Imaduddin Ahmed

Trade between China and Taiwan was worth $77 million in 1979, the first year of Beijing’s opening-up policy. By 1993, cross-strait trade was worth $9.3 billion.[1] Even under strained political relations with a DPP Taiwanese government antagonising China’s political leadership, China accounted for 40% of Taiwan’s exports in 2006 and 70% of its foreign direct investment in 2005, with trade between the two amounting for US$108 billion in 2006 according to Mainland government figures. In early 2009, 1 million, Taiwanese business people and their family members, or 4.5% of the island’s population, lived and worked in China.[2]

Official trade, let alone economic interdependence, between rival states which, no less, make claims to the same population and territory, seems puzzling. Why do they trade and what outcomes do they hope to achieve? Will they both benefit, or will there only be one winner?

This paper attempts to model the preferences, constraints and strategies of Taiwan and China through realist and liberal prisms, and then predict the outcome of their economic interdependence.

Why rivalry?

The core rivalry between China and Taiwan is best explained in realist terms of sovereignty, security[3] and survival. Beijing exists as the capital of the People’s Republic of China, while Taipei has been the seat of power for Republic of China government-in-exile since 1949. The fantasy of reclaiming the Mainland has been reflected in the moderated policy ambitions of various Taiwanese governments, ranging from eventual reunification with de facto independence, to outright independence. Taiwan vacillates between a liberal business-driven identity (which is when relations between the Mainland and Taiwan are best) and an at times nationalist, and therefore[4] realist, identity (which is when relations between the Mainland and Taiwan are at their worst). The People’s Republic of China, meanwhile, has remained resolute in its realist ambition to reacquire Taiwan and unify it with the Mainland.

What has deterred the Mainland from thus far attempting to decapitate Taiwan’s leadership militarily has been the superior military backing Taiwan has from the USA in the event of an attack. A US defeat would not only be humiliating, but would, according to Robert Ross, cause a domestic economic crisis.

‘Nationalism and economic performance, the twin pillars of [Chinese Communist Party] CCP legitimacy, would collapse, bringing down with them party rule’.[5]

Before we can proceed to explain why, then, Taiwan and China trade in terms of realist and liberal theory, we need to define realism and liberalism.

Realism

Realism is the philosophical position that states seek power to increase their power, and since power is relative, they seek to decrease the power of their rivals. Realist states exist in an anarchic international system, and states are the principal actors in international affairs. [6]

Synonymous with mercantilists, realists are concerned with accumulating wealth as a means of sustaining power, which in turn is necessary to sustain long-term prosperity and the security of a state.[7]

Although relative gains through trade are a realist tactic for gaining power[8], pushing for better terms of trade do not necessarily come at the cost of market failure; Pareto optimality can still be achieved.[9]

Liberalism

Liberalism is the philosophical position that there is a harmony of interests among individuals over the long term, that they cooperate through the use of institutions to achieve mutual benefits, social stability and political stability. Both international institutions and states are actors on the world stage.[10]

Why trade?

Liberal theorists Jia Qingguo and Susan Shirk concede that it was China’s realist political objective of reunification that opened trade relations in 1979.[11] As Robert Ross puts it, China meant to employ Sun-Tzu’s ‘ideal objective’ of “defeating the enemy without fighting.”[12]

In spite of the origins of Beijing’s opening-up policy, Qingguo and Shirk argue, the nature of the Taiwanese-Chinese relationship evolved, one from which Taiwan’s security fear of invasion as the dominant feature of the relationship became a background issue to the more salient issue of economic interdependence.

While invasion seems no more likely than it was before because of continued US-backing, China does seem to have gained power. The integration of China and Taiwan’s economies has accentuated asymmetries in China’s favour and Qingguo and Shirk note:

 ‘Cross-strait trade occupies a much larger proportion of Taiwan’s foreign trade than of China’s [ . . . N]ow that Taiwanese investors have committed funds to mainland projects [ . . . ], they cannot pull out without paying a heavy price. As a smaller economy, Taiwan worries about being vulnerable to manipulation by the mainland more than the mainland worries about being manipulated by Taiwan. Taiwanese officials worry [. . . of] Beijing’s political domination [ . . . ] through control of Taiwan’s economy and a weakening of Taiwan’s leverage to negotiate with Beijing over reunification when that time eventually comes.’[13]

Why does Taiwan trade with China?

Why then would Taiwanese public officials and private businesspeople, aware of the security externalities of commercial ties, trade with China? asks Steve Chan.[14]

First of all, it should be noted that, as Chan himself points out, early KMT governments banned trade with the Mainland altogether, while subsequent KMT and DPP governments attempted to slow down trade with China once trade opened, but failed.

Secondly, it should be noted that Chan gets it wrong in principle when he assesses that ‘realists expect security-minded states to eschew commerce’[15]; Krasner has shown that it is possible for realists to pursue Pareto-efficient policies.[16] It would equally be in a realist small state’s interest to open up its market to make up for the resources it lacks domestically and to make up for its small domestic market as it would be for a liberal state. Taiwan as a capital and technology oriented economy with strong managerial and marketing skills would find complementarity with an economy with raw materials, cheap labour and a strong heavy industrial base. [17]

But why specifically trade with China? China’s low cost but high quality labour, tax incentives, relative political stability, lack of environmental regulation, enormous domestic market as well as shared language, culture and geographical proximity explain why Taiwanese businesses looked no further than the Mainland when investment in Taiwan started to look unattractive because of rapid currency  appreciation, sharp labour cost increases and increased environmental regulation.[18] Greater economic gains are to be made at a macro-level from trade with China as opposed to trade with any other state, because of all these factors combined. This explains Taiwan’s motivation were Taiwan a liberal state interested in maximising mutual gain, but not as a realist state conceding political leverage, as noted above, to China, and ceding international economic decision making power to businesses.

As a liberal state, is Taiwan not serious about security, as was reportedly suggested by US Deputy Defence Secretary Paul Wolfowitz in response to the Taiwanese Legislative Yuan’s refusal to approve the DPP administration’s proposed NT$610 billion defence budget in 2004?[19] Certainly the fact that KMT Chairman Lien Chan argued against the budget, saying that domestic social and economic needs were higher priorities[20] supports this argument.

Wolfowitz’s criticism may be unfair, though, as there was also realist opposition to the defence budget within the Legislative Yuan.

‘Criticisms were that the prices were too high, that the systems and terms were being dictated by the U.S. rather than by Taiwan’s defence needs, and that the proposal was an expensive “insurance policy” being bought to assure Washington’s continued support for Taiwan’s defence,’ [21] reports David Brown.

The fact that there was opposition to the executive, and that there were polar motivations within the opposition, again does not sit well with state-centric realism. [22] While the ruling party of the Mainland has only to deliver realist goals – nationalism and economic performance – as noted above, Taiwan, as a democratic liberal state, faces Robert Putnam’s liberal problem of two-level games. [23]

Even as a liberal state, “decreased leverage with Beijing in negotiation about reunification” is perhaps an exaggeration of what Taiwan has to fear. As a democracy with its two-level games, the will of the people is important. According to the Mainland Council of Affairs for the Republic of China Taiwan, the will of 87% of Taiwanese individuals is to maintain Taiwan’s de facto independence (defined as including “maintaining the status quo and deciding on independence or unification later,” “maintaining the status quo and unification later,” “maintaining the status quo and independence later,” and “maintaining the status quo indefinitely”).[24]

So long as this is what Taiwan wants, it will have the USA’s protection from forced reunification.[25] The USA’s prestige and status as a global hegemon protecting Taiwan’s property rights, its democracy as well as Taiwan’s usefulness in keeping political and economic rival China distracted are stakes that matter to a realist state such as the USA. The US Defense Department’s comments about wanting to see Taiwan taking its security seriously before it committed to providing security[26] can be seen as hard negotiation for higher pay for US protection. A US Naval exercise, “Summer Pulse 04” conducted in the Pacific, and a simulation exercise at the National Defense University, to examine possibilities in Taiwan’s strait, confirmed, analysts believe, Washington’s resolve and ability to respond to attacks on Taiwan. [27]

Which model wins?
A liberal Taiwan can become as economically integrated as it desires and as China desires, but so long as the Taiwanese people wish to defer reunification and maintain their de facto independence, and so long as a realist USA remains interested in protecting Taiwan, Beijing will not achieve its realist aim of becoming Taiwan’s capital. Taiwan will achieve its aim of realising Pareto efficiency. This is not a victory for liberalism over realism; the victory of Taiwan’s liberal aim comes as a result of its coincidence with America’s realist aim. As realism would predict, the more powerful state wins; in this case it is the ally of the more powerful state that achieves its desired outcome.