There is little doubt that despite the twists and turns of domestic politics in Taiwan, cross-strait relations have been improving. On the reasonable assumption that this trend will continue, it is time perhaps to look at the economic consequences on both sides of closer ties.
The improvement in the climate, despite the often erratic and sometimes provocative performance of Chen Shui-bian can be attributed to three main developments.
On the mainland side, since President Hu Jintao took office, there has been a recognition that gentle words and friendly gestures are key to breaking down hostility and suspicion among Taiwan people.
On the Taiwan side, there has been increasing belief that the island is losing out economically from the restrictions it imposes on trade and investment. The relatively slow growth of the island’s mature economy is readily contrasted with the rapid growth on the mainland.
There are still many who believe that removing restrictions will result in the loss of more manufacturing jobs to the mainland as Taiwan firms exploit the much lower labor and land costs there.
However this argument has been losing force as the restrictions are seen to have little impact on all but a few high-tech industries. Most labor-intensive ones catering to international markets have already moved at least some of their production offshore, while the restrictions are blamed for discouraging the development of higher value-added service industries.
A third factor is that the United States – beset with wars in Iraq and Afghanistan and its so-called "war on terror" – has seen the merit of engaging Beijing on issues ranging from North Korea to global trade and nuclear proliferation. In turn this has led to Washington publicly expressing disapproval with Chen Shui-bian’s separatist gestures, thereby undermining the credibility of the DPP with the Taiwan public.
The visits of former KMT leader Lien Chan and People First Party leader James Soong to the mainland showed that moves towards rapprochement were no longer a political liability in Taiwan. Helping too have been the scandals engulfing Chen, which have required him to cede more authority to a premier more conscious of the benefits of cross-strait trade.
So what is now in store for the economies on both sides? The most likely immediate development is an easing of the restrictions on mainland investment, particularly that which aims to prevent Taiwan companies from having more than 40% of their capital invested on the mainland.
This measure has largely failed in preventing investment because Taiwan companies are free to set up entities in Hong Kong and Singapore from which to conduct mainland business.
The shackles placed on mainland firms looking to invest in Taiwan are also likely to be removed. There are expectations that mainland money will boost real estate prices, particularly for high-end residential property, Taipei offices and hotels.
The most sensitive issue is direct air links. But it’s possible that within 12 months there will be regular direct commercial flights, which do not require direct government to government dealings.
Direct flights will have particular beneficial impact on Taipei, giving it the potential to become a commuter hub for Taiwan people working along the mainland’s east coast. The Taipei-based financial sector would also benefit hugely from direct links and two-way portfolio and banking flows.
Tourism will take a while to develop but it can become a big earner for Taiwan. Listed hotel stocks are already booming in expectation of a wave of mainland tourists.
What then of manufacturing? Given that the current – and somewhat light – restrictions have only really affected the high-tech sector, direct links and the easing of investment controls may in practice have less impact than is often assumed.
The main drivers are demand, costs and market access. With costs in the mainland now rising faster than in Taiwan – albeit from a very low base – the cost incentive is weakening and low-end garment and shoe producers are starting to look to Vietnam and elsewhere. So there is unlikely to be a major shift of export industries to the mainland. More likely is an increase in Taiwan investment aimed at the double-digit growth in mainland consumer demand.
Even if they were given the freedom to relocate to the mainland, Taiwan’s high-tech companies are still likely to keep their top-end production and most of their R&D work at home. Indeed, cross-strait links might reduce the need for them to be on the mainland and close to their customers.
The bottom line for Taiwan manufacturing is that it must compete globally through innovation and access to low-cost production centers. That will not change because of direct links.
It is also easy to over-emphasize Taiwan’s dependence on the mainland. Whilst some 40% of its exports now go there, more than half of these are components for products made by Taiwan-owned firms and sold internationally. Almost all laptop production is now done on the mainland – but the value added in Taiwan is greater than the 20% or so added on the mainland.
In short, the strengthening of cross-strait ties is more likely to impact service industries than manufacturing. Not only are services on both sides of the strait relatively underdeveloped but the WTO memberships of mainland and Taiwan requires them to open up to foreign competition, as well as to each other.