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."

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