Taiwan Communiqué No. 72, October 1996

The trials of trade with China

Broken dreams of China profits

On 21 August 1996, the San Francisco Examiner published an excellent article about the trials and tribulations of attempting to trade with China. The article, titled "America's many broken dreams of China profits" was written by Professor Frank Kofsky of California State University, where he teaches history and U.S. foreign policy.

After a historical overview of America's long string of broken dreams of China profits, starting with the outfitting of first "China Clipper" by Robert Morris in 1784, professor Kofsky explains that the China trade 200 years ago led to a large trade deficit and the first economic depression in America's young history.

Professor Kofsky argues that many in the U.S. are seemingly determined to repeat the same mistakes of the past, and succumb to a "delirious infatuation with China." He concludes:

"Despite all the rose-colored rhetoric about supposed fortunes to be made and jobs to be created by selling to China, the United States runs its largest trade deficit with that country. Should the terms of trade ever likely to run in favor of the United States, you can be sure at that moment China will find a pretext for taking business elsewhere.

In short, a fantasy that still has not borne fruit after more than 200 years probably never will. It should be obvious and probably is, to all except high-ranking makers of policy that the current government of China is utterly ruthless, deceitful, corrupt and vicious.

It will promise almost anything no more bootleg compact disks, no more nuclear technology to developing nations, no more AK-47's brought into the United States illicitly but we believe its words only at our peril. If we as a nation truly value principle over profit, the time for revoking China's most-favored-nation status is long overdue."

President Lee steps on the brakes

Concerned that Taiwan's economy is becoming a hostage of increasing investment in China, President Lee Teng-hui recently stepped on the "China investment" brakes. In August and September 1996 he made repeated appeals to Taiwan businessmen to slow their investments in China and invest in Taiwan instead, in order to raise Taiwan's competitiveness in the international market.

President Lee's decision to cool the so-called "mainland fever" was prompted by the announcement of several Taiwanese corporations that they planned major new investments in China. After the March missile crisis and military exercises failed to intimidate Taiwan, China changed tactics by offering carrots in order to lure Taiwan into closer economic ties. China stepped up its efforts to woo Taiwanese investors by offering economic benefits. In August President Chiang Zeming received a delegation of 80 Taiwanese business leaders and urged them to invest in China.

However, on 14 August 1996, in a speech to the National Assembly, President Lee urged Taiwanese businessmen to "keep their roots" in Taiwan. He pointed out that investment in China is crowding out investment at home and has lowered Taiwan's economic growth in recent years. He announced guidelines, which would limit a company's China investment at 20 percent of its investment in Taiwan itself.

On 14 September 1996, in a speech to business leaders, President pledged new policy changes to remove barriers in order to facilitate investment at home.

Major Taiwan firms postpone China investment

At the end of August 1996, two major Taiwan firms, Formosa Plastics and the President Corporation announced that they were suspending plans for new major investments in China's coastal provinces. Responding to President Lee's appeal, Formosa Plastic put a freeze on its US$ 3 billion investment in China. The President Enterprise group also announced the cancellation of a planned US$100 million power plant project in China.

This development reverses a trend which was set in during the late 1980s and early 1990s, when Taiwanese businessmen started to invest in China, and located their factories there in order to utilize its cheap labor and lax environment policy. According to some reports, since 1989 some 30,000 Taiwanese businesses have built factories in China at a total investment of more than US$20 billion.

The Journalist, a Taipei-based news magazine, reported that trade with China amounts to 8.2% of GDP. If this trend continues, the economy of Taiwan would become economically overly dependent on China, and reduce Taiwan's room for maneuver in future negotiations with China.

The Liberty Times also reported that investment in China is also recreating social problems at home. For the first six months of 1996, as many as 240,000 workers were out of work, about 2.6% of the work force, as Taiwan businessmen closed down their factories in Taiwan.

For a Taiwanese "Southern Strategy"

Taiwan Communiqué comment: It would be wise for the Taiwan authorities to follow a "Southern Strategy" and strengthen economic and political ties with the countries of Southeast Asia. Business and industry from Taiwan traditionally have a strong foothold there. Increasing those ties will reduce the over-reliance on economic ties with China.

Continuing to let business from Taiwan invest in the coastal provinces of China, will eventually give China a stranglehold on Taiwan.

If Taiwan is to gain in international stature, better ties with the nations of ASEAN are a prerequisite. And once they support a free and independent Taiwan, the rest of the world will follow.

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