China's FDI liberalization and Taiwan's autonomy/sovereignty

Gallagher's article was not about Taiwan's international status, but this topic was touched upon several times this week during the lectures so I thought that discussing it in the context of China's economic liberalization would be of some interest for our section. Really the issue of Taiwan independence is an extremely sensitive issue and I was appalled to see during my International Finance class this morning that Taiwan was listed as a province of China (we were looking at graphs of U.S. current accounts with various countries in the world).

After China opened up its economy for FDI, it has surprisingly found a very willing provider of capital in its small island neighbor of Taiwan. Since Deng Xiaoping's reforms, the economic ties between Taiwan and Mainland China has been growing unaffected by the volatile political relations between the two. Taiwan's FDI in China completely dwarfs Taiwan's FDI in any other place in the world. In 2003, there were 3,875 instances of Taiwanese FDI in Mainland China (highest) as opposed 229 in the USA (second highest). This has worried some observers who believe that as Taiwanese capitalists accumulate vested interests in Mainland China, they will favor policies of the PRC such as reunification, and oppose destabilizing policies like independence. These businessmen will try to create friendly ties with the PRC, which is ultimately focused on reunifying Taiwan on its own terms.

In addition to Taiwanese FDI to China, Taiwanese dependence on the Mainland as a market for exports has greatly increased over the years since the PRC's economic reforms. In 1998 the Taiwan's total exports to China was about 17.7% of its total exports, and in 2003, this number increased to 24.2%. This has also created security concerns for Taiwan because the exporting party is always more dependent on the importer, rather than vice versa. This has raised the possibility of China coercing Taiwan economically to negotiate reunification on China's terms, and Taiwan having to submit because of its growing economic dependence on the Mainland.

Some observers maintain that growing economic ties will not put Taiwan in an unfavorable position in cross-strait negotiations, because both parties are interdependent and stability in the Taiwan strait will remain the highest priority for economic concerns. It may be the case that the asymmetry of Taiwanese economic dependence on China is exaggerated, and that China has no interest trying to use it as leverage in cross-strait negotiations. Really what I hoped to achieve through this post to was provide a Taiwanese perspective on the implications of China's economic reforms, since our readings provide the Mainland's perspective.



Statistics taken from Presidential Politics in Taiwan: the Administration of Chen Shuibian edited by Steven M. Goldstein & Julian Chang.