Saturday, November 26, 2005

China, Taiwan Economic Integration, Peace, and War

There are three immutable economic laws of life:

1. There is no town so small that it can't use another shoe store.
2. By the time you get around to investing in the bubble economy, it will already be too late.
3. Nations do not form political unions because they are economically integrated.

Last week Asiapundit had pointer to Madman of Chu on Taiwan and China, who made a point that seems destined to become the new conventional wisdom on Taiwan-China relations:

Taiwanization seems more and more likely at least in part because it is already under way. As China's economy has liberalized and cross-strait tensions have cooled (albeit incrementally) the PRC has become a major target of Taiwanese investment capital. At least a quarter of a million Taiwanese businessmen and women are resident in Shanghai, billions of Taiwanese dollars have built factories and office buildings across Southern China. Just as Taiwanese capital has flowed to China, mainland citizens have become increasingly enthusiastic consumers of Taiwanese products. Taiwanese pop music, movies, and snack foods have become ubiquitous in the PRC both north & south.

With such an ever-increasing volume of economic intercourse one can only wonder how long it can fail to slide over into the political realm, especially given that both governments remain, in name at least, dedicated to a policy of "eventual reunification." Indeed, such political intercourse has proven unavoidable. The PRC government particularly is in some respects hostage to its commitment to reunification, a condition clearly ilustrated by September's visit to Beijing by Taiwanese intellectual and parliamentarian Li Ao. Li Ao has been one of the most articulate and effective advocates of reunification on the Taiwanese political scene, a fact which no doubt inspired the PRC government to invite him as a state guest. One can only imagine their chagrin when in a speech at Beijing University Li launched into scathing critique of the anti-democratic nature of the PRC government and berated the school's faculty for lacking the courage to dissent.

This reasoning is mirrored by a similar negative formulation, neatly articulated by a Smith Barney policy report back in 2000:

"The deeper economic integration goes, the higher the cost of disruption and the lower the probability of conflict," it said. "Most likely, the possibility of war is already behind us."

Unfortunately history does not provide any support for the idea that economic integration ameliorates political conflicts. In fact, history is one long story of just the opposite case: that economic integration may exacerbate political conflict by spotlighting dependency relationships, or by creating new areas of conflict.

How integrated are China and Taiwan?
There's more than one way to define what economic integration means in this context. It is difficult to get clear figures, since at least some of the trade and manufacturing is gray, but:

In 2004, China (including Hong Kong) accounted for over 23% of Taiwan's total trade and almost 37% of Taiwan's exports. Japan was Taiwan's second largest trading partner with 15% of total trade, including 26% of Taiwan's imports. The U.S. is now Taiwan's third-largest trade partner, taking 16% of Taiwan's exports and supplying 13% of its imports. [here]

The CIA factbook similarly gives for exports China, including Hong Kong, at 37%, but the at US 16%, and Japan 7.7% (2004). Statistics vary -- and are difficult to calculate -- but probably a similar proportion of the production of Taiwan's firms also takes place in China. One should keep in mind that much of this "trade" is probably trade within firms and the end products are exported out of China. Further, Taiwan at the moment runs a trade surplus with China. Finally, many of Taiwan's most important electronics firms have both legally and illegally moved their factories to China.

"How integrated" of course simply begs the question of what kind of economic integration Taiwan and China have. What are the Taiwanese doing in China? They open up factories, they use local labor, they ship in parts and expertise, and ship out products to markets in the industrialized world. They take local concubines and live in separate enclaves. They eat at local restaurants, but also in Taiwan restaurants that have located there. They often shop in supermarkets where they can buy goods from home. Integrated? If any other two nations were involved, everyone would automatically call the Taiwanese colonialists and the Chinese a colonized people. The Taiwan-China relationship is a dependency relationship, and it is the Chinese who are dependent. Tomorrow if the Yuan rises all that Taiwanese investment will leave faster than you can say "baffled pundits" and the gospel of economic progress and friendly relations will once again founder on reality. Not, as history teaches, that anyone ever gives up their beliefs when their theology conflicts with reality.

It might be more illuminating to say what is not happening: there is no influx of Chinese students into Taiwan to study the more advanced knowledge there. Any Chinese with money and brains to study abroad goes to real universities in the West, not to the faux versions in Taiwan. There is no blending of law or policy -- indeed all of this economic "integration" is taking place in a regulatory vaccuum. Each side has its own policies governing exchanges, but shared regs are few and far between. Joint ventures between large firms from both sides are uncommon. Neither side depends on the other for raw materials, which both import, but not from each other. The Taiwanese only do business. They do not build China in any other significant way.

Thus, one could profitably ask -- what integration? May as well say that a mining company is integrated with its vein of ore. Taiwanese investment in China is a plant that exists in the hothouse of 9% growth. If that growth should slacken, the plant will die. Although I have been talking to local businessmen about Taiwan-China investments for many years, I have never heard one say: "I really have come to love China and even if the economy tanks and my costs rise, I'll still keep my company there regardless." Taiwanese economic investment in China has not produced any emotional connection to China. In fact, until the economy took off at the turn of the century, polls showed consistently that Taiwanese who went to China came back more confirmed in their Taiwanese identity. Talk of political integration following trade is strictly a phenomenon of the last five years, and, I believe, strictly a wish-fantasy of those who flinch from facing the reality of potential conflict in the Taiwan Straits.

Another way to look at Taiwanese economic integration is to ask in what important way Taiwanese factories in China are different from the factories of other nations' businesses in China. After all, American businessmen come to China, live in enclaves, shop in American supermarkets, eat in American-style restaurants, and take a local mistress. Ditto for Japanese businessmen. Again, do Taiwanese business behave differently? If economic integration drives political integration, surely China and Japan or China and America will draw closer politically. But the reality is that just the opposite has happened: Taiwan, Japan and the US have grown more wary of China even as their economic relationships with China have deepened.

Culture is not Destiny
One might argue that of course, the important difference between Taiwan and other countries heavily involved with China is that Taiwanese culture and Chinese culture are closely related -- some might say, even the same -- and thus, economic integration is different for them. But then one is essentially arguing that the important factor in any putative political integration is cultural.

Madman of Chu also points to the "Taiwanization" of China. "Taiwanese pop music, movies, and snack foods have become ubiquitous in the PRC both north & south." So, one might add, are Taiwanese authors, and Taiwanese celebrities. So what! One could say the same about US brands, foods, movies and music, which are as common, or even more common, in China than anything Taiwanese. But no one argues for the "Americanization" of China.

Other Places, Other Non-integrations
Yet another way to get a handle on the integration issue is to look at other pairs of nations with a long history of interrelating and shared culture.

Take Germany and Austria. Ireland and the UK. The US and Canada. The US and UK. Australia and New Zealand. Ukraine and Russia. Taiwan and Japan. All these represent nations with shared cultures and languages, close trading relationships, colonial histories, and so on. Some of them are far more economically interdependent than China and Taiwan. Yet no one ever argues that New Zealand and Australia or Germany and Austria will become one state because they are so economically and culturally interdependent.

One can also name innumerable civil wars, trust territories, and dependencies, in which one side opted for independence from the motherland despite close economic interdependence. The South seceded from the Union even though its goods were shipped on northern ships and it was profoundly dependent on the north for manufactured goods. Puerto Rico is happy as a commonwealth and has not pressed for further political integration with the US. Quebec's interdependence with the rest of Canada has not prevented the rise of Quebec nationalism. The Ukraine left Russia, and the Chechens are trying to, despite the fact of close economic relationships. Tibet does not want to be part of China despite the fact that China has probably invested more in Tibet than Tibet could have obtained from international development organizations, and on much better terms. Such a list of failed marriages could be extended indefinitely. When people wish to break ties, economic interdependence is an annoying reality that everyone plans for to the extent that they are able to. It is not, however, the determining factor.

It's the Missiles, Stupid
What is really on display here is a sort of willful neglect of reality -- reality in the form of 700 missiles pointed at Taiwan, reality in the form of continued Chinese suppression of Taiwan's international status, reality in the form of Chinese threats to kill and maim Taiwanese if they decide that political union is not in the cards. The reality is quite simple: if China was not out to annex Taiwan, no one would be discussing political union, just as no one discusses political union between China and Japan although in absolute value China-Japan trade will reach nearly $200 billion in 2005, a sum that dwarfs China-Taiwan trade, and in fact is equal to more than half Taiwan's total GDP. China accounts for about 17% of Japan's foreign trade (compared to 23% of Taiwan's foreign trade). No one would take issue with the suggestions that (a) China's share of Japan's trade will continue to rise and (b) despite this, no one will talk about political integration between China and Japan. So why are we talking about it with China and Taiwan?

It's the missiles, stupid.

In other words, the way that Madman of Chu's question.....

With such an ever-increasing volume of economic intercourse one can only wonder how long it can fail to slide over into the political realm, especially given that both governments remain, in name at least, dedicated to a policy of "eventual reunification."

....is phrased is wrong. What he is really asking is "Will the Taiwanese become more resigned to annexation to China as their economy becomes more integrated with it?"

And the answer to that question is: probably not. Peaceful annexation of Taiwan to China isn't going to follow on the heels of the popularity of Taiwan snack foods and Taiwan celebrities, nor will it be created by concubinage, investments, factories and rising trade. I doubt that even China becoming a democracy would entice Taiwan into the Chinese political embrace. One, and only one thing will create "peaceful" union between China and Taiwan: the Taiwanese belief that China is willing to commit murder and mayhem on an island-wide scale, coupled with the calculation that they are unwilling to accept such destruction in exchange for their independence, that will cause them to pack up their tents and set out the white flag.

But few among us would call such blackmail "peaceful."

10 comments:

Sam said...

BRAVO!

This ought to be published somewhere. Man, I wish you were writing for NY Times as their correspondent.

Too true, no one thinks Austria and Germany are about to unite with love, so why should Taiwan and China? Rather, people should expect this closeness to cause irritation and an eventual open conflict.

Sun Bin said...

let's assume you are right, that economic integration does not mean political merger. (i believe so, even though i also believe economoc interwining reduces the risk of conflict/war to certain extent)

then my question is,
why is CSB and LTH so afraid of such integration? why did they try everything they could to curb more interaction (even though there is already a lot so that the incremental makes small difference)?

i am sincerely asking for an answer, because I really cannot understand. (and i think this hurts DPP itself, e.g. support of businesses such as Formosa Plastic and Evergreen)

Madman of Chu said...

Michael,

I don't in essence disagree with anything you have to say here, except for the manner in which you mischaracterize my own argument. My original post was entitled "The Coming (Knock on Wood) Taiwanization of China," NOT "The Coming Sinification of Taiwan." My purpose was to comment on how engagement with Taiwan might alter the political culture of the PRC, not to discuss what influences work in the other direction across the Strait. I would point to one very germane passage in my original post that contradicts many of the implicit claims in your piece:

"Many of the political and economic woes of the current [PRC] regime stem from the same systemic forces that impeded and eroded the Chinese Empire- the fact that precious few institutional structures were in place to allow for the free expression of local interests or the reconciliation of conflicts between center and periphery. Though Beijing looks to a future in which Taiwan exists in the same relationship to itself as Hunan or Jiangsu, all China would arguably profit from a situation where those provinces' orientation toward Beijing grew closer to that of Taiwan."

Toward the conclusion of my piece I note that Taiwanese resistance to reunification will never likely be wholly overcome. You are surely correct when you say that "the Taiwanese belief that China is willing to commit murder and mayhem on an island-wide scale, coupled with the calculation that they are unwilling to accept such destruction in exchange for their independence, that will cause them to pack up their tents and set out the white flag." My post was never meant to contradict this fact- again my purpose was to comment on the political situation in CHINA, not Taiwan.

Michael Turton said...

MoC:

When you say that other provinces should become like Taiwan in some way, are you suggesting that they should become independent? Democratic? Or what?

I know your piece was about Chinese politics. That is why throughout my piece I emphasized what a total veneer the Taiwanese are in China. They are a colonial population living in enclaves, present in China only to make $$, after which they will depart. Just like the Americans, the Japanese, and the denizens of other countries. No one is arguing that Japan will Japanify China. In fact the most likely influencer of China is the US, which not only has the power, but also the prestige, and unlike either Taiwan or Japan, has (1) an ideology that it actively promulgates (democracy + human rights) and (2) has businesses that are sometimes near-democratic in their practices. As a researcher pointed out on H-Asia last year, for many Chinese the grievance processes of American multinationals are their first experience of due process. Neither Taiwanese or Japanese firms are going to give them such experiences.

Sun, I do not believe economic integration reduces the risk of war. Perhaps I will blog on that in the future.

then my question is,
why is CSB and LTH so afraid of such integration? why did they try everything they could to curb more interaction


Because they, like me, do not believe that Taiwan should be out improving the economy of a nation out to destroy it as a separate political entity. Taiwanese investment enables China to grow, modernize its military, and threaten Taiwan.

You're right that their stance does hurt the DPP, though.

Michael

Madman of Chu said...

Michael,

Again you don't really seem to catch on to what I'm saying. I didn't propose that the provinces of the PRC should become "like Taiwan," I asserted that their relationship with Beijing should become more like that of Taiwan than it currently is. No, I don't imagine that they will ever become independent, but there are many shades of autonomy between that and the current state of near-total (in formal terms, at least) centralization that is the structuring principle of the PRC. Someday it would be to everyone's benefit if the provinces could choose their own local leaders and have the same kind of autonomous institutions, rights and powers controlled by the individual states of the U.S.

Your description of the Taiwanese as a "veneer" in China is interesting but tendentious. The Taiwanese will always have a linguistic and cultural advantage over other contingencies doing business in China, and as to when they will "depart," I'm interested to know when exactly you think that is going to happen. However strong a presence the U.S. has in China, Sino-U.S. relations will never have the same kind of volatile potential that cross-Strait relations do in PRC domestic politics- engagement with Taiwan is not a matter of choice for Beijing.

Moreover, my contention was never that Taiwanese are "trying" to democratize China. I only maintain that if things work out for the best and China does liberalize politically: a)Taiwan will provide China with a natural model; b)Taiwanese politicians are likely to play some sort of role; c)the process of democratization is likely to draw Taiwan and China closer, just as China's economic liberalization has done.

David said...

then my question is,
why is CSB and LTH so afraid of such integration? why did they try everything they could to curb more interaction


Sun Bin, I think you're looking at it from the wrong angle: the DPP government has greatly liberalised cross-strait economic policy - of course, not as much as many businessmen would hope, or as much as the KMT would like, but liberalised none the less. (In fact, from an economic viewpoint they are the most pro-China government in the history of the ROC-on-Taiwan by some distance!)

So you should be asking "Why is the DPP not moving to embrace China faster?" - to which there are plenty of possible answers: fear of a military enemy, fear of unemployment in Taiwan (too many jobs moving to China too fast), fear of overdependence on one overheated economy, dificulty in interacting with a government that doesn't acknowledge your existence, because that's what differentiates them from the KMT ...


As for LTH: Well, nowadays I consider him a spokesperson for a pressure-group. Since that pressure-group is not particularly concerned with economics, his opinion is pretty irrelevant :)

Sun Bin said...

david and michael,

i understand that there is some rationale in some of the measures, as both of you stated. however, if you look at the 'liberalization', in almost all cases DPP was pressured into doing it or it has no other choice (e.g. the labor internsive factories would be closed in Taiwan whether you let them move to China or not.)

i guess what DPP (also KMT) needs to do is to evaluate the plus and minus of each measure, and proceed on those that nets a plus for the island. this is not easy to quantify, but some of the cases are very simple and straightforward.

in that sense, i still believe many of DPP's reaction do not make sense, e.g. the fruit export problem. this just shows that DPP is still not sure about whether it should act as a 'pressure group' or a 'ruling party'.

wayne said...

I'm in 100% agreement with your main point that the overriding impetus behind any future unification between Taiwan and the mainland will be the violent imposition of force or the threat thereof, as opposed to (say) the number of pirated Jay Chou CDs there are on the mainland, I disagree with some of your other minor points.

1.) that economic integration may exacerbate political conflict by spotlighting dependency relationships, or by creating new areas of conflict.

Excuse me? Perhaps this is commonly accepted wisdom in poli sci departments, but that won't fly very far in econ/IPE departments. Do you have an example from the post-colonial era?

2.) Quoting direct trade stats between Taiwan and the mainland is highly misleading when the archtypical economic relationship is a Taiwanese company building factories in the mainland to export cheap electronics to developed countries. FDI stats would be a much more accurate indicator. A lazy Google search turns up something like 80% of Taiwan's FDI goes to China. http://www.taipeitimes.com/News/editorials/archives/2005/04/06/2003249361

Sun Bin said...

other minor points

Take Germany and Austria. Ireland and the UK. The US and Canada. The US and UK. Australia and New Zealand. Ukraine and Russia. Taiwan and Japan. All these represent nations with shared cultures and languages, close trading relationships, colonial histories, and so on. Some of them are far more economically interdependent than China and Taiwan.

1. no, none of them is as close in language and culture as china and taiwan, except, maybe austria and germany. irish speak a different language, american is much more racially diverse than british, canadian includes the french speaking quebec, ukraine has its own history and language, plus different religion; taiwan/japan is like taiwan/korea or say, england and franch.

2. none of yhour example is more economically interdependent than mainland china and taiwan (including your austria/germany example), as indicated by wayne's FDI figures

----
... one side opted for independence from the motherland despite close economic interdependence...

yes, there is a choice. but it is a lot more difficult and divided within the area in question, precisely because of the economic and cultural interaction (if not for economic reason, quebec might have been independent already).

Quebec is the best example that 'relationship and ties',and economic interests could trump desire for power.

about tibet, you really cannot speak for the tibetans who live there now, not until there is a poll. dalai and his clan's interests is not neccessarily the same as that of the tibetans.

David said...

Sun Bin,

I was thinking more of the economic package that was developed about a year after CSB became president: which was probably the biggest policy decision of CSBs first term (certainly the biggest re:China economically). Although there was pressure to change the rules on Chinese investment then, it was a pretty bold and unforced move.

I believe they are planning another large economic policy review soon - we shall see what comes out of it.

The fruit export thing is, I agree, stupid - however I think it is far more politically significant than economically significant. The reason the DPP oppose it is because it is closely tied to the KMT - If it was instigated by the KMT, it *must* be a bad thing and resisted at all costs. It's the same as any issue in Taiwan: once it becomes politicized, the original reason and logic goes out the window.