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Taiwan to Change Trade Policy with China - 2001-09-05

Taiwan is about to change its policy on restricting trade and investment with mainland China. Businesses have welcomed the decision to lift current barriers. But analysts say the economic benefits are likely to be limited, and the political impact may be limited, too.

Taiwan has long had restrictions against direct trade with China, forcing Taiwan companies to conduct commerce through third countries or Hong Kong. Nevertheless, indirect cross-strait trade has boomed, and last year it totaled more than $31 billion. Five years ago, then-president of Taiwan Lee Teng-hui implemented a policy called "No Haste, Be Patient," intended to protect Taiwan's economy from being dominated by mainland China. At the time, Taiwan had a strong economy, and there were fears that increased interaction with the mainland would make Taiwan too dependent on China.

That policy set restrictions on how Taiwan businesses and individuals could invest in the People's Republic of China. No more than $50 million could be invested in a single project. In addition, the policy banned any investment in infrastructure projects or the advanced technology sector on the mainland. Despite the limits, Taiwanese investment on the mainland has grown steadily, and the cumulative total is more than $60 billion.

Now, Taiwan President Chen Shui-bian says he will implement recommendations by an advisory panel that wants him to replace the "No Haste, Be Patient" policy with one that encourages closer economic ties with China.

Businesses on Taiwan are pleased with his decision, saying it will help revive the island's economy which has been hurt in the last couple of years by the slowdown in the electronics industry.

The U.S. Chamber of Commerce also welcomes the plan to ease trade and investment restrictions across the Taiwan Strait. The chamber's senior vice president for international affairs, Willard Workman, calls it an important symbolic decision. "For American business looking at mainland China, we view this as an important source of capital going into the country which is going to create a demand for not only Taiwanese products but also American goods and services," said Mr. Workman. "So, this is welcome."

Professor Barry Naughton is a specialist on China's economy at the School of International Relations and Pacific Studies at the University of California at San Diego. He says the most significant change would be an end to the restrictions that limit the size and sectors of Taiwan investment on the mainland. "In the last 10 years, a very substantial amount of the lower end of electronics production carried out by Taiwan companies has moved to China, but previous Taiwan government restrictions prevented the more sophisticated types of electronics production from also relocating," Mr. Naughton says. "So for instance, until policy is changed, a chip foundry, that is a fabrication plant that makes integrated circuits and central processing units and other kinds of circuits for computers, could not be built in mainland China by a Taiwan firm. Presumably that will change as these restrictions are rolled back by President Chen."

Gary Hufbauer, of the Institute for International Economics in Washington, downplays the importance of ending limits on Taiwanese investment in China, because he says that kind of investment already occurs. "It's not so significant because Taiwan firms already use many subterfuges to invest in China and all but own the land, including in various kind of service enterprises," Mr. Hufbauer says.

Mr. Hufbauer says it will be more significant if the Taiwan government decides to allow Chinese investors to participate in Taiwan's real estate and stock markets and let mainland banks set up branch offices on Taiwan. "Not that Chinese firms are going to buy up a lot of Taiwan real estate," he said. "That would be an exaggeration. That's not going to happen. But certainly they will set up banking branches and other kinds of distribution firms, maybe retail distribution in a major way. And that will be a significant change."

Professor Naughton says because Taiwan is more developed than the mainland, he expects the influx of Chinese investment on Taiwan to have more political than economic impact on the island. "The economic impact of Chinese firms investing in Taiwan will not be terribly large, but the political impact is quite substantial because so many Chinese firms still have government ownership or government influence," Mr. Naughton said. "Chinese government investment in Taiwan inevitably means much greater human traffic back and forth. It inevitably means that Chinese government-linked people will be in residence in Taiwan, so it's going to create a whole new political environment between the two sides."

But Mr. Naughton says President Chen's decision to lift trade and investment restrictions is not likely to ease the political stalemate between Beijing and Taipei. He says Beijing probably wants to wait for the outcome of Taiwan's legislative elections in December before allowing any real progress to occur. "This will improve the atmosphere somewhat, but it's not going to be... You know, if he had done this shortly after he became president, it would have had a dramatic effect on the atmosphere. Now, it's not going to have that kind of effect," says Mr. Naughton. "It's a step forward, but an incremental one in a situation where both sides are basically adopting a wait and see policy until after the December elections."

Professor Naughton says Taiwan and China have come a long way on economic interaction, considering how far apart the two sides are politically. The government in Beijing considers Taiwan a renegade province and wants Taiwan's leaders to recognize there is only one China before the mainland will resume a dialogue with the island.

Mr. Naughton says it makes sense that President Chen is moving to lift barriers to trade with mainland China. When the two join the World Trade Organization in a few months, he notes that Taiwan will have to confer the same access to mainland companies that it does to businesses from other WTO member states, unless Taiwan asks for a special exception on grounds of national security.