications of businesspeople and technical professionals traveling from China to Taiwan. In particular, the total period of stay for a Chinese technical specialist applying to visit Taiwan for research purposes was extended from three to six years. With the implementation of the new regulations, the number of Chinese business visitors increased from 5,896 in 2000 to 13,264 in In February 2005, Taiwan further relaxed the restrictions of Chinese citizens coming to Taiwan to engage in commercial activities. The number of Chinese business visitors grew by 31.3 percent to 17,409 in C. CONCERNS/RESERVATIONS Although Taiwan adopted many opening policy measures with respect to cross-strait economic exchange during the first Chen Shui-bian administration, Taiwan retained and continues to have--strong concerns and reservations about moving ahead with rapid economic integration between Taiwan and China. In his White Paper on China policy unveiled on November 15, 1999, candidate Chen pointed out the externality costs of national security stemmed from cross-strait economic exchanges. He proposed to balance national security and economic interest by adopting an economic security developmental strategy. 10 Like the KMT government, the Chen Shui-bian administration fears the flood of investment and trade will make Taiwan economically dependent on China, undermining its de facto political independence. Taipei s primary concern is that Beijing will exploit its economic leverage to achieve its political goal Kua Shiji Zhongguo Zhengce Baipishu, pp For instance, see Tsai Ing-wen, Constructing New Cross-Strait Relationship with Democracy and Peace as its Core, in Mainland Affairs Council, Executive Yuan, Republic of China (ed.), Zhengfu Dalu Zhengce 16

17 In fact, Taiwan s fear has been triggered and reinforced by the fact that China explicitly considers cross-strait economic relations an important source of political leverage against Taiwan. Beijing conducts cross-strait economic exchange with two political strategies in mind: yi min bi guan (utilizing the public to urge the official) and yi shang wei zheng (exploiting business to press politics). Taipei worries that Beijing might exploit its economic leverage through economic sanctions to achieve political goals if asymmetric interdependence emerges between Taiwan and China. 12 Taiwan s concerns have been reflected in its policy formulation. For instance, on August 13, 2003, President Chen pledged to resume direct links with China by the end of Two days later, the Taiwanese government issued a policy paper called The Assessment of the Impact of Direct Cross-Strait Transportation. The assessment report stressed that the effects of cross-strait direct transportation links would be extensive and far-reaching, presenting both advantages and disadvantages for Taiwan in terms of economic and security dimensions. It concluded that both parties across the Taiwan Strait should sit down and negotiate on direct transportation links as soon as possible in order to maximize advantages and minimize disadvantages for Taiwan. 13 In regard to details, the assessment report estimated that direct links would result in a reduction of transportation costs amounting to around NT$ 15 billion per year and an enhancement of efficiency in resource utilization as well as in business Zhongyao Wenjian [Important Documents of the Government s Mainland Policy] (Taipei: Mainland Affairs Council, 2004), pp Chen Bo-chi, Taiwan Jingji Zhanlue [Taiwan s Economic Strategy] (Taipei: Shibao Publisher, 2004), pp Tsai Ing-wen was former chairwoman of the Mainland Affairs Council of the Executive Yuan and Chen Bo-chi was former chairman of the Council of Economic Plan and Development of the Executive Yuan in the first term of the Chen Shui-bian administration. 12 For instance, see Tsai Ing-wen, Cross-Strait Relations and Our Policy, in Mainland Affairs Council, Executive Yuan, Republic of China (ed.), Zhengfu Dalu Zhengce Zhongyao Wenjian [Important Documents of the Government s Mainland Policy] (Taipei: Mainland Affairs Council, 2004), pp Chen Ming-tong, Minzhuhua Taiwan: Xin Guojia Anqianguan [Democratic Taiwan: A New National Security Perspective] (Taipei: Xiangue Publisher, 2005), pp Chen was vice chairman of the Mainland Affair Council of the Executive Yuan in the first Chen Shui-bian administration. 13 Related agencies of the Executive Yuan (ROC), Assessment of the Impact of Direct Cross-Strait Transportation, Mainland Affairs Council, accessed on July 4,

18 management. Nevertheless, the report also pointed out that Taiwan would face severe pressures resulting from economic competition and structural transformation. More importantly, the report argued that, without sound supporting measures, direct links would have impacts primarily on national security and secondarily on economic and social security. At the political and international relations levels, the report stated that direct links would undermine Taiwan s sovereign status and impose constraints on Taiwan s international position. Given these concerns and reservations, the following section discusses China s policies on cross-strait economic relations between 2000 and particularly Beijing s approach on the three links and on sanctions and inducements against the Taiwan-invested enterprises (TIEs) in China. IV. CHINA S POLICY ON CROSS-STRAIT ECONOMIC RELATIONS A. MOTIVES Before mid-2000, China insisted that Taiwan accept the one-china principle before the two sides could discuss the three links. After August 2000, however, Chinese Vice Premier Qian Qichen began to emphasize that establishing the three links did not require that the two sides first resolve political issues. As long as the links were regarded as the internal affairs of one country, he stressed, this issue could be solved through private-to-private, industry-to-industry, and company-to-company channels. Qian added that neither side should display flags on its ships involved in cross-strait exchanges, since flags are symbols of sovereignty. 14 In July 2002, Qian Qichen reiterated that the three links could be implemented 14 Qian Qichen: Mainland and Taiwan Belong to One China, Lienho Bao [United Daily], August 26, 2000, p

19 as soon as possible without reference to the political meaning of the one-china principle, as long as they were considered as the internal affair of one country. Qian also stressed that the three links could be negotiated by a private organization as long as it had received the authorization of the Taiwanese government. 15 In this way, Beijing de-emphasized the political significance of the three links and removed the one-china principle as a prerequisite for the negotiation of the three links. Nevertheless, China s proposal was quickly rejected by Taiwan. President Chen argued that the phrasing internal affairs of one country was equivalent to one China, and had the effect of localizing and marginalizing Taiwan. As a result, Qian put forward a new statement in October 2002, defining cross-strait air and sea links as cross-strait routes. 16 On December 17, 2003, China issued a policy paper reiterating its flexible position on the negotiation of the three links. The document argued that the three links were purely an economic matter and urged that political differences should be shelved. It defined the three links as a cross-strait affair and an internal affair of Chinese people on both sides of the Strait. It reiterated that negotiation on the three links was not political and might be carried out through non-governmental trade organizations, thus avoiding the political implications of one China. By 2004, Chinese scholars and officials related to China s relations with Taiwan for the most part believed that Taiwan s need for the three links was greater than China s. 17 In addition, Beijing believed that President Chen s advocacy of the three links was only pre-election posturing and concealed his true desire that they not be 15 Jia-wei Luo, De-huei Zhou, Pei-fen Chiou, Qian Qichen: Talks on the Three Direct Links, No Involving One China, Lienho Bao, July 6, 2002, p The interview group of the Lienho Bao, Qian Qichen: Promoting the Three Direct Links Has Nothing to Do with the Next Presidential Election, Lienho Bao, October 17, 2002, p A person involved with Taiwan in Shanghai, author s conference notes, October 9, A senior person involved with Taiwan, interview with author, November Two senior scholars of Taiwan studies in Beijing, interview with author, November

20 enacted. As a result, they argued that the three links would not be achieved in the short run. 18 If this was the case, why was the idea of the three links so actively promoted by the Chinese government during the period ? Why did China adopt a more flexible approach, rescinding the one-china principle as the prerequisite for unofficial negotiation of the three links, and defining cross-strait air and sea links as cross-strait routes? There are four reasons why Beijing actively promoted the three links. First, Chinese leaders hoped that they could realize a major historical achievement instituting the links, a proposal that has been put forward since 1979 in order to help consolidate their status within the Chinese Communist Party. 19 Secondly, China s leaders believed that implementation of the three links would both facilitate unification and prevent Taiwan s continued move toward independence. Beijing expected that closer economic exchanges would create more favorable public opinion toward unification in Taiwan, as shared economic interests increasingly accrued to both sides. 20 Third, the three links would help China solve its current economic predicament and help maintain the momentum of its economic development. 21 By the early 2000s, notwithstanding its outstanding economic growth rates, China s internal economic, social, and political problems such as an ailing financial system, poorly-performing state-owned economy, stagnating agricultural and rural development, increasing 18 Two senior persons involved with Taiwan in Beijing, interview with author, November A senior scholar of Taiwan studies in Beijing, November Two scholars of Taiwan studies in Shanghai, interview with author, November A senior person involved with Taiwan in Beijing, interview with author, March A scholar of Taiwan studies in Shanghai, interview with author, March A person involved with Taiwan in Shanghai, author s conference notes, October 9, A senior scholar of Taiwan studies in Shanghai, interview with author, November A senior scholar of Taiwan studies in Shanghai, interview with author, November A scholar of international relations in Beijing, interview with author, July 12, A senior economist at the Xiamen University, July 8, A senior scholar of Taiwan studies in Beijing, interview with author, July 8, Several senior scholars of Taiwan studies in Beijing, interview with author, July 9 and 16,

21 income and regional inequality, and serious political corruption persisted. Moreover, since joining the WTO at the end of 2001, China had faced an increasingly serious economic challenge associated with a rise in unemployment. The only way in which China could solve, or limit, this problem was to maintain an economic growth rate of 7-8 percent annually in order to provide sufficient employment opportunities. 22 For instance, in 2004, the Chinese government sought to create 9 million new urban jobs a target that implied the attainment of annual GDP growth rate of at least 9 percent in that year. 23 In fact, during internal meetings in Beijing in early 2000s, Premier Zhu Rongji did not mention any policy achievements, emphasizing that China still had enormous problems to be solved. He had a clear picture of China s overall situation, which led him to be less optimistic than previously. 24 At a press conference in March 2002, Premier Zhu even argued that if the Chinese government had not adopted a proactive fiscal policy and prudent monetary policy between 1998 and 2002, China s economy would probably have collapsed. 25 Fourth, Beijing maintained that the three links would promote the stability and development of cross-strait relations and thereby allow China to focus on its economic development. 26 In July 2002, explaining cross-strait relations to a visiting delegation of the Mountain Alliance, a political group from Taiwan, Vice Premier Qian pointed out that China still faced many difficulties; and he cited peace and 22 Tung, China's Economic Leverage and Taiwan's Security Concerns, pp A senior economist in Tianjin, conversation with author, November A senior economist in Beijing, conversation with author, November Chen-yuan Tung, Assessment and Prospects of China s Economic Development: , China Economic Analysis Yearly Report, Cross-Strait Interflow Prospect Foundation, December 2004, p A senior scholar of Taiwan studies in Beijing, interview with author, July 9, Comparison Xinhua Reports on Premier Zhu Rongji News Conference (in Chinese), Beijing Xinhua Domestic Service, March 15, 2002, in FBIS, Daily Reports/China, March 15, A senior scholar of Taiwan studies in Beijing, interview with author, November A senior scholar of American studies in Beijing, interview with author, November

22 stability as the major imperatives. 27 Thus, during these years Beijing strongly promoted the policy of direct links across the Taiwan Strait. For the Chinese leadership, success in this regard seemed to pose little risk, to have a high probability of realization, and to bring with it a possible elevation of their status within the party. For these reasons, it remained at the center of China s policy towards Taiwan. In sum, during these years it seemed that both sides of the Taiwan Strait were very pragmatic in promoting cross-strait economic exchanges, but the progress was only incremental. In addition to unilateral openings or promotion, the most important issue for both sides was to formulate a feasible negotiation model that would allow economic issues, including direct links, to be addressed. In the case of negotiations on cross-strait charter flights, such a flexible negotiation model was indeed achieved. However, before discussing this example of flexibility, note should be made of China s policies of sanctions and inducements against the TIEs in China which highlights the political agenda that looms over Chinese flexibility. B. POLICIES OF SANCTIONS AND INDUCEMENTS AGAINST TAIWAN BUSINESSPEOPLE On March 10, 2000, DPP presidential candidate Chen Shui-bian revealed his list of advisors for national policies, including Stan Shih, chairman of the Acer Group; Shi Wen-lung, chairman of the Chi Mei Group; Chang Yung-fa, chairman of the Evergreen Group; and Ying Qi, president of the Continental Engineering Corporation. Zhang Zhiqun, director of Shanghai Taiwan Affairs Office, was quick to summon representatives of these companies to Shanghai, where he expressed China s concerns regarding their support for Chen Shui-bian. 27 Jia-wei Luo and Pei-fen Chou, Qian Qichen Affirms the Function of the Two Associations, Lienho Bao, July 6, 2002, p

23 One month later, although reassuring TIEs in China that their legitimate interests would be protected, Li Bingcai, TAO deputy director, said, [V]ery particular individual important Taiwan businesspeople openly clamor for Taiwan independence and advocate the Lee Teng-hui line, which preaches the break up of the motherland. Meanwhile, they scrabble for profits by engaging in business and economic operations on the Mainland. Such a situation will not be allowed to continue. 28 Li Bincai s remarks provoked anxiety among TIEs which Beijing quickly tried to minimize. On April 24, ARATS Vice Chairman Tang Shubei emphasized that Beijing welcomed and encouraged the majority of TIEs that had invested in China, and would protect their interests. He added that China s concerns were directed only towards very particular individual TIEs, which publicly supported Taiwan independence. On May 7, one month after his earlier remarks, Li Bincai reassured TIEs that China would continue to abide by Jiang s eight-point proposal and effectively protect all legitimate interests of TIEs. He again made it clear that Beijing was concerned only with very particular individual TIEs which publicly supported Taiwan independence. On September 23, Li reassured TIEs that cross-strait political differences would not be allowed to interfere with economic exchange and cooperation. He maintained that China valued the important role of TIEs in its economic development and would protect their interests under any circumstances. In early March 2001, Shi Wen-lung made controversial comments (contained in a comic book, Taiwan Discourse, by Japanese cartoonist Yohinori Kobayachi) that with economic compensation some Taiwanese comfort women were not forced to become sexual slaves for the Japanese military during the World War II. As a result, 28 On the Current Development of Cross-Strait Economic Relations: Questions Answered by the Leader of the Central Taiwan Affairs Office and the State Council Taiwan Affairs Office, Renmin Ribao [People s Daily], April 10, 2000, p.1. 23

24 on March 10, the Chi Mei petrochemical plant in Zhenjiang, Jiangsu Province, was reportedly forced to shut down under pressure from Beijing. In addition, China launched a series of tax investigations at the Chi Mei s Zhenjiang plant actions that were widely seen as Beijing s retaliation for Shi s comments. 29 Nevertheless, on the same day, both the Chi Mei Group and Chinese authorities denied reports that the Chi Mei s plant in Zhenjiang had closed. In addition, the TAO issued a statement that China would protect the legitimate rights of Taiwanese investors in China. The next day, a TAO spokesman reiterated China s opposition to anyone making money in China while simultaneously advocating independence in Taiwan. He added that while China would protect the rights of Taiwanese companies in China, it would also take appropriate measures against anyone who broke the law. Although Shi Wen-lung did not explicitly support President Chen s re-election campaign in , a TAO spokesman stated after the 2004 election that China did not welcome green Taiwanese businesspeople. He clarified the statement in a comment to the effect that we do not welcome those Taiwan businessmen who earn money from the mainland and support Taiwan independence when they return to Taiwan. 30 In editorial comments of Renmin Ribao [People s Daily], China called Shi Wen-lung a big-shot for Taiwan independence, adding that he was a major behind-the-scenes financial supporter of President Chen. 31 In addition to rhetoric threat, the Chinese government has moderately sanctioned the Chi Mei group for Shi s Taiwan independence stance by constantly launching tax probes and harassing/threatening its cooperative companies, both upstream and downstream Sofia Wu, Mainland Official Denies Chi Mei Plant Closure, Central News Agency, March 11, Huei-xing Wang, Chi Mei Builds an Empire of Petrochemical Industry, Zhongguo Shibao, March 11, Beijing Taiwan Affairs Spokesman s News Conference on 24 May, BBC Worldwide Monitoring, May 24, Gang Cheng, We Do Not Welcome Green Taiwan Businesspeople, Renmin Ribao, overseas edition, May 31, Jia-hong Chen, Shi Wen-long s Stance Was Manipulated by China, Zhongguo Shibao, March 30, 2005, p. A4. 24

25 By mid-2004, the Chi Mei group had become the world s largest manufacturer of important plastic material ABS and China was its major market. Since 1996 it had established a petrochemical complex in Zhenjiang (Jiangsu Province), in which it had invested US$ 170 million. Its expansion plans projected that total investment in the Zhenjiang plant would eventually reach US$ 600 million and attain a production capability greater than the group s domestic facilities in Taiwan. 33 In addition, the Chi Mei group planned to invest increasingly in high-tech information industry in China. In short, the Chi Mei group had a very high stake in its investment interest in China and faced significant pressure to drop its political stance. On March 26, 2005, less than two weeks after China s passage of the Anti-Secession Law (ASL) toward Taiwan, Shi Wen-lung released a retirement statement, in which he not only stated that he felt comfortable with the ASL, but argued that Taiwan independence would only push Taiwan into a war and bring disaster to the people. In his statement he said that his ancestors came from China s southern Fujian Province and that he believed that both Taiwan and the mainland belong to one China. 34 His statement came as a particular shock since it was made on the same day when Taiwan s one-million people demonstrated against China s ASL. Since Shi was regarded as having been a strong supporter of Taiwan independence in the past, the Chi Mei case had a strong influence on the political stance of Taiwan investors towards cross-strait relations. It was surely no coincidence that following the Shi Shock, the Acer Group s Chairman Stan Shih declined President Chen s invitation to serve as his advisor, saying, I have kept politically neutral and refrained from choosing sides all along. The declared purpose 33 Xu Wenlong Neidi Jidi Tancha [Exploring Xu Wenlong s Mainland Projects], Zhongguo Jingying Bao [China Business Daily], June 7, 2004, p Taiwanese Tycoon Vows Support for Beijing s One China Policy, China Post, March 26,

26 of the excuse by Shih was to avoid misunderstanding from the other side of the Taiwan Strait (i.e. China). 35 Note that the Evergreen Group s Chairman Chang Yung-fa quit the position as President Chen s advisor in May In essence, China s tactics were both economic inducements and economic sanctions. Economic sanctions involve the threat or act by their initiator(s) to disrupt customary economic exchange with the object of the sanctions ( target ) in order to punish the target or force a change in the target s policies. Economic inducements involve commercial concessions, technology transfers, and other economic carrots that are offered by the initiator(s) in exchange for political compliance by the target. Economic inducements are also called positive sanctions. 36 Despite having punished green Taiwan businesspeople (pro-dpp government) by launching tax probes or undertaking other forms of administrative harassment from time to time, China mainly relied on its potential market and investment opportunities to induce TIEs to comply with China s political stance. In the Chi Mei case, Shi Wen-lung was at pains to point out that the group stood to lose NT$ 4.5 billion (US$ 141 million) annually if it could not invest in liquid crystal display (LCD) modules in China to save production costs. 37 V. BILATERAL NEGOTIATIONS ON THE CHARTER FLIGHTS ISSUE The crux of the deadlock between Taiwan and China has been China s insistence on recognition of the one-china principle (1992 consensus) as the precondition for the holding of official negotiations on both functional and political issues; however, 35 Xiou-ming Zou, Stan Shih: No More State Advisor, Lienho Bao, April 1, 2005, p. A1. 36 Tung, China s Economic Leverage and Taiwan s Security Concerns, pp Shi Wen-lung: Independence and Unification Is Personal Feeling, Zhongguo Shibao, August 4, 2005, p. A13. 26

27 Taiwan remained unwilling to accept the one-china principle and 1992 consensus even as it has insisted that these issues required talks at the official level. As a result of these contradictory positions, cross-strait political relations have remained deadlocked from 1999 to the present. A side effect of this has been that negotiations on cross-strait economic issues have not moved ahead. At the end of 2001, Taiwan suggested that negotiations be held on the issue of opening up Taiwan to Chinese tourists. In mid-2004, Taiwan put forward 18 issues for negotiations with China,, including currency clearance, investment protection, financial supervision, avoidance of double taxation, product importation, protection of intellectual property rights, judicial assistance, commercial arbitration, fisheries dispute arbitration, personal security, charter flights and direct transportation links, tourism, repatriation of illegal migrants, joint crime prevention, marine pollution, and fishing boat worker negotiations, but China failed to respond positively. However, negotiations regarding these issues were frustrated by the contradictory positions described above. Nevertheless, cross-strait Lunar New Year charter flight negotiations have gradually opened up a window of opportunity to break this deadlock. Because of the burgeoning demand from Taiwan businesspeople in China for charter flights, in late October 2002, the two sides began to consider and plan Lunar New Year charter flights. China requested Taiwan to undertake negotiations on the details of charter flights through authorized private organizations and urged seeking an agreement to institute reciprocal two-way flights in the following year. In response, Taiwan emphasized that it was ready to send representatives of the Strait Exchange Foundation (SEF) to negotiate with their counterpart organization - the Association of Relations Across the Taiwan Strait (ARATS). China, however, refused to resume the SEF-ARATS dialogue because Taiwan did not accept the one-china principle as a 27