A debate is raging over the pace and content of cross-strait economic integration. Despite the risk to national security, businesspeople argue that their escalating costs and the government's own APROC plan require direct links to the mainland.
The autonomy of the ROC government in the formulation of policy priorities for cross-strait relations has been repeatedly compromised by the business community. As small, medium-sized, and large businesses adapt their strategies to changing domestic and international economic realities, they have had greater impact on the domestic policy debate concerning the proper degree of economic integration between Taiwan and mainland China.
Businesspeople, many economic planners in the Ministry of Economic Affairs (MOEA) and the Council for Economic Planning and Development (CEPD), and other officials are increasingly concerned about the escalating costs associated with the government's continuing bans on direct trade, travel, and telcommunications with the mainland. Even the recent steps in the first quarter of 1997 to establish direct cross-strait shipping ties are considered inadequate. As a result, businesses, frustrated with official footdragging on elimin ating the ban on direct links, are becoming more aggressive in their attempts to influence government policy. They are building on previous success.
Since the mid-1980s, the tempo of cross-strait economic integration has been only partially affected by the ROC's official mainland policy. Although the government has been relatively effective in restricting inbound flows of commodities, capital, and people from the mainland, it has been able to exert only limited control over outbound flows. Most regulatory measures and policy incentives (and disincentives) have proved to be either ineffective or simply irrelevant. Instead, the government has repeatedly been compelled to loosen its trade and investment controls as existing regulations have been overtaken by events.
On the surface, government measures have put Taiwan's investors at a clear disadvantage in mainland China. For instance:
· Many finished or semifinished products produced by Taiwan-invested firms in mainland China cannot be imported to Taiwan, because of unilateral trade sanctions, including a long prohibitive list. By the end of 1994, for instance, only 2,637 products out of a total customs list exceeding 9,000 items were permitted to be imported from the mainland.
· The freight costs for shipping parts, components, and other goods and materials to or from a mainland-based subsidiary are comparatively much higher because of the requirement to ship items to the mainland indirectly through a third port. For example, transshipping rates can increase the freight fee by almost 100 percent for a container shipped from Keelung to Xiamen, on the coast of Fujian province.
· Company and corporation headquarters in Taiwan cannot get tax write-offs from the ROC for their business losses in mainland China.
· Taiwan businessmen in mainland China get little assistance from their home-based banks, because of restrictions on Taiwan banks that want to set up branch offices in mainland China.
· According to the 1993 "Regulations Governing Investments and Technical Cooperation with Mainland China," all investment projects worth over US$1 million require prior government approval and are subject to a rigorous and often lengthy review process.
· Projects that would compete with any domestic agricultural sector, service sector, state-designated strategic industry, defense-related industry, or high-tech sector that has received R&D subsidies or assistance from the government are usually barred from mainland investment.
· Mainland investments are subject to stricter financial regulations by the Security and Exchange Commission. For example, listed companies are not allowed to earmark funds for mainland projects by issuing new shares.
· In principle, the annual sum of mainland investment by any listed company should not exceed its gross domestic investment.
In contrast, investors who target Southeast Asia have few restrictions. The government ha s sought to encourage Taiwan firms to follow a "southward" instead of a "westbound" strategy by providing soft loans to the Philippines, Indonesia, and Vietnam to finance the development of industrial parks, export-processing zones, and other infrastructure projects that cater to the needs of Taiwan investors.
Despite the intent of government regulations, however, local businesses have not been thwarted in their westbound movement, because their primary investment criteria are based on different factors. Prominent among these are the minor adjustment costs associated with adapting to mainland business practices; the PRC's attractive investment environment; the strong prospects for a more open mainland market; and the strategies of their global competitors, who are also seeking a foothold on the mainland. The government's mainland policy has had little impact on these criteria.
The integrative pull to strengthen cross-strait economic links has been reinforced by other develop ments as well. One has been the welcoming arms of local PRC authorities. Since the mid-1980s, the investment environment has been shaped increasingly by local governments, as Beijing has delegated more discretionary power to local officials in the areas of foreign investment and trade. Motivated by the job opportunities that arise from overseas investment--and perhaps no less by the personal financial gains possible--local officials have engaged in a bidding war to attract prospective investors.
To sweeten the incentive package, these officials have employed their own fiscal resources to build needed infrastructure, such as roads and power facilities. Oftentimes they have also bent bureaucratic rules or simply ignored many laws and regulations that would turn potential investors away. Such irregular practices are most prevalent at the city and county levels. Although few Western transnational corporations feel comfortable dealing with this sort of environment, such irregular practices have much greate r appeal to Hong Kong, Taiwan, and overseas Chinese investors, because they are quite used to this informal way of doing business.
The first wave of Taiwan firms that flocked to mainland China after 1988 were mostly export-oriented, small and medium-sized enterprises (SMEs). These predominantly family-owned-and-operated business entities, when forced by economic trends to either internationalize or perish, found that they could not afford a full-fledged globalization strategy. Instead, they expanded to the mainland in order to continue following deeply ingrained business habits. Moreover, the mainland offered the advantage of a shared cultural heritage, a common language, and ways of doing business similar to Taiwan's own just a few decades ago.
Most of Taiwan's export-oriented, labor-intensive sectors share a distinctive industrial structure: an extensive and dense net of subcontracting relationships among mostly small and medium-sized firms. This structure helps explain why the exod us of a few Taiwan firms, albeit in the absence of any coordinating authority, was soon followed by a regiment of connected companies. Thus, in the span of only four years, between 1988 and 1992, thousands of Taiwan manufacturers--in garments, handbags, sport shoes, toys, bicycles, umbrellas, small consumer electronics, and cameras--were transplanted along the coast of Guangdong and Fujian provinces.
This first wave of Taiwan investment forced some adjustments in the ROC's cross-strait regulations, because the highly-adaptable SMEs simply ignored the official ban on mainland investment. Forced to modify its policy to accommodate a fait accompli, in 1991 the government formally lifted the ban on investment through overseas subsidiaries and eased the restrictions on mainland imports.
In fact, the first-wave Taiwan investors did not put any ostensible political pressure on government officials to revamp existing mainland policy. The island's SMEs have never enjoyed strong rapport with the governme nt's ruling party, the KMT, and have little political potency because they lack the necessary institutional resources and skills for organizing group-based lobbying efforts. Moreover, these firms have traditionally been able to move in or out of their business sectors with relative ease, because start-up and exit costs are quite low. These conditions encouraged private adjustments to economic realities instead of pursuing collective bargaining for a shift in government policy, an allocation of time and resources that kept businesspeople's eyes on profits instead of almost certain frustration with attempts at lobbying.
More importantly, those businesses were not much bothered by many of the existing regulations. Government restrictions did not on the whole weaken their position. Local SMEs concentrated their investments in the coastal areas close to Hong Kong, the center for "indirect" cross-strait shipping. A great many set up operations in Shenzhen's Special Economic Zone, already linked to Hong Kong with a highway and railroad. For transplanted factories located elsewhere, the transshipping requirement was also not a serious hindrance, as most of the outbound containers shipped from mainland seaports had to be transshipped through Hong Kong anyway, because most of the coastal province seaports do not have the facilities to accommodate modern ocean-going container ships.
The cross-strait economic picture started changing further in 1992, after the mainland increased its market-oriented reform. The renewed prospect of mainland economic expansion triggered a second wave of Taiwan investment. But this one was propelled by rather different economic incentives. Many businesspeople were attracted by the gradual opening up of the entire coastal area, including much of the mainland's industrial heartland, such as Shanghai, Tianjin, Qingdao, Dalian, and Wuhan. In these industrial centers, Taiwan investors would have access not only to cheap labor and land, but also to well-trained technicians an d engineers. And almost all Taiwan firms had their eyes on the growing spending power of the mainland's vast urban population.
The key players in the second wave were Taiwan's largest business groups. By the end of 1993, among Taiwan's 350 listed companies, only 46 had made investments through official channels. By mid-1996, 83 companies had done so. Even this figure is underestimated, however, because many listed companies invested through their overseas subsidiaries to avoid government approval processes. The top investor, President Food Co., had an accumulated investment of US$300 million by mid-1996. Its mainland-generated revenues have risen rapidly in recent years and are approaching one-fifth of the group's gross revenue.
Diversified business groups have the financial and organizational resources to implement a long-term Greater China strategy to integrate their Taiwan, Hong Kong, and mainland operations. They also enjoy much stronger bargaining power for getting permission directly from Beijing planners for entry into import-substitution sectors and highly-regulated service sectors. Most of these investments are located in or near major commercial centers, all with a vast urban population with a rapidly rising disposable income.
As an increasingly larger proportion of Taiwan investors set up projects in central and northern China, and with the steady improvement of mainland port facilities, Taiwan firms began feeling uncomfortably squeezed by the ROC's limitations on direct cross-strait shipping and air transportation. Moreover, other restrictive measures put large local business groups at a clear disadvantage versus the many American, Japanese, and European multinational companies that were moving into the mainland market.
As the worry of being locked out of the mainland market intensified, large business groups started exerting pressure on ROC officials to relax existing regulations. Interestingly, these demands partially converged with the agenda of the government's own ec onomic planning officials. Many in the MOEA and CEPD, for instance, wanted to foster a rational integration of the two economies.
Nevertheless, the central government did not want to give up its discretionary power over approving large-scale investment projects on the mainland. With the backing of officials at the Mainland Affairs Council (MAC)--the primary agency for handling mainland policy--the government cajoled a number of large business groups to postpone or scale down several ambitious investment projects.
The most famous case involves an ongoing dispute between the government and the Formosa Plastics Group, the island's largest diversified business group, over a US$3.2 billion project slated for a power plant in Zhangzhou, Fujian province. Government officials have tried to persuade Formosa Plastics to postpone the project indefinitely with both a lucrative counter-offer package and an unspoken threat to reconsider the group's credit line at state-owned banks. Formosa Plastics seems to be c ircumventing this pressure by having one of its American subsidiaries continue with the project, and finance it with funds raised outside Taiwan. Negotiations over the dispute are expected to continue well into mid-1997.
To further offset the lure of mainland business opportunities, the government has moved to curb the price of industrial land, relax pollution regulations, sweeten tax incentives, and open up many restricted sectors, such as power generation, telecommunications, and petroleum refineries, for private investment.
The future of Taiwan's economy in the dynamic Asia-Pacific region, however, increasingly depends on smooth economic cooperation with mainland China. This became even clearer in late 1994, when the government unveiled its plan to develop Taiwan into an Asia-Pacific Regional Operations Center--the APROC plan--as a means to attract multinational corporations to set up regional offices here. The plan calls for Taiwan to become a regional center for financial service s, telecommunications, air transportation, shipping, manufacturing, and media. None of this could happen, of course, under the existing regulations forbidding direct cross-strait links.
For almost three years, economic officials have vigorously promoted the APROC plan, but they have deliberately avoided challenging the political rationale for continuing the bans on direct links. Early on, however, they did commission an international management consultant firm to do a feasibility study on the plan. The report confirmed the planners' own unspoken conclusion: the existing bans on direct trade and direct sea and air links are major obstacles to Taiwan's APROC ambitions. From that point on, the internal government rift between officials concerned primarily about economic development and those who were focusing on the national security implications of direct links helped bring about more public debate on the pace and content of cross-strait economic integration.
One of the most formidable tasks for the government in this debate is to reconcile the potential conflict between the National Unification Guidelines, which include stipulations that reject direct cross-strait links until the PRC becomes more democratic and treats the ROC as an equal entity, and the APROC plan, which needs these links before it can effectively be implemented.
The PRC military maneuvers and missile tests in the Taiwan Strait during the ROC's 1996 presidential campaign and election greatly increased cross-strait tension, and put on hold any attempt to bring about a change in the no-direct-links policy. But since last summer, tension has abated, and Taiwan businesspeople have proved no less inclined to invest on the mainland.
As a result, the government is now feeling even greater pressure from businesses, large and small, to open up direct links for purely economic reasons. Businesspeople, and many economic planners, share the view that existing government regulations carry an increasingly higher economic price tag for Taiwan. The protracted recession in the service sector and a sharp decline of shipping volume at Kaohsiung over the last two years have only amplified this concern.
Moreover, with the approaching Hong Kong handover, shipping arrangements between Taiwan and Hong Kong have to be clarified. While positive steps have been taken in the first quarter of 1997 to resolve some shipping issues, businesspeople are also concerned about bans on direct air transportation and telecommunications, as well as other restrictions that increase their costs.
If the government wants to soothe business anxieties, it seems to have little choice but to endorse a gradual approach to resolving the three-links issue, a process dictated by economic reality and the imminent Hong Kong handover. At the same time, the government has to weigh the national security implications of removing these bans. The policies outlined in the National Unification Guidelines and the APROC plan put the government on the horns of a dilemma. It remains to be seen how and if these conflicting policies can be reconciled.
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Chu Yun-han (朱雲漢) is a political science professor at National Taiwan University and director of programs at the Institute for National Policy Research (INPR), a prominent Taipei-based think tank. This article is excerpted from a paper presented at the Association for Asian Studies meeting held in Chicago, March 1997.