Mainland China and Taiwan Relation: Where Will It Go?

Gregory CHOW

Perspectives, Vol. 2, No. 3

(Editor's Note: This article is based on a speech delivered on December 4, 2000 by the author at a seminar sponsored by the Chinese Students and Scholars Association at Princeton University.)

I will discuss the mainland China and Taiwan relation in five parts: (1) the current state and its historical basis, (2) recent developments, (3) the role of continued dialogues, (4) prospects in the near future, and (5) long-term possibilities. The last two parts are short because they are speculative. Understanding the first three parts will be helpful in forming one's own assessment of future prospects.

1. The Current State and Its Historical Basis

Concerning the current state, two statements summarize the situation. Economic relations are excellent and have made great progress. Political relations are characterized by conflicting stands and not making progress.

Since Mainland China started its economic reform and adopted an open-door policy in 1978, it has promoted foreign trade and welcomed foreign investment. The total volume of foreign trade obtained increased from 9.8 percent of GDP in 1978 to 34 percent in 1998. The 1998 value amounts to 323.9 billion US dollars. Taiwan is an important trading partner of Mainland China. Of mainland's total imports of 140 billion USD in 1998, 16.6 billion or almost 12 percent was from Taiwan. This accounted for about 15 percent of Taiwan's total exports. According to the latest report from Taiwan (see p.1 of People's Daily Overseas Edition, November 29, 2000), the volume of its trade with the mainland reached an annual rate of 24.1 billion USD in the third quarter of 2000. The exports of 19.4 billion were 28 percent higher than the amount a year ago and accounted for 17.7 percent of Taiwan's total exports.

Foreign direct investment in the mainland increased from almost nothing in 1978 to 45.5 billion USD in 1997. Of this amount, 20.6 billion or almost a half was from Hong Kong and 3.3 billion was from Taiwan. Taiwan was then the third largest investor, next to Hong Kong and Japan but above the US (the US overtook Taiwan in the third place in 1998). Without counting foreign investment in Hong Kong, Taiwan' share of FDI was about 16 percent. This 16 percent is a useful figure because some of the Taiwan investors registered as Hong Kong investors. Excluding their investment as investment from Taiwan would underestimate Taiwan's share in direct foreign investment in the mainland. Like investors from other areas, Taiwan investors try to take advantage of the low cost labor in the mainland, but they have the advantage of being very near the mainland and knowing the Chinese culture and human relations.

Just opposite to the positive economic relation the political relation is mainly negative: the two sides hold opposing stands. From the mainland government's point of view, Taiwan is a province of the People's Republic of China (PRC). From Taiwan's viewpoint, it is an independent nation.

The historical basis of the PRC's claim is the following. Before the Sino-Japanese War of 1895 Taiwan was a part of China and inhabited mainly by Chinese immigrants who had arrived during the Ming Dynasty. China gave up her sovereignty over Taiwan to Japan by the treaty signed after China's defeat in 1895. After the defeat of Japan in the Second World War in 1945 sovereignty of Taiwan was returned to China, then the Republic of China under the Kuomintang (KMT) or the Nationalist Party. Since the establishment of the PRC in 1949, the government of PRC has claimed to be the government of the whole China, including Taiwan.

The government in Taiwan does not agree to the above claim of the Beijing government. The establishment of the PRC did not in fact include Taiwan as its territory. Since 1945 Taiwan's government has always been the government of the ROC. Besides the above factual and legal argument, a large number of people in Taiwan do not like to be a part of the PRC. The government of the PRC adopted policies in the mainland that these people do not like, although the dislike has probably diminished to some extent after the PRC government adopted more liberal policies. In addition, the dislike of mainlanders including those who have moved to Taiwan with Chiang Kei-shek in 1949 has partly come from the strong rule of the Chiang government. In that government native-born Taiwanese were under-represented. Why should Taiwan be a part of Mainland China? The people of Taiwan are proud of their economic accomplishment and they would like to have their own identity. Some observers have suggested that the Chiang government contributed significantly to Taiwan's economic development in spite of some politically unpopular policies. The contributions of the Chiang government was derived from the large number of talented people who had come with the government from the mainland, including some of the ablest people selected from the very large population in the mainland. These people helped run the successful agencies responsible for Taiwan's economic development, including the Commission for Rural Reconstruction and the Ministry of Economic Affairs. Today, however, Taiwan scholars who dislike the Chiang rule call this assessment to question.

2. Recent Developments

Given these two different viewpoints, what have been the major recent developments? Partly because of the close economic relations, both sides desire a dialogue to improve relations. The PRC government wishes to use the dialogue to convince Taiwan to be a part of China, and the Taiwan government is interested in protecting the interests of Taiwan investors. There has been a semi-government channel through two organizations (Strait Exchange Foundation, or SEF, established in Taiwan in February 1991 and Association for Relations Across the Taiwan Strait, or ARAT, established in the PRC in December 1991, headed respectively by Koo Chen-fu and Wang Daohan, order mentioned above according to dates of establishment). The meetings of Wang and Koo led to the signing of a written agreement in April 1994 on economic and cultural relations. Since then two events occurred which worsened the relation. First, in June 1995, President Lee Teng-hui visited the United States and made a speech while receiving an honorary degree from Cornell University. The PRC government was objecting to the US welcoming, even in an unofficial capacity, the President of a country with which it had agreed to terminate diplomatic relations. It was also offended by the derogatory tone of Lee's Cornell speech that was critical of the PRC. Lee's visit and speech led to the PRC government carrying out military exercises by firing missiles near the Taiwan Island.

Second, in the summer of 1999, Lee Teng-hui made a statement to a German reporter that the two sides should engage in dialogues on a "state to state" basis. This statement can be interpreted to mean that there are two countries. Lee's statement was made in anticipation of the visit of Wang Daohan to Taiwan in the fall of 1999, as a return visit of Mr. Koo to China in October 1998. Koo's visit had succeeded in reaching a four point agreement, to maintain dialogue covering political, economic and other areas, to carry out exchanges involving the staffs of ARATS and SEF, to set up communications and assistance on issues concerning the security and properties of individuals from both sides, and Mr. Wang agreeing to visit Taiwan. Lee's statement caused Beijing to cancel Mr. Wang's visit and discontinue the dialogue.

In May 2000, Chen Shui-bian became the President in Taiwan. Today the mainland's position is that the dialogue will continue only after Taiwan accepts the "One-China" principle, to which President Chen Shui-bian has not agreed. In 1992 both PRC and ROC claimed to be the government of China. Then they agreed that there was only one China. The agreement was "One China, two interpretations." As of early December 2000, neither side seemed to agree to this compromised formula as they had done before. A tougher mainland position, sometimes expressed but not consistently, is "one China, PRC being the government." In the summer of 2000, in answering questions from reporters, Wang Daohan hinted that the two sides could talk first by sidestepping the question of who represents China as long as both agree that there is only one China, but this position has not been reiterated by any top leaders in Beijing. Chen Shui-bian also hinted that he wanted to compromise but did not yet express agreement on the "One-China" principle even with two different interpretations. The prospect of continuing dialogue depends on some compromise on both sides not yet reached.

3. Role of Continued Dialogues

At this point, the prospect of re-opening dialogue is uncertain. The PRC government shows no sign of being willing to give up the agreement on the "One-China principle" as a precondition to the resumption of negotiations. How can PRC officially accept "two China's?" Its policy is to apply the one-country two systems formula to Taiwan. The Taiwan government is in a weak position. There were three main political parties contending for the Presidency with a term beginning in May 2000: the KMT which has ruled Taiwan since 1945, the People First Party (PFP) formed by James Soong and consisting of former KMT members, and the Democratic Progressive Party (DPP) with Chen Shui-bian as its candidate. Chen won the election with 39 percent of the votes, slightly higher than Soong. He is serving as a minority president with the legislature dominated by KMT members. The PRC government has been suspicious of him because his party once advocated Taiwan independence, although Chen will not declare Taiwan independence today. Up to this point Chen has not been able to forge a unified policy towards the mainland, not even an agreed statement concerning the "One-China" principle. The best hope is that Chen can express agreement to a "One-China principle" without specifying its interpretation or when it will apply. When the mainland insists on a "One-China principle' with its own interpretation, Chen might express agreement to the former part and remain silent on the latter part. Such a pair of compromise positions might not be acceptable to the mainland government, and might not be achievable by Chen today. However, there are continued pressures on both sides to reach some form of agreement in order to resume the dialogue. The pressures will be discussed below.

Why is a continued dialogue important? It is to prevent deterioration of political relations. The PRC government has said that it is unlikely to use force, as long as the dialogue continues and as long as progress is made towards unification. Furthermore, it has not openly given up the use of force for the unification of Taiwan. As long as there is a dialogue, leaders in Beijing can claim that they are making progress in the unification of Taiwan, an objective shared by the majority of the people in the mainland. In this sense the mainland government is under pressure. The pressure on Taiwan is the continued military threat that has led to political and economic instability and is bad for the Taiwan stock market and the Taiwan economy in general. It is these pressures on both sides that will cause them to seek ways to reopen the dialogue. Like any bargaining situation, both sides would like to come in with a strong position. Hence both would like to maintain a position more favorable to its own side as a precondition of the dialogue.

Lee Teng-hui's remark on "state-to-state" discussion and the mainland's insistence on a "One-China" principle are moves to establish a strong position before the dialogue begins. However, there are costs of delaying the dialogue on both sides. The cost seems harder for Taiwan to bear at this point because the effect on its economic and political stability is greater than the effect on the prestige of China's leaders. The mainland government cannot conclude from this circumstance that Taiwan will soon offer a compromise position to resume the dialogue because there are conflicting forces that make a compromise difficult, unless it is good for all major parties in Taiwan. In short, Taiwan bears a higher cost of not reaching a position to resume negotiation with the mainland but it cannot easily agree on such a position unless it is considered favorable to all major parties and the majority of the people in Taiwan. The mainland government pays a lower cost by waiting but it cannot hope to get an easy bargain from Taiwan because the conflicting political parties will not agree to it. Pressures on both sides will force reopening of talks or some equivalent form of discourse on the relation probably within at most a year and half to two years.

Before the semi-official talks resume, the relation can be improved by other means. One is the opening of direct trade, transport and postal service between the two sides, an issue in discussion for nine years without an agreement. In a speech on the promotion of foreign investment which I gave on September 8, 2000, in the International Forum on Foreign Trade Investment held in Xiamen, I suggested that the Beijing government alone, without having to obtain consent from the Taiwan government, can achieve direct trade, transport and postal service by simply unilaterally allowing ships and planes from Taiwan to come to the mainland without going through Hong Kong. It would be difficult for the Taiwan government to stop this for at least three reasons. First, the business community in Taiwan is strongly in favor of this. The official Taiwan government policy to the international community, and the U.S. in particular, is in favor of promoting further cooperation with the mainland government. Third, it would be awkward for the Taiwan government to prevent international airlines and ships passing through Taiwan to go directly to a mainland port as the next stop. I hope that the mainland government will consider taking this step seriously, for its own interest and for the interests of the Chinese people as well as the Taiwan business community.

4. Medium Term Prospects

What are the possible developments in the next 5 to 10 years? It could range from military conflict to continuation of the status quo with gradual improvement by negotiation but not unification. The worse case is military conflict. This appears to be very unlikely for several reasons. First, most leaders in China realize that military conquest of Taiwan is a bad idea for the purpose of getting support from the Taiwan people, and it is not worth the cost. The mainland government has a difficult and demanding task of developing the economy and improving the political and legal systems in the mainland itself. Second, the military in the mainland may not have the capability to conquer Taiwan, as it requires a much stronger navy and airforce than Taiwan's. Third, in case of military conflict there is the possibility of Taiwan receiving US military aid, at least in the form of naval blockade. The second possibility, short of military attack, is naval blockade of Taiwan, possibly accompanied by military exercises near Taiwan. The blockade can at least be partially effective and can put pressure on the government and people of Taiwan at the expense of their cooperation and good will. This possibility has been talked about often by people in the mainland. It would be a threat to Taiwan's economy. Note that the business community in Taiwan asserts a force on the governments of both sides to find non-military solutions.

The third possibility is a continuation of the status quo with possible improvements in economic and cultural cooperation through time. By status quo I mean Taiwan retaining its current political status as an independent nation in reality, although very few nations officially recognize it as a separate nation. Unless something like the first or the second possibility occurs, this is the remaining outcome. It may last for five to ten years. The main reason for the status quo to continue is that the first two alternatives are very costly to both sides. The second alternative of blockading Taiwan will not only hurt the mainland's trade with and investment from Taiwan, but also its image and status in the international community, even if it does not generate open hostility from some of its members including the United States.

5. Long Term Possibilities

If the status quo is likely to continue in the near future, when will it end? In the longer run, say twenty to thirty years from now, what can happen to the political relation? There are two possibilities. One is that the two sides will become one China under some political arrangement. The arrangement need not be "one country two systems." It might be some form of federation, or some union of the republics of China. Currently such forms are unacceptable to the Beijing government because it fears that some of its autonomous regions especially Tibet might be influenced by such an example. In the long run such fears will diminish if the government's authority over the autonomous regions becomes even more firmly established. In the mean time economic and political conditions in the mainland will become more similar to those in Taiwan, making some form of political union more achievable. Continued and expanding economic and cultural exchanges will add to the forces working towards a union.

The second possibility is that the two sides will still remain politically separate even with the above-mentioned developments. The Taiwan people will desire to maintain their own identity while being friendly with people in Mainland China. Their leaders will prefer to be heads of a nation rather than that of a region of another nation. For one China to take place eventually the people and government of Taiwan must have something to gain by giving up the current status, unless they are forced to do so. Therefore the possibility of a future union depends on whether future political leaders in China can offer Taiwan something attractive enough for them to join in. For example, the union will have a higher chance of realization if the President of PRC in Beijing is the head but Taiwan is given more, rather than less, international status such as membership in the United Nations - this is possible because some members of the former Soviet Union were also members of the General Assembly of the UN while the Soviet government was a member of the Security Council.

Once Taiwan becomes a part of China under the leadership of the PRC, it would be to the advantage of the PRC government to promote Taiwan's international status as it does Hong Kong's today. However, the PRC government would be opposed to such an idea, and even if it were to propose it, it would not be sufficient to forge a union from Taiwan's point of view. Only time may change their positions. Offering more benefits to Taiwan for joining the PRC under some form of political arrangement is not the current policy of the PRC, which has relied on the use of more pressure and threats. Each person can form his or her own opinion as to whether the threat of force is capable of achieving unification. We can all agree that taking the interest and wishes of the Taiwan people into account in future dialogues will improve the chance of having a union consisting of governments from both sides of the Taiwan Strait.

(The author is a professor of economics at Princeton University. He would like to thank Cyrus Chu and Sheng-Cheng Hu of Academia Sinica, Hu Shouwei of Zhongshan University, Anloh Lin of Chunghua Institution for Economic Research and Wentong Zheng of Stanford University for helpful comments without implying that they necessarily agree with the views here expressed.)