Title

National identity, economic interest and Taiwan's crossstrait economic policy 1994-2009

Author(s)

Lin, Syaru, Shirley; gYY

Citation

Issue Date

2010

URL

http://hdl.handle.net/10722/57614

Rights

unrestricted

National Identity, Economic Interest and Taiwans Cross-Strait Economic Policy 1994-2009

by Syaru Shirley Lin AB, Harvard College MIPA, University of Hong Kong

A thesis submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy at the University of Hong Kong March 2010

Abstract of thesis entitled National Identity, Economic Interest and Taiwans Cross-Strait Economic Policy 1994-2009 Submitted by Syaru Shirley Lin for the degree of Doctor of Philosophy at the University of Hong Kong in March 2010
Over the last fifteen years, Taiwans cross-Strait economic policies have fluctuated between periods of liberalization and periods of restriction. This is an anomaly: as an export-oriented, technology-dependent economy, Taiwan has generally responded to the challenges of globalization with a commitment to free trade and open investment flows. It has restricted its trade and investments only with China, even though China is its largest and most complementary economic partner. Previous studies have failed to provide a persuasive explanation of these oscillations in Taiwans cross-Strait policies. This study uses a model that is summarized graphically in an inverted pyramid that links national identity, national interest, and economic policy. The key to the model is the emergence and consolidation of Taiwans new national identity during the period from 1994 to the present. Only on that basis have Taiwanese been able to clearly define their national economic interests, including growth, stability, security and equity. Like other small economies, Taiwan has had to confront the problems presented by an increasingly globalized economy. It has also had to respond to pressures from Mainland China and the U.S. In this complex environment, it is not surprisingly that different groups and individuals have proposed different cross-Strait policies, based on different prioritizations of Taiwans economic interests. The debate has revolved around four competing tendencies: Extreme Restriction, Guided Development, Guided Liberalization, and Extreme Liberalization. It has been especially intense in four episodes 1996, 2001, 2006 and 2009 when there were major conferences on Taiwans economic policy or a major proposal on redefining Taiwans cross-Strait economic policy. The nature of this debate has changed substantially over time. In the first two episodes, Taiwanese had not yet agreed on their national identity. There was intense struggle between those who regarded themselves as Chinese and those who saw themselves as Taiwanese. This emotional conflict led most participants in the debate to support either Extreme Restriction or Extreme Liberalization, based on their definition of their national identity. In essence, the discussion was focused less on economic than political considerations. In the latter two episodes, however, there was increasing convergence on a new definition of national identity, one that was based not on ethnicity, but rather on a common place of residence, and on upholding Taiwans values of freedom and democracy. As that consensus on a new Taiwanese identity was forged, the

range of views on Taiwans cross-Strait economic policies narrowed and moved towards the center, with the debate now centered on the more moderate policies advocated by the proponents of Guided Development and Guided Liberalization. Despite the growing consensus on national identity, the debate over crossStrait economic relations continues, focused on finding the optimal balance among the competing goals of growth, stability, security and equity. An agreement on the best way to balance these objectives seems elusive, but the debate revolves around a narrower set of more moderate policy options. This has implications not only for Taiwans political process, but also for cross-Strait relations and the discipline of international political economy. _________________________________________________________

Declaration

I declare that this thesis represents my own work, except where due acknowledgement is made, and that it has not been previously included in a thesis, dissertation or report submitted to this University or to any other institution for a degree, diploma or other qualification.

Signed .............................................................................................. SYARU SHIRLEY LIN

Acknowledgements
Having been away from an academic environment for more than ten years, I was overjoyed and challenged by the opportunity to resume my study, especially because time to think conceptually was always limited while working. Having abandoned a thesis on East Asian industrial policy while pursuing a Social Studies degree at Harvard, my interest in cross-Strait political economy never faded. With the full support of my family, including my parents, siblings and children, I embarked on this long journey. My parents believed in me every step of the way. Mom reminded me to stay focused and Dad was always interested in my ideas, even at an early stage. Suzette moved all the way to Hong Kong to keep me company while we studied in the Masters program at the University of Hong Kong. My loving daughters, Stefani, Samantha and Stacey, allowed me to spend unending hours in my study, even during their exams and holidays, alternating between concern and support depending on my mood. In the most intense months, they kept me going by tracking my progress and making sure no one disturbed our four-girl dorm at Wing On Tower. The journey never would have started had I not entered the MIPA Program and studied with Dr. Richard Hu, who became my advisor. Dr. Hu encouraged me to start the doctoral research work and gave me steady guidance throughout the years, not only advising me on my research, but also introducing me to the joy of learning. Whenever I was discouraged, Dr. Hu would remind me that everyone follows a different research path and therefore everyone reaches unique conclusions that are valuable in her own way. This thesis has given me the pleasure and opportunity to reach out to many insightful and knowledgeable people, many of whom appear on the list of interviewees. Many were gracious beyond the interview, providing literature and introducing me to other experts so that I could broaden my perspective. My appreciation for their help is immeasurable. Finally, I want to thank a few people who have made this work possible. Dr. Naiteh Wu introduced me to the importance of identity, which was not on my original research agenda. Dr. Miron Mushkat showed me how one could simultaneously conduct research, teach and work. Classmate Vic Li read every draft of this thesis and shared with me ideas and literature that I would not otherwise have been aware of. And love to all my amazing friends and family in Taipei, Beijing and Hong Kong who looked after the girls whenever the workload became too heavy. Finally, Lao Han has been the greatest cheerleader anyone could ask for, ready to pick me up whenever I fall, with loving words and patience that I do not deserve.

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Contents
Declaration ...............................................................................................................i Acknowledgements .................................................................................................ii Contents..................................................................................................................iii Tables, Figures and Appendix...............................................................................vii List of Interviews..................................................................................................viii List of Abbreviations..............................................................................................ix Chapter One Introduction ...........................................................................................................1 The Development of Cross-Strait Economic Relations.......................................3 The Puzzle ...........................................................................................................7 Analytic Approach and Methodology .................................................................9 Organization of the Study..................................................................................11 Chapter Two Prevailing Perspectives on Taiwans Cross-Strait Economic Policies............15 Introduction .......................................................................................................15 Taiwans Economic Policy: Some Prevailing Explanations .............................17 Security-Focus Theories................................................................................18 Economic-Focus Theories .............................................................................21 How the Prevailing Explanations Fall Short .................................................27 The Role of Identity...........................................................................................28 A Sociological Perspective on National Identity: Toward Inclusive Identity ..........................................................................28 A Political Perspective on National Identity: Identity Politics ..................32 Closing the Research Gap .................................................................................34 Complex Reality and Analytic Eclecticism.......................................................36 Chapter Three The Identity-Interest-Policy Pyramid: A Conceptual Framework.................38 The Identity-Interest-Policy Inverted Pyramid and Methodology ....................40 Contextual Variable: National Identity .............................................................43 Independent Variables: Interests and Purpose of the Nation.............................50 Growth...........................................................................................................50 Stability..........................................................................................................51 Equity ............................................................................................................51 Economic and Military Security....................................................................53 Intervening Variables: Evolving Domestic and International Environment .....54 The Four Tendencies and Their Relative Influence ..........................................56 Extensive Restriction.....................................................................................58 Guided Development.....................................................................................59 Guided Liberalization....................................................................................59 Extensive Liberalization................................................................................60 More Extreme Positions ................................................................................60 Dependent Variable: Categories of Economic Policy .......................................61 Transportation and Communication ..............................................................61 iii

Trade Policy...................................................................................................62 Foreign Investment Policy.............................................................................62 Capital and Currency Control........................................................................62 Inbound Immigration.....................................................................................62 Application of the Identity-Interest-Policy Pyramid .........................................63 Discussion of Hypotheses..................................................................................65 Debate Over Identity, 1994-2005 (First Period) ........................................65 Consensus Over Identity, 2006-2009 (Second Period)..............................66 Chapter Four No Haste: The 1996 National Development Conference..................................68 Economic Environment .....................................................................................69 A Developing Polity ..........................................................................................70 Cross-Strait Policy.........................................................................................72 China, the U.S. and Taiwan...............................................................................74 Beijings Taiwan Policy ................................................................................74 Washingtons Taiwan Policy.........................................................................76 National Development Conference ...................................................................78 Public Response.................................................................................................84 The Four Tendencies .........................................................................................86 Extensive Restriction.....................................................................................87 Guided Development.....................................................................................90 Guided Liberalization....................................................................................91 Extensive Liberalization................................................................................92 Sectoral Case Study: Formosa Plastics and the Zhangzhou Project..................94 Conclusion.......................................................................................................100 Chapter Five Active Opening, Effective Management: The 2001 Economic Development Advisory Conference ...............................102 Economic Environment ...................................................................................102 A Divided Government ...................................................................................104 Fourth Nuclear Power Plant Crisis ..............................................................105 China, the U.S. and Taiwan.............................................................................106 Beijings Taiwan Policy ..............................................................................106 Washingtons Taiwan Policy.......................................................................107 Economic Development Advisory Conference ...............................................108 Public Response...............................................................................................114 The Four Tendencies .......................................................................................116 Extensive Restriction...................................................................................116 Guided Development...................................................................................119 Guided Liberalization..................................................................................123 Extensive Liberalization..............................................................................125 Sectoral Case Study: The Great Semiconductor Debate .................................126 History of Migration to China .....................................................................128 The Great Debate.........................................................................................129 Conclusion.......................................................................................................134

iv

Chapter Six Active Management, Effective Opening: The 2006 Conference on Sustaining Taiwans Economic Development.......137 Economic Environment ...................................................................................137 A Lame Duck Government .............................................................................139 Cross-Strait Initiative...................................................................................142 China, the U.S. and Taiwan.............................................................................145 Beijings Taiwan Policies............................................................................145 Washingtons Taiwan Policies ....................................................................147 Conference on Sustaining Taiwans Economic Development ........................149 Preparation and Agenda-setting ..................................................................151 The Cross-Strait Panel.................................................................................152 Public Response...............................................................................................154 The Four Tendencies .......................................................................................156 Extensive Restriction...................................................................................158 Guided Development...................................................................................163 Guided Liberalization..................................................................................166 Extensive Liberalization..............................................................................167 Sectoral Case Study: Continued Debate on Evolving Semiconductor Industry...................................................................................170 TSMC Application Approval ......................................................................172 Prosecution of He Jian-UMC and SMIC.....................................................175 Testing and Packing Investments ................................................................177 Aftermath.....................................................................................................178 Conclusion.......................................................................................................179 Chapter Seven Mutual Liberalization: The 2009 Campaign for ECFA ................................184 Economic Environment ...................................................................................185 Reversal of Political Fortunes from Green to Blue .........................................186 Launching Cross-Strait Initiatives...................................................................188 The Three Link ............................................................................................191 Permitting Investment by Mainland Chinese ..............................................193 Financial Memorandums of Understanding ................................................196 China, the U.S. and Taiwan.............................................................................197 Beijings Taiwan Policy ..............................................................................197 Washingtons Taiwan Policy.......................................................................198 The Promotion of ECFA .................................................................................199 Public Response...............................................................................................203 The Four Tendencies .......................................................................................207 Extensive Restriction...................................................................................207 Guided Development...................................................................................209 Guided Liberalization..................................................................................211 Extensive Liberalization..............................................................................213 Sectoral Case Study: Liberalization of the Finance Industry ..........................215 Conclusion.......................................................................................................219

Chapter Eight Conclusion ..........................................................................................................221 Findings of Study ............................................................................................222 The Evolution of National Identity..............................................................222 Economic Interests and the Four Tendencies ..............................................223 Policy Outcomes and the Four Episodes .....................................................228 The Domestic and International Environment ............................................232 Review of the Hypotheses ...............................................................................233 Implications of the Study.................................................................................238 Implications for Taiwan ..............................................................................238 Implications for Cross-Strait Relations .......................................................240 Implications for the Study of International Political Economy...................243 Limitations of the Study and Suggestions for Further Research.....................244 References ..........................................................................................................246

vi

Tables, Figures and Appendix Tables

Table 1-1 Table 3-1 Table 6-1 Table 7-1 Table 7-2 Economic Statistics for Mainland China and Taiwan.......................6 Four Tendencies of Taiwans Cross-Strait Economic Policies.......58 Key Regulations for Semiconductor Investments in China ..........174 Comparison of Key Cross-Strait Economic Policy Changes 1994-2009......................................................................................190 List of 100 Sectors to be Opened to Chinese Investment .............195

Figures
Figure 3-1 Figure 3-2 Figure 3-3 Figure 8-1 Figure 8-2 Figure 8-3 Figure 8-4 Identity-Interest-Policy Pyramid ....................................................41 Identity-Interest-Policy Cyclical Timeline .....................................43 Identity-Interest-Policy Flowchart..................................................64 Taiwans Identity-Interest-Policy Pyramid as Applied to Cross-Strait Economic Policies ....................................................224 Annotated Identity-Interest-Policy Timeline, 1994-2009.............227 Summary of Debates over National Identity and Cross-Strait Economic Policy, 1996-2009 .......................................................234 Flowchart of Taiwans Identity-Interest-Policy Cyclical Timline, 1994-2009........................................................237

Appendix
Appendix 6-1 Semiconductor Timeline, 2000-2007 ...........................................181

vii

List of Interviews
List of Interviewees (in alphabetical order by last names) Jean-Pierre Cabestan, Hong Kong Baptist University Bellona Chen, Director of Finance Division, United Microelectronics Corporation Chang Jung-feng, National Security Council Advisor Morris Chang, CEO of Taiwan Semiconductor Manufacturing Company Richard Chang, former CEO of Semiconductor Manufacturing International Corporation Chao Chien-min, Mainland Affairs Council Deputy Minister, formerly at Foundation on International and Cross-Strait Studies and National Chengchi University Henry Chen, Chairman of MassMutual Mercuries Life Insurance Chiang Pin-kung, Chairman of Straits Exchange Foundation Chiu Chui-cheng, formerly of Mainland Affairs Council Fan Yun, Professor, National Taiwan University Fu Don-Cheng, Deputy Minister, Mainland Affairs Council Earle Ho, CEO of Tung Ho Steel Enterprise, former Chairman of the Chinese National Federation of Industries Ho Mei-yueh, former Minister of Economic Affairs and former Chairwoman of Council for Economic Planning and Development Paul Hsu, Chairman of Epoch Foundation, former Partner of Lee and Li Law Firm Wenfu Hsu (also Bunhu Khou), Member and Officer of Taiwan Association of University Professors and Taiwan Engineers Association Huang Tien-lin, former National Policy Advisor Stan Hung, CEO of United Microelectronics Corporation Ed Ku, former President of Yue Yuen Kung Ming-hsin, Taiwan Institute of Economic Research Jimmy Lai, CEO of Next Media Jin-yi Lee, CEO of Fubon Bank (Hong Kong) Lin I-hsiung, former DPP Chairman Tsai Horng-ming, former National Security Council Senior Advisor and former Deputy Secretary General of CNFI Robert Tsao, Honorary Chairman of United Microelectronics Corporation Tseng Chao-yuan, CEO of Awakening Tung Cheng-yuan, formerly at Mainland Affairs Council Richard Vuylsteke, former Chairman of AmCham Taipei Naiteh Wu, Research Fellow, Academia Sinica Yang Chao, Chief Editor, The Journalist Jeff Yang, Director General, Bureau of Hong Kong Affairs, Mainland Affairs Council Yang I-feng, Director of National Teachers Association of the Republic of China Yu Fu, columnist, former Main Program Producer of Sanli Television and Political Talk Show Host, 1996-2001 Interview Dates May 22, 2009 April 5, 2009 June 18, 2008 April 3, 2009 January 4, 2008 August 17, 2006 July 12, 2009 April 9, 2009 June 18, 208 April 2, 2009 April 3, 2009 April 2, 2009 July 30, 2008 August 11, 2007 July 29, 2008 July 30, 2008 April 3, 2009 November 29, 2007 August 15, 2007 June 23, 2009 August 28, 2009 April 1, 2009 July 31, 2008 April 3, 2009 April 2, 2009 August 15, 2007 May 26, 2009 July 13, 2009 July 24, 2009 July 23, 2008 June 17, 2008 April 1, 2009

viii

List of Abbreviations
AFC AIT AmCham APEC APROC ARATS ASE ASEAN ASEAN+3 BOT CCP CECA CEPA CEPD CIER CNAIC CNFI CSTED DPP ECC ECFA EDAC FDI FNP FSC FTA GCCROC GFC GSMC HKSE IC IMF INPR IP IPE KMT Asian Financial Crisis American Institute in Taiwan American Chamber of Commerce (Taiwan) Asia-Pacific Economic Cooperation Asia-Pacific Regional Operations Center Association for Relations across the Taiwan Straits Advanced Semiconductor Engineering Association of Southeast Asian Nations ASEAN plus Three (China, Japan and South Korea) build-operate-transfer Chinese Communist Party Comprehensive Economic Cooperation Agreement Closer Economic Partnership Arrangement Council for Economic Policy and Planning Chung-Hua Institution for Economic Research Chinese National Association of Industry and Commerce Chinese National Federation of Industries Conference on Sustaining Taiwans Economic Development Democratic Progressive Party European Chamber of Commerce Economic Cooperation Framework Agreement Economic Development Advisory Conference Foreign Direct Investment future-of-nation preference Financial Supervisory Commission Free Trade Agreement Chamber of Commerce of the Republic of China Global Financial Crisis Grace Semiconductor Hong Kong Stock Exchange integrated circuit International Monetary Fund Institute for National Policy Research intellectual property international political economy Kuomintang

ix

MAC MNC MOEA MOF MOU NAC NASME NAV NCCU-ESC NDC NEDC NP NPF NSC NTAROC NUC NUG NYSE PRC OEM OPEC QFII PCT PFP R&D RDEC ROC ROCCOC SARS SEF SME SMIC TAIP TAIEX TAO TAUP

Mainland Affairs Council Multinational Corporation Ministry of Economic Affairs Ministry of Finance memorandum of understanding National Affairs Conference National Association of Small and Medium Enterprises net asset value National Chengchi University Election Study Center National Development Conference National Economic Development Conference New Party National Policy Foundation National Security Council National Teachers Association, Republic of China National Unification Council National Unification Guidelines New York Stock Exchange Peoples Republic of China original equipment manufacturer Organization of the Petroleum Exporting Countries Qualified Foreign Institutional Investor Presbyterian Church in Taiwan Peoples First Party research and development Research, Development and Evaluation Commission of the Executive Yuan Republic of China General Chamber of Commerce of the Republic of China Severe Acute Respiratory Syndrome Straits Exchange Foundation small and medium-size enterprises Semiconductor Manufacturing International Corporation Taiwan Independence Party TWSE Capitalization Weighted Stock Index Taiwan Affairs Office Taiwan Association of University Professors

TCTU TEA TEEMA TEPU TIER TSIA TSMC TSTA TSU TWSE UMC WTO WHO

Taiwan Confederation of Trade Unions Taiwan Engineers Association Taiwan Electrical and Electronic Manufactures Association Taiwan Environmental Protection Union Taiwan Institute of Economic Research Taiwan Semiconductor Industry Association Taiwan Semiconductor Manufacturing Company Taiwan Strait Tourism Association Taiwan Solidarity Union Taiwan Stock Exchange United Microelectronics Corporation World Trade Organization World Health Organization

xi

Chapter One Introduction

To trade or not to trade with China? For a small state like Taiwan, market pressures can be as merciless as external military threat, both powerful factors coming from China.1 In his book banned in Taiwan, published before Taiwan lifted martial law, the pro-democracy observer Marc Cohen argued that Taiwans policy of restricting political and economic ties with China had become increasingly untenable, (M. Cohen 1988, 220) with younger members of both the Democratic Progressive Party (DPP) and Kuomintang (KMT) pressing for eased restrictions on visits to China. (Ibid, 227) Twenty years onward, the DPP and the KMT are alternating in power, and the pressure from China has become even greater, with China now the second largest economy in the world. In addition, Chinas ability to threaten Taiwan militarily has become more pronounced than ever. China has invested heavily in its military capabilities, acquiring fighter jets and deploying missiles, 1,000-1,500 of which are aimed at Taiwan. Furthermore, China has over 50 submarines, some armed with nucleartipped ballistic missiles compared with Taiwans four outdated submarines. Most importantly, China has never renounced the use of force to safeguard its territorial integrity. Taiwan has responded to these pressures by lowering its barriers to trade and investment across the Taiwan Strait. An estimated one million Taiwanese work and live in China. As a result, economic interdependence has grown dramatically between Taiwan and China and China is now indispensable to Taiwans growth. With the example of regional economic integration in Europe, some expect that the economic relations between Taiwan and China will become ever closer, and that this will also produce a more stable political relationship between the two sides. However, despite its greater reliance on China, Taiwans cross-Strait economic policies have not liberalized in a smooth and continuous way, but rather have experienced constant alternation between restriction and liberalization. Since 1991, Taiwan has allowed direct investment into China, in response to Chinas 1979 decision to set up two special economic zones, Xiamen and Shantou, opposite Taiwan. But in 1994, in an early policy reversal, the Taiwan government started encouraging investment to flow toward Southeast Asia and away from China. Two years later, the government instituted formal restrictions on largescale and strategic investments in China with the so-called no haste policy. In 2001, the newly elected DPP government replaced the policy with a policy of active opening, which liberalized some aspects of cross-Strait economic relations, only to reverse it in 2006 by adopting the more restrictive policy of active management. In 2008, the KMT government established regular and direct air links between Taiwan and China, began to relax the previous restrictions on investment in China, and announced its intention to negotiate an Economic Cooperation Framework Agreement (ECFA) with China. Why have the Taiwans Mainland China economic policies oscillated so much? What are the sources of these economic policies? Conventional analysis
The terms Republic of China (ROC), Taiwan, and Taipei are used interchangeably. For Peoples Republic of China (PRC), China, the Mainland, and Beijing are also used interchangeably.
1

of small Asian states would look first to the international structure to explain their foreign economic policies. But the international pressures on Taiwan all point to the direction of liberalization, not restriction or even oscillation. Taiwans security guarantor, the U.S., has made clear its desire for cross-Strait stability through more economic cooperation. China has likewise encouraged a policy of liberalization, responding with generous economic incentives. As noted above, the general process of globalization especially given the natural complementarity between the Taiwanese and Chinese economies has also produced pressure for liberalization. The alternative approach is to analyze the domestic political pressures that influence a governments foreign economic policies, especially in democratic political systems. Taiwans political process has become highly democratic since the mid-1980s, with intense competition in local and central elections virtually every year. This approach would focus on the two main competing political parties in Taiwan, one of which the KMT is seen as being pro-unification, the second of which the DPP is viewed as being pro-independence. It would be plausible to assume that a DPP government would therefore adopt more restrictive economic policies toward China, and that a KMT government would liberalize those restrictions. However, oscillation in cross-Strait economic policies has occurred regardless of which party is in power. Both the KMT and the DPP have championed cross-Strait economic policies that have been liberalizing in some periods and more restrictive in others. Taiwans oscillating policy history actually echoes similar changes in other countries. Diverging from a neo-liberal forecast of ever-closer economic integration among trade and investment partners, globalization has actually been accompanied by the resurgence of labor politics, increased distributive politics, and greater focus on economic, political and social stability at the expense of global investors.2 (Garrett 1998, 10-1) In short, markets are global but politics are increasingly national and therefore occasionally more restrictive. With the Global Financial Crisis (GFC) of 2008, national governments have intervened in markets by injecting capital into leading private financial institutions, and welfare and protectionist measures appear to have gained more domestic political support than ever. Fundamental doubts about the importance of achieving economic growth through liberalization at home and abroad, relative to other competing values such as stability, security, equity, and freedom, have surfaced all around the world, not just in Taiwan. The tension between economic growth and other values is increasingly apparent. This may be particularly true in the case of Taiwan, since it continues to face a military threat from China. The main purpose of this study, therefore, is to provide a perspective on Taiwans choice of economic policy toward China, and its oscillation between liberalization and restriction. This complements other analyses of small nations economic policies, but none of them has encountered the same dilemma that Taiwan faces, caught between a rock and a hard place, with a country that is

Garrett studies 14 industrialized countries including Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan the Netherlands, Norway, Sweden, the UK and the U.S. from 1966-1990 and shows that increased market integration is associated with the rise of leftlabor parties.

simultaneously its most complementary economic partner and its most serious security threat.3 The Development of Cross-Strait Economic Relations According to Taiwan government statistics, approved Taiwanese investments in China reached a cumulative total of $72.0 billion as of year-end 2008, including more than 37,251 projects, exceeding the combined total of outward investments to all other countries.4 The growth in Taiwanese investments has been surprising, especially considering the unofficial figures are estimated to be several multiples of the recorded approved amount.5 Estimates that include investments transferred through third countries are likely to exceed $100 billion.6 But there are few who doubt that, had policies been more liberal, the total investment amount would be even higher. (Y. Chu 2004, 493; Wong 2005; Chao 2004, 696) Two-way trade between China and Taiwan reached $105.4 billion in 7 2008. Since 1999, China and Hong Kong have replaced the U.S. as Taiwans top export market. Exports have grown by4.6 times since 1994, from 17.0% ($16.0 billion) of Taiwans total exports in 1994 to 28.9% ($74.0 billion) in 2008.8 The trade surplus in favor of Taiwan was over $42.6 billion in 2008. Similarly, China has been the only country from which imports have consistently risen every year from 1996 onwards. Since 2006, China has been Taiwans second most important source of imports after Japan, growing over tenfold from 3.0% ($3.1 billion) in 1996 to 13.1% ($31.4 billion) of Taiwans total imports in 2008.9

For an excellent study on small states economic policy, see Katzenstein (1985) and his subsequent update and reflection on the original book in Katzenstein (2003). 4 The figure reports the cumulative estimates from 1991 to March 2009 as calculated by the MOEA of ROC. Note that the estimate provided by Mainland China is a much higher one (77,939 projects). All figures in this study are quoted in U.S. dollars (USD or $), unless otherwise noted. For example, NTD is marked NT$, and RMB is indicated as such. For details of the data, and the different data as released by the Taiwan and Mainland China authorities, see the MAC, Table 10: Taiwan Investment in Mainland China, , no. 196, http://www.mac.gov.tw/big5/statistic/em/196/10.pdf (Last accessed Aug, 31, 2009). 5 Statistics provided by the PRC show the cumulative investments to be much greater. Sources from the Chinese government suggest, for example, there have been over 77,000 projects financed by Taiwanese investment since 1991. See ibid. 6 Though the figure has not been endorsed by the Chinese authorities, it is reported widely and cited by both official and unofficial sources. See for example, Taiwan Affairs Office (TAO), State Council, Taiwan investment in mainland reached $46 bln over 20 years, April 9, 2008, http://www.gwytb.gov.cn:8088/detail.asp?table=Trade&title=Crossstrait+Trade&offset=25&m_id =231/ (Last accessed on Feb 28, 2010); 20062007, January 4, 2007, /www.china.com.cn/overseas/txt/2007-01/04/content_7605720.htm (Last accessed on Feb 28, 2010); , , February 5, 2008, www.caita.org.tw/web/upload/paper/317-02.htm (Last accessed on Feb 28, 2010). 7 PRC data show over $130 billion, see Department of Taiwan, Hong Kong and Macao Affairs, Ministry of Commerce, PRC, (1978-2008), released February 4, 2009, http://www.chinataiwan.org/wxzl/sj/sjjl/200907/t20090708_945159.htm (Last accessed on Feb 28, 2010). 8 See Table 1-1 below. 9 This does not take into account indirect imports through third countries except for Hong Kong. Department of Investment Services, MOEA, ROC, , undated, http://twbusiness.nat.gov.tw/old/pdf/roc_imp.pdf (Last accessed on Feb 28, 2010).

Although Taiwans initial investments in China and subsequent trade were important for China in the early 1990s, Taiwans comparative advantage relative to China continued to erode. Taiwans early investment into China when China first opened to the world helped China move up the value chain in manufacturing, research and development and management. Having expanded its GDP close to five-fold since 1994, however, China has become a global economic powerhouse with an international investor base and extremely diversified trade partners. (Ohashi 2005; Ash 2005) As a result, in recent years, Taiwans reliance on China has come to far outweigh Chinas reliance on Taiwan, as China constituted 21.2% of Taiwans total trade, but Taiwan represented only 4.1% of Chinas total trade in 2008.10 There are four characteristics of cross-Strait economic interdependence that indicate how structurally important China is to Taiwans economy, both as a market and as a manufacturing base. First, Taiwanese capital investment in China is the major crux of the relationship. Cross-Strait trade, whether imports or exports, is based primarily on intra-firm or inter-Taishang (Taiwanese firms in China) trade. Almost all of the leading and largest Taiwanese companies have operations in China as of 2008. This kind of trade is based on the vertical integration of the supply chain. This is a very different pattern than commodity trade, where alternative sources can be found if one country can no longer supply a certain commodity. A typical example of such trade would be Pou Chen, a shoe manufacturer with businesses listed on the Taiwan Stock Exchange (TWSE) as Pou Chen and on the Hong Kong Stock Exchange (HKSE) as Yue Yuen, headquartered in Taichung with plants in Dongguan. Research and development (R&D), sales, and marketing all are conducted at the headquarters. As orders are received from Nike (U.S.), Adidas (Germany) or Asics (Japan), the shoe mold is created in Taiwan and raw materials ordered from China and Taiwan. The first batch of raw materials, including specialty chemicals, as well as key components, such as shoe soles and airbags from the foreign original equipment manufacturers (OEM) such as Nike, are exported to China. The companys wholly-owned plants in Dongguan then gather hundreds of Chinese components to assemble the final shoes. A small percentage of the final products is sold in China with the rest exported to all parts of the world to fulfill orders for the OEM customers. Taiwan also imports some of these shoes for sale in its own market.11 In addition, Taiwanese manufacturers also want to sell their finished products in China, one of the largest domestic markets in the world. Making the products in China gives the manufacturer a just in time advantage as well as a cost advantage over exports from Taiwan. For example, leading Taiwanesebranded products like Giant bicycles are manufactured in Giants Kunshan factory near Shanghai and sold within China, giving Giant a cost and time advantage over its competitors. In addition to components and raw materials, a large amount of the most advanced technology and machinery, especially for Taishang manufacturers in the technology sector, are imported from Taiwan. Second, the industries investing in China increasingly include Taiwans most competitive sectors. The migration of low value-added and labor-intensive assembly business starting in the mid-1990s gave an impression that opening up
10 11

See Table 1-1; Chinas total foreign trade amounted to $2,560.3 billion. Based on interview with Ed Ku, President of Yue Yuen, November 29, 2007.

to China has mainly produced a hollowing-out of Taiwans sunset industries. The truth is Taiwans most advanced companies go to China first, if unregulated, because they need to stay competitive. The top two sectors of Taiwanese foreign direct investment (FDI) in China as of March 2009 are electronic component manufacturing and computer, electronic and optical component manufacturing, two of Taiwans leading industries. Third, economic integration with China is a regional and global phenomenon that Taiwan cannot avoid, even if it wished to diversify its outbound investments and trade flows in order to hedge against economic and political risk. Asian countries from Korea and Japan to Thailand and Indonesia have all become dependent on investing in and trading with China. Chinas economic opening has restructured the regional and the global economy with China becoming the factory of the world. With limited natural resources, export for Taiwan is nearly 80% of its GDP and such trade is primarily with China. Furthermore, capital and technology are completely locked into investments in China, as China is the leading economic powerhouse for Asia and the world. (Fuller 2005; Clark 2002, 757) Taiwans shift of economic activities to China is also part of the transformation of the economic relations between China and the U.S., Taiwans second largest export market. The U.S. depends on China in multiple ways including capital and production in what has been described as Chimerica. (Ferguson 2008, 283-340) Taiwan is an integral part of the Sino-U.S. trade in that a large portion of Chinese exports to the U.S., especially in technology but also in labor-intensive goods, are manufactured by Taiwanese based in China. An example is Foxconn in China, owned by a Taiwanese parent company, which is the main exporter of Apple products ranging from iPod to Macbook. Finally, the economic balance of power between China and Taiwan has shifted dramatically in favor of the former. In the last fifteen years, Chinas GDP grew close to five-fold with average yearly growth of 9.2%, while Taiwans economy grew by only 4.7% per annum. In 1994, Chinas economys was a little more than twice Taiwans economy, whereas in 2008, China was the second largest economy in the world and more than ten times larger than that of Taiwan. In terms of FDI, China has become the worlds leading investment destination since 2001, attracting over $800 billion of FDI in that year alone compared to Taiwans cumulative total of $84 billion since 1994. Foreign trade shows even greater disparity with Chinas global trade exceeding Taiwans by five times in 2008.

Table 1-1: Economic Statistics For Mainland China and Taiwan

(US$bn except where noted) GDP (US$bn) Year
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

GDP Growth Rate PRC

12.6% 10.5% 9.6% 8.8% 7.8% 7.1% 8.0% 7.3% 7.5% 8.0% 9.1% 9.1% 10.3% 10.7% 11.4%

ROC Trade with Mainland China Total

$17.9 $22.5 $23.8 $26.4 $24.0 $25.8 $31.2 $31.5 $39.5 $49.3 $65.7 $76.4 $88.1 $102.3 $105.4

PRC
$542.5 $700.2 $817.9 $898.2 $946.2 $991.2 $1,079.8 $1,158.7 $1,240.6 $1,641.0 $1,931.7 $2,235.8 $2,657.8 $3,382.5 $4,401.6

ROC
$252.7 $274.7 $287.9 $298.8 $275.1 $299.0 $326.2 $293.7 $301.1 $310.8 $340.0 $364.8 $376.4 $393.1 $402.6

ROC
7.6% 6.4% 5.5% 5.5% 3.5% 6.0% 5.8% -1.7% 5.3% 3.7% 6.2% 4.7% 5.4% 6.0% 0.7%

% of Total
9.9% 10.4% 10.8% 11.0% 11.0% 11.0% 10.7% 13.5% 15.9% 17.7% 18.7% 20.0% 20.7% 22.0% 21.2%

Export
$16.0 $19.4 $20.7 $22.5 $19.8 $21.3 $25.0 $25.6 $31.5 $38.3 $48.9 $56.3 $63.3 $74.2 $74.0

% of Export
17.0% 17.2% 17.6% 18.1% 17.6% 17.2% 16.5% 20.3% 23.3% 25.4% 26.8% 28.4% 28.3% 30.1% 28.9%

Taiwan's Annual Outflow FDI to To PRC/ PRC ROW World

$1.0 $1.1 $1.2 $4.3 $2.0 $1.3 $2.6 $2.8 $6.7 $7.7 $6.9 $6.0 $7.6 $10.0 $10.7 $1.6 $1.4 $2.2 $2.9 $3.3 $3.3 $5.1 $4.4 $3.4 $4.0 $3.4 $2.4 $4.3 $6.5 $4.5 37.3% 44.6% 36.2% 60.0% 38.2% 27.7% 33.9% 38.8% 66.6% 66.0% 67.2% 71.1% 63.9% 60.6% 70.5%

Cumulative FDI to PRC

N/A $2.1 $3.3 $7.6 $9.7 $10.9 $13.5 $16.3 $23.0 $30.7 $37.7 $43.7 $51.3 $61.3 $72.0

Sources: 1. GDP & Growth Rate: International Monetary Fund/World Bank for PRC Data; Statistical Abstract of National Income, Directorate of Budget, Accounting and Statistics for Taiwan data. 2. Trade and FDI data from:, http://www.mac.gov.tw/big5/statistic/em/196/index.htm; Department of Statistics, MOEA, http://2k3dmz2.moea.gov.tw/gnweb/Indicator/wFrmIndicator.aspx; italics denotes adjustment for previously unreported investments.

The Puzzle As an export-oriented, technology-dependent economy, Taiwan has responded to the challenges of globalization in an unusual manner: it has focused on restricting only trade and investments with China, despite China being Taiwans most complementary and now most important economic partner. Unlike Taiwans economic policies towards other major trading partners, its cross-Strait economic policies have been characterized by periods of economic liberalization promoted largely by Taiwanese businesses, followed by more restrictive measures resulting from a strong public outcry. (Dent 2003, 472) Until very recently, there have been bans on direct shipping, air, postal, and telecommunications links, which Taiwan rarely imposed on any other country especially since the end of the Cold War. And Taiwanese direct investment projects in China must be approved case by case if over $50 million and if they are in restrictive industries and products. One explanation of this puzzle lies in the politics of trade: the challenges of globalization have produced protectionist pressures in Taiwanese society. As elsewhere, interdependence has created winners and losers as resources are redistributed within the society. With increases in the flow of goods, capital and talent, social tensions over inequality and unemployment has been magnified. The establishment of a fully democratic political system has empowered divergent social interests to express themselves on this issue more vocally. Countries deal with such issues differently depending on the size of their economy. Usually, small and especially export-oriented countries cannot afford protectionism; they can ameliorate the political consequences of these economic impacts only through domestic welfare policies that redistribute income more evenly and through retraining programs for workers who have been displaced. In contrast, larger countries can also engage in protectionist policies, such as higher tariffs or agriculture subsidies, since they can rely on their own domestic markets for consumption and employment. Only rarely, however, do smaller countries turn to restrictive foreign economic policies to insulate themselves from the negative consequences of globalization, like Malaysia temporarily instituting capital controls during the 1997 Asian Financial Crisis (AFC). But these examples do not answer the question of why Taiwan, a small export-oriented economy, has restricted trade and investment only with China, its economic lifeline. A second possible explanation to this puzzle lies in the evolving definition of Taiwanese identity. Chinas active effort to isolate Taiwan internationally and to use economic interdependence to promote political integration in other words, to make Taiwan believe that it has no alternative to unification has given Taiwanese an increasingly strong sense of national identity, as reflected in opinion polls throughout these fifteen years, associated first with the localization and democratization of the islands government and subsequently with the idea that Taiwan is an independent sovereign state.12 Therefore, some opinion leaders

On identity and political attitudes, the longest and most reliable survey by National Chengchi University Election Study Center (NCCU-ESC) showed a combined 91% of the people surveyed in December 2009 believed they were Taiwanese (51%) or both Taiwanese and Chinese (40%), a stark contrast to the combined 65% in December 1994 where Taiwanese constituted only 20% and Taiwanese and Chinese were the remaining 44%. Time-series data available

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have thought that economic isolation from China would prevent the dilution of Taiwanese identity. This certainly explains how protectionism towards China was associated with identity politics, but does not answer why many advocates of a unique Taiwanese identity disagreed with restrictive economic measures towards China and supported the liberalization of cross-Strait economic policy. In short, due to the common culture and language that Taiwan and China share and each countrys complementary comparative advantage, there is a high potential for the two countries to work together economically. At the same time, these ties, or the cross-Strait relationship more generally, also pose what many on Taiwan see as a serious military and economic threat to their island. In this way, commercial ties with China pose both challenges and opportunities for Taiwan that are qualitatively different from those presented by any other country; to Taiwan, China is both uniquely attractive and uniquely dangerous. The political dilemma is obvious: cross-Strait economic ties will produce growing economic interdependence with a country that is threatening to subsume Taiwan, possibly by force. China wants not just beneficial economic relations with Taiwan, but wants unification as well and sees economic relations as one way of promoting it. While a structural analysis might suggest that Taiwan can only cast its economic and perhaps political lot with China, Taiwanese society believes there is a choice to be made. While economic interdependence deepens, surveys show that public attitudes towards cross-Strait economic policies continue to be ambivalent. In a survey conducted by the NCCU-ESC in 2008, Taiwanese appeared to oppose liberalization of economic relations with China. 44% of those surveyed believed the government should increase restrictions on Taiwanese investment on Mainland China, as opposed to 42% who believed the government should reduce restrictions. Despite a higher level of trade, this was a slight trend away from cooperation.13 In the most recent polls, there appeared to be growing convergence of opinion on the underlying issue of identity, but attitudes towards the governments recent policy of liberalizing economic policy towards China remained polarized. August 2009 poll on economic policy conducted by Global View, a leading business magazine, showed that 37% of the people were dissatisfied with the result after one year of the normalization of three links (santong or Three Links) including direct postal, transportation including flights and trade as opposed to 44% who were satisfied. These results can be compared to the Global View poll from June 2008, which asked about the prospects of cross-Strait economic relations after the inauguration of direct flights. In that earlier poll, 20% were pessimistic, against 57% who were optimistic. This

online at: http://esc.nccu.edu.tw/newchinese/data/TaiwanChineseID.htm (Last accessed on Feb 28, 2010). 13 For details, see survey data at: http://www.mac.gov.tw/english/english/pos/9703/9703e_9.gif (Last accessed on Aug 31, 2009). On the broader question of foreign relations, this March 2008 survey also showed great ambivalence. 36% vs. 30% prioritized cross-Strait relations over other foreign relations. However, when asked more specifically about the trade-off, the cautious attitude towards China becomes more pronounced: 75% believed that if developing foreign ties led to rising tension on cross-Strait relations, they would still agree with such an effort, and only 20% would not. See the statistic charts at: http://www.mac.gov.tw/english/english/pos/9703/po9703e.htm (Last accessed on Aug 31, 2009).

suggests the results of the most recent liberalization of cross-Strait economic policies have disappointed the people.14 An important explanation of the puzzle, therefore, is the Taiwanese desire to remain economically competitive yet politically autonomous as a democratic political entity, defying systemic pressure. Michael Swaine (2004) describes these contradictory opinions prevalent among Taiwanese as follows: Overall, a clear majority recognizesBeijings growing military capabilities and the enormous benefits that accrue to Taiwan as a result of deepening economic and social contact with the Chinese mainland. That said, most of Taiwans citizens do not want to be ruled by the current Chinese regime and would prefer a greater level of international recognition as a nation. (Swaine 2004, 46) Analytic Approach and Methodology The particular theories and approaches applied in this study are further explained in Chapter Two and Three; however, a brief overview of what are emphasized in this thesis is important. The political economy of Taiwans crossStrait relations should be analyzed as the political economy of any small trading state in political and economic transition.15 Both the international structure and domestic political pressures impact Taiwans policy formulation, requiring constant attention to the international-domestic linkage.16 Societal actors like Taishang and domestic interest groups have grown in power relative to governments in these fifteen years, reflecting Keohane and Nyes proposition that we are living in a world of complex interdependence.17 (1989) To fully understand the dynamics of cross-Strait economic policies, this study seeks to understand the role of both sets of causal factors the international environment and Taiwans domestic political order in shaping each of the policy changes that have taken place over the last fifteen years.18 This follows Katzensteins distinction, in analyzing economic policies of small states, between "understanding-a-thing-on-its-own" and "understanding-a-thing-in-context." The

; , Global View, August 2009, http://www.gvm.com.tw/gvsrc/200907_GVSRC_others.pdf (Last accessed on Feb 28, 2010). Although it is difficult to establish the linkage between public opinion and foreign policy as Rosenau (1961, 4-5) suggested, the Taiwanese governments policy orientation has increasingly reflected public opinion. For example, from 1996-2000, studies of 41 major policies showed that only 24% of them failed to correspond to the opinions of the public and the elites. (Yu 2002, 137-8) For the purpose of this study, we will use public opinion polls to partially reflect social tendencies, as will be explained below. 15 Contrast Rosecrances forecast that the foreign economic policies of trading states will converge (1986) with Katzenstein (1985 and 2003) who stresses variations in national economic policy among even small states. 16 See Putnam (1988) on the concept of two-level game, and Gourevitch (1978) on the second image reversed. See also the exemplary illustration of this international-domestic linkage analysis in Milner and Keohane (1996), which is extremely appropriate for studying Taiwans political economy. 17 See Keohane and Nye (1989, 37) on the dominance of economic issues and the connection of societies through multiple networks. 18 Reflecting such a point of view, Susan Strange (1988, 18) points out that in todays international political economy, the values that are important include wealth, security, freedom and justice; she strongly urges all policy analysis to rely on an understanding of the context as well as the specific facts.

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external structure is always important, but does not completely determine how governments will respond in different contexts.19 (Katzenstein2003, 9-10) This attempt to understand cross-Strait economic policies is reflected in the evolving analytical framework of this research. Initially, the study adopted strictly rationalist approaches, particularly the politics of trade and the motivations for protectionism. It intended to provide a parsimonious analysis of the economic logic of each instance of change in cross-Strait economic policies. But it soon became clear that a purely economic approach could not produce adequate explanations, and that incorporation of non-economic logic was important. (Hinich 2006, 999) Domestic determinants also proved to be at least as important as the international structure, which also ran contrary to prevailing analyses. It was clear that only by combining various approaches integrating social, economic and political elements could the puzzle be explained, as opposed to a purely structural approach relying on rationalist methodology that considered only calculated costs and benefits. This study does not deny the utility of a rationalist methodology, especially in understanding the politics of trade. In fact, it relies on work by Frieden, Rogowski, Garrett, and other political economists to analyze the consequences of the economic inequality that results from economic liberalization.20 As Taiwans democracy matures into a two-party system, publicly elected officials increasingly seek to maximize their own gains by formulating and implementing policies as Anthony Downs (1957) or any public choice theorists would have predicted. Moreover, this study incorporates the structural approach but also examines domestic actors in explaining the puzzle. Much contemporary international political economy (IPE) theory negates the importance the domestic politics of small states by assuming that their foreign economic policies are determined by the structure of the international system, and overlooks the impact of domestic societal actors. (Bates 1997, 13) In contrast, this study assumes that state actors play an independent role in shaping public policy.21 Competition to set the agenda among domestic institutions, from the executive branch, legislature, bureaucracies and courts does set Taiwan apart from China and other politically less competitive societies. (Birkland 2001; Gupta 2001) In addition to government entities, political parties, interest groups, media, think tanks, businesses and other domestic actors make the political arena highly competitive. In short, this study seeks to understand the evolution of cross-Strait economic policies through an examination of the relationship among national
Katzenstein describes his journey in analyzing economic policies of Austria and Switzerland over the years with a full appreciation for the importance of history and context. 20 The importance of combining various methodologies is highlighted in Weingast and Wittman (2006). 21 Governments often mediate in globalization by interfering with price signals such as Soviet Union did, or freezing coalitions and policies like LDP in Japan did, but in order to survive, channeling response to change appears to be the best strategy. (Milner and Keohane 1996) China is a good example where it has responded to international pressure by joining WTO and opening its market but has maintained a strong sense of national purpose. Its national identity is based on global nationalism where it seeks gains by joining the global market, and remains statist in separating its economic agenda from its political approach, unyielding to the neo-liberal democratic order. This has served to minimize costs to its political structure and has created the government to re-distribute the benefits and costs of economic liberalization accordingly. (Moore 2000)
19

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identity, economic interests and foreign economic policy by tracing the historical processes that have led to changes in policies in the last fifteen years. In addition to including structure and domestic variables, this analytic narrative approach attaches context, stories and accounts or some may say thick description (Geertz 1973) to a strict rationalist or positivist analysis of policy.22 (Bates et al 1998, 10) We examine four major instances of policy change which we will call episodes using Alexander Georges structured and focused approach to case studies. (George 1979) Through the narrative, we can better understand the motivations behind the changes in cross-Strait economic policies, using the same analytical framework to examine each of the episodes (George and Bennett, 2004; Geddes 2006). To understand the origins of policy change, interpretations of the motivations, perceptions, and preferences of societal and government actors are made based on primary material including newspapers, government sources and meeting notes. Much of this analysis is based on extensive interviews with officials, business leaders, interest groups, think tanks and media who were engaged in these debates. Secondary material is used to broaden the perspective, make comparisons with previous periods of cross-Strait relations and support findings uncovered from primary sources. (King, Keohane and Verba 1994, 28) Organization of the Study The prevailing literature on Taiwans Mainland China economic policies, centered on structural analyses, is introduced in Chapter Two. After an overview of the general and specific literature most relevant to cross-Strait economic policies, the chapter discusses how the prevailing interpretations fail to provide an adequate explanation of the oscillations in Taiwans economic policy toward China. The role of identity is discussed as an alternative, but still incomplete, explanation. By identifying the gaps in current research on cross-Strait economic policies, this chapter provides the background for understanding the authors own analytic approach. Chapter Three outlines the conceptual framework utilized in this thesis and the hypotheses to be tested through the four case studies of cross-Strait economic policy reversal from 1994 to 2009. Approaches relevant to the framework of this study are reviewed, focusing on theories of strategic choice and theories of the politics of trade to understand the oscillations in cross-Strait economic policies. A new framework for explaining the puzzle identified in this study is introduced: the Identity-Interest-Policy Inverted Pyramid. The core argument in this framework is that identity forms the basis for defining ones interests. National interests cannot be formed in isolation from identity. Relying on literature that distinguishes between pragmatic and ideological values, the framework sets forth the difference between national identity and national interests, which cannot be juxtaposed and weighed against each other as they are measured on entirely different dimensions. National identity is necessarily the context, and interests are independent variables that impact policies, which then reconstitute national identity. The mutually constitutive nature is essential to understanding how Taiwanese identity relates to interests and policy.

See also Bates (1997), which illustrates the effectiveness of this approach through his work on the domestic politics of the international coffee market.

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National identity is explored on two dimensions: content and contestation. The evolution of the definition of Taiwanese national identity as well as the level of contestation over time are both important to fully grasping Taiwanese national identity. Chapter Three then identifies the economic interests that form the basis of cross-Strait economic policies. Although growth is usually accepted as the ultimate goal in economic policy, it competes with many other interests, some of which can be even more important at times. Over the last fifteen years, Taiwanese have attempted to balance economic growth, stability, security and equity. General economic policy tools available to states to promote their economic interests are listed, along with the more specific policy alternatives that have been relevant to cross-Strait economic policies over these fifteen years. The different priorities assigned to these interests form the basis for four competing clusters of opinions about Taiwans cross-Strait economic policies. These opinion clusters, or tendencies, are arrayed along a spectrum from extensive regulation of economic relations with China to extreme liberalization. These four tendencies are used to categorize the policy positions taken by various societal and government actors during the four episodes under consideration. Finally, two sets of hypotheses to be tested throughout the four episodes are introduced. The first hypothesis relates to the first two episodes (1994-2005): 1. A high level of contestation on national identity leads to perceived choice among extreme economic policies. The second set of hypotheses focuses on the changes in the discussions of cross-Strait economic policies in the later two episodes (2006-2009): 2. As a consensus on identity is forged, the range of views of economic policies narrows and moves towards the center. 3. The narrowing of the spectrum of policy debate eliminates the extremes, but does not produce a consensus on the remaining options. Chapters Four to Seven analyze the four episodes that provide the empirical data to test the hypotheses. Chapter Four introduces the first episode, No Haste. It starts in 1994 with the inauguration of the go south policy, Taiwans first formal albeit relatively weak effort to direct trade and investment away from Mainland China. Then, after the 1995 missile crisis, Lee rolled out a tougher version of the no haste policy in 1996, formalizing restrictions on crossStrait economic relations. A National Development Conference was held in order to mobilize what appeared to be overwhelming support to adopt and implement this policy. While the rest of Asia suffered from the 1997 AFC, Taiwans economy remained resilient throughout 1998. Chapter Five, Active Opening, Effective Management, analyzes the second episode: the DPPs decision in 2001 to free cross-Strait economic policies from some of the constraints that had been in place for five years since the adoption of the no haste policy. After coming to power in Taiwans first peaceful transition of power since 1949, Chen Shui-bian was confronted with a KMT-controlled legislature and a severe economic slump. Despite the DPPs record of favoring independence and its skepticism toward economic relations with China, Chen Shui-bian concluded that liberalization of cross-Strait economic policy would be the most effective way of restoring economic growth and strengthening his political base. The government organized a large-scale

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Economic Development Advisory Council to discuss the policy change fully and promptly rolled out liberalization policies relaxing restrictions on investment in China. In the end, however, because of the divided government, and with the increasing emergence of divergent voices in a more democratic Taiwanese society, Chens move towards relaxation was even more controversial and generated much more dissent than the previous episode. The analysis of the third episode in Chapter Six, Active Management, Effective Opening, begins with the government reintroducing restrictions on cross-Strait investment in 2006. After one full term in power, Chen Shui-bian had been unable to reverse the economic downslide or engage China in any dialogue. As a result, the DPP fared poorly in elections, winning the 2004 presidency by only a razor thin margin and receiving a smaller percentage of the vote in several subsequent local elections. Mired in personal scandal and facing a growing national budget deficit, Chen Shui-bian suffered from declining popularity and sought to appeal to the more extreme elements in his political base by imposing restrictions on investment in China. Chen convened a Conference on Sustaining Taiwans Economic Development with more than one thousand participants with the aim of ratifying these restrictions, but the meeting achieved more superficial results than the two previous all-hands conferences, as it was not able to pass any formal resolution endorsing Chens proposals. Chapter Seven, Mutual Liberalization, begins with the presidential elections 2008. After two terms and eight years of DPPs erratic economic policies, the KMT regained power in 2008 and its successful presidential candidate, Ma Ying-jeou, launched another period of liberalization in cross-Strait economic policies. Cross-Strait negotiations resumed after a hiatus of fifteen years with three successive formal meetings between Taiwanese and Chinese representatives. Each meeting was followed by a set of liberalizing policies, totaling ten in all, nine of which took the form of bilateral agreements. Ma also announced his intention to work toward a memorandum of understanding (MOU) on financial regulation that would liberalize the establishment of banks, securities and insurance companies on both sides, and toward an even broader ECFA that would essentially normalize trade and investment relations between Taiwan and China. But these unprecedented liberalization measures generated an equally unprecedented protectionist backlash. Hosting more than 18 conferences in three months, many open to the public as well as to elites, the government tried to quell the public protest as a debate raged on over the priority to be assigned to growth, equity, stability and security. In each of the episodes, public opinion will be examined through the surveys and polls that have been regularly conducted by polling companies, media and universities. The public responses will then be analyzed in terms of the relative appeal of four cross-Strait economic policy tendencies. A tendency reflects a cluster of opinions on the linear scale of economic liberalization and restriction. Each tendency also embodies criticisms of the other tendencies forming the crux of the public debate. For each of the four tendencies Extensive Restriction, Guided Liberalization, Guided Development and Extensive Restriction examples are given of leaders who articulate and represent such positions, with particular reference to their rankings of Taiwans national interests and the rationale for their policy preferences.

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The last chapter summarizes the findings of the four empirical episodes, specifically in relation to the three hypotheses. Furthermore, the implications of this study for Taiwans public policy, for regional and global stability, as well as to the discipline of IPE are provided. Finally, the limitations of this study in methodology and approach are discussed, with an emphasis on identifying areas for further research.

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Chapter Two Prevailing Perspectives on Taiwans Cross-Strait Economic Policies

Introduction The case of Taiwan has defied conventional wisdom. Structural analyses have focused on the asymmetrical relationship between Taiwan and China, and how their disparity in size and power meant that, as the smaller country, Taiwan had little leverage and must adopt a strategy that either accommodated China or relied on an alliance with the United States. Many analysts therefore thought that after the U.S. recognized China, it would only be a matter of time before Taiwan would accommodate the much larger China politically and economically by accepting the one China principle and liberalizing trade policy. Some recommended that the U.S. government made policy decisions based on such premise.23 Kissinger and Nixon considered Taiwan essentially an American client state that would expire without [U.S.] support Without U.S. backing, Taiwan would have no option but to come to terms with China The new American connection with China would fundamentally rebalance power worldwide. (Waldron 2008, 160) Taiwan, however, has behaved very differently from those predictions, oscillating between accommodating Beijing and defying China, both politically and economically. Overall, this is a world that veered dramatically from what Nixon and Kissinger imagined in 1971 when they put Taiwan into play, with Taiwan still independent but more isolated diplomatically than most countries in this world. Furthermore, The question of her future is every bit as challenging now as it was in the 1970s: more so, in fact, as a new generation is in charge, decisions are made democratically, and popular aspirations cannot be ignored. (Waldron 2008, 174) In the 1960s and 1970s, the Chinese themselves already showed that weaker powers can have their own agendas and can defy nations far stronger than themselves. In recent decades, international norms and institutions have changed to give small states the ability to defend their interests, along with their asymmetrical strategies that give small states disproportionate leverage over the large so that relative size is no longer the primary determinant of foreign policy, as the example of Europe shows. (Goetschel 1998, 30; Katzenstein 1996, 28) The lessons since WWII again show that smaller countries can choose between balancing and accommodation, and structure and agents change each other in iterations. The grand structural theories appear better able to predict a small number of extreme cases, and possibly very long-term trends, but not the shorterterm, more nuanced changes in smaller nations policies toward larger powers. (East 1973)24 Furthermore, small states often appeared quite effective in lobbying superpowers for support, as the KMT did in lobbying the U.S. during the 1960s

The asymmetry in cross-Strait relations is well explored and best identified with the work of Y.S. Wu (1999) and updated in Y.S. Wu (2009). 24 East (1973) shows that structural theories can explain war better, but that countries react to structural pressures on other issues very differently.

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and 1970s.25 Thus, it is not entirely surprising that, since the normalization of the relationship between China and the U.S., Taiwan has also taken a path unpredicted by most pundits. What is true of political relationships is also true of economics. The 1997 AFC and the 2008 GFC clearly show that national regulation can influence the impact of global economic conditions even on small economies.26 For example, Taiwan was relatively unaffected compared to most Asian economies during the AFC, but suffered more than most during the GFC.27 The role of national government was affirmed through literature and interviews conducted for this thesis that confirmed that Taiwans government has been able to restrict investments in China, especially for large and strategic industries, as well as to redirect resources domestically. Structuralist theories, for example, that downplay the role of history, individuals and other domestic variables, have not been satisfactory in explaining the variation in cross-Strait policies. With relation to cross-Strait political economy, the most prominent structural theories applied are neo-liberalism and neo-realism. Each of these schools claims to provide a comprehensive framework to explain the impact of globalization on national economies and to compare the role of the state vis--vis the market. Each theory emphasizes different aspects of the international structure: in the case of neo-realism, power is paramount whereas neo-liberals find institutions and economic interests to be the most important features. But despite these differences, both of these theories stress external structural variables and de-emphasize the domestic and contextual factors. The uniqueness of cross-Strait relations lies in the juxtaposition of Taiwans economic complementarity with China against Chinas security threat to Taiwan. Even many traditional constructivists would find Taiwans case baffling. They would assume that values are as important as material interests, and that historical and cultural contexts will influence decisions on economic policy. Sharing a broader common history and culture, some constructivists have predicted that Taiwan and China should become closer over time with socialization. (Acharya 1999) Contrary to such analyses, and despite the steady increase in interaction across the Strait, Taiwans cross-Strait economic policies have not been consistent. At most, constructivists attempt to enrich structural analyses with historical context in order to explain a domestic political development rooted in the particular (Berger 2003, 400) Taiwan is seen as a unique case where domestic politics often trumps structural factors and the rationale for nationalism is reduced to particular historical context because it appears difficult to explain. (Berger 2003, 408)
Keohane (1971) points out that Israel and the Nationalist government in Taiwan show how small states with focused and concerted efforts can influence U.S. foreign policy a great deal more than one would expect. 26 Even free-marketeers like George Soros urge the government to provide good and effective regulation. See his latest 2009 book analyzing the current credit crisis, which states that markets are not rational and human behaviors are conditioned and easily affected by socialization. (Soros 2009) 27 Both Malaysia and Korea recovered quickly although Korea accepted IMF aid and conditionality whereas Malaysia did not. The Malaysian government appeared to have recovered by adopting distinctive national policies. As for Korea, many fear that the structure of Korean economy has not improved and is still inherently prone to external shock. Taiwan was hardly affected by the AFC, because of low levels of indebtedness and an economic foundation based on small and medium-sized companies (SMEs).
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In this chapter, we will review some of the most widely accepted theories of international politics and political economy as they pertain to Taiwans crossStrait economic policy. Because of Chinas military and economic rise, as well as Taiwans newfound status as an emerging democracy with a vibrant domestic political culture, there has been an abundance of academic work produced specific to Taiwan and to cross-Strait economic policies. One dominant perspective on cross-Strait political economy has been that if Taiwan liberalizes its economic relationship with China, the relationship will improve, even if China refuses to renounce the use of force against Taiwan to deter independence or to impose unification. (S. Chan 2009) Others believe that Taiwan should balance against China, in order to enhance its military and economic security. Each of these perspectives privileges one particular strategy by emphasizing one variable but fails to provide an adequate explanation to our puzzle. This produces a research gap, since the existing literature is unable to explain the oscillations in Taiwans cross-Strait economic policies. Taiwans Economic Policy: Some Prevailing Explanations The structuralists do pose a legitimate question: how much autonomy do small states have to determine their foreign economic policy? Neorealists believe that exogenous factors like pressure from the U.S. and China should be the primary drivers of Taiwans foreign economic policies because of the asymmetries in Taiwans power position. Neoliberals doubt that a small state like Taiwan can resist the logic of integration. In the early years of Taiwans democratization, many analysts dismissed Taiwans domestic politics as influential for long-term cross-Strait relations as they focus predominantly on the geo-political position of Taiwan vis--vis other countries. However, Taiwans cross-Strait economic policies have not conformed to these analysts expectations over the last fifteen years, especially with Taiwanese societys increased participation in policy-making. And, in turn, Taiwans unpredictable economic policies appear to shape Chinas Taiwan strategy and to contribute to the U.S. reluctance to support Taiwan against Chinese pressure. For a small state, a strategy of maintaining autonomy and balancing against a strong threat appears logical only if it is realistic. Weak states cannot maintain their autonomy if they are closely watched and jealously prevented from developing relations with other powers, such that they can only seek isolation from the international system or inclusion within the sphere of influence of one of the great powers. (Handel 1990, 258) In the case of Taiwan, because of its limited leverage against China, neo-realists have contended that it will have difficulty in maintaining its autonomy from China. Neo-realists assume that all states foreign policies are determined by structure first, with domestic politics playing a secondary role. (Rose 1998) This is even truer for smaller states, which are at the mercy of the international structure, and whose domestic debates over strategy will have a negligible impact over the long run. In making these arguments, the neo-realists agree with the neo-liberals that foreign policy depends primarily on the structure of the international system. They differ in terms of what constitutes that structure and what interests drive it. To realists, the primary interest is power, and the main agent is the state. The ultimate goals of the state are state building and autonomy. Small states have little choice but to accommodate larger states, especially powerful neighbors, or bandwagon with other great powers to balance the rising power. (Yu 2009, 43)

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For the neoliberals, the agents include international institutions, states and societal actors, all of which contribute to national policy. And economic interests motivate such actors, with the goals of the state being to enhance economic welfare of domestic economy, to promote development, and to maximize growth. Much of the cross-Strait literature actually applies a combination of analytical methods and approaches, many based on structuralist arguments including neo-realism and neo-liberalism. However, given the dynamic changes in Taiwans political economy, it has become common for many to also refer to domestic factors such as protectionism and identity concerns, drawing on Putnams win-set in two-level games. (Wu and Shi 2009; C.W. Lin 2009; Putnam 1988) In order to understand the competing schools of thought on crossStrait political economy, the literature can be best divided not by level of analysis but by different emphasis - some analyses focus more on security issues, and other analyses center on economic concerns. Lastly, the proliferation of literature on identity politics will be discussed as an important addition to cross-Strait analysis in the last thirty years, before a review of the remaining research gap. Security-Focus Theories To enhance Taiwans security, analysts see Taiwans choices as either accommodating China, or balancing against it with the U.S. alliance. If one focuses on the asymmetry between China and Taiwan, the conclusion is likely to be that Taiwans economic policies will be accommodative to China. (Yu 2009, 54) China sees trade as a way of promoting what it regards as a vital interest in eventual political unification.28 (Bush 2003; Tung 2005; P. Chang 1995) China also believes that Taiwan needs trade with China to maximize its economic growth. (Tanner 2007) China therefore demands from Taiwan a commitment to the one China principle, or commitment to eventual reunification, as a condition for trade. And since Taiwan must accommodate Chinas core interests, Taiwan should and will accept the one China principle. Over the past two decades China has risen economically to become the second largest economy in the world, and strategically, China has become a leader on important issues ranging from convening the Six-Party talks on Korea to jumpstarting the current global economy. Resisting economic cooperation may provoke China and possibly irritate the U.S., increasing the risk of conflict.29 (Chang and Sun 1999, 23) China can only be placated if Taiwan initiates more accommodative economic policies. Those who hold this view have offered different explanations as to why they expect Taiwan to take an accommodative approach to China. Some have predicted accommodative economic policies because of the assumption that Taiwan has negligible chance of long-term survival without China. (Shao 2001, 120 and 123; Zhao and Sutter 1991; W.Y. Chang 1999) Some have been optimistic that the unification of Taiwan and China would occur along with Chinas progress in economic and political development. (Zhao and Sutter 1991; Moore and Yang 2001) Analysts focusing on the power play between Taiwan and China have seen Taiwans restrictive policies toward cross-Strait economic
This is consistent with the analysis of Albert Hirschman (1945, Chapter 5) on Nazi Germanys expansion of power through trade with the Balkan countries. 29 The assertion by Chang and Sun (1999, 23) is normative, rather than predictive: Taiwan should follow Americas engagement policy to peacefully transform the PRC It should avoid being regarded as a trouble maker that puts threat to the security in the Asia-Pacific region.
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relations as undesirable variables that could tip the balance against the fragile stability in the Taiwan Strait. The focus for security issues has primarily been on the U.S.-China-Taiwan strategic triangle. (C.W. Lin 2009; A.C. Wu 2000) Others have contended that growing economic interaction and accommodation is beneficial for cross-Strait stability because it makes China more patient and less likely to employ force. Taiwan needs to have a consensus on Mainland China economic policies in order to maintain this stability. (Zagoria 2003) Taiwan will and must work with China in order to stimulate growth and remain more essential to the global economy, which will enhance Taiwans security. (Addison 2001; Tung 2003b) In addition, many have asserted that declining U.S. power will lead Taiwan to become more accommodative, rather than to balance against China. (Chang and Sun 1999) Because the price to confront China is so high, the U.S. has gradually conditioned its commitment to Taiwan on responsible i.e., accommodative or at least non-confrontational behavior by Taiwan. (Shirk 2007) As a compromise to China, U.S. does not sell state-of-the-art weaponry to Taiwan, and Taiwan cannot produce its own and has been slow to buy any of what the U.S. sells due to domestic debate. Some have seen this as desirable because a further commitment to Taiwan would propel China to buildup militarily further and feed into a vicious arms race cycle. (Carpenter 2005, 174; Terrill 2003; Tucker 2002; Yan 2006, 194) The U.S. has also clearly indicated that stability and greater economic liberalization across the Strait are in the American interest. American multinationals fully support such stance, since they have been using Taiwan as a base to expand into China.30 Without an unconditional American security commitment, Taiwan has lost the option of balancing China with U.S. backing. Taiwan must therefore reconsider all its options, and as the U.S. increasingly accommodates China, then Taiwan must and will do the same. (Bao 1999; Bao 2009, 351; Min 2009, 327) On the other hand, some security analysts have found over-reliance on the Chinese market or Chinese resources to be undesirable because of Chinas animosity toward Taiwan and have concluded that balancing will be the natural outcome. Although China has become the leading trading partner for Japan and Korea as well, Taiwan is obviously different because of Chinas hostility. China is motivated by nationalism and uses economic incentives to cajole Taiwan into political integration, while Taiwan increasingly desires autonomy. (Tanner 2007) As a result of such divergent interests, trade cannot create additional political benefits for the two sides and may actually raise the tension between them. (L. Kao 1999; Y.S. Wu 1995; Y.S. Wu 2007) With Chinese capital now allowed to invest in Taiwan, Taiwan will be even more vulnerable to Chinas economic and fiscal policies. (Friedman 2006; S.G. Wu 1999; Wu and Huang 1995; Jacobs 2006) These analyses resonate with the work of Kastner (2006) and Kahler and Kastner (2006) that have questioned the premise that economic interdependence leads to peace. In the extreme, some neo-realists have concluded that cross-Strait economic ties reduce Taiwans security to such an extent that they call for
See for example, the American Chamber of Commerce (Taiwan) (AmCham), Taiwan White Paper 2008, available online at: http://www.amcham.com.tw/component/option,com_docman/task,cat_view/gid,163/Itemid,377/ (Last accessed on Feb 28, 2010).
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complete isolation.31 They have claimed that Taiwan must be competitive economically, independent of China, particularly in strategic industries such as semiconductor and petrochemical industry.32 (P.C. Chen 2004) This would allow Taiwan to gain economic leverage over China and avoid economic sanctions initiated by China.33 This was a particularly important argument in the 1990s when Taiwan was economically strong relative to China, but is increasingly unrealistic. Any strategy of economic sanction against China is unlikely to work because of the relatively small size of Taiwans economy and military force compared with China, which has overtaken Taiwan economically in scale and growth. Also focusing on the strategic triangle, some realists have predicted balancing rather than accommodation because the U.S. prefers Taipei to keep a distance from Beijing, serving as a counterweight against China. Structurally, if the U.S. wants Taiwan to play a supportive role in any containment effort against China, even if non-provocatively, Taiwan should and must structure its economic policies so as to prevent economic integration. Some have asserted that the American sense of identity may push it to create alliances based on values and institutions such as democracy and will lead to a closer cooperation with Taiwan, rather than to allow an anchorless pursuit of economic engagement with China that leaves Japan and aspiring democratizing states in Asia exposed to opaque and unpredictable Chinese intentions.34 (Nau 2002, 250) Going forward, Taiwan must continue to be mindful of U.S. objectives, as Taiwans only guarantor of security. (Y.C. Chang 2000; W. Y. Chang 1999; Min 1999) This may be especially important as U.S. continues to adhere to strategic ambiguity. (Kastner 2006) These analysts have made the argument that, in the short term, China would not push too far as U.S. still has a vested interest in Taiwan, and if pressured, U.S. might choose strategic clarity by confronting China, rather than maintain strategic ambiguity. (Cabestan 2006) Taiwans behavior does not fit the predictions made by such analysts either. If Taiwan is really trying to bandwagon with the U.S. by imposing restrictions on cross-Strait economic policies in an attempt to maintain its autonomy from China, it appears illogical for Taiwan to move towards independence in ways that constantly challenge its relations with Washington. (Tucker 2002) But Taiwan has continued to act as a provocateur, creating mistrust with the U.S. by not consulting its most important guarantor in formulating economic policies. (Terrill 2003; Bao 1999, Y.S. Wu 1999, 182; Swaine 2001) The last fifteen years have witnessed a high level of distrust between the U.S. and Taiwan. (Tucker 2009) For a small country to act
See Art and Jervis (2003) for the general theoretical underpinning of such arguments. See also , , accessible at Taiwan Advocates website: http://www.advocates.org.tw/wooooa/front/bin/ptlist.phtml?Category=101220 (Last accessed on Feb 28, 2010). 33 Supporters of economic isolation sometimes cite literature on economic sanctions like Tung 2003a and Addison 2001, which shows that China would not be able to impose trade sanction on Taiwan without hurting itself economically. 34 This is not containment, but an orientation towards basing international alliances on common values. In the case of Taiwan, Nau (2002, 250) writes that, Taiwan is also becoming an increasingly delicate problem. As it democratizes, its identity inevitably becomes more independent of mainland China. That does not sanction formal declaration of independence by Taiwan, but it also raises the imperative for the United States to defend Taiwan against unprovoked Chinese threats or attacks.
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independently of its strongest security ally and largest enemy does not fit the neorealist prediction that Taiwan is balancing against China by allying with the U.S. Economic-Focus Theories Just as analysts who focus on security have predicted that Taiwan will either accommodate China or balance against it, analysts who stress economic factors have also made opposite predications. Those who focus on structure and accept the logic of neo-liberal principles mostly predict liberalization and economic integration between the two sides. Analysts who stress the domestic politics of trade, however, see protectionism looming. Since the end of the Cold War, neo-liberal ideals of economic liberalization have dominated the literature on the effects of economic interaction on international relations. The neo-liberals have created a mainstream view that is fundamentally deterministic. (Kahler and Lake 2003, 16-17) It has also become a trend to supplement such a rationalist view with constructivist approaches that emphasize the role of norms, ideas and perceptions in shaping the ways in which growing economic interdependence affects international relationships. One variant of neo-liberalism has held that economic liberalization will lead to a reduced role for the nation-state and thus will evolve into political integration. It envisions economic liberalization leading to a reduced role for the nation-state. In a world where cooperation on functional issues is on the rise, governments will increasingly delegate parts of national governance upward toward global or regional organizations, like the European Union, to solve transnational problems. This pressure can also be downward, as these supranational institutions make demands on national governments. This theory was subsequently refined by neo-functionalism, which included the role of nongovernmental actors within specific functional areas in facilitating political and economic integration. These non-governmental networks create what Keohane and Nye call complex interdependence, further constraining the state. (Keohane and Nye 1989) Developed after functionalism, liberal institutionalism has focused on the role of international institutions in efficiently aggregating common interests. But since Taiwan hardly belongs to any international institutions due to Chinas strategy of isolating it, this approach generally does not apply to crossStrait relations. (Noble and Ravenhill 2000; Lee 2006)35 Since the Cold War ended, functionalism has lent support to those who assert the benefits of globalization for the global political economy. National governments are constrained both by the international structure in the form of global market pressures and by increased domestic demands presented by businesses and NGOs. Non-state actors have been empowered by advanced technology that allows the networking of capital and know-how both domestically and internationally. Neo-classical economists believe that the economic benefits of belonging to a bigger market will naturally lead to the formation of larger transnational markets, even a single global market, thus reducing the importance

In fact, Noble and Ravenhill (2000) analyzed Taiwan and Korea during the 1997 AFC and concluded that international institutions did not transform either country very much in terms of underlying structure or long-term outlook. However, Yuan Yis work (1999, 2009) sees institutionalism as playing an increasingly important role in cross-Strait relations, especially since Mas conciliatory policies began.

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of national governments as markets merge. The benefits of enhanced economic integration will outweigh any political costs. More recent literature with an institutionalist streak argues that international institutions now demand cooperation and order. Some have taken the neo-liberal logic further by saying that globalization has created a structure that ostracizes those who do not opt into the established network. (Grewal 2008) Others exhibit similar logic and believe that the prospect of future interaction makes trade possible and brings peace between trading partners. (Copeland 1996) The implication is that as long as the rest of the world accepts such a network of norms and relationships, Taiwan will probably be forced to conform to it. And if China succeeds in becoming the hub of such a network, Taiwan may find itself having to accept Chinas preferences. The Mainland can exclude Taiwan economically and ostracize Taiwan internationally, but Taiwan cannot tolerate being excluded by China. Pro-liberalization analysts have often attributed the failure of the Taiwanese government to provide growth or equity during these fifteen years to opposition to economic integration with China. They have said that liberalization and economic integration with China are inevitable and that Taiwans government is only stalling the process by imposing restrictions on cross-Strait trade and investments. For the globalists, economic integration with China is favorable to growth, and inevitable. Analysts like David Smick (2008, 17) have attacked protectionism as anathema to the proper balanced workings of free markets. They have argued that regulation and restrictions are counter-productive, impeding growth and actually decreasing economic security. For them, in restricting trade and investment, the Taiwanese government is acting irrationally. Proponents of the neoliberal order expect that an increase in the intensity of trade and investment will create a spillover to the political realm, encouraging further top-down economic liberalization and intensifying the economic relationship. (Y.C. Chang 2000, 312-3) Some have even inferred from the intense economic activities across the Strait that a de facto and unwritten agreement across the Taiwan Strait has emerged that has produced detente between Taiwan and China. (S. Chan 2009, 86) Scholars of this persuasion have assumed that freer trade will ease political frictions between Taiwan and China and should reduce the possibility of conflict. (Rigger 2008)36 The stronger Taiwans economy is and the more interdependent Taiwan and China are, the less the likelihood of any military conflict. Trade will serve as a security deterrent to potential Chinese aggression and thus will promote peace.37 In a world defined by complex interdependence, Taiwan should therefore promote trade and investment with China in order to enhance economic and security stability across the Strait, rather than seeking isolation. (Chan and Clark 1995; Zagoria 2003) In fact, economic engagement such that China relies on Taiwan for advanced technology will be the most effective policy for economic stability, because the stakes would be too high for China to impose economic sanction against Taiwan. (Addison 2001; Tung 2003b)
This is a common argument for Sino-U.S. relations as well. Phillip Saunders argues that should China become dependent on the U.S. economically, then politics will not be the primary driver of its U.S. policies. (Saunders 2000) 37 This refers to both the literature on democratic peace as well as Copelands work mentioned above.
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From a structural point of view, neo-liberal scholars have argued that the Taiwan governments policies will be unable to prevent the evolution toward free trade that is unfolding throughout the world, including Taiwans own trade with China. They have attempted to show how the Taiwanese government is receding into the background with economic forces overpowering national policies. Historically, these scholars have acknowledged, the state did play an important role in upgrading Taiwans economy as a capitalist developmental state in the 1960s and 1970s. (Y.S. Wu 2007) But this structure has been undermined with globalization and the opening of China and Eastern Europe. New constraints have been imposed on the ability of the state to formulate economic policies that can dictate the speed or patterns of economic transactions. (Chiang 2004) Globalization also allegedly demands structural changes in Taiwanese economy, forcing the state to reduce its role and cede more power to private firms, which have been the foundation of Taiwans economic development. (Leng 1999; Leng and Ho 2004; Leng 2005b; Cheng 2001) With Taiwans economic relations with China trade growing rapidly in the last two decades, the investments and trade conducted by Taiwanese firms have defied government attempts at exchange rate controls, capital controls, or trade restrictions. (Streeten 1996; Cheng 2005) This has produced a net gain for the Taiwanese economy and strengthened Taiwans global competitive position as Taiwanese managers have adapted to the China market well relative to other groups. (Cheng 2005) Douglas Fuller (2008) has argued that Taiwans increased economic interdependence with China, even without government encouragement and sometimes against the wishes of government, has had positive consequences, transforming Taiwan into a more knowledge-based economy and maintaining a high level of employment on the island. The nature of Taiwans developmental state was also quite different than in the other three tigers, Korea, Japan and Singapore. In the past, the Taiwanese state assisted, rather than controlled, the growth of many industries by promoting market-conforming policies and facilitating the operation market forces. As a result, Taiwan had a more vibrant private sector than many other Asian states. (Leng 1999; Leng 2002) The emergence of a highly entrepreneurial group of private businesspeople in a small domestic market has meant that the states role in Taiwan is radically different than most Asian governments. Interest groups, including both those with transnational interests and purely domestic ones, have exerted great initiatives to shape or, if necessary, even to defy public policy in order to remain competitive. In addition, Taiwan moved from a dictatorship to a multi-party democracy starting in 1987 with the lifting of martial law, and the state-society relationship has been dramatically altered in the direction of a bigger or more vocal society and a smaller or less centralized state. Economic statecraft in this era of market internationalization needs to be re-examined as its effectiveness is compromised. (Leng 1998; Leng 2005a; Leng2005b) These analysts have further believed that cross-Strait policies will only be increasingly market-conforming, allowing Taiwanese businessmen further access to Mainland markets, and that any efforts to impede cross-Strait trade will hurt Taiwans economy in the short term and cannot persist. (S. Chan 2009, 86) Even if the Taiwanese government tries to restrict trade and investment with China, sub-state interactions especially in business will continue to rise and create a virtuous cycle of cooperation. (Johnson 1987; Huchet 1997; Chiang 2004; Chung

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1997) The government no longer, for example, controls the multinational corporations (MNCs) or the technology industry, which it groomed for decades.38 (Leng 1998; Leng 2002; Wang 2001; S.M. Chang 1999) Despite the governments effort to hold companies back, cross-Strait linkages in the technology industry continue to deepen. (Leng 2005a; Cheng 2005) In short, the governments attempt to control trade has been futile and counterproductive. (Zhu 2006) Globalization supporters do not value state autonomy or economic autarky, and believe that performing a particular or even low-end part of the global integrated industry chain will be more economically beneficial, even though the economy will be intricately tied into the global market. (Chung, Tsai and Wang 2004) For example, the division of labor in the electronics sector is spread among China, Taiwan, Japan, the U.S., and other Asian countries; Taiwan and China are extremely complementary in this internationally integrated sector. (Chung 1997) Taiwans economic policies, therefore, will be to upgrade Taiwan to a knowledge-based economy, usually involving Taiwanese firms moving manufacturing to China and leaving high-end research in their headquarters in Taiwan. (T.J. Chen 2004) As Taiwan moves into product design and other highend processes, China will have a naturally advantageous position in integrated circuit (IC) design, testing and assembly, and non-leading-edge manufacturing. (Chen and Woetzel 2002) The dynamics of the electronics industry have often overridden the ability of the state to regulate businesses, as shown by the failure of U.S. semiconductor quota imposed on Japanese imports in the early 1970s.39 Restrictions like Taiwans ban on producing semiconductors on the Mainland should be lifted because they simply increase transaction costs to Taiwanese players, making them less competitive. (Yan and Hung, 2003) Finally, globalists have argued that globalization has also eroded local identity and created the context for greater cross-Strait economic integration. With the steady increase in trade and investment with China, many have doubted that Taiwanese nationalism will be a barrier to greater cooperation. (Cabestan 2006; Lynch 2004; Kao 2004) Many have heralded the advent of a global identity without borders, which would facilitate the eventual resolution of the political differences between China and Taiwan.40 All of the above analysts, based on different theories and logic focusing on economic interest, hold that the liberalization of cross-Strait economic relations is inevitable in the long run and probably beneficial economically and possibly security-wise. As an example, Taiwan and China have already conducted joint oil exploration, media expansion and two-way travel despite political obstacles. (Clough 2003) Overall, cross-Strait business logic is compelling: China and

Abundant research has been devoted to how Taiwans industrial state is an ideal combination of private and public sector collaboration. See the work of Robert Wade (1990; 1995). Also see Chang and You (2000) on the success of the IT industry. This combination of private and public sector has allowed Taiwan to cushion the China factor better than otherwise, and made Taiwan less vulnerable to the AFC compared to Korea, for example. 39 The market players simply did not comply with the imposed production quota intended to favor Intel. 40 The impact of loss of national identity in the integration of European nations has been researched widely. See McLaren (2006, 178).

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Taiwan are perfect partners with common economic interests that should only be encouraged.41 (Fuller 2008; Sutter 2002) In contrast, other analysts, who focus on the domestic politics of trade and domestic backlash against liberalization, argue that the continued liberalization of economic policies that have facilitated globalization should not be taken for granted. The history of globalization since WWII involving increased movement of capital, goods and people has been short. (Frieden 2006; Ferguson 2008) The distributional consequences of the free flow of capital, goods and talent can be extremely destabilizing. (Rogowski 1999) The new economic order does not necessarily create a more stable world, especially for developing countries, but a more perilous economic landscape. (Kahler 1996) Even if freer trade promotes economic growth, it accentuates the emergence of winners and losers, which is an important consideration in a democratic society. While the overall wealth of a polity may be enhanced by economic liberalization, distinct subgroups may lose more than they gain. These economic costs of growth may be more accentuated if income disparities already exist among geographic regions. (Garrett and Rodden 2003) Protectionism is therefore a highly likely policy choice in a democracy. (Garrett 1998, 24) The negative consequences of liberalizing Taiwans economic relations with China have led to the adoption of protectionist policies that are intended to defend the Taiwanese peoples sovereignty and their hard-earned way of life. (Leng 2009, 156) This literature partially echoes the logic of the broader global backlash against globalization. Korten (2001, 22) sees that backlash as originating from a convergence of ideological, political and technological forces that shift power away from governance for public good towards policies that benefit a few corporations and financial institutions. Stiglitz (2003) similarly describes a world where economic forces outpace changes in political structures to meet our moral objectives. Krugman (2007, 246) stresses that income inequality has led to social inequality, and the use of national policy to redistribute wealth is the only solution. The backlash against cross-Strait economic interdependence is said to be particularly pronounced because China has become Taiwans nearest and most important economic partner. For Taiwan to use economic policy as its primary tool in resisting Chinas political overtures is also logical. Maurice Easts early study of the foreign policies of small states (1973) tests two models with data from 32 states, divided into large and small, developed and developing. East concluded that small states tend to engage in high-commitment, high-risk behavior because they do not have the information or the resources to engage in more subtle and ambiguous foreign policies. Moreover, their diplomacy tends to focus around economic policies, with economic statecraft serving as their primary instrument of foreign relations. (Hey 2003, 5) On the basis of this study, it should come as no surprise that Taiwans economic policies have been its primary foreign policy tool in cross-Strait relations, and that in the last fifteen years, they have often been provocative especially in the absence of other foreign policy tools. With its rich history of island traders, Taiwan has a small domestic market and has always depended on exports. There have been few, if any, protests
This should be differentiated from the more normative and advocatory literature common in the 90s that argues that a top-down economic integration is necessary and important for Taiwans survival, and that political unification is inevitable. (Y.C. Chang 2000; Chang and Sun 1999)
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against globalization or the goals of the World Trade Organization (WTO). Consequently, there has been little research analyzing Taiwanese protectionism. Consistent with Peter Katzensteins work on small states (1985), Taiwanese understand they cannot frame the global economic structure, and trade politics has never been influential in Taiwan. But trade with China has presented a unique challenge for several reasons. First, the size of the Chinese market dwarfs that of any other trading partner, and it is unusually complementary to Taiwan creating a high level of dependence and thus instability. Overwhelmed by the size of Chinas market, closer economic cooperation naturally stokes nationalism and protectionism. This is evident from the early Taishang forays in tapping the low-cost Chinese labor market to the recent investment relaxation that has allowed Mainland Chinese funds into Taiwan or the recent opening of import categories for agricultural products. Lin Hsiang-kai (2008a and 2008b) of National Taiwan University has presented convincing data showing how Taiwan was already over-reliant on China as of the end of 2007 in terms of all economic measures, including trade, FDI and job migration. By setting trade and investment restrictions, the state could play a particularly important role in limiting and mitigating this risk of being overly dependent on the Chinese market. Second, trading with and investing in China have certainly exacerbated the inequality between the winners and losers of globalization. The negative economic consequence of interdependence with China has been so high that it cannot be offset by its overall wealth creation potential. Job loss, the migration of important technology and heavy industry abroad, and increased economic inequality have all been directly related to Taishangs' increased investments in China and the opening of more sectors for trade with China. (P.C. Chen 2004; S. Chan 2009, 83) Taiwans economic inequality has been on the rise since 2000, and will only worsen unless government policy can mitigate the influence of industrial migration. Unskilled workers have been hurt the most, and the government has few social policies to lessen the impact. The bottom 40% of Taiwanese families have seen their real earnings drop precipitously, weakening the foundation of Taiwans once middle-class economy.42 Conversely, the winners from cross-Strait economic liberalization, including the owners of businesses and skilled workers, have exited to China as opposed to trying to improve Taiwans domestic structure. Moreover, unregulated economic integration with China may result in Taiwans economy losing overall competitiveness as both capital and talent migrate to China.43 As Kung Ming-hsin of the Taiwan Institute of Economic Research (TIER) has pointed out, concentrated growth by liberalizing trade and investments with China, especially allowing capital to flow both ways, is
See for example the presentation by Lin Hsiang-kai , November 5, 2008, accessible in Lins website at: http://homepage.nt.edu.tw/~kslin/ (Last accessed on Aug 31, 2009). 43 Taiwan Advocate 2008 has a good collection of this line of advocacy arguments made by scholars and politicians alike. See for example the conference papers , ; , : ; , ; , :; , , accessible at Taiwan Advocates website: http://www.advocates.org.tw/wooooa/front/bin/ptlist.phtml?Category=101220 (Last accessed on Feb 28, 2010).
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introducing unprecedented structural threats, especially in the presence of Chinas sovereign funds and state-owned enterprises.44 (Kung 2006) As a result, protectionism is necessary and expected. How the Prevailing Explanations Fall Short In summary, dominant analyses whether focused on security or economics have predicted either accommodation or balancing, either liberalization or protectionism. But they have failed to explain the zigzag trajectory between these sets of policies that Taiwan has experienced. The increasing trend has been to forecast accommodation and economic integration. As a small state, Taiwan should be compelled to liberalize its economic relations with China, and this should be beneficial to Taiwan both politically and economically. For realists, cooperation is determined by relative power, so Taiwan has no choice but to work with China to ensure its security. For the liberals, market forces promote integration of Taiwan and China, and those forces can only be retarded, but not thwarted, by Taiwans economic policies. They have further contended that the global trading order benefits everyone and Taiwans economy would be stronger for cooperating with China. Though the realists and the liberals come along different paths, they reach a common conclusion in that Taiwans occasional forays into restrictions are just temporary anomalies.45 But that common prediction has not proven to be correct. The security-focused accommodation argument would be valid if Taiwan recognized that it is so weak vis--vis China that it has no choice with regard to its cross-Strait policies. But the Taiwanese have believed they have a choice, and Taiwans domestic politics have therefore been characterized by extremely active and intense debates over both economic and security policy toward China. Similarly, the structure-focused economic argument would predict that Taiwan will benefit from closer economic ties with China; however, Taiwans economic dynamism seems to have languished as its economic relations with China have grown. And the growing economic ties across the Strait over the last fifteen years have sometimes been accompanied by an increase rather than a reduction in political tension. (Naughton 1997; Hu 2006, 33; Terrill 2003; Y.H. Chu 2004, 486; Abramowitz 2002) But many have disagreed and forecast problems in cross-Strait relations. Some security analysts predict balancing based on the global geo-politics. During power transition, Taiwan necessarily should side with U.S. and balance against the rise of China. Economically, some analysts have posited that protectionism will be inevitable as Taiwan increasingly relies on trade with and investments in China. Both these arguments predict a trajectory of increasing hostility, just as other theorists have predicted only increasing integration and accommodation with the Chinese economy.
Lin Hsiang-kai and Liu Chia-feng, , December 10, 2008, accessible in Lins website at http://homepage.ntu.edu.tw/%7Ekslin/course/safe.pdf (Last accessed on Feb 28, 2010). In the article, Lin and Liu examine public priorities during this most recent round of debate on liberalization. They point out that current Ma administrations orientation towards indiscriminate growth is outdated because the society has moved on, valuing equality and long-term sustainable growth more than pure aggregate growth. 45 We are reminded of Fukuyamas (1992) end of history argument, which concludes that the global spread of liberal democracy will make it the only viable type of political regime in the world.
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Unlike Taiwans economic policies towards other major trading partners, its cross-Strait economic policies have been characterized by periods of economic liberalization promoted largely by Taiwanese businesses, followed by more restrictive measures resulting from a strong public opposition. Since it joined WTO in 2001, Taiwan has continued to promote policies that allow its economy to integrate into the global supply chain, especially in IT industries - except with regard to its policies towards China. The structuralists who forecast accommodation and liberalization have not been able to fully account for the fluctuation in Taiwans economic policies, which from their perspective seems to run counter to the logic of the power disparity between Taiwan and China and the broader logic of economic cooperation in a globalized world, and thus also run counter to Taiwans economic and security interests. Similarly, those who forecast balancing and protectionism are also unable to systematically explain the oscillation of policy. The Role of Identity Because prevailing explanations of political economy fail to predict the erratic nature of the Taiwanese policies towards China, a growing tendency attributes the inexplicable to the role of identity. There are two perspectives on identity. First is a more comprehensive approach focusing on the evolution and emergence of Taiwanese identity historically and sociologically. The second is explanation is primarily political and views identity predominantly as identity politics that leads Taiwanese voters to act irrationally or emotionally.46 This view complements the views of analysts forecasting accommodation or economic liberalization because to them, any resistance for integration with China is simply the result of identity politics having created antagonism and nativist nationalism on the part of the Taiwanese. Even for those who have predicted balancing of power or politics of trade, some see a pan-Chinese identity as motivating leaders like Ma Ying-jeou to initiate liberalization.47 (Shih 2009, 209) Those who have focused on the pan-Chinese identity have made reference to the European Union in predicting that an overlapping identity can be constructed so that one day, Taiwanese will accept being Chinese before being Taiwanese, which will make it easier to accept political and economic integration. (Chang 2009, 109) In order to understand how this growing body of literature has imputed Taiwanese national identity with explanatory power towards cross-Strait relations, one needs an understanding of how Taiwans national identity has evolved. Hence the broader sociological perspective is valuable. It focuses on the internal and external forces that have shaped Taiwans national identity. The latter perspective on identity politics is a political explanation, which relates more narrowly to electoral politics. The two views are both important but they are dissociated from each other, with the sociological perspective offering little explanation for policy formulation, and identity politics having no context on which to base its conclusions. A Sociological Perspective on National Identity: Toward Inclusive Identity During the Cold War and during the authoritarian rule of the KMT the content of Taiwanese identity was clear and contestation over that identity was
Identity politics originally refers to political action within liberal societies that advances the interests of members of a group whether such shared identity is race, ethnicity, religion, or gender. 47 This is an accusation that the pan green often raises towards deep blue supporters.
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low because the Nationalists imposed a Chinese identity on the population. All residents of Taiwan except the aborigines were defined as Chinese. But the KMT separated the waishengren or mainlanders newly arriving from China, from benshengren, or home province people whose fathers had immigrated to Taiwan before the Nationalists retreated to Taiwan, including the Hakka and the Hokkien.48 This definition of identity was then linked to a segregation policy that ensured that benshengren were inferior within the domestic political structure.49 (C.S. Lin 1991, 145-8) However, in the late 1980s, facing the possibility of eventual integration with an authoritarian polity, accentuated by the upcoming handover of Hong Kong in 1997, Taiwanese joined millions others globally searching for their national identity. During the Cold War, national identity was largely subsumed by a fundamental security concern: ones identity was necessarily defined as a free capitalist, or a committed communist. As the Cold War ended, small states broke away from the Soviet Union, multi-ethnic states in Eastern Europe like Yugoslavia and Czechoslovakia broke apart, military alliances morphed into economic networks, and global trade swept the world. The counter-effect has been a surge in the reassertion of national identity, especially in the face of globalization threatening to homogenize the world. Taiwan also went through the transition from an authoritarian regime to democracy, which lifted the ban on identity discussion. After Chiang Ching-kuos lifting of martial law in 1987, there began an open and long debate on Taiwanese identity, with increasing criticism of the Chinese nationalism maintained by the ruling KMT under authoritarian rule to hold Taiwan together as a politicalcultural community. (Cabestan 2005, Hsiao 2008, 33) Taiwans urgent need to redefine its own national identity provided ammunition to opponents of economic integration with China, concerned that Chinese culture would obliterate unique Taiwanese values. This initial debate over Taiwans national identity was long overdue, many have contended.50 It started on a primordial basis with Taiwanese still being defined on the basis of ethnic background in this case, primarily Hokkien and Hakka.51 It was also an exclusive definition, which sought to exclude the waishengren who arrived in Taiwan after World War II, just as the Nationalists previous policy had excluded the benshengren. The ethnic definition of identity created an environment where people associated being Taiwanese with being strong anti-China especially in economic policies.

On the identity card, ones Province of Origin was based where ones father or grandfather was born. For example, many of those who were registered as being from Shanghai may never have been to China. The policy kept the descendents of non-Taiwanese distinct from the Taiwanese during the KMTs rule. 49 Lin provides a detailed history of Taiwan prior to the KMTs arrival and describes the segregation policy of the KMT as consolidating power at the expense of the Taiwanese people. 50 Identity may be as much of an issue for China as for Taiwan. Shih (1999) writes that China struggles between becoming a responsible member of the international community and retaining its own political culture. 51 Aborigines are now often known as the real Taiwanese but were singled out by the KMT administration as a separate group. Defined as anyone with partial aboriginal ancestry, the aborigines constitute 2% of the population, and received preferential political and economic treatment although a high percentage live in rural areas and are economically disadvantaged.

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Chinas effort to isolate Taiwan internationally, trying to deny it diplomatic recognition and to exclude it from international organizations like the Asia-Pacific Economic Cooperation forum (APEC) and the World Health Organization (WHO), intensified Taiwans search for identity. (Y.S. Wu 2005; Y.S. Wu 2009, 52; Chao and Hsu 2006; Jacobs 2006) Although some argued that Taiwans participation in unofficial networks of NGOs allowed it to gain some international respect, the overall pattern was that Taiwan was ostracized internationally and that Taiwanese identity became strengthened in the process, contrary to Chinas intention.52 (Hickey 2006; T.Y. Wang 2006; Lynch 2006a; Y.M. Lee 2002; Yuan 1999; J. Chen 2006; Harrison 2006) Chinas effort to isolate Taiwan to rein in Taiwanese nationalism seems to have backfired. Even more importantly, it promoted the inclusive definition of identity by grouping everyone in Taiwan together versus the other which is China: These political threats [against Taiwan by China] are precisely the kind of sociopolitical events that consolidate identity. Moreover, rather than bringing Taiwans people into line with PRC sentiment, they consolidate the identity of all people in Taiwan as a single group, thus reinforcing the very Taiwanese national identity that the PRC wishes to undercut. (Brown 2004, 240) Like other emerging nations becoming independent from colonial rule, and like other small nations confronting the homogenization processes produced by globalization, the search for a unique national identity has become an important but highly contested mission.53 As Beijing came to monopolize what constituted Chinese identity on the international stage, there was a renewed urgency to redefining and reasserting a Taiwanese identity so as to avoid international isolation. But many analysts, including political scientists, historians and sociologists, believe this new identity is not rooted in a parochial ethnic nationalism. Instead, Taiwanese national identity reflects a strong sense of institutional distinctiveness. Taiwan has all the components of a nation-state: territorial control, a distinctive society, an autonomous government, homogeneity of culture, and a high degree of social integration. Moreover, as noted above, Taiwans national identity is also rooted in shared common democratic values. (R.R. Wu 2007) Taiwanese national identity now involves continued separation from the Mainland: Taiwan-centered national identities, including both the Taiwanese nationalist identity and the pro-Taiwan identity, are now dominant on the island they all exhibit a psychological attachment to a political community known as Taiwan that is separate from the Chinese
There is vast amount of literature about non-state networks and their influence on cross-Strait politics. As civil society in Taiwan strengthens, Taiwans NGOs like the Himalayan Foundation and the Tzu Chi Foundation have expanded into China without support from governments. Yi Yuans work analyzes how collective identities and interests are formed around issues, so individuals form groups that can impact domestic politics and also international regimes, as demonstrated in Taiwan (1999, 2009). But the inability to work together with China in international institutions or NGOs on even non-political issues has made many Taiwanese more resolved to be separate. In short, Chinas isolation policy stokes Taiwanese nationalism. 53 For some, joining the global political economy necessarily entails a larger, supra-national identity. (Friedman 2005; Krugman 2007) For others, a society can still maintain a strong national identity while engaging in globalization (Stiglitz 2003; Rodrik 1997; Rodrik 2007)
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mainland [believing] they can be both Chinese culturally and Taiwanese politically it is not difficult to recognize the key features of the islanders political preferences regarding Taiwans future relations with the Chinese mainland: security, equality, and autonomy. (Wang and Liu 2004, 586-588) As Taiwan became fully democratic, a new and more inclusive Taiwanese identity began to emerge from more than a decade of debate. This new identity was no longer based on ethnic or nativist appeals, and included not just ethnic Taiwanese, but rather all residents of Taiwan.54 It replaced the concept of the exclusive expression of a suppressed ethnic self that had been freed from the KMTs imposition of a Chinese identity. This new Taiwanese identity is based on Taiwans distinctive civic values and institutions, rather than on ethnic nationalism. (Rigger 1999/2000, 548) Taiwanese came to realize that Taiwan was not differentiated from other communities so much by language, culture or ethnicity, but more clearly by the values they place on belonging to a democratic polity with free markets and private property. Hence, the primary goal of the nation-state became the preservation of market democracy and the institutions and lifestyles associated with it. Part of this evolving sense of national identity is generational. Much research asks the obvious questions: is there a greater degree of rationality in discussions of cross-Strait relations among the older and more established and business-oriented group or the younger population who have yet ventured to China? Surveys focusing on generational change show that the younger generations have a firm sense of being distinctly Taiwanese, but do not think of China as an enemy and are more open-minded about their relationship with China. (Chen and Keng 2009, 170) They see no contradiction between being Taiwanese and supporting cross-Strait economic liberalization. The attitude among the younger generations is no longer anti-Chinese among the younger generations, but just non-Chinese or not exclusively Chinese. Shelley Rigger (2006) demonstrates this point in her latest survey of Taiwanese, divided into four generations, each having distinct collective identities. While she finds declining support for unification, she also concludes that most Taiwanese do not share the President [Chens] aversion towards all things Chinese and young Taiwanese while they oppose unification are agnostic in their view of the PRC. Rigger describes this transformation as a change from Taiwanese nationalism to Taiwanese rationalism. (Rigger 2006, 57) And as Taiwanese voters become more rational, cross-Strait policies may become more stable. (Chu 2004) After years of intense debate on national identity, a consensus has emerged in the last few years. This new consensus is reflected in surveys and public opinion polls that have become more nuanced over time. It has two components. First, it involves a politically-correct view of Taiwanese identity that everyone including elected officials has come to embrace. (R.R. Wu 2007; see also Schubert 2004 for further discussion) Second, it includes a preferred future relationship with China. As early as 1993, Naiteh Wu (1993) distinguished between these two components of national identity and cross-Strait policy preference in his surveys, showing that some had a stronger sense of Taiwanese identity than others, but that some who saw themselves as Taiwanese might still
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On Taiwanese identity becoming more civic and less ethnic, see Cabestan (2005).

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prefer economic and political accommodation with China. More recently, both Niou (2005) and Naiteh Wu (2005) have shown that Taiwanese have developed conditional preferences for various political outcomes, in ways that were far more nuanced than their self-identification as Taiwanese or Chinese.55 (Niou 2005; Hsieh and Niou 2005) For example, while one might continue to support unification unconditionally, it was more common to attach conditions to that support, such as supporting unification only if there is no choice. Similarly, support for independence could be qualified by adding the condition that independence should be supported, if and only if China will not use force. In essence, identity does not determine political or economic policy preference. While these analysts have described identity as an evolutionary process, the sociological perspective is inconclusive about the linkage between national identity and policy choice. A Political Perspective on National Identity: Identity Politics For those eager to establish direct causal relationship between national identity and cross-Strait policies, identity can be the easy variable to explain behavior that departs from rationalist predictions. (Berger 2003) These analysts have seen identity politics as the explanation linking identity and policy, leading to provocative policies that harm national security and limit economic growth. Identity is viewed as a political tool and treated as an independent variable in analysis. What does identity politics involve? Some have associated it with populism and political opportunism, obstructing the rational identification and pursuit of interests. For these analysts, Taiwanese identity was created and perhaps manipulated by political leaders for their own election campaigns since democratization in the late 1980s. On the surface, it appears so. There is evidence that politicians have redefined their own identity or articulated it differently during electoral campaigns. For both the green (Lee Teng-hui and Chen Shui-bian) and the blue camps (Lien Chan, James Soong, Ma Ying-jeou), making a strong statement on Taiwanese national identity became a prerequisite for an effective candidacy. This political explanation has privileged the role of political entrepreneurs whether individual leaders or political parties in manipulating and defining national identity for their own political interests. In these analyses, national identity has been described as easily changeable and therefore has relative less explanatory power than constructivist literature would suggest. (Helleiner 2005, 231) National identity has no intrinsic value and is simply an outcome of political contestation, just like any other domestic or foreign policy. For these analysts, political leaders and their strategy are the main reason for changing national identity, as demonstrated in each episode. Many have seen Lee Teng-hui as the originator of identity politics in Taiwan. Early in his term, he sought to replace the KMTs Chinese nationalism paradigm so as to justify Taiwans existence as a distinctive state and community. (Shih 2007) In 1993, Lee Teng-hui formally launched a new discourse about identity by introducing the concept of the New Taiwanese, which sought to
Wu asked whether one would support independence if there were no security consequences and if one would support unification if there were no change in Taiwans democratic system (N. Wu 2005). Many answered yes to both questions, after identifying themselves as Taiwanese.
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supersede the previous distinctions between waishengren and benshengren. In campaigning for Ma Ying-jeou, a mainlander, to run for Taipeis mayor in 1998 against Chen Shui-bian, a native Taiwanese, Lee promoted this new identity vigorously, which had positive effects on integrating the ethnic groups in Taiwan. (Ho and Liu 2003, 178) Lees immediate goal was to garner support for Ma among the Taiwanese voters but he also had two broader objectives: to include more benshengren in leading positions in the KMT, and then to draw back into the KMT those waishengren who had defected to newly formed mainlander political parties as a response. Waishengren politicians like James Soong and Ma Ying-jeou embraced the concept in order to appeal to the benshengren and younger voters. The emphasis on identity during the 1998 election distinguished the candidates on ethnic rather than on the material benefits that their policies would produce and allowed for election engineering based on identity and the rise of demagogic politicians from all parties. (Ho and Liu 2003, 178) Chen Shui-bian also profited from the initial division of the Taiwanese electorate along these ethnic lines and deliberately emphasized identity in his campaigns and policies. Voting patterns in the presidential elections of 1996 and 2000 showed that votes were distributed geographically on the basis of ethnic divisions (the blue East and the green South, with the North somewhat divided). (Lin, Wu and Lee 2006; Lay, Yap and Chen 2008) Much research has been done on President Chens active role in identity politics during his administrations. He authorized studies of nation-state, nationalism and local identity and, as a result, think tanks focused on identity issues proliferated. (Cabestan 2005) Moreover, the identity literature produced by those research organizations often concluded with recommendations for cross-Strait economic policies, justified by how these policies would strengthen national identity. Chen promoted national identity by fanning ethnic division through efforts in rewriting history textbooks, amending the constitution, promoting de-Sinicization by changing street and stadium names, and passing referenda. Specifically, the referenda law passed in 2004 was branded as Chen Shui-bians blatant attempt to legitimize his administration, boost morale for his presidential campaign and qualify Taiwans independence position. (Kao 2004) Critics saw these measures as partisan tools for the DPP administration to solidify support, win elections and nothing more. President Ma has also been accused of playing the identity card in his campaigns. Ma, along with many in the blue camp, was also complicit in perpetuating the concept of identity for electoral gains. Ma and the KMT merely adopted a new identity of New Taiwanese during election campaigns, characterized as brilliant strategy by the media.56 (Zagoria 2008; Z.S. Lin 2008) But Ma also wanted to placate the waishengren. He re-initiated the controversial presidential visits to the Chiang Ching-kuo Memorial, which in effect also highlighted identity politics. Many have attributed the problems in Taiwans volatile cross-Strait policies to this manipulation of identity. (J.W. Lin 2002) Most analyses of this focus have discussed identity in the context of irrational or emotional factors
Chin Fu-Chong was the mastermind behind Mas campaign to re-brand himself as a New Taiwanese. Much has been written about Chins contribution, especially in light of the fact that Chin is no longer in government, and Ma seems to abandoned his adopted identity altogether. See Yang Chao, , The Journalists, vol. 1146, February 19, 2009.
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versus the rational or interest-oriented factors of security and economics. (Chen and Ken 2009, 167 and 187) The politicians may have benefited from identity politics, these analysts contend, but it has damaged Taiwans social fabric and polarized the people, all of which hurt Taiwans democratic culture and longterm national interests. (S.C. Hsu 2007) These analysts have equated any discussion of national identity as identity politics, associated with support for independence or for a specific political platform. (Y.S. Wu 2004) Political leaders fan or manipulate identity politics for the sake of intense and short-term domestic political competition. These analysts have treated identity as a variable to be weighed against security interests, as shown in the widely referenced material interest vs. national identity quadrant.57 They have been concerned that national identity discussions provoke Beijing, and thus affect Washington, create international tension and put Taiwan at risk. However, a clear linkage is often assumed, not established, between national identity on the one hand and future-ofnation preference (FNP) or economic policy on the other. There is validity in the claims that identity has been a political tool, and that the rise of Taiwanese identity has been associated primarily with localization of Taiwanese politics. There was pressure to reduce the distortedly high proportion of waishengren representatives in the government administration, and then to see larger numbers of benshengren elected to public office. However, even these analysts have acknowledged that that studying cross-Strait relations must include a thorough understanding of Taiwans culture, history and mass psychology.58 (K. Chen 2004, 180-297) Because Taiwans distinctive history has created a complicated psychological background compared to other parts of China, identity has played a disproportionate role in Taiwanese politics no matter what Chinas policy toward Taiwan might have been. In Chens view, the Taiwanese have a stronger sub-conscious sense of identity, of the sort that emerges when people of similar ethnic backgrounds come together, overriding a calculation of common material interest. Identity evolves over time and can only be understood in the context of history and values. Integrating the understanding of Taiwanese identity with other explanations on cross-Strait political economy is essential to deciphering the puzzle presented in this thesis, which will be further explored in Chapter Three. Closing the Research Gap One of the major problems with the literature that deals specifically with cross-Strait economic relations is that it is largely descriptive, prescriptive, or evaluative of existing policies, rather than conceptual or analytical. Policy advocacy and theoretical analysis overlap significantly, even in scholarly work. This may be due to the important role of scholars in policy-making in both Taiwan and China, such that many analysts are also involved in policy work.59
The trade-off quadrants are well explained in Y. S. Wu (1999, 182-183) and Y.S. Wu (2005). Wu plotted various interest groups and political parties along the two axes to show a four-quadrant distribution of opinion. Material interests (with security on one end and economic interests on the other end of the horizontal axis) are juxtaposed against national identity (specifically measured in terms of FNP or the preference for independence moving towards unification on the y-axis). 58 As the founder of The Southern School of Taiwan Studies in China, Kongli Chens perspective on identity has influenced a generation of scholars on the Mainland. 59 This is pointed out by both Rigger (2002/3) and T.J. Cheng and Marble (2004). They also provide a useful overview of the literature in Taiwan studies. Rigger divides Taiwan studies into policy-relevant, theory-informed and area studies work. She also sees a meaningful difference
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This heavily advocatory literature describes the changes during this period from the viewpoint of economic logic as well as identity formation but fails to provide a rigorous analysis of the relationship between the structural constraints and the domestic political factors. We need to understand how identity plays a part in economic policies, and with such an understanding, we can draw on other literature to integrate the internal and external factors affecting Taiwans economic policies. Various scholars from different schools have been able to explain either restriction or accommodation, but have not been able to weave those explanations together to explain the oscillation between those two tendencies. Structural analysts often dismiss all oscillations in the eventual march to global free tradedemocracy as temporary and insignificant. Any microscopic analysis of seeming exceptions will ultimately be overshadowed by the longer term trend, even though it may take decades for it to be realized. Such approaches so far have little predictive value in explaining the cross-Strait economic relationship, which does not display any predictable trajectory. Taiwan has shown that the international structure does not pre-determine the direction or outcome of cross-Strait relations. Like the structuralist arguments, innenpolitik, or domestic political explanations based on Taiwans domestic problems of economic distribution or national identity, can explain only part of the equation. Unemployment and inequality may support calls for protectionism and identity politics may encourage the voters to support distancing from China, but such explanations fall short they do not explain why the same voters may, at other times, support the liberalization of cross-Strait economic policy along with the globalists. In other words, each of the explanations cited so far focuses on one set of national interests. But none of them helps us understand how people prioritize interests, or how that prioritization may change over time. Economic interests, military security, and national identity all help shape economic policy, but how are these interests defined and prioritized? What motivates the actors to define their interests and change the ranking of those priorities over time? In particular, analyses of Taiwans cross-Strait economic policy that are rooted in concepts of identity politics often conclude that identity can be and has been manipulated for the purpose of electoral gain, at the expense of rational policy formation. These studies equate and privilege FNP and assume such a political outlook translates directly into a corresponding national identity, as well as into economic policy preferences. (Stockton 2008, 106) Because structural analyses cannot fully explain the unsteady course of cross-Strait economic relations, they tend to explain the policy oscillations by referring to the ways in which identity politics overrides rational calculations. They believe the structure provides clear signals about the benefits and costs for Taiwan from economic integration with China. Interpretations based on identity politics, moreover, view nativists as leading an ethnically charged and illiberal movement, steering Taiwanese to choose policies that override their security or economic logic. Finally, the sociological perspective offers important insights that are missing in the structural, economic or identity politics perspectives, but it
between Chinese and English work. Cheng and Marble (2004) recognize a similar divide between English and Chinese work, between quantitative and qualitative methodologies and between theoretical approaches and topical work. Both Rigger and Cheng and Marble see important contributions to the field from each category of literature.

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does not shed sufficient light on the relationship between national identity, economic interests and economic policy. The constructivist and realist views of identity are independently unable to provide answers to the puzzle examined here. If identity politics leads voters to support irrational cross-Strait economic policies, then why has Taiwan alternated between liberalization and restriction even as identity has become more clearly defined? Why doesnt a strong sense of autonomous national identity, as shown by many surveys and polls, harbinger an increasingly protective economic environment? Or is the current liberalizing policy an indication that the Taiwanese no longer care about identity? Moreover, what is the relationship between identity and interests? Is identity a measurable interest? Until these questions can be answered, the invocation of identity politics without an understanding of the sociological perspective, like theories of protectionism, cannot adequately fill the research gap. Complex Reality and Analytic Eclecticism As early as 1966, the eminent political scientist James Rosenau (1966) already reminded analysts to incorporate both structural and domestic variables in the study of foreign policy. He believed that foreign policymakers in any country must consider both domestic and international factors; his main thesis was that the divide between comparative politics and international relations had gone too far and it did not fully reflect the complexity of foreign policy. According to Rosenau, five sets of variables system, societal, governmental, role (leadership) and idiosyncratic variables are all intertwined in foreign policy decision-making, and these variables are relatively more or less influential depending on the size of the country, its stage of economic development, the type of polity, and the level of international penetration. (Rosenau 1966, 90-1) Subsequently, many other analysts have also found applying only one research methodology to Asian cases to be unsatisfactory in providing adequate analyses. Katzenstein and Sil (2004, 14-15) find eclecticism most appropriate for applying theories to Asia: the considerable differences within constructivist, liberal and realist research traditions generate significantly different explanatory sketches that can coexist as part of a single research tradition explanatory sketches constructed within different research traditions can converge in their wider implications and projections. In analyzing Asias security, for example, Nau (2003, 229) applies both realism and constructivism because he believes tracking only one set of variables cannot provide a complete perspective.60 Taiwan reflects the complex reality that Rosenau identified and Katzenstein and Nau have reiterated. Leading an economic miracle in the 1970s and 1980s, the Taiwanese government has been central in industrial planning especially during the one-party KMT rule and has continued to play a role regulating cross-Strait economic relations.61 During this transition from an export-led developmental state to relying on China as its leading economic
Nau comments that these perspectives [realism and constructivism] track only one structural variable, they pull these developments out of context A more complete perspective would track both variables simultaneously. But Taiwan is still treated as an aberration in his work. 61 Taiwans economic performance and the governments role are examined in Robert Wades (1990) book, updated in his 1995 article Resolving the State-Market Dilemma in East Asia (Wade 1995). See also Bello (2009) for the evolution of the developmental states explanation for East Asian IPE.
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partner, Taiwans economic policy has been influenced by both external and internal variables. (Hickey 2007) Over time, as the developmental state moves towards becoming a participant in a global production chain, state-centric analysis gives way to more detailed socio-cultural understanding of the logic of each nations objectives. (Yeung 2009) Analyzing the issues Taiwan faces, some analysts rely on one particular and dominant theory of political economy - realist nationalism, neo-liberalism, or alternative approaches such as historical structuralism or constructivism - but fail to provide a comprehensive explanation of the puzzle of why Taiwans economic policy toward China has been so erratic and volatile. Other analysts refer to multiple theories of political economy to justify a normative conclusion, but fail to build them into an overall framework of analysis.62 An example of such testing of Western theories in the cross-Strait case is Acharyas (1999) International Relations Theory and Cross-Strait Relations in which he applies each of these theories to the cross-Strait relations and concludes that, over time, the tension would abate. Examples of analysts using a single approach in Asian case studies are those who apply structural security analysis to the U.S.-Japan-China relationship (Christensen 2003, Goldstein 2003, Kang 2003, Duffield 2003) or those who use constructivist analysis in analyzing national foreign policies. (Johnston 2003, Tamamoto 2003, Nau 2003) One risk facing scholars applying single theories to empirical cases in Asia is to use only the data that are relevant to that particular theory, in order to make the theory work. The current literature on Taiwans foreign policy covers a wide range of issues from trade imbalances and capital controls to domestic distribution and sovereignty, but lacks a comprehensive framework to make predictions. Without drawing theoretical generalizations from the specific empirical case study, Taiwan cannot be compared with other small nation-states that also face the dilemma of balancing security and economic interests. Taiwans foreign economic policy may have idiosyncratic elements, but only by understanding the puzzle through a comprehensive analytical framework can we demonstrate its broader theoretical relevance.

Gilpins seminal 1987 edition of Global Political Economy presented three dominant theories: nationalism, liberalism and Marxism. (Gilpin 1987) In Theodore Cohns 2008 Global Political Economy: Theory and Practice, he terms these schools as realism, liberalism and historical structuralism. (Cohn 2008) This author finds classical international relations theories are still the most appropriate way to analyze cross-Strait relations: realism, liberalism and constructivism. Aside from theories, Henry Nau (2007, 4-5) identifies three perspectives on international politics and IPE: realist, liberal and identity. These perspectives identify what theories emphasize, for example, realists emphasize power, liberals focus on institutions and the identity perspective looks at ideas. Identity in Naus work is a perspective that employs both rationalist and constructivist methods.

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Chapter Three The Identity-Interest-Policy Pyramid: A Conceptual Framework

Although Taiwan increasingly depends on the Chinese market, its economic policy has gyrated between protectionism and liberalism. The existing literature does not provide compelling or comprehensive explanations of these policy oscillations. Taiwans approach toward China can be understood only through a new paradigm63 that incorporates both changes in international structure and the dynamics of Taiwans domestic politics, and links both the ideological and practical components of Taiwans foreign economic policies. This thesis seeks to provide a more complete analysis of Taiwans cross-Strait economic policy through a paradigm that comes not from any single school realism, liberalism or constructivism but that reflects analytic eclecticism.64 This paradigm will be based largely on strategic choice theory, which can incorporate all the elements that determine Taiwans cross-Strait economic policy. Strategic choice theory includes elements of the politics of trade, public choice analysis of domestic policies, international structural changes, and underlying ideational currents. It looks simultaneously at societal actors, government actors, and the international structure. Based on rationalist methods but incorporating constructivist assumptions, strategic choice theory links societal and state actors to the environment or structure in explaining a policy outcome. It highlights both high and low politics, so that issues of investment and trade can be analyzed at the same level as security issues. (Lake and Powell 1999) Actors and environments are both important. So are ideas and material interests. In contrast to theories focusing on the structural elements of international political economy, strategic choice theory emphasizes actors intentions, including government, institutions and societal variables, in analyzing the interaction among them. It calls for a purposive, intentionalist, rational explanations of behavior (Stein 1999, 198) and seeks to show how policies match societal preferences: First, for most analytical purposes, preferences must be kept separate form other things most important, from characteristics of the strategic setting. Otherwise, we are unable to distinguish between the casual role of actors interests and that of their environment. Second, scholars need to be explicit about how they determine the preferences of relevant social actors. Whether preferences are variables of interest or control variables, it is essential that they be derived clearly and unambiguously. (Frieden 1999, 39) The approach makes the unusual attempt to show that analyses based on rational choice can also incorporate identity and belief.65 (Kahler 2000) Actor and
A paradigm is simply an intellectual effort to make sense of the world. As was noted by Thomas Kuhn (1970), paradigms are defined by structures within which specific narratives are constructed and evaluated. 64 Katzenstein and Sil (2004, 30-32) make a compelling argument for analytic eclecticism for research on Asia because the empirical data and history are simply so divergent as to make general theorizing inapplicable. 65 This is largely consistent with the views of classic realists and classic liberals, different from structural rationalists. Recent research shows that policy outcome of global forces depends largely on strategic and political choice of political actors and institutions. As such, adaptive learning by
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environment are mutually constitutive, and variance in interests and strategies across states, even in the common context of a globalized economy, is emphasized. The emphasis is on issues at all levels of analysis, analyzing structural and domestic variables, incorporating ideas and interests make strategic choice highly appropriate to analyze the puzzle in cross-Strait political economy. There are other methods that factor in domestic politics and domestic institutions in international issues, specifically Putnams two-level game and the principal-agent model. Putnams win-set framework (1988) has been applied to the cross-Strait case only rarely and when done, has obvious limitations. (Wu and Shi 2009, 258) This is because the two-level game is usually applied to study the ability of state leaders to balance domestic and international audiences in formulating foreign policies. Thus the focus is on state actors. Similarly, principal-agent model focuses on the inefficiencies or externalities produced by domestic institutions. What differentiates strategic choice from these theories is that it considers multiple levels of analysis including state and societal actors, and a broader range of issues, from domestic to international. (Morrow 1999) For IPE, strategic choice has the most potential to provide an overall explanation as it incorporates elements of all these methods but links actors to outcomes by examining their motivation based on both rational and ideational factors, and by showing the role of domestic and international institutions in translating preferences into outcomes. Compared with structural analysis, strategic choice theory starts the analysis at the unit level, analyzing preferences and strategies of individual actors before raising the analysis to the structural level. Strategic choice theory enables us to explain outcomes that structuralist theories fail to predict, such as what factors might lead states to fail to balance when they should? (Morrow 1999, 103) As mentioned in introduction, traditional theories of the politics of trade already predicted the problems that might result from Taiwans economic integration with China. While underscoring the traditional distributional effects of economic interdependence, strategic choice theory also focuses on how these domestic outcomes and trends will influence various actors preferences, leading to changes in a countrys foreign economic policy. Strategic choice theory allows for the possibility that, with increased trade, the foreign economic policies of various nation states will become increasingly divergent.66 (Lake and OMahony 2006, Kahler 2006) This is in contrast to neo-liberal structuralist theories that hold that globalization will continue to dwarf all political units (Rosecrance 2006, 280) and will force all nations to change their preferences in favor of free trade.67 Strategic choice theory suggests that different patterns of distribution
states may not be progressive, but evolutionary. (Kahler 1999) Kahler observes that political outcomes are random, and actors may not necessarily converge on choosing more efficient institutions to advance their economic goals. This view refutes the historical determinism of neoliberals and the validity of path-determined structuralism, specifically the conclusion of neoliberals that the world has come to accept a common set of norms and institutions. 66 The authors note that the divergence comes from an increase in the number of nation-states, from 44 Bretton Woods conference participants in 1944, to 178 members in the IMF by 1993. It should be noted that the trend continues: as of 2009, there are 192 members of the United Nations, plus the Vatican, Kosovo and Taiwan. 67 As Rosecrance (2001, 29) writes, trading states emulate one another and differences are reduced as they trade with one another such that emulation may go farther than national imitation. It may actually involve trying to be a member of the exemplar country or region.

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among countries and regions and the different interests and preferences of various domestic actors will make this unlikely. (Garrett and Rodden 2003) Even if all governments want to increase productivity and wealth, their factor endowment and domestic institutions differ, and they will adopt different economic policies. (Streeten 1996) By focusing on domestic actors identity, interests, and preferences, we come to understand the motivations and objectives that shape their views on foreign economic relations. And a nations foreign economic policy will naturally reflect the views of the collective, including all societal forces. The Identity-Interest-Policy Inverted Pyramid and Methodology The analytic framework employed in this thesis takes foreign economic policy in this case, Taiwans economic policy toward Mainland China as its dependent variable. It argues that Taiwans evolving national identity provides an important context for the formulation of its cross-Strait economic policy. Specifically, national identity shapes the identification of Taiwans economic interests. The relative weight of those interests is then determined by several aspects of Taiwans domestic and interventional environment, which serve as the intervening variables in this thesis. Since different groups in Taiwan prioritize national interests differently, they put forward competing policy options, here described as different opinion clusters or tendencies. Decision-makers choices among these competing policy options, based in part on their assessments of the relative support the various tendencies enjoy, then determine Taiwans crossStrait economic policies, which constitute this studys dependent variable We use an inverted pyramid as shown in Figure 3-1 to graphically illustrate the relationship among the definition of national identity, the identification of economic interests, changes in the domestic and international environment and formulation of economic policies.

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Figure 3-1: Identity-Interest-Policy Pyramid

Contextual Variable: Definition of National Identity

Independent Variables: Identification of Economic Interests

Intervening Variables: Evolving Domestic and International Environment

Relative Influence of Competing Policy Tendencies

Dependent Variable: Formulation of Taiwan's Cross-Strait Economic Policy

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The top of the inverted pyramid definition of national identity provides the foundation for all policies, domestic or foreign. The consolidation of national identity is a process that necessarily involves everyone, although some have stronger views than others.68 This is therefore the widest level in the pyramid where a broad range of societal forces participates in the process. Within the context of a certain national identity, a range of national economic interests may then be identified. These interests are independent variables that directly shape economic policies. Security interests may include military, political or economic security. Economic interests may include growth, stability, equity and (again) economic security. The interests of individual actors are influenced or reconstituted by several aspects of the domestic and international environment. These interests are formulated into foreign economic policies by a smaller group of actors, who have a direct interest in those policies. Through public policy debate and bargaining among elites and interest groups, interests are prioritized and aggregated into competing policy tendencies. These tendencies are the raw materials from which foreign economic policies are formulated, adopted and executed. Those foreign economic policies are the dependent variables in this study. In this inverted pyramid, policies are intended to promote certain interests, which are built on an assumed national identity. National identity is regarded not as an independent variable in determining foreign economic policies, but rather as a contextual variable in shaping economic interests. National identity is not viewed as competing against national interests, rather, it provides the context that allows individuals, groups and states to define and prioritize them. The inverted pyramid delineates the process of domestic debate in each episode of policy formation. But it does not show the temporal relationship among those episodes. Over time, not only does national identity form the context in which policies are debated, but the outcome of the debate returns to have an impact on the formation of national identity, as illustrated in the Identity-Interest-Policy Cyclical Timeline. (Figure 3-2) The figure graphically shows how the consolidation of national identity is an iterative process, dynamic and continuous. At each point of policy decision, national identity may be more or less contested, and as a result, interests will be more intensely debated or more easily prioritized. As changes in foreign economic policies are introduced, those changes will have an impact on a societys international relationships and on its domestic economy and society. The redefinition of the communitys collective identity redefines its economic interests, which are then re-prioritized, strengthening different tendencies or clusters of opinion in the political debate, finally, leading to formulation of specific economic policies. The cycle then continues and may re-energize the debate on national identity. In other words, national identity is in a constant process of consolidation that impacts policies, and in return, the policies may also change peoples sense of identity. The context of national identity, on the other hand, like domestic institutions, evolves more slowly over time, whereas interests and policies are
This is particularly true in Taiwan as reflected by recent research based on extensive and relevant surveys by Naiteh Wu (2005) that account for a strong or weak sense of national identity.
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time-specific and may change more suddenly. This iteration challenges Alexander Wendts proposition that interests are dependent on identities (Wendt 1994, 385), which suggests that the relationship among identity, interests, and policies is uni-directional, when in fact, it is circular and multi-directional. In short, identity and interests are mutually constitutive. (Helleiner 2005, 231)

Figure 3-2: Identity-Interest-Policy Cyclical Timeline

Public Policy Debate One

Public Policy Debate Two

Public Policy Debate Three

In order to show how public opinion on economic interest, as framed by national identity, affects changes in cross-Strait economic policies, this thesis depends on discourse analysis through the four episodes of major policy changes. In each of the episodes, public opinion is examined in two ways: public opinion polls and the expression of individual or organizational opinion in newspapers, panel discussions and public debates. Public opinion is then divided into tendencies, distinguished by the relative weight they assign to competing interests and by their preference for liberalizing or restrictive policies. In addition, policy outcomes are examined in detail, first in their formulation through policy-making conferences (a distinctive feature of Taiwans political process), then their promulgation through legislation and regulations, and finally their subsequent implementation. Contextual Variable: National Identity Although national interests are the independent variables in this study, those interests cannot be defined in a vacuum, without reference to national identity. A community needs an implicit or explicit understanding of its national identity, united or fragmented, before it can define its economic or political interests and objectives. And based on those interests and objectives, economic policies can be effectively formulated and measured. Prevailing political analysis linking identity to policy largely defines national identity as an outcome of political contestation and identity is often treated as a political tool and independent variable. This study is based on a different approach: it posits that national identity is the foundation that allows the identification of long-term national interests; therefore, it must be viewed as a contextual variable. There are two dimensions to identity: content and contestation. Content is the meaning of a collective identity, while contestation is the degree of disagreement within a group over the content of that identity.

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(Abdelal et al 2009a, 19; Abdelal et al 2009b; Brady and Kaplan 2009) As a social construct, national identity varies from state to state, with some states having a relatively more stable national identity at a high level of consensus. Many countries can agree only on who they are not, without being able to arrive at a clear positive identity or purpose. After the Hapsburg Empire disintegrated, for example, Austrians recognized that they were strictly no longer German but they lacked consensus on the positive identity of the Austrian state. And still other countries may have no sense of national identity at all. This has been the case in some African countries that are artificial amalgams of separate ethnic groups with different languages, cultures, and values, whose boundaries were drawn by European powers with little attention to creating a unified national consciousness. Taiwan demonstrates the particular challenges facing a society grappling with its national identity after the dissolution of a larger community. There is prolific literature on the process of policy formation after decolonization or dissolution of a larger political entity, although few of the analyses of decolonization are directly relevant to Taiwan.69 Once part of China politically, Taiwan is in the stage of redefining its relationship with China culturally, economically and politically as China reintegrates with the world. Thus, understanding the process of national identity reformulation on Taiwan is crucial to understanding the definition of Taiwans national interests and the shaping of its foreign policies. The content of national identity usually has three components: the definition of the boundaries and members of the nation, the specification of the basic purposes and values of the nation-state, and the identification of the states or values that threaten those objectives. (Abdelal 2005, 24) A nation-state such as Japan, which has a common ethnicity, language and history, and which enjoys well-defined geographic boundaries, has a strong sense of national identity in the first and most traditional sense of the term. Although ethnicity and language are one basis for national identity, they merely define who are the members of the nation, and usually are not the only foundation. Membership and boundaries are the minimal step for nation building before a community can establish common values. Beyond membership, a well-defined identity in a modern nation-state usually is based on common purposes, values and institutions, such as pluralism and democracy or unity and stability, rather than merely on shared ethnicity or language. Examples of multicultural states with a strong sense of identity include the Americans, the Australians, and the Indians. The common values and objectives that constitute national identity change over time, usually stimulated by external shock. For example, American identity has evolved quite noticeably in the last decade especially since 9/11 which prompted a wave of introspection on what constitutes the essence of American national identity. Henry Naus work, At Home Abroad (2002), highlights the importance of American identity in the shaping of American foreign policy and how often that identity has been challenged as a result of both internal and external factors:
69

Examples of countries like Mali and Indonesia after decolonization or Austria and Hungary after the Hapsburg Empire, or Lithuania and Ukraine after the Soviet Union show how history and social context frame interests, allowing policy formulation. (Bremmer 1997; Abdelal 2001)

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Americas identity has shaped American foreign policy just as much as American power has This identity is a product of both internal experiences unique to America and external interactions with other societies These internal and external dimensions of identity change, often independently of power, to influence the accumulation and use of national power. (Nau 2002, 60) The final part of the content of national identity is the identification of a real or imagined other state that threatens its survival, such as the Communist Bloc during the Cold War for non-Communist countries. Decisions about membership, boundaries and common values all contribute to defining the other state in relation to the nation. The identification of China as that other state is an essential part of Taiwanese national identity. Taiwanese began to lose their Chinese identity when they realized that the former purpose of their state, which was to fight the Communists in China and unify the island with the motherland under the Nationalist ideology, was no longer practical. (Copper 2003) This was enhanced by the fact that the PRC monopolized the Chinese identity internationally. Not being Chinese was a key driver in the emergence of Taiwans national identity, just as separation the larger colonial or imperial entity often is the foundation of identity for emerging nations.70 (Abdelal 2001, 198-9) This initial definition of Taiwanese identity in negative terms, as being not Chinese, proved unsatisfactory. This led to a fervent discussion of membership: who are the Taiwanese who belong to this nation-state? Do they include only benshengren or can they include waishengren as well? This led later to questions of what makes Taiwanese who they are: common ethnicity, common place of residence, or common values and lifestyles? Increasingly, the answer was more the latter than the former. While few would deny that being Chinese has historically been part of Taiwans national identity, external security pressure and domestic politics have resulted in a new consensus that minimizes the degree of Chinese-ness: Sovereignty and democracy are the pillars of an overarching consensus among both the people and the political parties on what constitutes the Taiwanese nation. Taiwans national identity stands firm against pan-Chinese nationalism. (Schubert 2004, 553-4) Content is important in that it affects the choice of partners, and the values to be promoted for the society and the state. But the content of national identity does not directly lead to policy choices. Rather, it is the level of agreement on the content that has relevance to policy-making. Contestation can either be intense or low depending on the specific definition of identity. For example, an identity based on ethnicity may not be accepted by minority groups or majority groups may be unwilling to broaden the definition of ethnicity to include the minority. An identity based on territorial boundaries may fall victim to disputes over the location of those boundaries. And an identity based on common values requires a consensus on the definition of those values. In any of these cases, there may be severe differences over the definition of national identity. In Taiwans case, after the 1995 cross-Strait missile crisis, there was a high degree of consensus on the proposition that Taiwans national identity was
Abdelal (2001, 198-9) writes that national identity can be defined by what it is not: Nationalists always have at least one external direction for their concerns about autonomy, an other against which identity is defined. Therefore, such a societal consensus gives foreign economic policy the same direction at least one state against which concerns for economic security are defined.
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no longer one of being Chinese, and that the other state was definitely Mainland China. But there was no comparable degree of consensus on a more positive definition or collective societal purpose of what Taiwans new national identity would be. Reaching that consensus was a more gradual and evolutionary process, featuring a much higher degree of contestation. Contestation thus adds an important dimension to the definition of national identity that is essential to understanding the relationship between identity and policy. The degree of consensus or contestation over national identity is also an important contextual variable, because of its impact on the definition of national interest and the formulation of national policy.71 A consistent and consensual sense of national identity makes it easier to identify and prioritize national interests and therefore to determine national policy. According to Abdelal (2005), it does so in four ways: A clear sense of national identity imbues economic policies with social objectives, it rationalizes economic sacrifices needed to achieve societal goals, it keeps a national community alive, and it gives policy directions especially away from the other group which it defines to not be. (Abdelal 2005, 21) Without a consensus on national identity, in contrast, foreign economic policies can be directionless. A weak sense of identity can produce passivity and a short-term orientation, as in the case of Belarus after the breakup of the Soviet Union. Although the Belarusians believed they had created an autonomous state, they did not regard their national identity as being separate from Russia, politically or culturally. (Scott 2007, 1-2) This ambivalent vision was constantly in flux, and without a fundamental national objective or sense of destiny, the Belarus government traded its political autonomy for short-term economic gain persuaded by the incentives offered by Russia. (Abdelal 2001, 102 and 148-9; Silitski 2007, 1-16) With Russias assistance, Belarus first saw its economy grow much faster than most of its neighbors. But the economy later deteriorated because of its overdependence on Russia, especially in energy, and many realized that the kind of growth was not sustainable and the trade-off did not benefit Belarus. (Astrov and Haylik 2007) With an ambivalent national identity, no selfidentification as an independent nation, and no agreement on the fundamental purpose of national statehood, Belarus found the definition of its economic interests difficult.72 It accepted Russian economic assistance without considering the long-range issues that would be produced by reintegration with a larger but

This is close to what Abdelal refers to as a constructivist nationalism approach, which is specifically different from state-realism and state-constructivism in that the formation of national identity includes societal and governmental actors: National identities are the collective identities of societies that understand themselves to be nations; state identities refer to the politics that govern those societies. (Abdelal 2001, 208) This contrasts with constructivists who focus on the state as the primary actor, like Alexander Wendt (1994; 1999) and Alastair Iain Johnston (1995; 2003). 72 Although Belarus has been part of several different countries historically, most notably Poland and the Russian Empire, during the Second World War, it became part of Soviet Union and was then subjected to an aggressive policy of Russification. The new authoritarian government consisted of former Communists who continued to promote their policy of political and economic reintegration with Russia through confederation.

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weak economy.73 In essence, it engaged in accommodation to a larger power by default. (Abdelal 2001, 194) In contrast to Belarus, after the disintegration of the Eastern Bloc Lithuania chose an entirely different foreign economic policy because of its high level of consensus on the content of its national identity. The society and the government agreed on a pro-west orientation, which was also natural as they already had a distinctive national identity, including values and religion, totally different from the Russians. Soon after becoming independent, Lithuania became a member of NATO and of the European Union. With a consolidated national identity, Lithuania showed great consistency and determination in its foreign economic policies, even though the government changed frequently. (Abdelal 2001, 101) As a result, over a period of ten years, Lithuania was able to institutionalize its relationship with Europe and extricate itself from the Russian sphere of influence. As a third possibility to the weak identity exhibited by Belarus or the clear identity demonstrated by Lithuania, contentious identity can result in inconsistency in foreign economic policies, as in the case of Ukraine throughout the 1990s. With a large Russian diaspora, Ukraine was torn by the polarization between groups with opposite agendas and identities. Although the Ukrainian portion of the population had a strong sense of identity, the standoff with the Russians has continued until now and the contestation over identity remains high.74 The highly contested sense of identity has made it difficult for the state to adopt either a pro-Western or pro-Russian foreign policy, especially it relies on Russia for energy. (Gotz 2007) A highly divided nation that includes Ukrainians, Russians and Belarusians, Ukraine was reluctant to adopt the Baltic foreign policy model of integration with the West because the immediate costs were high. (Astrov and Havlik, 130) On the other hand, integration back with the East was unacceptable to many Ukrainians because the majority leaned towards a proWestern identity. (Moshes 2007, 17-46) The degree of political polarization experienced by Ukraine reflects the fact that national identity is what Apter (1965) would call a consummatory value, rather than an instrumental value.75 This distinction is a fundamentally important one in understanding how identity impacts policy formation: Structurally, consummatory values provide the basis for solidarity in the community. They are a community-building factor in social life. Behaviorally, they provide identity for individuals. In fact, they create a range of identities that are mutually coherent. Instrumental values, on the
I thank Roumyan Sechkova, Senior Researcher at the Institute for History at the Bulgarian Academy of Sciences and the Director of Creating Effective Grassroot Alternatives, for giving me a better understanding of the history and background of Lithuania, Latvia, Estonia, Belarus and Ukraine. 74 Constituting 30% of the population and controlling a significant part of Ukraine economy, the Russians in Ukraine did not share the same national interests and identity as the rest of the population, and would like to remain close to, if not part of, Russia. Supported by Russia, Russians in Ukraine had hoped for reintegration while the other 70% of the Ukrainian population were pro-Western and intended to become members of the European Union and NATO in order to guarantee their independence, national identity and freedom from the Russian influence. 75 As used by John Dewey in 1934, consummatory experience refers to a theory of experience denoting those events in which the depth and intensity of meaning is so heightened as to constitute a pervasive, qualitative and organizing whole. See Lachs and Talisse (2008).
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other hand, affect the intermediate range of ends, which may be identified in the widest context as command over resources Societies can combine instrumental and consummatory values Different ideologies represent a ranking or priority of values, consummatory and instrumental, along with a recipe for action or policy. They represent an effort to organize ideas deriving from consummatory and instrumental values into a doctrine affecting solidarity and identity, on the one hand, and to employ values to appropriate stratification, on the other. (Apter 1965, 250-1) Debates over consummatory values like identity tend to be more intense, and feature more extreme alternatives, than debates over instrumental values. Consummatory values by definition are founded in long-term concerns, such as religion, culture, and beliefs. Instrumental concerns are temporal, shorter term and change easily depending on the circumstance, whether material comfort or sense of security. The crusades in the Middle Ages, the Cold War, and what Huntington (1996) refers to as the clash of civilization in the post-Cold War era, all refer to differences in consummatory values, which have deep-rooted origins. The difference between the two kinds of value is important in understanding why identity is a major factor in some countries foreign policy formulation, such as Belarus and Ukraine, and appears less relevant in other countries, such as Lithuania. It is not because Lithuania lacks national identity, but rather because it has achieved a level of consensus on identity to frame its foreign policies. For Lithuania, there was a high level of agreement on the importance of democratic and market institutions as part of their national identity; therefore, their foreign economic policy objective was focused on instrumental goals, allowing for consistent formulation of policy. Ukraine and Belarus, however, in lacking a tradition of consensus on what constituted their respective national identities, chose accommodation to some degree by default. (Scott 2007) The debate on identity and policy in Ukraine can be characterized as consummatory, which led to extreme policies and inconsistent directions over time.76 Contestation over national identity is usually overlooked in case studies of the foreign policy of East Asian countries, with most analysts assuming a high degree of consensus on national identity.77 This contrasts with the analysis of European or American national identity, where disagreement over identity is often highlighted along with the implications of that disagreement for policy making.78 Most analysis of national identity in Asia assumes a low level of contestation and high level of consensus in Asian societies, whether Japan, Taiwan or Korea. This bias is most clearly reflected by scholars when discussing the development state model in the 1970s and 1980s, which assumes the state has well-defined national objectives based on a broad consensus over national identity. (Wade 1990) Even in recent discussions of the adaptation of the developmental state to new global economic conditions, the attempt is to analyze how the state adapts to new challenges, but the nation-states of East Asia are still treated as relatively unified
The 2010 presidential election in Ukraine where the pro-West incumbent candidate lost to the pro-Russia candidate by a small margin shows a very polarized society that has wavered between inconsistent foreign economic policies. 77 When analyzing domestic politics in Asia, however, prevailing analyses have often focused on identity, compared with the rationalist approach often applied to Western countries. (Katzenstein and Sil 2004, 17) 78 See Wendt (1999) where he discusses the contestation of European national identity.
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communities with common identities, without distinguishing between state and societal goals. (Pickel 2005; Woo-Cumings 2005; Greene 2008) Similarly, in most analysis of industrialized economies, national identity is no longer assumed to be a variable. Rather, it is regarded as relatively fixed, redefined only in rare and dramatic circumstances, such as the wave of identity discourse prevalent in Europe during European Union integration. (McLaren 2006; Gilpin 2001, 20-22) Gilpin (1987) defends the dismissal of identity in his renowned work on political economy. He explains that identity cannot be the most important determinant of a nations foreign policy in an integrated global economy because states will continue to pursue power and channel economic resources to further national interests in ways that are independent of the definition of national identity. Gilpin thereby assumes that national identity is not a pre-requisite for an understanding of national interests, which he sees as primarily state-led. The fundamental implication is to regard identity as a less important variable than economic interests. Taiwan refutes both of these generalizations about the role of national identity that it is highly consensual in Asian states and that it is an unimportant factor in long-term analysis of policy-making in industrialized states. A relatively developed Asian economy, Taiwan has seen a highly contested national identity, which has played an important role in cross-Strait relations. We need to examine the ways in which the evolution of Taiwans national identity has affected the definition and prioritization of its national interests and the selection of its crossStraits economic policies. The initial discussions of Taiwanese identity were clearly what Apter termed consummatory in nature. They produced controversial content and inconsistent policies, much like Ukraine. Over time, however, the content and contestation of Taiwans national identity have changed in three meaningful ways that have important implications for the formulation of Taiwans cross-Strait economic policy. First, there is a growing consensus on a national identity that is not essentially ethnic but rather is based on being part of a democratic sovereign state that is separate from China. Many would describe this common value as a way of life which incorporates a free economy and a democratic society.79 Second, this has meant that discussions of foreign economic policy have become increasingly instrumental, with the dominant consideration being the impact of alternative policies on Taiwans economic interests rather than their impact on Taiwans national identity. Third, as Taiwanese engage in more instrumental analyses of economic policies, there is more flexibility in their consideration of Taiwans cross-Strait economic policies.80 In addition to facing the same issues as countries like Belarus, Ukraine and Lithuania, Taiwan has the additional complication of being a state unrecognized internationally. In defining its identity relative to a neighboring economic and military giant of which it was once a part, Taiwan differs from the post-Soviet states, all of which all eventually gained UN membership, as well as from Finland after World War II, which was always recognized by the Soviet Union as an
I thank comments made during interviews by Earle Ho (April 2, 2009) and Morris Chang (April 3, 2009), both of whom identified a way of life as the most important common value of Taiwanese people. 80 Wong and Sun (2004) shows in their survey that there are at least five discourses on identity, not just independence-unification.
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independent sovereign state. International legitimacy is an essential aspect of the consummatory nature of Taiwans search for its national identity. Independent Variables: Interests and Purpose of the Nation Based on their national identity, contested or not, people in a community must still identify and prioritize their key national interests, the independent variables in economic policy formulation. What are the goals of the nation, how do they change, and how does national identity inform the purpose of the nation in defining its interests? Foreign economic policies in a democracy typically have growth as one of their top priorities. But the cost of unfettered market growth without proper national policy to ameliorate its negative effects has been enormous. As the movements of services, goods, people and financial capital increases in a global political economy, national policies have retreated from interdependence quite dramatically with each systematic shock, including the 1997 AFC, the 2001 global economic downturn and the 2008 GFC. Each of these financial crises led to greater regulation and restriction by national governments as a way of mitigating the negative impacts of the systemic shocks. (Frieden 2006; Ferguson 2008) Similarly, as Chinas trade surplus with the world widens, trade protectionism is also on the rise. Free trade as a way of maximizing economic growth is increasingly managed by national governments for the sake of other competing interests. What are the objectives valued by Taiwanese as a community? Although many economic interests are relevant to foreign economic policies, the most important interests considered by Taiwanese in the debates over Taiwans crossStrait economic policies are growth, stability, equity and security. One of the key linkages between national identity and interests is that a strong sense of identity induces the members of the community to make sacrifices for collective objectives and values. A sense of distinct national identity, including the desire to achieve autonomy and respect, may lead its members to focus on security more and to make compromises on other interests to enhance the sense of security. A lack of consensus on national identity and common objectives, on the other hand, may lead the members of a society to focus exclusively on short-term material interests in the absence of a willingness to make sacrifices, thereby allowing growth, for example, to dictate policy. (Abdelal 2005) Growth The promise of prosperity is one of the foundations of most governments, especially democratic ones. Absolute growth is correlated with, but distinct from, market freedom and economic efficiency, both of which are highly valued by Taiwanese. Taiwans growth in the 1950s to 1980s as an authoritarian state is difficult to replicate today, as the state was able to sacrifice all other goals in favor of growth.81 During those decades, growth came about not as the result of an invisible hand as Adam Smith would have predicted, but rather of a strong and single-minded state, with the clear tradeoff being political freedom. Governments can be more efficient than private enterprises in certain respects, and decisions can certainly be made faster when societal input is not considered.82
For an updated explanation of the path Taiwan took with an emphasis on the development of technology, see Greene (2008, 152-63). 82 Freedom, therefore, is neither a necessary nor a sufficient condition for growth. For example China was ranked 140th freest economy in the world out of 183 countries, and 31st out of 41 countries in Asia. It was labeled mostly un-free in the Index of Economic Freedom in 2010. See
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However, in todays global political economy, the drive towards efficiency in a free economy is often associated with a limited government, leaving most economic activities to private enterprises except in the case of public goods like utility or transportation, depending on the nature of national economy. Growth is best understood in contrast to other economic interests, usually as a trade-off. Few democratic states focus only on growth, depending on the stage of development. For Northern European countries, for example, equity and stability play a much larger role, whereas for the United States after WWII, security against the Communist others justified aid to U.S. allies and restrictions on trade with Communist countries. Stability The relationship between market stability and economic growth is a particularly important dilemma for democracies. Empirically, democratic societies have been proven to be more risk averse than non-democracies, reflecting the preference of voters for economic stability. (Quinn and Woolley 2001) Despite the link between higher risks and rewards, pluralistic societies seek lower market volatility in favor of more predictability. Leading causes of market volatility are changes in trade regulations and capital controls. External shocks cannot be avoided but as Rodrik (1997; 2007) points out, democratic governments can use national economic policies to reduce market volatility. If and when a society is divided, market volatility is a particular risk to political stability, and it is therefore important for the governments in such societies to introduce economic policies that can reduce that volatility, even at the expense of efficiency, and by implication, growth. Often this requires a larger and more interventionist government.83 In most societies, finding the proper balance between growth and stability is highly desirable. Equity For capitalist systems, equity is the most difficult interest to balance against growth. The term equity is used here to refer to fair competition or social fairness in distributions of resources and opportunities. This is distinct from equality, as often supported by proponents of various forms of socialism, which implies equal outcomes regardless of effort and ability. (Rawls 1971, 60) Growth requires continuous improvement in efficiency, which means leaving some people behind. The more growth there is, the more inequality is increased. Integration into the international economy may promote growth, but it may not increase equality for the simple reason that not everyone benefits equally from trade. In fact, globalization has increased inequality between and within nations, above and beyond producing market dislocation.
The Heritage Foundation, China Information on Economic Freedom, http://www.heritage.org/index/country/China (Last accessed on Feb 28, 2010). Yet it has enjoyed one of the highest growth rates in the world for two decades. Many have written about how China compromised many other values in order to pursue growth as its highest priority. (Pei 2009; Fewsmith 2007) In fact, economic growth often necessitates political coercion, even in essentially democratic societies, because the market depends on political institutions having regulatory power to ensure rights and security. (Okun 1975, 32) 83 Taiwans government spending equaled 17.8% of its national GDP in 2008, which makes it a big government, almost as big as China (2009 central government spending over GDP was 19.9%). The Heritage Foundation, Taiwan Information on Economic Freedom, http://www.heritage.org/index/country/taiwan (Last accessed on Feb 28, 2010).

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For a democracy, the contradiction between growth and equity poses a real dilemma. A free economy guarantees property rights and the free exchange of goods and assets. But the inequalities that this creates will contrast with the egalitarian nature of the political structure: A democratic capitalist society will keep searching for better ways of drawing the boundary lines between the domain of rights and the domain of dollars. And it can make progress. To be sure, it will never solve the problem, for the conflict between equality and economic efficiency is inescapable. In that sense, capitalism and democracy are really a most improbable mixture, maybe that is why they need each other to put some rationality into equality and some humanity into efficiency. (Okun 1975, 120) The tradeoff between growth and equity also poses a real challenge to developing economies, particularly large and fast-growing economies like China and Latin America where both growth and equity are required to ensure social and political stability. In the case of Taiwan, high economic growth in the 1980s had been accompanied by the rise of a large middle class, which is described as an economic miracle because inequality usually widens during high growth. As Taiwan has adapted to a new global economic order and to greater integration with China over the last two decades, however, it has experienced slower growth and more inequality. This is not unusual: it is also characteristic of Korea, whose political and economic features are similar to those of Taiwan. (Kang 2009) The distributional consequences that Taiwan faces in trading with a large partner like China can be predicted by political economic theories that focus on the social and political tensions produced by trade. (Frieden 1991; Frieden and Rogowski 1996; Garrett 1998; Hiscox 2003; Hirschman 1981) Given the difference in factor endowment between Taiwan and China, Taiwanese capitalists, unskilled workers and farmers would experience very different consequences from growing trade with China. (S. Chan 2009, 82) According to the StoplerSamuelson theorem, trade enhances the returns to well-endowed factors of a nation, which for Taiwan are capital and experienced management, and diminishes the return to the scarce factor particularly relative to China, which is labor. Furthermore, according to the Hecksher-Ohlin theorem, restricting trade, or protectionism, would boost wages for the scarce factor, which would be unskilled worker or farmers in Taiwan. Changes in international prices also change the distribution of income, and may therefore lead to conflict among domestic groups. The Ricardo-Viner theorem, or the sector-specific factors model, predicts that industries with mobile factors of production will eventually benefit more from trade than traditional or non-mobile industries. (Frieden and Rogowski 1996) At higher levels of economic integration, cleavages are the natural outcome, not only between classes, but also by industry and sector, depending on the domestic political institutions and economic structures. (Rogowski 2003; Alt and Gilligan 1994) Rational governments will identify, as strategic industries, those that make use of the factors with which they are better endowed. In turn, those industries which enjoy a competitive advantage internationally, will want freer trade since that would produce a rise in their income. Taiwan has witnessed internal conflict along multiple dimensions since enlarging its economic relationship with China. Cleavages by skill level, by

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geography and by sector are all overlaid on top of ethnic conflicts, making it difficult to assess the relative importance of ethnic and economic factors. Economic and Military Security A nations economic security relates to both finance and trade. An economically secure country usually has a diversified export and import base, high levels of foreign reserves, secure access to raw materials at reasonable prices, and proprietary sources of technology. Alternatively, economic security can also be derived from autarky as a way to insulate an economy against boycott, embargo or sanctions, but this comes at a high price in terms of growth. Enhancing economic security usually entails some tradeoff with efficiency and absolute growth. Integration with the global economy allows a country to receive more for its most competitive factors of production, but at the price of less market autonomy and therefore greater economic insecurity. Market autonomy is also related to policy independence, which is curtailed with trade and even more so with capital mobility. Countries are more economically secure either because they are resource rich, like the Organization of the Petroleum Exporting Countries, or less exportoriented and more self-contained, like China before reform. Taiwan falls into neither category. Like other export-dependent economies, Taiwan relies on a global supply chain, into which it is highly integrated. Furthermore, relatively free movement of capital makes the pursuit of market autonomy untenable, although most countries still attempt to maintain control over investment in key and strategic sectors. While Taiwan attracted substantial FDI in the post-WWII decades, the outflow of capital has far outweighed inward investments in recent years. According to the MundellFleming theorem, if Taiwan wishes to attract and keep Taiwanese and foreign capital in Taiwan, it will lose control over either the value of its currency or its monetary policy. (Frieden 1991, 431) If a country wants capital mobility, then it necessarily gives up monetary policy autonomy, as in the case of Hong Kong, or it gives up a fixed exchange rate. To regain control over its monetary policy or its exchange rate, it must reinstate controls over capital flows, as Malaysia did during the 1997 AFC. The Malaysian government instituted capital controls in order to preserve the value of its currency and to maintain control over its own monetary policy both of which it viewed as essential to enhancing its economic security. An indispensable corollary to economic security is military security, which raises the classic dilemma of guns vs. butter. In some cases, military preparations actually contribute to economic growth, but the maximum rate of military spending compatible with overall economic growth is highly debatable. The ratio of Taiwans defense budget to GDP has dropped steadily over the last fifteen years despite a growing Chinese military capability, including more missiles aimed at Taiwan, declining from 4.2% of GDP in 1995 to only 3.0% of GDP in 2008.84 Taiwan can promote its military security through either accommodating China or balancing, and if the latter, it must choose between a soft or hard strategy and between self-strengthening or alliance with U.S. There has been a perception of the declining utility of military spending for a small and democratic Taiwan
Data from the Ministry of National Defense, National Defense Report of the Republic of China 2008. The full report is accessible at: http://report.mnd.gov.tw/ (Last accessed on Feb 28, 2010).
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facing a larger and increasingly well armed PLA: The PLA will soon not only be able to launch a paralytic, knockout strike against Taiwans center of gravity by surprise, but also neutralize Taiwans defense, and achieve its desired political objectives long before the United States can come to the rescue. (Y.W. Chen 2008, 276) Although not everyone agrees that the PLA can take over Taiwan before the U.S. assistance can arrive, the imbalance is certainly well recognized. This imbalance leads to a policy of either relying on the U.S. for Taiwans defense or of accommodating China militarily. (Huang 2008, 264) Intervening Variables: Evolving Domestic and International Environment There are four important intervening variables that change the relative appeal of competing cross-Strait economic policies: the state of the global economy, Beijings policies toward Taiwan, Washingtons policies toward Taiwan and the state of Taiwans political economy. First, few foreign economic policies today can be adopted without regard to the state of the global economy. The neo-liberal order has shown unforeseen vulnerability and volatility. The economic dislocations caused by large and abrupt movement of capital in and out of national markets has made it less appealing to allow national economic conditions to be determined by the state of the international economy. Market gyrations have also reinforced the view that foreign economic policy must take into account the preferences of domestic social forces, as well as the demands of global financial markets. Taiwan has also been part of a Taiwan-U.S.-China strategic triangle, and its cross-Strait economic policies have been strongly influenced by the preferences of both China and the United States. China has begun to assume a more assertive posture in Asia, especially towards Taiwan, although its fundamental approach is still within the bounds of rationality, not driven only by Chinese nationalism. (Zhao 2008) Robert Ross sees Asian countries as using a mixed strategy that is neither balancing nor bandwagoning with China. The nature of the mix depends on purely the size and location of the country, and Taiwan shows the greatest tendency towards accommodation because of its proximity and small size relative to China. (Ross 2007) Chinas Taiwan policy has also been gradually evolving. Chinas fundamental position is focused on its desire to assert sovereignty over Taiwan; therefore, Beijing will not negotiate with Taiwan as an equal, and the use of force remains an option. However, as China continues to assign the highest priority to its own economic development, the likelihood that it will resort to force against Taiwan is low, because such a decision would be costly. Most observers therefore believe that China has softened its approach to Taiwan and now focuses on deterring independence rather than achieving unification. Chinas policy toward Taiwan combines carrots and sticks, cajoling and coercing Taiwanese government and private business groups at the same time. The changing balance between these two strategies changes the way in which Taiwans interests are prioritized in formulating its cross-Strait economic policies. For example, the adoption of Chinas Anti-Secession Law was viewed in Taiwan largely as a coercive measure, and it therefore mobilized advocates of protectionism and led to the adoption of more restrictive measures in 2006. Conversely, when China behaves in a conciliatory matter, like allowing Taiwan to participate on an ad hoc basis in the annual meeting of the World Health

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Assembly in 2009, Taiwanese then become more open to the possibility of liberalizing restrictions on cross-Straits trade and investment. The preferences of the U.S. have also influenced Taiwans policies towards the Mainland. But like Chinese policies, American policies towards Taiwan have also been short-term and inconsistent. Compared with China, the U.S. has had more ambiguous and increasingly indirect influence on Taiwans policies. On the one hand, Taiwanese understand that the U.S. is Taiwans ultimate security guarantor, in part through its continued arms sales to Taiwan, and that Taiwan faces pressures to comply with American preferences. On the other hand, Taiwanese are quick to point out the contradiction in American policies towards Taiwan, charging that the U.S. government tries to appease China by pressuring Taiwan when American interests require Chinese cooperation. They fear that the combination of Americas declining standing in the balance of power in Asia and the increasing importance of China economically have reduced the U.S. incentives to uphold Taiwans autonomy, and have therefore reduced Americas leverage over Taiwan. (Acharya 1999; Tucker 2009) With American policies toward Taiwan characterized by strategic ambiguity, American influence over Taiwanese policy appears to be unpredictable. It is often the case that after Washington whispers to Taiwan its preferences about what Taiwan should do, Taiwanese political leaders refuse to comply. The continuous disputes over any referendum that Taiwan proposes to hold despite Chinese opposition are a case in point. In 2008, the U.S. and Taiwan suspended official communication for months after Chen Shui-bian brushed aside U.S. warnings against holding a referendum about rejoining the UN concurrently with the March 2008 presidential election. Interestingly, both the KMT and the DPP had introduced their own versions of the referendum because of popular interest in this issue.85 Clearly, neither party was willing to appear weak vis--vis the U.S. before the election. In Taiwan as elsewhere, elites have mobilized domestic forces either to support or oppose American policies. American preferences are an influential factor in Taiwanese policymaking, but not necessarily a decisive one. (Nau 2002) Finally, Taiwans domestic political economy including its economic situation to political changes is a powerful intervening variable. Theories of trade lead one to forecast the emergence of a cross-Strait economy that will be oriented around Chinas large labor pool and Taiwans management, capital and technology, creating disparity between a new set of winners and losers. Highly competitive Taiwanese companies and industries will benefit from expanding into China, creating a huge exodus of capital, technology, organization and knowledge, and leaving unskilled workers behind. Cross-strait economic relations may augur a more efficient utilization of resources, but they will also result in a reduction in welfare gains because of the differences in return to different socio-economic groups. (Leng 2009, 155-156) The dramatic increase in inequality will pit nearly four million, of highly disenfranchised farmers and unskilled workers against a select group of owners of profitable assets.86 Moreover, the rise of womens groups, veteran organizations and indigenous groups also underscores the plight of other marginal groups. This has put tremendous pressure on domestic leaders to
Lawrence Chung, Chen admits referendum dispute has halted dialogue with the U.S., South China Morning Post, September 16, 2007, p. 6. 86 Number of farmers and blue-collar workers from Taiwan Statistical Data Book 2009, p. 16.
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find ways of boosting Taiwans economy in ways that create more opportunities for everyone.87 (Chow 2002, 261) Since the expansion of cross-Strait economic relations, Taiwan has fared poorly with regard to most of its economic interests: Taiwan experienced its first negative growth rate of -1.7% in 2001 and only averaged 4.6% between 2002 to 2008, compared with its previous annual growth rate of over 5.7% between 1994 and 2000.88 Estimates are that growth for 2009 will also be negative.89 On the job front, the data are even more staggering. From 1994, unemployment rose gradually from 1.6% to 3.0% in 2000. From 2000 to 2008, unemployment was at unprecedented levels of between 3.9% and 5.2%.90 Wage decline was precipitous as well. From 2000 to 2007, the average monthly earnings of employees in the industrial and service sectors in Taiwan declined in six sectors out of thirteen. In fact, for the overall work force, average monthly earnings in 2008 were only 0.5% higher than in 2006. In 2002 and 2005, real wages dropped compared to previous year, directly affecting 3.3 million workers.91 Therefore, the total number of perceived economic losers from cross-Strait relations is probably at least equal to those who regard themselves as winners. And more people are likely to believe they are going to become losers in the future, given Taiwans declining competitiveness and the perception of marginalization as capital moves to China. Taiwans lower growth, increasing inequality, and greater market instability may or may not be directly produced by its interdependence with China, but the correlation is glaring and the perception of the correlation has a significant impact on the influence of various groups have on policy-making in Taiwan. The impact on policy making is clear: the worse off the state of Taiwans economy is, the more demand for protectionism. The Four Tendencies and Their Relative Influence During economic policy debates, opinion leaders prioritize the competing interests and advocate specific economic policies to promote them. These alternative combinations of interest and policy can be arrayed along a linear spectrum, ranging from the greatest amount of government restriction and regulation of cross-Strait relations, to the most extensive degree of liberalization and deregulation. Each of these tendencies is based on a different prioritization of economic interests, but their specific content and their base of political support has changed over time. This is because each of the four episodes analyzed in this study has emerged from a different domestic and international context and focused on a different set of policies. (Table 3-1)
On the pressure set by international markets on domestic governments, see Garrett (2000) and Milner and Keohane (1996). Rogowski (2003) specifies that only if two countries have the same capital to labor ratio and assuming capital is mobile, then policy convergence is expected between them as trade and investment increase, otherwise, each government will implement policies to enhance its competitiveness, resulting in friction, such is the effect of changing capital to labor ratio on policy. 88 See Table 1-1 in Chapter One and for the total amount of cross-strait trade (export, import and trade balances) since the late 1980s, see the Council for Economic Policy and Planning (CEPD), Executive Yuan, Taiwan Statistical Handbook 2009, p. 21. Available online at: www.cepd.gov.tw/encontent/dn.aspx?uid=6984 (Last accessed on Feb 28, 2010). 89 Goldman Sachs, Global Economics Analyst, July/August 2009. 90 Taiwan Statistical Handbook 2009, p. 17. 91 Manpower Planning Department, CEPD, Executive Yuan, Manpower Indicator (ROC Taiwan), pp. 27-8. Available online at: http://www.cepd.gov.tw/dn.aspx?uid=5884 (Last accessed on Feb 28, 2010).
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For each opinion cluster, the number of interests to be promoted varies, from the least for the Extensive Liberalizers to the most for the Extensive Restrictors. This difference underscores each tendencys relative emphasis on the importance of Taiwans survival as a separate sovereign state. For the Liberalizers, the security of a Taiwanese nation-state is not as important as other priorities as long as there is no war and economic activities are allowed to continue. For the Restrictors, all economic activities must be based on preserving the existence of a Taiwanese state. This spectrum of economic policy preference is different than and has no direct correlation with other types of analysis based on political parties, ethnicities, FNP, class, industry or interest groups. This study also disputes the conclusions many past studies have shown that ones national identity is correlated with ones preference for a variety of cross-Strait policies. These studies presume that those who saw themselves as Taiwanese, for example, were highly likely to favor independence and restrictions on cross-Strait economic ties, while those who saw themselves as Chinese were more likely to favor unification and the liberalization of Taiwans economic policies toward China. (Hsieh 2004) As a result, some have mistaken voters FNP as a proxy both for their national identity, and for their preferences regarding policies toward economic relations with China, whether protectionism or liberalization. These assumptions are misleading generalizations. In this table, the rows on associated national identity and associated attitude toward political outcome show the distinction between definitions of national identity and preferences for cross-Strait political outcome. While there are associated preferences especially for the extreme groups on either end of the spectrum, for the two middle groups there is no established correlation and should not be assumed.

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Table 3-1: Four Tendencies of Taiwans Cross-Strait Economic Policies

Tendencies in Economic Policies Place on Political Spectrum Highest priority of interests (in order of importance) Extensive Restriction Left Guided Development Center Left Guided Liberalization Center Right Growth Stability Economic and Military Security Extensive Liberalization Right

Economic and Military Security Equity

Equity Stability Growth Economic and Military Security

Growth Economic and Military Security

Associated national identity

Taiwanese only

Taiwanese only, or both Taiwanese and Chinese

Chinese only, or both Taiwanese and Chinese Unification is acceptable

Associated attitude toward cross-Strait political outcome Preferences toward crossStrait economic policy Position in comparative perspective:92

Independence is most preferred

Outcome depends on circumstances

Extensive regulation on all economic policies towards China Conservative Separatist

Cautious and gradual liberalization, with remedial social and economic policies Liberal Separatist

Regulated, accelerated liberalization

Extensive and accelerated liberalization

Conservative Integrationist

Liberal Integrationist

Extensive Restriction The first opinion cluster is primarily concerned with Taiwans military and economic security, as many in this group are advocates of de jure independence. To them, restrictive policies are an important means to preserving both Taiwans identity and its equitable development. They believe in buttressing Taiwans security at all costs, followed by equity, stability and growth, all of which are assumed to strengthen the position of an autonomous Taiwan. Specifically, they are motivated by concerns that, without extensive restriction, Taiwan will be absorbed by China, whether by military force or
These labels are derived from the paradigm proposed by Friedman (1999, 438) in his widely read The Lexus and the Olive Tree. Friedman describes the two ends of his distribution axis the Social-safety-netters and the Let-them-eat-cakers. I have used the more familiar labels of liberal and conservative.
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economic integration. Extensive Restrictors therefore regard interdependence with China to be highly risky. While they often appeal to the U.S., Japan, and other countries for military and diplomatic support, they are skeptical that Taiwan can rely on anyone else if China becomes assertive militarily or economically. Recent changes in U.S. policies, especially Washingtons opposition to provocative behavior by Taiwan, has reinforced their fear that in the long run Taiwan will be on its own militarily as well as economically. Therefore, they advocate very limited interaction with China as a way of insulating Taiwan from these risks. Even Extensive Restrictors recognize that overall economic growth requires some economic ties with China, but they advocate tightly controlling the level of economic interdependence. Furthermore, they believe that a high level of insulation from China will have the additional social and economic benefits of reducing inequality, wage stagnation, and job insecurity. They want the government to stop capital outflow to China and to restrict the import of Chinese products and any flow of Chinese workers into Taiwan. While most people in this tendency tend to be staunch supporters of independence, many supporters of strong Taiwanese identity and perhaps even independence do not subscribe to preferences in this tendency. Guided Development Guided Developmentalists exhibit a strong populist streak that differentiates them from those who believe in a market-led society. In addition to stability and growth, supporters of this tendency are concerned about the longterm prospects for equity under the impact of globalization. They believe that a more competitive economy should adopt effective social welfare programs and promote broadly based job creation in order to manage the grievances of those who would suffer from closer economic ties with China. They would like to see a thorough discussion of the remedies that would be necessary to address these potential problems before any further liberalization of cross-Strait economic policies. They believe in a greater role for government to adopt effective social welfare and job creation programs, as long as they are market-oriented. Guided Developmentalists believe that a strong state is the key to achieving these values. In turn, the market serves as a vehicle to strengthen the state relative to other countries; therefore, over-reliance on any single market poses a great threat to Taiwans economic security. People who support Guided Development vary widely in terms of their FNP, including supporters of both a high level and a low level of political integration. Again, the correlation between economic preference and political outlook cannot be established directly. Guided Liberalization Like the Guided Developmentalists, Guided Liberalizers agree that a strong state is important but they view it more exclusively from the perspective of growth. Although focused on the primacy of growth, Guided Liberalizers are also concerned with economic stability and economic security. Given Taiwans special relationship vis--vis China, they therefore accept more regulation of cross-Strait economic relations than do the Extensive Liberalizers, in the belief that the government can and should be proactive and strategic in formulating foreign economic policy.

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The Guided Liberalizers know that isolation from China, or excessively restrictive policies toward cross-Strait economic relations, are not viable options, since they would create more inefficiency and sluggish growth. They therefore support trade and investment with China as a way of maximizing prosperity. However, they do not want to risk Taiwans security or its economic stability. They therefore see regulation of the economy including regulation of economic relations with China as necessary and important. In addition, the Guided Liberalizers see government guidance as necessary for Taiwan to be more competitive than other national economies. Along with the Guided Developmentalists, Guided Liberalizers make up the majority of the Taiwanese population, and they vary just as widely in terms of FNP. Staunch supporters of independence or unification can both be found in this tendency. Extensive Liberalization Many Taiwanese regard the creation of a more integrated Greater Chinese economy as a way of promoting growth through greater efficiency. They are therefore willing to consider not only liberalization, but also more thoroughgoing economic and political integration, as a step in that direction. Conversely, the Extensive Liberalizers tend to be skeptical about more than a minimal emphasis on security, equity or stability because they do not believe markets should or can be controlled. These Economic Liberalizers are usually advocates of globalization in that they see greater economic interaction as beneficial to everyone, often categorized as globalists. Even more importantly, they are generally indifferent to the questions of promoting the sovereignty of the nation-state. They see engaging in cross-border production, trade and investment activities with other countries as enhancing efficiency and stimulating the Taiwanese economy. They are confident that the benefits of such economic relationships will trickle down to reach all members of society, even at the price of some increased inequality. They regard any government effort to redistribute wealth as being inefficient and therefore unworthy of support. The Economic Liberalizers are usually considered to be free marketers except with regards to China. To them, barriers to trade and investments usually carry a cost, most of which are unjustified and should not be encouraged, although in the case of cross-Strait economic policies, a limited number of restrictions can be tolerated such as limits on the immigration of Chinese to Taiwan. What differentiates supporters of Extensive Liberalization from the proponents of Guided Liberalization is not merely their attitude toward restrictive policies, but also their position on unification. Extensive Liberalizers do not necessarily promote political unification outright, but many of them regard it as an acceptable outcome, perhaps even a desirable one, if the terms are good and it is offered without the threat of force. Like the Extensive Restrictionists, many in this tendency tend to have a strong political FNP, unlike those in the middle two groups. More Extreme Positions Two extreme tendencies are missing from this analysis, simply because they have played a minor role in policy debates on Taiwan. Proponents of complete autarky, similar to the economic systems of Cuba or North Korea, and proponents of political and economic integration with the PRC, under a 60

framework similar to Hong Kongs, have never constituted powerful groups in the discussion on cross-Strait policies and therefore are not included. Their absence is because China presents an immediate opportunity and threat like no other trading partner or neighboring state. To seek autarky would be to reject Taiwans overall economic history, which has always been to maintain an open economy integrated into the international economy, and would be to ignore the size and proximity of the Chinese market. At the other end of the spectrum, given the immense imbalance in military strength between China and Taiwan and Chinas refusal to renounce the use of force against Taiwan, the overwhelming majority of Taiwanese understand that unfettered free trade with China is not a viable option. This is especially so when China has always made clear that its economic relations with Taiwan will always be governed by political criteria, and has demonstrated this by penalizing Taishang who were viewed as DPP supporters. Dependent Variable: Categories of Economic Policy How does the general policy debate over competing tendencies translate into specific foreign economic policies, the dependent variable of this study? And how do these specific policies reflect the contradictions among the objectives of maximizing growth, promoting economic stability, striving towards equity, and maintaining security? Foreign economic policies are usually understood in terms of five levels of economic integration: normal trade relations, free trade areas, customs unions, common markets and economic or monetary unions. Cross-strait economic relations have not even reached the first level of full trade normalization, with many related issues like travel and immigration still tightly controlled. But even at this level, there are many alternatives to consider as Taiwan defines its crossStrait economic policy. These more specific policies fall into five broad categories.93 Transportation and Communication Taiwan has restricted direct transportation links with China, including air and shipping links and postal services, even though it has allowed cross-Strait trade, mail and trade through a third country since November 1987. Until 1987, Taiwanese were strictly prohibited from travelling to China, a restriction which still applies to government officials. The March 1993 Koo-Wang Four Agreements and the May 1995 Offshore Transfer Center Procedure Regulation were the only policy relaxations that made any difference, but they governed only indirect transportation and communication. A breakthrough appeared in January 2001 allowing the Taiwan-held offshore islands of Quemoy and Matsu to establish direct transportation links with Fujian, China. But these so-called mini-Three Links did not lead to an immediate opening of normal links between Taiwan and the Mainland. Mail, trade and all forms of contact still had to go through a third country. (J.M. Chen 2008) Finally, with the opening of the Three Links in June 2008, direct communication and transportation between Taiwan and the Mainland were permitted, including the

These categories loosely parallel major economic policy tools of national governments in global economic integration trade, immigration, investment and exchange rates, see Hiscox (2005, 5086) and Tung (2006).

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long-awaited direct passenger and cargo flights, cargo shipments and telecommunications. Trade Policy Taiwan has imposed restrictions on the import and export of specific products and services, the most important of which have been bans on imports of Chinese goods into Taiwan. The Foreign Trade Act of 1993 (amended in 1997 and 1999) started formally allowing and regulating cross-Strait trade while incorporating security considerations. In July 1996, a negative list of impermissible imports from China replaced a more restrictive positive list of of permissible items, and by April 2000, 5,678 product lines (55.4% of nomenclature) were allowed to be imported. (Dent 2003, 472) In 2009, there were still 1,308 industrial products that could not be imported. (Sin 2009, 179) Taiwans export policies are often based on industry-specific strategies that are intended to keep certain industries rooted in Taiwan. These industry-specific restrictions include controls on exporting technology or equipment to China; for example, semiconductor equipment must be approved before it can be transferred to China. Foreign Investment Policy Taiwanese individuals and companies are restricted in their ability to make direct and portfolio investments in China or in Chinese securities listed outside China. The restrictions on direct investments are based on the aggregate amount of capital, presently no more than $50 million per project. Furthermore, restrictions have been placed on specific products and industries, for which approval was required regardless of the size of the investment. Inflows of capital are also restricted, in that Chinese companies and QDII funds, even if only partially Chinese owned, have been banned from investing in Taiwanese companies, assets and securities. Taiwanese banks, securities firms and insurance companies were restricted from setting up branch offices or subsidiaries in China. Taiwanese financial institutions have also been unable to open branch offices in China. In November 2009, three bilateral financial supervisory MOUs were signed. When implemented, the MOUs would lift some of the restrictions by both Taiwan and China. Capital and Currency Control Since 1979, the New Taiwan Dollar has been a floating currency, and with the liberalization of Taiwans current and capital accounts, there has been a tremendous flow of capital both in and out of Taiwan. But Taiwans foreign exchange policy is still subject to extensive regulation, with its central bank retaining supervisory authority over capital flows to China. Moreover, Taiwan does not have any settlement mechanism with the PRC, not being a member of the International Monetary Fund (IMF), and renminbi could not be converted into Taiwanese currency onshore until 2009. (Dent 2003, 478) This may change with the 2009 Financial MOUs. There are also regulations on the Chinese side, since capital flow in and out of China is highly controlled. Inbound Immigration Taiwanese companies are restricted from hiring Mainland Chinese employees. This restriction is not limited to China, but is consistent with Taiwans policies towards most other countries in protecting the Taiwanese labor market. There has been a gradual relaxation in that a handful of Mainland

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Chinas graduate degrees and professional qualifications are now recognized in Taiwan, paving the way for the possibility of eventual immigration. While there is no discussion of the sensitive issue of naturalization, there are already over 50,000 Mainland Chinese spouses who are able to live in Taiwan but with a specialized identity card, distinct from other nationalities, that does not allow work or legal benefits such as inheritance. In June, the Legislative Yuan finally approved laws to allow a shortened waiting period of six years for a Mainland Chinese spouse to receive full Taiwanese residency with legal rights.94 Most important, with the normalization of the Three Links, the ban on Mainland Chinese entering Taiwan was finally lifted, and tourists in organized groups were able to visit Taiwan by application starting in 2008. Application of the Identity-Interest-Policy Pyramid Having reviewed the Identity-Interest-Policy Inverted Pyramid from the contextual to the dependent variables, we can now turn to how this study plans to apply it as a framework to understand Taiwans cross-Strait economic policies. Figure 3-3, the Identity-Interest-Policy Flowchart, repeats the basic concept of the original pyramid of Figure 3-1: economic interest is embedded and defined by national identity, and is affected by external and domestic intervening variables in each episode. Societal actors then aggregate those economic interests into tendencies, competing in public policy debates to affect foreign economic policy. But Figure 3-3 adds the Taiwan-specific details to the original pyramid, identifying the economic interests, environmental factors, opinion clusters, and dimensions of cross-Strait economic policy involved in Taiwans policy toward Mainland China in the period covered by this dissertation.

See the MAC official announcement at: http://www.mac.gov.tw/ct.asp?xItem=44394&ctNode=5615&mp=1 (Last accessed on Aug 31, 2009); Awakening, Issue 291, April-June 2009 issue, available at: www.awakening.org.tw (Last accessed on Feb 28, 2010).

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Figure 3-3: Identity-Interest-Policy Flowchart

Definition of National Identity (Contextual Variable)

Identification of Economic Interests (Independent Variables) 1. Growth 2. Stability 3. Equity 4. Economic and Military Security

Evolving Domestic and International Environment (Intervening Variables) 1. State of Global Economy 2. PRC Policies 3. US Policies 4. State of Taiwans Political Economy

Relative Influence of Competing Policy Tendencies 1. Extensive Restriction 2. Guided Development 3. Guided Liberalization 4. Extensive Liberalization

Formulation of Taiwans Cross-Strait Economic Policy (Dependent Variable) 1. Transportation and Communication Policy 2. Trade Policy 3. Foreign Investment Policy 4. Capital and Currency Controls 5. Immigration Policy

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Discussion of Hypotheses The first question to be raised in this study is whether there is any correlation between identity and interests in the evolution of Taiwans cross-Strait economic policy. When national identity was contentious, competing definitions of identity were correlated with extreme policy preferences and tendencies; as the debate on identity was resolved, people with similar definitions of national identity began to exhibit different political and economic policy preferences, particularly the guided liberalization and guided development tendencies. Specifically, there has been increased bipartisan support for opening Taiwans economy to China, in the hopes that it would create more prosperity for Taiwan and enhance its political security as well. In the earlier periods especially during the first episode, these moderate voices had been largely drowned out by demagogues with more extreme views, especially during tense moments in the protracted political standoff with China in 1995 and 2003. Debate Over Identity, 1994-2005 (First Period) Taiwans initial debate over cross-Strait economic policy was closely linked to the debate over identity. Of course economic logic was also a factor: potential losers favored protectionism while proprietors and skilled workers and managers supported liberalization. But the main item on the political agenda was the reconsideration of national identity, and it was that debate that dominated the discussion of cross-Strait economic policy during this early period. The intense and simultaneous debate on identity and economic policies in the earlier episodes made discussion of cross-Strait economic policy highly emotional and often led to the consideration of the extreme options of either isolation or integration. As the government reacted to these competing pressures, its policies zigzagged from liberalization to restriction. (Chao 2004) Both restriction and liberalization were justified primarily with reference to concerns about economic security as the nature of the debate was consummatory. In this early period, the making of Taiwans cross-Strait economic policy was characterized by the process described by Susan Strange: political choices on economic policies have seldom been motivated by carefully reasoned assessments of quantifiable economic costs and benefits, but rather by political aims and fears, and sometimes by totally irrelevant considerations and irrational emotions. (Strange 1970 [2002], 192) But what were those political aims and fears that pushed aside quantifiable economic costs and benefits? As Apter explains, consummatory values must be selected before instrumental values can be identified and prioritized. It can be expected that any disagreement over consummatory value would take precedence over instrumental values, with such debates likely to be intense as they are more fundamental in nature. National identity is by nature consummatory whether it is contentious or not, and when it is unresolved, the consummatory nature of the debate easily lends its intensity to other debates on interests and policies. Constructivist work shows that nationalism can embrace either liberal policies or protectionist economic policies, with choice based primarily on the content of national identity. In the case of Taiwan, these competing economic policies would focus on cross-Strait relations, given that China was both Taiwans most important potential trading partner and the foil against which its national identity would be defined. This assumption produces the first hypothesis:

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1. A high level of contestation over Taiwans national identity leads to a perceived choice between extreme cross-Strait economic policies, with those holding a strong sense of Taiwanese national identity favoring highly restrictive policies toward Mainland China and those with a strong sense of Chinese identity advocating more liberal policies. Consensus Over Identity, 2006-2009 (Second Period) Over time, the intensity of the debate on national identity declined as the definition of Taiwanese identity became less ethnically based and more inclusive and as a consensus emerged on the composition and values of the community. Many who had identified themselves as Chinese and who hoped that China and Taiwan would unify under Nationalist rule felt disillusioned after the opening of cross-Strait relations revealed the viability of the Mainland political and economic system and the differences in lifestyle and values across the Taiwan Strait. And with democratization on Taiwan, many Taiwanese who had previously defined their identity ethnically began to accept a more inclusive definition that incorporated all residents of Taiwan. As a result, the political parties converged on this emerging mainstream view of national identity, as is expected in a majoritarian representative system. As Anthony Downs has theorized, both parties in a two-party system [would] agree on any issues that a majority of citizens strongly favor.95 (1957, 297) Although the Taiwanese developed a greater consensus on their national identity, they did not create a consensus on their cross-Strait economic policy. This became obvious in the run-up to 2008 presidential election, where both candidates endorsed a common New Taiwanese identity but differentiated themselves on the economic policies they believed would strengthen Taiwans domestic economic performance and bolster its international position. But although no consensus on cross-Strait economic policy was reached, we can hypothesize that the growing consensus on identity would mean that the debate would become less consummatory and more instrumental or, in other words, that the later episodes differ from the earlier ones in the following ways: 2. As a consensus on identity is forged, the range of views of economic policies narrows and moves towards the center. 3. The narrowing of the spectrum of policy options eliminates the extremes, but does not produce a consensus on the remaining options. In short, these two hypotheses suggest that while the distribution of opinion on identity has become unimodal, the distribution of opinion on policy has remained bimodal, but within a narrower range. The growing consensus on national identity, we hypothesize, nearly eliminated support for policy options that entailed unfettered economic integration with China, because those options might jeopardize Taiwans security. The emerging consensus on identity also reduced support for highly restrictive cross-Strait economic policies that would reduce Taiwans competitiveness in the global market. How was the debate over national identity reflected in an alternation between extreme cross-Strait economic policies? Why did a growing consensus on national identity not produce a similar consensus on economic policies? But
Some characterized this as moving the center on identity from right to left, although such a description again wrongly associates national identity with FNP and mis-characterizes Taiwanese national identity.
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why did that consensus lead to a narrowing of the spectrum of opinion on Taiwans cross-Strait economic policies? These are the questions that an in-depth examination into the four episodes in Chapters Four through Seven seeks to answer.

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Chapter Four No Haste: The 1996 National Development Conference

On March 23, 1996, the Taiwanese went to the polls to vote for their president for the first time. They voted overwhelmingly in favor of the incumbent, President Lee Teng-hui, and his running mate, Premier Lien Chan. With 54.0% of the vote in a four-way election against the DPPs Peng Ming-min and Frank Hsieh (21.2%), the New Partys Lin Yang-kang and Hau Pei-tsun (14.9%), and independents Chen Li-an and Wang Ching-feng (10.0%), Lee Teng-hui knew winning the election was just the beginning of the challenge of formulating a coherent cross-Strait policy. Tension with China was at an all-time high, and the KMTs base was increasingly weakening. Lee set about immediately to consolidate his leadership by bringing together the increasingly divergent interests of the society in a process that would consider, and hopefully address, a wide range of critically important national issues. On the international front, Lee Teng-hui had been dealing with China politically and economically ever since he became president in 1988, and the interaction intensified with the Koo-Wang talks in 1993, the first semi-official cross-Strait meeting since the end of the civil war in 1949.96 But common ground with China appeared elusive. Concerned about Taiwans international isolation as well as its economic marginalization, Lee began to be proactive on the diplomatic front by reaching out to countries with which Taiwan did not have diplomatic relations, including the U.S., which angered China by violating Beijings version of the one China principle. Ahead of the 1995 legislative elections and the 1996 presidential elections, China launched two rounds of missile tests in an attempt to discourage voters from supporting pro-independence candidates. The tests shocked Taiwan and the world. More importantly, they led to significant changes in national identity on Taiwan, and to the adoption of more restrictive cross-Strait economic policies. Having been president since Chiang Ching-kuos death in 1988, Lee was an agricultural economist who viewed economic policies strategically. He first rolled out a go south policy in 1994 to steer investments and trade away from China, then aggressively prohibited large-scale investments in China with the 1996 no haste policy. The ROC constitution was being amended to give the president more power to make decisions on cross-Strait issues and on military matters. The Legislative Yuan had the power to veto the budget and hence had leverage over all the other branches of government, but the KMT continued to have a slight majority in the legislature during this period. Lee was not eligible to run for re-election in 2000 and was not therefore under any electoral pressure after May 1996. But he did have the responsibility of ensuring that KMT candidates won the ensuing legislative, mayoral and local elections including the next presidency.

Given no recognition by either country of the other government, the meetings were not government-to-government but representative-to-representative, with C.F. Koo representing Taiwan and Wang Daohan representing China. There were a series of preparatory meetings for the 1993 Koo-Wang meeting in Singapore. For details, see the chronology at: http://www.mac.gov.tw/lp.asp?CtNode=6605&CtUnit=4589&BaseDSD=7&mp=3 (Last accessed on Feb 28, 2010).

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Pluralism in a newly democratized Taiwan had begun to manifest itself with the formation of new political parties and interest groups. The New Party (NP) split off from the KMT in 1993 and enjoyed considerable success in the legislative election in December 1995, leaving the KMT with only a slim majority in the Legislative Yuan. The Taiwan Independence Party (TAIP), consisting of the most independence-minded members of the DPP, splintered off in 1996 to protest against the DPPs willingness to cooperate on domestic reforms with the pro-unification NP. Lee sought to consolidate power within the KMT by creating a mainstream loyal to him as he faced international economic and political pressure. He did this by convening a National Development Conference (NDC) in 1996, after his reelection, in order to address a wide range of economic and political issues, including Taiwans economic policy toward China. Economic Environment The general economic condition of Taiwan was manageable in the early 1990s but turned sluggish by the mid-1990s. Economic interdependence between Taiwan and China was growing, but was still relatively immaterial to many Taiwanese industries. Taiwans economy had diversified into China, but the expansion was based on manufacturers exploiting Chinas lower cost basis and increasing their profit margin for exports, not on exploring the Chinese domestic market or investing in state-of-the-art plants for long-term growth. As a result, most people did not attribute Taiwans economic malaise to economic interdependence with China. In fact, most people believed it was the missile crisis, not the Chinese economy, which caused the economic slump and the exodus of capital from Taiwan. Taiwans unemployment rate rose from 1.6% in 1994 to 2.6% in 1996, the highest in ten years. Export growth fell from 20.2% in 1994 to 3.7% in 1995 and 5.6% in 1996. Economic growth dropped from 7.6% in 1994, to 6.4% in 1995 and then 5.5% in 1996. In 1996, the government tried to stimulate the economy by cutting reserve requirements and discount rates, but the economy did not react in a significant way. The only consolation was that inflation was kept in check, with the CPI at 3.1% in 1996, the lowest in three years.97 Across the Strait, Chinas economy was growing reasonably rapidly in the mid-1990s, but had many problems that were not easily surmountable. At the end of 1994, two thirds of state-owned enterprises were losing money, and the renminbi had to be devalued by 60%, from 5.4 yuan to the U.S. dollar to 8.2 to the U.S. dollar, to deal with a persistent trade deficit. (Bachman 1995, 40-3) Although both Taiwan and China were experiencing some economic difficulties, the economic relationship on between the two sides of the Strait was relatively balanced and mutually beneficial. Taiwan had a considerable advantage in many areas, from manufacturing know-how to technology development, and enjoyed a healthy trade surplus because of its restrictions on imports from China. In the early days, Taiwanese entrepreneurs also found that their profits easily doubled with the relocation to China. (Perry 1993, 19) But although there were an estimated 100,000 Taishang in China in June 1996, employing more than seven million PRC workers,98 China was not the most important location for most companies production, nor was the Chinese market big compared to the overseas
For data, see relevant entries in the Taiwan Statistical Data Book 2009. Available at http://www.cepd.gov.tw/encontent/m1.aspx?sNo=0011995 (Last accessed on Feb 28, 2010). 98 , . China Times, Oct 30, 1996, p. 7.
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markets for Taiwanese goods. China relied on Taiwanese entrepreneurs for capital, technology and management know-how, and as a way of penetrating new markets abroad. The missile crisis of 1995-96 jolted the Taiwanese economy. In particular, markets reacted very negatively to the missile tests of March 1996, with a 15% drop in the stock market and a precipitous depreciation of the NTD, which stabilized only after a massive market intervention that drained Taiwans foreign exchange reserves by 9%. Trade and investment with China that had been steadily increasing since the early 1990s dropped suddenly in the summer of 1996. Some thought that the crisis signaled far more instability, and moved their capital offshore, creating a serious capital crisis. Even the vote of confidence by international investors as reflected by TWSEs inclusion in the Morgan Stanley Composite Index could not save the market in this deteriorating situation. The economic consequences of the missile crisis also had important implications for cross-Strait economic policy. Many Taiwanese became resentful of how China could instigate both capital flight and a drop in the stock market. There was a surge of support for restricting economic relations with China, with the aim of reducing Chinas leverage over Taiwan. Few saw how Taiwans economy, like the rest of Asia, was to be engulfed by the fast-growing Chinese economy with its vast supply of labor and a growing consumer market. It still seemed possible for Taiwan to keep its economic distance from China. The economists who had strong conviction that Taiwan needed China to maintain its economic growth found themselves in the minority. The China threat made security a paramount interest in everyones mind. A Developing Polity From the beginning of his second term in office in 1990, President Lee had shown his independence from the traditional KMT veterans. (Dickson and Chao 2002) As one of a handful of native Taiwanese in the party, Lee did not have a remarkable record as a mid-level bureaucrat and was never expected to become president. After receiving a Japanese colonial education, he entered the government and worked until he became eligible to further his study at Cornell University, earning a doctorate in agricultural economics.99 Extremely religious, Lee had aspired to become a Presbyterian minister at one point, and continued to have strong links to the church, known for its advocacy of Taiwan independence.100 General support for the KMT was declining, however. After the integrationists splintered off to form the NP in 1993, internal politics centered on the next presidential nomination, and no fewer than three different tickets came out of the KMT: Lee Teng-hui-Lien Chan, Lin Yang-kang-Hau Pei-tsun and Chen Lu-an-Wang Ching-feng. In addition to this political infighting, the KMT was also weakened by its Black Gold image, as many party members were linked to

For details of his background, see Chan et al. (1994); T.H. Lee (2001); Wakabayashi (1998); Chou (2001). 100 See most recent political declaration of the church in Taiwan, PCT Symposium on the Future of Taiwan, July 23, 2009, available at: http://www.pct.org.tw/english/enNews_pct.htm?strBlockID=B00176&strContentID=C200907200 0002&strCTID=&strDesc=Y&strPub=&strASP=enNews_pct (Last accessed on Feb 28, 2010).

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corruption and organized crime. Crime was on the rise and several high-profile murders made people angry.101 The KMT was seriously challenged for the first time in the December 1995 Legislative Yuan elections, where it won only 46% of the popular vote, the first time ever that its vote count had fallen below 50%. In the concurrent National Assembly election, the KMT also received slightly less than 50% of popular vote, which was equally disappointing. In March 1996, Lee Teng-hui won the presidential election by 54% of the divided field a strong plurality but not a decisive majority. The KMTs loss of power was evident in its difficulty in passing the budget bill in the summer of 1996. The budget for state enterprises also stalled in the legislature throughout 1997. The cabinet was approved by the Legislative Yuan, but only with plenty of dissenting voices, and Lien Chan almost could not be confirmed as premier (a position he held in addition to the vice presidency). The constitution had to be interpreted creatively to break the deadlock, a theme that repeated itself in 2000-2001 during the Fourth Nuclear Plant Crisis. Amidst this unprecedentedly complex political landscape, Lee sought to consolidate support within the KMT as well as from other political parties. Part of Lees strategy in this regard was to amend the constitution to broaden the authority of the president versus the legislators.102 The existing constitution was unclear as to whether executive power resided with the president or the prime minister, and whether the prime minister was principally responsible to the president or the legislature.103 By increasing presidential power, Lee could also achieve a more personal objective of weakening the position of his principal political rival, Taiwan Governor James Soong. Soong became the first and only popularly elected governor of Taiwan Province after the first direct election for the post was held in December 1994. Soong was very popular and, by being governor, held a mandate from over two thirds of the population. This favored him as compared to the president, who was not directly elected until 1996. In addition, the governor could direct substantial resources from banks to the infrastructure projects he favored. Soong was therefore a contender for the first direct presidential elections scheduled for 1996. In addition to seeking constitutional reform, Lee also charted a new course for Taiwans foreign economic relations and, he hoped, Taiwans foreign policy more generally. During the early nineties, President Lee focused his efforts on convincing Taiwanese to reinvest domestically and not relocate to cheaper locations, whether Southeast Asia or China. As it became obvious that Taiwanese manufacturers could not remain competitive unless they found lower cost production centers, Lee switched course somewhat, determined to promote the liberalization of foreign economic policy and the diversification of Taiwans economic base, but also to contain the China Threat. (Chan et al. 1994, 67-72) On July 1, 1993, the government rolled out its Economic Strategy for
This is in reference to, among others, the famous kidnap and subsequent murder of the daughter of Pai Ping-ping, a famous TV personality. 102 The irony is that the general concern then was to prevent a deadlock if the KMT were to lose control of the legislature. The majority of KMT members wanted to enhance the presidents role. 103 I want to thank Yang Hsiou-hui, Secretary of the Office of the Deputy Chairman of the Control Yuan, for a better understanding of the changing complexity of the changing relationship among the five branches of government for these four episodes.
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Revitalization, aimed in part at drawing investments to Taiwan as an AsiaPacific Regional Operations Center (APROC).104 The Ministry of Economic Affairs (MOEA) then followed up with a go south policy (hereafter Go South) in the fall in an attempt to encourage Taiwanese businesses to invest in countries in the Association of Southeast Asian Nations (ASEAN), especially Vietnam, Indonesia and the Philippines, to replace Hong Kong prior to its handover to China in 1997. (Chan et al. 1994, 74-81) The Go South policy was summarized in the guideline named, To Strengthen Economic and Trade Relations with Southeast Asia and Australia, New Zealand Area Guideline. (Luo 2009, 60) In February 1994, Lee launched what was known as vacation diplomacy, partially to formalize the Go South policy, but also to reach out to Central and South America and Africa diplomatically.105 Over the Chinese New Year holiday, Lee and his wife visited the Philippines, Indonesia and Thailand, nominally for vacation, but actually to promote their economic relations with Taiwan. Upon his return, he declared that it was time for the Taiwanese to go out and let the world know of the existence of ROC on Taiwan. (Wakabayashi 1998, 240-1) In May of the same year, Lee visited Nicaragua, Swaziland, and attended Nelson Mandelas presidential inauguration in South Africa. While en route to Central America, Lees chartered plane refueled in Honolulu, but Lee was not allowed to leave the airport, therefore giving Lee a sense of grievance toward the U.S. The incident also gave the American Congress a reason to press the Clinton Administration to give Lee a visa to visit the U.S. the following year. Lees efforts to promote Taiwanese investment in Southeast Asia were initially successful. 70% of cumulative investments in Southeast Asia by mid1995 had been made in the year after the policy was announced. By June 1995, FDI in Southeast Asia had reached $24.7 billion in six countries in 4,038 projects, compared with just over $24 billion in China spread over 27,000 projects. Government policies clearly had influenced the location of the largest investments. (Sheng 2001, 102) Taiwans disappointment lay in how little political spillover Taiwan enjoyed from the growth of its economic relations with the ASEAN countries. Taiwan was not able to enter into any security dialogues, establish diplomatic relations, or sign bilateral free trade agreements (FTAs) with these partners. (Luo 2009, 60-1) Moreover, the 1997 AFC hit Southeast Asia far harder than it hit China and Taiwan, which redirected further expansion of Taiwanese overseas investment back to the Mainland. Cross-Strait Policy Until Lee convened the NDC, Taiwans cross-Strait economic policies had been ad hoc responses to a series of Chinese initiatives. China had begun its economic reform program and its Open Door policy in 1978. (H.K. Lin 2004, 217-9) Some of Chinas new economic policies were specifically directed at expanding economic ties with Taiwan as a way of promoting political integration. In 1979, Beijing published a Declaration to Taiwanese Compatriots suggesting increased interaction and communication, and in May of same year, promulgated the Temporary Regulations for Taiwanese Trade to promote trade with Taiwan. A decade later, with substantial amounts of Taiwanese capital already invested in
Many of the governments propaganda remain available online, for example, APROC page (updated as of 2001) remains on the website of the Taipei Economic and Cultural Office of Australia available at http://www.teco.org.au/eaproc.htm (Last accessed on Feb 28, 2010). 105 More than $15 billion of investments were made during Lees trip in early 1994.
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coastal areas, China tried to increase Taiwanese investment by issuing the July 1988 Regulations on Incentives for Taiwanese Compatriots Investments. In addition, China also directed a series of unification messages at Taiwan, all reflecting a policy of peaceful unification without renouncing the potential use of force. In 1982, Deng Xiaoping created the one country two system concept for reestablishing Chinese sovereignty over Hong Kong and Macau. Deng later said that the same concept could be applied to Taiwan, and in October 1987 Beijing formally declared that the one country two system formula could be used to solve the Taiwan Problem. At first, Taiwan had responded to the Chinese initiatives with a policy of no contact, no negotiation, and no compromise. But the pressure for increasing economic relations with China was too strong and exports to China soared. Finally, in 1987, Taiwan announced that 29 agricultural and industrial products could be imported from China, and that Taiwanese could travel to China to visit their relatives. In October 1990, the Regulations on Indirect Investment or Technology Cooperation towards Mainland China were announced, which allowed indirect investments in China through a third country by application. Only projects in a list of positive categories were allowed, with the underlying principle that such investments would not harm national economic security or hurt Taiwans domestic economy. But Taiwan needed more than a series of ad hoc responses. In July 1988, therefore, the KMT announced an overall guidance for its Mainland China policy, summarized in the four adjectives social, indirect, gradual, and safe. On October 7, 1990, President Lee gathered all the important political parties and societal groups at the Presidential Office and established a National Unification Council (NUC), charged with drafting a set of National Unification Guidelines. (NUG) The Legislative Yuan then approved, on January 18, 1991, the establishment of the Mainland Affairs Council (MAC). From then on, NUG became the highest guiding principle, and the MAC was the chief coordinator to plan and execute Mainland policy.106 As Taiwans Mainland investment projects became bigger and more extensive, in March 1993 the government approved a new set of regulations that finally allowed direct investment in China, but only through companies in a third location. Projects were categorized as allowed, prohibited, or considered on a case-by-case basis. In conjunction with Taiwans plan to promote APROC in 1994, the range of permitted import items was widened, the number of allowed investments was increased, and the application process for investments in China was streamlined The government then formally stated that economic and trade relations would be the crux of cross-Strait relations. But the 1995 missile crisis caused a fundamental reexamination of Taiwans cross-Strait economic policies. The government began to be stricter in approving investment policies on the Mainland. At about the same time, a negative list of banned imports was drawn up. Three more restrictive principles were established to guide cross-Strait relations: first, because China continued to be hostile towards Taiwan, cross-Strait economic relations would have to consider
See details of the guidelines titled Guidelines for National Unification, http://www.mac.gov.tw/ct.asp?xItem=68107&ctNode=5910&mp=3&xq_xCat=1991 (Last accessed on Feb 28, 2010).
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political risks; second, cross-Strait economic ties would have to constitute a mutually beneficial relationship; and third, Taiwan should develop a diversified global economic strategy in which cross-Strait economic relations should only be one part. This laid the groundwork for a more comprehensive reconsideration of cross-Strait economic policies at the NDC that would come to be known as no haste. China, the U.S. and Taiwan Beijings Taiwan Policy After the death of Chiang Ching-kuo, China had been treading carefully to find a strategy for talking with his successor, replacing the secret communication channels that had previously existed between Chiang and the PRC leadership with a new set of conduits trusted by Lee Teng-hui. (T.H. Lee 2001) The most important step in this direction was the establishment of two semi-official negotiating bodies: the Straits Exchange Foundation (SEF) in Taiwan and the Association for Relations across the Taiwan Strait (ARATS) in China. The first formal cross-Strait negotiations were launched in Singapore between the heads of the two organizations, Koo Chen-fu of the SEF and Wang Daohan of ARATS. The Koo-Wang talks had both political and economic dimensions. The political discussions focused on Chinas demand that Taiwan recommit itself to the one China principle, which implied both that Taiwan would eventually unify with the Mainland, and that in the meantime the PRC was the sole legitimate government of China. Having just adopted the NUG, Taiwan could commit to some form of one China statement, but insisted on making clear that its version of one China was not the same as the PRCs, using the formula one China, each side with its own interpretation. China was extremely exacerbated by what it regarded as Taiwans intransigent attitude, interpreting it as reflecting an increasing trend towards autonomy that China was determined to stem at any cost. Chinas nervousness on this point soon led to a dangerous chain reaction. Beijing had reasons to be apprehensive. China had been concerned about democratization in Taiwan all along, and the legalization of the DPP and the declining position of the KMT seemed to be confirming their worst fears. With the death of Chiang Ching-kuo, the Chinese Communist Party (CCP) had lost its mechanisms for communicating with Taiwanese leaders. And Lee Teng-hui did not appear to be a man with whom it would be easy to deal. China first took notice of Lees penchant for provocation in an exclusive interview he gave to Japanese writer Ryotaro Shiba in May 1994 in which he discussed a separate Taiwanese identity.107 (Wakabayashi1998, 229) This built on Lees earlier slogans of putting Taiwan First and his call for a Taiwanese Common Community.108 At about the same time, when 24 Taiwanese tourists were murdered on a lake in Zhejiang, Lee made denigrating remarks about China and its leadership which irked the Chinese government further. China started to be concerned that its differences with Lee were fundamental, not just a matter of negotiating details. As a former Communist and a long-time KMT veteran, Lee initially appeared to share the same political outlook as Chiang Ching-kuo when he first assumed the presidency. But as
This interview by Ryotaro Shiba first appeared in Shokan Asahi (May 6 and 13, 1994). For details, see , October 17, 2001, http://www.npf.org.tw/post/1/779 (Last accessed on Feb 28, 2010).
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Taiwan became democratic and interaction with China increased, he talked openly about the need for Taiwanese to discuss their national identity, warning that the KMTs version of national identity Taiwanese as being Chinese was not representative of the will of the people.109 Beijing soon realized that the historical power struggle between the KMT and the CCP divide was a relatively simple problem compared with perhaps more fundamental differences in national identity that were now opening up between China and Taiwan. What was unclear to China was whether Lee really did represent the majority of the people, as he claimed, or was merely directing his own show, which could more easily be stopped.110 At first, China took a conciliatory approach. In January 1995, Jiang Zemin issued his eight-point olive branch, calling for the termination of crossStrait hostilities. The highlight was a plea for Taiwan to unify with China under the Hong Kong model of one country, two systems. In return, Lee responded with a six-point statement in April 1995, also agreeing to unification but only after the two sides shared the same democratic system. This condition was completely unacceptable to the CCP leadership. And, even worse, Lees rejection of what Beijing regarded as a conciliatory approach convinced Chinese hardliners that it was now time to show strength and determination. During his speech at Cornell University speech in May 1995, to be discussed in greater detail below, Lee made a plea for respect for Taiwans democratic values, reminding China of Taiwans intention to remain separate until the Mainland democratized. The internal politics of China did not allow the CCP leaders to stand idly by. Xinhua News Agency and the Peoples Daily published eight joint editorials accusing Lee of being a secessionist. (Tien 1996, 36) China also conducted a series of missile tests and military exercises in the Taiwan Strait in late 1995 and 1996 as a way of warning Taiwan against the consequences of Lees secessionist strategy. Chinas goals were to deter Lee from making any more statements embodying Taiwanese nationalism, to protest against Lees visit to the U.S., and to influence the outcomes of the legislative and presidential elections, in particular to reduce popular support for both Lee and the DPP. (Goldstein 1997, 42) But subsequent political trends on Taiwan suggested that separatist sentiments remained on the rise. The effects of the missile tests on Taiwans domestic politics were the opposite of what Beijing intended. Despite the threeway split within the KMT, Lee still won reelection, although with only a relatively small majority. The following year, the DPP defeated the KMT and won the local elections including the mayoral election in Taipei for the first time in history. This sudden change threw China completely off guard. Beijing broadened its stance from simply attacking Lee Teng-hui to actively working against the DPP, which now appeared to be the bigger evil.

As Wakabayashi (1998, 230-232) wrote, what Lee Teng-hui said to the Japanese media in 1994 largely reflected what the majority of native Taiwanese believed, especially in regard to the history of Taiwan. Lee said in the interview that Taiwans history must be understood from the time it was ceded to Japan in 1895, which is very different from the KMTs insistence that Taiwans history should be understood as starting only in 1949 when the Nationalist government moved to Taiwan. Wakabayashi wrote that Lees views were not unusual compared to his peers. 110 Many have described President Lee as creating the Taiwanese national identity problem, with the implication that it was against the will of the people, as described by J. Kuo (2002, 216).

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Moreover, from Chinas point of view, the crisis in the Taiwan Strait also produced negative consequences on the international front. Taiwan was able to make advanced weapons purchases from both France and the U.S. Even worse, Japan agreed to include Taiwan in the areas adjacent to Japan which the U.S. and Japan would jointly defend under the U.S.-Japan Mutual Security Treaty. China tried but failed to force Japan to not agree to this inclusion, out of fear that it would embolden Taiwans separatist movement. This was all happening while Hong Kong was preparing to revert back to China in July 1997, with Macau following suit in 1999. China had hoped that the twin reversions would help market the one country two system in Taiwan as well, but it was being rebuffed at every turn. On the international front, China never let up the pressure to isolate Taiwan diplomatically. Lee had launched a policy of flexible diplomacy, implying that Taiwan would be happy to establish diplomatic relations with countries that also recognized China. But China would not allow it. As early as November 1993, China had already rejected Lees participation in the first APEC summit meeting held in Seattle.111 And China easily defeated Taiwans annual bids for UN membership that started in 1993. After the reversion of Hong Kong to Chinese sovereignty, China downgraded to trade offices the consulates that the Dominican Republic, Panama, Tonga, and Belize had established in Hong Kong, on the grounds that they maintained diplomatic relations with Taipei rather than Beijing. Three other countries, Senegal, Saint Christopher and Nevis and Paraguay, were forced to withdraw their consulates from Hong Kong altogether. Then, as a permanent member of the UN Security Council, China vetoed the UN from sending peacekeeping forces to Guatemala because Guatemala still recognized Taiwan. It was also able to block Lees proposal to hold a Universal Congress on the Panama Canal. Overall, China was successful in reducing the number of countries maintaining diplomatic relations with Taiwan from thirty to twenty-six. The biggest prize was gaining diplomatic recognition from South Africa, originally one of Taiwans largest diplomatic allies. Although China generally took a tough approach to the Taiwan issue after 1995, there were a few conciliatory gestures aimed at reducing Lees domestic and international support. After the CCPs Congress of 1997, Jiang Zemin actively sought a strategic partnership with the United States as an additional way of thwarting the perceived trend towards Taiwan independence. Beijing also provided more incentives for Taiwanese businesses to defy the Taiwan governments restrictive policies on cross-Strait economic relations. It began to cultivate ties with a wider range of Taiwanese businessmen, from deep blue groups to green groups such as Formosa Plastics and the President Group. The Chinese government even gave approval to the Evergreen Groups proposal to Japan to establish airline services to Osaka. Washingtons Taiwan Policy The U.S. played an unusually important role in the cross-Strait economic policies during this episode. American policy toward China gradually moved
For an understanding of how China valued defeating any formal Taiwanese representation in APEC, see the editorial in Peoples Daily, Taiwan Plays Little Tricks in APEC History, August 3, 2001, available at http://english.peopledaily.com.cn/english/200108/02/eng20010802_76360.html (Last accessed on Feb 28, 2010).
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from confrontation to engagement between 1994 and 1997, gradually ending the estrangement caused by the Tiananmen Crisis of 1989. While China was learning to contend with an unpredictable landscape in Taiwanese domestic politics, the U.S. was also coming to terms with its need to balance its security commitment to Taiwan with its growing economic and geopolitical interests in China. Although in 1994 the relationship between Beijing and Washington was still highly contentious, the rise of the Chinese economy was beginning to have its impact. Clintons national security adviser, secretary of state and assistant secretary for East Asian Affairs all argued for balancing economic interest with other values in Sino-U.S. relations. Some thought that Taiwan-U.S. relations were improving slightly with the conclusion of the Taiwan Policy Review, a comprehensive overview of Americas policies toward Taiwan, especially those governing the political interaction between the two governments. (Pollack 1996, 4) Under the terms of this policy review, in 1995, the State Department initially had reassured the Chinese it would not allow Lee to visit the U.S., even in transit. After the Honolulu stopover incident in 1994 aroused strong protests in Congress, however, Washington issued President Lee a visa to visit the United States to give a speech at his alma mater, Cornell University. Clinton decided to issue the visa after the House voted 396-0 in favor and the Senate 97-1 in favor of doing so. Clinton reportedly was also irritated with the Chinese position on this issue and thought that offering Lee a visa was the honorable thing to do. (Tucker 2009, 210) On May 18, 1995, Lee finally visited the U.S., representing Taiwans most important diplomatic achievement since the passage of the Taiwan Relations Act in 1979. But despite this victory, in his memoirs Lee described the relationship with the U.S. as extremely difficult, reflecting the problems all subsequent Taiwanese presidents would have with the U.S. government. (Chou 2001, 311) Beijing cancelled several official visits with the U.S. as a consequence of the visa flap and accused the U.S. of supporting Lees secessionist moves as part of a containment policy against China. Clinton sought to calm China down with a letter sent in August 1995 promising not to host Lee frequently in the future, but China did not believe the U.S. was determined enough to stem the trend toward Taiwan independence. After the series of Chinese military exercises in the summer and autumn of 1995, the U.S. sent the aircraft carrier USS Nimitz and its battle group through the Taiwan Strait en route to Hong Kong as a show of force on December 19, 1995. After Beijings massive military exercises with 150,000 troops in late February and March 1996, China fired M-9 missiles into international shipping lanes near Kaohsiung and Keelung, directly challenging Washingtons defense commitment to Taiwan. Secretary of Defense William Perry told Liu Huaqiu, director of the Foreign Affairs Office of Chinas State Council, that such action against Taiwan was a threat to American interests, implying the use of force by the U.S. in response. When the U.S. finally announced it would once again dispatch the Nimitz from the Persian Gulf, this time accompanied by a second battle group led by the USS Independence from Japan, China and Taiwan were both surprised by the strong deployment. The Chinese launched no further missile after this, but the U.S.-China-Taiwan relationship had once again become militarized for the first time since the 1970s. (Tucker 2009, 223)

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National Development Conference While the president had extraordinary constitutional power to make decisions on cross-Strait policies, Lee realized he still needed to co-opt the DPP, which controlled 30% of the still important National Assembly, if he were to pass the constitutional amendments he envisioned. But how best to do so? Lee first consulted with his closest advisors, including Liu Tai-ying, the treasurer of KMT, and Tien Hung-mao of the Institute of National Policy Research (INPR).112 In fact, this inner circle of Lees was so small that many of his policy announcements surprised his Cabinet members because they were issued without any warning. Lee first discussed with his advisors how government policy must be rooted in Taiwans interests, as opposed to the broader interests of China, and then turned to the question of cross-Strait relations. (Myers, Chao and Kuo 2002, 78) Forewarnings of Lees policy thinking were sprinkled throughout the publications of the INPR.113 In the August 6 issue of the INPRs bi-weekly journal, signs of what would soon be called the no haste policy were clear as it recommended that Taiwan should reduce its dependence on Chinese markets.114 Reliance on China would give China too much leverage especially dangerous at a time when the Chinese government was very becoming hard-handed with Taiwan. Although MOEA, the Council for Economic Planning and Development (CEPD), and Premier Lien Chan were all pushing for a more liberal cross-Strait economic policy, Lee decided to move in the opposite direction, announcing a more restrictive policy, again without much prior consultation. At a National Entrepreneurs Conference on September 14, 1996, President Lee declared that Taiwan should not be hasty, but should be patient in its economic relations with China (thus providing the label for what came to be known as the No Haste policy). Initially, he had been open-minded about investment in China, even encouraging it in order to establish Taiwan as an APROC. As late as 1995, in fact, Lee had talked about how Taiwan was the perfect base from which MNCs could expand into China, and how Taipei could become the center of a Greater Chinese economy. (Harding 1993) At this point, he had adopted a strategy of economic integration, not an isolationist one. But over time, Lees position began to change. In 1994, he attempted to steer investments away from China with his Go South policy, but was hesitant to use administrative measures to restrict them outright. Then, after Chinas missile tests, Lee decided that he must put a halt to the process of tying the two sides together economically, and found that there was widespread support for such attempts to ensure Taiwans economic and military security. After the September 14 announcement of his No Haste policy, Lee realized he needed to have a proper forum for the different parties and interest groups to approve this decision to restrict investments with China, and that this forum could also address his constitutional reform agenda. In terms of formal institutions, the alternative platforms for discussing cross-Strait policies would the NUC or the National Security Council (NSC), but these bodies excluded the DPP.
Kao Chen, Teng-hui turns to think-tank and scholars for advice, The Straits Times, Nov 9, 1996. 113 As an important architect of Lees policies, Tien Hung-maos overview of Taiwans democratic institutions in six perspectives can be found in Tien and Cheng (1999, 23-48). 114 Kao Chen, Teng-hui turns to think-tank and scholars for advice.
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Moreover, with independence as part of its charter, the DPP refused to join any council which had unification as its objective. And the NUC and NSC also were not appropriate bodies to discuss the broader constitutional issues that Lee wanted to raise. In 1995-96 there had been cross-party discussions on various issues, including membership in the WTO and cross-Strait economic policies, but they were limited to members within the system such as legislators and cabinet members. So Lee decided to call a NDC, a so-called intra-institutional meeting outside the existing institutional framework, similar to the 1990 National Affairs Conference (NAC) that had been held two years after Lee took over the Presidency. The NAC had been Lees first attempt to bring diverging views together to restructure the political system, and had been relatively successful. Many cynics who thought Lee was making decisions unilaterally branded the NDC as a way to bring in opposition groups by giving them a minimal position in the process. They viewed the process as rubber stamping Lees new policies. But the KMT, NP and DPP all stood to gain from such a national forum. The NP had won 13 additional legislative seats in the 1995 elections but was afraid to appear to be in favor of unification after the second round of missile tests. The DPP could ill afford to be blamed for instigating the two rounds of missile crisis because of its pro-independence rhetoric. Furthermore, the DPP realized it could not rely only on pro-independence constituents and needed to moderate its policies to gain support from the centrist voters. And the KMT needed to consolidate its position before the next legislative elections, where it was predicted to lose control. All parties therefore saw an advantage in a conference intended to form a consensus on cross-Strait economic policy. (Y. H. Chu 1999, 158) Some international observers wrote the following on the eve of the NDC: To the elites it became apparent that a push for full independence would clearly risk war with China. They also realized that reunification with a bullying China had lost whatever appeal it once had among voters. At base, the crisis made it urgent for elites to seek a way out of the national identity impasse, something that had eluded the NAC but was crucial to Taiwans political stability and democratic consolidation (Higley, Huang and Lin 1998). The meeting included 170 participants from the government, the four political parties, academia, and the private sector. Leading business figures such as Morris Chang of Taiwan Semiconductor Manufacturing Company (TSMC) and Stan Shih of Acer participated as early as the preparatory sessions. CEOs of state owned enterprises were also important participants because the NDC was slated to discuss proposals to privatize their firms. The attitudes of the two growing political parties, the NP and the DPP, were essential to the success of the NDC. Agreeing to the cross-Strait policies Lee recommended, the NP participated in the preparatory meetings but walked out after only one day of the conference because of the changes Lee proposed to the constitution. Lee had discussed these changes in an internal KMT meeting on December 16, 1996, but they were revealed to non-KMT members only at the beginning of the NDC. Lee Teng-hui wanted to appoint his premier without Legislative Yuans approval, although he still allowed the legislature the subsequent power to pass a vote of no confidence in the premier, which would

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still complicate any controversial appointment.115 Lee Teng-hui also wanted to have the power to dissolve the Legislative Yuan. As important as enhancing the presidents power to appoint the premier was Lees desire to abolish the provincial government, and thus the position of provincial governor as noted above a position so powerful that it rivaled the president. The NP members saw these proposals as an attempted aggrandizement of the Presidency, which they found alarming. The DPP, which had been included in such nation-wide policy meetings only since the 1990 NAC, began to explore formalizing its China policy on the eve of this conference. But when it held a meeting to discuss the issue just days before the NDC convened, factional divisions erupted. The far-left members of the DPP members were shocked to learn of its newly returned Chairman Hsu Hsin-liangs pragmatic approach on policy toward China, and that the DDP might join a coalition with the KMT and even the NP in formulating a new cross-Strait economic policy. Hsu even argued that, in light of the DPPs loss in the presidential elections, a KMT-DPP alliance would be in DPPs interest. This prompted more dissent. These divisions were so deep that the extreme proponents of independence split off to form the TAIP. (T.Y. Wang 2000) The division between the mainstream and the extreme factions of the DPP continue to complicate the DPPs attempts to develop its China policy. The party did not have a formal discussion about China policy until February 1998 or a China policy white paper until November 1999.116 Its ambiguous and outdated China policy had hurt DPP among the electorate. (Liu 1998, 194-226) But the departure of some DPP extremists to the TAIP helped the moderate factions of the DPP to work more closely with others during the NDC. In the end, the NDC adopted some major political reforms. As Lee had proposed, the president could appoint a premier without legislative approval and gained the authority to dissolve the Legislative Yuan under certain conditions. But the legislators retained the right to pass a no-confidence vote that would replace the premier. The Legislative Yuan was expanded to more than 200 members, the term of office was increased from three to four years, and the electoral system of SNTV was replaced by a combination of single-seat districts and nationwide proportional representation. Abolishing the provincial government and the provincial assembly was so controversial, however, that these proposals were postponed until the National Assembly in May 1997. After a period of high profile and acrimonious public debate, the National Assembly agreed to eliminate the Taiwan provincial government. But James Soong did not even wait for this final decision. A week after the close of the NDC, the disappointed governor resigned and began to plot his own path, which led to his running for presidency in 2000.

Any appointment could still be overturned with a two-thirds no confidence vote during this time. 116 For history of the DPPs position on cross-Strait policies, see its official website at: http://www.dpp.org.tw/history.php?sub_menu=89 (Last accessed on Feb 28, 2010). And for details of the 1998 China Policy Symposium, see Democratic Progressive Party China Policy Symposium, available at: http://taiwan.yam.org.tw/china_policy/e_bg.htm and http://taiwan.yam.org.tw/china_policy/; for the policy white paper in 1999, see White Paper on China Policy for the 21st Century, November 30, 1999, http://www.taiwandocuments.org/dpp01.htm (Last accessed on Feb 28, 2010).

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With so much of the conference focused on the political restructuring, cross-Strait policies were sidelined. But to the extent that they were discussed at the NDC, they enjoyed a high level of agreement. Even though the NP walked out of the NDC, the NP had already endorsed the consensus on cross-Strait issues. As already noted, the NP was in principle pro-unification and pro-liberalization, but as elected officials, they could not accept further Chinese encroachments on Taiwans security or tolerate to Beijings rebuke of Taiwans democratic institutions from which the NPs legislators derived their power. For its part, the majority of the DPP was supportive of a restrictive policy towards China, and during this conference, it was happy to consent to the details as proposed by the KMT in order to have its proposals on constitutional amendment be considered. The formal sessions of the NDC were held over five days, from December 23-27, 1996, and were divided into three panels. The first panel discussed the proposals on constitutional reform, as described above. The second panel on economic development generated 134 specific measures broadly divided into three strategies: accelerate economic liberalization and globalization; enhance the utilization of Taiwans resources; and to increase the efficiency of the government. There was little discussion of economic inequality, and welfare proposals were discussed but not emphasized. The broad goal was to raise overall international competitiveness and further national development. The third and least controversial panel was the one responsible for crossStrait policy, which reached consensus easily. While representatives were deeply divided about domestic political reforms, they had a high level of agreement that, in order to contain the threat from China, Taiwan must impose restrictions on cross-Strait economic policies. There was not a hint of opposition to Lee Tenghuis No Haste policy. The consensus reached at the NDC represented the unanimous prioritization of Taiwans national security over any other economic objective. Even before the opening of the NDC, the leaders of the KMT, DPP and NP had already agreed on important issues related to national identity. Everyone agreed that the ROC was a sovereign state, both sides of the Strait were equal political entities, Taiwan was not part of PRC, and admission to the UN should be pursued as a long-term goal. There was almost no discussion of the upcoming Hong Kong reversion to China under the one country two system formula, since everyone opposed such an outcome for Taiwan.117 Once the NDC convened, 36 points of consensus were reached on the details of cross-Strait relations, which became the guiding principles for the Taiwan government for the next five years.118 One key theme was what was later termed Formosa First, including the principles of upholding Taiwanese sovereignty, promoting the welfare of the Taiwanese people, and insisting on mutual respect from Mainland China. With regard to trade and investment policy with China, specific principles were laid out. Development of investment and trade relations with the Chinese Mainland should involve exceptional consideration of political risks. Accordingly, the pertinent policies must be
, China Times, December 11, 1996, p. 2. Consensus Formed at the National Development Conference on Cross-Strait Relations, December 28, 1996, http://www.mac.gov.tw/ct.asp?xItem=68108&CtNode=6619&mp=3 (Last accessed on Feb 28, 2010).
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gradually pursued in proper sequence under the premise of safeguarding ROC security and peace between the two sides. Liberalization and globalization should be hastened, but postal, transportation and commercial links with the Mainland should only be established through negotiation at an opportune time according to the principles of security and reciprocity. The government should map out policies in response to the new situation where both Taiwan and the Mainland were about to accede to the WTO. And large-scale Taiwan businesses should make a prudent assessment of investment opportunities on the Mainland and the government should set reasonable standards to govern them. The DPP and the NP pushed for Lee to set up a multi-party committee to oversee cross-Strait relations. The KMT opposed this proposal, on the grounds that the president had the power to determine cross-Strait policies. To President Lee, the consensus reached in the NDC was probably more than sufficient to satisfy the electorate that there had been inter-party consultation. Ultimately, however, it was agreed that a National Development Advisory Council should be set up to study cross-Strait ties as well as constitutional reform and domestic economic development. This would include all political parties and representatives of society, and would provide an alternative to the NUC, which was aimed to organize Taiwans takeover of China, an impractical and obsolete concept.119 Originally set up only as a coordinating unit to implement various laws related to Mainland China, the MACs leadership role was enhanced after the NDC. The MAC started having a role in deciding what was in the interest of Taiwans security and in setting the direction and pace of cross-Strait relations. Under the MACs leadership, MOEA then went ahead to detail the slowdown in westbound investment and the encouragement of southbound investment, based on the Formosa-first principle. The change in strategy was to focus on regulating large-scale projects and strategic investments in areas such as infrastructure and high technology. But while the government imposed strict restrictions in these areas, it began to relax regulations on commercial and technological exchanges in less sensitive areas. The MAC consolidated the NDCs 36 points of consensus on cross-Strait policy into a 29-point guideline. And by May 28, 1997, MOEA had published a new set of rules regulating Taiwanese enterprises investing in Mainland China.120 There had previously been three categories of investments in China the allowed category, the prohibited category and a category subject to government approval. Under the new law, 32 new industries were added to the prohibited category, including railroad and highway infrastructure, petrochemicals and hi-tech industries, and insurance and real estate. Furthermore, the upper limit for investment became more constrained. The limit was now scaled by the size of the company, such that the bigger the company, the lower the allowed percentage of net asset value (NAV) could be invested in China. For example, the largest public companies were limited to invest no more than 20% of the NAV of the company in China, and no project could exceed $50 million unless special
Ko Shu-ling and Charles Snyder, Chen says the NUC will cease, Taipei Times, February 28, 2006, http://www.taipeitimes.com/News/front/archives/2006/02/28/2003294988 (Last accessed on Feb 28, 2010). 120 Govt to implement new mland investment rules on July 1, Taiwan Economic News, June 11, 1997.
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approval was given. Finally, there were eleven benchmarks, linked to the specific industries and projects, for the proposals that required special approval. This last rule made the application process extremely onerous, especially for large corporations and listed companies. There were other related measures that followed the adoption of the No Haste policy. There was now a penalty for companies which failed to report investments on time, further restrictions on Taiwanese businessmen setting up investment companies in China, and rules that made investments in China approvable. The Ministry even sent people to check up on a few large corporations, as it did later with Formosa Plastics Zhangzhou infrastructure project, to set an example for Taiwanese companies. As a direct result, many Taiwanese companies planning infrastructure projects in China began to postpone the capital injection, and big projects were eventually called off to comply with the ban. By the following year, Taiwanese investments in Fujian had dropped 30%. Many thought the ban would be temporary. And, in fact, Vice President Lien Chan promised at the time that these restrictions were not meant to be permanent but were important as a strategy: If cross-Strait ties have further improved and the rights and interests of Taiwan investors in Mainland China have been further safeguarded, the policy can be adjusted, as it was intended as a strategy and not a forever unchanging principle.121 Taiwanese entrepreneurs would have been disappointed if they had known that the reversal of some of these decisions would take until 2001, and many of the important prohibited categories remained so even in 2009. Lee Teng-hui called the five-day conference the most successful in the history of Taiwan.122 This is little wonder since most believed that he got everything he aimed for: amending the constitution to enhance the office of the president, restructuring the government, restricting investment in China, and making the DPP an ally.123 Giving the DPP a role in government allowed Lee Teng-hui to secure support for expanding presidential power and eliminating both the Taiwan provincial government and the National Assembly.124 The importance of the consensus reached by the KMT and the DPP on Taiwans cross-Strait policy cannot be overestimated. As T.Y. Wang writes in his article, An Analysis of the Democratic Progressive Partys China Policy: The fact that Taiwans two largest political parties have converged from very different starting points to arrive at essentially the same policy towards China reveals that there is a strong consensus on the island as how to deal with cross-Strait relations. This consensus has recently been formulated as a series of Policies and Principles for Cross-Strait Interactions at the National Development Conference held in 1996 with a strong endorsement from leaders of both the KMT and the DPP. Taiwans next ruling party, be it the KMT or the DPP, will continue to pursue a
Taiwan presidential candidate Lien says no haste policy may be changed, BBC News Monitoring Asia Pacific, January 20, 2000. 122 Lee San Chouy, Taiwan President sets up 3 new advisory bodies, The Strait Times, December 29, 1996. 123 Kao Chen, Teng-hui Gains Upper Hand after Conference, but Irks Critics, The Strait Times, January 30, 1997. 124 Ibid.
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China policy that is based on the Taiwan Foremost principle aiming to safeguard the security and welfare of the 21 million-plus people of the Taiwan, Penghu, Kinmen [Quemoy] and Matsu areas. (T.Y. Wang 2000, 175) Public Response Even before the convening of the NDC, Lees more restrictive cross-Strait policies were reported to achieve widespread public support, partially reflecting the KMTs control over media. The day after Lee announced the No Haste policy, the front pages of all major newspapers reported the news favorably. The headline on the front page of the China Times on September 15 was Lee advises Taiwanese to be patient and not hasty because of the CCPs strategy of surrounding politics with economics and using the people to force the government.125 Polls showed that over half the people supported prudence in approving investments in China.126 An editorial in the China Times on October 12, 1996, quoted a poll that showed the KMT with a popularity of 42% compared to the DPPs 27% and the NPs 22%, and predicting great success with the KMTs strategy for the upcoming NDC.127 The main decisions taken by the participants in the NDC involved sweeping changes on how Taiwan was governed, not Taiwans policies toward Mainland China policies. The decision to adopt a more restrictive policy toward Taiwans economic ties with China was not especially controversial at the time, especially in light of the Chinese missile tests and military exercises. The main debate over those cross-Strait policies actually occurred after the conference, during the period of implementation and execution. As in later episodes, the role of public opinion was important in that the government sought to anticipate the views of the public, and made changes to adapt its policies to public opinion when feedback became available. Polls after the implementation of the No Haste policy showed the widespread fear of China. Results from 1997-1999, including polls conducted by the United Daily News and those commissioned by the KMT, the MAC, MOEA and the Foundation on International Cross-Strait Studies, showed people clamoring for more restriction.128 In fact, the MAC polls showed that support for even more restrictions than the No Haste policies imposed rose from 55% in February 1997 to nearly 62% in April 1998. With regards to infrastructure (such as power generation) and high technology (such as semiconductor fabrication), all the polls over these years showed support for complete restriction, reaching 69% in May 1997.129 Unlike the high degree of consensus in favor of the restriction of crossStrait economic relations, attitudes on national identity showed a high level of contestation. In polls conducted by universities and think tanks national identity was measured in two ways: political attitudes towards independence and unification (often referred to as FNP) and whether one considered oneself
, China Times, September 15, 1996, p. 1. , Central Daily News, May 7, 1997. 127 ? China Times, October 12, 1996, p. 3. 128 The polls are available at: http://www.mac.gov.tw/big5/mlpolicy/pos/indexb.htm (Last accessed on Aug 31, 2009). 129 The polls are available at: http://www.mac.gov.tw/big5/mlpolicy/pos/870911/86tab8.htm (Last accessed on Aug 31, 2009).
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Taiwanese, Taiwanese and Chinese, or Chinese. On these measures, Taiwanese were experiencing great disagreement. Trends in Core Political Attitudes Among Taiwanese as surveyed by the NCCU-ESC showed that in 1994, 1995, 1996 and mid-year 1997, there was increasing but still moderate support for autonomy, defined as including all those who chose the options of maintain the status quo and decide later, maintain the status quo indefinitely, maintain the status quo but move toward independence, and pursue independence immediately. By that definition, support for Taiwanese autonomy rose slightly, reaching the levels of 59%, 52%, 61%, and 63% in each of those four years. By the same token, those who were against an autonomous state, whether in the short term or long term, was still high, approximately 40% in these four years.130 A more nuanced Academia Sinica survey conducted in August 1995 asked respondents about the conditions under which they would choose future political outcomes. The poll corroborated the NCCU-ESC survey in showing an undecided attitude. It showed that 47% would support an independent Taiwan if PRC accepted it vs. 29% who would oppose it. 54% would favor unification with a democratic and prosperous China vs. 22% who would oppose it.131 A point worth noting in this episode was that the people were also very unattached to the political parties. Most claimed they were independent or did not respond when asked about political party affiliation, which may explain why the parties worked very hard to differentiate themselves on issue.132 Many reserved their judgment until later, to be based on Taiwans economic performance as well as the outcome of Taiwans negotiations with China. (Chao, Myers and Robinson 1997) On the explicit three-way national identity question, the surveys between 1994 and 1997 showed around 20% of people consistently thought they were Chinese. However, there was an increase in people who thought they were Taiwanese only, from 20% in 1994 to 25% in 1995 and 34% by June 1997. People who thought they were both Chinese and Taiwanese dropped slightly from 44% in 1994 to 42% in 1997, and with very few non-responsive.133 National identity was still highly contested and nothing was firmly concluded yet. Because there was so much controversy on domestic reforms, the controversial topic of identity was put aside with no policy directly addressing the issue. In hindsight, the NDC was the last show of government strength in forging political consensus and mobilizing public support, particularly in comparison to the 2001 and 2006 conferences that President Chen Shui-bian would organize. The DPP and the NP all issued public reports showing support for the NDC resolutions. Some foreign observers like James Robinson perceived it as a successful attempt to balance narrow interests and public benefits. (Chao, Myers and Robinson 1997, 681-682) In comparison to a number of countries in
The date quoted from NUUC-ESC in this study for national identity is based surveys conducted in June and December of every year from 1994 to 2009. Data from Election Study Center, NCCU, Important Political Attitude Trend Distribution, http://esc.nccu.edu.tw/english/modules/tinyd2/index.php?id=6 (Last accessed on Feb 28, 2010). 131 As conducted by Center for Survey Research, Academia Sinica. Details can be found at its website at: http://survey.sinica.edu.tw/. 132 People who claimed they were independent or no-response constituting 53%, 48%, 44%, 53% of the responses in 1994-1997 in the NCCU-ESC survey. 133 Data from Election Study Center, NCCU, Important Political Attitude Trend Distribution, http://esc.nccu.edu.tw/english/modules/tinyd2/index.php?id=6 (Last accessed on Feb 28, 2010).
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democratic transition with serious domestic issues, Higley, Huang and Lin thought the compromise reached between the KMT and the DPP (and the NP on cross-Strait issues) in the NDC was extraordinary: The emergence of a united political elite and a consolidated democratic regime has been singularly clear and dramatic in Taiwan. The main reason is the settlement that came out of the NAC and the NDC. In their careful preparation, the participation of opposing elite camps, their handling of core disputes, and the mutual concessions and agreed constitutional and policy changes that they produced, these two elite conclaves have been without equivalents in the rest of Asia. (Huang, Lin and Higley 1998, 163)134 Indeed, the policymaking process in 1996 was very different than in later episodes. Future turning points in cross-Strait relations were characterized by a divided government and a divided society: the legislature and executive branch were controlled by different parties, and the public increasingly found more channels to voice their opinion. This was the last time that a Taiwanese government could generate substantial consensus on economic policy toward the Mainland. Interestingly, that consensus could be forged despite the fact that there was still considerable disagreement over the definition of Taiwanese identity. The Four Tendencies Lee Teng-huis No Haste policy aroused surprisingly little public debate. In part, this was because the focus of the NDC had been on domestic political reform, rather than on cross-Strait relations. As The Far Eastern Economic Review reported on January 9, 1997, when the meeting was convened in May 1996, most expected a serious discussion about how to deal with the nationalist bullies in Beijing. Yet in the intervening months, the problems of Taiwans topheavy government and free-for-all democracy stole centre stage from Chinas missiles and military maneuvers.135 But to the degree that issue of cross-Strait relations did come under discussion, there was considerable consensus, largely because of Chinas decision to conduct the missile tests and other military exercises to pressure Taiwan. As the polls just summarized indicated, the public started to lean towards autonomy openly. Extreme supporters of unification as well as independence actually united in their opposition to Chinas use of force and believed that Taiwan should seek to be more in control of its political and economic destiny. This was also the only time the NP worked with the DPP in a coalition. As The Australian reported, the conference message was clear: Despite divergence on visions for Taiwans long-term relations with Mainland China, the conference also sent a united message to Beijing that Taiwan is not a part of the Peoples Republic of China and expressed opposition to the one country, two systems notion touted by Beijing as a framework for cross-Strait ties.136

The authors compared a long list of countries in this report and showed that the NDC was highly unusually as an example of political elite settlement. 135 Julian Buam, Second Republic? Multiparty Conclave Proposes Dramatic Political Change, The Far Eastern Economic Review, January 9, 1997. 136 Dennis Engbarth, Lee wins backing to pursue reforms, The Australian, December 31, 1996.

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In short, the announcement of the No Haste policy was overshadowed by the domestic reforms and rationalized by the solidarity Taiwanese felt against the Chinese missiles. Still, a careful analysis of statements by both government agencies and non-government elites reveals a range of views on the policy, some of which were quite skeptical about restrictions on Taiwans economic relations with China. Those views, while relatively muted in the immediate aftermath of the NDC, would become increasingly important later, as the government tried to implement the No Haste policy on which it thought it had achieved substantial agreement, only to encounter an unexpected degree of opposition. Extensive Restriction The No Haste policy embodied the tendency we have described as Extensive Restriction. Not surprisingly, given the fact that the policy was formulated by the presidential office, the main supporters of the policy were the relevant government ministries, particularly the MAC and MOEA, which also enlisted the support of leading think tanks such as the Chung-Hua Institution for Economic Research (CIER). In April 1997, MOEA and CIER jointly held a seminar, attended by government officials, businessmen and academics, to discuss cross-Strait trade and industrial policies. At the conference, MOEA announced that reasonable restriction on investment in Mainland China and gradual liberalization of crossStrait trade would remain the ministrys stance for the foreseeable future. Investment was by far a more thorny issue than trade, which gave Taiwan a surplus, not deficit. The MOEA representative also mentioned that a restrictive policy would bring economic benefit as well as promoting national security. From the MAC, Vice Chairman Lin Chung-pin said that Chinas economy was developing rapidly, and that Taiwan should watch that development extremely carefully.137 CIERs Wu Hui-lin believed that accomplishment of 134 points of consensus in the economic group indicates that the administrative and legislative branches and all the parties realize that there is no choice but to pick up the pace of reform.138 A member of the NUC under Lee Teng-hui, Jung-feng Chang, a specialist on the Chinese economy, believed that Taiwan was affected by globalization like all other countries, but must take extra precautions and safeguards when opening its economy to China because Taiwan was so small relative to the Mainland. Fundamentally a believer in free markets, as shown in later episodes when he moved away from the Extensive Restriction tendency, Chang believed that effective industrial planning was crucial. As a result, he saw insulating Taiwan as a way to buy time for the society to develop the rule of law, democracy and gain international recognition.139 Many others also welcomed the move to restrict investments in China. The head of TIER, Chen Po-chih, who later headed the CEPD under President Chen, praised the NDC for consulting among representatives from business, academic and other social groups to agree to more restrictive economic policies.140
Restrictions on Mainland Investment to Remain, Central News Agency (Taiwan), April 28, 1997. 138 Dennis Engbarth, Development Conference Mandates Faster Reform, Trade Winds Industry Weekly, February 9, 1997. 139 Based on interview with Chang Jung-feng, June 18, 2008. 140 Dennis Engbarth, Development Conference Mandates Faster Reform.
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President Lee solicited and received support from some prominent academics who rallied around both of his restrictive economic policies, Go South and No Haste. Among the well-known advisors were Liu Tai-ying, who in addition to his role in the KMT headed the Taiwan Research Institute, Kau Yingmao of Brown University, Tai Guo-hwei in Japan, and Tien Hung-mao of the INPR.141 Liu Tai-ying repeatedly called on everyone in business to focus on Taiwans long-term national interest and, on that basis, proposed being very cautious about liberalization of cross-Strait economic policies. Their advice was so influential that they often were regarded as proxies for the president, and some of them may have actually contributed to Lees policy reversal.142 Religious organizations have always played an important role in Taiwans democratic development, and the Presbyterian Church in Taiwan (PCT), to which Lee Teng-hui belonged, weighed in heavily on the sovereignty issue. In August 1991, the PCT had already issued a public statement on The Sovereignty of Taiwan which declared that Taiwan is a sovereign state and that Taiwan and China are two different countries. In December 1994, when the Mainlands Chinese Christian Council, regulated and controlled by Beijing, issued a statement declaring that Taiwan is part of China, the PCT immediately refuted it with its own statement:143 Based on its Faith, the PCT identifies with Taiwan, and together with its people, has undergone the painful experiences of colonial rule People are the masters of a country. The people of Taiwan, according to past experiences and current realities, have advocated that Taiwan is Taiwan, and China is China, and Taiwan and China are two different sovereign countries. They have the right to decide their own countrys destiny. When Taiwans people, through peaceful means, decide their nations future, we hope the international community would respect their decision.144 Not surprisingly, after Lee Teng-huis declaration of Taiwans special state-to-state relationship with the Mainland in 1999, the PCT supported his stand with a statement in July 1999 that it: appreciates the emphasis of President Lee that Taiwan is a sovereign and independent country, and we strongly affirm and support this stance. We expect all the people in Taiwan will recognize, accept and experience

Liu Tai-ying was then still managing KMTs assets, and extremely influential among the business community. As early as Go South, he started writing in support of restricting economic activities. For details, see Chan et al. (1994, 83-8). 142 Kao Chen, Teng-hui turns to think-tank and scholars for advice. 143 The Presbyterian Church in Taiwan's Response to the China Christian Council's Statement, December 24, 1994, http://www.taiwandocuments.org/pct09.htm (Last accessed on Feb 28, 2010). 144 The division of opinion among the Christian Church community on the Taiwan issue is similar to how the Buddhist community is also differentiated by different leaders having different national identity. While the PCT fights for a Taiwanese identity, several prominent Buddhist sects like Chungtai Monastery are very vocal about the importance of assuming a Chinese identity for all Taiwanese. See related articles in the monasterys monthly at: http://www.chungtai.org.tw/monthly/index1.htm (Last accessed on Feb 28, 2010).

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this fact. We expect and hope that the government and people can cooperate hand-in-hand to confirm this status as a nation145 The New Tide Faction of the DPP also provided strong support for Lees No Haste policy.146 Formed by a group of intellectuals as one of the two founding factions of the DPP, along with the Formosa Faction, New Tide members were highly educated, disciplined, and ideologically driven.147 Infused with left-wing ideologies focusing on sovereignty and social welfare, the faction advocated holding open discussions on issues and was the key driver behind the DPPs debates on its foreign policies.148 A three-day DPP conference in February 1998 worked out a consensus on cross-Strait issues. The debate centered around the New Tides policy of strengthening the base, which featured economic growth and diplomatic assertiveness, as opposed to Hsu Hsin-liangs plan to go west boldly (dadan xijin). As Rigger points out, the New Tide Factions position embodied realist logic. (Rigger 2001, 130-1) New Tide leaders like Lin Cho-shui believed that Taiwan needed to strengthen its leverage against Beijing by promoting economic growth and by linking Taiwan into an international economic network, while reducing its dependence on China. New Tide leaders believed that liberalization would encourage flight of capital, reduction of domestic investment, retardation of growth, and the hollowing out of Taiwans industrial strength, and would therefore undermine Taiwans national security. (Liu 1998, 217) They therefore argued that the development of economic ties with China should be given only incremental impetus. The New Tide believed it feasible to delay negotiation with China since it viewed American policy toward China as being in a containment mode. Business leaders generally acquiesced to Lees policy, with some who are staunchly native Taiwanese openly embracing his demand that Taiwan become more independent of China. Stan Shih of Acer, Morris Chang of the TSMC, and several academic representatives convened a non-governmental economic conference on December 13-14, 1996, to discuss the upcoming NDC, and to endorse Lee Teng-huis proposals.149 Trade associations were initially divided over the issue, but many either became convinced by the governments arguments, or simply decided it would be best to support the governments policies. Like other NGOs during this period, trade associations were beginning to evolve into genuinely autonomous interest groups, but the tradition of strong state control persisted. The KMT and the state still retained stewardship over several strategically important trade organizations, including elite business associations, national associations of trade unions, and farmers credit associations. The KMT and the government continued to shape
Presbyterian Church in Taiwan: An Affirmation and Appeal regarding President Lee Tenghui's Statement on the Two-Nation Policy, July 1999, http://www.taiwandocuments.org/pct12.htm (Last accessed on Feb 28, 2010). 146 New Tide Faction was attacked in later episodes as it was viewed to be supportive of liberalization under Chen Shui-bian. 147 Shelley Rigger, The Ruling Party: Finding Effective Governance, Taiwan Review, January 2, 2003, http://taiwanreview.nat.gov.tw/ct.asp?xItem=812&CtNode=128 (Last accessed on Feb 28, 2010). 148 Chang Yun-ping, DPP's New Tide wants open debate on banning factions, Taipei Times, June 15, 2004, http://www.taipeitimes.com/News/taiwan/archives/2004/06/15/2003175111 (Last accessed on Feb 28, 2010). 149 Private Sector to convene economic conference, Taiwan Business News, December 6, 1996.
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their choice of leadership and intervene in their activities. The party and the state also actively mediated between competing associations rather than letting them play out their disputes. In this regard, Taiwan displayed some features of democratic corporatism found in Japan and small Western European nations. (Tien and Cheng 1999, 46) On November 13, 1996, Wang You-Tsang of the Rebar Group, who headed the Chamber of Commerce of the Republic of China (GCCROC), started to actively support President Lee. In a public speech entitled Roots in Taiwan, Heart in Taiwan, he asked Taiwanese businesses to cherish Taiwans development and keep their roots in Taiwan in order to develop a better future. He said that Taiwans achievements in the areas of human rights, democracy, and economic development were hard won, and that Taiwanese businesses should not move overseas. He supported Lees No Haste policy and called on Taiwanese business to exercise prudence when investing in China.150 Within weeks, most trade groups accepted Lees agenda, some more vocally supportive than others. On December 5, 1996, Taiwans major trade associations, including the Chinese National Association of Industry and Commerce (CNAIC), the Chinese National Federation of Industries (CNFI), and the Council for Industrial and Commercial Development, joined GCCROC in holding a seminar in which the MAC was invited to explain why a restrictive policy was appropriate at this stage of cross-Strait political development. During the seminar, the sponsoring groups all echoed the MACs strategy. One representative Chang Ching-yu warned that China was unstable, and that if China experienced unrest, there would be very little the Taiwanese government could to protect the Taishang on the ground. Although the Taiwan government could provide guidelines on how to invest in China, Taiwanese business would best be prudent. Chang reiterated that the best strategy for the Taishang would be No Haste.151 Guided Development There were some who continued to be bold about developing economic ties with China, but typically for those who belonged to the Guided Development tendency doing so with a Taiwan first rather than a free market agenda. (Rigger 2001, 130-131) During this period, the most prominent spokesman for this position was actually the DPP Chairman Hsu Hsin-liang, who initially laid out his arguments in the DPPs pre-NDC meeting in December 1996. His views were further elaborated in the DPPs 1998 China Policy Symposium.152 Few rallied to Hsus cause, but his arguments stimulated a party-wide debate. Hsus proposal focused on liberalizing control over trade and investment in China. He believed that negotiating with China on a comprehensive range of issues from economic to sovereignty issues would prevent Taiwan from falling into an unfavorable position as the international community turned more and more sympathetic to Chinas claims to the island. More specifically, he saw expanded economic ties with China as a way of strengthening Taiwans economic position by serving as a conduit between China and the world, and making alliances among Taiwanese firms, Chinese companies, and foreign MNCs that would deter
150 151

, ,Central Daily News, Nov 13, 1996. , . China Times, Dec 6, 1996. 152 See discussions on page 1 of Liberty Time, Feb 16, 1998.

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Chinese aggression. This way, Taiwan could continue its economic growth, upgrade its technologies and maintain its competitive edge over China. He also viewed membership in the WTO favorably, hoping it would prevent China from exploiting Taiwans economic dependency. (Yu 1999, 39) As noted above, Hsu summarized his proposal in the phrase go west boldly. Hsus conclusions overlapped with what the Guided Liberalizers favored, but his motivation was not based solely on growth. Hsus proposal was for Taiwan to become stronger as a result of liberalization, and growth was only a necessary means to the end of strengthening the countrys bargaining position with China. Because of fierce opposition from the New Tide members, the DPPs China Policy Symposium in February 1998 did not endorse Hsus approach. Rather, it agreed to a compromise slogan that simply combined the slogans put forward by Hsu Hsin-liang and the New Tide faction: Strengthen the Base and Go West (qiangben xijin) an awkward and self-contradictory compromise, since it seemed to imply that Taiwan should both stay here and go there at the same time. Hsu continued to advocate establishing the Three Links with China until November 1998, when he was finally silenced by his own party, accused of undermining the partys performance in the local elections for city mayors and county magistrates. He subsequently resigned as DPP chairman for the second time. Guided Liberalization In the political environment of the time, which combined resentment of Chinas military activities in the Taiwan Strait and the traditional tendency to support major government initiatives, very few were willing to risk openly challenging the governments No Haste policy. But those with investments or intentions to further in invest in China did so quietly. Some individuals began going to China to explore strategic investments, like in the semiconductor industry, even though they were banned. Some corporations willing to take the China risk, from laptop computer assemblers to shoe manufacturers, began to invest heavily, some by using offshore funds, and others by applying and going through the red tape to move capital from Taiwan to China. (Liu 1998) The largest shoemaker in the world, Pou Chen and its largest shareholders challenged Taiwans regulation by indirectly investing in Sino First, a bank in Shanghai with special license, and the investment became well known in 1997. Open support for liberalization was limited, but businesses continued to move into the China market at a rapid pace. Although security was a common concern, the Guided Liberalizers were more concerned about growth, and did not place much priority on other interests such as equity or stability a democratic government must contend with. Several large companies that had already invested in China were against the No Haste policy because of business considerations. Companies that had previously made sacrifices by not expanding to China now began to argue that securing a position in the Chinese market would be good for Taiwans international position. For example, Formosa Plastics had intended to invest in Haicang, China in 1990 but decided instead to invest heavily in the Sixth Naphtha Cracking Project (liu qing) project in Miaoli, Taiwan at the behest of the government and with large state subsidies. In 1996, however, Formosa Plastics became interested in a thermal power plant project in Zhangzhou, China. Formosa Plastics chairman, Y.C. Wang, often spoke up about the importance of staking a claim in the

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underdeveloped Chinese market in order to strengthen Taiwans competitiveness, although he also often stated that government regulation was always necessary and important. (Y.C. Wang 2001)153 Extremely close to Lee Teng-hui in the 1990s, he openly challenged No Haste by writing the preface to Hsu Hsin-liangs book, although Wangs focus was on growth, not national security per se. (Y.C. Wang 2001, vol. 3: 113-6) Extensive Liberalization The media representing the Extensive Liberalization tendency were the most vocal in attacking the alleged perils of the No Haste policy. Although it had initially agreed to the NDCs decisions on cross-Strait policies, the NP, together with the editorial page of the United Daily News, expressed opposition to this sudden shift in investment policy arguing it would hamper Taiwans growth on absolutely terms. On October 22, 1996, the KMT-controlled paper Central Daily News reported on No Haste as its cover story by explaining that Lee intended to use the policy as a means for gradual unification, in light of the use of force by the PRC.154 By April 1997, however, skeptics of Lee and his plans started to openly attack Lee Teng-hui and his KMT mainstream faction and their brand of unification. United Daily News, representing KMTs old guards, openly attacked this unification as hypocrisy, and discussed in detail the rift among the NP, the DPP and the KMT. The article reported that no other party agreed with the KMT policy: the DPP actually promoted Go West, and the NP deemed No Haste to be economic white terror.155 Although some Taiwanese companies continued to explore the China market, and a few began to speak out in favor of continued liberalization, the most aggressive and organized dissent by the private sector came from AmCham, which issued a white paper explicitly criticizing the No Haste policy.156 With a long history in Taiwan, AmCham had lobbied for free trade with every administration, enjoying a close relationship with each of the presidents. Although its members were primarily multinationals in Taiwan, the representatives of these companies were mostly Taiwanese nationals, whose political allegiances and affiliations covered the whole of political spectrum, from deep green to deep blue. But the members all believed in liberalizing trade with China and, more generally, in free trade, rule of law, and reducing regulation and any protectionism although they might not agree on the optimal speed of liberalization.157 Influential in the business community, AmCham was able to meet regularly with government officials in the U.S. and Taiwan, counting Taiwans president as a guest at every one of its annual dinners.158 Both AmChams 19971998 and 1998-1999 white papers attacked the No Haste policy for hindering Taiwans plans to become a regional hub. While the Taiwanese government
Wang had often shown his support for the government in initiating appropriate regulations. See Y.C. Wang (2001, vol. 4: 210); see also Y.C. Wang (1996: 60-4; 100-18) on the policy change from go South to go West (invest in China) as an appropriate strategy for Taiwanese business. 154 , Central Daily, October 22, 1996. 155 , United Daily News, April 1, 1997 156 Direct Links Focus of Amcham Report, The China Post, September 10, 1998. 157 Based on interview with Richarde Vuylsteke, June 22, 2009. 158 AmCham had primarily members who were American companies and Taiwanese companies engaged in the import-export business, but the representatives of these companies in AmCham Taiwan were primarily Taiwanese nationals.
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reacted strongly to the criticism, AmCham delegates met with U.S. government officials to lobby the U.S. government to pressure Taiwan on relaxation of policies. John Chang, then ROC Minister of Foreign Affairs, responded by declaring that AmCham did not understand that Taiwans economic policies needed to be based on security considerations. Chang further asked that AmCham not emphasize its differences with the Taiwanese government while in Washington.159 Since the NP had not gained support for any of the political reforms on its agenda, it had little reluctance to express its dissent from the conferences economic policies as well. The NP not only walked out of the NDC as an expression of its disapproval of the KMT-DPP alliance in freezing the provincial government, it also proceeded to send a delegation to China right before the January 1998 elections and came back to Taiwan claiming to represent the Taiwan people in China.160 The visit failed to help the NP in the elections, where they gained less than 1% of the votes. Independents such as Legislator Li Ao were important in warning of the long-term implications of a restrictive economic policy. Interestingly, Hsu Hsinliang of the DPP actually invited Li Ao to be his vice presidential running mate in the 2000 presidential election, since both of them advocated expanding Taiwans trade and investment with China, although for quite different reasons.161 Li Ao believed in ultimate unification and was not shy about acknowledging that this was his reason for supporting economic integration. In an interview with The Journalist, Li Ao explained out his opposition to the KMTs No Haste policy as follows: The KMT, since its 1949 landing in Taiwan, has been doing nothing but dragging it out, and now having dragged it out for fifty years, it is not entirely unfeasible There shouldnt be the issue of be patient or not; you should be patient only if there is obvious benefit, otherwise, why hold back?162 Li believed that the KMTs untenable position was demonstrated by Lees No Haste policy, which Li described as an ostrich policy by which Taiwan was trying to avoid China. Li believed that the relationship between Taiwan and China was a war of attrition: the more No Haste, the more patient Taiwan is, the less leverage it will have!163 Focused on the economic benefits of integration, he wrote that businessmen are far smarter than politicians and that is why they were rushing to gain a foothold in China, to capture the opportunities available there. Li agreed with Hsu Hsin-liang that Taiwan should get as close to China as possible in order to gain the upper hand. But Lis position was compromised by the fact that many of his writings assumed a Chinese identity, and few would regard his arguments as being rooted in any consideration for Taiwans future.

The AmCham reports of previous years (1996-8) are accessible at: http://www.amcham.com.tw/content/view/1117/109/ (Last accessed on Feb 28, 2010). 160 For details on NPs history and background, see its official website available at http://www.np.org.tw/StaticWeb_article.asp?channel=2 (Last accessed on Feb 28, 2010). 161 , China Times, November 20, 1999, http://forums.chinatimes.com/report/vote2000/tsu/88112004.htm (Last accessed on Feb 28, 2010). 162 , The Journalist, Issue 636, May 1999. 163 Ibid.

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Sectoral Case Study: Formosa Plastics and the Zhangzhou Project In an effort to co-opt the business community, the PRC government courted the Formosa Plastics Groups headed by Y.C. Wang, known as the God of Management by the Taiwanese. Known to have excellent relationships with both Lee Teng-hui and many DPP leaders, Y.C. Wang was a pragmatic self-made man who had already made a serious foray into China in the early 1990s. Born in 1917 outside of Taipei, Wang started out running a small rice store in the southern county of Chiayi at age 15 with only NT$200 from his father. He experienced both success and failure throughout his business career.164 While he was initially successful with his rice trading business, he was arrested on March 11, 1947 by the KMT government. After the 228 Massacre of 1947, in which the KMT government and the Taiwanese engaged in violent clashes, the government imposed strict controls over the sale of key commodities. Wang was caught delivering rice to another county without authorization and subsequently detained for 28 days. In 1954, Wang set up what was then the worlds smallest polyvinyl chloride firm, the Formosa Plastics Corporation, producing only 4 tons of PVC a day. But by the seventies, the Formosa Plastics Group manufactured everything from petrochemical to detergents, and Wang had become the second richest man in Taiwan with over net worth of over $6 billion and multiple companies listed on the TWSE including the flagship Formosa Plastics. The Groups footprint extended to Indonesia, Vietnam, and the United States. Wang also set up two universities and one of Taipei first private hospitals. His business was widely considered to have benefitted from favorable government policies, especially in petrochemicals.165 Wang took risks, and was often rewarded for them. But China proved to be a challenge like no other. Only five months after the Tiananmen crackdown, when businesses of all national background were pulling out of China, Wang went to Beijing to meet with Deng Xiaoping. He offered to set up a $7 billion petrochemical complex in Haicang near Xiamen. Chinese leaders were very warm to his proposal and offered a large plot of land for the project in 1992. Just before the deal was to be signed, however, President Lee pressured Wang to stop, giving him both enormous incentives to start the Sixth Naphtha Cracking Project in Taiwan and threatening to cut off credit for his businesses if he proceeded with his venture in China.166 Succumbing to Lee, Wang decided to cancel the Haicang project. Chinese officials who had personally met with Wang, such as Zhu Rongji and Li Peng, felt let down. Wang then moved to the U.S. for two years to escape the stress. Wang later also donated $15 million to build schools and hospitals in Haicang to smooth things over.167
There are varied accounts of Wangs start-up and life, see for example, Common Wealths coverage by Alice Yang, which does not discuss his difficulty with Lee Teng-hui. Alice Yang, A Life Ends, the Legend Lives On, Common Wealth, October 23, 2008 (no. 408), http://english.cw.com.tw/article.do?action=show&id=10545&offset=0 (Last accessed on Feb 28, 2010). 165 To understand the strong backing Taiwan government gave to Formosa Plastic through petrochemical industrial policies, see W.W. Chu (1997: 112-113). 166 For an overview of the No. 6 Naphtha Cracking Project, see Formosa Plastics company website at: http://www.fpcc.com.tw/English/No.6/project%20inception.htm (Last accessed on Feb 28, 2010). 167 Whats good for the goose, South China Morning Post, October 20, 2008.
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But the temptation of extending his empire to China did not go away. On May 28, 1996, Wang made up his mind to have Formosa Plastics U.S. subsidiary set up the Huayang Power Company to invest in a large-scale project in Houshi village, in Zhangzhou, reportedly after a careful negotiation lasting two years. Nestled between the Xiamen and Shantou special economic zones, Zhangzhou is the fourth largest city in Fujian province in terms of both the size of its economy and the level of Taiwanese investments. The plan was to build and operate a 3.6-megawatt power plant under terms of a $3.8 billion contract. Two 600 MW generators and port and coal storage facilities costing $1.7 billion would start generating power in 1999, out of an eventual total of six generators that would supply electricity to Fujian Province and to a Formosa Plastics petrochemical complex there at a fixed price for ten years. The remaining four generators would be installed by 2001. The plant was to be operated on a build-operate-transfer (BOT) basis for a term of 23 years, unusually long and favorable terms compared to similar projects at the time with off take guaranteed by the government.168 The government also offered a fiveyear tax holiday (three years of exemption and two years of 50% reduction in profit tax) and 137 hectares of land for the plant, provided it became operational by 2002.169 To justify these favorable terms, the Zhangzhou government noted that it could levy a 17% VAT tax on the electricity that the plant produced, and that the government would not have to provide any financing or financial guarantees for the project. Most importantly, the plant would use coal supply from the Formosa Plastics Group and would bring in over RMB 510 million of revenue per year. In August 1996, Lee Teng-hui had already discussed a more stringent review of investments in China with the National Assembly. The Investment Commission officials of MOEA, including Vice Minister Chang Chang-pang, had to decide how to deal with Y.C. Wang and his project, the largest Taiwanese investment project in China that had ever been proposed. On August 16, 1996, a private understanding between Y.C. Wang, Formosa Plastics Groups engineers, and the Investment Commission was reached and the application to the Taiwan government to build the plant was withdrawn.170 Everything seemed to be settled with the Lee administration once again seeming to have gained the upper hand. The South China Morning Post described Mainland Chinas reaction to Wangs withdrawal from the project, which denounced Wang for reneging on proposed investments twice in a row:171 Faith in Taiwanese money has been dashed before. No one has forgotten the debacle when one of Taiwans richest magnates, Formosa Plastics Wang Yung-ching promised to invest in a $6 billion petrochemical plant in 1990, only to pull out on orders from Taiwans government two years later. Wangs name stinks around here, as one local official bluntly put it. That was before Mr. Wang was reported to have pulled out of another
Another attractive part of the agreement was that the plant would sell its output to the national power grid for RMB 0.53 per kWh for ten years and RMB 0.36 thereafter, compared with Zhangzhou governments selling price of RMB 0.50 per kWh for industrial use and RMB 0.40 for domestic use. National Grid To Tap Into Formosa, South China Morning Post, August 22, 1996. 169 Taiwan Group Accused of Cashing in on Crisis, South China Morning Post, June 13, 1996. 170 August 17, 1996, Central News Agency, Taipei. 171 Banking on cross-Strait Boom, South China Morning Post, September 15, 1996.
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huge project, a $3.5 billion coal-powered generating plant in nearby Zhangzhou on the orders of President Lee Teng-hui. After China fired missiles at Taiwan during his re-election campaign, President Lee started worrying that if Taiwanese companies invested too much in China, economic dependency would restrict his room to maneuver. However, the controversy did not end. In March 1997, the No Haste policy had been written into the law. By this time most Taishang were hoping that the policy was merely a temporary reaction to Chinas missiles tests and would be reversed in time. The government announced it would finalize changes in the investment rules for projects in China towards the end of April 1997.172 These new regulations were intended to remove some of the ambiguity that surrounded the investment approval process. There were 4,842 permissible manufacturing industries and 299 prohibited industries but still a very long list of projects required special approval. The criteria for reviewing those projects were unclear. Public infrastructure such as transportation and power generation, for example, were prohibited not because they retarded Taiwans growth, but because they supported Chinas economic development, which was not seen to be in Taiwans interest. The government announced that the new requirements would be based on a point system based on factors such as the amount of capital required, whether the project would be financed by equity or debt, and whether the financing came from Taiwan or abroad. Every project would generate a score, which would determine the probability of approval.173 Investments that would be channeled through third countries or foreign subsidiaries would still require approval and would be subject to the same upper limit of 20% of NAV as an onshore company. Eventually, the new regulations took the form of an amendment to Article 35 of the Taiwan and Mainland China Relations Act. The new restrictions maintained a ban on investments in capital-intensive infrastructure projects such as dams, power plants and highways, and subjected all projects over $50 million to approval, a death-sentence for Y.C. Wangs planned investments in China. In a direct challenge to the governments prohibition on infrastructure project, Y.C. Wang confirmed on March 29, 1997, at his companys legendary firm-wide annual sports day, that construction on the Zhangzhou power project had begun, and that he was hoping the Taiwanese government would change its position and become supportive. This created a public outrage. Wang would not disclose the sources of funding. All that was known was that the initial investments were not made through any affiliates of Formosa Plastics, which were all regulated.174 The reason Wang had made this plea public was that the second phase of construction would require a lot more capital and Wang probably would no longer
, , Central Daily, April 2, 1997, p. 6. For details, refer to articles on the project: : , : , , , China Times, March 30, 1997, p. 1 and p. 3 (last two items); : , China Times, March 31, 1997, p. 2; , , Hsu Cheng-min, , , Central Daily, April 1, 1997, p. 3 and p. 11; , , Central Daily, April 2, 1997, p. 6. 174 Construction of Zhangzhou power plant started in Fujian, Central News Agency, March 30, 1997.
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be able to fund it in a stealth mode. Wangs admission that the Zhangzhou project continued, even though he had publicly withdrawn the application, was a slap in the face for the Lee administration. Newspapers mocked the government in speculating how easy it must have been for Wang to circumvent the government as it owned many overseas subsidiaries that could transfer funds to China without alerting the Taiwanese authorities. Wang made it clear that Formosa Plastics would prefer to comply with government regulations, but that if the government did not lend its support, the group would still continue with the Zhangzhou project. The government panicked and had the Economic Minister Wang Chi-kang hastily arrange a meeting with Wang. The governments nominal tool was a relatively small fine of up to NT$15 million but, pressured, Y.C. Wang eventually complied once again. An editorial in the China Times on March 30, 1997 sympathized with Wang. In effect, it presented the Guided Liberalization position when it explained that the governments role should be to keep businesses competitive, even when considering other national interests: In an era of free competition and businesses becoming increasingly international, the governments regulation over how individual businesses invest should not overpower strategic decisions made by management on how to remain competitively economically Last year, after major expansion plans announced by the President Group and Formosa Plastics Group, the government became concerned about hollowing out and Taiwans over-dependence on the Chinese economy. President Lee then began to revise his earlier plan calling for Taiwan striving to become Asia Pacific Regional Center with China as a base The No Haste policy heightened cross-Strait tension and ignited panic among the private sector. Both Formosa Plastics and Pou Chen took the courage to challenge the government policy on investments, which run counter to free competition not only because of profit consideration, but also because of their own long-term strategic plans. Chinas vast market for global industries and companies is very attractive. Because of cross-Strait tension, we can appreciate the governments apprehension and prudence; however, the promulgation and execution of a liberalization and internationalization policy are necessary conditions for Taiwan to become competitive. Instead of penalizing Formosa Plastics and Pou Chen and other industrial companies, why not speed up the development of Taiwan into a more competitive entity. At that time, Taiwans competitive advantage would naturally appear and overdependence on Chinese economy or capital outflow would no longer be a problem.175 But opposition to relaxing the governments position towards infrastructure investments was also strong. Professor Hsu Cheng-min published an opinion column in the China Times on April 1, 1997, specifically attacking large Taiwanese corporations for investing in China. Until China democratized,

175

: , China Times, March 30, 1997, p. 3.

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he wrote in support of Extensive Restriction, Taiwans economic relations with the Mainland should always be tightly regulated:176 Basically, everyone understands that big companies may be able to generate a lot of profit by investing in China, however, considering economic independence for our country, if the government representing the people does not take care to regulate it, Taiwan would quickly become Hong Kong, with absolutely no leverage in negotiation. Cross-strait relations have always been a dynamic political economy issue. Only through Chinas democratization and economic development can we become comfortable to integrate with China and allow the government to completely liberalize. A few other Taiwanese conglomerates encountered similar application problems for investments in China, but few openly feuded with the government. During the same time that the controversy over Formosa Plastics raged on, Pou Chen, the largest shoemaker in the world, held back on obtaining a banking license in China in light of the restrictive guidelines. A TWSE-listed company, Pou Chens intended investment was not only in a prohibited category banking it would also exceed the allowed $50 million. Furthermore, the group did not want to hurt its chances in applying simultaneously for a Taiwanese industrial banking license, which would have allowed it to engage in both commercial and investment banking services.177 On April 2, 1997, Central Daily reported that the government was looking into Pou Chens illegal activities and considering taking actions. This was in a period when scrutiny was applied to all large-scale investments. Eventually, the controlling shareholder of the Pou Chen Group openly abandoned the investment in the Chinese bank, although the investment was actually scaled down and invested through offshore funds and managed through Pou Chens HKSE-listed affiliate, Yue Yuen. The President Group, which had strong ties to Lee Teng-hui, also called off its application to invest in two thermal power plant projects in Wuhan, Central China.178 The political parties were very divided on this subject. The DPP was openly critical of Wangs defiant stance towards Lees policy and thought his group was undermining the governments overall cross-Strait policy. Legislator Lee Ching-yong said that since China was full of animosity towards Taiwan, the government should have the resolve to wipe out a disease, and take a harsh position toward the Formosa Plastics Group without mercy or compromise. Another DPP legislator, Chien Hsi-kai, thought that the Formosa Plastics Group was blackmailing the government, hoping to gain leverage in bargaining with the government over its projects in Taiwan. TAIPs Chen Wen-hui pointed out that
176

The editorial, aimed at the Formosa Plastic project, also made the point that the government regulations are necessary and can be effective: Most big companies would not risk their business in Taiwan by investing in China illegally. The owners also have family in Taiwan, and they enjoy the living quality as well as education environment in Taiwan. Our leading industrial companies already have hi-tech subsidiaries as well as other services businesses like banks which generate returns that may outweigh Chinas capital-intensives businesses. See Hsu Cheng-min, , , China Times, April 1, 1997, p. 11. 177 The investment is not subject to any Taiwanese regulation, but remains limited in scope. Based on interview with Ed Ku, president of Yue Yuen, November 29, 2007. 178 National Grid To Tap Into Formosa, South China Morning Post, August 22, 1996.

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Wangs case was a benchmark for the private sector and that if the government were permissive on this case, then all other businesses would follow suit. In contrast, the NP aimed its criticism at the policy, not at those who violated it. Hao Lung-bing, who later was elected the Taipei mayor, said that the restrictive policy was unreasonable and forced the business community to invest secretly. Chou Chuan openly supported Y.C. Wangs projects and saw the joint venture among Formosa Plastics, China and foreign investors as a triple winwin-win. The NP Secretary Wang Chien-hsuan denounced the governments intervention in the Formosa Plastics project as going against the principles of internationalization and liberalization. He openly accused the government of calling in the companys domestic loans early as a way to coerce it into abandoning its China project. Such coercion was outdated, he said, and the government should not mix politics with economics.179 By May 1997, Wang acknowledged that if the government didnt allow the investment, he would have to abandon the Zhangzhou project because of insufficient capital. In a private meeting with Chinese officials visiting Taiwan, Wang told them that he could wait another year for the Taiwanese government to change its policy, still hoping the restrictions would be lifted.180 He admitted that 70% of the funds did come from Formosa Plastics Group and its affiliates and that his other offshore companies had invested the remaining 30%. The construction costs were entirely provided by offshore companies, not the parent company. The Chinese government was impatient for the final decision, since construction was due to be completed sometime in late 1997 and the ownership of the project was still unclear. Among all this tension and suspense, on October 6, 1997, Lee Teng-hui bestowed a second-class honor to Y.C. Wang to thank him for his long-term support of Taiwans industrial and economic development, locking Wang into compliance. In March 1998, therefore, Wang announced that the Zhangzhou project would be transferred to a foreign partner in order for Formosa Plastics to comply with government regulations.181 Y.C. Wang personally went to China and met with Li Peng in June in an effort to explain the cancellation of the project in light of Lee Teng-huis restrictive policy. In October, he also disclosed the transfer of the Zhangzhou power plant project ownership to the foreign partner that originally owned only 40%, but with an option to buy back the shares as soon as the government changed its policies.182 Throughout this episode, Wang remained optimistic. In August 1998, while in New Jersey, he said that the minute Lee Teng-hui stepped down as president even the former Haicang project would be revived right away. Later, Wang went as far as saying that, besides instituting democracy, he couldnt think of how Lee Teng-hui had done any good for Taiwan.183 In October, he expressed the hope that the impending Koo-Wang talks would change the situation and provide his investments with support. But the results of the negotiations were

, , Central Daily, April 2, 1997, p. 6. , , Economic Daily News, May 7, 1997, p. 4. 181 Tycoon hopes to explain investment cancellation to mainland premier, Central Daily News, March 29, 1998. 182 Another cross-Strait talk, China News, October 15, 1998. 183 : , China Times, August 22, 1998, p. 1.
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disappointing as China was much less ready to negotiate with Taiwan than expected. The Lee-Wang rift became open and irrecoverable by the 2000 presidential election. Wang spoke up openly, hoping the next president would reverse the investment policies on what were considered strategic investments. Once elected, President Chen immediately appointed Wang the role of Vice chairman of the 2001 Economic Development Advisory Conference, but Wang would again be disappointed in the persistent restrictions on petrochemical and other infrastructure investments. In 2001, TAIP candidates who later formed the Taiwan Solidarity Union (TSU) under Lee Teng-huis leadership derided Wangs money-losing investments and blamed Wang for accumulating debt in Taiwan while investing in strategic industries in China. In campaigning for the TSU candidates in year-end 2001, Lee Teng-hui said that Wang was to blame for Taiwans economic problems because of his objection to the No Haste policy.184 The epilogue to this episode is difficult to write. Up until his death in 2009, Wang became more and more critical of Lee Teng-hui and his policies. But ironically, Wangs most important son also became Lee Teng-huis partner in starting a new political advocacy group calling for independence only months after his fathers death. As for Wangs power project, the power supply situation in China did not turn out as he had predicted. There was an oversupply of power, especially from hydropower plants, and the first six years of the Zhangzhou project therefore produced heavy losses. The pricing scheme did not help the project, since the plant was forced to sell its electricity to Xiamen at a competitive RMB 0.30 per watt, below the contracted price, because Xiamen was selling to its consumers at RMB 0.36 per watt. Commercial operations of generators four, five and six never began and the BOT terms will expire in 2016.185 Ironically, Wang reaped much better returns from his No. 6 Naphtha Cracking Project in Taiwan.186 Wang, however, never gave up. As China started experiencing a power shortage in September 2004, he began to search again for more power plant investments, especially in areas near his factories in China.187 In his own words, power projects are long-term investments that will always be needed. Conclusion Chinas missile tests in 1995 and 1996 are perhaps the most important factor in explaining why President Lee Teng-hui decided to restrict Taiwanese investments towards China and why the majority of Taiwanese rallied behind him. At the NDC in 1996, Lee announced that all investments valued at more than $50 million would be subject to government review, and that investments in a number of strategically important categories would be prohibited. In this threatening environment, economic and military security had trumped all other national interests, encouraging the adoption of a highly restrictive cross-Strait economic policy.
FPGs Wang responds to mainland power plant criticism, China Post, November 6, 2001. Tycoons Ailing Power Play a Could over Oasis of Growth, South China Morning Post, November 5, 2001. 186 For an external assessment of the project in Mailiao, see the Taiwan information page in the U.S. Energy Information Administration at: http://www.eia.doe.gov/emeu/cabs/taiwan.html (Last accessed on Feb 28, 2010). 187 FPG To Build Power Plants in Inner Mongolia, China Post, September 8, 2004.
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Without understanding that the majority of Taiwanese were searching for their national identity rather than advocating immediate separation from China, Beijing had taken what it regarded as necessary measures to stop the rise of proindependence sentiment. But Chinas policy backfired. Most Taiwanese began to experience a distinct anti-Chinese feeling, leading them to support the governments policy of restricting Taiwanese investment in China. Equally important, the missile tests contributed, as shown in the polls, to the emergence of a Taiwanese identity that would have even longer-term consequences. Domestically, three other factors also reduced the level of debate on the more restrictive cross-Strait economic policies. First, the issue of cross-Strait economic policies was not at the top of Taiwans political agenda. Instead, all the parties were focused on what was regarded as the more urgent issue of constitutional reforms. Second, the level of economic integration between Taiwan and China was at an early stage, with relatively less dependency than in later episodes. That, plus the relatively healthy state of the Taiwanese economy, made a restrictive cross-Strait economic policy to appear relatively cost- and riskfree, since, for most companies, investments in China did not seem totally indispensable. Finally, Lees personal authority discouraged dissent over his decisions and facilitated the implementation of the new restrictions. As in the next chapter on the second episode of this study, Taiwanese public opinion was focused on consummatory values and on extreme policy options. The discussions of the No Haste policy revealed a close link between the assertion of a Taiwanese identity and a highly restrictive cross-Strait economic policy. On the other extreme, those who claimed they were exclusively or primarily Chinese rather than Taiwanese advocated accelerated and extensive economic integration with China, not only as a way of promoting growth but also as a way of asserting a Chinese national identity. Less extreme positions, taken by business groups favoring less restrictive policies but not necessarily full economic integration with China, could only be made quietly. This confirms Hypothesis One: a highly intense and emotional debate over national identity was accompanied by a perceived choice among extreme economic policies. The overriding concern was with economic and military security, rather than with an attempt to balance it against equity, stability and growth. The various political parties also fanned the debate in their search for electoral advantage. This episode laid the ground for further, and even more serious, debate over national identity. The 1998 Taipei mayoral election heavily focused on the fact that the two candidates, Chen Shui-bian and Ma Ying-jeou, came from different ethnic backgrounds. In the run-up to the 2000 presidential election, James Soongs views on national identity were also examined in great detail. In the next episode, discussions of cross-Strait economic policies remained openly and unabashedly intertwined with the ongoing debate over national identity.

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Chapter Five Active Opening, Effective Management: The 2001 Economic Development Advisory Conference
Chen Shui-bian was elected president in March 2000, the winner of Taiwans first highly contested presidential election, marking the end of forty years of KMT rule. It was an ominous time to come into office, as the first nonKMT president, and facing external challenges greater than those faced by any of the previous presidents, and with a remarkably precarious mandate. The new DPP administration entered office with only 39.3% of the total votes cast, only 2.5% more than independent candidate James Soong (36.8%), who had split the pan blue votes with Lien Chan (23.1%). Taking over the reins from a larger-than-life figure, Lee Teng-hui, and with the KMT still dominating the legislature, President Chen sought immediately to build a broader consensus so as to increase his legitimacy and push his program through. Unless he could gain support from at least some elements of the KMT, Chens hands would be tied: he would be unable to manage the bureaucracy, form a coalition cabinet, or chart the course for cross-Strait relations. Although the president had the executive power to adopt cross-Strait economic policies, according to Taiwans newly amended constitution the Legislative Yuan had the right to cast a no confidence vote against the presidents choice of premier, effectively giving it veto power over the presidents initiatives. With the Legislative Yuan dominated by KMT legislators, as soon as he was inaugurated in May 2000, Chen Shui-bian and the DPP began mapping their strategy for the Legislative Yuan elections of December 2001. Chen started from a position that was fragile but full of hope. In order to garner wider support from the opposition parties, businesses and even international actors, President Chen decided early on that cross-Strait economic policy was an area where he could make a difference, differentiating his presidency from any other as shown by the DPPs white paper on China policy published during his campaign. Given the history and the ideology of the DPP, it was surprising that President Chen decided to liberalize cross-Strait economic policies. But the formulation of his policies took longer than expected and had unexpected consequences. Economic Environment The year 2000 showed great economic promise. The world had entered the online era where everything seemed to be moving from brick and mortar to virtual existence. It appeared that companies started by college dropouts were going public within months of being started and creating tremendous value through the Shumpeterian process of entrepreneurial destruction, transforming traditional business models and markets. The Internet Bubble hit an all-time high on March 10, 2000, when the NASDAQ Composite Index peaked at 5132. After more than a decade of economic liberalization, Chinas standing in the world economy had changed substantially. Even with a global economic downturn, the Chinese economy grew 8.0% and Chinas foreign reserves passed the $200 billion mark. It also became the leading recipient of FDI in Asia, having taken in $40.7 billion of investments from leading multinationals and corporations

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all over the world.188 In contrast to Taiwan, Chinese was able to increase its government revenue by nearly 20% from growth and fiscal and tax reforms. Relative to Taiwan, Chinas international importance was also growing leaps and bounds. China had become Taiwans largest trading partner, with two-way trade growing from $17.9 billion in 1994 to $31.2 billion in 2000.189 Taiwans official approach to cross-Strait economic relations was still the restrictive No Haste policy, which had caused a noticeable drop in cross-Strait investment particularly with regard to large investments. While the Go South incentives to guide businesses towards Southeast Asia directed some investments away from China, the policy was dropped after the 1997 AFC decimated those economies. Businesses began to focus on China more than ever, but total cumulative investments in China stood at slightly below $13.5 billion in year-end 2000, still less than Taiwans total outward FDI towards other countries. In a sign that the new administration wanted more consensus on economic policies, Premier Chang Chun-hsiung convened a multi-party meeting, the National Economic Development Conference (NEDC) in January 2001 to discuss a range of measures to improve the economic climate, including reviewing the categories of approved investments in Mainland China and the mechanisms for granting such approvals. In March 2001, the new economy that had been heating up for much of the 1990s took a sudden hit as a result of the decision of the U.S. Federal Reserve to reduce liquidity, ending an era of what Greenspan called irrational exuberance. (Kindleberger and Aliber 2005, 161) The market value of companies traded on NASDAQ declined around 80%, and the growth of information technology slowed down as well.190 With so much of the economy tied up in exporting technology hardware, Taiwans economy immediately contracted in the second quarter of 2001, for the first time since 1974. The global economic slowdown spread quickly and Taiwanese exports declined, eventually leading to a substantial slowing of GDP growth and sharp increase in the unemployment rate from slightly under 3.0% in 2000 to 4.6% in 2001, highest in nearly five decades.191 The Taiwan Stock Exchange Capitalization Weighted Stock Price Index (TAIEX) dropped by roughly two thirds in Chens first 18 months, falling from over 10,000 on February 17, 2000 to 3,446 on October 3, 2001. In an economy where the majority of the households engaged in stock speculation, the government felt tremendous pressure. More importantly, Taiwan was expected to join the WTO in late 2001, which meant that its economy would become even more vulnerable to the global economic fluctuations.192
See Table 1-1 in Chapter One. See Table 1-1 in Chapter One. 190 For background on this buildup of technology speculation and its effect on the fundamentals of the economy, see Kindleberger and Aliber (2005, 158-164) and a more dramatic account in Lowenstein (2004). 191 See National Statistics of ROC (Taiwan) for data at: http://eng.stat.gov.tw/mp.asp?mp=5; and Taiwan Statistical Data Book 2009 at: http://www.cepd.gov.tw/encontent/m1.aspx?sNo=0011995 (Last accessed on Feb 28, 2010). 192 The effect of WTO on cross-Strait relations was not great but there was much expectation. See Cho (2005). The MAC was already doubtful that China would follow the WTO rules in dealing with Taiwan. There were few incentives for Beijing to resort to the dispute settlement mechanism with Taiwan. No Guarantee WTO will help China ties, Taipei Times, Nov 5, 2001, http://www.taipeitimes.com/News/twbiz/archives/2001/11/05/110242 (Last accessed on Feb 28, 2010).
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Understanding the urgent need to revitalize the Taiwanese economy, Chen Shui-bian started hinting at some major policy changes. In June, while on a trip to New York, he began pushing for Strategic Alliance of International Corporations that would encourage MNCs to invest in Taiwan and go to China along with Taiwanese partners. He became focused on promoting Taiwan as a hub, through the APROC concept, for firms operating in the Asia-Pacific, presumably including those with operations in China. But this begged the question: how could Taiwan play this new role under the No Haste policy that Chen had inherited from Lee Teng-hui? A Divided Government The peaceful transfer of power from the KMT to DPP represented clear progress in the consolidation of Taiwans democracy. But the first DPP administration faced several challenges. In terms of the political structure, the most fundamental was the divide between the DDP-controlled Executive Yuan and the KMT-controlled Legislative Yuan a division that lasted throughout Chen Shui-bians eight-year administration. Under Taiwans semi-presidential system, the legislators had limited ways to affect the policy and budgetary initiatives of the president, because they could not reject or amend decisions made by the executive branch. But they did have the power to veto the executives budgetary proposals and its choice of premier. Similarly, the president did not have constitutional power to resolve any problems resulting from executivelegislative disagreement over legislative proposals. (Peng 2003) The check and balance was that president and the legislators could hold up the other, but there were little incentives or mechanisms to work together to solve problems.193 Consensus building between the Executive Yuan and Legislative Yuan was crucial, but Taiwans structure made it difficult, even when both branches were controlled by members of the same party. Accountability to the public was also low. The executive branch dominated the government, which meant that the Legislative Yuan was not held accountable in law making, budget making, or monitoring the performance of the executive branch. Development of legislation and the creation of public consensus on policy issues was primarily the responsibility of the Executive Yuan. Given the prevalence of vote buying, the legislators were not highly accountable to their constituents. The legislators tried to ensure accountability to their constituents every now and then, through such mechanisms as the Legislator Demeanor Law and the Political Contributions Law. But many still questioned whether the legislators and the public were aligned in their interests. This gap also negatively impacted the rate of public participation in politics, judging from the low turnout in legislative elections.194 Facing economic woes and the prospect of WTO accession by both China and Taiwan, Chen was pressured to find consensus with his political opponents and with moderate DPP members. Reversing cross-Strait economic policies would be an ideal policy to garner support, Chen concluded, as powerful interest groups clamored for the ability to make direct investments in China.
The president could not intervene in the legislative process, and needed the legislators to amend laws, including the constitution, which was important. 194 Julie M. Wang, Taiwans Legislative Yuan and the Challenge of Putting Democratic Principles into Practice, The Asia Foundation, October 200, http://www.asiafoundation.com/pdf/TW_Legislative_Yuan.pdf (Last accessed on Feb 28, 2010).
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Fourth Nuclear Power Plant Crisis A good example of the legislative and executive divide was the crisis surrounding the construction of Taiwans fourth nuclear power plant. During his presidential campaign, Chen Shui-bian called for a stop to the construction of the plant, which had started in 1994 and was already about 30% completed in 2000 when Chen took office. The project had galvanized the opposition of both the DPP and many environmental groups, and had led to many protests in 1994. (Chao and Myers 1998, 289) This was a cause dear to the then DPP Chairman Lin I-hsiung, who was counting on Chens scrapping the plant; in fact, antinuclear statements had been incorporated in the DPP constitution. Particularly active was the Taiwan Environmental Protection Union (TEPU), which was aligned with the DPP-controlled Taipei County Government. The new DPP head of the EPA, Lin Yun-yi, was also sympathetic to the cause. Chen directed MOEA to set up a committee to review the project. Even though this committee deliberately excluded Taipower and the State Energy Commission, both of which supported the project, no decision on the issue could be reached even after three months of discussion. There were televised and online policy debates, but these seemed to unite the opposition parties the KMT, the NP and the Peoples First Party (PFP) even more in opposing the termination of the construction. Finally, on October 27, 2000, President Chen formally and abruptly terminated the project, without seeking either a consensus from the review committee or the approval of the legislature. But within four months, his decision to terminate the project was overturned. The legal basis for terminating the project by the executive branch unilaterally was thin, and Taiwans Council of Grand Justices was called upon to interpret the decisions constitutionality. The Councils formal interpretation was that this was a major policy that under the constitution required the Legislative Yuans approval.195 This judicial interpretation alone did not lead to President Chen to change his mind. Instead, President Chen pressured the speaker of the Legislative Yuan, Wang Jing-pyng, to reach a compromise. The crisis led to the resignation of Chens first premier, KMT General Tang Fei, who had joined the Cabinet with much fanfare as a sign of Chens intention to work with the KMT and the military. In the end, the new DPP Premier Chang Chu-hsiung and Speaker Wang Jing-pyng agreed to resume construction of the power plant, with the conditional goal of achieving a nuclear-free island over the longer term. (S.H. Hsu 2005)This procedure for resolving the crisis was not structural or institutionalized. But even this compromise did not end the crisis, since it seemed to acknowledge that President Chen had acted improperly in canceling the project. This led to a discussion about a legislative vote of no confidence against the president. The proposal generated considerable insecurity throughout the society, with polls conducted by TVBS, a leading television station, showing that 55% of the public opposed the vote of no confidence. In fact, the whole incident

It was unclear as to whether the president could discontinue the project under the amended constitution, which required legislative approval for Major Policy, and the Grand Council was called upon to decide what constituted a Major Policy.

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generated more sympathy for President Chen and DPP than before.196 This crisis demonstrated how politically polarized the society was, with the environmental issue becoming a rallying point for both the opposition (the KMT) and the newly elected president. (Rigger 2001) China, the U.S. and Taiwan Beijings Taiwan Policy Chinas policies during this episode changed slightly since the 2000 election, from an aggressive and intimidating strategy meant to promote unification, to a more accommodative strategy with the more modest ambition of preventing the declaration of Taiwanese independence, amidst a leadership transition coming up in 2002. This was because Chinas tougher policy had proven counterproductive. In fact, Beijings intimidation strategy had repeatedly backfired with the Taiwanese. The 1995-96 missile tests and military exercises had led directly to Lee Teng-huis pursuit of a more independent Taiwanese economy through his Go South and No Haste policies. During his last term, Lee Teng-hui pushed through a series of constitutional revisions that reduced the ROCs claims to the rest of China, and thus weakened the basis for eventual unification. In addition, the process of cross-Strait dialogue bogged down: although there was a preparatory SEF-ARATS meeting in Shanghai in 1998, it did not reach any agreements. Then, in 1999, Lee tested Chinas resolve with his characterization of cross-Strait relations as a special state-to-state relationship (later known as the two-state theory, or liangguo lun) in an interview with a German radio station, implying that China and Taiwan were two separate states, or at least two governments with equal standing197 Although China abstained from using force, it responded with a series of threats and retaliatory measure. Beijing decided to freeze the SEF-ARATS meetings, so the second formal meeting that was originally supposed to follow the preparatory session in Shanghai was never held. Beijing issued another serious warning in February 2000 with the publication of a White Paper on Taiwan, imposing a vague deadline for unification and warning the Taiwanese not to vote for the DPP. (Copper 2002, 149) Zhu Rongji even held a press conference on March 15, 2000 threatening war if DPP were elected, a threat that had may have marginally increased popular support for Chen. (Dittmer 2008, 186) The CCPs uncompromising policy toward Taiwan was part of its broader attempt to consolidate power at home through a more assertive policy abroad, relying on the support of rising popular nationalism. Chinas hard-line approach continued after the inauguration of Chen Shuibian, whom Beijing deeply mistrusted and whose election it had actively tried to prevent. China declared it would be patient, adopting a wait and see attitude after Chen Shui-bians victory. But it refused to resume the SEF-ARATS dialogue or to establish any public contact with members of the DPP, and there

Result of the TVBS Survey specific to this crisis was conducted on Oct 31, 2000 available at: http://www.tvbs.com.tw/code/tvbsnews/poll/20001102/20001102.asp (Last accessed on Feb 28, 2010). 197 For Lees detailed response to questions submitted by Deutsche Welle, see Responses to Questions Submitted by Deutsche Welle, Lee Teng-hui, President of Republic of China, July 9, 1999, http://www.fas.org/news/taiwan/1999/0709.htm (Last accessed on Feb 28, 2010).

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were still threats of military exercises around Chen Shui-bians inauguration.198 Then in October 2001, China made sure that all Taiwanese officials were excluded from participating in the annual APEC Economic Leaders Meeting (the so-called APEC summit). Only CEPD Chairman Chen Po-chih and Minister of Economic Affairs Lin Hsin-yi participated in separate ministerial meetings in China before the summit, but failed to achieve any understanding with their Chinese counterparts.199 Despite Beijings hard-line approach, President Chen believed that he could contribute to cross-Strait reconciliation, if only to gain needed political support from the Taiwanese business community and to show his departure from Lee Teng-huis political and economic policies. Chen decided to liberalize crossStrait economic policy, hoping it would affect Beijings attitude. Washingtons Taiwan Policy During the missile crisis of 1995-96, Clinton had dispatched naval forces to the Western Pacific twice to demonstrate American military support to Taiwan, but there was growing mistrust between the U.S. and Taiwan because of the widespread view in Washington that that Lee was being unnecessarily provocative and that this was increasing the risk of a military confrontation between China and the U.S. Beijing took advantage of those fears by seeking better ties with Washington proposing the formation of what it called a strategic partnership with the U.S. but demanding clarification of American policy toward Taiwan as a precondition for an improved relationship. This led to the Clinton Administrations articulation in 1997-98 of the three nos, its objections to Lees 1999 statement on state-to-state relations, and its repeated reaffirmations of Americas one China policy.200 (Tucker 2009; Dittmer 2008; Cooper 2003, 234) All this was intended to demonstrate that neither American concerns about Chinas record on trade and human rights, nor the rise of pro-independence forces on Taiwan, had changed the contours of American policy toward the island. Moreover, the Clinton Administration demanded a preview of Chens inaugural speech, to ensure that he would not announce any provocative steps toward independence, and to encourage him to make some conciliatory gestures to China. In 2001, the new G.W. Bush administration gave Taiwan a respite from the seemingly pro-Beijing policies of the second Clinton term. Although the U.S. still refused to sell the most advanced weapons to China, Washington did propose an increased package of arms sales, including submarines, destroyers, P-3 Orion antisubmarine aircraft, torpedoes, minesweeping helicopters and amphibious assault vehicles, some previously barred as offensive. (Tucker 2009, 260) The
See Ralph Cossa, China-Taiwan: wait and see, PacNet Newsletter, March 31, 2000 as summary to immediate reaction to Taiwans 2000 election result. Available at: http://csis.org/files/media/csis/pubs/pac0013.pdf. See also Taiwan Brushes off PLA Threat, South China Morning Post, May 26, 2000, reprinted in abridged version at: http://taiwansecurity.org/TSR-Archives-Jan-Jun-2000.htm (Last accessed on Feb 28, 2010). 199 The Taiwanese had an uproar over how Lin was treated in Shanghai, see Editorial: Walking into Chinas Trap, Taipei Times, Nov 1, 2001, www.taipeitimes.com/News/editorials/archives/2001/11/01/109644 (Last accessed on Feb 28, 2010). 200 The three nos were: We dont support independence for Taiwan, or two Chinas or one Taiwan, one China. And we dont believe that Taiwan should be a member in any organization for which statehood is a requirement.
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Bush Administration allowed Chen to make transit stops in American cities before and after visiting some of Taiwans diplomatic allies in Latin America.201 And, perhaps most importantly, Bush reasserted Americas commitment to Taiwans security by pledging, in his first press conference, that the U.S. had an obligation to help Taiwan defend itself (originally stated even more strongly as to defend Taiwan), without imposing the condition that the American commitment did not extend to a declaration of independence by Taiwan. (Tucker 2009, 261) However, after the 9/11 attacks and the subsequent American focus on the global war on terrorism, the necessity for the U.S. to work with China on a range of issues, both bilaterally and in multilateral organizations, reduced the possibility for a fundamental improvement in U.S.-Taiwan relations. The American attitude toward cross-Strait relations remained pretty much unchanged: it encouraged an improved cross-Strait relationship, opposed any provocative actions by the new DPP administration, and hoped that the accession of both China and Taiwan to the WTO could lead to direct trade links and stabilize the relationship.202 Lees 1999 statement of special state-to-state relations between Taiwan and the Mainland had actually been quite popular with the Taiwanese, who saw it as simply an objective description of the status quo. Clintons willingness to repudiate the liangguo lun in order to improve American relations with China magnified the Taiwanese concern and made them regard China as even more belligerent. But neither Chinese pressure on Taiwan, nor American willingness to accommodate Beijing, caused Taiwan to back away from Lee Teng-huis No Haste policy until Chen Shui-bians term began. Economic Development Advisory Conference Chen Shui-bian came into power facing a challenging environment: a legislature controlled by the opposition, electoral support from only a minority of the public, and close scrutiny from an American government that feared his partys historic support for independence. With the economy slipping, and after the failure to work with the opposition legislators during the Fourth Nuclear Plant project, by early 2001 President Chen realized he had to take an initiative to revive Taiwans economy and to build a stronger political base. He chose to highlight two issues to show the administrations determination to be flexible and realistic: the revitalization of the Taiwanese economy and, more surprisingly, an improvement of Taiwans relations with Mainland China. Chen Shui-bian seemed to have believed that he could actually make a breakthrough in cross-Strait relations by being conciliatory at the beginning of his term.203 In his May 2000 inaugural address Taiwan Stands Up, he said that the
This was commonly known as Transit Diplomacy as Chen made ten state visits during his terms and twice to the U.S. in transit. See KMT description in Seven Years of Diplomatic Maneuvers Resulting Just in Biting the Bullet? August 13, 2007, http://www.kmt.org.tw/english/page.aspx?type=article&mnum=113&anum=3246 (Last accessed on Feb 28, 2010). 202 CRS Report for Congress, Taiwans Accession to the WTO and its Economic Relations with the U.S. and China, May 16, 2003, http://fpc.state.gov/documents/organization/23370.pdf (Last accessed on Feb 28, 2010). 203 A typical commentary is John Browns occasional paper for Center for Strategic and International Studies. See for instance, China-Taiwan Relations: Groping for a Formula for Cross-Strait Talks, 2000, http://csis.org/files/media/csis/pubs/0002qchina_taiwan.pdf (Last accessed on Feb 28, 2010).
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two sides should be able to deal creatively with the issue of a future one China, and announced the Four Nos and One Have-Not: Therefore, as long as the CCP regime has no intention to use military force against Taiwan, I pledge that during my term in office, I will not declare independence, I will not change the national title, I will not put forth the inclusion of the so-called "state-to-state" description in the constitution, and I will not promote a referendum to change the status quo in regard to the question of independence or unification. Furthermore, there is no question of abolishing the Guidelines for National Unification and the National Unification Council.204 Chen extended other olive branches to Beijing in the first two years of his presidency. In March 2000, he enacted the Island Infrastructure Regulation, which established the mini-Three Links and thereby normalized the movement of goods and people between Quemoy, Matsu and Mainland China in 2001. Even more importantly, this was followed in January 2001 by Chens suggestion that the No Haste policy be modified and that the restrictions on Taiwanese investment in the Mainland be relaxed in the direction of what Chen called active opening, effective management (what came to be known as the Active Opening policy).205 Chens second policy goal to promote Taiwans economic recovery and long-term growth was reflected in a closed-door meeting, the NEDC, organized in January 2001 by Premier Chang Chu-hsiung immediately after he succeeded Tang Fei as prime minister after the Fourth Nuclear Plant fiasco. The NEDC focused mainly on domestic economic problems, including issues of infrastructure, taxation, and labor. However, the topic of Overseas Investment and Cooperation was also discussed, with the government announcing the relaxation of the No Haste policy by expanding the number of items allowed for Taiwan investment on the Chinese mainland and establish[ing] a risk-management mechanism and capital return system for investments on the Chinese mainland, considering both business development and risk management.206 As noted above, Chen Shui-bian had actually proposed relaxing the restrictions on investing in China in his New Years speech earlier that month, and it appeared that the NEDC was intended to be the formal mechanism to begin the policy reversal process.207 On May 8, 2001, Chen Shui-bian called for an all-hands conference that merged his two major policy objectives: economic development and improved cross-Strait relations. In contrast to the NDC, the Economic Development
See President Chen's 520 Inaugural Speech: Taiwan Stands Up: Advancing to an Uplifting Era, http://www.mac.gov.tw/english/english/macpolicy/cb0520e.htm (Last accessed on Aug 31, 2009); also refer to the exhibit by Center for Strategic and International Studies, Taiwan Strait Time Line: a history of cross strait relation, http://csis.org/files/media/csis/programs/taiwan/timeline/pt6.htm/ (Last accessed on Feb 28, 2010). 205 See President Chens speech on December 31, 2000. , http://www.president.gov.tw/php-bin/prez/shownews.php4?Rid=5085 (Last accessed on Feb 28, 2010). 206 Government Information Office, Major Conclusions of the National Economic Development Conference, January 7, 2001, http://www.gio.gov.tw/taiwan-website/4-oa/chang/press0107.htm (Last accessed on Feb 28, 2010). 207 Hsu Cheng-min, , Economic Journal, January 14, 2001, http://old.npf.org.tw/PUBLICATION/FM/090/C/FM-C-090-013.htm (Last accessed on Feb 28, 2010).
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Advisory Conference (EDAC) was described as an as extra-institutional (not intra-institutional) mechanism because it included civil society groups as well as government agencies and political parties.208 The idea was to bring together all relevant opinion leaders so that Chen Shui-bian could roll out his key proposals, especially on cross-Strait economic ones, in a setting that would minimize any potential opposition. Given the economic and political problems, polls showed that over 60% of the public supported holding this conference.209 In fact, the public and politicians alike had high expectations of the results that could come from such an all-hands conference.210 Chen Shui-bian made an extraordinary effort to commit himself to respect the consensus decisions reached by the conference, even though they were not legally binding on him in any way. In addition to formulating effective economic policies, he wanted the conference to show that the competing political parties could work together and eventually form a coalition government: [T]his is not an ending, but a new beginning. The satisfactory conclusion of the conference is proof that governing and opposition parties, labor and management, academics, and researchers representing a broad spectrum of opinions, regardless of different positions and stances, are able to reach a strong consensus, as long as they open their hearts and find common interests.211 From June to August 2001, five preparatory panels were convened at which no fewer than 314 non-political proposals were presented, ranging from tax cuts to workers rights. There were a total of 125 participants from all four political parties and major industry associations including the General Chamber of Commerce of the Republic of Taiwan (ROCCOC), CNFI, CNAIC, the Taiwan Federation of Industry, the National Association of Small and Medium Enterprises (NASME) and the Taiwan Electrical and Electronic Manufactures Association (TEEMA).212 The fifth of the preparatory panels, the Cross-Strait Group included 17 participants from the NP, the KMT, the DPP and the PFP, led by three organizers, President of TIER Rong-i Wu, Acer founder and business leader Stan Shih, and the DPPs Ing-wen Tsai. The group held four meetings to prepare for a series of public meetings to be held across the island between July 31 and August 12 in order to gather public opinion, which would then be shared with the entire panel during the conference. Shih chaired the Central Taiwan public meeting in
Further details on the NDC can be found in Rigger (2001, 106). Polls conducted by Open Weekly on July 18-19, 2001, which appeared on page 4 of United Daily News, July 22, 2001. 61% of the respondents thoughts the EDAC was necessary, 44% thought the EDAC could help improve unemployment, 51% thought maybe EDAC could improve economic growth, and 44% thought EDAC would end up being a big political get-together only. 210 Wu Rong-i, . Taiwan New Century Foundation Forum, Issue 15, September 30, 2001, http://www.taiwanncf.org.tw/ttforum/15/ (Last accessed on Feb 28, 2010). 211 Government Information Office, President Chen's Remarks at the Closing Ceremony of the EDAC, August 26, 2001, http://www.president.gov.tw/en/prog/news_release/print.php?id=1105496925 (Last accessed on Feb 28, 2010). 212 The six groups endorsement was very important to the government, although their opinions varied. See the NPF article by Tan Ching-yu, , July 30, 2001, http://old.npf.org.tw/PUBLICATION/TE/090/TE-C-090-080.htm (Last accessed on Feb 28, 2010).
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Taichung, Wu led the Southern Taiwan public meeting in Kaohsiung, and Tsai organized the Eastern Taiwan public hearing. The conference itself took place from August 24 to 26, 2001, during which each of the panels including that on cross-Strait relationsmade their recommendations. At the closing of the conference, President Chen pledged to follow through in seven ways:213 1. Speedy implementation of the consensual conclusions, taken as representative of public opinion. 2. Amendment of 43 relevant laws, many of which could be completed at the beginning of the following parliamentary session. 3. Further consideration of policies that had attained majority support but not a consensus, such as an annual debt service plan and tax system reform. 4. Upgrading Taiwans economy with concrete measures like increasing the R&D budget by more than twelve percent. 5. Streamlining the government. 6. Convening, as a next step, a multiparty consultative meeting and a multiparty leaders summit. 7. Organizing a coalition government and not changing the direction of the conclusions of the EDAC regardless of year-end Legislative Yuan election results. At the time, it appeared to be a breakthrough for the Chen administration to agree on these seven points with the other political parties. Policy formulation in Chens first year had been fraught with disagreement between the DPP and opposition parties and there was real concern the EDAC would achieve nothing. In order to follow up the initial success of the EDAC, there was a summit of Legislative Yuan party leaders to conduct inter-party negotiations on the next steps. Participants included the KMTs Lien Chan, the DPPs Frank Hsieh, the PFPs James Soong and the NPs Hsieh Chi-ta. National Non-Party League convener Tsai Hau and Peoples Union convener Yeh Hsien-hsiu also attended.214 The meeting arrived at reached 322 consensus opinions and 36 majority opinions, of which 36 focused on closer cross-Strait ties. Attention then turned to implementing these agreements. As the EDAC had agreed, the Cabinet needed to draft or revise 43 relevant laws, which were then sent to the Legislative Yuan for approval and finally back to the Executive Yuan for implementation. The Legislative Yuan worked hard during the subsequent legislative session to approve 20 of these laws that related to EDAC proposals along with 14 other WTO-related legislations. Finally, the CEPD, headed by Chen Po-chih, was assigned to be in charge of the process of implementation.215 This seemed to be an overwhelmingly successful conference despite the high tension of Chens first year in office.

Government Information Office, President Chen's Remarks at the Closing Ceremony of the EDAC, August 26, 2001, http://www.president.gov.tw/en/prog/news_release/print.php?id=1105496925 (Last accessed on Feb 28, 2010). 214 Stephanie Low, Party leaders vow to cooperate, Taipei Times, September 16, 2001, www.taipeitimes.com/News/local/archives/2001/09/16/103183 (Last accessed on Feb 28, 2010). 215 Ibid.

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The conference had a considerable impact on cross-Strait economic policy. The EDAC gave the new administration a green light to end the No Haste Policy. Members of the Cross-Strait panel from all political parties had been eager to agree on the liberalization of Mainland China economic policies as elections were drawing near, and everyone involved in the EDAC wanted to claim credit for moving the economy forward. Six points of consensus on cross-Strait policies were reached, all of which were described as avoiding difficult political issues and focusing on purely economic matters:216 1. Promote the fundamental principle of cross-Strait economic and trade development. 2. Aggressively liberalize cross-Strait trade and investment policies, and loosen the no haste, be patient policy. 3. Establish a flexible system for capital flow across the Strait. 4. Join the WTO and bring about the Three Links with China 5. Allow Mainland Chinese tourists to visit Taiwan. 6. Initiate cross-Strait negotiations, resolving differences over the 92 Consensus and putting aside political debates to focus on issues of peoples welfare.217 In August, through much negotiation and compromise, details of the Active Opening policy were hashed out under the leadership of Koo Chen-fu, and the Executive Yuan made final announcements on implementation of the EDAC consensus in November.218 Some slogans and principles were stressed such as Taiwan First, Global Strategy, Mutual Win-win, and Risk Management. The highlights were that trade and postal and telecommunications would become direct, instead of indirect. Investment restrictions were relaxed, and PRC tourists were allowed to visit Taiwan on a trial basis.219 However, the issue of the 92 Consensus was discussed extensively but essentially unresolved.220 It referred to the 1992 recognition by both sides that there is only one China, although there was no agreement on the definition of that one China. What was unresolved was how Taiwan would represent its definition of one China to China. On investments in China, several important initiatives were promised. First, the negative list would be replaced with a positive list such that there were only prohibited and general categories. Specifically, industries that could not survive unless they moved to China, barring strategic industries such as upstream petrochemical products and silicon wafers, should be allowed to do so.
, August 26, 2001, http://www.mac.gov.tw/ct.asp?xItem=68173&ctNode=6621&mp=1 (Last accessed on Feb 28, 2010). 217 Each member of the Conference was on record as to his opinion on the 92 Consensus. For details, see: http://www.mac.gov.tw/ct.asp?xItem=68267&ctNode=6621&mp=1 (Last accessed on Feb 28, 2010). See also Copper (2002, 218). 218 Details and official announcement available at: Economic Ties with the Chinese Mainland, http://www.gio.gov.tw/taiwan-website/5-gp/yearbook/2002/chpt10-4.htm (Last accessed on Feb 28, 2010). 219 In January 2002, Mainland Chinese with residency in a third country were invited to apply for permission to visit Taiwan. In May 2002, Chen even stated while in Quemoy that the two sides should normalize their economic relations and that it was imperative to establish the full Three Links between them. (See Liberty Times, May 9, 2002, page 1) 220 See , China Times, August 27, 2001, http://forums.chinatimes.com.tw/special/open/index.htm (Last accessed on Feb 28, 2010).
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Second, the application process for investing in China, especially for projects under $20 million, would be streamlined and investment could be made directly rather than through a third location. Even larger investments would be considered on a case-by-case basis according to clearly stated standards. Third, a special industry review mechanism would be introduced to help Taishang make investments and diversify funding sources. Most importantly, the relaxation of limits on the level of investment (such as the $50 million per project limit) and on the percentage of a firms capital that could be invested (such as the 20% NAV limit for public companies) was to be expected. Anticipating changes from accession to the WTO, it was announced that PRC investors would be allowed to invest in Taiwan real estate and participate in Qualified Foreign Institutional Investor (QFII) funds, and that Taiwanese financial institutions would be allowed to invest in China through subsidiaries or branches.221 However, these initiatives did not materialize until financial MOUs were signed in November 2009, which allowed mutual supervision. The ECAC was significant not only because of its willingness to address the sensitive issue of cross-Strait policies, but also because of the governments desire to show a united front with the opposition parties and to build consensus within the DPP in doing so. In its first two years in power, the DPP had been rife with internal politics, with competing factions holding totally different opinions on cross-Strait economic policies. This conference was seen as a way to reach some kind of decision without yielding excessively to the extreme protectionists within the DPP party. (Chao 2002, 119) International observers welcomed the creative initiative and commented that until Taiwans politicians and political institutions mature, such extra-institutional meetings, where national interest is given clear priority, may be the way for an immature, divided democracy to meet the many challenges facing it.222 Unfortunately, however, serious problems of implementation still lay ahead. Cross-Strait economic policies were of two kinds policies that the Taiwan government could decide unilaterally, and those that required Chinas involvement and agreement. Furthermore, the EDACs recommendations were extremely varied some technical, some tactical, and others strategic that required different types of coordination and that had varying degrees of priority. The problems with implementing the recommendations on cross-Strait economic relations arose almost immediately. The opening of direct shipping and air links with China, for example, still required the political parties to reach agreement on implementing laws and regulations. And there were some sectors, like the semiconductor industry, that were far more sensitive than others. Coming up with a coherent policy to govern that sectors investments in China took many more months, culminating in a March 2002 protest.

On official explanation, see the MAC, , November 17, 2001, http://www.mac.gov.tw/ct.asp?xItem=60312&ctNode=5645&mp=1&xq_xCat=2001 (Last accessed on Feb 28, 2010). 222 Bruce Jacobs (Monash University of Melbourne Australia), From Exhilaration to Pessimism, Taipei Times, September 15, 2001, http://www.taipeitimes.com/News/editorials/archives/2001/09/15/103071 (Last accessed on Feb 28, 2010).

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Public Response Although many were skeptical of the DPPs political motives, they realized that the public had high expectations for the conferences success, and were therefore motivated to reach some decisions as to economic policies. As a result, the EDAC reached a surprising degree of consensus on a wide range of issues, including cross-Strait economic policies. The Chen Administration was, not surprisingly, eager to gauge the publics response. It adopted a variety of measures to do so, unheard of in the past, including presidential speeches, public hearings, televised debates, and public surveys. Immediately after the conclusion of the EADC, the government conducted a survey with a sample size of 1,069 on August 29-31, 2001. Nearly 80% of the respondents knew about the conference, but they evaluated it in very different ways: roughly a third were satisfied or very satisfied with the consensus conclusions, a third were not sure or didnt know, and about a quarter of the respondents expressed dissatisfaction. But on Chens proposal of forming a coalition government, which was part of the purpose of the conference, a large majority, 63%, was supportive.223 In the same government poll as well as in private polls conducted at the same time regarding whether EDAC should relax former restrictions on Chinese investments, approval was consistently over 50%.224 Specifically, when asked about reversing the No Haste policy, majorities were supportive: 54% supported versus 20% who opposed. That ratio was 54% to 16% in a second poll by TVBS Polls, and 48% to 33% in a third poll by the Research, Development and Evaluation Commission of the Executive Yuan (RDEC). The No Haste policy obtained an overwhelming 80% support in a fourth poll by the ROC Federation of Industries.225 But when asked about the details of measures to liberalize cross-Strait economic policy, reservations began to appear. Specifically, when asked if the government should lift previous restrictions on Taishangs investments in China by project and amount, 33% in the RDEC poll said they were not at all supportive or not supportive and 17% said they were not sure or didnt know, compared with 48% who said they were very supportive or somewhat supportive.226 Some of the contradictory poll results were clarified when people were asked more specifically about particular restrictions. On opening the Three Links in trade, mail and transportation after Taiwan joined the WTO, for example, 67% responded that they were very supportive or somewhat supportive. Similarly,
Poll conducted by the RDEC. For details, see ( : 90.08.29~31), August 31, 2001, accessible at: http://www.rdec.gov.tw/mp100.htm or http://www.rdec.gov.tw/ct.asp?xItem=4023315&CtNode=12142&mp=100 (Last accessed on Feb 28, 2010). 224 The MAC summarizes the results of all the polls in 2001 as , http://www.mac.gov.tw/public/Attachment/97710133767.htm (Last accessed on Feb 28, 2010). 225 Ibid. 226 Poll conducted by the RDEC. For details, see ( : 90.08.29-31), August 31, 2001, http://www.rdec.gov.tw/ct.asp?xItem=4023315&CtNode=12142&mp=100 (Last accessed on Feb 28, 2010).
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the public was open-minded about allowing Mainland Chinese to come to Taiwan as tourists, with 67% responding they were very supportive and somewhat supportive. Many thought tourism would bring in employment and income. But allowing investments in China received less support, as they were believed to take jobs and capital away from Taiwan.227 In 2002, for example, MACcommissioned polls showed that 47% of public believed that restrictions on investments in China should be stricter, while 25% thought they should be more lax. This phenomenon was even greater with regard to high-tech industries moving to China, where as many as 70% of respondents supported continuing or furthering restrictions. The events of 2001 also showed the increasing power of various societal groups. For the first time, there was an organized and consistent attempt to influence cross-Strait economic policies. Along with the transition of power to the DPP, the number of think tanks and interest groups rose dramatically. The public was better educated and more engaged in discussions of cross-Strait economic policies than ever. The EDAC generated discussions on economic liberalization at all levels of society, and the public appeared engaged to influence changes in government policy. The ambivalence about Taiwans national identity continued in this episode. The percentage of respondents in the NCCU-ESC polls who claimed a Taiwanese identity fluctuated between 37% and 39%. Those who had adopted a Chinese identify had steadily dropped and now hovered around 9%. The only category that consistently increased was those who said they were both Taiwanese and Chinese, which rose from 40% to 44% to 46% in 1998, 1999 and 2000, respectively.228 Attitudes on the ultimate relationship between China and Taiwan also remained largely undecided. In December 2000, while 10% veered towards independence (independence as soon as possible and status quo moving toward independence) and 21% leaned towards unification (unification as soon as possible and status quo moving toward unification), 52% supported maintaining the status quo indefinitely or postponing a decision until later.229 But perhaps the most important test of public reaction to the EDAC and the DPPs new cross-Strait economic policies was not the opinion polls but the electoral polls: the elections for city mayors and county magistrates, as well as the legislative elections, at the end of 2001. In the legislative elections, the DPP won a plurality (87 of 225 legislative seats) more than the KMT, and much better than had been expected on the basis of the elections of 2000. However, the panblue coalition of the KMT, the PFP, and the NP continued to enjoy a majority. Overall, the Legislative Yuan was divided between a pan-green coalition of 100 members (87 DPP and 13 TSU) and a pan-blue coalition of 115 members (68 KMT, 46 PF, 1 NP), plus ten independents. To many, the signal was unmistakable: the DPP administration was right on course, especially with regards to cross-Strait relations. (Copper 2003) But
The MAC summarizes the results of all the polls in 2001 as , http://www.mac.gov.tw/public/Attachment/97710133767.htm (Last accessed on Feb 28, 2010). 228 Data from Election Study Center, NCCU, Important Political Attitude Trend Distribution, http://esc.nccu.edu.tw/english/modules/tinyd2/index.php?id=6 (Last accessed on Feb 28, 2010). 229 Ibid.
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other analysts disagreed, arguing that although the DPP performed better than expected, there had been no major shift in public sentiment. The question remained: had the new Active Opening policy achieved Chens objective of building a stronger political base for the DPP? The Four Tendencies One important difference among the four episodes discussed in this study concerns the timing of public input into the formulation of cross-Strait economic policies. Public input can occur before, during, or after a law is passed or a decision is reached. In this episode, as in the earlier one, it occurred primarily after the new policy was announced. This was largely because of Taiwans institutional setting. The president had exclusive power over cross-Strait policies and did not require prior public support to reach or announce his decision. Second, as a legacy of the previous authoritarian system, public think tanks and interest groups were slowly maturing and many, like the teachers unions, had only become legal recently. And established groups with decades of history, ranging from think tanks to trade and professional associations, which had been associated with or even controlled by the KMT-government, were just starting to adapt to working with the DPP. Extensive Restriction Predictably, those who belonged to the Extensive Restriction opinion cluster opposed the new policy of Active Opening, even though many of them were sympathetic supporters of Chen Shui-bian and the DPP. What distinguished them from other critics of the liberalization of cross-Strait economic policies was the reason for their opposition: as in other episodes, the Extensive Restrictionists were primarily concerned with Taiwans economic and military security, and were apprehensive that any relaxation of the previous No Haste policy would threaten national security by making Taiwan more dependent on China. Other economic interests market stability, equity, and economic growth were given far less priority. What is more surprising is that many in Chens own government were against his reversal of course, starting with Chens vice president, Annette Lu. She objected specifically to relaxing the investment rules and called for those in power to consult their consciences in formulating cross-Strait economic policies.230 Others rallied around Lus call to oppose Chens move. In an op-ed in Liberty Times in January 2002, Professor Lin Wen-cheng of National Sun Yat-sen University made the following argument against Active Opening policy, demonstrating the Extensive Restrictionists characteristic focus on comprehensive security, including military and economic: Since China insists on not renouncing the use of force against Taiwan, achieving direct cross-strait economic interaction and mutual civil exchanges will increase Taiwans national security burden. It will also increase economic and trade dependency on China and reduce Taiwans ability to resist Chinese pressure. Taiwan must therefore make some sacrifices involving economics and trade on the one hand and national

:, Commercial Times, August 23, 2001, http://forums.chinatimes.com/special/open/da.htm (Last accessed on Feb 28, 2010).

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security on the other and try to strike a balance between them The premise for this though, is that national security must be guaranteed.231 In other words, the Extensive Restrictionists believed it necessary to assign the highest priority to security, even at the cost of other economic interests such as equity, stability and growth. Even many of those at the MAC, who were responsible for implementing the relaxation of cross-Strait economic policies, leaned towards tighter control, not less. Chiu Chui-cheng who was at the MAC in 2001 has explained that sovereignty and hence security was his highest considerations when thinking about cross-Strait economic policies: There is no example of two hostile countries working as closely together as Taiwan and China without any institutional framework. What we must consider is security versus economic concern on the one hand and special interests versus general welfare on the other. The DPP government prioritizes sovereignty and on that basis, the DPP wants to develop Taiwan economically, socially and politically. That differentiates the DPP from other political parties.232 Huang Tien-lin, former chairman of First Commercial Bank, a previous member of the Lee Teng-hui administration, and then a National Policy Advisor for Chen Shui-bian, argued that building national security on the back of economic globalization could be achieved only under very strict conditions which Taiwan would not be able to achieve. He portrayed the westward march fervor generated from the EDAC as a fantasy to be abandoned, and argued that easing restrictions on investment in China will lead to the hollowing out and marginalization of Taiwans economy.233 In support of this contention, he compared Taiwan to Korea, noting that Korea was able to strengthen its industrial base by limiting outbound foreign investments whereas Taiwan had invested $15 billion in China but saw a negative growth rate of 2.4% in the second quarter of 2001. He advised President Chen to set a quota on exports to China at no more than 30% and on FDI to China at under 50% of Taiwans total outgoing FDI.234 The NSC approved the benchmarks, but President Chen never put them into executive order. According to Huang, Chen failed to set an independent economic course that would enable Taiwan to thrive under globalization without relying on China, which would give Taiwan more political options. (T.L. Huang 2007, 305) The military, although predominantly of KMT lineage, took an interesting position: although it favored unification as a long-term objective, its primary short- and middle-term interest was autonomy and security. On Sep 4, 2001 Armed Forces Day, the Chief of the General Staff General Tang Yao-ming seemed to caution against the liberalization of cross-Strait economic ties by warning, The Chinese tactic of using Taiwan businessmen and civilians to
Lin Wen-cheng, Stiffening our cross-strait resolve, Taipei Times, Jan 16, 2002, www.taipeitimes.com/News/editorials/archives/2002/01/16/120183 (Last accessed on Feb 28, 2010). 232 Based on interview with Chiu Chui-cheng, June 18, 2008; see also Chiu (2008). 233 Huang Tien-lin, Time to drop the China fantasies, Taipei Times, September 20, 2001, http://www.taipeitimes.com/News/editorials/archives/2001/09/20/103757 (Last accessed on Feb 28, 2010). 234 Based on interview with Huang Tian-lin, July 30, 2008.
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influence the Taiwan government is aimed at suppressing our economic development and competitive power. His statement was representative of the militarys view on the risks inherent in easing the restrictions on Taiwanese investments in China.235 Prior to the formation of the TSU in July 2001, the TAIP had been the strongest advocate among political parties in supporting extensive restriction, and it too focused exclusively on preserving Taiwans security. Even before the EDAC, the chairman of the TAIP, Ho Voonky, resisted any steps toward abandoning the No Haste policy prior to EDAC, on the grounds that to do so would expose Taiwanese businessmen to more risks in China, as the country shows no respect for the rule of law Few actually make a profit from doing business there These people never bother to channel it back to Taiwan where banks and friends loaned them their capital in the first place.236 Ho equated the establishment of direct air links as surrendering to China since China treated Taiwan as a local province. Lee Teng-hui joined the debate by stating that the Taiwanese economy would be worse off than it was had it not been for his No Haste policy. In September 2001, Lee led the formation of the TSU, and began active campaigning for its candidates in the run-up to the December 2001 legislative elections. In his speeches, he repeatedly argued that the solution to Taiwans economic problems would not be to open up to China, as doing so would pose a security risk.237 (Lynch 2006b, 186) In one campaign speech, Lee called Chens administration clueless for its policy of opening up to China.238 The professional associations were also against opening the market to competition although some groups were more politically driven than others. There was a clear divide between groups focused on sovereignty and security, which are regarded here as Extreme Restrictionists, and those who were primarily concerned with market stability and economic equity (or, more simply, their jobs), most of whom can be considered as Guided Developmentalists. Founded in 1990, the Taiwan Association of University Professors (TAUP) and the Taiwan Engineers Association (TEA) were two principal examples of groups that worked tirelessly to stop the Active Opening policy for political reasons, which in the case of TAUP reflected the fact that the organizations charter included the goal of supporting Taiwanese independence.239 Although not affiliated with any political party, and while prohibiting its members to hold public office, TAUP worked closely with TSU and shared similar goals.

Brian Hsu, Tang warns of Beijings threat, Taipei Times, September 4, 2001, http://www.taipeitimes.com/News/local/archives/2001/09/04/101441 (Last accessed on Feb 28, 2010). 236 Crystal Hsu, Independence activist s bemoan Chens betrayal, Taipei Times, August 19, 2001, http://www.taipeitimes.com/News/local/archives/2001/08/19/99197 (Last accessed on Feb 28, 2010). 237 Lin Chieh-yu and William Ide, Lee on the offensive at first TSU allies, Taipei Times, September 2, 2001, http://www.taipeitimes.com/News/front/archives/2001/09/02/101159. 238 Dec 1. elections: Lee criticizes EDAC as being useless, Taipei Times, November 9, 2001, http://www.taipeitimes.com/News/local/archives/2001/11/09/110755 (Last accessed on Feb 28, 2010). 239 TAUP currently has over 400 members. Details of TAUP from TAUP constitution and Charter and mission statement at: http://www.taup.org.tw/content4.html (Last accessed on Feb 28, 2010).

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DPPs former Chairman Lin I-hsiung, who had put Chen Shui-bian into office in 2000, was extremely disappointed with Chens backtracking on the fourth nuclear plant issue and openly challenged Chen. His view was that Chen kowtowed to opposition parties because he had no strategy, therefore, could not galvanize support for the right kind of economic policies. The previous No Haste was supported across the board because President Lee had internal support from the KMT and thus, the public. Chen Shui-bian, however, did not have any economic strategy towards China, which requires thoughtful consideration on protection of sovereignty.240 Some media began to voice similar concerns about the implications of Chens new Active Opening policy for Taiwans security. For example, the president of Taipei Times (affiliated with Chinese leading newspaper Liberty Times), Lee Chang-kuei, also a former KMT legislator, wrote that the battle is between the Taiwan first and one China camps, and stressed that it was important to protect the long-term national interest of Taiwan. Lee was astounded by the EDAC liberalization proposal, describing it as a success for the KMT, which he said was playing the role of Chinese embassy in Taiwan. Lee Changkuei declared that there was little to be gained from liberalization, economically, politically or militarily.241 Economically, he warned against exaggerating the benefits to be gained from Active Opening, predicting that Taiwans traditional industries [will] suffocate, unemployment rates surge and the suffering of the general public intensifies. Furthermore, China would threaten Taiwans existence because China has different political objectives: A nations economy is closely linked with its governmental system. The political goals of democratic countries are the attainment of economic development and the well being of the population. In contrast, the goals of communist countries are to develop national defense systems and maintain social order Sooner or later, Taiwan will be engulfed by China.242 Similar to other Extreme Restrictionists, security considerations served as the underpinning for Lee Chang-kueis arguments. Guided Development A second opinion cluster also perceived trade with and investment in China to be detrimental to Taiwans interests. Together with the Extensive Restrictionists, they formed a formidable bloc to try to block the implementation of the Active Opening policy. In certain instances the coalition between these groups proved to be stronger than the coalition of liberalizers that supported Chens policy and, as we will see, they proved successful in forcing Chen Shuibian to abandon his original intention for a broad reversal of Lee Teng-huis No Haste policy. As compared with the Extensive Restrictionists concern about security, however, the principal priorities for the proponents of Guided Development were the issues of equity and market stability, with particular attention in 2001 to the
Based on interview with Lin I-hsiung, April 1, 2009. Lee Chang-kuei, Year-end election choice clear-cut, Taipei Times, September 16, 2001, http://www.taipeitimes.com/News/editorials/archives/2001/09/16/103209 (Last accessed on Feb 28, 2010). 242 Lee Chang-kuei, The Dangers of active opening. Taipei Times, October 29, 2001, http://www.taipeitimes.com/News/editorials/archives/2001/10/29/109202 (Last accessed on Feb 28, 2010).
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problem of unemployment. Economic growth was a secondary, although not negligible, concern: Taiwans economic troubles have also been exacerbated by the exodus of its manufacturing base to China and the accompanying massive outflow of capital and management talent. Encouraging Taiwans high-tech industry to move to China will simply create a business competitor and increase unemployment in Taiwan the nations economy as a whole will be weakened and become increasingly dependent on China.243 The slowdown in the Taiwanese economy encouraged the formation of a number of NGOs concerned with unemployment. Proclaiming itself to be libertarian in principle, The Taipei Society organized 300 NGOs concerned with unemployment to protest against the EDACs liberalization policy on September 10, 2001.244 The media event 99 Declaration from the Taiwanese People, which involved groups like the TEPU and the Garden of Hope Foundation, also aimed to express concern about the long-term economic consequences of relaxing restrictions in investments in China. They expressed concern about unemployment and the environment, and accused the government of pandering to military personnel and public workers.245 With two thirds of all public school teachers as members, the NTAROC was also very vocal in trying to ensure that the Active Opening policy would not allow teachers from China to work in Taiwan.246 Formed under the KMT administration, the group had no party affiliation.247 According to Yang I-feng, one of the founders and the director of the NTAROC, the organization opposed liberalization, whether proposed by the DPP or the KMT, on the grounds that it would cost teachers their jobs. The NTAROC was a key participant in the debates over Taiwans cross-Strait economic policies, and participated in the 2001 EDAC as well as the 2005 WTO Ministerial meetings in Hong Kong. The organization argued that growth was important for the society, but should not come at the teachers expense: Structurally, DPP like the KMT needs to open the economy enough to ensure larger export market, but not too much to marginalize Taiwans economic strength or threaten its power base like support from the teachers. Presidents Lee and Chen knew that prohibiting investments in China can
Li Thian-hok, Taiwans economy at a crossroads, Taipei Times, Sep 8, 2001. For details on Taipei Society, one of the first NGOs centered around self-proclaimed libertarian intellectuals, see official website at: http://www.taipeisociety.org/taxonomy/term/10 (Last accessed on Feb 28, 2010). 245 Jimmy Chuang, Social issues overlooked, groups say, Taipei Times, September 10, 2001, http://www.taipeitimes.com/News/front/archives/2001/09/10/102292. Also see the platforms and clauses of the Taipei Society at: http://www.ts.twmail.org/content/default.asp (Last accessed on Feb 28, 2010). 246 An example of the groups success was how the Association organized 100,000 people for a street protest in 2002. It was to protest against taxing teachers (who enjoyed tax-free income in Taiwan) and it even galvanized international support from other countrys teacher organizations, which led to a defeat of the tax proposal. 247 Based on interview with Yang I-feng, June 17, 2008. The group continued to receive support, however, from the National Policy Foundation backed by the Lien Chan Foundation. The founders believed they have left wing and libertarian roots according to Yang I-feng. Teachers in Taiwan were already organized in the 1980s but it was underground, and the movement expanded in 1993-1994. The Association was formed in 1999 as soon as unions were allowed, Yang explained that the organization has become bipartisan and self-funded.
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be an effective way to stop the flight of capital and talent, and leaves Taiwanese with another economic option if China does not prove lucrative.248 Several members of the bureaucracy like MOEA, the CEPD and parts of the MAC wanted to be prudent, and to make sure the government did not change cross-Strait economic policies too drastically. They argued that the new principles as agreed to by the EDAC did not require amending too many laws. With regard to investments in China, they believed that the administration needed only to engage in internal and external consultations to clarify the application process, making known what sectors and projects would be explicitly allowed.249 Vice Chairman John Deng of the MAC spelled out the prevalent opinion of the Guided Developmentalists that cross-Strait economic relations could improve only if China was willing to engage in official negotiations with Taiwan. Since Beijing showed no willingness to do so, any liberalization implemented unilaterally by the Taiwanese government should be done very cautiously. Jeff Yang, a senior member of the MAC at the time, has explained why he thought the relaxation of cross-Strait economic policies had to be very guarded, even if the ultimate objectives were agreed upon: Cross-Strait policy can only move forward, not backward, since any kind of retreat would result in a drastic setback. Cross-Strait policies are commonly a result of reacting to negative public reaction, so we at the MAC have to be careful and guard against introducing any change towards liberalization lest we have to reverse it later.250 Similarly, the vice-chairwoman of the CEPD, Ho Mei-yueh, who had spent her entire career in industrial policy and planning, believed that the Nation First concept should have been the basis for Active Opening and said that if liberalizing was a means for Taiwan to remain a global leader, then Taiwan must make sure its leading industries were already firmly established so that Taiwan did not lose its competitiveness and job opportunities in the long run.251 The long-term orientation of Guided Developmentalists differentiated them from either group of Liberalizers, who wanted to see immediate growth. Ho accepted the principle that Taiwan must rely on free market to grow, but believed that the government had played and must continue to play an important role to stop large and strategic industries, like petrochemicals, from moving to China. For small companies with competitive needs, the CEPD was pushing to relax the policies and give Taiwanese businesses concrete support. However, 2001 was an exceptional time when liberalization was costly and controversial, against the best intentions of the government and regulators, and the people: A large percentage of the SMEs had moved to China by 2001, as the government focused its effort on stopping the large companies from moving. When regulation towards China started in 1994, the KMT was
Based on interview with Yang I-feng, June 17, 2008. No guarantee WTO will help China ties, Taipei Times, Nov 5, 2001. Amendments to be sent to the Legislative Yuan by November 2001 included laws on double taxation and relevant regulation. 250 Based on interview with Jeff Yang, Director General of Bureau of Hong Kong Affairs of the MAC, Taiwans de facto representative in Hong Kong, July 23, 2008. 251 Based on interview with Ho Mei-yueh, former Vice Chair of the CEPD from May 2000 to 2004, July 30, 2008.
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very concerned about losing key industries but globalization really creates pressure, and Taiwanese businesses cannot help but be drawn to China. Then the DPP wanted to improve the situation by legitimizing big companies move to China and hence the EDAC process. But unfortunately the public reacted very strongly and negatively towards opening up to China because they blamed China with the bad economy in 2001, forgetting about the global recession and the WTO. We had prepared for the WTO for a long time, but the timing of 2001 was terrible. People were leaving for China in droves, every family had at least one person working, usually the father, in China there was a widespread joke about cars parked on the street with no driver. The public was upset and so later, we had to consider protectionism which has high costs.252 Many academics who were concerned about Taiwans long-term survivability as a sovereign state, but who also accepted liberalization as helpful in promoting economic growth, hoped that the EDAC would maintain some restrictions on the process of liberalization. The best summation of this attitude of promoting an open economy under the condition of sovereignty was written by Lin Wen-cheng, Director of the Institute of Mainland China Studies at National Sun Yat-Sen University. He warned against yielding to Beijings pressure, and encouraged continued efforts to maintain consensus on the implementation of the resolutions passed at the EDAC: We hope that the negotiations will transcend the selfish interests of party factions, and proceed conscientiously with a responsible attitude toward future generations establishing a basis for Taiwans secure, flourishing prosperity, as well as consolidating the consensus between ruling and opposition parties on China policy.253 There was also wide support for Guided Development among economists. Having become the Deputy Secretary-general of the NSC, Chang Jung-feng believed that Taiwan was affected by globalization like all other countries.254 He said that Taiwan must take extra precaution and safeguards, within WTO restrictions, to ensure equity and market stability. Provided a country has consolidated its democratic institutions and traditions, a free market economy is the most efficient and most conducive to growth and prosperity. Barriers to trade could therefore be removed eventually, but in the meantime Taiwan was a small economy that needed to have effective industrial planning conducted by a government that diligently checked the public response to policies.255 Kung Min-hsin of TIER made a similar argument that a country can open up its economy only when it is resilient enough, and that industrial planning is important to guide an economy before it can engage in complete liberalization. Extensive Restrictionist approaches like the No Haste policy may have been
Ibid. Lin Wen-cheng, Kissing Up to Beijing is a Disgrace, Taipei Times, September 17, 2001, http://www.taipeitimes.com/News/editorials/archives/2001/09/17/103336 (Last accessed on Feb 28, 2010). 254 Chang resigned in June 2003 to become vice chairman of CIER, protesting Chens lack of long-term plans compared to Lee Teng-hui, which he stressed in my interview with him, June 2008. See also Lin Chieh-yu, Chang Jung-feng defends decision to re-enter academia, Taipei Times, June 2, 2003, www.taipeitimes.com/News/taiwan/archives/2003/06/02/2003053628 (Last accessed on Feb 28, 2010). 255 Based on interview with Chang Jung-feng, June 18, 2008.
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appropriate in the past, but Guided Development was more appropriate for Taiwan under the WTO than either extreme restriction or a more extensive degree of liberalization.256 Guided Liberalization Supporters of Guided Liberalization were probably the largest opinion group at this time, given Taiwans history of being an open, export-oriented open economy. This was a powerful group led by fiscal conservatives, liberal economists, and other important public intellectuals, including those with both Mainland Chinese and native Taiwanese backgrounds. One of the top and longest running media groups founded in 1950, the China Times and its subsidiary the Commercial Times generally advocated open markets. A large number of the KMT legislators, some DPP pragmatists, and most export-oriented corporations also belonged to this group. Chiang Ping-kun, the head of the National Policy Foundation (NPF), a KMT think tank, and former head of the CEPD, was the architect of EDAC and a key opinion leader representing the guided liberalizers.257 He believed that the economic downturn actually facilitated the convening of the conference and encouraged reaching consensus there. Although he had defended the KMTs No Haste policy as an attempt to lure China back into negotiation, his preference was for opening direct cross-Strait transportation and establishing the APROC as ways of lifting Taiwan out of the economic downturn. He believed that liberalization was important because most Taiwanese businesses needed the Chinese market or production base to remain competitive, especially in sectors such as desktop and laptop computer manufacturing. He therefore commended the DPP for achieving cooperation between the ruling and opposition parties in making a breakthrough in easing cross-Strait trade barriers. He did not regard capital outflow as a serious problem if it enabled Taiwan to maintain its technological lead: The exodus of Taiwanese capital to China has proven harmless to Taiwans economy if China catches up with Taiwan in terms of technology, Taiwan may not be able to compete with it. Therefore, Taiwan should continue to develop its high-tech sector and other advanced industries.258 Similar arguments about growth were made by the NPF, which argued that the reason for industries leaving Taiwan was is precisely because of restrictions on the Three Links, and growth should be the primary objective, not just security.259 In contrast to the professional associations described above, trade and industrial associations were generally supportive of Active Opening and focused on growth as their principal economic priority. As mentioned in the last episode, although they had formerly been controlled by the KMT, the industrial associations were changing as the DPP took over the government. In the past, a
Based on interview with Kung Min-hsin, August 15, 2007. Based on interview with Chiang Ping-kun, April 9, 2009. Chiang was formerly the head of the CEPD, and later in 2008, became the head of the SEF. 258 KMT economics guru look life after EDAC, Taipei Times, Sep 2, 2001, http://www.taipeitimes.com/News/local/archives/2001/09/02/101175 (Last accessed on Feb 28, 2010). 259 See Shu Chen-min and Tang Cheng-yi, , May 2, 2002, http://www.npf.org.tw/post/2/3497 (Last accessed on Feb 28, 2010).
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well-known family managing one of the top conglomerates was usually appointed by the government to run one of the dominant business associations, but this connection between government and business gradually loosened especially after DPP and KMT began alternating power. The CNFI strongly advocated expanding markets and keeping politics out of economics. Tsai Horng-Ming at the Federation described the convening of the EDAC and the reversal of the No Haste as inevitable, but said that it still took the government great effort to reverse it as quickly as it did in 2001. He agreed with the governments efforts to stimulate the economy by opening up to China, but believed more was required to create growth for Taiwan. Unless Taiwan remained competitive and attractive as an investment base, capital would continue to flow out of Taiwan, and domestic stimulus was needed as well as opening up to China.260 The formerly KMT-dominated CIER generally advocated a more open economy, although relevant policies to guide the liberalization were necessary and often proposed by CIER. It was at CIERs twentieth anniversary that President Chen stressed the importance of free markets and urged the Legislative Yuan to respond to the EDAC conclusions in a timely matter.261 Taiwanese businesses in China (Taishang) were represented in both the Guided Liberalization and Extensive Liberalization tendencies. At this point, most Taiwanese corporations had expanded into China or had uprooted from Taiwan altogether, but not all were lobbying for the same degree of relaxation of trade and capital control. In addition to the Taishang themselves, there was also a large group of professional Taiwanese managers and workers sent to work in China for Taiwanese companies (Taigang). They had very diverse backgrounds, including members of both the DPP and the KMT, and expressing a wide range of views on national identity.262 Many of the Taishang and Taigang supported Guided Liberalization because they saw the value of maintaining some restrictions on cross-Strait economic relations.263 While they wanted complete freedom to invest and work in China, they also liked keeping a Taiwanese hard shell, with the special status of being Taibao (Taiwanese compatriots in China).264 Y.C. Wangs Formosa Plastics Group was a good example of groups with Taiwan roots that continued to work with the government to further the Active Opening policy. Wangs key argument was that profits would be repatriated back to Taiwan if Taishang were successful.265 They usually lobbied to remove specific Taiwanese government
Based on interview with Tsai Horng-ming, National Security Council Senior Advisor, formerly Secretary of CNFI, July 31, 2008. 261 Chen says market should guide cross-strait policies, Taipei Times, Sep 25, 2001, http://www.taipeitimes.com/News/twbiz/archives/2001/09/25/104493 (Last accessed on Feb 28, 2010). 262 Jean-Pierre Cabestan estimates, based on reviewing numerous surveys on Taishang identity, that about one third of Taishang support the green and two thirds the blue. Based on interview with Jean-Pierre Cabestan, May 22, 2009. 263 Taishangs political leverage should be higher only when the home country is very strong vis-vis the host country as research on FDI shows. See Tarzi (1995); and on Taiwan vs. China, see C.T. Kuo (1995). 264 This characterization is based on interview with Jean-Pierre Cabestan on May 22 2009; see Cabestan (2005) for details and background in his study of Taiwanese national identity. 265 , Commercial Times, August 22, 2001, http://forums.chinatimes.com/special/open/90da823a.htm (Last accessed on Feb 28, 2010).
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restrictions on their investments in China, or to receive higher incentives and subsidies, working within the system in trying to affect regulation. They were also careful to voice their support for some continuing restrictions on investment on the Mainland to remove the public suspicions that they had developed vested interests from their business activities there. (Cheng 2005, 112; Wade 1996) Many prominent Taishang in this opinion group were represented in the EDAC and subsequently supported the governments Active Opening policy.266 Extensive Liberalization The Extensive Liberalizers were the most unified opinion cluster in terms of the background of its members. Some members of this group advocated economic integration with China, or even outright political unification, and saw the complete liberalization of cross-Strait economic policies as an important step in that direction. Many analyses and books on cross-Strait economic policies published during this episode were of this tendency. Specific examples include scholars like T. H. Shao, author of Cross-Strait Relation: Chen Shui-bians Mainland China Policy (2001), who favored unification on the basis of Beijings one country, two systems model; and Chang Ya-chungs On Integration Across the Taiwan Strait (2000), which advocated unification through a confederation. Many were intellectuals, writers, and artists of Mainland Chinese background, but a fair number of native Taiwanese also proposed a greater China economic market during this time. (Y.M. Hsu 2007) After leaving office, Vincent Siew was still active with the DPP administration but was unable to wield the kind of influence he had in the past. In 2001, he tried to create a following with his Cross-Strait Common Market Campaign" and advocated normalizing all economic relations with China.267 The integration would consist of three stages, starting with opening the Three Links and reversing the defensive No Haste concept. This would be followed by the coordination of economic rules and regulations and increased economic cooperation. The final stage, following the EU example, would be realized through currency unification and labor policy convergence. Other proponents of Extensive Liberalization were Taishang who had completely uprooted from Taiwan and moved their operations to the Mainland. Many who assisted and participated in the founding of the Semiconductor Manufacturing International Corporation (SMIC) constituted one of the most important examples of this type of Extensive Liberalizer. (See sectoral case study

In China, the same research shows they have limited political participation in China, if at all. As long as cross-Strait economic policies are restrictive, the Chinese government tries to doll out economic incentives for Taishang for political reasons, above and beyond benefits enjoyed by other foreign investors. For example, they enjoy a great deal of tax incentives and preferential treatment in China as Taibao (Taiwanese compatriots), while developing process technology in Taiwan with Taiwanese government funds. For Taigang working in China, they have families in Taiwan, they often receive salary in Hong Kong with reduced tax liability, enjoy corporate medical coverage in China and Taiwan residents national health insurance in Taiwan. The pattern of civilian governance, where cross-Strait investment and trade are not protected legally but through private negotiations, may not be ideal but the companies have learned to take advantage of both China and Taiwans legal structure. 267 Vincent Siew, Towards the Creation of a Cross-Strait Common Market, Keynote Speech at the American Enterprise Institute, Washington, D.C., January 22, 2001, http://www.crossstrait.org/version3/index.html (Last accessed on Feb 28, 2010).

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below.) For many of them, working in China on a strategic investment such as SMIC was a calling, not just a job.268 Both groups of Extensive Liberalizers rallied around the formation of the NP and the PFP, and used those parties excellent organization and high-profile leaders to push for liberalization during the EDAC. In addition, several top media groups like Central Daily News and United Daily (and affiliated Commercial Times) still commanded wide-ranging influence during this period and used that influence to advocate extensive liberalization. The former governor of Taiwan Province, James Soong had split the deep-blue votes with the NP and the KMT in the 2000 presidential election with the creation of PFP based on his personal following. Known for his pragmatism, Soong based his partys political rationale on center-right economic policies, not only on a political commitment to unification. The PFPs cross-Strait policies were therefore more pragmatic than those of the NP. Soong called for economic and political integration with China based on four principles: First, consensus must be reached by the Taiwan people. Second, economic and functional exchanges should be followed by social interaction, culminating in political integration. Third, China must renounce using force against Taiwan. Fourth, the Three Links must be normalized and the two economies should be fully integrated.269 After a strong showing in the last episode, the NP failed to attract native Taiwanese members and now consisted primarily of ideologues and conservative former KMT members who had become disenchanted with the KMTs move towards the center or even center-left with regard to its political attitude towards China and the localization of its membership. In contrast to the PFP, the NP openly opposed Taiwanese independence in its charter, and was more committed to unification with the Mainland. The NP called for economic growth, equality, and unification as basis for nation-building.270 It justified unrestricted trade and investment with China on the grounds that they would promote Taiwans economic growth, but they regarded political unification as an inevitable and welcome side effect of that process. Sectoral Case Study: The Great Semiconductor Debate President Chen had convened the EDAC in the hopes of forming a consensus among a divided government and a polarized public, with emerging interest groups trying to make their marks. Pressured by the semiconductor companies in Taiwan, Chen Shui-bian had included the industry on his list those under consideration for relaxation. The fact that the CEO of Taiwan Semiconductor Manufacturing Corporation (TSMC), Morris Chang, was selected to be a leading member of the EDAC, and not the legendary industrialist Y.C .Wang of Formosa Plastics, stirred some debate and it hinted that Chen Shuibian had already decided to side with the foundrys desire to obtain more business opportunities in China. In the end, Chens policy for the industry galvanized
Based on twelve anonymous interviews at SMIC Shanghai, SMIC Beijing and SMIC Chengdu, January 3-7, 2008. 269 (), http://www.pfp.org.tw/platform/assert.php?id=4&pid=01 (Last accessed on Feb 28, 2010). 270 See , http://www.np.org.tw/StaticWeb_articleserial.asp?serial=3 (Last accessed on Feb 28, 2010). It is assumed by the NP that national building of Taiwan is part of national building of China, so it is usually unspecified, equating the two.
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different interest groups across the spectrum including non-skilled workers, middle-range engineers and think tanks in a contentious debate that lasted well over six months after the conference to continue the No Haste restrictions on semiconductor investment. Why was the decision to liberalize cross-Strait investment opportunities for the semiconductor industry so controversial? The importance of the sector for Taiwan has been both symbolic and material. Given the high entry barriers, Taiwan, along with Korea, took more than two decades to nurture the semiconductor industry. But the results were impressive. By 2001, Taiwan was well on its way to becoming the leader in IC fabrication, accounting for nearly 80% of global production value. In the late 1990s, the Taiwan government had believed that, unlike the laptop industry, semiconductor production would not migrate abroad. Although China was accounting for the majority of total worldwide growth in semiconductor demand, Taiwan believed that it could meet that demand from its foundries at home.271 The economic pressures to migrate to reduce cost were not compelling because labor content was not a significant element in the cost calculation. The prerequisites were R&D and manufacturing, which required highly talented engineers and managers with industry experience.272 The assumption was that Taiwan would easily retain its comparative advantage in this area. Moreover, the migration of the semiconductor industry from one location to another takes time and money. In todays supply chain relationship, both the initial entry barrier and subsequent switching costs are high. The start-up capital required for even a modest fabrication plant easily exceeds a billion dollars. Resources are needed from international capital markets in addition to government financing and private equity, difficult for an emerging economy to acquire. In addition, sales and marketing depend on long-term relationships with suppliers. Unlike changing a mobile phone component, for example, made-toorder wafers have technical considerations that make it difficult for foundries to shop around for suppliers. (Addison 2001, 101) Switching to different suppliers is nearly impossible after the customers have begun a relationship with a specific foundry. Finally, Chinas own policy toward inbound foreign investment in the semiconductor sector was highly restrictive. Beijing had attempted and failed to develop its own IC industry in the 1980s and it tried to steer foreign investments into state-owned firms to develop proprietary technology. When this proved impossible, the government continued to deny incentives to wholly owned foreign companies or joint ventures in some cases. For its part, as a leader in
It is estimated that China constitutes over 90% of the worldwide growth in semiconductor demand. 272 R&D is key to the continual survival of the companies, as the manufacturing technology involved can range from very low grade to highly classified dual-use technology with military application. Such technology transfer from advanced countries is often restricted, and increasingly so with concerns about security. See United States General Accounting Office Report to the Ranking Minority Member, Committee on Governmental Affairs, U.S. Senate, Export Controls: Rapid Advances in Chinas Semiconductor Industry Underscore Need for Fundamental U.S. Policy Review, April 2002, available at: http://www.gao.gov/new.items/d02620.pdf (Last accessed on Feb 28, 2010). Timely for this episode, it called for strengthening restrictions of semiconductor technology and products to China, specifically to make sure China is at least two generations behind the U.S.
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semiconductor manufacturing, Taiwan had initially been a key factor in assisting Chinas entry into the industry but restrictions established under the No Haste policy in 1996 made it basically impossible to invest further in China. (Keller and Pauly 2005, 52) History of Migration to China And yet, the pressures for migration were growing. Despite the restrictions imposed by the Taiwanese government, Taishang began operations in Chinese cities beginning in 2000, to set up design houses, to work with local Chinese companies, or to supply MNCs. When the DPP came to power in March of that year, semiconductor companies and the government continued to downplay the importance of the China market. TSMC, the worlds leading foundry based in Hsinchu, announced that it intended to focus exclusively on Taiwan as a base for the next five to ten years. (Cheng 2005, 119)273 The public had no desire to see further liberalization in the technology sector. Although most did not understand the semiconductor industry well, they regarded TSMC and the United Microelectronic Corporation (UMC) as Taiwans pride and future. Many believed that Taiwan had lost its leadership positions in the textile, shoe and toy industries in 1987, and then in the PC components industry in 1995, because the government had not engaged in strategic long-term thinking about its economic future. Instead of outsourcing certain parts of manufacturing to China, entire companies and industries were uprooted and the profits never repatriated to Taiwan. The loss of these industries had made a strong impression among the public, who therefore reacted negatively towards a policy of relaxing restrictions on outbound investment in semiconductors. (Kung 2006, 68) In early 2000, after two Taiwanese-backed foundries appeared in China through offshore funding, Taiwanese companies and investors began to take notice. The first one was Grace Semiconductor (GSMC), co-founded by Wang Wen-yang, the scion of the Formosa Plastics Group, and by Jiang Zemins son Jiang Mianheng. Without any know-how or industry leadership, GSMC easily secured massive funding and land easily and generated impressive publicity.274 (Zhu 2006, 169-172) SMIC, led by Richard Chang, a former Texas Instrument and Worldwide Semiconductor Manufacturing Corporation executive, obtained seed capital from Foxconn, a subsidiary of one of Taiwans largest companies, Hon Hai; from Goldman Sachs, a U.S. investment bank; and from several prominent venture capital funds from Silicon Valley and Taiwan to start operations in China.275 SMIC ramped up production in Shanghai very quickly and, as a complete surprise to its Taiwanese competitors, was able to lure several export customers immediately, thus effectively taking away export market share from Taiwan.276
For details, see TSMC company website at: http://www.tsmc.com/english/default.htm. By 2005, the Wang family had left the stagnant partnership as GSMC failed to reach profitability. 275 Taiwanese funds like TCW/YFY, H&Q, WK Technology, invested through their offshore funds. See SMIC, Initial Public Offering Prospectus for American Depositary Shares, March 11, 2004. See also the official company website at: http://www.smics.com/website/enVersion/Homepage/index_1024.jsp (Last accessed on Feb 28, 2010). 276 Based on several interviews with Richard Chang, CEO of SMIC, Jan 4, 2008.
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The pressure began to build to reverse the No Haste policy, which formally restricted Taiwanese leaders from making their own strategic investments in China.277 What made an important difference at this stage was that the PRC government began to propose very strong incentives to draw Taiwanese to industrial parks throughout China, using cheap credit, guarantees of abundant land, utilities, engineering talent, and other essential resources, along with substantial tax incentives. (Klaus 2003, 240) Document Number 18 was promulgated in 2000, which provided incentives and favorable export policies as well as intellectual property (IP) protection, reducing the cost of migration for Taishang contemplating the move. (Hu and Jefferson, 2003, 316) Against this push-pull factor - the market pushing and Chinese government pulling - coupled with Chinas joining the WTO and the 2001 postInternet recession, the leading players in Taiwans semiconductor sector had a change of heart about the desirability of migrating to China. By mid-2001, news of SMICs November ground-breaking and the eventual commencement of mass production at its first factory in Shanghai was already very alarming. By the end of 2001, after having raised over $3 billion of equity and debt with an impressive array of U.S., European and Japanese customers, SMIC announced that it was moving towards listing on the New York Stock Exchange (NYSE). SMIC eventually became the fastest growing foundry to reach profitability in the history of semiconductor history.278 TSMC and UMC could no longer delay their expansion: they needed a large amount of capital and formal government approval to start construction of plants in China in order to catch up with SMIC. The Great Debate Both TSMC and its top competitor, UMC, lobbied hard for a relaxation of the restrictions on investing in foundries in China. Morris Chang, CEO of TSMC, formally reversed his decision not to make investments in China and pressed for a policy change. In the same year, TSMC opened a liaison office in Shanghai to explore a possible expansion into China. UMC entrusted two of its middle managers to go to China on a personal basis to start investing before the company could.279 Meanwhile, Advanced Semiconductor Engineering (ASE), Taiwans leading testing and packing company, also applied for permission to build a chip assembly plant in the hopes of starting construction by year-end. To ensure ASEs future business, it also made a $50 million investment in SMIC with offshore funds. Although Chen was in favor of liberalizing the restrictions on semiconductors, and the EDAC had reached consensus on the general policy of Active Opening, the conference did not specifically agree to liberalize semiconductor investments. The pressure to do so continued to build with the public listing of SMIC, and TSMC and UMC pressed for permission to follow SMIC to China. And as soon as the government began considering the implications of the EDAC for semiconductor investments in Mainland China, the public became fully engaged.
Ibid. With the exception of niche players in Israel, SMIC was the fastest large-scale foundry to become profitable in the world and the only one to become top ten in capacity within three years of founding. 279 In 2005, UMCs top management was eventually penalized for such transgression.
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Starting in September 2001, the public intensely debated the costs and benefits of opening the semiconductor sector to investment in China, culminating in protests and televised debates in March 2002. The opponents of the relaxation went into full gear and gave the DPP government its first real challenge in managing cross-Strait economic policies. While the business logic for relaxation was clear, its opponents were well organized. Some touted national security as the main consideration, but others focused on the loss of technology, resources and jobs, including professional managers, engineers and workers. The scale of the problem was magnified by the cluster effect of suppliers and customers all moving to China.280 (Leng and Ho 2004, 741) More importantly, with limited evidence of IP protection, the critics charged that once the floodgate was opened, China would take over as a leader in design and manufacturing and Taiwan would be marginalized, regardless of the kind of technology permitted. The domestic voices against any liberalization of economic policy toward Mainland China were numerous and powerful, including interest groups that had never spoken out on this issue before. During the conference, since all the political parties agreed only on a general relaxation of investment restrictions, all the details had been left to be decided. It was during the drafting of the law that TEA and TAUP engaged the TSU to organize a movement to oppose liberalization of investments in the semiconductor industry. These two organizations subsequently became powerful independent forces raising public awareness on this issue, especially on job loss.281 The intense emotions that the issue evoked developed into a broader popular movement, forcing the government to reconsider its policy. Soon thereafter, Lee Teng-hui and the TSU began to lead the opposition to the policy reversal. On March 9, 2002, a televised debate was held between the two sides. The Liberalizers were represented by Chen Wen-hsien of Taiwan Semiconductor Industry Association (TSIA), and semiconductor company executives Lu Chaochun and Huang Chung-jen. The opponents were represented by Wu Rong-i of TIER, Liu Ching-hsin of National Taiwan University of Science and Technology, and Lo Cheng-fan of Cheng-kung University Satellite and Communications Center. The proponents asked the people to have confidence in Taiwans semiconductor industry, because it would only move the lowest end technology to China. The opponents then argued that allowing even eight-inch foundries to move to China would be merely the beginning of an accelerating migration of the whole industry, affecting more than 100,000 jobs and fundamentally weakening Taiwans economy.282
During these transfers of production base, low-end jobs would have been the first to be eliminated. Although TSMC and UMC employed around 30,000, the industry consisted of a larger group of suppliers and customers. In 2002, the industry including suppliers actually employed more than 94,000 and had been perceived by the government and the public as Taiwans key industry, valued at more than NT$600 billion. See annual report of TSMC and UMC 2000, 2001, 2002. Accessible online respectively at: http://www.tsmc.com/english/e_investor/e02_annual/e02_annual.htm and http://www.umc.com/english/investors/c.asp (Last accessed on Feb 28, 2010). 281 Based on interview with Wen-fu Hsu, July 29, 2008. 282 The transcript of the entire debate was available published by Taiwan Thinktank, , July 2002, pp. 47-57. See also Lin Mei-chun, 1,000 Protest Relaxation of Wafer Rules, Taipei Times, March 10, 2002, http://www.taipeitimes.com/News/taiwan/archives/2002/03/10/127081 (Last accessed on Feb 28, 2010).
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TAUP, TEA and their ally, the National Jobless-Labor Union, held a joint press conference that called any relaxation of restrictions on wafer investment in China a death stroke for Taiwans economy. On the day of the televised debate on March 9, they also held a large-scale public protest in Taipei.283 Some of the participants in the opposition were concerned about unemployment as the wages of Chinese engineers were much lower, and many Taiwanese engineers did not want to move to China for work. Others like academic leaders were not directly threatened by changes in policy in this sector, but they were not the beneficiaries of a growing economic pie. Exemplifying this logic, Chen I-shen of TAUP warned that relaxing the regulations would cripple Taiwans economy, exacerbate unemployment and cause the country to lose its competitive edge by giving first-rate technology to China.284 The opponents stressed unemployment and security, especially in technology where the issue was presented as s a zero-sum game. Two scholars associated with Taiwan Thinktank, Liu Chin-hsin and Lo Cheng-fang, published data claiming that 18,000 employees out of 94,000 would lose their jobs by 2005 if eight-inch fabrication plants were moved to China, and the size of the industry would fall by nearly a third, a decrease of NT$217.9 billion (approximately US$6.8 billion).285 The decline in fabrication would then extend to upstream and downstream affiliates such as IC design houses and testing and assembly ventures. Taiwan would lose resources, revenues and employment opportunities. (Fuller 2005, 500) They concluded that the two sides of the Taiwan Strait are engaged in zero-sum competition in the IC industry. It is not a mutually beneficial division of labor in which the two sides have complementary strengths.286 Their research was focused on employment and economic security, and it was extremely compelling. As already noted, Taiwans government bureaucracy was split. MOEA sided with the industry players in touting liberalization as a means for promoting growth, which was their primary interest, while most at the MAC and the NSC cited the long-term threat to Taiwans security as the primary reason for continuing restrictions. (Yang and Hung 2003, 686) In fact, the MAC was also internally divided on this issue.287 Concerns spread throughout the public. The Taiwanese Association of Teachers and, overseas, the North American Association of Taiwanese Professors joined TEA in arguing against TSIA, the Taipei Computer Manufacturing Association and the National Association of Industry and Commerce. TIER and Taiwan Thinktank went on the attack to support restriction, while CIER was split into two camps. (T.J. Cheng 2005, 120)

Lin Mei-chung, Chipmaking Plans Spark Protest, Taipei Times, March 9, 2002, http://www.taipeitimes.com/News/taiwan/archives/2002/03/09/126954 (Last accessed on Feb 28, 2010). 284 Ibid. 285 Liu Chin-hsin and Lo Cheng-fang, Long-term effects may have serious implications, Taipei Times, March 9, 2002, http://www.taipeitimes.com/News/editorials/archives/2002/03/09/126986 (Last accessed on Feb 28, 2010). Indeed, both Liu and Lo assumed the industry would grow to NT$700 billion by 2005. 286 As the story developed, the leading design firm VIA opened an office in Shanghai which was soon followed by other Taiwanese design firms ALI, Realtek, Sunplus and Faraday and they recruited and trained thousands of local engineers, which gave the opponents more grounds for their argument. 287 Based on interviews with Jeff Yang, July 23, 2008 and Chiu Chui-cheng, June 18, 2008.

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The proponents of relaxation, who had not expected the semiconductor industry to be singled out for debate after the EDAC, worked hard to defend their position. Morris Chang has explained that if Taiwanese companies had invested in China then, the Chinese and even the global semiconductor industry would not be the same.288 In announcing TSMCs decision to apply to invest in China, Chang insisted that Taiwanese firms would lose competitiveness if they were prohibited from accepting the incentives offered by the Chinese government.289 At a minimum, the industry supported TSMCs view that Taiwanese companies should start their expansion into China, even if not yet on a large scale.290 During this period, UMC tried to portray their decision to move old equipment to China as beneficial to Taiwans economy, in order to quell public anxiety over the hollowing out effect.291 TEEMA was elated with EDACs decision to relax investment rules, and published numerous documents to educate the public about the importance of allowing investments. WTO, which would eventually break down all barriers to trade and investment, was a main reason.292 Lowering cost, expanding into new markets and increasing companies flexibility in deployment of resources were other reasons why moving to China would actually allow these companies headquartered in Taiwan to contribute more to the economy, eliminating concerns over national security, unemployment and recession.293 NPF mobilized a team to conduct research and writing in defense of allowing semiconductor investments. Urging the Taiwan government to consider allowing the companies to move their eight-inch foundries to China, the article, Overview on Global Strategy of Industry in Transferring Eight-Inch Foundry to China by Chu Yun-peng and Chao Yu-pai showed that Taiwanese companies were moving up the technology chain extremely quickly and needed to move lower end manufacturing to China to stay competitive.294 They showed that Taiwan was already a global leader in terms of the number of patents held and should consider moving eight-inch foundries to China to be a natural part of the global integration of the technology industry, especially since China was projected to become the worlds leading market by 2010: We hope the government can understand the importance of expanding market share, and also call for the government to give the companies enough room to grow in industrial planning. Economic policies are the main strength of industrial strategy; if we continue to justify restrictions on

Based on interview with Morris Chang, April 3, 2009. , China Times Express, August 27, 2001, http://forums.chinatimes.com/special/open/90e0827f.htm (Last accessed on Feb 28, 2010). 290 , China Times Express, August 27, 2001, http://forums.chinatimes.com/special/open/90e0827b.htm (Last accessed on Feb 28, 2010). 291 Based on interview with Bellona Chen of UMC, April 2, 2009. 292 WTO, undated, http://www.teema.org.tw/publish/moreinfo.asp?autono=576 (Last accessed on Feb 28, 2010). 293 , undated, http://www.teema.org.tw/publish/moreinfo.asp?autono=551 (Last accessed on Feb 28, 2010). 294 Chu, Yun-Peng and Chao, Yu-Pei, 8, January 15, 202, http://old.npf.org.tw/PUBLICATION/TE/091/TE-B-091-005.htm (Last accessed on Feb 28, 2010).
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ideological grounds, Taiwans competitiveness will be reduced especially for a country known for economic prowess.295 Within weeks after the televised debate and public protest on March 29, Premier Yu Shyi-kun signaled his approval for the foundries to invest in China within certain regulations, but the details were not yet announced. In April 2002, the ban was partially lifted, but again without any details. The public continued to have serious reservations about this decision, as polls showed that only 27% of those surveyed agreed with the decision to lift the ban on foundry investments in China. The rest either objected to the relaxation outright, or did not know enough about it to decide.296 With the general policy of partial liberalization having been announced, the government still had to work out the details, which occurred in the spring and summer of 2002. The government decided that movement of personnel in approved investments could occur without restriction, but only after the passage of a National Technology Protection Law, a technology export control regime similar that of the U.S. (Leng and Ho 2004, 741) This was not only to protect Taiwans intellectual property, but was also to partially comply with the Wassenaar Agreement that restricted the transfer of dual-use technology to China. Japan, Korea and Taiwan, the semiconductor powerhouses, all abided by it voluntarily. In addition, the government placed detailed restrictions on semiconductor investments in China. The restrictions were formally announced on August 9, 2002, along with the application requirements for semiconductor companies intending to invest in China:297 1. Approval would be given to only three silicon wafer foundries to be established by Taiwanese firms in China before 2005. 2. The highest level of transfer permitted would be 8-inch or below, using 0.25-micron process technology. 3. Any investment in 8-inch wafers in China must be accompanied by a concurrent 12-inch project in Taiwan, and must not occur before the 12inch fab had reached the economy of scale. 4. Key components and R&D capability must be preserved in Taiwan. One month later, TSMC formally filed an application to build a foundry with upfront capital of $898 million in Shanghai. While the application was extremely high profile, the government hesitated to make any immediate decision because the opponents were outraged at the policy shift and they were determined to escalate the controversy. Ultimately, the government forced TSMC to divide its project into two stages. On February 26, 2003, it was allowed to invest only 67% of its original budget to achieve the limited soft opening of its foundry.298
Ibid. See the summary of polls in , January 2002, http://www.mac.gov.tw/big5/mlpolicy/pos/9201/pos9201.htm (Last accessed on Aug 31, 2009). 297 See official press release on the policies, , March, 29, 2002, http://117.56.123.1/big5/cnews/inv02.htm (Last accessed on Aug 31, 2009); and , http://117.56.123.1/big5/cnews/inv04.pdf (Last accessed on Aug 31, 2009). 298 U.S.-Taiwan Business Council, Semiconductor Report: Second Quarter 2007.
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The premier wanted to consult with experts further before the second phase began. The rest of the equity would take another year to be transferred.299 In short, the battle over semiconductor investment policy took a year and a half, from the initial EDAC consultation process of June to August 2001, to the approval of the first phase of TSMCs investment project in February 2003. The government started out believing that it had the support to engage in a sweeping liberalization of cross-Strait investment policy, but quickly realized that it needed to place limits on its policy of Active Opening in semiconductors and also petrochemicals in order to mollify public opinion. This was in stark contrast to Lee Teng-huis unilateral adoption of the No Haste policy, which was first pronounced without any public consultation and then remained unmodified for five years. Facing organized interests across the entire spectrum of the debate, the government ended up with a compromise that did not satisfy many of the interest groups, companies or politicians: The government has faced a dilemma, however, of liberalizing rules for investment in China while not boosting the mainland economy at Taiwans own expense others are concerned that easing the ban on semiconductor investment will weaken the islands already faltering economy and give China added political leverage over the island. In March 2002 the Taiwanese government finally came out with a solution designed to satisfy conflicting interests The semiconductor investment problem may not have actually been solved, since a purely economic issue was resolved by political means. (Yang and Hung 2003, 696) The saga continued well past this episode, and will be discussed further in the next chapter. But the semiconductor issue highlights all of Taiwans competing economic interests: growth, stability, equity and security. The semiconductor industry believed it had to migrate to the Mainland to remain profitable and competitive with its emerging Chinese rivals. But without its semiconductor industries, Taiwanese feared that they would be deprived of some of the most important symbols of its economic success and more importantly, they would face the loss of jobs and intellectual property, undermining both equity and security on the island. The tension among these different considerations was not completely resolved by the Chen administration, which failed to convince either its own party members or the general public of its good intentions. Conclusion The 2001 debate surrounding the relaxation of investment restrictions towards China was driven primarily by external economic problems. The market downturn in spring 2001, continuing through the 9/11 terrorist attack in New York the following September, dragged Taiwans economy down. Like other exportoriented Asian countries, Taiwan was also affected by the wave of globalization led by Chinas opening and its accession to the WTO. Job losses, plant relocations to China, market instability and a decline in growth rates hit Taiwan hard as the KMT ceded power to the DPP for the first time. The factional
The public and companies continued to press for clarification on the 8 foundry investment policy, see official press conference. , January 24, 2003, http://117.56.123.1/big5/cnews/rec920124.htm (Last accessed on Aug 31, 2009).
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rivalries within the DPP and the legislative-executive divide between the KMT and the DPP made the debate even more irreconcilable. Taiwans first DPP president, Chen Shui-bian, was conciliatory toward China in his first few years in office, even seemingly willing to return to the 92 Consensus or to find some other way of mollifying Beijings demands for a recommitment to a one China principle. At the EDAC, Chen proposed the Active Opening policy. This entailed a significant relaxation of restrictions on Taiwanese investments in China, such that review was no longer required of all investments valued at more than $50 million, and companies could invest up to 40% of a firms NAV. Chen intended his Active Opening policy both as a friendly gesture toward Beijing and as a way of addressing Taiwans mounting economic problems. He was also being pressured to do so by Taishang and other interest groups, and may have believed that concessions on this issue would help him build the base of political support that he previously lacked. Unfortunately for Chen, he very quickly became caught between the DPP hardliners and the Taishang industrialists, with absolutely no reciprocal gestures from China, which continued to treat him as persona non grata. This episode also evolved in the ways that were predicted by Hypothesis One. The debate remained highly emotional, again reflecting a society with a contested national identity. During this episode, some groups continued to accuse each other of being traitors to their vision of what constituted the correct national identity.300 Moreover, the competing policy options were still defined in extremes: No Haste (Extensive Restriction) versus Active Opening (Extensive Liberalization). The advocates of these two extreme tendencies seemed to believe that a fundamental change in the prevailing No Haste policy would either uphold or threaten their respective national identities as Taiwanese or Chinese respectively. Compared to the adoption of Lee Teng-huis No Haste policy in 1996, economic concerns now weighed much more heavily on peoples minds than Taiwans economic and military security. All four tendencies agreed on the necessity of restoring high levels of economic grow thin the face of an economic downturn. As a result, the initial choice was to reverse the previous No Haste policy, and the adoption of an equally broad policy of Active Opening, rather than a selective set of policies that could address specific policy issues in a more targeted way. The voices of those who favored more measured approaches were once again drowned out by those who favored more extreme policies. The semiconductor industry was particularly susceptible to this kind of polarized debate. The semiconductor sector had become the symbol of Taiwans economic miracle, and the fate of the industry motivated public debate like never before. For some, their national identity would be immediately threatened by a change in the structure of Taiwans industrial economy. Although the government initially announced a policy of rather extreme liberalization, it was soon forced to back away and re-impose restrictions on cross-Strait investment, particularly in the semiconductor industry. In the end, a compromise policy was
A good example is former President Lees accusation that Y.C. Wang was a pro-China sycophant. See related articles in the online forum hosted by China Times at: http://forums.chinatimes.com.tw/special/open/002.htm (Last accessed on Feb 28, 2010).
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adopted that satisfied neither the Extreme Restrictionists nor the Extreme Liberalizers. In the next episode, Taiwan appeared on the road to resolving its debate over national identity. Discussions over Taiwans economic policy toward China then could begin to focus on a wider range of interests, with much clearer objectives, a more rational debate, and less extreme outcomes.

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Chapter Six Active Management, Effective Opening: The 2006 Conference on Sustaining Taiwans Economic Development
After one full term as president and a close re-election in 2004, President Chen had become consumed by scandals and internal factional problems. His second administration fell apart in 2006 amidst allegations of corruption, poor economic performance, and lack of strategy for the upcoming 2008 presidential election. After such high expectations for the regime, produced by the countrys first peaceful democratic transfer of power, by 2006 the Taiwanese public had become frustrated and disappointed. It was tired of a divided government that seemed unable to cope with international and domestic problems. Meanwhile, the world economy went through several cycles after 9/11 and the collapse of the Internet Bubble. By 2002, the global economy and the U.S. in particular had begun to recover, and a global bull market started that lasted for more than five years. Taiwan, however, struggled to have its fair share of growth. It lagged behind the other East Asian tigers Singapore, Hong Kong and South Korea on all economic indicators. In fact, by 2006, Taiwans per capita GDP had fallen behind South Koreas. Unemployment was increasing. Taiwans competitiveness dropped relative to Chinas in a range of surveys, and foreign companies, including American and European firms, were relocating in droves. Internationally, Sino-U.S. relations had reached a stage of unprecedented cooperation, U.S. relations with Taiwan were strained, and Taiwan was sidelined in every international organization and forum. China passed its anti-Secession Law in 2005, which proved to be more an irritant than a threat, but showed Beijings continued determination to deter Taiwanese independence and to promote Taiwans unification with China. But despite these compounded internal and external problems, and Taiwans weak and divided government, Taiwanese showed evidence of consolidating their new national identity, which had a significant impact on the continuing debate over cross-Strait economic policies. Economic Environment Taiwan had difficulty recovering from the 2000-01 global recession, plagued as it was by a weak government, inconsistent policies, and poor investor sentiment. Although the economy rebounded in 2004 with GDP growth of 6.2%, it promptly decelerated to 4.7% and 5.4% in 2005 and 2006, as the result of rising prices for oil and raw materials and a fall in export demand. The unemployment situation continued to worsen, rising from 1.6% in 1994 to 4.6% in 2001, and staying above 4.0% until 2006. In October 2006, consumer confidence index dropped to 67.5%, the lowest level in five years.301 Although the stock market attracted increased amounts of foreign capital, in 2006 the TAIEX was still 30% below its pre-1997 peak, and paled in
See Table 1-1 in Chapter One. Unemployment and consumer confidence index can be found in Taiwan Statistical Handbook 2009 by CEPD, http://www.cepd.gov.tw/encontent/m1.aspx?sNo=0011995 (Last accessed on Feb 28, 2010).
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comparison with other Asian dragons, which broke new trading records in that year. By the end of 2006, the stock market and the real estate market were both showing signs of further decline, and bad loans were on the rise. The privatization of the state-owned banks, which held 50% of all loans, was postponed repeatedly.302 Furthermore, the capital market was shrinking as companies started to scale down their registered capital to move it elsewhere.303 Overall investor confidence was bleak as the European Chamber of Commerce (ECC) and AmCham both issued warnings about Taiwans declining competitiveness given poor cross-Strait relations.304 Taiwans ranking dropped to 12th among the 60 most competitive countries of the world, according to the International Management and Development Institute, in a report much watched by Taiwanese officials. (Verchenko 2006, 140) In addition to this weak domestic economic performance, Taiwan also began to experience serious budget deficits. It registered its first budget deficit in 1989, and had not achieved a balanced budget since.305 The public debt-to-GNP ratio rose from 5% in 1990 to 33% at the end of 2005, causing great concern.306 In fact, using the standard international definition, which also includes local government deficits, Taiwans public debt-to-GDP ratio was even greater: 46%.307 These growing deficits and soaring debts limited the governments ability to stimulate the economy. Taiwans budget problem was caused in large part by the adoption of additional welfare programs that were promised by both parties, such as the National Health Insurance Program and the Elderly Welfare Subsidy, growing corruption, and the expenses associated with the disaster relief measures following a large earthquake in September 1999.308 While defense spending dropped, spending on social security, education, and scientific and cultural development rose tremendously, while revenues declined as a result of the

At the time, Bank of Taiwan, Central Trust of China and Land Bank of Taiwan were all wholly state-owned. The three big banks, in addition to others state-controlled banks, held 50% of total loans and nearly 70% of all deposits. See Taiwan Fiscal Transparency: Country Report 2006, Oxford Analytica, December 2006, p. 506. 303 From 2000 to 2005, 173 firms opted for this, and in 2006 alone, 142 firms filed for decapitalization. In total, 20% of Taiwans total listed firms reduced their registered capital during this time. The regulatory environment was difficult for private and foreign companies. For details, see S. Chan (2006). 304 The ECC lost 15 corporate members in 2005 and 32 in first ten months of 2006, as many moved their Asian operations away from Taiwan. See also see , , Commercial Times, April 13, 2005, p. 4. The ECC issued warnings about Taiwans lack of transparency and how regulation on cross-Strait relations would choke Taiwan. 305 For details, see Taxation and Tariff Committee, Ministry of Finance (MOF), Government Finance in the Republic of China 2009, pp. 9-11 at: www.ttc.gov.tw/ct.asp?xItem=61&CtNode=71 (Last accessed on Feb 28, 2010). 306 Taiwan Fiscal Transparency: Country Report 2006, Oxford Analytica, December 2006, p. 512. 307 National Security Council, Taiwan, 2006 National Security Report, May 20, 2006, p. 57. Available online at: www.president.gov.tw/en/prog/news_release/appendix/2006%20National%20Security%20Report. pdf (Last accessed on Feb 28, 2010). 308 The Elderly Welfare Subsidy, passed in May 2002, handed out stipend of NT$3,000 per month to around 440,000 senior citizens starting in Jun 2002. The government was spending NT$16 billion for this one program. For details, see C. Chen (2005).

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economic slowdown and repeated tax cuts. Neither the DPP nor the KMT was able to agree on how to balance the budget.309 The only bright spot in the domestic economy was that the government had encouraged companies to invest in the Central Taiwan Science Park, which had started to attain some scale in President Chens second term. Built only three years earlier, the park housed 83 businesses employing 11,000 workers and with investments worth NT$1.6 trillion dollars, including an impressive flat-panel industry.310 Although the science park was one of the Chen administrations often unsung achievements, unfortunately it could not stem the flow of technology investments to China. Economic relations with China deepened following the announcement of the Active Opening policy in 2001. Although there was an upper limit on the proportion of NAV that a public company could invest in China (the so-called 40% NAV rule), more categories for investments in China were than under the previous No Haste policy. With a GDP more than seven times that of Taiwan, China replaced the U.S. as Taiwans leading trade partner by 2003, and total bilateral trade reached $88.1 billion by 2006. Taiwan had become Chinas third leading source of capital, with investments in China now a staggering 71% of Taiwans total outward FDI in 2005. The official cumulative investments in China exceeded $43.7 billion.311 Approximately a million Taiwanese were living and working in China by 2006. (Hickey 2007, 13) More Taiwanese traveled to China than ever before, and cross-Strait charter flights were inaugurated to serve them.312 A Lame Duck Government After a close re-election win of only 29,518 votes out of 13 million ballots in 2004, and a suspicious assassination attempt the day before the election, Chen Shui-bian did not enjoy a broad mandate from the electorate, even though he won more votes in 2004 than in 2000. His reputation also suffered from the DPPs poor showing in the 2004 legislative elections and the 2005 local three-in-one elections, after which public satisfaction with Chens administration dropped to only 13%.313 The pan-green only won 101 out of 225 legislative seats in 2004 and in 2005, while the KMT gained control of 16 out of 23 counties and cities as well as most local governments, a great victory for KMT Chairman Ma Yingjeou.314 Chens presidency began to look fatigued and immobilized even at the
Taxation and Tariff Committee, MOF, Government Finance in the Republic of China 2009, pp. 9-11. 310 President Chen's 2006 National Day Address, http://www.gio.gov.tw/taiwan-website/4oa/20061010/2006101001.html (Last accessed on Feb 28, 2010); also based on interview with Ho Mei-yueh, July 30, 2008. 311 See Table 1-1 of Chapter One. 312 Direct charter flights were in operation over the Spring Festival for three years. Between January 20 and February 7, 2006, 72 non-stop round-trip charter flights operated transporting about 27,000 passengers. 313 Taiwan Presidents Speech Show Stubborn Stand Unchanged, BBC Monitoring Asia Pacific, January 3, 2006. 314 The pan-blue held on to 114 legislative seats, with 10 going to independents. The three-in-one elections are for local positions, including county executives and equivalent municipal mayors, county assemblies and city councils, and township executives and equivalent mayors. For significance of the December 2005 defeat of the DPP, see Bruce Jacob, Voting for Change, Taiwan Review, January 3, 2006, http://taiwanreview.nat.gov.tw/fp.asp?xItem=1189&CtNode=119 (Last accessed on Feb 28, 2010).
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beginning of in his second term, with the premier and ministers changing constantly. Because the annual government budget required legislative approval, the legislature effectively held the Executive Yuan hostage, and Chens every decision became a struggle with the KMT-led Legislative Yuan. Despite the constitutional revisions adopted during the Lee Teng-hui administration, the government had not become any more streamlined. More constitutional reforms were necessary, but they had become impossible due to the political gridlock. After Chens 2006 New Years address, China Post published an editorial titled, Disillusionment Deepening which described the situation in bleak terms: The Chen-DPP government has made the island less prosperous and less democratic while facing greater threats to its self rule.315 On the same day, the China Times published an editorial that likened Chen to a lame duck: The president may be able to avoid a lame duck predicament, but he is very likely to make the ruling party and Taiwan both fall into a lame duck predicament.316 The stalemate between the DPP and the opposition was exemplified by the debate over Taiwans defense spending. For years, the KMT government had asked the U.S. to sell Taiwan advanced weapons. As noted in the previous chapter, in April 2001 the new George W. Bush administration finally approved a $15 billion arms sale including three PAC-3 Patriot anti-missile batteries, 12 P-3C Orion marine-patrol aircraft, and eight diesel-electric submarines. The submarines were especially important as they could counter a Chinese blockade and threaten any Chinese surface ships involved in an amphibious attack against Taiwan. On the other hand, given its growing budget deficits, the Chen administration could ill afford to spend more on defense, and the pan-blue, which had been pushing the U.S. to authorize the sales in the past, now became committed to block them. After three years of deliberation and constant pressure from the U.S., the Chen administration submitted the purchase as a special budget request in June 2004 with a 15-year delivery schedule, rather than as part of the regular government budget. Although Chen resubmitted the request more than 30 times, the KMT and PFP repeatedly blocked it on the grounds of Taiwans fiscal problems and the need to improve cross-Strait relations, often accusing the pangreen of wanting the advanced weapons systems to support a formal declaration of independence. (S. Chan 2006) The NPF summarized the pan-blue position in its publication Taiwan 2005 Review: While Taiwan is trying hard to cope with its economic crisis, it does not seem wise to start controversy with China over an addition to the defense buildup, which may gravitate Chinese nationalism against the people on the island. In fact, the badly timed move on the part of the government gets Taiwanese deeper into trouble with the Peoples Republic of China.317 The pan-blue was also motivated by its desire to include the arms purchases in the regular annual budget, thus forcing the DPP to make cuts in other areas that could be portrayed as reneging on its promises to the electorate. The
Disillusionment Deepening, China Post, January 4, 2006. Editorial, China Times, January 4, 2006, reprinted in BBC Monitoring Asia-Pacific, January 6, 2006. 317 National Policy Foundation, Taiwan 2005 Review, pp. 129-130, http://old.npf.org.tw/english/Publication/TDP2005.pdf (Last accessed on Feb 28, 2010).
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budget was finally approved in 2006 after the Chen administration finally eliminated the special defense budget and included the arms purchases in the regular annual defense budget, having first increased that budget to 3% of the GDP.318 A more immediate blow to the Chen administration occurred in 2006. In May 2006, Chens son-in-law Chao Chien-ming was implicated in insider trading activities that had resulted in profits of up to NT$400 million. In addition, First Lady Wu Shu-chen, along with three senior officials, was charged with corruption for embezzling an estimated NT$14.8 million in special state funds, an estimate that later rose to more than NT$104.0 million. Known to wield undue influence on President Chen and often meddling in important state decisions, Wu had been entangled in scandals as early as 2004 when she was warned by the Control Yuan for undisclosed stock trading using her childrens accounts. In 2006, it came to light that she had accepted gift coupons from the Pacific Sogo department store in exchange for influencing the governments decision on the transfer of ownership of Pacific Sogo in 2002.319 Chen Shui-bian himself was accused in July 2006 of using fake invoices to claim expenses amounting to NT$10.2 million. Chen had immunity as the president until the end of his term, but widespread rumors about the corruption of his administration appeared to be credible although the investigation was still ongoing. Opposition groups made three attempts to recall President Chen from June to October 2006, but they did not succeed because a recall required the approval of two-thirds of the Legislative Yuan. However, the government became paralyzed, and the lack of effective economic policies during this period was attributed primarily to this uncertain environment. On November 3, 2006, Wu was indicted on charges of embezzlement, but Chen announced that he would not resign unless his wife was formally convicted. Chen accused his pan-blue opponents of an ongoing persecution campaign: This is the latest episode in what has been a vicious rivalry between political parties ever since the alternation of political power between parties in 2000 Besides indicating that the ruling and opposition parties have not grown accustomed to the reversal of roles, these ongoing problems reveal that Taiwan is facing predicaments similar to those faced by other new democracies during the transition from authoritarian rule to democracy.320 The scandals surrounding Taiwans first family coincided with the exposure of corruption in connection with the Kaohsiung Mass Rapid Transit project. The corruption charges, which had surfaced in August 2005, implicated associates of Premier Frank Hsieh. This additional scandal intensified the protests against Chens China policies and his leadership in general. Lin Wei-hou of the New Tide Faction, who was known as a reformer, quit the DPP in April.
The argument was that China was growing its military spending at a double-digit rate for 17 consecutive years, which Taiwan could not ignore. The P-3C maritime patrol aircraft and missile defense programs were approved, but not the diesel-electric submarine purchase; see National Security Council, Taiwan, 2006 National Security Report, May 20, 2006, p. 88, http://www.president.gov.tw/download/nsc/NSC-4.pdf (Last accessed on Feb 28, 2010). 319 Lawrence Chung, Taiwan's 'Empress Dowager' to face court over corruption charges, South China Morning Post, Monday, Feb 9, 2009 p. A6. 320 Full Text of Taiwans Presidents National Day Address, BBC Monitoring Asia Pacific, October 10, 2006.
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Legislator Lin Wen-chung of the same faction then called for a party reform, which was supported by Frank Hsieh, resulting in the DPP Chairman Yu Shyi-kun agreeing to hold a party reform meeting in April. The party was falling apart as its leadership weakened.321 Events turned even more dramatic as the year moved forward. A group of scholars close to the DPP petitioned for Chens resignation on July 15, 2006.322 One of the leaders, Fan Yun of National Taiwan University, said that Chen Shuibian had simply lost his credibility and the trust of the public.323 In August 2006, Shih Ming-te, a widely respected DPP leader since the famous Formosa Incident of 1979, led a massive Crimson Protest demanding Chens resignation as part of an anti-corruption campaign.324 Like other party elders such as Lin I-hsiung, Shih had been disappointed by Chens performance in office.325 From September to November, Shih raised money and staged protests across the island, with the largest demonstration on October 10, concurrent with the governments National Day parade. The attempt to show solidarity between President Chen and the DPP at the National Day parade failed, and discontent simmering within the party became public. Younger politicians like Frank Hsieh and his successor Su Tseng-chang, appointed premier in January 2006, were becoming increasingly concerned that President Chen was becoming a liability to their own prospects as the DPPs next presidential candidate. Wary of antagonizing Chen through a direct confrontation, however, each of them sought simply to strike a safe distance from him. The gap between the fundamentalists and the moderates began to widen, which threatened the partys ability to campaign effectively in future local, legislative, and presidential elections. Although the DPP had become one of Taiwans two dominant parties with Chens election as president, it was now deeply divided threatening it with the same fate that the KMT experienced when the NP and the PFP split off from it in 1993 and 2000. To be sure, the DPP was still able to eke out some electoral victories. The 2006 year-end mayoral elections for Taipei and Kaohsiung concluded with the KMT and the DPP each winning in its traditional stronghold the KMT in Taipei and the DPP in Kaohsiung. Even with all the scandals surrounding the DPP and its candidates, the KMT still found it difficult to gain control over the South. But the DPPs margin of victory in Kaohsiung was unprecedentedly narrow, suggesting serious electoral problems ahead as Taiwan moved toward the January 2008 legislative election and the March 2008 presidential election. Cross-Strait Initiative As a result of his loss of support with the public and within the DPP, President Chen decided to hang on to the strongest supporters he had the deep green by tightening controls over cross-Strait interactions, including economic
President Chen Makes Call for Solidarity in DPP Ranks, China Post, April 2, 2006. The group consists of pro-independence scholars, who began to view cross-Strait relations similar to many pan-blue groups; as a result, some speculate that the protest was a way to draw a line between the deep green with Chens administration and the KMT. See F. Chen (2006, 81-8). 323 Based on interview with Fan Yun, April 2, 2009. See also Lawrence Chung, Transport Links with Mainland off Agenda; Taiwanese Pro-Independence Groups Scuttle Plan to Discuss Proposal, South China Morning Post, July 27, 2006. 324 See the official website of Million Voices against Corruption Chen Must Go Campaign at: http://www.nori.org.tw/english/. 325 Based on interview with Lin I-hsiung, April 1, 2009.
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relations. These extreme independence-leaning factions had been disappointed with him like everyone else, but as former DPP Chairman Lin I-hsiung described it, the deep green had no other choice.326 Still, the price for Chen to court the deep green was high. For example, they wanted Chen to conduct a namerectification campaign to change the Republic of China to the Republic of Taiwan.327 Chen chose his 2006 New Years speech to describe his governments goals as sovereignty, democracy, peace and parity. He took the occasion to announce that there would be more restrictions on Taiwanese investments in China. In so doing, he introduced the concept of active management and effective opening (what came to be known as the Active Management policy) neatly reversing his previous policy of active opening and effective management.328 He justified the change of course by saying that China had not reciprocated his overtures of the previous six years, and that the risks of Taiwans growing interdependence with China were increasing: At present, the Chinese Peoples Liberation Army has deployed 784 ballistic missiles targeting Taiwan it has unceasingly pursued its ambition to annex Taiwan National security for Taiwan means being able to safeguard our national and having the means to ensure the security of our citizens; through economic development, we seek equitable distribution of wealth and prosperity. The government must proactively take on the responsibility of management in order to effectively reduce the risks of liberalization. Globalization is not tantamount to China-ization.we shall also not lock in our economic lifeline and all our bargaining chips in China.329 The government highlighted the China risks: capital, technology and human resources have been relocating to China, local industries have been hollowed out, and structural unemployment has been experienced. This is also hampering Taiwan from achieving sustainable development within trends towards global integration.330 Chens policy did not represent as dramatic a shift as this rhetorical reversal might have suggested. Although the emphasis shifted away from opening, there were also a few elements of liberalization in his approach, such as the relaxation of restrictions on imports from China and preparations for the establishment of a financial settlement mechanism, to be established with proper firewalls, in anticipation of a future deregulation of cross-Strait financial relations.
Ibid. Lawrence Chung, Transport Links with Mainland off Agenda; Taiwanese Pro-Independence Groups Scuttle Plan to Discuss Proposal. 328 Office of the President, Republic of China (Taiwan), 95 , January 1, 2006, http://www.president.gov.tw/phpbin/prez/shownews.php4?Rid=11443 (Last accessed on Feb 28, 2010); translation can be found in the exhibit prepared by the Center for Strategic and International Studies, Taiwan Strait Time Line: A History of Cross Strait Relations, http://csis.org/files/media/csis/programs/taiwan/timeline/pt6.htm (Last accessed on Feb 28, 2010). 329 Ibid. 330 For a summary of the speech, see the MAC, President Chen Shui-bians New Years Day Message and the Development of Cross-strait Relations, January 2006, http://www.mac.gov.tw/ct.asp?xItem=50733&ctNode=5913&mp=3 (Last accessed on Feb 28, 2010).
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Nor was the new policy an attempt to restrict cross-Strait economic relations across the board. Rather, it involved the more rigorous enforcement of existing rules in a few important sectors, in order to show the public the administrations determination to manage the risks that Chen had alluded to in his speech. These enforcement efforts, however, were ad hoc and onerous. On March 22, 2006, the Executive Yuan announced that investment projects over $20 million, and those involving sensitive technology, would be subject to greater scrutiny starting on June 30, 2006. Companies planning such investments would have to increase their investments in Taiwan relative to their China investments, and explain the reason for such an investment to an inter-ministerial taskforce possibly involving the MAC, MOEA and the MOF. Corporate executives would have to be interviewed by government ministers, and the investors would need to sign an agreement with the government to allow auditing of the companys Chinese subsidiary before the project could even be reviewed by the Investment Commission of MOEA.331 The government would negotiate with responsible persons of the applicant enterprises over their financial planning, technical transfer, equipment exports and investment plans in Taiwan.332 Businesses were outraged that even Hong Kong subsidiaries were subject to these new audit requirements.333 On tourism, rules were added to make cross-Strait travel more difficult, like doubling the deposit the Taiwanese travel agents needed to pay in order to bring Chinese tourists to Taiwan.334 As an example of these enhanced enforcement efforts, soon after Chens January speech, UMC was fined for illegally investing in a foundry in China, and its then chairman and founder Robert Tsao was interrogated. (For further details, see the sectoral case study) Even so, many observers questioned the governments intention to thoroughly implement these rules because, with an application threshold of only $20 million per project, then there would be 100-200 applications each year, more than the government could ever review, not to mention the follow-up auditing in China that the government had threatened to conduct.335 Although not as extreme as they might have been, the tightening of crossStrait regulation was discouraging to many in the business community who had been lobbying for a further relaxation of cross-Strait economic policies. Many who felt the regulations had not kept up with the pace of cross-Strait investment and trade since 2001 had been expecting a streamlining of process, not a tightening. At a minimum, companies like TSMC were hopeful that the governments decision to implement those regulations more rigorously would lead to a clarification of the many ambiguities in Taiwans policies toward investment in China.336

BBC Monitoring Asia Pacific, March 23, 2006. Government Tightens Its Grip on China Investments, China Post, March 23, 2006. 333 , , Commercial Times, March 23, 2006, p. A2. 334 Chang Yun-ping, Investment rules made stricter, Taipei Times, March 23, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/03/23/2003298757 (Last accessed on Feb 28, 2010). The deposit would be NT$2 million to the tourism bureau, and the new fine for each Chinese tourist who overstays would be NT$200,000. 335 , , Commercial Times, March 23, 2006, p. A3. 336 : , , and : , Commercial Times, March 23, 2006, p. A3.
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China, the U.S. and Taiwan Beijings Taiwan Policies President Chen was a showman who focused on his domestic popularity more than on Chinas reaction. After his yibian yiguo statement in August 2002 (Taiwan and the nation on the other side of the Taiwan strait, China, are two nations), he called for a referendum on Taiwans participation in the WHO in May 2003, and then insisted on holding a peace referendum concurrently with the presidential election in 2004.337 But he toned down his cross-Strait rhetoric by delivering a non-provocative inaugural address in 2004. Nevertheless, China persisted in a hard-line strategy during Chens second term in office. Although Beijing had accepted Taiwans accession to the WTO as the Taiwan, Penghu, Quemoy and Matsu customs area, it quickly became clear that China insisted on dealing deal with Taiwan bilaterally in any trade conflict under the one China principle, rather than using the WTOs dispute resolution mechanism. (Cho 2005) Nor was it willing to see Taiwan sign FTAs with any other WTO member. Beijing also continued to be successful in isolating Taiwan politically in other arenas as well. Taiwan remained excluded from the World Bank and the IMF. For the 13th successive year, the UN General Assembly declined to consider Taiwans bid for membership in September 2005.338 In 2006, Taiwans diplomatic network declined from 27 to 24, with Grenada, Senegal and Chad switching sides. The diplomacy game had escalated in bad form, as Chad broke off relations with Taiwan on the very day that Premier Su was to leave Taipei to attend President Idriss Debys third inaugural ceremony, supposedly by Beijings design.339 The big setback which surprised the Taiwanese was the WHOs refusal in 2004 to allow Taiwan to participate as an observer, even in the aftermath of the Severe Acute Respiratory Syndrome (SARS) outbreak, and despite support from the U.S. and Japan. The DPPs new internationalism was no match for Chinas strategy of restricting Taiwans international space. (C.P. Li 2006) The single most important development in Chinas policy toward Taiwan during this episode was the passage of the Anti-Secession Act on March 14, 2005 by the PRCs National Peoples Congress. The law stipulated that should Taiwan move towards independence, Beijing would be required to use force.340 It was not an empty threat, as both the U.S. Department of Defense and Taiwans Ministry of National Defense warned that the larger number of more accurate missiles deployed by China could put the island at risk. (Hickey 2007, 116) The combination of the Anti-Secession Law and increase of Chinas ballistic missile
See Government Information Office, Explanation of President Chen Shui-bian's Remarks of August 3, 2002, August 12, 2002, http://www.gio.gov.tw/taiwan-website/4oa/20020812/2002081201.html (Last accessed on Feb 28, 2010). 338 See Experts analyze strategy behind last UN bid, October 19, 2005 on official website of Taiwan and the bid to join UN at: http://www.taiwanunme.tw/ct.asp?xItem=62&CtNode=4&Prev=328&next=249 (Last accessed on Feb 28, 2010). 339 Flying the Flag The Diplomatic Battle, The Banker, September 1, 2006. The article featured an interview by Dennisas Engbarth with James Huang and Ministry of Foreign Affairs Secretary-General Michael Lu. 340 For the full text of the law, see Full text of Anti-Secession Law, March 14, 2005, http://english.peopledaily.com.cn/200503/14/eng20050314_176746.html (Last accessed on Feb 28, 2010).
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capability was considered provocative by most analysts in Taiwan and elsewhere.341 (Xing 2007, 140) It produced a massive public demonstration on March 26, 2005 in Taipei, involving all the political parties, with approximately one million participants.342 In addition to threatening the use of force against Taiwan and denying Taiwan international space, China also tried to put pressure on the DPP by conciliatory gestures to various opposition groups and individuals in Taiwan. In April 2005, Lien Chan, the chairman of the KMT, visited China for eight days and met with Hu Jintao in Beijing. This was followed by a cross-Strait Economic and Trade Forum that attracted Taiwans leading business groups to China. In May 2006, James Soong of the PFP visited the Mainland, and then Yok Mu-ming visited in July on behalf of the NP. All three of the opposition party leaders endorsed the 92 Consensus on the one China principle. Beijing also reached out to key economic interests in Taiwan, including most importantly a decision to allow import of Taiwanese agricultural products. Although the policy did not produce long-term material benefits for Taiwanese farmers, it was an important part of Chinas overall strategy in 2005 that had economic impact. Tellingly, the gesture was made in the context of Chinas growing dialogue with the KMT and increasing stalemate with the DPP. After the first KMT-CCP summit on March 30, 2005, when KMT Vice Chairman Chiang Pin-kungs delegation met with Director Chen Yunlin of the TAO, Beijing immediately indicated its intention to allow Taiwanese agricultural products into China.343 Then, after the April 29, 2005 meeting between Hu Jintao and Lien Chan, Chen Yunlin announced that Beijing would remove tariffs on 18 Taiwanese agricultural products. Over the following year, 15 more agricultural products were given preferential treatment, and in June 2006 Taiwanese agricultural exports began to be distributed through domestic green passage channels, enjoying the same treatment as Chinese products. In October 2006, a cross-Strait forum was held specifically to provide incentives for Taiwanese farmers to export fruits to China. Jia Qinglin even made a speech at the forum encouraging Taiwanese to invest in agriculture in China.344 In April 2007 another forum was held in order to appeal to southern farmers in Taiwan who were primarily DPP supporters. (Chao and Chang 2008, 12-3) In response to these developments in Chinas policy toward Taiwan, President Chen adopted a harder line toward Beijing. At the beginning of 2006, Chen announced that he was contemplating abolishing the NUG and the NUC.
An example of U.S. critics includes Scott McClellans response in the White House Press Briefing on March 14, 2005. Script accessible online at: http://georgewbushwhitehouse.archives.gov/news/releases/2005/03/20050314-6.html (Last accessed on Feb 28, 2010). See also John Tkacilk, Chinas New Anti-Secession Law Escalates Tensions in the Taiwan Strait, Heritage Foundation WebMemo no. 629, December 21, 2004, http://www.heritage.org/Research/AsiaandthePacific/wm629.cfm (Last accessed on Feb 28, 2010). 342 Standing Up for Peace, Taipei Times, March 27, 2005, http://www.taipeitimes.com/News/front/archives/2005/03/27/2003247928 (Last accessed on Feb 28, 2010). 343 They announced the Common Visions for Cross-Strait Peaceful Development, in which they declared the joint objectives of normalizing bilateral economic relations and establishing a KMT/CCP forum. 344 CPC, KMT vow to Boost Agricultural Ties, China Daily, October 18, 2007, http://www.chinadaily.com.cn/china/2006-10/18/content_710573.htm (Last accessed on Feb 28, 2010).
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He explained that his Active Management policy towards China was meant to preserve Taiwans identity and prevent the country from being sidelined in the international community.345 Both decisions appeared to be responses to the Anti-Secession Law of 2005. Chen Shui-bian published an article in The Wall Street Journal on April 20, 2006, denouncing what he regarded as Beijings continuing provocation. In the article, he described China as aggressive and refusing to engage with Taiwans government as follows: By inviting Taiwans opposition party leaders to visit, Chinese leaders attempted to undermine the ruling Democratic Progressive Party. These visits were very cynically timed to draw attention away from the passage of Chinas so-called Anti-Secession Law.the Chinese government deliberately proceeded to unilaterally change the status quo by passing legislation codifying non-peaceful measures against Taiwan Separate negotiating channels expose division within Taiwan without narrowing differences with China.346 But again China was able to trump Chens initiatives. Having made an official announcement protesting against the Active Management policy,347 Beijing then showed its international clout by having the U.S., the EU, Russia, Germany, Japan, South Korea, Singapore and others condemn the elimination of the NUG and NUC. (Hickey 2007, 117) It also launched a campaign to put pressure on Taishang throughout China to cut off ties with pro-independence forces. In short, after the last episode of liberalization, China did not resume dialogue with an economically more open Taiwan, but instead tried to restrict its international space. Chinas harsh tactics toward Taiwan gave a boost to protectionist sentiment on the island. On balance, although Beijing tried to reach out to the opposition parties and to key Taiwanese economic interests, Chinese pressure against the DPP may have tipped the public in the direction of supporting Active Management policy. Washingtons Taiwan Policies After the last episode of policy change in 2001, the Bush Administration had become increasingly uneasy with DPPs inexperience and rashness. Bush had intended to show the world that the he sought a closer relationship with Taiwan than the island had enjoyed during the Clinton Administration, and that this new policy would be symbolized by the April 23, 2001 arms sales announcement. But the initial potential for a closer U.S.-Taiwan relationship gradually gave way to increasing mistrust. First, Chen Shui-bians team was inward looking. Not only did it lack its own connections and expertise on the U.S., it also was unable to work effectively with the excellent lobbying network in America that the KMT had built for decades. As a result, Chen did not consult the U.S. before he made important remarks such as yibian yiguo, or when he decided to initiate referenda on issues related to cross-Strait ties.
Flor Wang, Prosperous Taiwan People Not to Agree to Unification with China President, Central News Agency, February 10, 2006. 346 Chen Shui-bian, Strait Talk, Asian Wall Street Journal, April 20, 2006, p. 15. 347 : , January 23, 2006, http://big5.fmprc.gov.cn/gate/big5/www.chinaconsulatesf.org/chn/xnyfgk/t232646.htm (Last accessed on Feb 28, 2010).
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Chen was allowed to visit New York to accept a human rights award in October 2003, which was considered a major breakthrough in Taiwan-U.S. relations. But the afterglow did not last for long, as the Bush administration found it could not stop Chen from conducting what it regarded as a provocative peace referendum in 2004. As a result, Bush stood alongside Wen Jiabao in Washington in December 2003 and said that the U.S. opposed any unilateral decision by either China or Taiwan to change the status quo considered at the time to be a slap in Chens face. (Hickey 2007, 38-9) In his remaining years in office, Chen further depleted his capital with the U.S. because of poor communication and a bit of opportunism. The U.S. was apparently very displeased with the inclusion of controversial passages in Chens New Years speech in 2006 that reflected his change in cross-Strait economic policy as well as his proposal for a referendum on a new constitution, done despite requests by U.S. officials to revise the talk after reading earlier drafts.348 Furthermore, the U.S. became alarmed when Chen scrapped the NUG and NUC, again leading the U.S. government to issue statements asking Taiwan not to change the status quo.349 In May 2006, Chen tried to enter the U.S. in transit on an overseas trip, but this time he was denied a visa. As mentioned above, highly divisive domestic politics, and probably some overconfidence in the U.S. security guarantee, made it impossible for the Chen Administration to push through the arms purchase, complicating the already deteriorating relationship with the U.S. (Chase 2008) Furthermore, given the long deadlock over the years on this issue, a perception arose in Taiwan that equated making the purchase to kowtowing to U.S. pressure, which further impeded proper discussion and a rational decision. Despite the neo-conservatives concern about maintaining Taiwans economic and military security, Chens administration did not get sufficient support to pass its proposed arms purchases. The U.S. tried to directly affect Chens cross-Strait economic policies, but achieved little result. The Chen administration, for example, had been trying to reach a bilateral FTA with the U.S., with the aim of boosting trade with the country that had purchased 27% of Taiwans exports in 2005. Taiwanese firms were becoming concerned by FTAs reached by many of its major trade partners, including ASEAN, China, Japan, South Korea, and the U.S., none of which included Taiwan. Conversely, APEC the regional trade organization of which Taiwan was a member, was not making much progress toward its stated goal of promoting free trade.350 Consecutive directors of the American Institute in Taiwan (AIT), Douglas Paal and Stephen Young, criticized Taiwans more restrictive policy toward economic relations with the Mainland, and called along with AmCham for more cross-Strait interaction as the best way for Taiwan to gain support for an FTA with the U.S.351 Chen often rebuffed these U.S. comments openly; he told both the president of AmCham and then Acting AIT Director
Officials Deny U.S. Displeased with Taiwan Presidents Speech, BBC Monitoring Asia Pacific, January 11, 2006. 349 The U.S. was concerned that Chen would not abide by his five nos and sent the then acting senior director of East Asian Affairs for the U.S. National Security Council to Taipei as a special envoy to ask Chen to reverse his course of action, without any success. 350 Taiwan KMT Vice-Chairman Criticizes Governments China Investment Policy, BBC Monitoring Asia Pacific, February 13, 2006; Trade Policy increasingly vital tier, China Post, January 5, 2006. 351 FTA is of Mutual Interest to Taiwan and to the U.S., China Post, September 4, 2006.
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David Keegan of the importance he placed on preserving Taiwans economic autonomy.352 Just as Beijing reached out to opposition leaders in Taiwan, so did the U.S. KMT chairman Ma Ying-jeou visited the U.S. in 2006 and was greeted warmly by senior State Department officials Robert Zoellick and John Bolton. The U.S. wanted not only to ask Ma to press KMT legislators to approve the arms purchases, but also to understand the cross-Strait policy of the man who might become the next president of Taiwan. Overall, it was an uneasy period in the triangular relationship among the U.S., Taiwan and China. Chens relations with both the U.S. and China were poor, and both Beijing and Washington were in open communication with Chens political rivals. (Tucker 2009, 271) But Chen was so deeply mired in his own domestic problems that he proceeded with his tougher cross-Strait economic policies despite Chinese and American criticisms. Rebuilding political support at home was more important to Chen than mending his fences abroad. Conference on Sustaining Taiwans Economic Development On March 8, Chen Shui-bian announced the convening of the Conference on Sustaining Taiwans Economic Development (CSTED) on July 27-28, 2006. The purpose of the conference was to seek long-term structural solutions to problems such as aging population, rising commodity prices and other welfarerelated problems. The CSTED thus contrasted with the EDAC which had been more urgent and more narrowly economic in nature.353 The nominal sponsor was the Executive Yuan, and Premier Su Tseng-chang was one of the conference conveners. Expected to push for liberalizing investment restrictions and increasing charter flights, Su wanted both to underscore that the administration was not a lame duck and to promote his own presidential bid in 2008.354 Legislative Yuan speaker Wang Jin-pyng of the KMT and Vincent Siew, then chairman of the CIER, were appointed co-conveners in order to show the bipartisan nature of this meeting. The CSTED was branded as a comprehensive and domestic-oriented conference, not focused only on cross-Strait policies.355 As the date of the conference approached, there was much anticipation and anxiety over how the policy would actually change. The business community had lobbied hard for relaxation of the 40% NAV rule on cross-Strait investments for listed companies, and many business leaders hoped that the government, especially Premier Su, would focus on the effective liberalization part of Chens new policy formula and would give in on this point.356 A Central Daily News report in May 2006 that the MOF was considering lifting the investment restriction served to increase the optimism on this score.357 Others had the more general expectation that the convening of the conference signaled the
It was at a dinner with AmCham President Tom Johnson and Taipei mayor Ma Ying-jeou in February 2006 that Chen responded to AmChams criticism. President Reiterates Importance of Taiwans Economic Autonomy, Asia Pulse, February 28, 2006. 353 See , March 10, 2006, http://theme.cepd.gov.tw/tesg/TESG1_f.htm (Last accessed on Feb 28, 2010). 354 Lee: Forum Kidnapped by Corporate Interests, China Post, July 30. 2006. Sus efforts were widely labeled Su Revisionism. 355 Taiwan: President Chen Speaks at Conference on Sustaining Taiwans Economic Development, US Fed New, July 27, 2006. 356 Asia Economic Flash, Goldman Sachs Economic Research, September 21, 2006, p. 6. 357 40% Restriction To Be Lifted, Central Daily News, May 9, 2006, p. 4.
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governments intention to build consensus on cross-Strait economic policies after other efforts at doing so failed. Chens administration made clear that the purpose of the CSTED was to reach an intra-government consensus and to adopt clear policies.358 However, other business leaders were less optimistic. Some expressed disappointment that the government had not simply relaxed the investment rules unilaterally, since it could easily have done so without the legislatures approval or Beijings consent. Some of them were so put off by the possibility that the investment regulations would not be relaxed that they flatly refused to show up, and several industrial associations failed to send delegates to the CSTED. Many did not want to endorse what they feared would be Chen Shui-bians reversal of policy. Although the public was not necessarily pressuring the government for tighter regulation, it did want stricter enforcement of existing rules. A first sign of the publics concern on this point was the uproar that followed highly publicized reports on January 5, 2006 that 37 public companies were exceeding the 40% NAV rule in on their investments in China. The public demanded to know if these violations were not penalized, what would be the purpose of more regulation.359 Division within the pan-green again characterized the organization of the CSTED. Some DPP legislators protested that the Cabinet had not consulted with the DPPs legislative caucus or the party in advance.360 Several of them, including Julian Kuo and Lee Wen-chung, challenged the organizers of a DPP debate on cross-Strait policies in April 2006, on the grounds that the executive branch had already announced rules governing investments in China before listening to their viewpoints.361 Members of the TSU attacked any proposal of relaxing investment rules as a path to ultimate economic unification with China.362 On the other hand, pragmatic-minded DPP members, like the New Tide faction, sided with the business, pan-blue legislators, some scholars and some former presidential aides in pressing for greater liberalization. Despite such tension, the Chen administration desperately wanted to maintain the support of the deep green. Vice Chairman Johnson Liu of the MAC as well as Kong Jaw-sheng of Financial Supervisory Commission spoke directly with the legislative caucus of the TSU, which was concerned about proposals to allow domestic financial companies to invest up to 10% of their total assets in China.363 As early as February 20, 2006, chairman of the MAC Joseph Wu had

Taiwan Thinktank, , Taiwan Thinktank Policy Studies, no. 16, p. 26. 359 ? 37, Commercial Times, January 5, 2006, p. A2. 360 Jewel Huang, DPP Lawmakers Plan to Boycott China Policy Debate, Taipei Times, March 24, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/03/24/2003298920 (Last accessed on Feb 28, 2010). 361 Luis Huang, DPP Lawmakers to Pull Out of Cross-Taiwan Strait Policy Debate, Central News Agency, March 23, 2006. 362 Chang Yun-ping and Jimmy Chuang, Other opinions' rule economic summit, Taipei Times, Jul 29, 2006, http://www.taipeitimes.com/News/front/archives/2006/07/29/2003320869 (Last accessed on Feb 28, 2010). 363 No Eased Rules on Financial Sectors Investment in China, Central News Agency, March 24, 2006. Kong denied this as rumor because China and Taiwan had not even signed any MOU.

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already participated in the TSUs policy review in order to justify and promote the governments thinking on reversing cross-Strait economic policy.364 Some key political leaders exacerbated the dissension within the pan-green, even as Chen made it clear he would restrict cross-Strait ties. Lee Teng-hui fiercely attacked the CSTED, expressing his opposition to any discussion at the conference of opening the door further to China.365 He further criticized the administration and specifically Premier Su for pandering to business interests in promoting liberalization, running counter to the mainstream of public opinion, which is tantamount to promoting Taiwans unification with China, instead of safeguarding the development of Taiwan.366 Vice President Annette Lu also warned against further liberalization of cross-Strait economic policies, stating that Taiwans sovereignty will be severely endangered if we bet our value of existence and industrial development on China.367 Preparation and Agenda-setting The preparatory group for the CSTED reached out even more widely than the EDAC had done by including scientists, industrial leaders, and political activists, especially environmental groups, with the aim of finding solutions to Taiwans structural economic problems. Between May 15 and July 27, 2006, four preparatory meetings, one pre-conference meeting, two senior advisors meetings, 46 media seminars and 44 working meetings divided into five panel discussions were held all over Taiwan to collect public opinion. Over 175 academic, industry and political leaders gathered to discuss the agenda and proposals. Each panel discussed one of five issues: social security, industrial competitiveness, the financial systems, global and cross-Strait economic issues and administrative efficiency. The topics drawing the most attention were the implementation of the Kyoto Protocol, Taiwans aging population, and the drop in international ratings of the governments administrative efficiency. Premier Su worked around the clock and on July 24, just days before the conference, he was still meeting with the six largest business organizations trying to convince them not to drop out of the conference. In contrast to the EDAC, where cross-Strait relations had not been a particularly contentious, this time, the cross-Strait Panel had the most controversial agenda.368 Its discussions were held between June 16 and July 15, 2006, in seven public hearings to gather opinions and suggestions. There was particularly heated debate over whether to table the two most important topics: loosening of restrictions on cross-Strait cargo and passenger charter flights and
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Lee: Forum Kidnapped by Corporate Interests, China Post, July 30. 2006. Lee Blasts Government Over Cross-Strait Economic Policies, China Post, August 13, 2006. 367 Taiwan: Vice President Lu Talks about Taiwans Economic Development with Taiwan Confederation of Trade Unions, US Fed News, July 24, 2006. Lu further discussed her administrations record as Taiwans trade surplus in the first five months of 2006 exceeded that of South Korea ($6.53 vs. $4.94 billion) and price index rose 1.4% vs. 2.3% for South Korea. Unemployment, she continued, in May 2006 was at an all-time low of 3.8% since the DPP assumed power in 2000 and foreign exchange reserves reached $260 billion, an increase of $140 billion compared to six years ago. 368 Premier Urges Best Resolution to Economic Issues at Conference, Central News Agency, July 27, 2006; Economic Meeting Stifles China Angle: Deep Divisions, Taipei Times, July 27, 2009, http://www.taipeitimes.com/News/front/archives/2006/07/27/2003320570 (Last accessed on Feb 28, 2010).
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relaxation of the 40% NAV rule. Right before the conference started, the MAC had to formally announce that the two issues would not be included in the formal agenda of the Conference, which disappointed many who were counting on liberalization. The 1,000-participant plenary session of the conference reached 516 conclusions, of which 107 related to social security topics, 148 to business competitiveness, 119 to fiscal and financial reform, 84 to government efficiency, in addition to the conclusions on global deployment and cross-Strait economic and trade relations. The conclusions were summarized as four major policy goals, each of which was linked to a flagship initiative: increasing investment in Taiwan, creating more jobs, bridging urban-rural gaps and promoting equitable distribution of wealth. Premier Su and Chairman Hu Cheng-sheng of the CEPD announced that the specific goals for 2015 were attaining an economic growth rate of 5%, achieving GDP per capita of $30,000, and reducing the unemployment rate to under 4%.369 More targeted programs were to be rolled out in September 2006, and the CEPD would be documenting the final versions. Premier Su delegated to the Cabinet agencies the responsibility to craft the necessary implementing legislation for the legislature to approve.370 The Cross-Strait Panel The Panel on Global Deployment and Cross-Strait Economic and Trade Relations proposed 57 items, only 17 of which involved change in cross-Strait economic and trade policies.371 There was a lot of discussion of permitting Chinese banks to open branches in Taiwan, assuming a cross-Strait financial supervisory pact could be signed. The PFP, represented by Christina Liu, identified the need for the operations of Taiwanese banks in China to be upgraded, assuming reciprocity. Opponents raised the issue of sovereignty and national security. Wang To-far, a DPP legislator, was concerned by the level of risk in the Chinese market.372 The Panel had a difficult time even during the agenda-setting stage, starting with direct transport links with China which was eventually excluded.373 The drama was heightened on the second day of the conference. Under pressure from the business organizations like the CNFI, as well as from KMT members, Vice Chairwoman Ing-wen Tsai agreed to hear several motions on cross-Strait motions, including reviewing and readjusting the 40% NAV rule. But since there was no agreement on these motions, they were included as other opinions,

Former CEPD Vice Chairman Schive Chi immediately ridiculed these goals as Taiwan had dropped in global competitiveness ranking from 7 to 18 just before the conference and per capita income had grown only 1.75% for the last six years. CEPD Visions for 2015 are empty, China Post, August 6, 2006. 370 Conference Consensus Taken Seriously: Taiwan Premier, Asia Pulse, August 3, 2006. 371 The MAC, Key Conclusions of the Panel on Global Deployment and Cross-strait Economic and Trade Relations of the Conference on Sustaining Taiwans Economic Development, July 28, 2006, http://www.mac.gov.tw/english/english/macpolicy/950728.htm (Last accessed on Aug 31, 2009). 372 Amber Chung, Let Chinese Banks In, Group Says; Reciprocity, Taipei Times, July 11, 2006, http://www.taipeitimes.com/News/biz/archives/2006/07/11/2003318323 (Last accessed on Feb 28, 2010). 373 Transport Links with China to be Excluded from Economic Conference, July 26, 2006, Central News Agency.

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rather than as consensus opinions, in the conference conclusions.374 The panel went on to consider other motions on establishing direct air transport links, allowing Taiwanese banks to establish Chinese subsidiaries, expediting air and sea cargo links, and requesting Chinese government to recognize Taiwanese professional licenses.375 The TSU representatives and several scholars then walked out in protest. The panel reached consensus on the establishment of a specialized ministry for industrial development, the enactment of a sunshine law for Chinarelated lobbying, and the abolition of the system of commissioning civic agencies for cross-Strait negotiations. Most importantly, however, the ceiling on investment was to be retained.376 The only substantive consensus involving the relaxation of regulations on cross-Strait economic relations was to allow local mutual funds and discretionary funds, excluding government funds like pension funds, to invest part of their assets in Chinese stock markets and in securities issued by the Chinese government or companies.377 For its part, China had already opened its A share stock market to Taiwan-funded enterprises, and the commercial banks in China also had the authority to grant special loans to Taiwanese companies, especially agricultural enterprises operating in China.378 In the end, Gary Wang Ling-li, a panel convener and head of Eastern Multimedia, announced that consensus had been reached for the government to reduce the economys dependence on China through enhancing Taiwans competitiveness. Three strategies were proposed: first, Taiwan should accelerate investment in research and development; second, it should promote strategic international cooperation with other economies through FTAs or other mechanisms; and finally, it should formulate economic policies, based on the principle of Taiwan First, that would create jobs and reduce inequality, such as encouraging Taiwanese investors to repatriate capital to Taiwan.379 A few measures of effective liberalization were to be instituted, such as loosening rules for Chinese nationals to visit Taiwan on business, setting up a cross-Strait supervisory system for financial sector interactions, and initiating
Taiwan Economic Conference Agrees on China Trade Moves despite Sparring, BBC Monitoring Asia Pacific, July 30, 2006. 375 Chang Yun-ping and Jimmy Chuang, Other opinions' rule economic summit, Taipei Times, Jul 29, 2006, http://www.taipeitimes.com/News/front/archives/2006/07/29/2003320869 (Last accessed on Feb 28, 2010). 376 See Taiwan Economic Conference Agrees on China Trade Moves despite Sparring, 40% Cap on China Investments to Stay, Emerging Markets Daily News, August 2, 2006; Government Upbeat, Industries Disappointed at Results, Taipei Times, July 29, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/07/29/2003320901 (Last accessed on Feb 28, 2010). The system of commissioning civic agencies to negotiate cross-Strait matters such as for the SEF, mandated by the MAC, to represent the government in the absence of official negotiating structure, has always been questioned. 377 Amber Chung, Conference on Sustaining Taiwans Economic Development: Cross-Strait issues hotly debated if finance meeting. Taipei Times, July 28, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/07/28/2003320723 (Last accessed on Feb 28, 2010). 378 Taiwan Fish, Fruit Coming Ashore, The Nikkei Weekly, July 10, 2006. 379 The MAC, Key Conclusions of the Panel on Global Deployment and Cross-strait Economic and Trade Relations of the Conference on Sustaining Taiwans Economic Development at http://www.mac.gov.tw/english/index1-e.htm; the press was generally positive, see Taiwan Economic Conference Agrees on China Trade Moves Despite Sparring, Taiwan News, July 29, 2006.
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cross-Strait flights when conditions were appropriate. The liberalization of tourism was also authorized. But some of these measures required Chinese cooperation, which would not materialize as long as DPP was in charge.380 Moreover, despite these limited steps toward liberalization, the conferences key message was that Taiwans increasing economic dependence on Mainland China was a source of risk to Taiwans economy and that mechanisms for managing the risks in cross-Strait economic and trade relations should be strengthened. Specifically, major China-bound investments must be regulated more carefully, especially in the technology sector, in order to maintain Taiwans competitiveness. Such investments would be approved only if they did not hurt Taiwan by transferring core technology to China. Chen Shui-bians conclusion was that Taiwan had invested too much in China already, not too little, and that Taiwans economic relations with the Mainland needed more regulation, not less.381 He argued that more investment in China would exacerbate the development of an M-shaped society.382 On December 15, 2006, the specific revisions of rules were announced after heated legislative debate. Major investments were defined as any new investment of over $100 million or any increment of more than $60 million in an investment with an accumulated value over $200 million, by either Taiwanese individuals or corporations. Investments in core industries and technologies would also require authorization by the economics ministry, including 8-inch or more advance wafer manufacturing, chip packaging and testing, and middle-stream manufacturing of TFT-LCD modules of 4 inches or under.383 Public Response The Taiwanese began to show take a more instrumental approach to crossStrait relations during this episode, focusing on the national interests at stake in their economic ties with China, rather than continuing to link their preferred economic policies to their concept of national identity. There was widespread discontent with the Chen administration both before and after the March 22, 2006
On June 2, 2006, the MAC announced that Taiwan was ready to start negotiations on allowing Chinese tourists into Taiwan and setting up regular cross-Taiwan Strait charter flights, pending Chinese approval. Immediately after the CSTED, a new group was established the Taiwan Strait Tourism Association (TSTA) which would continue the work of the ROC Travel Business Association set up a year prior, as a counterpart to Chinas Cross Strait Tourism Exchange Association newly set up in August 2006. The TSTA consisted of a board with officials from Taiwans tourism Bureau, the Immigration Office, the Taiwan Visitors Association and leaders of travel agency associations. 381 Chen Shui-bian continued defending his policies as concluded in July 2006 from the CSTED, see Stance on Risk Management in Cross-Strait Trade Unchanged: Cabinet, Central News Agency, August 3, 2006; and more than a year later, at the New Years address on January 1, 2008, see Taiwan President Warns Against Over-Reliance on China Market, Central News Agency, January 2, 2008. 382 The M-shaped society was a concept put forth by Japanese business strategist Kenichi Ohmae, which describes how a society with normal distribution may morph into a M-shaped society where the middle class slowly becomes eliminated as they either move up to upper class, or most of them sink to the lower classes with unemployment or real salary declining. This may happen even when the economy is growing, because of uneven distribution of wealth benefitting only a few elites. See Ohmae (2006). 383 Jessie Ho, Lisa Wang and Ko Shu-ling, New PRC Investment Rules Announced, Taipei Times, December 15, 2006, http://www.taipeitimes.com/News/biz/archives/2006/12/15/2003340571 (Last accessed on Feb 28, 2010).
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announcement by the MAC of more stringent controls on investments in China. This was reflected by the publics low interest or trust in the CSTED, with some polls indicating that up to 75% of the public was unaware of the conference.384 But this did not mean the public was not interested in the specific issues discussed at the conference, such as direct cross-Strait flights, investment restriction and cross-Strait financial liberalization. Polls throughout 2006 showed that the public opinion exhibited a wide range of views on cross-Strait economic policies, increasingly clustered in the middle of the spectrum supporting a managed liberalization rather than total restriction or unconditional liberalization, and reflecting an a desire to consider and weigh competing national interests.385 When asked about direct transportation links with China, for example, 70% thought they should be established conditionally, compared with 16% who thought no condition was necessary. 56% of the respondents thought it would be beneficial for the Taiwan economy to open direct flights with China, but nearly half also thought it would impact Taiwans security. A further 63% thought that if direct flights enhanced growth but hurt Taiwans security, then security should have the higher priority. When asked if they were concerned about the fact that Taiwans FDI in China already represented 71% of Taiwans total overseas investments, nearly 74% said yes.386 When asked specifically about restrictions on Taiwanese investment in China, only fewer than 13% supported current policy, compared with 35% who wanted fewer restrictions and close to 50% who wanted more restrictions.387 Most other polls on specific policies showed similar patterns. A July poll asked if the 40% NAV investment cap was too high or too low. Approximately 37% responded that it was too low, about 25% said that it was too high, and 26% thought it was just right. Only 11% had no opinion, rather unusual for such a specific policy question, reflecting the publics high degree of interest in crossStrait economic policies.388 On national identity, 2006 polls showed the continuation of an unmistakable trend, lasting more than a decade, of increasing support for Taiwans autonomy and increasing identification of the islands population as purely Taiwanese. Respondents in the NCCU-ESC who identified themselves as exclusively Taiwanese had risen from over 40% in 2001 to 44% in 2006, whereas respondents who chose the combined Taiwanese and Chinese category

Based on poll commissioned by Taiwan Advocates poll on July 18 and 19, 2006, which showed that 75% of respondents were unaware of Conference, and 61% thought it unlikely to revive the economy or enhance Taiwans well-being. See Jimmy Chuang, Jackie Lin and Chang Yun-ping, Economic Meeting Stifles China Angle, Taipei Times, July 27, 2006, http://www.taipeitimes.com/News/front/archives/2006/07/27/2003320570 (Last accessed on Feb 28, 2010). 385 2006, http://www.mac.gov.tw/ct.asp?xItem=56144&ctNode=6333&mp=1 (Last accessed on Feb 28, 2010). 386 This particular survey is done by the DPP Polling Center, in July 14-15, 2006. See the MAC, 2006, http://www.mac.gov.tw/ct.asp?xItem=56144&ctNode=6333&mp=1 (Last accessed on Feb 28, 2010). 387 NCCU-ESC polls on the MAC site, How should our Government Handle Taiwan Investment on Mainland China poll on December 2006, http://www.mac.gov.tw/. 388 This survey is done by the DPP Polling Center, in July 14-15, 2006.

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stood at 45%.389 Those who chose Chinese only had fallen from 10% in 2001 to 6% in 2006. The change in identity appeared to reflect changes in attitudes to Taiwans eventual relationship with China. People who advocated independence as soon as possible, or the status quo leading to independence, had risen to a combined total of 20%, compared to 16% in 2001. The percentage of those who chose the status quo indefinitely or until later, with no clear preference as to the ultimate outcome, grew the most, to over 58% in 2006 compared with almost 48% in 2001. Unification as a goal received declining support, from nearly 22% in 2001 to 14% in 2006. The percentage of those who were apathetic or undecided declined by half, from 17% in 2001 to under 8% in 2006.390 Combining the survey on preferred political outcome, which showed a majority preferring the status quo, with the identity survey, which showed a combined 89% of the respondents declaring themselves to be Taiwanese (44%) or Taiwanese and Chinese (44%), the public seems to have become increasingly Taiwanese, without simultaneously rejecting the status quo in favor of independence.391 Although there was a greater consensus on Taiwans relationship with China maintain the status quo, with the long-term future open-ended there was still no agreement on specific cross-Strait policies. Consider, for example, the publics views on the pace of cross-Strait exchanges. In 2006, 36% thought the pace was just right, versus 20% who thought they were going too fast, and 31% who thought they were developing too slowly. There appeared to be a far wider range of opinions on the details of cross-Strait economic policies than on the more basic issues of national identity or Taiwans future relationship with China.392 The Four Tendencies Immediately after Chens January 2006 active management speech, in which he signaled his intention to tighten economic policy towards China, the DPP experienced its biggest internal rift since the 1998 debate over cross-Strait policy. The four leading factions the Justice Alliance, the New Tide, the Welfare State Alliance and the Green Group all advocated different cross-Strait economic policies.393 The Justice Alliance, headed by Chen Ching-chun, advocated complete isolation from China. The Welfare State Alliance led by Lin Yu-sheng was more interested in reforming domestic economic policies, but was willing to support liberalization of cross-Strait economic relations if they were adequately regulated. The New Tide Faction, led by Hung Chi-chang, believed in opening Taiwan more to China, establishing the Three Links and positioning
Although this percentage remains at similar levels, the composition of the group has shifted significantly from 1994, with many moving over to the Taiwanese group, and more coming into this category from the Chinese only category. See Chapter Eight for overall trend. 390 This includes categories cannot decide and non-responsive categories. 391 The distinction is also made by Naiteh Wu (2005) in his categorization of Taiwanese Nationalism vs. Chinese Nationalism. Taiwanese nationalists are those who called themselves Taiwanese only and prefer independence while Chinese nationalists would be Chinese only and prefer unification. 392 For details of the polls, see 2006, http://www.mac.gov.tw/ct.asp?xItem=56144&ctNode=6333&mp=1 (Last accessed on Feb 28, 2010). 393 The factions were disbanded following a DPP resolution in July 2006. See DPP votes to disband party factions, China Post, July 24, 2006, http://www.chinapost.com.tw/2006/07/24/86462/p2/DPP%2Dvotes.htm (Last accessed on Feb 28, 2010).
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Taiwan as a hub for firms wishing to invest in China. Finally, the Green Faction led by Lin Ching-hsing wanted to eliminate the offshore capital repatriation tax and raise the upper limit restriction on Chinese investments.394 In other words, the range of views on cross-Strait economic relations within the DPP ran the gamut from Extreme Restriction to Guided Liberalization. The factional fights were so severe that the factions were officially disbanded later in the year. The business community of Taishang was also very divided, and fell unusually quiet during in this episode. Taishang were typically torn by the dilemma that their businesses were now purely in China, and yet they retained strong roots in Taiwan and preferred to keep their families there. Most wanted growth for their business, but not at the expense of Taiwans security. Thus, as a group they probably offered varying degrees of support for Chens more restrictive policy toward cross-Strait economic relations. Publicly, many Taishang made statements critical of Chen Shui-bians government, probably to ensure they would not be penalized by Beijing. A Chinese New Year banquet for Taishang returning to Taiwan in February 2006, for example, turned into a mini rally among leaders of different associations complaining that the potential tightening of restrictions and the deterioration of cross-Strait relations would have a negative impact on their business in China. Hsieh Kun-tsung, chairman of the Beijing-based Taiwan Business Association, said that Taishang would go wherever the money is, and if Taiwan had been doing better, they would not have had to leave home to go to China.395 Privately, however, the Taishang complained about the constant harassment they faced from Beijing, aimed at forcing them to openly oppose independence. The chairman of the Taiwanese Businessmens Association in Chongqing, for example, said that TAO officials in all the provinces were investigating Taishang to confirm their political backgrounds, including any donations they might have made to the DPP.396 The political pressure faced by the Taishang was exemplified by the case of Chi Mei, the worlds leading ABS plastic manufacturer, which underwent a wide-ranging tax audit by the Chinese regulators, leading to the early retirement of the pro-independence founder, Hsu Wen-long. Forced by the Chinese to publicly endorse the Anti-Secession Law, Hsu had to repudiate his former proindependence position by affirming the one China principle, with much sympathy from the Taiwanese public.397

, , Economic Daily, January 20, 2006, p. A3. Investors Worry on Impact of Chens Latest Remarks, China Post, February 7, 2006. Other comments were made by prominent leaders. Yuh Hui-teh, Chairman of the Taiwan businessmens association in Shanghai, claimed President Chens comments were signs of further deterioration of cross-Strait relations, and was only a ploy to detract from public scrutiny of the Kaohsiung Mass Rapid Transit scandal. Cheng Jung-wen, Chairman of the Taiwan businessmens association in Zhangzhou, said scrapping the NUC and NUG had rocked the relationship. 396 For the history of pressure on Chi Mei and other Taishang by Chinese authorities, see the article in the INPR by Wang Hsin-hsien, Malicious Tax Audits, http://www.tp.org.tw/document/detail.htm?id=20012002 (Last accessed on Feb 28, 2010). 397 For China Dailys coverage of Hsus support, see Secessionist Moves Suffer Setback, China Daily, April 11, 2005, http://sientechina.china.com.cn/english/China/125488.htm (Last accessed on Feb 28, 2010).
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Extensive Restriction The Extensive Restrictionists continued to be primarily interested in protecting Taiwans security and sovereignty from infringement by China. They saw no benefit in economic integration with China and opposed any further relaxation of cross-Strait economic policies. There were three types of organizations in this opinion cluster: some factions within the pan-green political parties; think tanks, independent scholars, and some parts of the media; and proindependence interest groups, including some industrial organizations and labor unions. The most organized and vocal advocate of more stringent control over cross-Strait economic policies was the TSU. Security was its priority above all else. The TSUs paper on cross-Strait policy charged that liberalization had harmed Taiwans security by reducing the competitiveness of Taiwanese economy. The TSU criticized President Chen for allowing excessive investments in China: the trend of Taiwanese businesspeople going west has become even more prevalent under the DPP than under the past rule of the KMT. The investment of more than $100 billion in China and the hundreds of thousands of Taiwanese businesses who reside in China have eroded the roots of Taiwans industrial development and inflicted major damage on the nations security.398 The TSU legislators drew the line against Chen and the DPP by walking out of the CSTED. They called the a conference a big hoax in which companies demanded further concessions of investments in China, and mocked it for agreeing to include 166 other opinions in its final report even though no consensus had been reached on them. Their protest hurt the administrations credibility and contributed to the public mood that led, as we will see, to further restriction on semiconductors.399 Working with the TSU, Lee Teng-hui had quickly become probably the single most important Extensive Restrictionist, constantly being the thorn in the governments side, a dramatic change from his more moderate position in 1996. In Lees view, opening up to China, or what he called Taiwans China fever, was the root cause of the islands economic woes, which the CSTED must seek to address: Does the massive industrial investment in China mean that our economy has grown faster than other countries? Has Taiwans international competitiveness improved significantly? Has the general public benefited from the flow of companies to China? Not only is the answer no to each of those questions, but Taiwans industrial sector has been hollowed out, resulting in rising unemployment and other problems. Taiwan, not China, should be the strategic focus of the nations sustainable development. We should build a new strategy centered on Taiwan that opens up the nation to the rest of the world. In the past, Taiwan was but
Change Course Now on Strait Policy, Taipei Times, September 12, 2004, http://www.taipeitimes.com/News/editorials/archives/2004/09/12/2003202613 (Last accessed on Feb 28, 2010). 399 Editorial: Now Comes the Hard Part, Taipei Times, July 31, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/07/31/2003321236 (Last accessed on Feb 28, 2010).
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a manufacturing plant participating in the global economy by providing international markets with cheap products of good quality. It moved toward globalization by dividing its eggs between the baskets of many other nations. The attempts to recreate Taiwans past in China should be abandoned in favor of building a Taiwan for the present and the future.400 Lee found every opportunity to discuss the importance of security for cross-Strait economic policies, such as in a speech he gave at his Lee Teng-hui school, a political academy founded in 2003, which attacked the CSTED for being more pro-business than he ever was, and which stressed the theme that globalization doesnt equal Sinicization. Most importantly, Lee said, Issues such as national security and sovereignty are the main concerns [of] cross-Strait economic policies. Promoting opinions that are not based on consensus is dangerous. (Kagan 2007, 153)401 Some members of the DPP also tried to ensure that cross-Strait economic policies would not be liberalized any further. Fundamentalist Lin Cho-shui pointed out that, under Vincent Siews direction, the KMTs strategy of becoming a service hub in the 1990s actually sacrificed the manufacturing sector.402 If the CSTED adopted the same approach as the KMT in making Taiwan a hub for global value-added services, there would certainly be a high economic price. Soon, he warned, all the manufacturing companies like Hon Hai Precision, Quanta Computer and Giant would leave the island, and Taiwan would be nothing but a service-oriented city like Singapore or Hong Kong.403 The second group that supported extensive restriction consisted of think tanks and academic scholars who became much better organized during these episodes of policy reversal. Often regarded as Chen Shui-bians brain trust, Taiwan Thinktank straddled the two tendencies of Extensive Restriction and Guided Development. Some of its scholars and analysts argued for extensive restriction by highlighting the risks of unemployment and social instability, but they always came back to security as their ultimate consideration. The head of Taiwan Thinktank, economist and former CEPD head Chen Po-chih, reminded the public that if unregulated, Taiwans semiconductor industry could be wiped out just as the notebook industry had been a decade ago. He warned that to open direct links is to sacrifice Taiwans national security and dignity. China could easily marginalize Taiwan with its new role in the new global division of labor: Moreover, Taiwans exploitation of and reliance on Chinas economy is already much higher than that of other countries we should worry about
Lee Teng-hui, Focus on The Future, Not Just China, Taipei Times, July 27, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/07/27/2003320637 (Last accessed on Feb 28, 2010). 401 See also Mo Yan-chih, Lee Attacks Conference Results, Reliance on China, Taipei Times, July 30, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/07/30/2003321028 (Last accessed on Feb 28, 2010). 402 Vincent Siew founded and chaired the Common Market Foundation in 2001, advocating an integrated market with China. As vice president since 2008, his views have continued to generate more debate. His vision can be found at the Foundations website at: http://www.crossstrait.org. 403 Lin points out that although Finland, Netherlands and Ireland were mentioned during the CSTED, but Taiwan has nothing in common with these countries which have less population and a non-diversified manufacturing base. Lin Cho-shui, Which Country Should We Emulate? Taipei Times, August 24, 2006, https://www.taipeitimes.com/News/editorials/archives/2006/08/24/2003324641 (Last accessed on Feb 28, 2010).
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unemployment problems, businesses moving away, and threats of economic sanctions there is no economic theory that suggests laissezfaire policy can accomplish optimal economic development.404 Another deep-green think tank, Taiwan Advocate, stressed both economic security and the needs of the working class.405 Margot Chen, research fellow at Taiwan Advocate, argued that national identity was still at the heart of the problem raised by the CSTED: At the CSTED pro-China political and business organizations ignored economic security and the needs of middle and lower-class blue-collar workers, and demanded that the government open up direct transportation links and lift the restriction blocking any firm from investing more than 40% of its net value in ChinaTaiwan does not belong to China and we have the right to decide our future As a result of the national identity problem, consolidating democracy is more complicated in Taiwan Attempts to consider other solutions for Taiwans democracy and to decide where we should start to build a national identity should begin by putting an end to pro-China forces and those who harbor the Greater China dream.406 Identity is always the most fundamental issue for Extensive Restrictionists. Huang Tien-lin, a National Policy Advisor, had become extremely disillusioned by how President Chen veered away from insulating Taiwans economy from China. A prolific writer, he believed that promoting ever greater degrees of liberalization in order to promote greater economic growth would be a neverending vicious cycle.407 After the CSTED, he wrote: Will Taiwan perish? Dont underestimate the severity of the deeper crisis that lies behind the thinking that would request the yuan be considered a semi-official national currency, or the choice of a phrase like Comrade Hu Jintao. If the government doesnt change its policies of active opening, effective opening, or confident opening, the confusion regarding national identity will deepen as cross-strait economic integration continues.408 Huang argued that Active Opening was a masterpiece drawn up by prounification activists, government officials and China-based Taiwanese businesspeople[It] has done great damage to Taiwans economy. In excess of 40% of Taiwans manufacturing now takes place abroad, mainly in China.409 By
Chen Po-chih, excerpt of his own book The Cross-Strait Economic Relationship, July 7, 2005, http://www.taiwanthinktank.org/ttt/servlet/OpenBlock?Template=Article&lan=en&category_id=4 1&article_id=1&BlockSet (Last accessed on Feb 28, 2010). 405 This was also closely affiliated with Lee Teng-hui. See Taiwan Advocate official website at: http://advocates.tomeet.biz/wooooa/front/bin/ptdetail.phtml?Part=e001&PreView=1 (Last accessed on Feb 28, 2010). 406 Margot Chen, Divisions Threaten Taiwans Democracy, Taipei Times, August 2, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/08/02/2003321511 (Last accessed on Feb 28, 2010). 407 Based on interview with Huang Tien-lin, July 30, 2008. See also T.L Huang (2007). 408 Huang Tien-lin, Identity Crisis Nears Tipping Point, Taipei Times, August 2, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/08/02/2003321513 (Last accessed on Feb 28, 2010). 409 Huang Tien-lin, Pro-China Policies Must Be Axed, Taipei Times, February 23, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/02/23/2003294290 (Last accessed on Feb 28, 2010).
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his calculation, relaxing the 40% NAV rule would lead to a 2-4% drop in domestic investment in two years, while the establishment of direct flights would reduce property prices in Taiwan due to the diversion of investment to Chinese coastal real estate.410 Pro-green media also supported the reversal of the Active Opening policy. Columnist, cartoonist and former television personality Yu Fu believed that the DPP had actually been taken over by pro-China forces, including traitors such as the New Tide faction. He applauded the TSU and its leaders for standing up to the administration during this episode.411 In the third quarter of 2006, the Liberty Times (whose sister Englishlanguage newspaper was the Taipei Times) became the islands leading newspaper, reflecting the publics increasing support for its pro-independence position.412 The Taipei Times published an op-ed right after President Chens New Year address: It has already been seen that active opening, effective management has led to capital outflows and has failed to gain any gratitude from China, which continues to ignore Taiwans existence and rejects official dialogue on direct links and protection of Taiwans interests in ChinaChens determination to put Taiwan first is the correct policy to pursue and he should be supported. If he has failed in anything, then surely it is that he realized too late the failings of the previous policy, and for this Taiwan has paid a heavy price.413 Lastly, among the new groups emerging throughout the island during this period, some took Extensive Restriction positions. The Taiwanese Society, for example, was established on June 18, 2006 as a coalition of more than 100 public societies, some of which had been active in the policy debate in 2001, including a number of pro-independence groups.414 The Society was very vocal about how economic integration with China hurt the middle and lower class workers.415 But they were so intensely pro-localization, they appeared to even tolerate corruption: We must first ensure the stability of the localized government before we can demand that it be clean and effective.416
Based on interview with Huang Tien-lin, July 30, 2008. See also T.L. Huang (2007, 218-21). Based on interview with Yu Fu, April 1, 2009. 412 Based on ACNielsens ranking which had been conducted for 18 years. See ACNielsen, , Liberty Times, November 1, 2006, http://www.libertytimes.com.tw/2006/new/nov/1/today-fo7.htm (Last accessed on Feb 28, 2010). 413 Editorial: Chen's policy shift the right move, Taipei Times, January 4, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/01/04/2003287369 (Last accessed on Feb 28, 2010). 414 Jewel Huang, Taiwan Society officially started, Taipei Times, June 19, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/06/19/2003314412 (Last accessed on Feb 28, 2010). The Society including the Northern Taiwan Society, Southern Taiwan Society and Eastern Taiwan Society, wanted to unify all civic groups that were pro-Taiwan identity and to promote political and cultural reform. The Chairman, Wu Shuh-min, was the chairman of the Northern Taiwan Society. The secretary-general of the Northern Taiwan Society, Chet Yang, was the initiator of the group. 415 , , : , Commercial Times, August 23, 2001, http://forums.chinatimes.com.tw/special/open/index.htm (Last accessed on Feb 28, 2010). 416 Kuo Chang-feng, TSU Needs to set off on a Direction of Its Own, Taipei Times, November 13, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/11/13/2003336178 (Last accessed on Feb 28, 2010).
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Class interests and security interests were also intertwined for many labor unions, which saw absolutely no benefit in economic integration with China and supported independence politically. Unions had become legal since May 2000. In addition to the only national labor union the Chinese Federation of Labor other unions such as the Taiwan Confederation of Trade Unions (TCTU) as well as many others like the National Trade Union Congress, the Chinese Federation of Occupational Labor, the National Labor Congress, the ROC National Labor Alliance, the ROC National Federation of Occupational Trade Unions and the Taiwan Confederation of Labor had sprung up. (Pan 2007, 210-1) Their arguments often included messages about protecting the victims of economic integration as well as defending Taiwans security. These labor unions complained that the CSTED did not provide any solution to Taiwans domestic problems, which the conference had considered without reaching any consensus. In a TSU survey conducted in August 2006, 43 out of 100 labor unions and organizations responded, and they rated the governments performance poorly at only 41 points out of 100. They complained about the degeneration of labor rights since the DPP came to power. They worried about unemployment and how wages failed to keep up with inflation. And they had a particular interest in protecting local workers by demanding that the government ban Chinese workers from migrating to Taiwan.417 Former TCTU member Lin Thung-hung summarized the trade unions fundamental argument when he declared that, for Taiwan, the growth of crossStrait commerce and the process of globalization more generally represented the consolidation of Taiwanese businesses, the marginalization of the working class, and the decline of the middle class.418 In an editorial in the Taipei Times highlighting the problem of equity, Lin Kuo-hua pointed out that the income of the poorest 20% of Taiwanese households had decreased by 9% from 1999 to 2005because wages had dropped nearly 20% over that time. [T]he chief culprit is the shifting of production to China, or, in international diction, the more neutral globalization It doesnt seem too far off the mark to say that cross-Strait trade is a question of class interests, and not a question of political identity.419 Some professional associations with a pro-independence outlook took a similar position. TAUP and TEA continued to support tighter control. For engineers and teachers alike, there was nothing to gain from permitting either the migration of workers from China or the leakage of technology to China. TEA was vocal in insisting that companies like UMC, founded by the government, must stay in line. In an interview, Hsu Wen-fu of TEA explained if the government did not prosecute UMC in 2005, all other companies would also
Flora Wang, Survey Reveals Substantial Labor Discontent, Taipei Times, August 22, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/08/22/2003324288 (Last accessed on Feb 28, 2010). 418 Lin Kuo-hua, Time to Look after Taiwans Poor, Taipei Times, October 22, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/10/22/2003332872 (Last accessed on Feb 28, 2010). The Taipei Society agreed that the debate over Taiwans cross-Strait economic policy had become an issue of competing class interests. But it pointed out that since there was a high correlation between low-income groups and benshengren, the issues of class interest and national identity may have been intertwined. Hsu Yung-ming, , China Times, August 6, 2003, p. A15. 419 Ibid.
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circumvent Taiwans investment regulations, ruining Taiwans industrial base.420 Taiwans security was threatened when the Chinese tried to persecute the Taishang in China in order to steal technology from them: [If] even big Taiwanese companies like Chi-mei in China cannot escape the fate of being persecuted by the CCP, how can UMC (He Jian) and TSMC be spared? The semiconductor industry, which is Taiwans national industry over the last thirty years, probably cannot resist the clustering effect of the foundry and assembly industry [as the result] of westward development. Neither Taiwans economy nor the society could possibly handle the severe consequences [of such migration].421 As an example of how Extensive Restrictionists viewed all incentives from China with suspicion, regarding them as having strong political motives, they were up in arms when China offered agricultural incentives through their discussions with the KMT, the PFP and the NP. The chairman of the Taiwan Agricultural-Academia-Industry Alliance attacked the KMT for undermining the governments role in trade, encouraging Taiwanese agricultural capital and technology to move to China, and surrounding Taiwan with agricultural incentives to befriend Taiwans agricultural opinion leaders [with the] ultimate goal to complete unification through agriculture.422 Taiwan Thinktanks Chen Po-chih added to the argument by saying that, while the incentives were leading the farmers on, they would be hurt in the end, because those incentives were not WTO-compliant and therefore would be revoked eventually.423 Guided Development The position of Guided Development was generally that the government should only restrict major and key investments, not investments across the board, in order to ensure stability, equity and security in addition to growth. Furthermore, enhancing implementation of existing regulations might be a better solution than imposing tighter controls on investment in China. Parts of the government reflected this opinion, calling for a balanced set of regulations. Tsai Chi-yuan, an economist at the Academia Sinica, published an analysis supporting more guidance on China-bound investments. He pointed out that Taiwans tax revenues and per capita income had been growing because of the return of Taiwanese businessmen from China. He believed that 20% of Taiwanese businessmen who moved to China had relocated home because of rising labor costs in China and increased investment risks. He thought that more
Interview with Wen-fu Hsu (also known as Bunhu Khou), July 29, 2008. He stresses the importance of fining UMC. After the UMC-affiliate HeJian was found to have made illegal investments in China, Chairman Robert Tsao had no qualms to quit his chairmanship and abandon relations with UMC completely. This could happen to all the companies which wanted to just move over to China without repercussion. 421 Wen-fu Hsu, ? Taiwan Daily, January 10, 2006, www.taausa.org/tw_latestnews/Jan2006/14.html (Last accessed on Feb 28, 2010). 422 Wu Ming-ming, Cross-Strait Agricultural Exchange and Trade: Leaving Myth for Breakthrough, April 14, 2006. Available on Taiwan Thinktank website at: http://www.taiwanthinktank.org/ttt/servlet/OpenBlock?Template=Article&category_id=&article_i d=643&lan=en (Last accessed on Feb 28, 2010). 423 Chen Po-chih, ? Common Wealth Magazine, August 15, 2005. Available on Taiwan Thinktank website: http://www.taiwanthinktank.org/ttt/servlet/OpenBlock?Template=Article&lan=tc&article_id=170 &BlockSet (Last accessed on Feb 28, 2010).
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Taishang wanted to invest back in Taiwan, and this trend could be encouraged given the right set of policies by Taiwan.424 Tung Cheng-yuan, then MAC vice chairman, explained that the relaxation of investment rules in 2001 had several implications. Not only was Taiwans net FDI down $107 billion between 2000 and 2007, but talent, technology and consumer power had all flowed outward, which had been extremely harmful to Taiwans economy.425 He acknowledged that investing in China could be beneficial as the Chinese economy was very complementary to Taiwans, but Taiwan must work with the Chinese economy in a selective way, not indiscriminately.426 Some think tanks also showed strong support for Guided Development as a way of promoting greater equity. Several Taiwan Thinktank analysts published articles asking the government to consider the unemployment problem that was looming as a result of opening the Three Links. As analyst Luo Jeng-feng wrote: The government must be prepared for possible waves of unemployment resulting from emigrating industries... For industries that are easily replaced, opening the Three Links will only quicken their structural unemployment crisis. The government should establish policies to help low-level technology laborers, particularly women, as well as lesseducated and elderly employers. They will be the first group of people to face the impactcurrently, the estimated unemployed population is over 50,000They cannot solve the problem for once and for all.427 The two leading think tanks, CIER and TIER, had plenty of economists who supported a varied approach to cross-Strait economic policies. CIERs Chang Jung-feng criticized the government for failing to consider how Taiwan could best take advantage of building economic relations with China, rather than just considering the two extreme options of either permitting or prohibiting investments in China.428 In his opinion, Taiwan needed a strategy for promoting its long-term economic future, rather than one intended merely to please special interest groups. In his view, the governments success in keeping big businesses in Taiwan by restricting investments such as the Zhangzhou power plant set the right precedent.429 TIERs Kung Min-hsin echoed the same thought: the government must be more pro-active in its cross-Strait economic policies, not
New China Investment Policy Helpful to Taiwan Economy, Central News Agency, February 3, 2006, 425 In the research, he points to a study of 1,019 Taiwanese and foreign companies, the predominant opinion was that Taiwan must work with China to attract more international capital, and Sinicization is one of the ways to fit into globalization; they are complimentary. The liberalization especially with regards to FTA with ASEAN and other East Asian countries must be selective and carefully planned. From Tung Cheng-yuan, , November 14, 2008. Available on New Societys website at: http://www.taiwansig.tw/index.php?option=com_content&task=view&id=733&Itemid=120 (Last accessed on Feb 28, 2010). 426 Based on interview with Tung Chen-yuan, August 15, 2007. 427 Luo Jeng-fang, Opening up the Three Links between Taiwan and China: Impact, Strategy, and Conditions for Success. February 22, 2003. Available on Taiwan Thinktank website: http://www.taiwanthinktank.org/ttt/attachment/article_286_attach2.pdf (Last accessed on Feb 28, 2010). 428 Chang Jung-feng, , China Times, December 31, 2007, http://www.coolloud.org.tw/node/13975 (Last accessed on Feb 28, 2010). 429 Based on interview with Chang Jung-feng, June 18, 2008.
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reactive, and it should not relinquish its regulatory role in the name of free markets.430 These views were similar to the position of the National Teachers Association of the ROC (NTAROC), which believed that the Taiwan government must enforce policies to protect Taiwanese teachers. Allowing PRC teachers into Taiwan would be counterproductive for the countrys educational sector and would create unemployment. To Yang I-feng, the DPPs economic policies were politically motivated: the DPP wanted to restrict investment and trade with China in order to have an upper hand in future negotiation and to prevent outflow of Taiwans capital. He explained that such restrictions were necessary and understandable, but the NTAROC would not be opposed to the relaxation of other restrictions on cross-Strait measures if doing so would be beneficial to Taiwanese, as long as the teachers were not hurt.431 Some business leaders who worked closely with the government in formulating the regulations governing cross-Strait economic relations also believed that the proper regulatory framework was essential to charting a prosperous future for Taiwan. Earle Ho, chairman of Tung-Ho Steel and chairman of the CNFI between 2003 and 2006, said that an emerging consensus on identity was forming that had important implications for the debate over crossStrait economic policies: There are two extremes in cross-Strait economic policies: globalizationlets-bandwagon with China or independence advocates who refuse all interaction. Those positions used to be linked to ones political position, but this has changed. Now we have an agreement on identity, or what I call way of life in terms of freedom and the way we live. As a result, business is now separated from politics, especially after the DPP scandals made political donations public. We are no longer forced to secretly donate money to both the KMT and the DPP. The macro and economic factors are important but they dont decide everything. As head of CNFI, I made several trips to China to send messages to Beijing, and encouraged more communication which directly led to Beijings invitation to several leaders in 2005. We were almost the only conduit in cross-Strait discussions in those years.432 Not only did Ho believe in effective regulation of Taiwans economic relations with the Mainland, but he also argued that the formulation of such regulations could be promoted by dialogue between Beijing and Taipei. He said Taiwanese must contend with the reality that God is far and China is near but Taiwanese still must choose their own course. He felt it was time for the Taiwanese government to help those industries that were facing fierce competition in China, unlike in the 1990s when China needed the assistance of his company and other Taiwanese companies. The table had turned: Taiwan needed China more economically than the reverse, but Taiwan must also protect its way of life.

Based on interview with Kung Ming-hsin, August 15, 2007. Based on interview with Yang I-feng, June 17, 2008. 432 Based on interview with Earle Ho, April 2, 2009. The last sentence refers to the years 20032006 when he headed CNFI.
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Guided Liberalization Failing to achieve any breakthroughs during the CSTED, most business associations had become disenchanted with the governments policies. But trying to stay in line with the government at the behest of Premier Su, the major local industrial and business associations, including the ROCCOC, CNFI, CNAIC, NASME, jointly issued a statement to recognize the achievements of the conference. They expressed the desire to cooperate with other sectors to achieve the conferences goal of maintaining economic development, environmental protection and social justice.433 The business groups were towing the official line, but were not enthusiastic about doing so. Some at the ROCCOC said that the government should do the right thing even if the society disagreed, hinting at full liberalization.434 The CNFI ignited an intense debate at the CSTED when it urged the lifting of the 40% NAV rule.435 Huang Puo-chih of CNFI claimed that only law-abiding businesses would be restricted by current regulations, which imposed different investment ceilings on local companies setting up offices or factories in China.436 The Federations secretary-general, Wang Ya-kang, said that he believed most companies found loopholes to invest in China anyway because they needed to compete globally.437 The executive director of the TEEMA, Luo Huai-jia, representing over 4,000 member companies, warned that the regulations increased the costs of doing business: Additional administrative measures increase costs to both government and companies.438 The government was unable to ensure that these business associations towed the government line anymore, since the DPP had a testy relationship with these KMT-founded quasi-governmental groups.439 Former KMT technocrats who believed in a strong government were nonetheless extremely vocal in their denunciation of the DPP governments restrictive policy, partially as a way of drumming up support for the KMT as the 2008 presidential campaign approached. But those who went too far toward liberalization had to become more moderate if they wanted to preserve their political support. Vice-presidential candidate Vincent Siew, who had been an Extensive Liberalizer advocating the creation of a Common Market with China in 2001, now adopted a Guided Liberalization position, favoring some government restrictions on Taishang rather than all-out liberalization.440 However, he still

Key Proposals Forwarded to Cabinet, China Post, July 29, 2006. Amber Chung and Jackie Lin, Government Upbeat, Industries Disappointed at Results, Taipei Times, July 29, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/07/29/2003320901. 435 Taiwan Economic Conference Agrees on China Trade Moves Despite Sparring. 436 Former President Criticizes Taiwan Economic Conference, Asia Pulse, July 31, 2006. 437 Ibid. 438 For a summary of the Taipei Times article by Amber Chung, see Taiwanese Premier Says Firms Wishing to Invest in China May Face Audit, BBC Monitoring Asia Pacific, January 3, 2006. 439 , Chinanet, November 28, 2006, http://www.china.com.cn/overseas/zhuanti/txt/2006-11/28/content_7420538.htm (Last accessed on Feb 28, 2010). 440 In 2008, while running as vice president on Mas campaign, Siew found that his vision was so controversial that he had to clarify his vision, against many mainstream critics, in order to continue in the election.
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advocated opening up to China more, rather than less, and pushed for removing the 40% NAV rule.441 KMT Vice Chairman Chiang Pin-kuang toured the world to support the liberalization of cross-Strait relations. He blamed Taiwans economic problems on inconsistent government policies: Over the past five years, Taiwans dwindling economy has led to higher jobless and suicide rates [that] are closely related to the governments policy vacillation and political uncertainty at home.442 Growth must be the highest goal, echoed other former KMT administrators like Tsai Horng-Ming of CNFI, who believed that politically, Taiwan must compromise with China to improve Taiwans economy. It was important for Taiwanese government to work with China because businesses could not expand if China continued to be hostile to Taiwan. Chinas hostility led President Chen to restrict Taiwans economic relations with China more, which angers China, producing a vicious cycle. To say economics trumps politics is very difficult, because you will always run into politics in the end, Tsai emphasized.443 Many businessmen also argued for more liberalized policies as a way of promoting growth. Repeating the message he had given to the CSTED, Chairman of TSMC Morris Chang spoke up firmly at the prestigious business social group the Third Wednesday Club444 on August 16, 2006 about his opposition to the new policy: Liberalization will pose no threat to local manufacturers, as [0.18-micron process] technology is mature among Chinese chipmakers with fair yields. I hope the government will loosen this restriction.445 He reassured his audience that Taiwan probably had the most stringent regulations, after the U.S., on restricting the export of key technologies. But on that basis, he went on to say that that the growing Chinese market could not be ignored and policy liberalization would create a larger market for Taiwanese companies. Extensive Liberalization Just as the Extensive Restrictionists focused their attention almost entirely on protecting Taiwans security, the Extensive Liberalizers were primarily concerned with promoting the islands economic growth, and saw further liberalization as the necessary way of doing so. They warned that if the
Official website of the foundation available at http://www.crossstrait.org/. Compare Vincent Siews positions: first, in 2001 in Towards the Creation of a Cross-Strait Common Market, Keynote Speech at the American Enterprise Institute, Washington, D.C., January 22, 2001, http://www.crossstrait.org/version3/index.html (Last accessed on Feb 28, 2010); second, his later view which does not refer to common market any longer, as reported in , , May 14, 2006, http://epochtimes.com/b5/6/5/14/n1317879.htm (Last accessed on Feb 28, 2010). 442 Based on interview with Chiang Pin-kung, April 9, 2009; direct quote from Taiwan KMT Vice-Chairman Criticizes Governments China Investment Policy, Central News Agency, February 13, 2006. 443 Based on interview with Tsai Horng-ming, former NSC Senior Advisor and Secretary of CNFI, July 31, 2008. 444 The Third Wednesday Club was a social gathering of business leaders, established in 1999 for the purpose of promoting exchanges with the business community in Japan. There were 49 companies registered with the Club, and these companies generated more than half of Taiwans GDP. The Club meets on the third Wednesday of every month. 445 Jessie Ho, TSMC Projects 20% Sales Spike, Taipei Times, August 17, 2006, http://www.taipeitimes.com/News/biz/archives/2006/08/17/2003323586 (Last accessed on Feb 28, 2010).
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government did not relax its restrictions on investment in China, an increasing number of firms would simply move from Taiwan to the Mainland to take advantage of the opportunities there. One such firm was the Want Want Group, a Taiwanese company that had reduced its investments in Taiwan and moved its headquarters to China so as to fully tap the opportunities in China for markets and capital. A front-page story in the Commercial Times on September 6, 2006, quoted the Want Want Group as criticizing the government for its investment restrictions.446 The head of AmCham, Richard Vuylsteke, who had direct contact with senior Taiwanese officials, again became the spokesman for many Taiwanese firms that didnt want to confront the government so directly. He pointed out that many companies have been spinning off divisions that concentrate on China operations and listing them on the HKSE. Others are delisting in Taiwan altogether. The main result is to sap the strength of Taiwans financial markets.447 He attacked the TSU for preventing the CSTED from advocating closer economic ties with China, and even likened Taiwan to North Korea and Burma in terms of its restrictive foreign economic policies.448 KMT veterans and members of NP and PFP all pushed even harder for economic integration as the DPP administration fell into disarray, noting not only the material benefit of working closely with China, but also the danger of a separate Taiwanese national identity. After his 2005 visit to Beijing where he affirmed Chinese nationalism and attacked pro-independence extremists, Lien Chan, who was no longer seeking the presidency, unabashedly advocated cooperation with the CCP.449 He said, I believe Beijings thinking has changed for the better. After twenty years of continuous economic growth and a certain degree of reform and opening up, the PRC has entered a new stage.450 He went on to argue that trade and economic exchanges are mutually beneficialTaiwan can provide China with capital, technology and assistance in international marketing. China supplies Taiwan with raw material, low-cost labor and a large market. It is a mutually complementary relationship [aimed] at integration with China as a common market. Additionally, he warned that it was dangerous to

As quoted by Huang Tien-lin, How to Rule by Reading the Daily Newspapers, Taipei Times, September 22, 2006, http://www.taipeitimes.com/News/editorials/archives/2006/09/22/2003328749 (Last accessed on Feb 28, 2010). The irony of this is that Want Want Group acquired the China Times Group including the Commercial Times in 2009 from its base in China, basically completing a reverse takeover. 447 Based on interview with Richard Vuylsteke, May 26, 2009. See also The 40% Regulations Negative Impact, http://www.amcham.com.tw/index2.php?option=com_content&task=view&id=930&pop=1&page =0&Itemid=329 (Last accessed on Feb 28, 2010). 448 Closer Ties with China Needed for Peace, Growth, China Post, September 9, 2006. 449 See a summary of his historical trip to China, see , December 22, 2006, http://www.npf.org.tw/post/5/20 (Last accessed on Feb 28, 2010). 450 Lien Chan, then Honorary Chairman of the KMT, Cross-Strait Relations: Problems and Prospects, Speech delivered at the Chicago Council on Foreign Relations and UC Division of Social Sciences, Chicago, October 31, 2006. Full-text available at http://old.npf.org.tw/english/Publication/en-paper/Cross-Strait%20Relations-Problems%20and%20Prospects.pdf (Last accessed on Feb 28, 2010).

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promote this Taiwan identity that excluded China, and that Taiwan should strive to maintain the status quo, which would also be ideal for the U.S.451 Lien Chans think tank NPF proposed initiatives to both governments that included not only proposals to reduce restrictions on Taiwanese investment in China but also a wide range of liberalization measures. It advocated that Taiwan should allow Chinese tourists to visit the island and should establish an offshore capital market in which renminbi could be traded. The NPF also proposed that both sides create arrangements for agricultural cooperation and for Taiwanese banks to operate in China.452 James Soong led the PFP to write a platform that called for solving Taiwans economic woes by relying on China and its ever-expanding domestic market. China could provide the economic demand that Taiwan needed, and the profits that Taiwanese firms earned from their trade and investments in China could eventually be repatriated to Taiwan.453 At an anti-Chen rally on March 19, 2006, Soong argued that Chinese investments had already yielded $50 billion of profit for the Taiwanese, and that Chens policy prohibiting investments in China was therefore counterproductive.454 He stressed this idea that extensive liberalization would be profitable for Taiwan during his December 2006 campaign for Taipei mayor. Soong also took a strong position on maintaining a Chinese identity. He denounced Chens scrapping of the NUC and NUG, calling him an independence advocate going against the will of the people. He also stressed that Taiwan should not seek to resolve its status internationally.455 He expressed his views on the identity issue most clearly when he visited Chen Yunlin in 2005 and presented a piece of calligraphy that read: Chinese Descendants Do Not Forget Their Roots, Brothers Across the Strait Belong to One Family.456 The NPs platform was even more unambiguous.457 In an editorial published on October 26, 2007, the NP declared that unification should be everyones goal, but could only be achieved through an ill-defined long-term
Ibid. National Policy Foundation, Taiwan Development Perspectives 2006, pp. 21-22. Available at: http://old.npf.org.tw/english/Publication/TDP2006.pdf (Last accessed on Feb 28, 2010). 453 , December 1, 2008, http://www.pfp.org.tw/news/news_detail.php?gid=1&id=1234&p=1577 (Last accessed on Feb 28, 2010). 454 319, http://www.pfp.org.tw/news/news_detail.php?id=1089&p=1418 (Last accessed on Feb 28, 2010). 455 Ibid. 456 , http://www.pfp.org.tw/news/news_detail.php?gid=1&id=1232&p=1575 (Last accessed on Feb 28, 2010). 457 The mission statement of the New Party, available on its official website at: http://www.np.org.tw/StaticWeb_articleserial.asp?serial=3 (Last accessed on Feb 28, 2010). The first of eight principles stated, Advocate National Principle, Oppose Taiwan Independence: ethnic principle is natural, and ethno-nationalism is the spiritual weapon of human survival and development; to protect your community is the god-given responsibility of the intellectual. The New Party advocates that Chinese people should protect its given boundary, even to death, every inch of water and blood, should not be tainted by foreign groups and the national territory should not be divided. If todays Mainland has changed because of Red Communism, Chinese culture and the wave of democracy will eventually set chaos straight, break through the red totalitarianism, bring out a democratic China. Until then, we are against Taiwan independence, which would cut off our national umbilical chord, from our ten billion brethrens.
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process. In the meantime, a recommitment to the one China principle would provide economic benefits to Taiwan because of Chinas vast resources: With regards to cross-Strait issue, we are honest and fearless From our past few years, it is clear that leaving the one China principle has not benefited Taiwan the way DPP predicted, quite the opposite, Taiwan has antagonized the U.S. and foreign diplomacy expenses have become a black holewe must be rational and calm, to make the most beneficial choice. Unification why is it good for Taiwan? many will ask. First, unification does not mean accepting CCPs totalitarian rule... we mean a long-term integration process of the Chinese people, to fight for the longterm peace of Taiwan, to concentrate resources to upgrade the economy, society and cultural development, to strengthen the rule of democracy and law. In this process, we will use Chinas resources fully to expand Taiwan458 Finally, some parts of the media declared that Taiwan had little choice. A Central Daily News editorial on January 9, 2006 described the inevitability of succumbing to Chinas power. It argued that Chens policies had led to Chinas complete and total disillusionment with Chen, and that this was the background to Anti-Secession Law. The article called for Chen to stop confrontation with the PRC, unless he could show how Taiwan can survive economically without China. If Chen can only realize that China is all about unification, but he cannot tell us the future of Taiwan, then is it any realization at all?459 Sectoral Case Study: Continued Debate on Evolving Semiconductor Industry In order to demonstrate its seriousness in implementing its new Active Management policy, the Chen administration spared no effort to make the everimportant semiconductor industry a showcase of tighter enforcement. It wanted to look reluctant to liberalize, so as to appease the Extreme Restrictionists who were such an important part of its political base. The semiconductor industry was still regulated by the temporary policies written in 2002, which were due to expire at the end of 2005. Those regulations stipulated that no more than three foundries using 8-inch technology were allowed to be built in China prior to December 31, 2005. The government used two means to implement its Active Management policy. First, deliberate approval delays made any investments by 2006 in Chinese foundries uneconomical, especially for the leader TSMC, which had been consistently compliant in seeking formal approvals for its projects. In the case of UMC, which had become the bad boy for its lack of compliance, the government used enforcement as a form of harassment. Testing and packaging companies were victims of both of these government strategies under Active Management. The Chen administration had promised liberalization of the semiconductor industry at the end of 2001, only to reverse itself in 2002 under considerable public pressure. The government slowed down the liberalization process and went to great lengths to come up with a detailed set of regulations, especially on
: , , http://www.np.org.tw/StaticWeb_article.asp?channel=9 (Last accessed on Feb 28, 2010). 459 Realization of Chen and Disillusionment of China, Central Daily News, January 9, 2006, p.2.
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advanced technology transfer. In the interim, semiconductor companies had been allowed to apply to make investments in China only in 2004, with little progress. Finally, the government held an agency meeting at the end of 2006 to decide when to allow advanced processes to be transferred to China. With the promulgation of its Directions Governing the Review and Supervision of Investment in IC Foundries in Mainland China on December 29, 2006, MOEA formally approved the construction of two 8-inch foundries, using 0.25 micron technology, and the first assembly investment in China.460 The approval of the transfer of this already outdated technology, which occurred after the CSTED, partially reversed restrictions that had been imposed after the EDACs original decision to relax in 2001. One of the reasons cited for these restrictions had been related to the U.S. governments export control policies and the Wassenaar Agreement, the voluntary pact among U.S. allies not to export advanced and dual-use technology to China. But Taiwans policies had actually been much stricter.461 In December 2004, the Wassenaar Arrangement had already been revised so as to permit the transfer of semiconductor fabrication equipment that utilized 0.18 micron processes, and the U.S. government had also removed controls over process technologies at 0.18 micron.462 The U.S. further relaxed technology restrictions in June 2007, which removed almost all of the restrictions relevant to Taiwanese manufacturers going to China.463 Even though specific approvals took place after the year-end 2006 meeting, the overall Active Management policy simply reintroduced uncertainty for these companies. There was no certainty how and when an application would be reviewed and approved, so many companies simply never applied. It would not be until 2008 that the Ma administration showed a willingness to grant substantive approval for semiconductor investments into China, but the global economic outlook, especially for the semiconductor industry, had deteriorated considerably by then.

Statement on the Policy of Easing Restriction on China-bound Investments in Producing Eight-inch Wafers Using Taiwans Wafer Technologies, Dec 29, 2006, http://www.mac.gov.tw/fp.asp?fpage=cp&xItem=50717&ctNode=5913&mp=3 (Last accessed on Feb 28, 2010). 461 For the official statement on the MAC website citing the Wasseneaar Agreement, see ibid; for the assessment of Taiwans policies, see the editorial by Amber Chung, Conference on Sustaining Taiwans Economic Development: Cross-Strait Issues Hotly Debated in Finance Meeting, Taipei Times, July 28, 2006, http://www.taipeitimes.com/News/taiwan/archives/2006/07/28/2003320723 (Last accessed on Feb 28, 2010). 462 On the Wassenaar Arrangement, see the treatys page at: http://www.wassenaar.org/. Taiwans adherence to 0.25-micron restriction did not conform to international norms; it was stricter than the accepted international standard. 463 In June 2007, the U.S. further relaxed technology restrictions by instituting a new program, the Validated End-User program, which allowed non-military related Chinese companies to purchase certain products. Today, only products which would make a direct and significant contribution to Chinese military capability would be banned from export, as opposed to the previous regulations that used the vaguely worded and broadly interpreted term material contribution. See Bureau of Industry and Security, U.S. Department of Commerce, Proposed Rule Revisions and Clarification of Export and Reexport Controls for the Peoples Republic of China (PRC); New Authorization Validated End-User, October 13, 2006, http://www.bis.doc.gov/finalChina.html (Last accessed on Feb 28, 2010).

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TSMC Application Approval Having put a hold on TSMCs plan to invest in Shanghai in 2002, on May 3, 2004, the government finally allowed it to remit $371 million to TSMC Shanghai, with the balance of the $898 million project was to be financed by debt raised locally in China. For TSMC, this plant was already not competitive, as it was using relatively old technology. Manufacturing 8 wafers, using 0.25 micron processes, made Taiwanese companies very uncompetitive compared with even the worst producer in China.464 Morris Changs goal was therefore to transfer more advanced 0.18 micron manufacturing processes to TSMCs Shanghai plant. Immediately after its Shanghai plant started mass production in October 2004, Chang followed up with an application to transfer this more advanced technology to Shanghai. Timing was crucial, and in retrospect, if TSMC had entered the market in 2004, SMIC would not have developed so quickly, according to TSMC.465 But TSMCs application was not considered by the Taiwanese government until two years later, in July 2006, after the conclusion of the CSTED and after the U.S. had relaxed its export control regulations under the Wassenaar Arrangement. Finally, on March 20, 2007, TSMC gained the approval to use 0.18 micron processes in China. But by then, that process was already widely used in China by home-grown foundries like SMIC, which was operating with 0.13 micron processes and introducing 90nm generation process technology.466 In addition, the foundry model in China had developed rapidly. With large amounts of foreign and state capital and a well-trained pool of engineers, China had been engaged in the design, testing, assembly and nonleading-edge manufacturing of ICs without the investment of TSMC or UMC. It was slowly firming up its potential position as the worlds largest mass producer of chips, not just as the site for low-cost assembly work. (Chen and Woetzel 2002) Other competitors, who immediately applied for project approvals after TSMCs Shanghai investment, experienced the same kinds of delay. DRAM maker ProMOS Tech announced its application for a $900 million plant in May 2004, which would have provided lucrative royalty payments to its Taiwan parent.467 Powerchip Semiconductor also announced its intention to apply in December 2004. Both of those applications were shelved for two years. They eventually received approval, but never moved forward as the timing of the projects had been delayed so long. In effect, the entire industry had been put on hold since 2002 because of government indecision. Throughout 2005 and 2006, the uncertainty prohibited the companies from making any long-term plans in China, which was growing faster than any other country in the world in semiconductor.468 Any further prospects for investment were nipped in the bud by the 2006 Active Management policy, which promised more interminable delays, this time deliberate. This
GSMC was the specific reference, in Business Leaders Question New Policy, China Post, March 24, 2006. 465 Based on interview with Morris Chang, April 3, 2009. 466 Amber Chung, Conference on Sustaining Taiwans Economic Development; also based on an interview with Richard Chang, CEO of SMIC, September 2007. 467 ProMos planned to first invest $365 million in an 8-inch foundry of which $300 million would be to purchase old equipment. The Chinese subsidiary would pay royalties to the Taiwanese parent. See Three Hi-tech Investments Projects in China Pass Policy Inspection, Taiwan Economic News, December 19, 2006. 468 , , Economic Daily, January 2, 2006, p. A3.
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onerous approval process, which became even more complicated in 2006 and thereafter as detailed in Table 6-1, effectively prohibited investments even by companies with the most compliance resources.469

469

, , Commercial Times, March 23, 2006, p. A3.

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Table 6-1: Key Regulations for Semiconductor Investments in China

Step I Applicants must be semiconductor firms from Taiwan. Applicants must have invested in a 12-inch foundry in Taiwan and ramped it up for six continuous months to pass customer inspection with production being used to fulfill customer orders. The Taiwan company must have a controlling interest in any joint China investment. Priority will be given to companies ready to move older and used equipment to China. The technology level allowed to be transferred to China is limited to 0.18 microns or larger etching processes, without time limit. Intellectual property developed by any Taiwan invested project must belong to the Taiwan company.

Step II

The proposal must contain a detailed plan as to how investment cash will be obtained and spent, how the workforce will be managed, how technology will be managed and protected against theft, and detailed reports of all financials must be submitted to include the following: Investment plans must list a maximum cash limit. The investment ratio will be determined by the net value of the company. Investment plan should include all past activities in cross-Strait trade as well as a three-year future plan of how the China operations will be used in conjunction with Taiwan operations. All risk assessment must be completed. All details must be listed as to how the company intends to raise funds for China operations, how the money will be spent, and to whom payments shall be made, as well as any and all other details relevant to the project in China. After the 12-inch plant in Taiwan has passed inspection by customers and MOEA task force, then 8-inch equipment or older may be transferred to China. After the applicant has gained proper authorization to establish a chip plant in China, regular reports must be filed with MOEA, including progress on all investments, financial statements, technology reports, quarterly sales and utilization reports, research in progress and technology achievements, and a state of the industry report. If a company fails to file reports regularly, meaning an annual report to be submitted by April 30 and quarterly reports every three months thereafter, or if a company fails to be completely transparent and honest, the government reserves the right to cancel their applications as well as all government tax breaks in Taiwan, training and R&D subsidies, preferred loans and any other tax or other government benefit enjoyed by the offending company. Any statements given to the government that are believed to be misleading or false will have to be challenged by MOEA within a reasonable period of time and the company will have a chance to rectify the situation. Prior to December 31, 2005, the government will permit only three chip plants using 8inch wafer or older technology to be built in China by Taiwans entire chip industry.

Step III Step IV

Step V

Note

Source: Authors own compilation, based on government announcements as posted by the Investment Commission, MOEA. The original regulations were to expire in December 2005, but were extended and made more onerous. Details of regulation at: , January 4, 2007, http://www.mac.gov.tw/ or http://www.moeaic.gov.tw/system_external/ctlr?PRO=LawsLoad&id=11(Last accessed on Feb 28, 2010).

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Prosecution of He Jian-UMC and SMIC Alongside the deliberate delays in the approval process, the second element in the governments Active Management strategy was to harass those who worked around the regulations and went to China without formal approval. UMC, a foundry leader after TSMC, thought that the government would not be easy to deal with so, as mentioned in the previous chapter, it entrusted a few employees to go to China in 2001 to start a local company, He Jian, armed with UMC resources. Legally, UMC had no claim to this foundry. It was not a high profile undertaking, but also not totally a secret within the industry. Shortly after having Chinese New Year dinner with President Chen, UMCs top managers were surprised by a raid on its headquarters in Taipei by government agents looking for evidence of an investment relationship between UMC and He Jian on February 15, 2005.470 Soon after President Chens active management speech, on January 9, 2006, the authorities indicted UMC Chairman Robert Tsao, Vice Chairman John Hsuan, and Cheng Tun-chien, head of one of UMCs subsidiaries, for violating the investment restrictions.471 The Investment Commission reportedly claimed that since 2001, UMC had assisted in the design, construction and installation of production equipment and in the management of He Jian, which gave UMC 15% equity in return, with an estimated market value of $1.1 billion. Realizing the implications for the companys shareholders, Robert Tsao and John Hsuan both resigned on the same day.472 MOEA also imposed a fine of NT$5 million (approximately US$156,250) on UMC for investing in He Jian.473 The fine was reportedly for violating the Statute Governing the Relations between the Peoples of the Taiwan Area and the Mainland Area, and the Regulation Governing Permission of Trade between the Taiwan Area and Mainland Area.474 The saga was part of the governments effort to slow down investments in China, but the indictments of Tsao and Hsuan represented a major escalation in the governments tactics. The semiconductor industry was outraged and accused the government of politicizing the UMC case because of its own electoral problems: Taipei is using the UMC situation as a pretext to continue to drag its heels on further loosening of China chip investment regulations, a policy harmful to its own chipmakers The impact of the DPP defeat in
See He Jians major shareholder Hsu Chien-hwa, a former UMC employee, and 20 other workers who returned to Taiwan for holidays were detained. On February 27, 2005, Hsu was fined NT$2 million (US$62,000) as a Taiwanese national investing in a Chinese chip company without approval. On April 21, 2005, UMC Chairman Robert Tsao was further fined NT$3 million (US$93,750) for not notifying shareholders of UMCs affiliation about its involvement with a Chinese foundry. In December 2005, He Jians Hsu lost his appeal on his fine and was asked to pay NT$2 million (US$62,500) of penalty. See First Taiwanese Firm Fined for Breaking China Investment Rules, BBC Monitoring Asia Pacific, February 15, 2006. 471 NT$5 million fine for UMC Over Investment Breach, China Post, February 16, 2006. 472 Based on interview with Robert Tsao, April 3, 2009, who stressed that from the beginning, he already thought the case would be highly political, involving persecution of top management. Also see company announcement, UMC Board Approves Resignation of UMC Chairman Bob Tsao; CEO Jackson Hu Elected to Position as Chairman, January 9, 2006, http://www.umc.com/English/news/20060109.asp (Last accessed on Feb 28, 2010). 473 First Taiwanese Firm Fined for Breaking China Investment Rules, BBC Monitoring Asia Pacific, February 15, 2006. 474 Taiwans UMC Fined, Asia Pulse, February 16, 2006.
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important city and county elections in December, 2005 means that Taiwan chip sector investment will remain in a deep freeze for the foreseeable future.475 However, by July 19, 2007, the UMCs fine was overturned by the courts, which ruled that UMCs affiliation with He Jian did not include any illegal investments. On October 25, 2007, the Taiwan court further ruled that there was insufficient evidence to convict Robert Tsao, John Hsuan, or Cheng Tun-chien. In the end, it was very difficult for the government to collect enough evidence to prosecute those in charge of UMC, especially since the investments were made through holding companies or individuals no longer affiliated with UMC and since the PRC authorities refused to cooperate. The government could only restrict or fine individuals who were Taiwanese residents, to show the public its intention to enforce regulations.476 The multi-year saga not only entailed open harassment but also reeked of corruption as well. During the initial period of investigation, the prosecutor even told UMCs CEO to look up Ma Yung-cheng in the Presidential Office, probably as a way of soliciting a bribe, but Hung and Chairman Robert Tsao decided not to succumb to the pressure.477 Although UMC may have crossed the line with He Jian, the government appeared indecisive to the companies, as well as to critics who thought the penalty should have been swifter or more drastic.478 A main cause of the Taiwan semiconductor industrys concerns about China, SMIC was at the top of the governments list to penalize. Listed on both the HKSE and the NYSE, SMIC involved Taiwanese investors and managers, but legally, it was not rooted in Taiwan. On March 31, 2005, the government tried to fine CEO Richard Chang NT$5 million for investing in a Chinese foundry without government approval, but Richard Chang was a naturalized-U.S. citizen living in Shanghai. All the government could do, therefore, was to prohibit him from traveling to Taiwan. Despite his personal and business ties on the island, he had to stop travelling to Taiwan after that. On September 30, 2005, the government imposed another NT$5 million fine on Chang for failing to withdraw his investment within six months after government warning.479 On March 17, 2007, the Taiwan High Court dismissed the governments case against Changs investment of 1% in SMIC Cayman and ruled that it was not a violation of Taiwan investment regulations. The government appealed but dropped the case on October 26, 2007.
U.S.-Taiwan Business Council, Executive Summary: Semiconductor Quarterly Report Annual Review 2005, p. 1. Available online at http://www.ustaiwan.org/reports/tech/semiconductors_q4_2005.pdf (Last accessed on Feb 28, 2010). 476 It was a long process for UMC, which eventually formally tried to acquire He Jian after KMT assumed power in 2009. See company announcement, UMC Shareholders Approve the Acquisition of He Jian Technology (Suzhou) Co., Ltd. and Elect 11th term of Directors at Annual Shareholders Meeting, June 10, 2009, http://www.umc.com/English/news/20090610.asp (Last accessed on Feb 28, 2010). But issues with approval continued to surface. See U.S.-Taiwan Business Council, Semiconductor Report: Second Quarter 2009, p. 3 and 10. 477 Based on interview with Stan Hung, CEO of UMC, April 3, 2009, and based a separate interview with Robert Tsao, April 3, 2009. 478 See proposal by TEU Wen-fu Hsu that the government just take over the He Jian equity from UMC reported in ? Taiwan Daily, January 10, 2006, http://www.taa-usa.org/tw_latestnews/Jan2006/14.html (Last accessed on Feb 28, 2010). 479 U.S.-Taiwan Business Council, Semiconductor Report: Annual Review 2007, p. 9.
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The He Jian and SMIC cases were important ways for Chen Shui-bian to demonstrate his resolve to enforce the restrictions on the semiconductor industry that had been imposed in 2001, and to underscore the fact that the high technology industry had been singled out to require special approval as a strategic industry in his January 2006 speech. Much of the public was scrutinizing the governments implementation of its restrictions, and this placed great pressure on a weakened Chen to comply with the publics demands. But the policy of delaying approvals for those who submitted proposals, and harassing those that invested without approval, created tremendous costs for the companies. Testing and Packing Investments Testing and packaging companies are an integral part of the manufacturing chain for foundries. When the foundries relocate their manufacturing operations, the testing and packaging firms tend to follow, although their investment is smaller. In 2004, MOEA indicated the possibility that testing and packing companies might be allowed to invest in China, but the final decision was delayed until after the CSTED. The situation was so difficult that the leading company, the TWSE-listed ASE, considered privatization through a $5.5 billion management buyout with the U.S. private equity fund, the Carlyle Group, in January 2006. The privatization proposal, hailed by Robert Tsao as a stroke of genius, meant that ASE would no longer be Taiwanese and thus could not be regulated by the Taiwanese government.480 Allowing the de-listing of a leading company like ASE, and seeing it relisted on the Shenzhen or Shanghai Stock Exchange by Carlyle, would be politically damaging to whomever approved the sale.481 At first, President Chen hailed the deal as showing foreign investors interest in Taiwan. But critics worried about the delisting effect on the local bourse and, despite the presidents initial endorsement, the government reconsidered and rejected the transaction six months later.482 Instead, the government approved four applications for testing and packaging investment in China, but only in low-end production and for small projects. For example, ASE was allowed to invest $21.6 million in China by taking a 60% stake in a NXP Semiconductor-Joint Venture.483 The ASE case was a good example of Chen Shui-bians dilemma. His policies toward Taiwanese investment in China were more restrictive than domestic and foreign businesses wanted, but still too liberal for the public. At the same time, Taiwanese companies that were allowed to invest in the Mainland were subject to significant risk because of the continued strains in cross-Strait relations. As a result of these political risks partly from Beijing, and partly from Taipei -- foreign investors lost confidence in dealing with Taiwan, negatively impacting the real value of companies in which they might otherwise have been interested: [R]isks of political isolation and even military conflict also persist as long as China and Taiwan continue antagonizing each other. The risk would
U.S.-Taiwan Business Council, Semiconductor Report: Annual Review 2006, p. 6. U.S. Taiwan Business Council, Special Commentary: Implications for Taiwan of the Failed Carlyle/ASE Buyout Deal, April 26, 2007, www.ustaiwan.org/reports/2007_april26_special_commentary.pdf (Last accessed on Feb 28, 2010). 482 Chen Tells Su to Lure Capital from China, China Post, December 6, 2006. 483 U.S.-Taiwan Business Council, Semiconductor Report: Second Quarter 2007, pp. 6-7.
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remain embedded in ASEs share price even if the company changed jurisdictions presuming it left substantial physical operations on the island.484 Testing and packaging companies were in the ultimate bind. Because they are more labor intensive in nature, moving to China is even more compelling for them. Even before Taiwanese foundries moved to China, major integrated design manufacturers around the world such as Intel and local Chinese foundries such as GSMC and SMIC had already generated substantial business that would give these testing and packaging companies additional revenues. Because of their labor intensivity, the job losses that result from moving operations to China are more severe for these firms than for foundries. As a result, this branch of the industry may attract more restriction.485 Aftermath The Chen administration was caught in a serious dilemma. On the one hand, it had to cope with the problems of unemployment, declining wages, and vulnerability to developments in China that would be created or exacerbated if it liberalized its policy toward investment in China. On the other hand, as MNCs moved on a grand scale to China to gain access to both production platforms and domestic markets, Taiwanese companies could potentially become de-linked from global horizontal and vertical integration if their government held them back. (H.H. Chen 2007) In 2007, for example, Intel announced that it had obtained Washingtons approval to spend $2.5 billion on a 12-inch plant in China, to open in 2010. By comparison, many observers believed that the Taiwanese government would not approve any similar investment until 2015.486 This meant that Taiwanese foundries operating in China would fall two generations behind their competitors. But however compelling this logic may have been to the Taiwanese business community, it was not persuasive to the Taiwanese public. Despite how tightly the government regulated the semiconductor industry, the public was still dissatisfied, given their enduring concern that investment in China would trigger a capital outflow that would deprive people of jobs, jeopardize Taiwans national security, and undermine its sovereignty. As erratic as the Chen Shui-bians approach was, devising an investment policy for semiconductors would be difficult for any administration, given the industrys real and symbolic importance to the islands economy. Even after the KMT regained power in 2008, the liberalization of the semiconductor industry did not happen as quickly or as easily as anticipated, even amidst the broader trend of relaxing Taiwans overall cross-Strait economic policy. Two analysts have described this quandary in the following terms: Strategic puzzles nevertheless abound. Imagine a country where one million citizens of a competitor nation currently live inside its territory and work hard to build up its companies, companies that will compete directly
Kurtz estimated that the economic costs of political restrictions for Taiwanese companies was 10-15%, because the U.S.-listed ASE stock went up 15% once the privatization deal was announced, offering a quantification of the price discount of Taiwanese equities under strict China policies. See Michael Kurtz, The Price of Playing Politics, The Asian Wall Street Journal, December 13, 2006. 485 U.S.-Taiwan Business Council, Semiconductor Report: Annual Review 2007, p. 8. 486 U.S.-Taiwan Business Council, Semiconductor Report: First Quarter 2007.
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with companies based in their homeland. That is the present situation in the semiconductor industry in China and Taiwan. (Keller and Pauly 2005, 71) Conclusion In this episode, the government became more and more paralyzed due to its economic and political problems. Externally, relations with China had been frozen for years, and Taiwan was left with only 23 diplomatic allies.487 The 2005 Anti-Secession Law was regarded as another hostile action by China, and drove half a million Taiwanese to the street in protest. At the same time, the Chen Shui-bian administration was plagued by several years of poor economic performance, as well as a serious corruption scandal involving President Chen and his family. This also led to wide-scale demonstrations in 2006 demanding his resignation. Increasingly losing credibility, the DPP was desperately looking for ways to restore its popularity. It decided on a reversal of cross-Strait economic policies as a way of appealing to the extreme factions in the pan-green coalition. This decision was reflected in the CSTED and in Chens policy of Active Management. It was during this period, however, that Taiwanese began to reach a consensus on their national identity. An increasing percentage of the residents of the island were now seeing themselves as being Taiwanese, although some continue to assume a dual identity of being both Taiwanese and Chinese. Once that consensus began to emerge, the debate over cross-Strait economic policy could focus on balancing the full range of national interests, including growth, stability, equity and security, rather than concentrating on growth or security alone. Accordingly, the debates no longer revolved around choosing between the extreme policies of across-the-board restriction or large-scale liberalization. This conforms to Hypothesis Two, which predicts that, as a consensus on national identity is forged, the range of views of economic policies would narrow and move towards the center. Furthermore, Hypothesis Three predicts that the narrowing of the spectrum of policy options would eliminate the extreme options, but would not necessarily produce a consensus on the remaining more modest options. True, the debate over cross-Strait economic policies had become instrumental, compared to the debate over the consummatory values of national identity that had characterized the two previous episodes. But this did not lead to complete agreement on cross-Strait policies. The business community wanted a fuller liberalization of restrictions on semiconductor projects in China than the public did. Still, the discussions had become nuanced, and the changes in policy far more limited. Chens Active Management policy rejected any relaxation of restrictions on Taiwanese investment in China, as sought by Taiwans business community. But it did not impose more stringent limits on investments on the Mainland. Instead, it took the more moderate position of tighter review of investment proposals and stricter enforcement of existing restrictions. The next episode, triggered by a change in government in 2008, produced another round of debate over Mainland China economic policies, with the
See Ministry of Foreign Affairs website for details of the 23 international allies, http://www.mofa.gov.tw/webapp/ct.asp?xItem=32618&CtNode=1865&mp=6 (Last accessed on Feb 28, 2010).
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incoming administration espousing full-scale liberalization and active engagement with Beijing. The public assessed the likely consequences of the governments proposed changes in a rigorous but rational manner, and the economic issues were increasingly considered without reference to their implications for the future political relationship between Taiwan and China.

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Appendix 6-1: Semiconductor Timeline 2000-2007

Spring 2000 Morris Chang stated that TSMC must have production facilities (8 wafer foundries) in China to meet the IC market demand there, and in 10 years, the Chinese market should overtake Japans to become the 2nd largest globally. ASE also called for a new policy in the summer. TSMC then declared it wouldnt invest in China for four more years, but would focus on its Fab Six in Taiwan.

27/6/00

Chinas Minister of Science and Tech Zhu tells a delegation from Taiwans Chinese National Federation of Industries that tax incentives were under consideration; visits by TSMC and UMC were welcome; FDI was likely to receive national treatment upon Chinas WTO entry. In the same year, Motorola begun discussions with China on constructing a chip plant; NEC quickly followed. TSMC opens a Liaison Office in Shanghai to explore business opportunities in China and CEO Morris Chang personally goes to China for business as well. ASE confirms that it has asked Taipei for permission to build a chip assembly plant in China. It hopes it will be able to start construction by end of year. Economic Development Advisory Conference convened to build consensus for business on investment environment in Taiwan; businesses condemn the No Haste policy and demand establishment of direct links. Taiwan government then promises a managed liberalization policy, increasing permissive imports from China from 2000 to 5000 items; allowing direct remittance from Taiwan to China. And opened several tech sectors investment. But 8 wafer foundries still prohibited.

10/5/01 20/6/01 Late Aug 2001

22/11/01 January 2002

SMIC hosts grand opening to celebrate mass production at its first factory. New Cabinet formed after the 12/01 legislative election announces intent to liberalize sector. Opponents of the industry galvanized to make Chen postpone the amendment of law and start a rational debate. The Challenge 2008 National Development Plan adopted to move Taiwans economic structure from manufacturing to R&D, with a central piece being two trillion and twin-star project. As announced, semiconductor industry output must reach $28.5 bn by 2006.

March 2002 29/3/02

Full-swung debate on the semiconductor industry investment regulation. Then Taiwan Premier Yu Shyi-kun gives in principal nod for chip makers to invest in China as long as they abide by certain regulations. Application procedures and rules still pending. Taiwan government decides to lift the ban on investment in China but promised to modulate the pace and the terms of investment on 8 wafer production there. Committed to drafting the National Technology Protection Law, the government does not restrict personnel movement, but demands two-phase application: first phase is to approve financing arrangements for initial investment, second phase is to approve relocating the equipment. Taiwan government announces regulations and application requirements for companies intending to invest in China. TSMC announces that it has filed an application with the Investment Commission of MOEA to build a $898 mm chip plant in China. (Structure: $371 mm from parent, $418 from Chinese banks, $109 mm from revenue of plant.)

April 2002

9/8/02 9/9/02

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22/1/03

Taiwan Minister of Economic Affairs Lin Yi-fu gives TSMC in principle approval to invest in China, but the Company is required to answer questions about the application first. TSMC is given approval to invest 6% to 7% of its total China plan (around $57 mm of the $898 mm project) in first phase of opening, but the premier had to neutralize opposition by punishing SMIC. TSU defined economy of scale in production as 20,000 wafers/mth, with 70% yield. For phase 2, the premier promises to consult with experts. TSMC gains final approval from the Taiwan government for its planned factory in Shanghai, paving the way for production to begin this year at the islands first officially sanctioned chip factory in China. Officials at MOEA confirm that talks to allow packaging and testing chipmakers to invest in China are underway. DRAM maker ProMOS Tech announces $900 mm plan to build a plant in china, and says it will apply for Taiwan government approval soon. Taiwan government formally grants permission for the remaining TSMC $371 mm remittance to TSMC Shanghai. The rest of the investment will be funded through loans from Chinese entities. TSMC Chairman Morris Chang makes news by asking the Taiwan government to consider allowing 0.18 micron manufacturing process technology to be transferred to China. TSMC Shanghai starts mass production at its China factory. Powerchip Semiconductor announces that its Board of Directors has approved a plan to build a wafer fab in China. The company says it will apply for permission soon. Taiwan government detains He Jians Hsu Chien-hwa and 20 other workers returning to Taiwan from China for Chinese New Year. Investigators raid UMC headquarters in Taipei and Hsinchu in search of evidence of investment relationship between UMC and He Jian. Taiwan government warns the fines for UMC could reach NT$25mm. He Jians Hsu is fined NT$2mm for investing in a PRC chip company without Taipeis approval. PRC passes the Anti-secession Law. SMIC Richard Chang is fined NT$5mm for investing in a foundry without government approval. UMC Robert Tsao is fined NT$5mm for investing in a foundry without government approval. He Jians Hsu loses the appeal on his fine, and is ordered to pay NT$2mm. SMIC Richard Chang is fined another NT$5mm for failing to withdraw his investment within the specified six months. MOEA announces that it will allow chipmakers to invest in low-end packaging and testing operations in China starting from April 28, 2006. However, the Ministry fails to provide application guidelines. The CSTED announces as one of its results that it will speed up discussions on allowing 0.18 micron technology and other mature technologies to be transferred to China, as it is already considered acceptable by international agreements such as the Wassenaar Arrangement. In a first test of Taipeis opening of chip assembly investments in China, the Taiwan Investment Commission under MOEA rejects an application by Siliconware Precision Industries, Taiwans second biggest semiconductor

26/2/03

3/5/04

14/4/04 28/5/04 11/5/04

Mid-year 2004

October 2004 23/12/04

15/2/05

27/2/05 14/3/05 31/3/05 21/4/05 8/12/05 30/9/05 27/4/06

27/7/06

3/8/06

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assembly firm and the worlds third largest, to build a low-end factory in China. Other chip assemblers, such as Greatek Electronics and ASE shelve their applications to wait for clearer guidelines. September 2006 Vice Minister of Economic Affairs Shih Yen-shiang says that Powerchip and ProMOS plan to reapply for permission to invest in China plants, and that the applications will be for wafer fabs that can use 0.18 micron manufacturing processes instead of older 0.25 micron processes. MOEA Steven Chen tells Taiwans legislature that he will hold an intragovernment meeting by the end of the year to decide on allowing 0.18 micron chip manufacturing processes to China. The Taiwan government approves three major chip investments to China, including two 8-inch chip fabs and the first chip assembly investment to China. DRAM maker ProMOS Tech wins approval for a $365 mm plant, while rival Powerchip is given the okay to invest $410 mm in a fab. Both fabs are restricted to 0.25 micron process technology. ASE receives approval to invest $60 mm in a low-end chip assembly company in Shanghai (Global Advanced Packaging Technology). ASE and NXP Semiconductors (the former chip arm of Philips Electronics) agree to cooperate in China if the Taiwan government will allow ASE to invest there. Taiwan High Court dismisses the government suit against Richard Chang of SMIC, saying his 1% investment in SMIC Cayman is not a violation of Taiwan investment regulations prohibiting individuals and companies from investing in Chinese chip industry. The government appeals. Nearly three years after its first request, TSMC wins approval to use 0.18 micron manufacturing processes in China. Intel announces plans to invest $2.5 billion on a 12-inch fab in China, slated to open in 2010. Plant would begin production in the first half of 2010, making chipsets with 90-nm etching processes (which would be outdated by the then expected 32-nm technology). Carlyles negotiations to buyout ASE for privatization at NT$39 per share is terminated, despite increasing the offer to NT$39.50/share. Four Taiwan chip packaging and testing companies are granted approval for investments in China SPIL ($30mm), Greatek Electronics ($30mm) and Walton Advanced Engineering ($30mm). ASE is granted final approval to invest $21.6 mm in China to take a 60% stake in a venture with NXP Semiconductors. UMCs fine is overturned by the court, which rules that the companys ties to He Jian did not include an illegal investment. Taiwan court rules there is not enough evidence to prove wrongdoing in the government case against Robert Tsao and John Hsuan. The case against Richard Chang is formally dropped.

3/10/06

27/12/06

2/2/07

17/3/07

20/3/07 March 2007

April 2007 28/6/07

19/7/07 25/10/07 26/10/07

Source: Authors own compilation and see also Semiconductor Report: Annual Review for 2000-2007 by the U.S.-Taiwan Business Council.

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Chapter Seven Mutual Liberalization: The 2009 Campaign for ECFA

Winning the largest margin ever achieved in competitive presidential elections on Taiwan, Ma Ying-jeou began his term on May 20, 2008. His party, the KMT, also controlled a majority of the Legislative Yuan, and Mas electoral margin appeared to reflect a very strong endorsement from the people to reform domestic politics and set new directions for cross-Strait relations, both of which had been part of his electoral platform. With a record of low economic growth, inconsistent foreign policies, widespread corruption, and personal scandal, the DPP and the Chen administration had lost the confidence of the people, not only among elites who had never been their enthusiastic supporters, but also on the part of the more marginal economic and social groups that had normally been part of their political base. The general sentiment was that government decisions had been made and implemented by a small group of people concerned only with holding on to power. Popular frustration with the DPPs performance was reflected in the overwhelming landslide not only for Ma Ying-jeou but also for the KMTs legislative candidates, surprising even the most optimistic KMT stewards. Although cross-Strait economic policies had been nominally reversed in 2006 from Active Opening to Active Management, very few fundamental policy changes had actually taken place as the first familys personal scandals widened and Chen Shui-bian lost his influence. Strict implementation of investment restrictions, such as the investigation of the UMC investment in He Jian and the indictment of the executives involved, was actually quite rare. However, the liberalization of cross-Strait policies was at a standstill, and leading businesses felt increasingly constrained by the restrictions in place. In addition, graft and corruption in the domestic economy as in various privatization projects, the issuance of bank licenses, and real estate projects during Chen Shui-bians eight years in office prevented the formulation of rational economic policies, both domestic and foreign. Much of this would come to light immediately after the new president was elected.488 Even before Mas arrival, therefore, the public was ready to move on and see changes in cross-Strait relations. Ma Ying-jeous campaign had promised that the liberalization of cross-Strait economic policies would create new opportunities that would solve all of Taiwans economic woes. This created high expectations, which were almost certain to be disappointed. But that disappointment came sooner than anyone expected. Mas approval ratings fell from over 60% when he assumed office, to under 25% in September 2008, and then to 16% in August 2009 (a historic low for any president) after the mishandling of rescue efforts for Typhoon Morakot, accentuating peoples concern that Ma had neglected domestic

Chen Shui-bian was arrested on November 11, 2008 for corruption, embezzlement of state assets and money laundering. Formal indictment came on December 12, 2008.

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economic reform and overly focused on liberalizing cross-Strait relations as a means to improve Taiwans economy.489 Economic Environment From 2002 to 2007, the world economy had experienced the greatest bull market in centuries, synchronized across markets, nation-states and industrial sectors. Taiwans economic performance had picked up slightly in 2006, with 4.0% growth, but still paled considerably next to Korea, its chief export competitor. Taiwan finally began to pick up speed in 2007, with a growth rate of 6.0%. But then the world turned upside down, starting with the liquidity and credit crisis in August 2007 and then the Lehman debacle in September 2008. Taiwans stock market dropped precipitously. Taiwans domestic demand showed real weakness in 2008. Before the March 2008 presidential election, GDP growth was steady, culminating in 6.8% growth in the first quarter of 2008, nearly the same as the fourth quarter of 2007, at 6.5%. Right after the election, however, domestic demand was hit hard, and growth turned negative in the third and fourth quarters. With both imports and exports also declining, the full year GDP growth fell to 0.7%, with fixed asset investment down 11.2%.490 Ma Ying-jeou came into office promising that an improvement in crossStrait ties would produce an immediate economic turnaround, summed up in a campaign slogan, repeated in his inaugural address, as the goal 633: six percent economic growth each year, per capita income of $30,000, and an unemployment rate lower than 3% by 2012.491 This raised public expectations that the economy would recover over immediately. But when the third quarter of 2008 GDP growth declined to -0.8% and exports dropped more than 40%, the 633 goals seemed increasingly elusive. The government began taking initiatives such as guaranteeing deposits to prevent bank runs, issuing NT$3,600 vouchers to each citizen to stimulate consumption, initiating infrastructure projects, and engaging in further monetary easing.492 By the fourth quarter of 2008, the rate of economic decline had increased to -7.1%, the largest quarterly drop in Taiwans history.493 The main cause was the large contraction in investment. The simultaneous drop in exports, imports, and investments showed how Taiwans investment cycle depended on export demands, and how the volume of imports depended on the flow of exports.494 Commercial banks tightened credit considerably, negating any benefits from the repeated easing of monetary policy by the Central Bank. The government subsequently revised its annual GDP growth forecast for 2009 to predict a
Pres. Ma takes chopper to visit flood-ravaged villages, China Post, August 22, 2009, http://www.chinapost.com.tw/taiwan/national/national-news/2009/08/22/221519/Pres-Ma.htm (Last accessed on Feb 28, 2010). 490 For details, see National Statistics of ROC (Taiwan) for quarterly data at: http://eng.stat.gov.tw/lp.asp?ctNode=2191&CtUnit=1050&BaseDSD=7 (Last accessed on Feb 28, 2010). 491 Data from President Mas speech and interview, available at: http://www.gio.gov.tw/ma2008/feat_18.htm (Last accessed on Feb 28, 2010). 492 Ibid. 493 For details, see National Statistics of ROC (Taiwan) for quarterly data at: http://eng.stat.gov.tw/lp.asp?ctNode=2191&CtUnit=1050&BaseDSD=7 (Last accessed on Feb 28, 2010). 494 Enoch Fung and Shirla Sum, Taiwan Views, Goldman Sachs Global Economics, Commodities and Strategy Research, February 18, 2009.
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contraction over previous year, rather than any growth. This served as a wake-up call to those whose support for Ma had been based on economic considerations. In such a bleak economic environment, President Ma again presented China as powerful potential economic stimulus for Taiwan. A series of crossStrait negotiations between June 2008 and April 2009 made rapid progress on economic issues, reaching agreements to establish direct cross-Strait air links and promote tourism, and eliminating a series of investment restrictions for both sides. As of August 2009, liberalization of cross-Strait economic policies had not had any significant effect on Taiwans economic indicators. Compared with most other Asian economies, Taiwans economic revival had been the weakest, with the full year still projected to contract as much as -4.0%, even before the economic damage inflicted by Typhoon Morakot in August.495 On the other hand, Mas new cross-Strait policies did have a positive impact on Taiwans financial markets. The TWSE started to outperform other markets in early 2009 partly as a result of the new cross-Strait liberalization measures. In addition, rumors circulated about the prospective approval of UMCs acquisition of the He Jian foundry in Shanghai and China Mobiles investment in FarEast Tone, and they buoyed the performance of stocks in the technology and telecommunications sectors. Despite the outbreak of swine flu, trading volume and cumulative QFII both hit record highs. Reversal of Political Fortunes from Green to Blue In January 2008, the Legislative Yuan election gave the KMT a landslide victory unimaginable to even the most optimistic KMT strategists. This outcome was the result of two important factors: the shift of public support away from the DPP to the KMT, and the magnification of that trend by changes in the structure of Taiwans electoral system. Taiwans previous system for selecting legislators involved multi-member constituencies elected through a system of single non-transferable votes. In contrast, the new system allowed each voter two votes: one for a representative in the voters district, and another vote for a political party. Each political party would then be allocated a certain number of legislators based on the percentage of the vote the party received on a national basis. Under this new system, the number of legislators was reduced from 225 to 113 and their term of service was lengthened from three to four years such that the legislative and presidential elections would always be held in the same year. The total of 113 legislators included 73 who were elected by their district constituencies, with six reserved for representatives of aborigines, and the remaining 34 were the at-large legislators who represented their respective parties and won their seats on the basis of the number of votes their parties garnered, with a 5% minimum threshold. Many in the DPP had supported this change as a way of overcoming the KMTs traditional advantage in mobilizing its supporters and allocating their votes across its candidates in multi-seat districts. But, as some DPP veterans had predicted, the DPP ended up being hurt by the reform, at least temporarily, because the KMTs skill at election mobilization was far superior to that of the

This is the projection made by Sharon Lam of Morgan Stanley in comparison with other Asian economies, Recovery Sign in Taiwan, The Wall Street Journal, August 21-23, p. 9. The actual 2009 growth rate turned out to be -1.9%.

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DPP.496 A more lasting consequence was that by eliminating multi-member districts, the new system eliminated small political parties and candidates with extreme positions who enjoyed solid but limited support. In effect, the PFP, the NP and the TSU were all merged into either the KMT or the DPP, creating a twoparty political structure. The January 2008 election resulted in the DPP seat count dropping to 27 seats compared to KMTs 81 seats, with even the Deep South, a traditional DPP stronghold, turning blue. By capturing over two-thirds of the legislative seats, the KMT could impeach the president; if it were able to gain the support of three-fourths of the legislators, it could amend the constitution. Few foresaw the landslide, which was phenomenal considering how much the DPP had warned the electorate of the dangers of giving control to both the legislative and executive branches to the KMT. The voters appeared to be tired of the corruption and inexperience of the DPP and wanted the stability of one-party government. The dynamics of the March 2008 presidential election were quite different than the previous elections in 2000 and 2004. Despite the difference between the two candidates ethnic backgrounds, identity was no longer a salient issue for most voters. Although he came from a blue-blooded KMT family that had worked for the Chiang family in the past, Ma espoused a New Taiwanese identity, and focused his campaign on promoting his socio-economic policies and attacking the DPPs corruption scandals. The DPP candidate Frank Hsieh, known as a pragmatist on important issues such as identity policies and cross-Strait relations, faced the dilemma of trying to distance himself from Chen Shui-bians declining popularity while still trying to mobilize Chens supporters in the DPP. The two candidates appeared to share much in common in prioritizing Taiwans interests as a distinct community and safeguarding the Taiwanese way of life.497 Both parties offered virtually identical referenda on Taiwans return to the UN, the only difference being that the DPPs version proposed entering the UN under the name of Taiwan, while the KMTs version just proposed to return to the UN without specifying any name. The difference between the two platforms was most notable in cross-Strait policies. The KMT sided with businesses in advocating accelerated liberalization and full engagement with China economically, while the DPP heeded populist demands for a more cautious but rational approach. Without much success, the DPP tried to play the identity card as in previous years by branding Ma as a mainlander and vice presidential candidate Vincent Siew as a unification supporter who advocated a cross-Strait common market. There were other distractions such as an investigation to whether Ma had misused government funds, although he was vindicated on all charges in April 2008. In the end, the electorate was focused intensely on economic policies, and its demand for more rational and long-term thinking about cross-Strait economic relations became apparent as the votes were counted.

Among those who made this prediction most vocally was Lin Chuo-shui, who was one of few DPP legislators to oppose this reform as he correctly forecast the result to be more favorable to the KMT. Isolated from the DPP as a result of his opposition, and he eventually resigned from his legislative seat. 497 Video of this presidential debate is available online at: http://www.youtube.com/watch?v=n16AsgLRVvw (Last accessed on Feb 28, 2010).

496

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76% of the electorate turned out to vote, with Ma securing a huge margin of 58% to Hsiehs 42%, winning all but five rural districts. In his inaugural address, Ma appealed to the electorate with the theme of Taiwans Renaissance, but also indicated a new tone in cross-Strait relations by claiming that the election results showed that the people have chosen clean politics, an open economy, ethnic harmony, and peaceful cross-strait relations to open their arms to the future.498 Despite his landslide victory, Ma attempted to reach out to the opposition by forming a coalition cabinet through such appointments as naming the TSUs Lai Shin-yuan to head the MAC. In fact, it was not the opposition but the members of his own party that initially proved most challenging for Ma. There immediately emerged obvious tensions between Ma and party elders such as Lien Chan, leading Ma to reclaim the KMT chairmanship in July 2009 in order to consolidate his power before the year-end local elections. Ma then alienated the DPP by incarcerating Chen Shui-bian for all of 2009, without coming to any resolution on his sentencing. The public faced the choice between Mas increasingly authoritarian style and the disorganized and scandal-plagued opposition. Launching Cross-Strait Initiatives During the eight years of DPP rule, the only semi-official cross-Strait contact was the pan-blue visits to China in 2005. In October 2007, Hu Jintao announced at the Seventeenth Party Congress that the state of hostility between Taiwan and China should end, based on a consensus on the one China principle. After winning the presidential election in 2008, Ma insisted that he would oppose either unification, independence, or the use of force. Without confronting the one China question directly, Ma made a strong overture to China in his inaugural speech on May 20, 2008 when he said that Taiwan, with only 23 formal diplomatic relationships around the world, wanted to end the diplomatic competition and work towards a peace agreement with Beijing.499 In April 2008, Mas vice president-elect, Vincent Siew, met with Hu Jintao in Boao. The following month, Wu Po-hsiung and Hu Jintao met as leaders of the KMT and the CCP respectively, and decided to resume the quasi-official dialogue that had been suspended since the 1998 meeting in Shanghai. A trade agreement and MOUs on financial deregulation between China and Taiwan were under discussion, the latter of which would finally allow Taiwanese financial institutions to enter the China market. Ma appointed former TSU member Lai Shin-yuan as the Chairwoman of the MAC in the hope that she could win support from the pan-green for his new cross-Strait policies. But the appointment displeased many pan-blue and pangreen supporters alike. Many veteran KMT leaders, including Wu Po-hsiung, Chiang Ping-kun, and Lien Chan, simply dismissed Mas authority, ignored Lai, and talked directly to Chinese officials without any official authorization to negotiate on behalf of Taiwanese government. Symbolic of this flouting of

Taiwan's Renaissance, Ma Ying-jeous inaugural address, May 20, 2008, http://www.president.gov.tw/en/20080520_PRESIDENT_INAUGURAL/e_speech.html (Last accessed on Feb 28, 2010). 499 Interview with SEF Chairman Chiang Pin-kun, December 2008, and a December 2008 Powerpoint presentation by Chiang obtained by the author.

498

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authority, Lien, Wu and James Soong attended the Beijing Olympics cheering the Zhonghua Taibei team with a special flag in August 2008. When the Ma administration allowed Mainland Chinese tourists to visit Taiwan, it estimated that the flow of visitors would reach 3,000 tourists daily. But the actual number turned out to be much lower, and hardly moved the economy. The administration was further challenged when the melamine-tainted milk incident broke out in China and aroused concern among the Taiwanese public as to the cost and benefit of increasing economic exchange with China, especially because the Ma administration was slow to help victims of the milk incident. Because tighter regulations on workers rights increased Taishangs operating costs, Taiwanese investors were abandoning their Chinese plants abruptly, leaving social and financial problems behind for the local municipalities where they had invested. Overall, the Ma administration announced ten measures for liberalizing Taiwans economic relations with the Mainland, including nine agreements signed with Taiwans Chinese counterpart, highlighted in Table 7-1 along with the measures rolled out in the three previous episodes. The agreements covered Mainland tourists visiting Taiwan, weekend charter flights, cross-Strait air and sea transport, postal services, food safety, scheduling of regular flights, financial services, joint crime-fighting, judicial mutual assistance and liberalizing Mainland investments in Taiwan in one hundred sectors.

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Table 7-1: Comparison of Key Cross-Strait Economic Policy Changes, 1994-2009

1996 No Haste Be Patient Go South: Establish incentives for investing in Southeast Asia in 1993-1994 Stipulate regulation on category and capital amount of Chinese investments. Establish categories of investments to be regulated including prohibited, permitted and those for special approval. Strictly prohibit investments in hi-tech and infrastructure. Set different levels of investment cap depending on the size of company. Enforce the investment cap of 20% of NAV rule for Taiwanese public companies. Limit investment in individual projects to $50 million. Set a rating system for special approval depending on nature of industry, business plan and impact on Taiwans economy. Enforce this system even for previously made investments. 2001 Active Opening Effective Management Streamline application process for investing in China. Simplify categories into just prohibited and general categories. Establish special industry review mechanism to facilitate investments in China. Adjust cap on investment amount and percentage. Relax the $50 million per project limit. Remove the investment cap of no more than 20% of NAV for publicly listed companies, set by MOEA; increase the 20% NAV cap for capital raised abroad to be re-invested in China to 40%. 2006 Active Management Effective Opening Maintain the investment cap for listed companies in China. Enforce the existing Chinese investment policy strictly, based on the principle of effective risk management. Relax restrictions on import items from China. Establish a financial settlement mechanism with proper firewall before initiating any cross-Strait financial deregulation planning. Add a special approval process for specific projects over the investment amount limit or related to sensitive technology: the government shall invite relevant professionals to discuss finance, technology transfer, export of equipment, and corresponding investment in Taiwan. After confirming the companies commitment with Letters of Intent and governments on-site inspection, the application must go through MOEA approval process. Strengthen supervision and audit of financial industrys overseas and Chinese operations. 2008-2009 Liberalization Policy (ECFA) Inaugurate the Three Links. Liberalize Mainland tourists visiting Taiwan. Relax portfolio investment rules. Streamline investment approval process for special categories. Lift the investment cap of 40% of NAV to 60% for publicly listed companies. Signing of three financial MOUs. Open 100 sectors in Taiwan for investments by Mainland Chinese. Source: Authors own compilation based on official information from the MAC.

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The Three Links. On May 25 and 29, the SEF and ARATS agreed to resume negotiations based on the 92 Consensus. It was hoped that this would pave the way for institutionalized consultation and an end to formal hostility between the ROC and the PRC. The first meeting between Chiang Ping-kun and Chen Yunlin, as heads of the SEF and ARATS respectively, took place on June 12, 2008. On June 13, 2008, agreements for charter flights as well as Mainland Chinese tourists coming to Taiwan were signed. 18 direct chartered flights from each side of the Strait each weekend were initiated, a significant increase over the previous number of flights, which had been limited to major holidays. And the average daily quota of Mainland tourists visiting Taiwan was increased from 1,000 to 3,000, with a maximum length of stay of ten days in tour groups, along with a streamlined visa-approval process.500 With the Chiang-Chen meeting under way, several economic and trade measures Ma had promised were submitted to the Executive Yuan in June and July. The renminbi became convertible in Taiwan. Five cross-Strait financial measures became permissible, including allowing foreign funds to buy Taiwanese equity without having to show proof that they do not have PRC capital, allowing the listing of Taiwan and Hong Kong exchange-traded funds on Mainland exchanges, allowing the secondary listing on the TWSE of HKSE-listed companies, lifting restrictions on Taiwanese funds buying into offshore affiliates of PRC companies, and allowing Taiwanese funds to trade PRC futures. The cap of 10% imposed on Taiwanese funds investing in red shares or H-shares was lifted, and the 0.4% limit on funds investing in listed Mainland securities was increased to 10%.Most importantly, individuals could invest up to $5 million in China, a significant increase over the previous $2.4 million (NT$80 million) limit, and both SMEs and other companies could invest up to 60% of their consolidated net worth in China.501 The previously onerous investment review process was streamlined.502 In other areas, cross-Strait policies also moved ahead quickly. The miniThree Links, which allowed for limited postal, transportation and trade between cities in Fujian, China and the islands of Quemoy and Matsu of the ROC, had started in 2001 unilaterally without strong support from either government. The links were finally normalized in 2008.Anyone with proper travel documents could now travel to China through Quemoy and Matsu. (J.M. Chen 2008, 235-6) Even the immigration laws were changed for the first time in seventeen years, with Mainland Chinese spouses finally earning the same legal rights as residents including working and inheritance rights.503
For details, see SEF, Full Text of Cross-Strait Agreement Signed Between SEF and ARATS Concerning Mainland Tourists Traveling to Taiwan, June 13, 2008, www.mac.gov.tw/public/Data/9630232971.pdf (Last accessed on Feb 28, 2010); Enoch Fung, Taiwan Views, Goldman Sachs Global Economics, Commodities and Strategy Research, April 27, 2009. 501 Powerpoint presentation by Chiang Pin-kun, December 2008, slide 34. 502 Program on Adjusting Cross-Strait Securities Investment: Short-term Plan, and Review of the Easing of Ratio Restrictions on Mainland Stock-related Overseas Investments Made by Funds, 3098, Jun 26, 2008, http://www.ey.gov.tw/ct.asp?xItem=43356&ctNode=1229&mp=1 (Last accessed on Feb 28, 2010). 503 Based on interview with Tseng Chao-yuan, CEO of Awakening Group on April 2, 2009.. Before the new law, Mainland spouses had limited rights. Details of the new legislation are available at: What is the current regulation concerning Mainland spouses seeking employment in
500

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Even though the Executive Yuan had full power to move forward in these areas, the pace of liberalization caught many by surprise, especially because Ma had not campaigned for these cross-Strait initiatives during his election bid. By October 2008 when preparations were underway for the second Chiang-Chen meeting, protests and violence broke out, culminating in the disruption of the visit to Taiwan by ARATS personnel in October 2008. On Retrocession Day, October 25, 2008, over half a million people led by the DPP held another demonstration against Mas policies prior to Chen Yunlins visit to Taiwan the following month. Despite the public protest, Chen Yunlin visited Taipei for the second Chiang-Chen meeting held on November 3-4, 2008. It was the highest-level visit by a Mainland Chinese official in sixty years and the meeting produced four more agreements including the opening of the Three Links:504 1. Regular direct cross-Strait air links established (i.e., no longer limited to holidays and weekends). 2. Direct sea transport established. 3. Postal cooperation including package and express mail deliveries. 4. Food safety regulations consistent with those in the U.S., Europe and Japan established, including a mechanism for consumer compensation. Furthermore, representatives of the Mainland delegation included much higher ranking officers than in the past, from the TAO, the Ministry of Commerce, the Ministry of Health, the Ministry of Transport, the Civil Aviation Administration, the State Administration of Foreign Exchange, the Securities Regulatory Commission, the Banking Regulatory Commission, and the Insurance Regulatory Commission. Attention was drawn to the Mainlands willingness to treat Taiwan with parity and dignity reflecting public concern that the Ma administration might be compromising too much in the process. Minister Lai of the MAC was clearly aware of the potential backlash and released a statement: some domestic political parties and associated individuals have expressed misgivings, and have launched demonstrations and protest activities, causing a very slight blemish to the talks For the future, we will do our utmost to enhance communication with people in Taiwan who do not see eye to eye with us, and will step up our efforts to explain the situation to important members of the global community of nations, to promote the broadest possible consensus and understanding.505 The third Chiang-Chen meeting on April 25-26, 2009 broke more new ground. More comprehensive agreements were reached paving the road for discussions on financial liberalization, which would change the landscape materially:506

Taiwan? http://www.mac.gov.tw/ct.asp?xItem=64458&ctNode=5946&mp=3 (Last accessed on Feb 28, 2010). See also Awakening Foundation, April-June 2009 Newsletter, Issue 291, p. 38. 504 Full-texts of related agreements available online at: http://www.mac.gov.tw/np.asp?ctNode=5689&mp=1 (Last accessed on Feb 28, 2010). 505 Lai Shin-yuan, Outcome and Explanation of the Second Chiang-Chen Talks, November 7, 2008, http://www.mac.gov.tw/np.asp?ctNode=5689&mp=1 (Last accessed on Feb 28, 2010). 506 Lai Shin-yuan, Third Chiang-Chen Talks Produce Fruitful Results, April 27, 2009, http://www.tp.org.tw/document/detail.htm?id=20013076 (Last accessed on Feb 28, 2010). On

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1.

An Agreement on Joint Crime-fighting and Mutual Judicial Assistance allowed for the expatriation of economic criminals and the joint investigation of major crimes, including kidnapping, drugs and human trafficking, cross-border organized crime, corruption, money laundering, forgery of currencies and securities, breach of trust, and telecommunication fraud. 2. Direct flights were increased from 108 per week to 270 and six more destinations were added to the previous list of 21. 3. Further efforts on cross-Strait financial cooperation included the establishment of: a. A joint regulatory framework to supervise the operation of banks, stock brokerages and insurers on both sides of the strait. This would also require a bilateral currency clearing system and a memorandum of understanding on banking, brokerage, insurance and other financial services. b. Communication mechanisms to increase Mainland investments in Taiwan and to release details on the legal and physical infrastructure that would permit an increase in the number of sectors in Taiwan open to Mainland investments. Permitting Investment by Mainland Chinese. A second wave of liberalization measures involved the much anticipated but controversial steps to allow Mainland investment in Taiwan. The MAC claimed that such liberalization was based on the principle of complementary strengths, mutual benefits, and a win-win situation. The MAC stressed that total Taiwanese FDI in China could easily be twice or three times the official estimates, which already exceeded $72 billion, if indirect and unregistered investments were included.507 Not allowing a reciprocal flow of Mainland Chinese capital into Taiwan had crippled Taiwanese economy, the government said. As an example, MAC Deputy Chairman Fu Dong-cheng mentioned that parts of the public overemphasized the negative economic effect of restrictions on capital and technology outflow to China in industries such as semiconductors. He stated that the root of certain economic problems was not allowing Chinese capital to invest in Taiwan, which would have easily compensated for any imbalance. The government signaled that it planned to lift such restrictions; the belief was that Taiwan should not adhere to standards higher than that set by Wassenaar Agreement, otherwise Taiwanese companies would be out-competed by Japanese and American firms which had moved to China.508 The government began planning liberalizing Chinese investments in Taiwan in July 2008 with the principle of Taiwan First. Official materials indicated that the government had considered the overall impact on the domestic
details of economic and trade matters, see 2009-05-13, http://www.mac.gov.tw/public/Data/972111255971.pdf (Last accessed on Feb 28, 2010). 507 , Jun 30, 2009, http://www.sef.org.tw/ct.asp?xItem=57015&ctNode=3882&mp=1 (Last accessed on Feb 28, 2010); see also Ting-i Tsai, In Big Shift, Taiwan Allows Investment from China Wall Street Journal Online, July 1, 2009, wsj.com/article/SB124638846987074997.html (Last accessed on Feb 28, 2010). 508 Based on interview with Deputy Minister Fu Dong-cheng at the Feng Chia University ECFA Conference, April 3, 2009.

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industrial structure, economy, society, and national security, and decided to move forward because Taiwans restrictive policy had crippled the companies and created a lopsided pattern of investments.509 To start the process of this opening, a list of positive list of investments in Taiwan open to PRC capital was announced on June 30, 2009. The list consisted primarily of traditional manufacturing industries and some services and infrastructure projects involving tourism, retail infrastructure and port infrastructure. In total, 64 manufacturing sectors, 25 services sectors and eleven public works sectors were included, as listed in Table 7-2.

509

Ibid.

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Table 7-2: List of 100 Sectors to be Opened to Chinese Investment

Manufacturing Sector total 64 sectors Textile (16 sectors) Cotton yam, wool yam, man-made fiber textile, yarn, man-made filaments, other yams, woven fabrics of cotton, woven fabrics of wool, woven fabrics of manmade fiber, woven fabrics of glass fiber, knit fabrics, other fabrics, nonwoven, textile printing, dyeing and finishing, textile products, rope, cable, net, other textiles. Apparel and Woven outwear, woven underwear &nightwear, knit outwears, knit Accessories (8 sectors) underwear & nightwear, docks, knit gloves, knit hats, other apparel & accessories. Electronic Components Passive components, other electronic components (electronic connector, (2 sectors) filter and converter, etc.) Computers, Electronic Computer manufacturing, telephone & mobile phone manufacturing, products and optical other communication equipment manufacturing, audio electronic product products (7 sectors) manufacturing, data storage media manufacturing (DVD etc.), radiation & electronic medical equipment manufacturing, other optical device & equipment manufacturing. Rubber products (3 Tire manufacturing, industrial rubber products manufacturing, etc. sec) Plastic products (5 Plastic sheets/plates/pipes, plastic membrane/bags, plastic products of sectors) daily use, industrial plastic products, etc. Electrical equipment Power generation, transmission, distribution machinery, electric manufacturing (8 wires/cables and related products, home appliances including airsectors) conditioners, refrigerators, washing machines, electric fans, etc. Machinery equipment Agricultural & forest machinery, mine & construction machinery manufacturing (4 manufacturing, food, beverage & tobacco machinery equipment & sectors) manufacturing, textile, apparel & leather producing machinery & manufacturing. Autos and Parts (3 sec) Car making, car body manufacturing, auto parts producing. Other transportation Ship and its parts manufacturing, bicycle production, bicycle production. vehicles (3 sectors) Furniture Wood furniture making, other non-metal furniture making, metal manufacturing (3 sec) furniture making. Others (2 sectors) Sporting goods production, other medical equipment and its production. Services - total 25 sectors Telecommunication Basic telecommunication service resale, type II services including valueElectronics added telecommunication, computer and related services. Traditional sectors Stock farming-related consulting service, mining-related service, sewage treatment, waste treatment, intermediary services, wholesale trade, retail service, hotels, restaurants. Transportation Civil aviation transportation, shipping, aviation service (aircraft maintenance, e-ticketing system), trucking, fixed-route trucking, container trucking, car renting, cargo van renting. Others Technical appraisal and analysis, research and development, other business services such as customized design and conference services. Public Works total 3 sectors Air Travel Ancillary facilities, airlines, operation facilities, training facilities, crossborder hotel, exhibition hall, international conference center, parking lots. Port Vessel parking, anchoring, cargo loading and unloading, warehouse, value-added affiliated facilities. Tourist Infrastructure Recreational facilities, lodging, restaurants, etc., transportation, cruise pier and related facilities. Source: , http://www.sef.org.tw/public/Attachment/97111313871.pdf (Last accessed on Feb 28, 2010).

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MOEAs Investment Commission also redefined Mainland Chinese Investments so that fewer Chinese-invested companies would be restricted in their activities in Taiwan. Such investments would now be defined as any overseas entity in which Chinese investors had management control or directly or indirectly owned a stake of 30% stake or more, except for financial institutions which were limited to 10%.510 Several industries were excluded from this much-anticipated list of sectors in which Mainland investment was permitted. Financial institutions in Taiwan and China were still waiting for formal MOUs on financial regulation to be signed before strategic investments could be allowed. (See below.) Not all telecom services were included in the positive list, and the contentious semiconductor and LCD display industries were excluded altogether. As a first test of this decision to allow Chinese investments into Taiwan, China Mobile, a PRC state-owned wireless carrier, agreed to pay $527 million for 12% of Taiwans Far EasTone Telecommunications in April 2009, but the Taiwan government refused to approve the project. The public reacted very negatively to the possibility that Taiwanese telecommunications industry usually regarded as a strategic industry by other countries including China would have Chinese shareholders. The proposed deal turned Taiwanese public attention to the issue of what sectors should be opened to Chinese capital investment. Symbolic signs of Chinese capital pouring into Taiwan were prevalent. Taipei 101 Office Tower, which was the worlds tallest building when it was built, soon housed tenants such as Lenovo, Sinosteel, and Tiens Group all high profile PRC companies. Mainland restaurants such as Quanjude and Goubuli also indicated their inclination to open branches in Taiwan. Office rents were expected to rise due to such demand from Chinese enterprises. Support from the PRC leadership was unmistakable, as groups of Mainland business representatives visited Taiwan, signing deals worth up to $68 billion. Finally, the number of Chinese tourists entering Taiwan in 2009 reached 300,000 by April, compared to 320,000 for all of 2008, according to Taiwans Tourism Bureau.511 Financial Memorandums of Understanding. Also highly anticipated by the public was the signing of MOUs between Taiwans Financial Supervisory Commission (FSC) and several Chinese agencies, including the China Banking Regulatory Commission, the China Securities Regulatory Commission, and the China Insurance Regulatory Commission.512 After much discussion and delay, three MOUs were signed on November 16, 2009, which allowed the FSC to supervise Mainland branches of Taiwanese financial institutions, and the Chinese agencies to supervise Taiwanese branches of Mainland financial institutions. The MOUs were primarily to establish mechanisms for sharing and protection of information, ongoing coordination and on-site inspections. But more importantly, once the MOUs took effect in January 2010, Taiwanese financial institutions

, April 26, 2009, http://www.mac.gov.tw/ct.asp?xItem=60637&ctNode=6174&mp=102 (Last accessed on Feb 28, 2010). 511 Ting-i Tsai, In Big Shift, Taiwan Allows Investment from China. 512 The MAC, Third Chiang-Chen Talks Proceeds Smoothly and Produces Fruitful Results, April 26, 2009, http://www.mac.gov.tw/ct.asp?xItem=60714&ctNode=6530&mp=202 (Last accessed on Feb 28, 2010).

510

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would be allowed to apply through the FSC to establish a presence in China.513 The implications of these MOUs and a possible future ECFA for Taiwans financial industries will be discussed in the sectoral case study below. China, the U.S. and Taiwan Beijings Taiwan Policy Chinas attitude was critically important during this period, as the Ma administration needed not only Beijings agreement to implement many of its new cross-Strait policies, but also additional positive responses from China to secure public support for Mas liberalization measures. In some ways, Beijing was willing to do so. After Lien Chan and Hu Jintao met at APEC in Lima in November 2008, President Hu made six proposals for improving cross-Strait relations including a formal truce and allowing Taiwan to participate in international activities, albeit on the basis of the one China principle. In May 2009, after the Ma administration liberalized the restrictions on Chinese tourism to Taiwan, Wen Jiabao announced that he would one day like to visit Taiwan as well. He also said that it would be a priority for Beijing to accelerate economic normalization with Taiwan by signing agreements and establishing institutions reflecting special cross-Strait characteristics.514 The May 18, 2009 TAO-held Cross-Strait Forum in Xiamen confirmed Chinas more flexible and active approach. TAO Director Wang Yi announced eight measures favorable to Taiwan, including the adoption of regulations permitting Chinese companies to invest in Taiwan, the expansion of the procurement of goods from Taiwan, plans to increase tourism to Taiwan, and most importantly, a willingness to begin negotiations on an ECFA.515 Indeed, China was so proactive that some Taiwanese critics suggested that Ma did not have his own strategy for developing cross-Strait relations, but was simply following the initiatives of the Chinese government, which was willing to give him credit for the respite in cross-Strait tension. The Chinese leadership appeared to be united on this more accommodative approach to Taiwan. A new fifth generation leadership that was beginning to emerge in the run-up to the 18th Party Congress in 2012 showed more flexibility on the Taiwan issue. In addition, the CCP seemed to be coming to terms with the implications of Taiwans democratization, causing it to replace the old hard-line approach with a more nuanced strategy. But there were different interpretations of Chinas strategy. Some believed that the change in Beijings approach was a genuine paradigm shift. (Hickey 2008, 231): [T]he PRC has launched numerous initiatives or soft measures intended to court key constituencies within Taiwanese society including the islands fruit farmers, university students, medical professionals, tourism industry, journalists, small business operators, politicians and industrialists.
FSC inked three MOUs with Chinese authorities, Dec 4, 2009, as posted on the FSC website, available at: http://www.fscey.gov.tw/Layout/main_en/News_NewsContent.aspx?NewsID=38541&LanguageT ype=2&path=1878 (Last accessed on Feb 28, 2010). 514 : , United Daily News, March 6, 2009, p. A13. 515 8 , Apple Daily (Taiwan), May 18, 2009, http://tw.nextmedia.com/applenews/article/art_id/31637116/IssueID/20090518 (Last accessed on Feb 28, 2010).
513

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The timetable for unification which offended much of Taiwans population has also been shelved. As one Mainland Chinese scholar gushed, the number and scope of changes in policy during the past several years are unparalleled in the history of the PRC. (Hickey 2008, 227) Others argued that Beijings willingness to be accommodating was tactical at best, aimed at isolating the DPP by directing its concessions at the KMT, since Beijing regarded the KMT as far more sympathetic to the development of cross-Strait integration than the DPP.516 Many also noted a strong conditionality in some of Beijings gestures. Much attention in this regard was focused on Chinas attitude toward Taiwans participation in the WHO. This was regarded not only as an important symbol of Chinas willingness to allow Taiwan more international space, but also as substantively significant as swine flu broke out right after the beginning of the discussion of ECFA. China ultimately decided to allow Taiwan to participate as an observer in the annual meeting of the World Health Assembly in April 2009, but only on a one-time basis. Mas supporters hailed this as a breakthrough, while his detractors described it as a handout from China that would be reconsidered every year, made conditional on continuing concessions to China and without any acknowledgement of Taiwans sovereignty.517 Washingtons Taiwan Policy As in past episodes, the U.S. supported the improvement in cross-Strait relations, although it has also encouraged China to reciprocate by granting Taiwan more international space. As the Center for American Progress pointed out in its August 2008 report, A Global Imperative: A Progressive Approach to U.S.China Relations in the 21st Century, the U.S. should encourage China and the international community to allow Taiwan to assume a greater role globally, and participation in the WHO would benefit both Taiwan and the world. It also endorsed the expansion of economic ties between China and Taiwan, saying that U.S. interests are enhanced, not damaged, by cross-Strait rapprochement.518 Following the Ma administrations initial moves toward dtente with China, the U.S. rewarded Taiwan by announcing on October 3, 2008, that the U.S. was proceeding with the sale of advanced arms, a $6.4 billion deal including Patriot air defense missiles, Apache helicopters and F-16 spare parts. Notably, however, the package was half of the original $12 billion proposal and excluded Blackhawk helicopters, additional Patriot PAC-III missile and any financing to study the possibility of buying diesel submarines. China denounced the U.S. sale, but its negative reaction was focused on the U.S., rather than on Taiwan. (Brown 2008) However, some in the U.S. have expressed caution about further agreements between Taiwan and Mainland China. In a typical statement about dtente being a double-edged sword, Susan Shirk, a former Clinton government
, Apply Daily (Taiwan), May 18, 2009, http://tw.nextmedia.com/applenews/article/art_id/31637240/IssueID/20090518 (Last accessed on Feb 28, 2010). 517 Taiwan must beware of China's WHA trap, Taiwan News, December 22, 2008, http://www.taiwannews.com.tw/etn/news_content.php?id=819150 (Last accessed on Feb 28, 2010). 518 See the Center for American Progress, A Global Imperative: A Progressive Approach to U.S.China Relations in the 21st Century, August 2008, p. 66., available at http://www.americanprogress.org/issues/2008/08/pdf/china_report.pdf (Last accessed on Feb 28, 2010).
516

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official, said that she believed increasing trade across the Taiwan Strait could greatly benefit Taiwan, but then warned that Taiwan should never underestimate the risk and urged the nation to further investigate Beijings motive behind the ECFA [trade agreement].519 Shirk described a rising China harder to predict than ever because of its fragile domestic situation. (Shirk 2007) Similarly, the Director of AIT said that Taipei must obtain "as close as possible to a consensus before negotiations with China could proceed to a higher and more difficult level.520 His speech was reflective of the ambiguous attitude the U.S. was beginning to have in this process, as Taiwans guarantor of safety: Even as we welcome Taiwans increased engagement with the PRC, however, we must not lose sight of the qualities that underpin Taiwans unique success: the vibrant democracy, civil society and open economy.521 This cautious attitude was also reflected in an editorial by Nixons former national security adviser, Richard Allen, in The Wall Street Journal on August 28, 2009, that cautioned the U.S. to counterbalance the improvements in cross-Strait relations by promoting U.S. ties with Taiwan through further arms sales and an FTA: Given that relations between Taiwan and the mainland have warmed considerably since the election of Mr. Ma, the U.S. should continue to work to improve relations with the PRC, while solidifying its historic relationship with Taiwan. The window of opportunity is within the next months and year, and U.S. commitments under the Taiwan Relations Act could be met by proceeding with the pending arms sale and initiating freetrade discussions with Taiwan.522 The Promotion of ECFA Within the first year, the Ma administration set out a cross-Strait agenda with three priorities: addressing the easy tasks before the difficult ones, the urgent before the non-urgent, and the economic before the political. According to MAC Chairwoman Lai Shin-yuan, normalization of cross-Strait economic and trade relations and maintaining peace in the Taiwan Strait were the new administrations highest priorities.523 In December 2008, the SEFs Chiang Ping-kun began discussing the possibility of a Comprehensive Economic Cooperation Agreement (CECA) with China. Although the Ma administrations interest in liberalizing cross-Strait economic policies was well-known, this ambitious objective surprised the public, as evidenced by the flood of media discussion attacking the government
Fang Cheng-hsiang and Rich Chang, Former U.S. Official Warns about ECFA with Beijing Taipei Times, June 21, 2009, http://www.taipeitimes.com/News/taiwan/archives/2009/06/21/2003446724 (Last accessed on Feb 28, 2010). 520 Yu Tsung-chi (U.S. Atlantic Council), A Constructivist Take on the Strait, Taipei Times, June 16, 2009, http://www.taipeitimes.com/News/editorials/archives/2009/06/16/2003446259 (Last accessed on Feb 28, 2010). 521 Ibid. 522 Richard Allen, The Next Step in the Taiwan-China Dance The Wall Street Journal, August 28, 2009, p. 15. 523 Lai Shin-yuan, The Current Stage of Cross-Strait Relations and the ROC Governments Mainland China Policy, Speech at Brookings Institution, Washington, D.C., July 14, 2009. Available online at: http://www.mac.gov.tw/ct.asp?xItem=63748&ctNode=6256&mp=3 (Last accessed on Feb 28, 2010).
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afterwards. Critics charged that the government, especially the MAC and the SEF, had not consulted the public when considering an unprecedentedly comprehensive agreement that would potentially require political cooperation. The media even reported that the initial discussions of CECA were done without the knowledge of the president or the Executive Yuan, complicating the public relations effort for the Ma administration. The Liberty Times reported on April 2, 2009 that the MAC, the SEF and MOEA all had different timetables and agendas, resulting in the KMT Standing Committee suddenly summoning Minister Yi of MOEA for an in-depth review of the situation.524 People were also incensed because of the possibility that the Ma administration was negotiating something that might resemble Hong Kongs Closer Economic Partnership Arrangement (CEPA) with the Mainland. While Hong Kongs economic relationship with China has been extremely beneficial, Taiwanese are particularly sensitive to any agreement with the Mainland that might resemble Hong Kongs one country, two systems model, given that its premise was the acknowledgement of Chinas sovereignty over Hong Kong. To avoid the implication that it was seeking the same kind of economic relationship with China that Hong Kong had agreed to, the Ma administration replaced the proposal for a the CECA with a proposal to create an Economic Cooperation Framework Agreement, or ECFA. Conceptually, ECFA was a framework, not a structured agreement requiring political cooperation like the CECA. The impetus behind ECFA was the impending FTA to be signed among countries in ASEAN plus China, Japan and South Korea (ASEAN+3), scheduled to go into effect in 2010. The FTA would eliminate tariffs on most China-bound products from the other member countries. Taiwan was not part of the ASEAN+3 and, even worse, had been unable to sign FTAs with any other country because of Chinas opposition. Several industries were concerned about the prospect that Taiwan would be economically marginalized if it could not join any FTAs, whether multilateral groups like ASEAN+3 or bilateral agreements that Taiwan might sign on its own. The DPP, which until now had appeared to be relatively passive and disorganized, now focused on ECFA as the latest symbol of what it portrayed as the KMTs authoritarian leadership and its eagerness to move too rapidly toward economic integration with China. (Chang and Lin 2008, 245) The DPP called for a referendum on the proposal. The party machine went into full gear to encourage friendly academics to produce prolific analysis on why building a consensus was important even if the Executive Yuan was not legally required to consult with legislators or the public before conducting an international negotiation. (I.H. Chen 2009) Faced with this mounting opposition, the government began to make great efforts to mend its fences with the public, publishing booklets explaining its policy and holding conferences all over the island.525 The propaganda effort was formally launched with a conference at Feng Chia University in Taichung on April 2009, at which the government provided the official rationale for ECFA.

ECFA , Liberty Times, April 2, 2009, p. A2 For policy explanation covering ECFA, see for example the MAC, Cross Strait Economic Cooperation Framework Agreement: Policy Explanation, May 18, 2009. Available online at: http://www.mac.gov.tw/public/MMO/MAC/ecfa_exp.pdf (Last accessed on Feb 28, 2010).
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The governments key message was that ECFA would not be a full-scale FTA, but rather a set of rules that would normalize cross-Strait economic relations. The MACs slogan was that that ECFA would provide the roadmap for the normalization of cross-Strait economy and trade. More importantly, the MAC repeated several times during the conference that ECFA would not touch on any sovereignty or political issues. The government spokesmen assured the audience that interdependence between China and Taiwan would not mean that Taiwans economy would rely excessively on China. They also noted that ECFA might potentially lead China to allow other countries to sign FTAs with Taiwan, enabling Taiwan to join the process of regional economic integration.526 The MAC also indicated the substantive limits it intended to place on liberalization. Specifically, it pledged not to allow Mainland Chinese workers into Taiwan, and not to further liberalize the restrictions on agricultural products imported from China. Finally, the MAC vowed to generate consensus on cross-Strait policies, and to move forward gradually in its negotiations with China. It described its basic principles for negotiating with China as three-fold: mutual non-denial where neither Beijing nor Taipei denied the existence of the other government and sidestepped the sovereignty issue; placing Taiwan first so as to ensure benefits for the Taiwanese people; and placing the priority on economic issues which are easier to resolve and avoiding the political issues that are more complicated.527 Responding to a flood of questions about whether sovereignty would be compromised during the ECFA negotiation, Deputy Chairman Fu stressed that sovereignty would not be mentioned in this agreement and would not be affected at all.528 In preparation for a further series of public events promoting ECFA, Lai Shin-yuan appeared on CTV on April 5, 2009 to stress the benefits to Taiwan.529 In the conference, television show and promotional material, the MAC pointed out that approximately 20% of Taiwanese would be characterized as losers in the further liberalization of links with the Chinese economy, but the government would provide assistance to such industries, just as had been done in the preparatory period prior to WTO accession.530 Given that the strongest reaction to economic liberalization could be expected to come from the south, where traditional industries and unskilled workers dominated the discussion, the government organized a series of meetings with local officials and business organizations in southern Taiwan. On June 3, 2009, the MAC hosted a large-scale conference for Lai to meet with the private sector, local officials and scholars in the Kaohsiung area to promote ECFA.531
For details, see policy documents and illustrations on ECFA provided by the government online through the official ECFA website available at http://www.ecfa.org.tw/. 527 Ibid. 528 Based on interview with Deputy Minister Fu Dong-cheng in the Feng Chia University ECFA Conference, April 3, 2009. 529 China Television (CTV) Interview, April 5, 2009. 530 : ECFA , Economic Daily News, April 6, 2009, http://www.chinareviewnews.com/doc/1009/3/4/3/100934339.html?coluid=7&kindid=0&docid=1 00934339 (Last accessed on Feb 28, 2010); : ECFA, Commercial Times, April 6, 2009, p. A7. 531 See Notes on Policy Explanation of Cross-Strait Negotiation for Southern Conference, June 3, 2009, available on http://www.mac.gov.tw/ (Last accessed on Aug 31, 2009).
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This was part of an island-wide road show to promote ECFA, including publishing books and articles to inform the public more fully. The program included efforts to assemble supportive opinions from all parts of the society, including students, non-profit organizations from womens group to labor rights advocates, and interest groups such as Taishang and professional organizations, reflecting the greater plurality of Taiwans political system over the course of several administrations. One important line of argument in this regard was to compare the negotiation of ECFA with Taiwans membership in the WTO.532 Ching-chang Yen of the Institute for National Policy Research, formerly Taiwans first WTO ambassador during 2002-2005, pointed out that China had never dealt with Taiwan in accordance with the WTO guidelines, and preferred not to respond to Taiwans complaints within the WTOs dispute resolution mechanism. Both sides had repeatedly violated their obligations as WTO members in order to retain their bargaining power vis--vis each other. Now, ECFA would essentially push the cross-Strait relationship from a WTO-minus to a WTO-plus relationship, he commented in an article. For Taiwan and China to enter into a WTO-plus relationship in the form of ECFA would be politically beneficial to Taiwan, since the normalization of cross-Strait trading relations would necessarily involve some form of mutual recognition of sovereignty.533 In response to the Taichung conference, Ing-wen Tsai, Chairwoman of DPP, immediately hosted a conference jointly with the TSU on April 11, 2009, to attack what she described as the governments rash announcement of ECFA without consultation, and to call for a referendum on ECFA. The DPPs main contention was that there would be no transparency, no due process, nor any checks and balances during the ECFA negotiation.534 In May, Chairwoman Tsai also appeared in Washington, D.C. and made an impassioned plea about how economic cooperation with China would involve a heavy political price. The problem with Mas approach to easing cross-Strait tension, she said, was that he lacked prudence and failed to engage in any consultations that might reassure the public of his intentions. She charged that Mas eagerness to get close to China would damage Taiwans relationship with other partners, presumably including the U.S., and that Taiwans democracy is actually becoming more vulnerable to Chinese influence.535 Soon after, Tsai announced that the DPP would host 500 grass-roots meetings to protest against the signing of ECFA. As the domestic marketing efforts continued, the government sent the MAC Chairwoman Lai to the U.S. in July 2009 to generate external support for ECFA. She went first to New York to meet with members of the overseas Taiwanese community, and then appeared at Brookings Institution at the 38th annual Taiwan-U.S. Conference on Contemporary China to garner support for
: ECFA, China Times, April 9, 2009, p. A12. Ching-chang Yen, The Dos and Don'ts of CECA between Taiwan and China from a WTOs Perspective, Taiwan Perspective, March 3, 2009. Available at: http://www.tp.org.tw/eletter?print.htm?id-20012984 (Last accessed on Feb 28, 2010). 534 DPP on CECA/ECFA, Democracy and Progress (DPP Newsletter), March 2009, pp. 5-6, http://www.dpp.org.tw/index_en/upload/news_letter/20090615175726_data_1.pdf (Last accessed on Feb 28, 2010). 535 William Lowther, Tsai warns of strategic collapse, Taipei Times, May 8, 2009, http://www.taipeitimes.com/News/front/archives/2009/05/08/2003443067/print (Last accessed on Feb 28, 2010).
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Mas cross-Strait agenda and specifically for ECFA. During the question and answer session at the Brookings conference, Lai acknowledged that a significant number of Taiwanese still had fear and doubt that the government might sell out the country and undermine Taiwans sovereignty by being too accommodating to China.536 She therefore emphasized in her speech that the governments aim was to first build a foundation of consensus within our domestic society: Taiwan is a pluralistic democratic society, in which cross-strait policy basically remains a highly sensitive issue. The people may hold differing views as to what the future holds for Taiwan, and the government must accord respect to all shades of belief and political opinion. How to gain approval for our policy from a greater proportion of the people is one of the current main focuses of our new administration.537 Although Ma had suggested that ECFA might be a step toward a crossStrait peace agreement, this linkage of economic and political issues actually generated a passionate public backlash. Accordingly, Lai made it very clear during her July talk that there was no timetable for cross-Strait political discussions, including consideration of cross-Strait military confidence building measures or a peace agreement.538 Public Response The liberalization of Taiwans cross-Strait economic policy was exceptionally good news for the Taiwanese investment community. From being downgraded by analysts around the world, Taiwans market suddenly became the darling by May 2009. Optimistic investors had hoped that there would be a rapprochement with China if Ma won the presidency in mid-2008, and that this would increase boost liquidity on Taiwan by allowing investments from the Mainland. Now these hopes were being realized. With prospects for more relaxation of cross-Strait economic policy, Taiwans stock market substantially outperformed the global average. Some predicted that Taiwan would benefit from greater integration with the PRC. Goldman Sachs, for example, altered its outlook for the Taiwan economy to decline only 7.0% in 2009 and to show growth of 3.5% in 2010 because of the liberalization of cross-Strait economic policies, and expressed surprise at the possibility that China and Taiwan can set aside their differences in order to concentrate on the myriad of synergies and cooperative ventures that are obvious, numerous and important, both economically as well as socially:539 [Goldman Sachs] change of view is partly based on the potential that this momentum will carry into the future, because both sides are on the cusp of creating a virtuous cycle, in which cooperation and unwinding

William Lowther, Lai Shin-yuan touts dtente at U.S. Conference, Taipei Times, July 16, 2009, http://www.taipeitimes.com/News/taiwan/archives/2009/07/16/2003448783 (Last accessed on Feb 28, 2010). 537 Lai Shin-yuan, The Current Stage of Cross-Strait Relations and the ROC Governments Mainland China Policy, July 14, 2009, http://www.mac.gov.tw/ct.asp?xItem=63748&ctNode=6256&mp=3 (Last accessed on Feb 28, 2010). 538 Ibid. 539 Timothy Moe and Christopher Eoyang, Taiwan, Material Hope, Goldman Sachs Global Economics, Commodities and Strategy Research, May 3, 2009.

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constraints lead to greater economic and financial linkages, stimulating a powerful and positive feedback loop.540 Although Wall Street may have anticipated greater profits from liberalization, many others were cautious for various reasons. First, they were concerned about the governments ability to turn the economy around. They warned that the fundamentals would catch up with an overly optimistic market, particularly when the global economic crisis hit Taiwan hard in the first half of the year. In an article entitled Mirror, mirror on the wall in its February 14, 2009 issue, the Economist asked whether Taiwan might actually be the ugliest economy of them all.541 The pessimists warned that addressing the basic problems of Taiwans lagging economy would require more than just cross-Strait liberalization. Second, many wondered if the government could manage relations with China and come out on top. Some investors and officials thought the market surge was a double-sided sword. MOEA indicated that more industries would become open to Chinese investment depending on the economic impact of the first tranche of liberalization. After the next SEF-ARATS meeting and discussion of ECFA, MOEA was to decide on the next step. The investment community had warned that Taiwans financial sector would be completely restructured if Chinese banks were to take over their Taiwanese counterparts, creating an adverse effect on credit. Moreover, Wall Street analysts pointed out that shares in Taiwanese companies already had the China market option priced in, and the future performance of Taiwanese equity would become more volatile, because it would become correlated with political developments on the Mainland: While it is no doubt exciting to have a new source of potential growth and financial flows, strong linkages to China will make the Taiwanese equity market more dependent on China than ever before we do not take the implementation risks lightly potential barriers exist on the regulatory, political and social fronts and there is a danger that the equity market discounts completely smooth sailing, and that implementation inevitably proves to be thornier than expected. Investors should be prepared for volatility, even as the prospects have grown brighter.542 Lastly, apart from the investment community, from the very outset the Taiwanese public was taken by surprise by the speed of liberalization. And it was quite polarized in its reaction to Mas policies. During the ECFA discussion, just as during the 2008 election campaign, advocates of all four tendencies were more vocal than ever before, demonstrating a divergent set of interests. In particular, the opposition challenged the government on every single policy initiative, and the Ma administration conducted a string of polls, on various policy options, to measure the strength of its political base. The MAC prided itself in the positive public reaction to these new agreements. Starting in August 2008, the MAC began publishing cross-Strait public opinion surveys on the liberalization effort on a regular basis to bolster its support in negotiation with the Mainland. But while the initial polls on the Ma
Ibid. Asia: Mirror, mirror on the wall; Taiwan's economy, The Economist, February 14, 2009, p. 52. 542 Timothy Moe and Christopher Eoyang, Taiwan, Material Hope, Goldman Sachs Global Economics, Commodities and Strategy Research, May 3, 2009.
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administrations policies showed some support, they did not indicate a consensus. On cross-Strait tension, a bare majority of 53% thought that the tension had been reduced, and only 51% of the public expressed confidence that tensions would relax further in the future. On economic policy, 52% surveyed supported government initiatives that liberalized economic and trade policies; however, 66% also thought that cross-Strait economic trade should be regulated more strictly. In terms of the speed of government liberalizing cross-Strait policies, 41% of the people thought the pace was just right, versus 30% who thought it was too fast and 18% who thought it was too slow. Politically, 83% believed maintaining the status quo was the best policy.543 Two months later, in October 2008, 60% of those surveyed thought crossStrait stability would be enhanced if the two sides resumed regular negotiation. Similarly, 58% thought weekend chartered flights and Mainland Chinese tourists visiting Taiwan were positive developments for cross-Strait relations. 64% supported holding Chiang-Chen talks in Taiwan, and somewhat fewer 56% believed they would not hurt Taiwans dignity or interests. But against the backdrop of the melamine milk scandal, 52% thought the Chinese government should apologize for the poisonous milk before Taiwan allowed Chen Yunlin to visit Taiwan. After the second Chiang-Chen talks, a more comprehensive review of all the surveys done by various media and the MAC-commissioned survey showed increased support for the liberalization of cross-Strait economic policies across the board. The MAC proudly proclaimed that it would uphold public opinion by adhering to the principle of putting Taiwan first, creating benefits for the people and a win-win situation for the two sides of the Taiwan Strait544 On the four agreements, 52% considered their advantages to outweigh the disadvantages, according to United Daily News Public Opinion Poll Center.545 Asked Will Chen Yunlins coming to Taiwan harm national dignity? 70% said no, while 27% said yes. Another poll asked, Has President Ma sold out Taiwans interests? to which 60% said no, but yes still garnered 23% of the responses.546 The second Chiang-Chen talks coincided with Mas six-month mark as president, and government surveys showed that the public was evenly divided. 51% were dissatisfied with Mas performance and 54% were dissatisfied with Premier Liu Chao-hsuans performance. In order, the publics reasons for their
The MAC, Summarized Results of Public Opinion Survey (August 22 to 24, 2008): The Public's View on Current Cross-Strait Relations, www.mac.gov.tw/public/Attachment/96315262717.pdf (Last accessed on Feb 28, 2010). The 83% included anyone who selected one of the following four choices in the survey in response to the question Whether you support unification or independence?: Maintain status quo, eventually for unification, Maintain status quo, eventually for independence, Maintain status quo first, and then decide independence or unification depending on the situation then, Forever maintain status quo. 544 Six different polls conducted in November 2008 after the second Chiang-Chen Talks summarized in brief. Public Opinion Polls Speak: The Second Chiang-Chen Talks and Taiwans Public Opinion, November 20, 2008, http://www.mac.gov.tw/public/Data/963010525171.pdf (Last accessed on Feb 28, 2010). 545 This did deviate much from the other polls conducted by TVBS (49%) and RDEC (60%), see data of respective sources in ibid. 546 The MAC, Public Opinion Polls Speak: The Second Chiang-Chen Talks and Taiwans Public Opinion, November 20, 2008, p. 6, available at http://www.mac.gov.tw/public/Data/963010525171.pdf (Last accessed on Feb 28, 2010).
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dissatisfaction with Ma included the economic recession, his lack of charisma, ineffective implementation of policy, lack of specific policy responses, going back on what he promised and finally, being too weak with Mainland China.547 The MAC cited the 56-58% public support for Chens visit as a response to the three days of street protests and rallies against Chen Yunlins visit that had just occurred, when more than 100 people were injured in clashed with the police.548 2009 witnessed continued reservations about the Ma administrations liberalization, with the polls showing a roughly even division of opinion and a lack of confidence in the administrations competence and strategic direction. People wanted improvement on specific issues; therefore, at the conclusion of the third Chiang-Chen talks, polls continued to show high level of support for specific task-oriented cross-Strait measures such as the joint effort to combat crime (79%), the regular charter flights (72%) and the financial cooperation pact (59%). More than half thought the negotiations upheld Taiwans interest (57%) and did not denigrate Taiwans sovereignty (54%). However, with regard to the overall strategy and trend of dealing with China, there was uneasy sense as to what the future holds, and ECFA would bring out all the insecurities.549 In April 2009, the MAC commissioned more polls to measure support for further cross-Strait liberalization. According to one poll conducted on April 8, fully 70% thought signing an ECFA was necessary to solve existing problems, versus 24% who disagreed.550 In the same survey, a further 60% thought it would facilitate Taiwans signing similar agreements with other countries, while 25% disagreed. Also, 54% thought ECFA would solve Taiwans economic problems without affecting its sovereignty, versus 38% who did not.551 But despite this broad agreement on improving relations with China, there was consistent concern over the speed of the development. (Chang and Lin 2008, 245) Only 41% believed the pace was fine, while 34% thought it was too fast. Pluralities expressed concern that the Mainland government was unfriendly towards both the Taiwanese government and the Taiwanese people. In a subsequent NCCU-ESC poll on April 17-20, 2009, the percentage of the public who had confidence in the governments ability to maintain cross-Strait peace had dropped to 50%, with 40% lacking confidence in the government.552
, United Daily News, November 19, 2008; 57, United Daily News, November 20, 2009. 548 Jenny W. Hsu, Public Backs China Policy: MAC, Taipei Times, February 17, 2009, http://www.taipeitimes.com/News/taiwan/archives/2009/02/17/2003436293 (Last accessed on Feb 28, 2010). 549 The MAC, Summarized Results of the Public Opinion Survey on the Third Chiang-Chen Talks (April 28-30, 2009), http://www.mac.gov.tw/english/english/news/09505_1.pdf (Last accessed on Aug 31, 2009). 550 The MAC, Summarized Results of the Public Opinion Survey on ECFA and Mainland Chinese investments in Taiwan (April 8-11, 2009), www.mac.gov.tw/public/Attachment/9631419251.pdf (Last accessed on Feb 28, 2010). 551 The DPP claimed that the April 8 polls by The Berkeley Polling Company, showing 70% support for ECFA, were substantially different from other polls done by news media, as did earlier polls which asked loaded questions. See article by Lin Cheng-yi of Academic Sinica, , July 11, 2008, http://www.taipeisociety.org/node/169 (Last accessed on Feb 28, 2010). 552 The MAC, Summarized Results of the Public Opinion Survey on Current Cross-Strait Relations (April 17-20, 2009), http://www.mac.gov.tw/public/Attachment/9631463262.pdf (Last accessed on Feb 28, 2010).
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This period was marked by a high degree of consensus on national identity, which rarely dominated the headline in discussions of cross-Strait economic relations. In the December 2008 and 2009 NCCU-ESC polls, a combined 91% of the people surveyed believed they were Taiwanese (51%) or both Taiwanese and Chinese (40%), a stark contrast to the combined 65% in December 1994, where Taiwanese constituted a relatively small minority at only 20%, and where Taiwanese and Chinese constituted the plurality at 45%. It appeared that a New Taiwanese identity had been consolidated and accepted by an overwhelming majority of Taiwanese. Support for the status quo continued at a high level (85%), with under 2% support for immediate unification and only 6% support for immediate independence.553 Neither identity nor FNP was contentious. Instead, the issue was how Taiwanese should manage trade with and investments in China. In short, the polls showed a high level of consensus on national identity and a high degree of preference for status quo, but mixed opinions on cross-Strait policies. A majority of the public approved of the specific measures that had been taken as part of the liberalization of cross-Strait relations, but they showed increasing concern about Chinas attitudes toward Taiwan, declining confidence in their governments ability to manage relations with China, and further doubts about the speed of the development of cross-Strait relations. The Four Tendencies A further assessment of the opinions expressed during the debate over ECFA shows that the public was divided not only on the substance of the governments policy toward China, but also on the mechanisms of cross-Strait negotiations. Because of Beijings non-recognition policy, much of the negotiation had been conducted between the KMT and the CCP, thus bypassing Taiwans democratically elected government. Some described this situation as one China, two Taiwans.554 Extensive Restriction Political leaders of the pan-green coalition, think tanks, scholars and the media, as well as pro-independence interest groups joined forces to fight against ECFA. For these supporters of Extensive Restriction, the objections to ECFA were both economic and political. As former DPP Chairman Lin I-hsiung put it, all issues are political.555 Since China refused to negotiate with Taiwan as an equal, no agreements should be reached on economic issues: Most cross-Strait policies can be decided without Chinas agreement, and even in cases of tourism, informal communication through civic agencies like the Tourism Association can solve most of the practical issues. Go South must be reinvigorated so that Taiwan is not overly reliant on China. China presents an increasing security threat, and Taiwan should be cautious in becoming locked with China even more. Economically, costs in China are rising, and more importantly, Ma is simply letting liberalization happen, with no grand plan. Others [including China] set the

Data from Election Study Center, NCCU, Important Political Attitude Trend Distribution, http://esc.nccu.edu.tw/english/modules/tinyd2/index.php?id=6 (Last accessed on Feb 28, 2010). 554 Lin Cheng-yi, . 555 Based on interview with Lin I-hsiung, April 1, 2009.

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cross-Strait agenda for him. He has not asked for any meaningful concessions from China.556 Other supporters of restriction were not quite so categorical. While seeing China as politically motivated, they did not see isolation from China as always being the best solution. If the terms were good, Taiwan should be pragmatic and accept them. But they were generally skeptical that Taiwan would ever be able to achieve a good bargain. Former legislator Lin Chuo-shui, for example, argued that if Taiwan should liberalize, the strategy must be very cautious and gradual. Labor-intensive sectors should be allowed to move to China only slowly, and only after other important sectors of Taiwans economy had been upgraded. (C.S. Lin 2006; 2008; 2009) Legislator Lin contrasted his approach with the policy he attributed to the Ma administration. He argued that Vice President Vincent Siews all-out liberalization policy did not take Taiwans economic future into consideration, and therefore put Taiwan in an untenable situation. He described the KMT as simply trying to emulate South Korea by focusing on achieving lower labor costs by moving production to China. In contrast, he claimed that the strategy of the previous DPP administration had been to focus on global branding and worldwide marketing, in which China is important but not the only source of growth. Lin raised the example of agriculture. Here, the DPPs strategy was to help southern farmers sell products to Korea and Japan, increasing exports by 15 times from 2003 to 2007. In contrast, the KMT encouraged investments in China to lower costs, resulting in big financial losses and the transfer of Taiwans technology in areas like orchid-farming. The KMTs go west strategy resulted in Chinese producers using Taiwanese technology to compete against Taiwan farmers, whereas the DPPs strategy had been to promote Taiwan globally. (C.S. Lin 2009, 490-1) In this episode, media groups like Sanli Television and to a lesser degree, the Liberty Times group (including the Taipei Times) regularly featured Extensive Restriction arguments in public debates. To Yu Fu, formerly the Main Program Producer of Sanli and television host, Ma Ying-jeous policies were intertwined with his political goal of unification.557 If President Ma were not pushing for unification, then he would agree to sign an ECFA with China only on the condition that Beijing allowed other countries to sign FTAs with Taiwan. Otherwise, signing ECFA would obviously have undesirable political implications for Taiwan. In fact, to a staunch Extreme Restrictionists like Yu Fu, even the DPPs economic policies had also failed because, under the influence of former New Tide Faction members, the Chen administration had liberalized cross-Strait relations too much. The languishing economy, in Yu Fus view, demonstrated the problems of excessive reliance on China. The Extensive Restrictionists argued that the liberalization of cross-Strait economic policies would risk the erosion of sovereignty and the loss of jobs. Lee Wen-chung argued vigorously that ECFA be brought to a referendum: Referenda can lead the two leading parties to meet Taiwans mainstream core values and maximum benefits to the people. This will reduce the public backlash that will come from concern for sovereignty and
556 557

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unemploymentTaiwans economic success is based on a global market, and without China, Taiwan will not have a global strategy. But if Taiwan were to establish a special economic institutional framework with China only, it will hurt Taiwans efforts to globalize and will increase risks towards political unification.558 To Lee, the main benefit of ECFA would be whether it enabled Taiwan to sign trade agreements with other countries. However, if Taiwan signed ECFA with China in order to have permission to sign FTAs with other countries, the implication would be that Taiwan has no sovereignty. Some think tanks taking the Extreme Restrictionists position focused on specific issues like the semiconductor investment policies. The Ma administration proposed to eventually relax the restrictions on 12 foundry and 0.13 process technology investments into China by Taiwanese nationals and companies.559 The Taiwan Thinktank organized a discussion group on June 30, 2009 to debate the merits of such liberalization, with participants from universities, think tanks, the DPP, and the private sector. The discussion centered on how to have TSMC and UMC maintain at least a two-generation lead in process technology over SMIC. This would also ensure that Taiwan retained the lead in IC design, manufacturing, testing and packaging, and keep jobs at home. Unrestricted liberalization would mean the relocation of large amounts of capital, technology and workers (about 1,200-1,500 people) to China to build design houses, foundries and DRAM plants. This would enable China to outcompete Taiwan economically and perhaps militarily as well.560 In summary, the Extreme Restrictionists argued that Mas economic policies brought on great risks by making Taiwan overly reliant on China. There were not only economic risks, but these changes would be a risk to Taiwans sovereignty. As Lin Hsiang-kai of NTU put it: [L]ocking in Taiwans economic future with China increases Taiwans risks exponentially. Unemployment increase and migration of supply chain clusters to China demonstrate that the Ma administration cannot control the outflow of our industries. The government shows no strategy to respond to the changes and is only concerned with allowing Mainland Chinese tourists and Chinese capital to save Taiwans economy and stock market.561 Guided Development For supporters of Guided Development, in contrast, there was the perception that Taiwans economic and political interests had become
See for example, Taiwans Unemployment and Economic Issues, Democracy and Progress (DPP Newsletter), February 2009, pp. 10-1; Lee Wen-chung, ECFA, Apple Daily (Taiwan), June 11, 2009. 559 U.S.-Taiwan Business Council, Semiconductor Report: Second Quarter 2009, p. 5 and Semiconductor Report Annual Report 2009. As of Feb 10, 2010, the Taiwan government had announced its intention to allow LCD panel and semiconductor manufacturers to invest in China. 560 See Taiwan Thinktank Position Paper by Wen-fu Hsu, following the June 30, 2009 Committee Meeting on 12-inch Semiconductor Westward Policy. Available at: http://blog.yam.com/bunhu/article/22005647 (Last accessed on Feb 28, 2010). 561 See Lin Hsiang-kai and Liu Chia-feng, , December 10, 2008; , November 5, 2008. Accessible in Lins website at: http://homepage.ntu.edu.tw/%7Ekslin/course/safe.pdf or http://homepage.ntu.edu.tw/~kslin/#course (Last accessed on Feb 28, 2010).
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increasingly disentangled. For example, Earle Ho argued that the consensus on Taiwanese identity now made it possible to differentiate Taiwans economic and political interests which are very different.562 In the past, businesses could not advocate their policy preference without being labeled as pro-independence or pro-unification. Now, Taiwanese business could assert their interests without being concerned about the political implications. To Ho, Chinas impressive economic development had made further liberalization of cross-Strait economic policies far more problematic than it had been in the past: The issue is much more nuanced now because in 1996, everyone had thought going to China was the only way to survive, but costs in China have risen and it is unclear companies like mine can profit by expanding to China. Furthermore, China needed Taiwans management and technology know-how in the 1990s, but in steel industry for example, China now enjoys the state-of-the-art technology as well as scale and deep sources of capital. The relationship has changed completely. On top of all this, Taiwanese now cherish their way of life and will not compromise on it easily. Well, protectionism is on the rise world-wide, as you see in the G20 discussions, and Taiwan is no exception.563 He believed that Lee Teng-huis No Haste policy and Chen Shui-bians semiconductor policies were all implemented to gain political leverage over negotiation with China. The government must be careful in cross-Strait negotiations, because it is not possible to avoid sovereignty infringement when discussing economic liberalization with China. Also, liberalization can create a very negative backlash if it doesnt bring real benefits.564 Other Guided Developmentalists argued that the governments role should be to regulate the economy, so as to promote certain social values and economic interests, as Chairwoman of DPP Ing-wen Tsai vowed to do: The DPPs economic policy will put equal weight on economic growth, social justice and ecological conservation. We must provide the people with an enjoyable life, high-quality education and a clean environment thats how the DPP will differ from the KMT.565 The magazine The Journalist also embraces these concerns, although it supported neither the DPP nor the KMT. Chief Editor Yang Chao said that government officials and business leaders in Taiwan have often decided on cross-Strait economic policies without understanding their impact on society, especially in terms of equity, and the DPP and the KMT have been equally disappointing in their failure to plan Taiwans long-term future.566 Interest groups that perceived trade with and investment in China to have a negative net impact on Taiwan, including both Extreme Restrictionists and Guided Developmentalists, first came together to form a formidable block during the EDAC, when they tried to stop Chen Shui-bians effort to reverse Lee TengBased on interview with Earle Ho, April 2, 2009. Ibid. 564 Ibid. 565 Loa Iok-sin, New DPP chief bothered by what Ma did not say, Liberty Times, May 22, 2008, http://www.taipeitimes.com/News/taiwan/archives/2008/05/22/2003412588 (Last accessed on Feb 28, 2010). 566 Based on interview with Yang Chao, July 24, 2009.
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huis No Haste policy. They continued to be joined by many unions and professional associations who realized that their jobs were threatened by liberalization. This coalition proved to be stronger than the dispersed Extensive Liberalizers, but was not quite on par with the Guided Liberalizers, the tendency that prevailed during this episode. Guided Liberalization Aware of the political opposition it was likely to face and given the depth and breadth of the liberalization it had initiated, many in the Ma administration had been active supporters of more liberal economic policies towards China. With Mas election, they finally had a chance to be fully engaged by promoting Taiwans new cross-Strait policies.567 As summarized by Vice Minister of the MAC Chao Chien-min, the governments main argument was that the liberalization of Taiwans cross-Strait economic policies was beneficial because it had elicited positive responses from China. Politically, Chao acknowledged that some people have great reservations [about ECFA] some people may not share our convictions and understanding of the process, but he went on to argue that trade agreements had become indispensable, and no longer a luxury, given that 240 FTAs had been ratified by various countries, mainly in the previous twenty years. Taiwans sovereignty should not an issue, and would not be sacrificed by ECFA.568 Another theme was expressed by the CEPD, through its Deputy Minister Hu Chung-ying. He argued that ever since the No Haste policy of 1996, the government had ceded its guiding role in cross-Strait relations to the private sector. The government was less and less able to stop private businesspeople from doing what made sense to them, and turned to reformulate policies that would benefit people of both sides of the Strait.569 The CEPDs goal was not to actively encourage investment in China, but simply to allow normal trade and investment relations so that Taiwanese businesspeople could make their own decisions about the risks and rewards of doing business in China and the opportunities for making further investments in Taiwan. He argued that the Ma administrations decision to liberalize cross-Strait economic policies had actually had a major and positive impact on Taiwans own economy, as evidenced by the 236 applications to reinvest in Taiwan submitted from September 2006 to January 2009, totaling NT $37.3 billion, 89% of which originated in Taiwanese projects in Mainland China. Taiwan had attracted these Taishang to re-invest in Taiwan, especially in R&D and logistics, because Chinas labor costs were no longer that competitive.570 In contrast, when the Lee and Chen administrations restricted semiconductor investments in China, the main consequence was to give room for the emergence of Chinese competitors, such as SMIC and GSMC. Although the SEF technically reported to the MAC, the SEF had an unusually influential role because of the status of its Director Chiang Ping-kun, a senior KMT official who had been a key architect of Taiwans industrial policies
Based on interview with Chao Chien-min, July 2006, before he joined the MAC, and he expressed support for government to loosen restriction on Taiwans cross-Strait economic policies. 568 Chao Chien-min in interview with Jane Rickards in the article, Cover Story: Reviewing the Previous Two Rounds of Taipei-Beijing Talks, May, 2009, http://www.amcham.com.tw/content/view/2725/423/ (Last accessed on Feb 28, 2010). 569 Based on interview with Deputy Minister Hu Chung-ying, April 7, 2009. 570 Based on materials prepared by the CEPD for the author, April 7, 2009.
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for decades. Leading the Chiang-Chen talks, Chiang argued that the No Haste policy was ineffective since it did not actually restrict many cross-Strait investment projects, but merely forced the investments to go through unofficial routes. Normalization of cross-Strait economic relations would enable Taiwan to catch up economically after more than a decade of lagging performance. Chiang acknowledged that about 20% of Taiwanese companies might find they would be worse off after the negotiation of the ECFA, but that should be compared with the 80% of Taiwans economy that would benefit from the deal. The government should be in active dialogue with the private sector in order to identify the potential losers and give them government assistance so that they could adjust.571 Like Hu Chung-ying, Chiang asserted that the government had given up Taiwans first-mover advantage by preventing its semiconductor firms from investing in China during the Lee and Ma administrations. If they had been given the green light to enter China from the start, they would have preempted the emergence of any competition from local Chinese companies and ensured that key technology remained in Taiwan.572 While there were strong efforts to move ECFA forward, many Guided Liberalizers in the administration like Chiang were disappointed that the pace was not faster.573 Many observers outside government agreed that the restrictive policies of the past fifteen years had been ineffective in preventing Taiwanese companies from investing in China. Like those government officials mentioned above, the head of the Epoch Foundation and former partner in the largest commercial law firm in Taiwan, Paul Hsu, expressed his doubt that government policy could alter the natural rhythm of markets. But while reiterating that government regulations had not prevented many small businesses from going to China, Hsu made the opposite argument as well: by removing those restrictions, ECFA should not be expected to open the floodgate and achieve extraordinary results.574 Government policy could guide the private sector, the foundation of Taiwans economy, but the market would still move at its own pace.575 Supporting such arguments made by the private sector, think tanks such as the Cross-Strait Interflow Prospect Foundation were quick to organize literature on ECFA to educate the public. In the new book ECFA: Create Cross-Strait Win-Win Future, the importance of ECFA in leading to more FTAs and the benefits of lifting investment restrictions were argued with substantial data and empirical research. (Ku 2009; Lam and Tang 2009) Although Ma had declared a timetable for permitting the construction of a 12 foundry in China, Taiwans two leading semiconductor companies did not take an active part in the debate during this episode. Affected even by the earliest stages of the GFC, the semiconductor industry had hit a new low in the first half
Interview with Chiang Ping-kun, April 9, 2009; Chiangs views on the role of the government are well explained in his authorized biography by Wang Chun-rui (2003). 572 Ibid. 573 A strong advocate of liberalization, Tsai Horng-ming of the NSC, for example, resigned to protest against the difficulty in pushing ECFA through. See , Commercial Time, August 24, 2009, http://news.chinatimes.com/CMoney/News/News-Pagecontent/0,4993,11050701+122009082400088,00.html (Last accessed on Feb 28, 2010). 574 Based on interview with Paul Hsu, April 2, 2009. Hsu mentions in the interview that even if ECFA is signed, capital control will take time to lift, which will effectively mute the effect of ECFA liberalization, so nothing is sweeping even with ECFA. 575 Ibid. See also P. Hsu (2004; 2008) for his detailed analysis and vision.
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of 2008 with massive layoffs, and Morris Chang of TSMC predicted that its revenue would not recover to the 2008 high of $250 billion until 2012, with growth thereafter limited to only 1.5% per year for five more years.576 As a result of this long-term cyclical downturn, Taiwans leading companies were not pushing for the liberalization of cross-Strait economic policies as they had been in 2001-2002.577 From TSMCs point of view, the goal of economic policy should be to promote Taiwans competitiveness by creating a level playing field for its companies and to help them compete internationally including expansion into new markets. Although not taking an active part in this particular debate in 2008, the semiconductor players in Taiwan continued to believe that they had become less competitive internationally because of government restrictions preventing TSMC and others to move even the obsolete 8 foundries to China. This eight-year delay had enabled large-scale competitors to emerge in China. They attributed those past policies to electoral dynamics, as opposed to sound economic logic. As of 2009-2010, prospects for the industry had substantially improved, but so had competition increased with new entrants to the industry. Morris Changs counterpart at UMC, CEO Stan Hung, had a slightly different perspective, but he reached the same conclusion. He argued that restrictive policies had helped Taiwans market leader, TSMC, to remain in the leading spot in the late 1990s, at the expense of UMC. But these restrictive policies were ultimately counterproductive, both for TSMC and for Taiwan more generally, since the Chinese market for semiconductors was now lost with the construction of SMICs three plants on the Mainland between 2003 and 2006. The governments regulatory role was powerful, both positively and negatively, and could either make or break an industry depending on its content and timing.578 Extensive Liberalization Economic growth is the ultimate priority for supporters of Extensive Liberalization. During the presidential election debate in early 2008, growth was a central issue because Taiwan had been one of the worst performing economies during the 2007-2009 GFC.579 The only solution, Extensive Liberalizers believed, was to achieve a higher level of economic interdependence with China, which in turn called for a more accommodative posture toward Beijing. Describing the worlds aversion towards free markets, The Economist issue of July 18-24, 2009 summarized frustrations that the Extensive Liberalizers in Taiwan would identity with: Too many people equate mistakes made by economists with a failure of economic liberalism. Their logic seems to be that if economists got things wrong, then politicians will do better.580 The free-market paradigm, in short, should be re-emphasized and reasserted even in the context of the financial crisis. Unique among the four tendencies, the Extensive Liberalizers believed that the Mas administration had not liberalized broadly or quickly enough. For example, Robert Tsao, honorary chairman and prominent shareholder of UMC maintained that Taiwanese semiconductor companies should go to China immediately to create value for their shareholders and for Taiwan. The
, Commonwealth Magazine, June 17-30, 2009, pp. 69-70. It was well known that both UMC and TSMC lobbied even the National Securities Bureau during the 2001 debate. 578 Based on interview with Stan Hung, April 3, 2009. 579 Asia: Mirror, mirror on the wall; Taiwan's economy. 580 What went wrong with economics, The Economist, July 16, 2009, p. 9.
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governments restriction indeed, its persecution of UMC had been entirely unreasonable and counterproductive for Taiwan and its people. Speaking not from UMCs perspective but as an advocate of a new political movement, Tsao not only wanted a far more liberal cross-Strait economic policy, but also proposed a referendum on political unification.581 Should the voters reject unification, he proposed, then China would know where Taiwanese people stood, but if the results favored unification, then the Taiwanese government will have a political basis for negotiating with China. Either way, the referendum would empower the government and move cross-Strait dialog further. Most importantly, deeper economic cooperation would be impossible, Tsao argued, without political initiatives.582 AmCham remained an advocate of extensive liberalization, although without the parallel interest in promoting a specific political outcome. Having been extremely critical of the No Haste and Active Management policies, AmCham continued to wield influence in each administration. AmCham was very critical of both the DPP and the KMT because neither party espoused complete liberalization. AmChams 2008 White Paper noted that China has become so central to the global supply chain that failure to engage fully with the Chinese economy is tantamount to self-marginalization.583 It argued that, even without any formal agreement with China, the Taiwan government could push liberalization forward unilaterally in several areas: Besides easing restrictions on Taiwanese investment in China, including elimination of the 40% cap on direct investment and the 0.4% limit on mutual fund investment, the government would send a welcome signal to multinational business by conducting a thorough and objective review of the items currently banned from being imported from China Industries everywhere habitually complain about regulatory constraints, but the frequency and severity of the regulatory hurdles in Taiwan are excessive by any standard.584 Unlike some other supporters of Extreme or Guided Liberalization, however, AmCham made no claims that the relaxation of restrictions on crossStrait economic relations would have a spillover effect on other aspects of Taiwans foreign economic relations. Richard Vuylsteke, who headed AmCham for many years, expressed his doubts that signing the ECFA with Taiwan would cause China to permit other countries to sign FTAs with Taiwan.585 Finally, some of Taiwans media also supported the arguments of the Extreme Liberalizers. Having entered the Taiwan market only in 2003 but enjoying the largest circulation of all the islands newspapers and magazines, Apple Daily, along with its weekly Next Magazine, had the clearest position on economic policies and supported unrestricted free trade. As Chairman Jimmy Lai put it, the Taiwanese people had finally come to embrace uninhibited free trade, because they were secure about their identity and felt confident that they could
Based on interview with Robert Tsao, April 3, 2009. Ibid. 583 AmCham, Taiwan White Paper 2008, p. 6. Available online at: http://www.amcham.com.tw/component/option,com_docman/task,cat_view/gid,163/Itemid,377/ (Last accessed on Feb 28, 2010). 584 Ibid. 585 Based on interview with Richard Vuylsteke, June, 22, 2009.
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choose to be more engaged with China without giving up values such as freedom. To Lai, the twin principles of free trade and democracy could provide a strong foundation for promoting Taiwans development and defending its sovereignty. More specifically, increased economic interdependence would reduce the chances of war, as it would mean China would lose just as much, if not more, than Taiwan in any conflict.586 As one of Lais editorials put it: In todays era with full transparency due to technology, under the global framework of democratic ideals, who would embrace the Devil? Without Taiwans consent, how can China take over Taiwan? Under American protection, China is unlikely to use force over Taiwan. Today, China is actively trying to fit into the global mainstream, why would it risk everything and use force on Taiwan? This would create global economic sanction against China, which would jeopardize CCPs absolute rule by curtailing its economic future. CCP may be authoritarian but it is not stupid.587 Sectoral Case Study: Liberalization of the Finance Industry Until now, Taiwanese banks had been prohibited both from establishing branches and lending in China, and from gaining access to the Chinese market by investing in Chinese banks. Taiwanese financial institutions felt a sense of urgency about entering the Chinese banking market for two reasons. First, in its WTO accession agreement China had committed to allow foreign participation in the renminbi business in three years, which meant the competition to enter one of the largest banking markets in the world would become heated very quickly. Second, Taishang were very much disadvantaged in China without Taiwanese banks since they lacked easy access to credit. This was also one area where Beijing appeared eager to help to upgrade Taiwan to the status of Hong Kong.588 Considering Chinas enormous depth of financial resources, this was clearly an area of liberalization that could bring great benefits to Taiwanese. In the past, some Taiwanese sought to evade these restrictions by indirectly investing in Chinese banks. Some, like the TWSE-listed Pou Chen Group, which controls a HKSE-listed subsidiary Yue Yuen and a controlling stake in an industrial bank in Taiwan, had invested in China using personal overseas capital, at the risk of being reprimanded by Taiwanese regulators. The stealth mode investment was hampered by the controlling shareholders inability to raise capital in private or public markets due to Taiwanese regulation. Pou Chen Groups investment in First Sino Bank, which engaged in renminbi business since 1996 with a special license in Beijing, Shenzhen and Shanghai, incurred the wrath of the Taiwanese regulators and other competitors in the first episode. According to Ed Ku, president of Yue Yuen, operating within the legal parameters set by Taiwanese regulations hampered the growth of its investment in the bank.589 The only other Taiwanese entrant into the China banking market was the Fubon Bank. It had indirectly acquired 19.99% ownership and management
Based on interview with Jimmy Lai, June 23, 2009. Jimmy Lai, , Apple Daily (Taiwan), June 3, 2009, http://tw.nextmedia.com/applenews/article/art_id/31677012/IssueID/20090603 (Last accessed on Feb 28, 2010). 588 : , Commercial Times, March 7, 2009, p. A2. 589 Based on interview with Ed Ku, November 29, 2007.
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rights of Xiamen Bank in June 2008 through its Hong Kong subsidiary, which then invested in Xiamen Bank through preferences granted by the CEPA between Hong Kong and China.590 In 2009, it was widely reported that Fubon Bank had indirectly increased its Xiamen Bank shareholding to 50%.591 As a result of its careful investments and planning, the stock had rallied substantially and continued to be recommended by securities analysts as a potential beneficiary of cross-Strait liberalization in the banking sector.592 Financial MOUs between Beijing and Taipei would give these two Taiwanese-controlled banks a first mover advantage to expand the scope of their business, and allow other Taiwanese banks to finally compete with other global banks already in China for years. Furthermore, it would allow Taiwanese banks with a presence in China to upgrade their offices to branch status on a preferential basis, bypassing the usual onerous requirement that banks conducting renminbi business operate for three years, and be profitable for two consecutive years.593 For banking, securities and insurance companies, this would enlarge the scope of their markets immediately and effectively relax the restrictions on cross-Strait banking relationships even before renminbi capital controls were lifted. As important as its content, the other significance of the MOU was that it would be the first government-to-government cross-Strait agreement that did not rely on the SEF or other nominally non-government organization.594 This was a small step toward mutual recognition, given that all past cross-Strait interactions were theoretically between private citizens or organizations. Much of the negotiation on the MOU was focused on Taiwans desire to enter the banking business in China with more preferential treatment than banks from other countries but without compromising Taiwans sovereignty. Although preferential treatment for Taiwanese financial institutions could only be finalized in a trade agreement like ECFA, an MOU establishing international supervisory cooperation was a prerequisite. Eventually, Taiwan would like China to allow Taiwanese financial institutions to operate in China as Hong Kong financial institutions do, more favorably than other foreign investors.595 To be WTOcompliant, China would only be able to give Taiwanese banks preferential treatment if an ECFA were signed, the Ma administration has insisted.596
Based on interview with Jin-yi Lee, August 28, 2009. 50%, Economic Daily News, July 20,. 2009, page A2. 592 2881 28-40, United Evening News, July 11, 2009, page B7; : ; , United Evening News, July 21, 2009, page B1. 593 See The Impact of the MOU and the ECFA on the Banking Industry, by Deloitte in January 2010 on the implications of the MOU signed in November 2009, accessible at: http://www.deloitte.com/assets/DcomChina/Local%20Assets/Documents/Firmwide/AFF%20thought%20leadership/cn_outlook_Twtho ught%20leadersEN_150110.pdf (Last accessed on Feb 28, 2010). 594 Chen Yi-shan and Chang Hxiang-i, MOU MOU in CommonWealth Magazine, October 2009 issue, accessible at: http://www.cw.com.tw/article/index.jsp?page=3&id=39314 (Last accessed on Feb 28, 2010). 595 See a list of Taiwans wish list compared with current Chinese regulation in: MOU, , Commercial Times, March 31, 2009, p. A4. 596 See ECFAMOU on the ECFA website, http://www.ecfa.org.tw/ (Last accessed on Feb 28, 2010); and see FSC website, Q&A,
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In addition to the promise that Taiwan might be allowed to sign FTAs with other countries, the other great promise of the liberalization of the financial sector concerned the reverse flow of Chinese capital. Many hoped that Chinese capital would boost the liquidity of Taiwans markets and push up the price of assets and securities, as could be seen in the frenzy of investment banks courting Taiwanese banks once the discussion of the financial MOUs started. Given the flow of capital into Hong Kong and Macau since their handovers, Taiwan might benefit in a similar fashion, although without making any political concessions. The Taiwanese government, concerned about public reaction, had been conducting the negotiations cautiously. Having preferred treatment like Hong Kong might imply accepting some kind of arrangement like CEPA, which would generate public backlash. Therefore, the FSC chairman repeated the message that weighted equality must be considered in the cross-Strait regulatory mechanisms. The concept was to ensure that any Taiwanese restrictions towards Chinese banks operating in Taiwan would match or be stricter than restrictions imposed by Chinese regulations towards Taiwanese financial institutions in China, and that there would be equal latitude for regulators across the Strait. Furthermore, since Chinese banks are much larger than Taiwanese banks, considerations must be given to imposing some restriction on Chinese investments in Taiwans financial sector, even though the Taiwanese banking and insurance sectors were already fully open to other foreign investors.597 Otherwise, financial liberalization would not be an equal trade: ECFA, tariff reduction, and normalization of trade and communication, are not meaningful without an MOU on financial regulation. However, in order to push through an MOU, policies must be adjusted so that there is weighted equality, above and beyond equal treatment, which the Taiwanese public will demand especially during election.598 A particularly important issue was how Chinese banks would use information that was obtained from Taiwanese banks in the course of regulation. This became more sensitive as Taiwanese banks set up branch offices in China and Chinese regulatory authorities were able to supervise and manage Taiwanese banks. Three MOUs were finally signed on November 16, 2009, with expectations of wide-ranging benefits. The seven Taiwanese banks that had representative offices in China became eligible to upgrade those offices to branch status. For example, the Bank of Taiwan had 35 branches in China before 1949, and as now part of the state-owned Taiwan Industrial Holding Company would certainly like to return to China.599 For insurance companies, Taiwanese should have an advantage given the cultural and language advantage in retail marketing insurance products but had been held back by regulations on both sides, according to Henry Chen, chairman of Mass Mutual Mercuries Life, a Taiwan-controlled

http://www.fscey.gov.tw/Layout/main_ch/News_NewsContent.aspx?NewsID=38417&LanguageT ype=1&path=1737 (Last accessed on Feb 28, 2010). 597 Standard Chartered, for example, acquired control of Hsinchu International Bank in 2006. 598 Based on interview with Sean Chen at FSC, April 3, 2009. 599 MOU , United Daily News, July 24, 2009, http://udn.com/NEWS/FINANCE/FIN4/5036881.shtml (Last accessed on Feb 28, 2010).

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insurance joint venture with the Mass Mutual Group of the U.S.600 Existing regulations in China were that the insurance company must have thirty years of history in its home country, and three or more years of operation in China with two years of profitability with varying capital requirements, before setting up branches in China and conducting renminbi businesses.601 These requirements were difficult to meet for any Taiwanese insurance groups, and therefore, the industry would have difficulty entering the China market even with these signed MOUs, unless an agreement such as ECFA makes an exception for Taiwanese insurers. Finally, as noted above, an MOU would permit each sides QDIIs to conduct portfolio investing in the other sides financial markets. Taishang were the immediate beneficiary from the financial MOUs and a possible ECFA. As a result of the existing restrictions on cross-Strait financial transactions, Taishang previously had an obvious disadvantage in that they were not able to borrow widely from either Taiwanese or Chinese banks and had to rely on credit from foreign banks already in China. The financial MOUs allowed Taiwanese businesses to have access to financing in China through their Taiwanese relationship banks.602 This gave give Taishang additional financing options. However, there may be unrealistic expectations given that the Chinese financial market is already very competitive, and Taiwanese financial institutions may not reap the benefit expected in terms of immediate profitability. Furthermore, as the FSC chairman noted, the public welcomed the liberalization of financial institutions, which can increase liquidity and boost the stock market, but was also apprehensive about unequal liberalization.603 Given existing Chinese capital controls and regulation of its banking industry, Taiwanese banks may find that the MOUs allowed them to start expanding into China but profitability could prove elusive. The public had been questioning President Ma as to the benefits Taiwan sees in negotiating with China, and it appeared that MOUs on the liberalization of the finance industry would prove to the Taiwanese public that Mas strategy could get concessions for Taiwan. But concerns about Chinese banks aggressively acquiring Taiwanese banks were prevalent. For any political leader to openly push for such an initiative could be politically problematic, and might be labeled during an election campaign as being overly accommodating toward China.604 In addition to being overwhelmed by Chinas financial prowess in banking, securities and real estate, volatility produced by a heated stock market and rising real estate values could worsen Taiwans inequality.605
Based on interview with Henry Chen, July 12, 2009. Now the Company has a joint venture with Mass Mutual which has a presence in China, Mercuries Life is not contemplating entering China separately, but sees potential for big structural change in the market with the MOU signed. 601 MOU, , Commercial Times, March 31, 2009, page A4. 602 Enoch Fung and Vincent Chang, Taiwan Views, Goldman Sachs Global Economics, Commodities and Strategy Research, April 30, 2009. 603 Based on interview with Sean Chen, April 3, 2009. 604 Ibid. 605 Refer to Deloittes report published in January 2010 on the implications of the MOU signed in November 2009, The Impact of the MOU and the ECFA on the Banking Industry, accessible at: http://www.deloitte.com/assets/DcomChina/Local%20Assets/Documents/Firmwide/AFF%20thought%20leadership/cn_outlook_Twtho ught%20leadersEN_150110.pdf (Last accessed on Feb 28, 2010).
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Conclusion Compared with the last three episodes of changes in Taiwans cross-Strait economic policy, the changes proposed in 2008-2009 initially appeared to be the most dramatic. Previous episodes had focused on tightening or loosening the regulations governing Taiwans investments in China. Now, the new president, Ma Ying-jeou, was willing to open regular cross-Strait airline flights, negotiate bilateral financial MOUs, and propose an ECFA that would effectively normalize cross-Strait economic relations. It appeared that the increased level of cross-Strait social and economic interaction was finally producing the liberalization of Mainland China economic policies that many had predicted for so long. The most important cause for this change of policy was the GFC and its devastating impact on the Taiwanese economy. But changes in Chinas policy toward Taiwan also played a role. There were subtle changes in Beijings approach that indicated increasing acceptance of the status quo on Taiwan, rather than a hard push towards unification. (Clark 2008) The threat from China was less acute than it was in previous periods, which had been characterized by missile tests, anti-secession legislation, and extreme rhetoric on both sides. (Hickey 2008) The 2008 presidential election campaign suggested the consolidation of the new sense of national identity that had begun to crystallize in the mid 2000s. What was earlier portrayed as a dual identity both Taiwanese and Chinese had now evolved into a single identity a New Taiwanese, defined less in terms of ethnic background and more in terms of a commitment to the interests of the people of Taiwan and to the islands new democratic institutions. The new sense of common identity among the Taiwanese was instrumental in toning down the discussions of sovereignty while facilitating more sophisticated discussions of economic policy. (deLisle 2008, 375; Clark 2008, 81) Faced with the more accommodative attitude from China, Taiwanese also began to focus more on promoting their economic interests, and less on establishing their sense of identity. Mas liberalization policies invigorated the public debate on the costs and benefits of increasing economic interdependence with China. Each of the four opinion groups became more distinct. Increasingly in the minority, the Extensive Restrictionists and the Extensive Liberalizers continued to envision political outcomes above and beyond economic interests. Guided Developmentalists and Guided Liberalizers appeared focused on material interests, placing importance on different economic interests in their calculation of the benefits of economic integration. Guided Developmentalists gathered support from advocates of economic equity, economic security and sustainable long-term growth for the Taiwanese economy. Guided Liberalizers argued that the boat rises with the water and supported mainly laissez-faire but occasionally interventionist policies that would promote economic growth. There was less concern about the consequences of interdependence with China for Taiwans national identity, and few in the middle opinion groups assumed that trade with China would mean a decreased sense of Taiwanese identity. This fourth episode therefore confirms Hypothesis Two, that the consolidation of national identity has moved the debate over economic policies towards the center, even though a few voices with political agendas remained on the extremes. Most political leaders stressed the importance of putting Taiwan first and placing priority on achieving benefits for the Taiwanese people. While

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it was once expected that the government would pursue a long-term vision of Chinas relationship with the Mainland, as well as aspirations for economic development, it was now de rigueur to put forward economic policies with no political overtones. At the same time, this episode also supports Hypothesis Three, which holds that a consensus on national identity leads to the narrowing of the spectrum of economic policy options, but does not produce a policy consensus. In fact, the divide between supporters of Guided Development and Guided Liberalization was more distinct and clearer than this episode than in any previous ones. While polls showed a high level of support for liberalization, there were different views about how much to regulate the flow of goods, capital, and people across the Taiwan Strait. Mas proposals for ECFA may have gone farther than the majority of the public was prepared to support. In addition, Chinas strategy of reaching out only to the KMT and trying to marginalize the DPP may have paradoxically weakened Mas position by antagonizing many Taiwanese who still belonged to the pangreen coalition. As a result, what originally appeared as a bold step toward the fundamental liberalization of cross-Strait economic policies may in the end produce far more modest results, as large segments of the public seek to moderate the specific elements in Mas grand plan.

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Chapter Eight Conclusion

This study has examined the puzzle of a small state that increasingly relies economically on one partner, while simultaneously adopting economic policies toward that partner that alternate between restriction and liberalization every few years. Taiwan has developed in such a way that its economy is completely tied to China. And yet, its cross-Strait economic policies have undergone significant change in direction four times, with each episode accompanied by a public policy debate as lively as the last. In this era of increasing globalization and economic integration, the case of Taiwan appears an anomaly, especially considering Taiwans overall openness to the rest of the world, the high complementarity of the Taiwanese and Chinese economies, and Chinas favorable policies toward Taiwanese businesses. In this study, we examined four specific instances of important changes in Taiwans cross-Strait economic policies from 1994 to 2009. In each case, we began by examining the global economic environment, the condition of the Taiwanese economy, Taiwans domestic political dynamics, and Chinese and American policies toward Taiwan. Each of these episodes shows that these intervening structural variables can create threats and opportunities at a specific time and contribute to the re-prioritization or redefinition of Taiwans national interests, thereby explaining some of the variation between the episodes. They do not entirely, however, explain the lasting and vigorous nature of the debate and the varying content of Taiwans cross-Strait economic policies, as the prevailing theoretical literature would suggest that the increasing economic interdependence between Taiwan and China would lead to the forecast that Taiwan would consistently liberalize its economic policies over time. The answer to the puzzle lies in understanding a key contextual factor (the emergence and consolidation of Taiwanese national identity) as well as several independent variables (Taiwans most important national economic interests, including growth, stability, equity and security). As a small newly democratic polity, Taiwan has witnessed a surge in public participation in developing its policies towards China. Like other small economies, it has had to confront the many issues presented by global economic forces outside its control, including both opportunities for growth and the challenges of market instability and socioeconomic inequality. But much more than any other similar case, it has also had to confront those forces under the threat of a militarily hostile neighbor on which it was dependent economically. This dynamic led to a feeling of resistance and powerlessness that has permeated the public discussions of Taiwans cross-Strait economic policies. The tension of managing the contradiction between the practical imperative to work with China and the desire to be independent of China was closely linked to an ambivalent sense of national identity in the earlier periods, when the discussion focused less on economic than on political considerations. Initially, those who shared the same definition of national identity, whether it was Chinese or Taiwanese, had similar views on cross-Strait economic policies. A high level of contestation on national identity forced most people to choose between two extreme economic policies: the liberalization of economic relations

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with the Mainland or the tightening of controls on trade and investment with China. In the later two episodes, however, support for extreme definitions of national identity, especially in terms of a preferred future relationship with the Mainland, dwindled, as did the preference for extreme economic policy options. There was an increasing convergence on a definition of national identity that valued being a resident of Taiwan, upholding the values of freedom and democracy. As that consensus on a new national identity was forged, the range of views on Taiwans cross-Strait economic policies narrowed and moved towards the center. But despite the growing consensus on national identity, the debate over cross-Strait economic relations has still raged on. The debate has no longer focused on national identity, but rather on the best balance among the competing goals of growth, stability, equity and security. An agreement on the most appropriate way to balance these objectives seems elusive, but the debate has come to revolve around a narrower set of more moderate policy options. In addition to providing an overview of the empirical findings of this study, this conclusion will draw the implications of the study and make suggestions for further research. This study has implications not only for Taiwan studies, but also for cross-Strait relations and the discipline of IPE. Moreover, since there are natural limitations to a study of this kind, further research should be conducted to enhance our understanding of this puzzle. Findings of Study In Chapter Three, Figure 3-1 illustrated the relationship among the definition of national identity, the identification of economic interests, changes in the domestic and international environments, the aggregation of interests into competing tendencies, and the formulation of foreign economic policy. A variant of that figure is now shown in Figure 8-1 as Taiwans Identity-Interest-Policy Inverted Pyramid as Applied to Cross-Strait Economic Policies, with more specific information about Taiwan included, as a way of summarizing the content of this thesis. The Evolution of National Identity By 2006, when Chen Shui-bian had become a lame duck and the campaign leading to the presidential elections of 2008 had begun, the debate over Taiwans national identity had been largely resolved. A consensus had formed around three points. First, the people of Taiwan are new Taiwanese, whose self-identification is that of residents of the same society, albeit from slightly different ethnic backgrounds, who share common political values. Second, Taiwan is an autonomous sovereign state, not part of the PRC. And third, there was a common understanding not to pursue either unification or de jure independence, but rather to preserve the status quo, defined as saying that Taiwan is already a sovereign entity whose ultimate fate will be determined only later, in the indefinite future. The distribution of voters FNP converged in the center of the spectrum, showing a bell-curve support for the status quo. (Hsieh 2004, 489; Hsieh 2008, 55-56) As that three-part consensus took shape, the old guards in Taiwans leading political parties who had different and more extreme views about Taiwans national identity were either pushed out or retired. Both deep-blue advocates who considered themselves to be Chinese and who espoused accelerated unification, and deep-green activists who defined their Taiwanese identity in terms of their

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ethnic background and who aggressively pushed for de jure independence, lost credibility among mainstream groups. Although this was a period of intense economic interaction between Taiwan and China, it did not produce a greater sense of Chinese identity. Nor did it produce an inclination to resolve the current political impasse. Instead, it led most Taiwanese to opt for the status quo, rather than displaying a strong preference for either unification or de jure independence. Economic Interests and the Four Tendencies This new consensus on national identity has enabled Taiwanese to debate their economic policy toward China in more purely economic terms, and so far, in more pragmatic and less extreme terms as well. The key issue became how to prioritize Taiwans economic interests, including growth, stability, equity and security as a sovereign entity, and then how to advance them. The debate focused on four opinion clusters, which assigned different priorities to these economic interests and proposed different degrees of liberalization or restriction of Taiwans economic policies toward the Mainland. The tendencies attracted varying levels of support across the four episodes.

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Figure 8-1: Taiwans Identity-Interest-Policy Pyramid as Applied to Cross-Strait Economic Policies

Contextual Variable: Deni*on of Na*onal Iden*ty

Content Contesta*on

Independent Variable: Iden*ca*on of Economic Interests

Growth Stability Equity Economic and Military Security

Intervening Variable: Evolving Domes*c and Interna*onal Environment Rela6ve Inuence of Compe6ng Policy Tendencies

State of Global Economy PRC Policies U.S. Policies State of Taiwan's Poli*cal Economy

Extensive Restric*on Guided Development Guided Liberaliza*on Extensive Liberaliza*on

Dependent Variable: Formula*on of Taiwan's Cross- Strait Economic Policy

Transporta*on and Communica*on Policy Trade Policy Foreign Investment Policy Capital and Currency Controls Immigra*on Policy

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At first, the supporters of Extensive Restriction displayed a strong sense of Taiwanese identity which, in the past, they had defined in ethnic terms as benshengren as opposed to waishengren. They saw independence as their ultimate goal, and they also believed that economic isolation from China was essential to preventing Taiwan from being absorbed into China. To advocates of de jure independence, restrictive economic policies were an important means to preserve both Taiwans identity and its equitable development, even though they recognized that overall economic growth required somewhat closer economic ties with China. Military and economic security remained paramount interests for this group throughout the four episodes. However, as inequality, wage stagnation and job insecurity increased along with economic liberalization, protectionism was also widely supported because of its alleged social and economic benefits. Other advocates of a separate Taiwanese identity supported Guided Development. They realized that economic isolation from China to the degree proposed by the Extensive Restrictionists was not a practical solution, and they therefore supported carefully limited trade and investment with China as a way of maximizing economic growth without risking Taiwans security. They predicted that excessively restrictive policies towards China would not redress social problems, but would create more inefficiency and sluggish growth. They were correct: as Taiwan adopted protectionist policies, its economy became less competitive, insecurity about identity increased, and this created even more restrictive economic policies toward China. The proponents of this tendency supported effective government policies they regarded as necessary to balance growth with the competing demands of stability, equity and security. On the other side of the political spectrum was the tendency we have labeled Extensive Liberalization. At first, those who still saw Taiwan and its residents as Chinese and believed in the ultimate goal of unification saw the creation of a more integrated "Greater Chinese" economy as a way of promoting that objective. They were willing to consider not only liberalization but also more thoroughgoing economic integration as a step in that direction. In the first episodes, the political inclinations of the supporters of this tendency made even small steps toward liberalization alarming to advocates of independence. Gradually, as supporters of immediate unification fell in number, the nature of this tendency also changed, such that they no longer justified their position on Taiwans cross-Strait economic policies in political terms. Instead, they argued that thoroughgoing liberalization even economic integration could be justified by the imperative of growth. In so doing, they prioritized growth over all other concerns, except possibly security. However, not all supporters of liberalization thought this way. Others believed that, by promoting greater economic growth, liberalization would bolster Taiwans sovereignty, international position, and increase its economic competitiveness, although many also thought that a more competitive economy should adopt effective social welfare programs and promote broadly based job creation in order to manage the grievances of those who would suffer from closer economic ties with China. They also expected that liberalization would lead to Taiwans gaining greater leverage and security vis--vis China and greater autonomy in the international political economy. The supporters of Guided Liberalization argued for supporting both liberalization and sovereignty and for instituting remedies that would be necessary to address these potential problems.

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They valued growth more than any other interest, but they also understood the value of maintaining stability, equity and security. The two extreme opinion clusters in this debate, Extensive Liberalization and Extensive Restriction, have tended to place a high priority on a small number of national interests. Extensive Liberalization has focused above all on maximizing economic growth by promoting overall efficiency, while Extensive Restriction has been associated mainly with advancing economic and military security. But a growing proportion of the public has sought a middle-of-the road policy that balances all the interests: growth, stability, security and equity. So the spectrum of opinion on economic policy has narrowed, along with the spectrum of opinion about identity. The debate over the prioritization of interests and on the best tactics for promoting them, continues to be passionate, but the options under active consideration fall within a more narrow range. Still, the distribution of opinion on identity and on policy has not taken the form of a perfectly U-shaped bell curve, but rather is skewed toward an autonomous identity and toward moderately restrictive policies on cross-Strait relations. At present, the debate is almost entirely between the supporters of Guided Development and supporters of Guided Liberalization, with their more nuanced approaches to Taiwans cross-Strait economic policies. On balance, however, Guided Development generally enjoys the upper hand. Figure 8-2 summarizes the evolution of the relationship among identity, interests, and economic policy over the four episodes and fifteen years covered in this study. It shows that the priority assigned to specific economic interests has changed frequently. On that basis, economic policy has changed as well, in a cyclical fashion between liberalization and restriction. In contrast, the discussion of identity has evolved in a more linear fashion, from a polarized debate between Chinese and Taiwanese identities, each defined on the basis of ethnic background, to a consensus on a new Taiwanese identity based on common place of residence and shared political values.

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Figure 8-2: Annotated Identity-Interest-Policy Timeline, 1994-2009

1996 NDC Fierce identity debate (CV): "Chinese" vs. "Taiwanese" Key interest: security (IV) 2001 EDAC Identity debate escalates (CV): "Taiwanese" vs. "Chinese" Key Interest: growth (IV) 2006 CSTED Identity reaches consensus (CV): "Both Taiwanese and Chinese" Key interests: equity, security, growth (IV) Anti-Secession Law and Domestic Political Scandal (Key ITVs) Predominant Tendency: Guided Development Active Management Policy (DV): tighter review of investments, and stricter enforcement of restrictions 2009 ECFA Campaign Consolidation of a common identity (CV): "New Taiwanese" Key interests: growth, stability (IV) Global Financial Crisis (Key ITV) Predominant Tendencies: From Extensive Liberalization to Guided Liberalization The ECFA Campaign (DV): Three Links, Financial MOUs and ECFA Proposal

1995-6 Missile Crisis (Key ITV) Predominant Tendency: Extensive Restriction No Haste Policy (DV): review of investments in China over $50 million and creation of prohibited categories

Global Economic Downturn (Key ITV) Predominant Tendencies: From Extensive Liberalization to Guided Liberalization Active Opening Policy (DV): relaxation of restrictions on investments in China and creation of 40% NAV rule

CV Contextual Variable (Definition of National Identity) IV Independent Variable (Identification of Interests) ITV Intervening Variable (Domestic and International Environment) DV Dependent Variable (Cross-Strait Economic Policy)

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Policy Outcomes and the Four Episodes A summary of each of the episodes highlights the differences between them in terms of our contextual, intervening and independent variables, and how these variables in turn explain the dramatic changes in policy, the dependent variable. Security considerations were paramount in the first episode (No Haste). The missile crisis of 1995-96 set the stage by swaying Taiwanese public opinion for the 1996 presidential election. The KMT still had control of the government, but the DPP still largely committed to independence had begun to exert influence over public policy with increasing success in legislative and local elections and with increasing public support. Lee Teng-hui stepped up discussions of national identity by talking about a New Taiwanese consciousness throughout his second term. His Go South policy to divert investments away from China was followed by the No Haste policy, which outright forbade certain investments in China. Lee convened the NDC in 1996 to build support for his argument in keeping with the position of the Extensive Restrictionists that it was necessary to safeguard Taiwans security by restricting investments in China. The sectoral case study on investment in power plants shows how successful the government was in imposing restrictions on companies wanting to expand into China. President Lees personal charisma helped generate public support, and his control over the KMT bureaucracy facilitated the development of effective regulatory mechanisms that could exert control over the Taishang. Several factors contributed to the choice of relatively extreme protectionist policies during this first episode. First, the Taiwanese were grappling with national identity formally for the first time in their history, at a time when it was Chinas strategy to isolate Taiwan internationally. The missile crisis weighed heavily on peoples minds, whether they supported independence or unification. Being patriotic was widely interpreted as implying support for either unification or independence, and for either heavy restriction or wide-scale liberalization in Taiwans cross-Strait economic policies. Given the circumstances, the interests of those who favored protectionism and those who were nationalistic converged to form a formidable political force. Second, the economic reality was such that many thought Taiwan could afford to keep China at bay. For many industries and companies, economic integration was only starting and compliance with government regulation did not exact as high as cost as it would later. Protectionism, seen as a necessary way to promote a separate Taiwanese identity, was regarded as affordable economically. Anxiety over growth replaced concern over security when the DPP took over the presidency for the first time in 2000, leading to the second episode (Active Opening, Effective Management). Hit by the global economic slump and then by the economic consequences of the subsequent 9/11 terrorist attack, the DPP felt immense pressure to prove that it could deliver economic growth, especially as protests widened against Lees No Haste policies. The initial years of the Chen Shui-bian administration were difficult, due to the struggle with the KMT as demonstrated by the issue of the fourth nuclear power plant. Furthermore, the latitude of the presidents executive power had declined substantially with the rise of newly empowered societal forces such as environmental and labor groups. Because of his relatively weak base of support, Chen wanted to court centrist voters instead of pandering solely to the extreme 228

advocates of independence, and his administration promised economic liberalization from the start. The liberalization policies, which were rolled out very quickly through the EDAC process, alarmed not only the pro-independence fundamentalists but also many centrists to whom President Chen had expected to appeal. Due to his inadequate public consultation and his misjudgment of the distribution of public opinion, Chens decision on relaxation generated much dissent, and the formulation of the specific measures for implementing the decision was dragged out for months. Beijing and Washington were not influential in shaping Chens decision, but mistrust between Taiwan and the two superpowers began to grow when China failed to respond positively to Chens overtures and Taiwan began to chafe against its increasing international isolation. The arguments from the proponents of Extensive Liberalization and Guided Liberalization persuaded the government to focus on growth by lifting restrictions on cross-Strait economic relations, but they were not as successful in convincing the broader public that growth was the only national interest worth promoting. The sectoral case study on the semiconductor industry revealed the strength of this public opposition and how it forced the government to adjust its policies from sweeping liberalization to gradual and limited liberalization. The controversies over semiconductor policy would continue to dog Chens administration for the next eight years. The debate was about balancing economic growth, security and equity. Managers and professionals in the semiconductor industry saw the previous restrictions as having given room for new competitors to rise in China. Conversely, members of the broader public believed that the semiconductor industry symbolized their countrys economic prowess and technological leadership, and were therefore favorably disposed to protectionist measures. Moreover, those who opposed liberalization became aware of how poorly coordinated and planned the governments policy changes had been, and became better organized to oppose every small step of relaxation the government began proposing. This second episode differed from the first episode in that the discourse over Taiwans cross-Strait economic policies focused on a wider range of national interests, and the content of national identity continued to be further defined. During the adoption of the No Haste policy, the debate had centered on security concerns. In 2001, in contrast, growth was the paramount consideration but equity also began to become more important. There was no easy agreement on how the government could simultaneously generate growth and promote social equity, while still managing the security risks from integrating with China. Having voted DPP into power, the Taiwanese people started discussing how to promote both a strong national identity and a robust economy. Although proponents of the two extreme tendencies still forged a strong linkage between their definitions of national identity and their preferences over Taiwans crossStrait economic policies, there appeared to be more support for the centrist position of formulating a balanced set of policies to support growth, security, and equity. Although the government had intended to heed the Extensive Liberalizers advice and lift most restrictions on investment so as to promote economic growth, advocates of the two moderate tendencies, concerned about economic security and equity, succeeded in preventing the implementation of what they considered to be extreme and unbalanced measures.

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The debate took up the issue of balancing the multiple interests of growth, equity, stability and security again in the third episode (Active Management, Effective Opening) when Chen Shui-bian reversed course and reintroduced investment restrictions. Having won the 2004 presidency by only a razor-thin margin, and with the DPP having lost ground in several subsequent local elections, Chen as both president and head of the DPP was losing political support. Unable to reverse the economic downslide amidst a growing national deficit, President Chen was frustrated and angered by Chinas refusal to engage in dialogue with his government despite his repeated efforts. Instead, China continued its strategy of ostracizing Taiwan internationally, competing with Taiwan for diplomatic allies, obstructing Taiwans participation in relevant international organizations during the 2003 SARS epidemic, and pushing through the 2005 Anti-Secession Law. Relationships with the U.S. also deteriorated, as Taiwan continued to disappoint the U.S. by not completing the purchases of the advanced weapons systems that the Bush administration had offered. The KMT-controlled legislature blocked the purchases by saying that it was only Chen Shui-bians provocative policies toward China that had made them necessary in the first place. To make things worse, Chen and his family became embroiled in corruption scandals in 2006. After the massive Crimson protests that demanded Chens resignation, Chen sought to appeal to extremist factions in the pan-green coalition by proposing the re-imposition of restrictions on Taiwanese investments in China. The CSTED was attended by more than a thousand participants, but it represented less of a success for the president than previous conferences in that it did not agree to recommend any formal pieces of legislation to the government. As shown in the sequel to the semiconductor sectoral case study, Chen then delayed approving TSMCs investments in China and penalized UMC and SMIC for circumventing the investment regulations in order to pacify the opposition. But his reversal of course angered those who favored some degree of liberalization of Taiwans cross-Strait economic policies, and yet was not enough to regain the support of those within the DPP who were dismayed by his personal scandals. The Guided Development arguments won over a wide following during this episode because center left attitudes about Taiwans relationship with China, defined as maintaining the status quo unless independence could be declared without provoking military retaliation from China, had become the mainstream view. The predominant national identity was now Taiwanese or Taiwanese and Chinese with little to no support for either an immediate declaration of de jure independence or the active pursuit of unification. Many interest groups, particularly those representing the business community, tried to sway the public towards their preferred policies of lifting restrictions on investments, forging the Three Links across the Taiwan Strait, and signing a financial MOU, even though many of these would be impossible to achieve given Chinas unwillingness to engage in dialogue with the Taiwan government before seeing the outcome of the presidential election in 2008. More than a million Taishang lived and worked in China, exerting more influence than before; compared with two decades ago, not only were business owners investing in China, but an increasing number of families had members living and working in China. Thus the absence of the Three Links directly inconvenienced millions of people who traveled regularly between Taiwan and the Mainland. The issues raised in

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Taiwans cross-Strait economic policy debate now represented a personal matter for most people, and no longer merely a theoretical argument. The debate in the fourth episode (Mutual Liberalization) reflected a continuation of the publics desire to balance all four interests in the liberalization of Taiwans cross-Strait economic policies. After his inauguration as president in May 2008, Ma Ying-jeou began to adopt the program of extensive liberalization he had promised during his election campaign, taking advantage of the widespread popular dissatisfaction with Chen Shui-bians restrictive Active Management policy. Ma enjoyed a united government, with the KMT in full control of both the legislative and executive branches, and with the extreme political parties eliminated from the Legislative Yuan because of electoral system reform. Three rounds of cross-Strait dialogues, resumed for the first time since 1993, were each followed by a set of liberalizing policies, ten new measures in all, nine of which took the form of formal bilateral agreements including the establishment of the Three Links. As of this writing, ECFA, an agreement providing for the partial normalization of cross-Strait trade, is expected to be signed in the near future, after the signing of financial MOUs that liberalized mutual access for the two sides banks, securities and insurance companies. Furthermore, one hundred sectors of the Taiwanese economy were opened to PRC capital investment, buoying prospects of increasing liquidity in Taiwanese market. An underlying driver in this episode was the combination of a conciliatory Chinese government working closely with an accommodative Taiwanese government. This has allowed the speedy resolution of several simple economic issues what are widely called low-hanging fruit without moving on to more sensitive political issues. Although Ma had planned to relax investment restrictions by raising the upper limit imposed by the 40% NAV rule, the public reacted very negatively because the pace and breadth of the liberalization went beyond what the mainstream of public opinion was prepared to support. The situation was exacerbated by the way Mas administration seemed to ignore trade problems related to China, like the melamine milk scandal, when demands for compensation were ignored and the restriction of further imports was delayed. There was a general perception that lifting restrictions on cross-Strait economic relations was merely intended to jumpstart Taiwans slumping economy, and that the government did not have any longer-term economic plans. Even worse, the liberalization, coming at a time of global economic tailspin, did not lead to an improvement in of the fundamentals of Taiwans economy. The backlash was so strong that further efforts to liberalize Taiwans cross Strait economic policies, as in the semiconductor industry, were put on hold. Hosting more than 18 conferences within April to June 2009, many open to the public and not reserved just for elites like in previous episodes, the government tried to quell the public protests. But the ever-dynamic debate over Taiwans economic relations with China raged on. It appears that everyone had accepted the importance of cross-Strait economic relations and sought to strike a balance among growth, equity, freedom and stability. But even though this generated a narrower set of policy options than in the past, the debate was just as charged as before. The sectoral case study on the financial sector shows the high expectations for growth that the public and businesses believed would come from

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signing financial MOUs and gaining preferential treatment through ECFA with China. The current ECFA initiative serves two main purposes for the Ma Administration: to promote further trade and investment ties with China, and to put Taiwan in a better position to sign the FTAs with other countries that China had previously obstructed. However, as in the 2001 episode, a lack of consultation made the public very wary of the governments efforts. The amount of debate generated by the ECFA proposal was many times more controversial than in previous episodes. But since a consensus on national identity had already been forged, there was a low correlation between national identity and economic policy preference during this episode. The economic policy options being discussed were not radical; in fact, most were considered logistically uncomplicated like the establishment of the Three Links, and had been planned for years. Conversely, more extreme options had been removed from consideration: no one advocated heavy protectionism, and talk of a common market was also shelved. However, there was little consensus on the specific policies, and the difficulties encountered in trying to adopt and implement these policies without sufficient public support had a negative impact on market stability. In the initial episodes, strong views on Taiwans identity meant that the discussion focused less on economic than on political considerations. Moreover, as noted above, those who shared a common identity differed as to the most appropriate economic approaches to achieve their common political objectives. The range of views on cross-Strait economic policy narrowed over time as the focus of political discourse moved away from an emotionally charged debate on the effect of cross-Strait economic policies on Taiwans identity to a more rational discussion of how alternative economic policies would promote Taiwans various economic interests. The association of national identity with either unification or independence had previously led to the advocacy of extreme economic policies, including both isolation and integration. Now, as the support for extreme versions of national identity and radical economic policies declined, the debate became more pragmatic and more focused on achieving specific economic objectives, yet without producing agreement on Taiwans cross-Strait economic policies. The Domestic and International Environment Intervening variables were important throughout the episodes, from Beijings missile attack in episode one, to a global economic downturn and rising unemployment in Taiwan in episode two, to Chinas adoption of the AntiSecession Law in episode three, to the GFC in episode four. In comparison with the other three intervening variables, Washingtons policy preferences have not weighed heavily in the formulation of Taiwans cross-Strait economic policies, except by expressing American objections to provocative steps by Taiwan and a general preference for the expansion of economic ties across the Strait. The U.S. continues to reinforce Taiwanese optimism that its new definition of national identity based on democratic values will be respected, but it simultaneously has expressed its opposition to any sign of movement toward de jure independence. (Hachigian and Sutphen 2008, 147; Tucker 2009, 250) China, on the other hand, has seen its influence rise relative to the U.S. although the impact does not always conform with Beijings intentions. In episode one, Beijings missile attack led to increased support for President Lees pro232

independence stance and candidacy. And in episode three, the Anti-Secession Law created a grass-root movement that even the deep-blue felt obliged to participate in. Many believe that the signing of the financial MOUs and the discussion of ECFA are all signs that China has turned the corner and is exerting influence through more positive measures, especially with an eager and compliant KMT on the other side of the table. How China wields its power, both hard and soft in Taiwans case, is to be seen. Externally, the global economic environment is the most obvious intervening variable. Taiwan is vulnerable to economic shocks and the Taiwanese, especially in a downturn, are always comparing themselves to countries of similar size and export orientation such as Korea. Pressures from growing unemployment, lower real wages and increasing inflation create political pressure on elected officials for changes in policy, although the direction of change can remain the subject of lively debate. Finally, Taiwans domestic political economy sets the foundation for any debate over cross-Strait economy policy. Leaders with large electoral mandates feel empowered to adopt bold policies. Those with a shrinking political base seek policies that will increase their political support. This has been especially true of Taiwanese presidents in their negotiation with China. As a Wall Street analyst writes, Taiwans domestic political noise presents the main potential hindrance that would complicate the negotiations on cross-Strait economic policies This is against the backdrop of pressure on the [Ma] governments popularity, given its setbacks in the recent local elections.606 Review of the Hypotheses The four episodes highlight greater consensus on a national identity of being separate from China, and an increasingly rational debate on economic policy toward the Mainland. Figure 8-3 summarizes the debates over national identity and cross-Strait economic policy underlying each episode in this study.

Enoch Fung, Asia Economics Flash, Goldman Sachs Global Economics, Commodities and Strategy Research, January 15, 2010, p. 4.

606

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Figure 8-3: Summary of Debates over National Identity and Cross-Strait Economy Policy, 1996-2009

In the earlier episodes, national identity and economic policy preference were linked because national identity was highly contested. The findings confirm Hypothesis One: A high level of contestation on national identity leads to a perceived choice among extreme economic policies. All issues became consummatory, and achieving a compromise was not considered possible. Extreme societal and political groups supported extreme policies and mobilized the public around their goals. Many people were pragmatists who wanted a balance, but they did not gain widespread support. In the first and second episodes, extreme policies dominated the debate, whether it was the No Haste policy or a total ban on semiconductor investment in China in 1996, or the Active Opening policy or the enthusiasm for economic integration into a Chinese Common Market in 2001. The missile crisis pushed national identity further in the direction of Taiwanization, justifying tight restrictions on cross-Strait economic relations. The subsequent 2002 debate over semiconductor policy saw the labeling of anyone who supported liberalization as a traitor to Taiwan. Conversely, when economic problems surfaced in 2001, full-scale opening to China became viewed as a panacea for Chen Shui-bian in 234

2001. In these earlier years, in other words, extreme economic policies more easily found support from those engaged in the intense debate over national identity. Changes in Taiwans cross-Strait economic policies during the last fifteen years also support Hypothesis Two: as a consensus on national identity is forged, the range of views of economic policies narrows and moves towards the center. Consider first the evidence that a consensus on Taiwans national identity has been created. Polls conducted in December 2008 and December 2009 consistently showed that over 91% of the people surveyed believed they were either Taiwanese or Both Taiwanese and Chinese.607 On FNP, Emerson Niou (2005) has shown a consistent decline in support for either unification or independence since Taiwans democratization, in favor of maintaining the status quo.608 The same December 2009 survey shows less than 10% favored either immediately or in the indefinite future.609 In the run-up to the 2008 presidential campaign, both the DPP and KMT candidates embraced a new Taiwanese identity, which entailed pride in being a member of this sovereign and politically democratic community. This sense of national consciousness, which has provided the basis for Taiwans foreign economic policies, has several components to it. First, regardless of their ancestral origins or cultural affinity, all politicians were expected to assign the highest priority to Taiwans national interests, as opposed to those of a Greater China. The acceptance of this New Taiwanese consciousness resolved the old argument over whether the residents of the island were only Chinese, or only Taiwanese, or perhaps both, and reflected a common political identity for all Taiwanese. Second, political debate was no longer focused on the choice between unification and independence: in other words, on FNP. Instead, competing economic policies were now evaluated in terms of Taiwans long-term economic and political interests, and the public called on candidates for office to discuss how they expected to gain international recognition for Taiwan. Neither the growing power of China nor the supposed logic of interdependence has made public opinion more favorably disposed towards unconditional liberalization, or toward across-the-board restriction. The two extreme tendencies have lost ground, and the public has become more circumspect about the wisdom of the sole pursuit of growth, realizing that a balance with other goals is equally important. Polls since 2001 have consistently shown that Taiwanese wish to pursue those other goals even at the expense of their relationship with China, Taiwans principal source of economic growth. In March 2008, for example, 75% believed that if developing foreign ties led to

From semi-annual survey conducted by Chengchi Universitys Election Study Center, June 2009 data, see: http://esc.nccu.edu.tw/modules/tinyd2/index.php?id=3 (Last accessed on Feb 28, 2010). 608 The questions in Nious research were designed not to be binary but to explore subtle preferences. For example, on FNP, respondents were asked to choose independence under various conditions, such as if Beijing allowed Taiwanese to decide without using force, or if Beijing did not allow Taiwan to pursue it, whether Taiwan should still make it a goal. 609 From semi-annual survey conducted by Chengchi Universitys Election Study Center, June 2009 data, see: http://esc.nccu.edu.tw/modules/tinyd2/index.php?id=3(Last accessed on Feb 28, 2010).

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rising tension on cross-Strait relations, they would still agree with such an effort, and only 21% would not. In the last episode, as the public reached this consensus about identity, the platforms of the two major parties (DPP and KMT) converged, and smaller parties (like the NP, TSU or PFP) that did not join the consensus were eliminated as a political force. During these two years, the Taiwanese have shown that they have moved beyond the question of who are we, and have begun thinking about the ideal policies for Taiwans long-term economic growth. As the sense of belonging to a distinctively Taiwanese society developed, many have felt skeptical about economic integration with China, finding over-reliance on China a threat to Taiwans identity, sovereignty and long-term economic security. At the same time, a majority of Taiwanese have found it difficult, if not impossible, to support economic isolation from China given Chinas importance. These episodes verify Hypothesis Three that the narrowing of the spectrum of policy options eliminates the extremes, but does not produce a policy consensus. The fact that the growing consensus over national identity has not produced consensus over cross-Strait economic policy is shown in several recent polls. The public is now relatively evenly split three ways about the relative importance of promoting economic relations with China. Of those surveyed in 2008, the plurality (36%) said that developing foreign relations was more important than cross-Strait relations, 31% said that cross-Strait relations were more important than other foreign relationships, and 32% said that both goals were equally important. On Taiwans cross-Strait economic policies, over 44% believed that the government should increase restrictions on Taiwanese investment on Mainland China vs. 42% who believed the government should reduce those restrictions, and only 7% who wanted to maintain current policy. This is the closest the first two groups have been, with the increase restrictions always much higher in the past.610 This increasing sense of rationality explains why the policies continue to waver between liberalization and restriction, but the oscillation between those alternatives has become more measured and less dramatic. Changes are now within a narrow range of possibilities, moving one step at a time instead of two or three steps in any direction. The spectrum of debate on identity politics has narrowed, and mainstream public concern has shifted from searching for a Taiwanese identity to seeking the optimal set of economic policies for Taiwan as a community, especially in todays fragile economic order. The changing nature of the discourse on Taiwans cross-Strait economic policies is demonstrated in the four episodes with the arguments increasingly focused on economic logic, rather than embodying a clear linkage between national identity and economic policy.

Survey by China Credit Information Service, as posted by the MAC which tracks 6 polls on the same question over the year. For data, see: http://www.mac.gov.tw.

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Figure 8-4: Flowchart of Taiwans Identity-Interest-Policy Cyclical Timeline, 1994-2009

"Chinese" vs. "Taiwanese"

"Taiwanese" vs. "Chinese"

"Both Taiwanese and Chinese"

A "New Taiwanese"

1996
No Haste Policy Priori/za/on of Security

2001
Ac/ve Opening Policy Priori/za/on of Growth Ac/ve Management Policy

2006
Priori/za/on of Equity, Security. and Growth

2009
ECFA Campaign Priori/za/on of Growth and Stability

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Implications of the Study Three important implications arise from this study: one for Taiwans public policy, one for the future of cross-Strait relations, and the third for the study of IPE. Implications for Taiwan First, there are important lessons for Taiwans policymakers from both major parties. The growing consensus over Taiwans national identity has led to the virtual elimination of the extreme parties, such as the NP and the TSU. But it has been challenging to the two mainstream parties as well. The DPPs nearly exclusive focus on identity building, and its concomitant failure to appeal to the economic interests of a broad spectrum of the public, has proved costly. The discussion of Taiwans national identity has evolved to the point that the question of national identity no longer differentiates the mainstream candidates, most of whom advocate the concepts of the New Taiwanese and Taiwan First. Although the DPP played an important role in the debate over Taiwans identity and spearheaded the redefinition of identity from Chinese to Taiwanese, it has failed to move beyond this issue to focus on charting a rational course for crossStrait economic policies. In light of Chinas emergence as a superpower, the publics expectations for a rational discussion of how Taiwan can maintain its economic competitiveness and prosperity, and simultaneously gain acceptance by China and other international members as a sovereign state, have never been stronger. The DPP has failed to meet this demand. In the end, the DPP lost the elections of 2008 largely due to its thin economic agenda and its overemphasis on the importance of voting for a native son (Frank Hsieh) over a mainlander (Ma Ying-jeou) an increasingly outdated definition of Taiwans national identity that was no longer attractive to many voters. But the Mas administrations difficulties in gaining public support for more liberal economic policies toward China show that it has not fully grasped the transformation of the agenda and its implications for Taiwanese politics, either. The mandate given to Ma in the 2008 presidential election was based in large part on the desire to repudiate the DPP and its corrupt members. To the extent that it was based on economic policies, it was not for broad and indiscriminate economic integration with China, but rather for a thoughtfully designed set of cross-Strait economic policies that would achieve economic benefits and gain international recognition for Taiwan. By introducing a wide range of liberalization policies at an accelerated pace, without prior consultations and without assuring the public that these measures would also increase social equity and bolster Taiwans international standing, the Ma administration appears to threaten the very identity that most Taiwanese now value so deeply.611 The voters believed Ma when he called himself a New Taiwanese and gave him leeway to reach out to China. But this was with the expectation that these policies would establish Taiwan as a major economic player and bring more respect from China. Now, as the restrictions on cross-Strait economic relations are lifted, the public is waiting to
2009 polls commissioned by Taiwan Thinktank showed that over 90% of the people regardless of political party affiliation did not understand the content of ECFA and 58% of the respondents did not believe the governments argument that ECFA would improve Taiwans unemployment problem. For details of the survey, see: http://www.taiwanthinktank.org/ttt/attachment/article_1082_attach1.pdf (Last accessed on Feb 28, 2010).
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see how China will treat Taiwan on the international stage. Every decision by China, from its willingness to lend Taiwan two pandas to its reluctance to allow Taiwans participation in the WHO, is seen as a measure of the success or failure of Mas policies. In short, neither the DPP nor the KMT has so far been able to identify a comprehensive set of domestic and foreign economic policies that fully meet the publics new expectations. The four episodes show that Taiwanese leaders seemed to have regularly failed to predict the public reaction to their cross-Strait economic policies. There did not seem to be effective mechanisms to channel societal opinions on economic policies to the government and, although there had been an increase in the number of public opinion polls, the validity (and therefore the impact) of these polls varied widely depending on the source. As a result, public opinion appeared more reactive than initiatory. This did not mean, however, that Taiwanese leaders acted without considering the will of the people, which many analysts have suggested was the case for Lee Teng-hui and Chen Shui-bian (Tucker 2009, 250 and 275; Hickey, 2007, 77-103) or that they set out to manipulate public opinion to gain support for an extreme political and economic agenda. To be sure, like all political leaders in a democracy, strong-minded Taiwanese presidents wanted to influence public opinion by mobilizing both their political base and a segment of wavering voters so as to gain acceptance of their policy initiatives. But it has been even more important for them to maintain political support for themselves and their political parties in subsequent elections, which are frequent and dynamic. Invariably, then, public perceptions of the costs and risks of leaders policies have acted as a constraint that can force the government to reverse course. The nature of the system is that the leaders have considerable administrative power, especially in foreign policy, but as this study shows, they must meet the public demand more than halfway in formulating Taiwans cross-Strait economic policies. It is here that leaders from both parties Lee Teng-hui, Chen Shui-bian, and Ma Ying-jeou have, to a surprising degree, misjudged public opinion. Some, like Lee and Chen, seemed to believe that invoking a new Taiwanese national identity would be enough to gain public support for their cross-Strait economic policies. All three seemed to believe that the public would react favorably to relatively extreme policies, whether liberal (Chen, Ma) or restrictive (Lee, Chen). In fact, having finally agreed on a left-of-center, but non-extreme definition of their national identity, Taiwans voters now want a set of nuanced cross-Strait economic policies that will promote the long-term objectives of ensuring robust growth, enhancing economic security and market stability, and maintaining levels of social equity compatible with Taiwans self-image as a democratic, middle-class society. As reviewed previously, research shows that it may increasingly be class conflict, not ethnic conflict, which is the real issue in Taiwanese political economy. Domestic economic policies must respond to increasingly pressing issues such as unemployment and social equity, and must be harnessed to a foreign economic policy that can manage the problems of globalization. Furthermore, the Taiwanese people more and more want not only military and economic security in the negative sense, but also international recognition as an autonomous and prosperous actor that plays a major role in key sectors of a globalized economy and can make major contributions to addressing world and regional problems.

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Implications for Cross-Strait Relations Through the Identity-Interest-Policy Pyramid, this study has sought to underscore the importance of national identity in defining economic interests and formulating economic policies. As such, trends in Taiwans national identity must be better understood in order to analyze changes in Taiwans cross-Strait economic policies. Although the initial identity divide had been based on ethnicity, the drive towards a consensus on either a dual identity as both Taiwanese and Chinese or a single identity as Taiwanese-only comes not only from benshengren who have abandoned their previous dual identity for a Taiwanese-only identity, but also from waishengren who have switched from a Chinese-only identity to a dual identity. In 1992, 73% of waishengren called themselves Chinese only. This ratio dropped to 26% in 2000 and then to 10% in 2005, when nearly 75% said they have a dual identity. (Wu and Shen 2008, 127-8 and 135) This is because, over the years, the combination of a smaller percentage of the population born in China, and the development of a more inclusive definition of Taiwanese identity, has made it possible for waishengren born in Taiwan to see themselves at least partially as Taiwanese, although very few of them have adopted a Taiwanese-only identity. 91% of the Taiwanese people now agree that they are either Taiwanese-only or both Taiwanese and Chinese, and they also agree on the nature of the relationship between Taiwan and Mainland China. A media survey in July 2009 showed only 6% of respondents believed that Taiwan is part of a divided China (less than 1% of them believed Taiwan belongs to a divided PRC, while only 5% saw Taiwan as part of a divided ROC), while nearly 83% believed that the two sides of the Strait are two separate and independent countries, an increase of nine percentage points since the previous poll in June 2008.612 The growing economic integration between Taiwan and Mainland China, and the election of a pan-blue government, obviously has not reduced, but has actually increased, the peoples sense of separateness. The changes in public opinion are also clear when examining preferences regarding independence and unification. In 1992, 78% of waishengren upheld unification, most with the view that independence was morally wrong, but this percentage dropped to 47% in 2004. Furthermore, even for the benshengren and waishengren who regarded themselves as exclusively Chinese, or with a dual identity as both Chinese and Taiwanese, an increasing percentage stated their support for Taiwanese independence. (Wu and Shen 2008, 127-8 and 135)613 What it means is that ones identity as Chinese-only had become a cultural notion, not a political standpoint accompanied by support for unification. Ironically, as Taiwanese identity moves away from an ethnic definition, the divide between China and Taiwan has become harder to bridge precisely because Taiwans identity is now based on civic values like freedom and democracy that China is unlikely in the short term to adopt. A final political resolution of the cross-Strait relationship on Beijings terms therefore appears even more unlikely. In essence, Taiwanese are asking that China accept common
For details, see: http://www.gvm.com.tw/gvsrc/eng/index.asp (Last accessed on Feb 28, 2010). Progeny of waishengren continue to call themselves as such, although they may say they are Taiwanese or Chinese or both in surveys of national identity. Hence, the value of Wu and Shens survey that asks for self-identification as waishengren and benshengren as well as questions of national identity.
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values and institutions, which makes economic and political integration even more different in the near term unless Chinas political structure moves towards pluralism. Furthermore, unlike in other trading relationships where economic interdependence creates spillovers in the form of institutional cooperation, Taiwan and China have great difficulty in furthering economic and political integration. The prospect for greater economic cooperation has improved, and some believe that Taiwan and China seem interlocked in a way that makes the use of force so costly that war between them is highly unlikely. (Rigger and Reid 2008) However, moving into some kind of economic union, let alone formal political integration, seems unlikely at present. For this, governmental cooperation is required and appears increasingly difficult. Most Taiwanese increasingly seem to want a left-of-center position: the liberalization of crossStrait economic relations, but with a substantial degree of government regulation or restriction. But so far China will not formally acknowledge the legitimacy of the Taiwan government, and is willing to deal only with one particular political party on the island, the KMT. This is not acceptable to the people of Taiwan, who believe their national identity as Taiwanese should be respected and their status as an equal sovereign state should be acknowledged. After two decades of crossStrait economic relations, progress has been slow and efforts at normalization of trade have been met with great resistance. Recent efforts at liberalization continue to be focused on practical logistical issues without making any political breakthrough. Political spillover seems improbable with an increasingly practical but nationalistic community of Taiwanese who distinguish clearly between promoting economic relations with China, as with any other trading partner, and political integration with the PRC. The growing economic relationship between the two sides has not led Taiwan to accept the one China principle, nor has it led China to accept the sovereignty of the Taiwan government, nor has it led to a convergence of values between the two societies. Unless there is a convergence of values or the rediscovery of a common ethnic identity, there remains the possibility of miscalculation and even military conflict despite their extensive economic interdependence. Taiwan appears naively optimistic that China will one day accept Taiwans national identity, change its policies on unification, and renounce the use of force, while China refuses to acknowledge that Taiwan has developed a genuine national identity and that its government is legitimate with authority endowed by its people. However, the growing number of Taiwanese who support the status quo does promote a more pragmatic approach to cross-Strait relations. The decline of support for extreme policies is directly related to the fact that those who both wanted independence and considered themselves only as Taiwanese appeared never to exceed 30% of the total population, as tracked since 1992. (Wu and Shen 2008, 123) If this group becomes bigger, then any cross-Strait dialogue would be impossible; but the present trend is the formation of a far larger group of people who are open-minded about their political future. But being open-minded, the Taiwanese public seems to have implicitly set two preconditions for political integration or unification: Chinas democratization and its acknowledgement of Taiwans sovereignty. They have also made clear their refusal to accept a Hong Kong solution of autonomy without sovereignty. There is no longer a gap between the Taiwan government and the public on these points, so Beijing must

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come to terms with negotiating with leaders elected by the Taiwanese of any political party. All this suggests four possible outcomes for cross-Strait relations. First, if China democratizes and come to terms with Taiwans sovereignty, Beijing will have an opportunity to propose a new common identity based on values, not a populist or primitive nationalism based on ethnicity. Rather than using exclusively economic incentives and hoping that special interest groups who benefit from cross-Strait economic relations will help China win over the Taiwanese public, China must come up with a formula for unification that acknowledges Taiwans identity and sovereignty and that will allow the Taiwanese to preserve the civic values that they cherish, perhaps with a constitutional guarantee of autonomy. This is the first and most optimistic outcome for cross-Strait relations. The second possibility is that Taiwanese will face the fact that China will not abandon its ultimate goal of unification, and will therefore resume their debate on national identity and gradually redefine that identity to once again become more Chinese. This possibility seems unlikely as the trend towards a stronger, more widely accepted separate Taiwanese national identity appears irreversible, particularly with Taiwans current demographics. On the other hand, Taiwanese national identity has evolved towards separation in part because its autonomy has been repeatedly denied. Changes may therefore be possible if and when China and the world change from sticks to carrots. Another possible source of a renewed sense of Chinese identity would be if China and Taiwan united to address a common security threat, such that the superordinate goal of defeating this enemy created a common identity.614 The most improbable outcome is that Chinas identity and political agenda change such that unifying Taiwan is no longer an imperative. Giving up the goal of unification with Taiwan directly impacts the CCPs legitimacy, which is partially based on territorial integrity. If Taiwan can be a separate state, Tibet, Xinjiang and other regions may propose to break away, leading to a collapse like that of the Soviet Union. The concept of unification with Taiwan and Chinas territorial integrity is deeply rooted in society, not based only on the interests of the elites, and therefore cannot be abandoned easily. Last, but not least, China may not change its approach, and the Taiwanese may not only move further away from a Chinese identity but also begin to seek de jure independence, leading to Beijing using force or coercion to compel unification. This is an outcome that benefits neither China nor Taiwan, but may be inevitable if Taiwan openly defies the idea of one China. Similarly, even without provocation from Taiwan, China may for domestic reasons find it necessary to forcefully unify Taiwan if it feels time is running out and the CCP must demonstrate its resolve on Taiwan to the public. One group of analysts optimistically point to Chinas potentially democratizing in the future as a reason for China to abandon force. On the other hand, other analysts respond that given the consummatory nature of the Taiwan issue to the CPP which has indoctrinated the public successfully on the importance of unity, a democratic China may be
This concept was tested in the famous Robbers Cave experiments developed by Muzafer Sherif et al. in 1954 (1961), where important common goals served to unite two boys groups that had previously been in a competitive, hostile relationship. These superordinate goals proved more effective in reducing conflict than mere communication or contact.
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even more militant and aggressive on cross-Strait issues.615 In fact, a recent study shows that 15% of the population would favor reunification through military means today. (Gilley 2010) Many believe that a majority would also favor coercion if Taiwan were to declare independence or act provocatively.616 Given the intensity of competition in Taiwans electoral politics, any miscalculation on the part of Taiwan, or China, could lead to unexpected and unfortunate turn of events. Implications for the Study of International Political Economy Finally, the example of Taiwan has implications for the study of international political economy. This study shows that Taiwans cross-Strait economic policy can only be understood as the result of a combination of structural constraints and domestic political pressures. (Rosecrance and Stein 1993, 20; Milner and Keohane 1996; Milner 1997) Because globalization affects the domestic distribution of economic resources, it makes domestic political variables increasingly important in the formulation of foreign policy. Recent research has shown that one result of globalization has been the replacement of territorial goals by economic goals as the primary foreign policy objective. But economic interdependence has not produced policy uniformity, precisely because each country is affected by and reacts to global forces differently. In this anarchic world, national governments are expected to protect the economic interests of their citizens, in a situation where, because of the differences in factor endowment, stage of development, and national institutions and leadership, the effect of globalization is uneven. (Kahler 2006; Milner and Keohane 1996) This runs counter to the argument that globalization makes external structural factors more powerful, especially for small states. In fact, it seems that small states, even more than large states, are reacting to todays trading order through diverse economic policies. (Kahler 1996) To be sure, the external structure remains very relevant, especially for small states geographically close to a large country like China, and for those that are thoroughly integrated into the global economy. This study therefore treated external factors as important intervening variables. But domestic variables in Taiwan, particularly the evolving debate over Taiwans economic interests, have been the key factor that has produced the oscillations in its economic policies toward Mainland China. Although they live in a small territory with a small population, the Taiwanese do not accept the alleged futility of national economic policy, but believe that they have meaningful choices in how they respond to their international environment. They also believe that a Taiwanese national identity can be maintained while economic relations with China deepen, and that the current neoliberal world order will respect the national identity of individual communities and will no longer operate according to the realist logic of force.617 (B. Cohen 2008, 174-5)

See for example, Jyrki Kallios article for the Finnish Institute of International Affairs, Finlandization is no model for Taiwan to follow, Feb 5, 2010, http://www.upi-fiia.fi/en/blg/259 (Last accessed on Feb 28, 2010). 616 Ibid. 617 Benjamin Cohen stresses the importance of combining rationalist analysis focusing on preferences, information and strategies with cognitivists emphasis on identities, norms and interests. This study has sought to bridge that gap by proposing a model inclusive of both materialist and ideational understandings. See B. Cohen (2008, 146-7).

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The implication of these attitudes toward foreign economic policy is important for all the major powers involved in the security order in Asia, including China, Japan and the U.S. With declining American hegemony and a rising China, the future may be shaped more by neo-mercantilism than by Fukuyama-style neo-liberalism. (Kahler 1995) The rise of a pragmatic but surprisingly strong Taiwanese nationalism needs to be considered along with the general rise of nationalism and protectionism elsewhere in the world: The rise of that Taiwanese nationalism means that the periphery, which had been marginalized by the dynamics of the center for so long, has come into its own and can respond to challenges emanating from the centers. Therefore, while an Independent Taiwan with a full statehood recognized by outside powers is difficult to envisage in the future, given Chinese power and its opposition to this scenario, it is also difficult to imagine that Taiwanese nationalism will cease to be an important factor in the islands politics and in cross-Strait relationsGreat historical and political consequences flow from the historical dynamics making for the rise of Taiwanese nationalism. (Wakabayashi 2006, 16) In the end, the puzzle examined in this study may not be such an anomaly. Other small countries, too, may seek to resist the structural logic of liberalization and the balance of power even under the most extreme political and economic pressure. What may be more distinctive about Taiwan is the way in which Taiwanese seek to make their policy choices. The more Taiwanese consolidate their national identity, then the more rational and pragmatic they become, and the less they are driven by ideology or nationalism in debating their economic policies. Limitations of the Study and Suggestions for Further Research There are some limitations to this study that can usefully be addressed through future research on Taiwans cross-Strait economic policies. First, this study has shown public opinion in Taiwan is reactive to each change of policy, but eventually shapes the implementation of those policies and the formulation of subsequent policies. Moreover, each government tries to anticipate public opinion and uses conferences and propaganda to shape such opinion. But there is room for more studies to substantiate the linkage between public opinion and the formulation of economic policies by Taiwans bureaucratic institutions, especially because cross-Strait policies do not require legislative approval.618 Although almost all the interviews in this study asserted that the Executive Yuan was influenced by public opinion when making its decisions, there are few empirical studies of this linkage.619 In the absence of legislative debate on Taiwans crossStrait economic policies, the policies are assumed to reflect the dominant tendencies in society, but substantiating that linkage can be done more concretely through further interviews with government policymakers, even though they may be loath to admit to succumbing to pressure from interest groups. Although Taiwans national identity has changed dramatically over the last fifteen years, after extensive and often emotional debate, it is too early to conclude that the evolution has been completed. Will Taiwanese national identity
These studies could be conducted along the lines suggested by Rosenau (1961). The study done on the linkage between public opinion and policy by C. Yu (2002) is a good example.
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change fundamentally in the future, perhaps redefined to become more Chinese one day? After all, if Taiwanese national identity is indeed defined by norms and institutions, then it is conceivable that the two sides of the Strait may share common values in the long run. The evolution of Taiwans national identity should be closely tracked for any analysis on cross-Strait policy to be relevant and comprehensive. Similarly, for the most important of the four intervening external variables considered in this study Beijings Taiwan policy there remains much to be studied. The scholarly literature on the sources and motivations of changes in Chinas Taiwan policies are limited, largely because the Chinese foreign policymaking process continues to lack transparency, especially with regard to the positions taken by the military and the bureaucracy. As a result, this study has not attempted to delve deeply into the politics of Chinas policies toward Taiwan. A better understanding of the sources and motivation for Beijings policies toward Taiwan is needed. This is critical as the Taiwanese are now increasingly rational and might accept some kind of political settlement if China were able to come up with a policy, such as a federal or confederal arrangement, that allows Taiwanese to uphold norms and values they have developed collectively. Unification based on a federation is more likely to be acceptable for two democratic societies, however, since there is no example of a federation between an authoritarian central government and a democratic polity. As the global economic order fails to produce market stability, especially for open economies, the resilience of Chinas economy remains an important subject that may determine the fate of Taiwan. This study does not venture into the discussion of the fundamental economic issues that Taiwan faces when integrating with an economy that is fifty times its size that remains largely statecontrolled, and that is characterized by major imbalances, calling its economic, political, and ecological sustainability into question. This, too, is an important issue that deserves further study. Finally, further comparative study with other countries will also be useful to build a comprehensive theory. This study is based on a single country often considered a deviant case. It seeks to build theory by presenting an analytical narrative of four different episodes, showing the ways in which Taiwans evolving national identity led to a reconsideration of national interests and thus to the reformulation of cross-Strait economic policy. Its conclusions can be made more robust by further comparison with other countries in Europe, Africa, Southeast Asia and Central America that have faced similar issues of forging their national identity and defining their economic relations with larger neighbors.620 They then can be compared with still other countries, facing different economic and political circumstances, to build a grand theory of the national basis for foreign economic policies.

The comparison may be specific to a few instances, such as the suggested comparison to be made between Taiwans 1996 NDC process and various episodes in policy making in Spain, Uruguay, and South Africa. (Higley, Huang and Lin 1998, 19)

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