Published in the Nikkei Asian Review 20/1/2016
The landslide victory of Tsai Ing-wen’s independence-minded Democratic Progressive Party (DPP) in Taiwan’s recent election has ignited speculation about possible tensions with Beijing.
Less often discussed is Taiwan’s relationship with its rich neighbour to the north. Cooler relations with China almost certainly mean stronger ties with Japan, just as the reverse held under the presidency of Beijing-friendly pragmatist, Ma Ying-jeou of the Kuomintang Party (KMT).
Politics often follows economics; hence Taiwan’s rapprochement with the mainland of the past twelve years, likewise the ascendancy of Ma’s KMT over the period. China’s super-charged growth spurt presented an irresistible opportunity to Taiwan’s larger companies, which became major players in the huge influx of foreign direct investment into the People’s Republic.
Today 40% of Taiwanese exports go to China and Hong Kong against 12% to the US and just 7% to Japan. On the back of its Chinese operations, Taiwanese contract manufacturer Foxconn has become a vast enterprise with $140 bn of revenues and over 1 million employees.
Ma’s administration made this possible by removing various impediments to closer economic ties and upholding the “1992 consensus,” a politically convenient formula that allowed each side to claim that there was “one China” while claiming that title for itself. Tsai and her DPP predecessors have never accepted this line.
From Beijing’s point of view, the carrot has worked much better than the stick – so far, at least. Back in 1996 there had been a severe bout of cross-strait tension when China showed its displeasure with the explicitly pro-independence Taiwanese president Lee Teng-hui by conducting missile tests within 25 miles of the Taiwanese coast. The result was a dangerous stand-off and a show of force by the US Navy, which sent two aircraft carriers to the area.
Nobody wants to see a repeat of that today, when the stakes are so much higher for all parties. Yet even on a purely economic view some distancing of Taiwan from mainland China is highly likely. Indeed ex-president Ma’s famous handshake with Chinese President Xi Jinping last October – which celebrated the first meeting between a leader of the KMT and a leader of the Chinese Communist Party since Mao Zedong met Chiang Kai-shek in 1945 – may prove to be the highwater mark of cross-strait relations.
CHINA’S SWEET SPOT IS TURNING SOUR
A key driver is change in the Chinese economy. Even on official numbers it is no longer the fastest-growing major economy in the world; today India has that distinction. More to the point, the combination of rising wages and a currency that has strengthened 40% in real terms over the last eight years has substantially reduced China’s competitive advantage as factory of the world.
If the authorities in Beijing manage a seamless transition to a consumption-driven economy, then China will remain a huge, dynamic market for goods and services. Yet many of the large Taiwanese companies present in China – such as Foxconn, Quanta and Giant – are global players who have sited manufacturing operations there for reasons of cost and efficiency. The final consumers of the products they manufacture are still mostly in the high-income OECD countries. Likewise most of the 40% of Taiwanese exports that go to Hong Kong / China are components – such as computer chips and LCD panels – that end up in products sold elsewhere in the world.
Of course complex supply chains cannot be replaced at the drop of a hat, yet over time cost should prove a crucial factor for new investment flows. Like US and Japanese companies, Taiwanese manufacturers will be examining alternative production bases.
Furthermore, what has worked well for major Taiwanese companies has not necessarily benefitted Taiwan’s domestic economy and the living standards of ordinary people; hence the KMT’s loss of public support. President Tsai will need to prioritize these issues over the interests of big business if she is to maintain her popularity.
THE TAIWANESE VERSION OF “JAPAN”
The combination of China’s rapid growth and Japan’s long period of inward-looking stagnation meant that Japanese-Taiwanese relations were downgraded. Even so Japan has remained a significant source of foreign direct investment, usually ranking first or second on a flow basis – as it also does in the supply of imports, mainly capital goods and components vital to Taiwan’s own exports.
The two economies are congruent in other ways. GDP per head is similar, as is the ranking on the Heritage Foundation’s economic freedom index, where Taiwan is 14th in the world and Japan 20th while China comes 149th.
The movement of people is revealing too. Over the past few years Japan has experienced an enormous boom in inbound tourism, with travellers from the Chinese mainland the most numerous by far. Look at it in proportion, though, and the picture is quite different. The 5 million mainlanders who came to Japan in 2015 amount to just 0.3% of all Chinese citizens. By contrast, the 3.7 million Taiwanese visitors constitute 16% of the island’s entire population.
Taiwan’s unique perspective on Japan is apparent in popular culture. A good example is the feel-good baseball movie Kano (2014) which tells the true story of a high-school baseball team from a poor area of southern Taiwan reaching the final of the national championship.
What makes the film unusual is that it is set in the 1930s, under Japanese colonial rule; the coach is Japanese, the team multi-ethnic and the championship takes place in Osaka’s famous Koshien stadium.
“Japan” means something totally different to Taiwan today than it does to China or Korea.
TIME TO HEDGE BETS
According to National Chengchi University polls, public support for unification in Taiwan has fallen from 21% in 1995 to 9% today, whereas support for independence has risen from 11% to 20% over the same period.
The pro-China numbers are hardly likely to swelled by events such as the illicit abduction from Hong Kong of bookshop personnel involved in publishing embarrassing information about China’s leaders.
The cautious majority, 60%, favours the status quo – but, depending on China’s internal politics, the status quo may not be particularly stable.
The challenge for Tsai will be to diversify Taiwan’s economic bets – by strengthening ties with Japan and other regional players – while averting a 1996-style breakdown in relations with Beijing. A surge in two-way FDI and strategic M&A deals would be the clearest sign of greater intimacy between Taiwan and Japan and would generate further political momentum. An early application to join the US-backed TPP is another option for Taiwan.
If it plays its cards right, Taiwan could become a logistic hub for North East Asia, perhaps taking over some of Hong Kong’s role as the mainland’s footprint there becomes more intrusive. The alternative – gradual absorption into a nervy, turbulent greater China – is looking less and less attractive.