The pragmatic straits

Will it make much difference to cross-straits relations who wins the presidential election on March 20th? On the face of it, there is a huge political divide between the supporters of the 'One China' principle and those who toy with varying degrees of Taiwanese separatism. It is a divide which threatens cross-straits ties to the point of catastrophe.

Political issues of a fundamental nature do exist. And as events at the time of the previous two Taiwan presidential elections in 1996 and 2000 showed, these can come dangerously close to spilling over, if not into warfare at least into tensions likely to frustrate the growth of trade and investment across the straits. Taiwanese and foreign investors cannot entirely put out of their minds the possibility of the commercial strangulation of the island should its leaders step beyond ambiguity into secessionist territory.

That said, the chance of the election fundamentally changing cross-straits relations is low. Both sides have rigid ideological positions on the status of Taiwan. But both sides also have fundamental economic interests at work which keep the politics in check. Thus the battleground of Taiwan politics is in the center, which means maximizing Taiwan's sense of identity without jeopardizing an economy dependent to an increasing degree on its Mainland links. Likewise, the Mainland's desire to build the economy takes precedence over its long term goal of reunification. Even alarming verbal exchanges in 1996 and 2000 had only short term economic impact. Business remains driven more by the profit cycle than the political one.

But there is a paradox. Economic success has helped entrench political positions on both sides of the Taiwan Straits. The Mainland's growth has increased its international leverage and thus its ability to keep Taiwan's international ambitions in check. This was starkly shown by the way that George W. Bush and Jacques Chirac both rushed to publicly criticize Chen Shui-bian's referendum proposal.

Although Taiwan's political position has been weakened by Mainland achievements, its own social and economic progress over the past two decades has provided fertile soil for demands for democracy and self-determination.

In the early 1990s it was widely believed, especially on the Mainland and by foreigners, that the rapid growth of cross-straits trade made possible by Mainland reform would create an economic interdependence which would foster reunification. By the mid-1990s the prospect of direct links soon was being widely touted, and much investment was made in Taiwan on the assumption that it would happen. It seemed a natural follow-up to the extraordinary growth of Mainland trade. In just a few years, Taiwan's exports to the Mainland went from almost nothing to 23% of its total. Thousands of Taiwanese firms shifted labor-intensive production to the Mainland and also invested in real estate and other activities.

The shift of low-wage jobs to the Mainland had the result of raising income levels in Taiwan as middle class, skill-intensive and service sector jobs expanded rapidly. New wealth underwrote a desire for participation in government. Although Taiwanese could see that the Mainland was also making rapid social and economic progress in this period, it was not sufficient to offset the sense of a right to self-government that had emerged.

Events since the Asian crisis have weakened Taiwan's relative economic position. The Mainland has roared ahead – particularly since joining the WTO. Security conditions for investors have also improved. More and more Taiwan firms have moved production to the Mainland. Now 33% of Taiwan's exports go there. Meanwhile the Taiwan economy has grown slowly. Unemployment is up and the income divide in Taiwan is growing as unskilled workers cannot find jobs. Politically, this has not been positive for cross-straits trade.

The business community mostly argues that increased cross-straits trade and investment would be good for Taiwan. Even without full links, many benefits could be reaped by removing barriers to movement of people and money across the strait. However, the fear of 'hollowing out' of Taiwan industry is also strong.

Domestic politics in Taiwan has only limited impact on the flow of investment into the Mainland. Most formal restrictions have been ignored by using Hong Kong as an intermediary point. A few higher technology, capital intensive projects in petrochemicals and semiconductors have been held back or aborted by Taiwan government opposition.

For now, the Mainland remains the investment destination of choice, whether as export platform or (increasingly) as a market in its own right. Probably more than a third of Taiwan exports to the Mainland are now for the domestic market rather than inputs for exports to third countries.

But the dynamic works two ways. Taiwan remains the Mainland's largest single source of FDI and production technology and many marketing networks are Taiwanese. They have the capability of moving elsewhere if conditions are not favorable. Investment flow is also driven by perceptions of demand. If investors perceive the Mainland to be saturated, as appears likely to be the case in some products as a result of the current investment boom, the flow will slow as it has done in the past. The Mainland also needs to sustain tax and other incentives to attract the higher technology Taiwanese investment.

The bottom line is that politics sets the parameters but commerce is in command on a daily basis. On both sides there are frictions, actual or potential, between central authorities who must take account of the politics and provincial or local business interests for whom arguments about the nature of One China are academic.

Where does this leave cross-straits relations after the election? A victory for Lien Chan will increase the prospects of direct links. On both sides, a fundamental political obstacle remains while the economic gains from yielding on the principle are as yet insufficient to ensure that a KMT government can do a deal. Taiwan is now in the weaker position and needs direct links to allow its businesses, and service industries in particular, to take full advantage of the Mainland market. But the realities of Taiwan politics give limited room for maneuver.

Informal links will continue to increase slowly – regardless of who wins the election – as long as the Mainland presents Taiwan with more commercial attractions than elsewhere.