Taiwan's delicate balancing act

The island is putting the final touches to a trade deal with its huge neighbour that will expand their already extensive economic links

Taipei by night: the spirit of rapprochement between China and Taiwan will have great economic benefits for the island as it gains access to China's markets. Maurice Tsai / Bloomberg

After six decades of mutual mistrust and suspicion, China and Taiwan have edged closer in the past two years, at least economically. Following the election of the nationalist Ma Ying-jeou as the Taiwanese president in 2008, Chinese tourists have been flocking to Taiwan to find out more about an island that in decades past they knew largely through communist propaganda.

More than 70 Taiwanese universities and other education institutions are this year recruiting their first students from the mainland. There also are many direct shipping services and flights between Taiwan and mainland China, and only last week flights between the airports closest to the centres of Shanghai and Taipei took to the air for the first time. In Beijing last month, a so-called Taiwan Street with more than 100 shops and restaurants selling Taiwanese products opened, while it was recently announced that the Chinese Writers' Association would welcome its first Taiwanese members.

On the economic front, the red tape snarling investments in sectors such as insurance and banking has been cut. With rapprochement the order of the day, it is no surprise China and Taiwan are looking to lower trade barriers even more. Mr Ma has recently called trade "Taiwan's lifeblood". "We can handle diplomatic isolation, but economic isolation is fatal," said Mr Ma, who is chairman of Taiwan's Kuomintang Party, which fled to the island in 1949 when Mao Zedong's communists took control of the mainland.

The so-called economic co-operation framework agreement that Beijing and Taipei are now finalising will cut tariffs on many goods moving between them. A total of 500 products exported from Taiwan to China, worth US$13.6 billion (Dh49.95bn) in trade annually, will be affected, along with 200 items moving in the other direction. The agreement is likely to be signed by the end of next month. "For the Taiwan government, the most important objective is to enhance Taiwan's economic networking and give Taiwan a new push to upgrade some of its industries," says Dr Ding Xueling, a professor at the Hong Kong University of Science and Technology who has more than a decade's experience of studying China's relations with its neighbours.

"Opening up to the mainland will give Taiwan important new dynamics. That's the number one priority for the Taiwan government." While some see economic benefits, the proposed agreement is causing controversy. Concerns have been raised in Taiwan that traditional industries such as footwear manufacturing will suffer if the island is swamped with cheap mainland goods. Shoes are not on the current list of items affected by the agreement, but Mr Ma said last week that as negotiations continued, more items could be added, as the list so far covered only 10 to 15 per cent of the trade between the mainland and the island.

Taiwan's opposition pro-independence Democratic Progressive Party, which fears an erosion of Taiwan's sovereignty and eventual compromising of its democratic institutions, plans to hold protests against the proposed agreement this month. Opponents insist the deal would threaten jobs on the island. And there are worries over whether it would make Taiwan too reliant economically on its much larger neighbour. Ren Xianfang, the Beijing-based analyst at IHS Global Insight, says Taiwan is already heavily dependent on the mainland "despite the investment restrictions that have been in place".

China is the destination for 40 per cent of Taiwan's exports, mostly products sent for final assembly in mainland factories. "Taiwanese investors have been the main source of overseas investment in coastal China and a huge source of growth for many of these coastal regions [of the mainland]," she says. Taiwanese investors have put more than $100bn into the mainland in the past two decades. Ms Ren believes the agreement will encourage more Taiwanese investment on the mainland. "That's very positive for the growth of China," she says. The agreement also comes as investment in the other direction increases.

Another observer who thinks the benefits will outweigh the drawbacks is Zhigang Li, an assistant professor in the faculty of business and economics at the University of Hong Kong. Taiwan's economy, being heavily involved in the production of components later assembled into finished goods in China, is "complementary" to that of the mainland. "In general I think the agreement should generate benefits to Taiwan," he says, while adding that as with previous similar pacts in the region, it could take years for the full impact to become clear.

Aside from the direct effect on trade, signing such an agreement with China is likely to help Taiwan extend economic ties beyond the mainland. China's ongoing moves to isolate Taiwan diplomatically - Beijing does not recognise countries that have diplomatic relations with Taipei - mean the island has struggled to develop free-trade agreements with its neighbours or countries further afield. Taiwan has only North Korea for company when it comes to countries in the region that have failed to strike trade agreements with China and members of the Association of South-East Asian Nations (ASEAN). The rival east Asian economies such as South Korea have finalised such deals and are reaping the economic benefits. Seoul concluded a third free-trade agreement with ASEAN a year ago covering investments, following similar pacts on goods and on services.

Taiwan hopes the trade accord with China will pave the way for agreements with the ASEAN block and ultimately with larger economies, even the US. While Taipei looks to extend economic ties, Dr Ding believes Beijing has one eye on political unification. "Beijing has an even longer perspective, that is to make the Taiwan people, especially the so-called pro-independence population, reduce their hostility to [the] PRC [People's Republic of China] and to create feelings of being a family," he says, adding this would "help the political integration".

Significant tensions remain between China and Taiwan. The mainland regards the island as its territory and has promised to invade if the Taiwanese leadership formally declares independence. This year Taiwan struck a $6.4bn defence agreement with the US, equipping itself with an array of mine-hunting ships, Patriot missiles and Black Hawk helicopters, much to Beijing's anger. Ms Ren says such "political uncertainty" between Beijing and Taipei and the competing nationalist and independence factions in Taiwan remain a "pitfall" to stronger economic links. In looking to deepen economic ties with the mainland, Taiwan is engaged in a delicate balancing act, Dr Ding believes.

"Taiwan will make every effort to do two things that look contradictory," he says. "On the one hand to benefit as much as possible from being part of the great Chinese market system, not just the mainland but also Hong Kong, South-East Asia and the overseas Chinese business network. "At the same time [it wants] to maintain the eventual economic independence of the Taiwanese economic system. They want these two things together. That will become more and more difficult."