The Debate

Over-Dependence on China Will Doom Taiwan

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The Debate

Over-Dependence on China Will Doom Taiwan

Becoming too dependent on China will have disastrous economic and political consequences for Taiwan.

Over-Dependence on China Will Doom Taiwan
Credit: Taipei image via Shutterstock

On March 30, up to half a million Taiwanese marched to protest against the passage of the Cross-Strait Service Pact with China, citing an unlawful approval process and the agreement’s potential overarching impact on national security. The people‘s requests were simple and reasonable: renegotiate this agreement with China and establish a monitoring mechanism for all future cross-strait negotiations. However, the Ma administration’s rhetoric has been consistent: approving the Service Trade Pact with China is the only stepping stone to joining other regional free trade regions such as the Trans-Pacific Partnership (TPP) and Regional Comprehensive Economic Partnership (RCEP). According to Ma, Taiwanese people’s resistance to this agreement will merely impede Taiwan’s competency in global markets. Supervision and oversight is not needed; the services pact and closer ties with China is the only way forward.

But is it? Free trade and foreign investment are undoubtedly crucial to economic growth and a nation’s wellbeing, especially for a country like Taiwan, which relies heavily on trade. However, free trade is no longer the sole consideration when your trading partner poses a clear national security threat. The Ma administration’s policies conveniently neglect the consequences of “locking” Taiwan’s economy with the very source of the main security threat facing Taiwan. Ma claims that the Service Trade Pact will boost Taiwan’s economy by allowing Taiwanese companies to leverage the potential of Chinese markets through the lifting of trade and direct investment restrictions. However, this cuts both ways. The government has to bear in mind that the agreement would also expose Taiwan to its rival across the strait — a major concern that drove the people to the streets on March 30, and a concern that has been weakly addressed by the government since then.

Under former Chinese President Hu Jintao, the Chinese government explicitly stated that economic integration with Taiwan would precede actual political acquisition. China’s priority target industries include banking, insurance, public transportation and construction — all of which pose national security concerns because the Chinese Communist Party can use investment in these sectors to dominate Taiwan’s economy, infrastructure, and financial system and penetrate through to affect politics and freedom of speech. Chinese influence has already been seen to have an effect on Taiwan’s news outlets.

The majority of Chinese conglomerates are huge state-owned enterprises (SOEs) controlled by the Chinese Communist Party. On the contrary, most of Taiwan’s service providers are small and medium enterprises (SMEs) with limited resources to expand or resist acquisition. Due to the miniscule size of Taiwan’s companies, even if they were to become competitive by being exposed to foreign markets, if the Chinese were to carry out their intention of “buying out” Taiwan, Chinese SOEs could easily wipe Taiwan’s domestic companies out through acquisition or hostile price competition. Profitability is not an issue to the Chinese government when business activity is a means to an end, as it clearly is in the case of Taiwan.

The Service Trade Pact would provide China access to its target industries in Taiwan, plus the printing and telecommunication industries, where loosened restrictions might enable Beijing to access private information and influence public opinion through publications. If the agreement is approved, the Chinese government will have a lawful channel to leverage its pervasive influence on Taiwan’s economy through massive-scale competition, mergers and acquisition. Taiwan’s service industry account for more than 60 percent of its GDP and the economy will not stand if the pillar of service industry collapses due to the overwhelming pressure from Chinese SOEs. The Chinese government’s political ambitions combined with its SOEs may harm Taiwan’s sovereignty.

In addition, if Taiwan puts all its eggs in China’s basket, it will pose tremendous trade and investment risks — which could ultimately have political implications. In 2013, 62 percent of approved overseas investment and 39 percent of Taiwan’s exports went to China. The reliance of Taiwan’s economy on China is already disproportionate. The potential of a “hard landing” for China’s overheating economy, which already shows the signs of decelerating investment, could overwhelmingly impact Taiwan’s industries. Meanwhile, China’s ability to change laws and policies in an opaque fashion with little notice and possibility for redress adds another layer of risk. The recent examples — banning SOEs from hiring foreign consulting firms and prohibiting government purchases of Microsoft’s newest operating system — reveal the risks all foreign companies face when investing in China. As Taiwan continues to tie its economy more closely to China, unexpected new trade and investment policies from Beijing could pull the rug out from under Taiwan’s economy.

The enforcement of Chinese law is yet another issue. Even though China claims it abides by the rule of law, the degree of enforcement still depends on the local governments and the interpretation varies. Many Taiwanese companies have formed self-remedy organizations, and have urged the Taiwanese government to address the Chinese government’s expropriation of their assets and infringement of their intellectual property. Taiwan, not being a member country of the U.N.’s International Court of Justice or the International Center for Settlement of Investment Disputes in the World Bank Group, cannot file complaints through these channels.

While the Ma administration proudly states that it signed a Cross-Straits Bilateral Investment agreement in 2012, a close look at the agreement reveals the lack of an effective dispute arbitration mechanism — an important component of any investment agreement. For arbitration, the investment agreement merely says that a Cross-Strait Economic Cooperation Committee, consisting of representatives designated by the two Parties, will be established to address dispute settlements.  Facing a trading partner that famously lacks the neutrality that is needed for dispute settlements, a Cross-strait Bilateral Investment Treaty without a third party arbitration mechanism to address disputes renders the agreement meaningless. Hypothetically, if the Chinese government were to expropriate assets from Taiwan’s gigantic corporations (such as Foxconn), there would be lethal ripple effects on numerous Taiwanese companies both up- and downstream. Worse, these firms cannot resort to neutral courts or arbiters for redress. How would the “Cross-Straits Economic Cooperation Committee” be able to serve as an effective dispute mechanism when China is one of the judges?

Moreover, Taiwan’s reliance on China sours relations with the U.S. and Japan, the main players counterbalancing China in the Asia-Pacific region. Taiwan’s national security unilaterally relies on the United States. We have seen some Asian experts in academia propose that the U.S. should consider abandoning Taiwan because of Taiwan’s pro-China stance, one which green-lights economic integration. In such an analysis, the next step of political annexation is seen as unavoidable. These actions have frustrated the U.S. and Japan, which share the same values of democracy, human rights, and liberty. If Taiwan gives up its commitment to self-governance, why would it expect the U.S., and even Japan, to assist Taiwan in any contingency?

Throughout history, it is rare to see a country voluntarily integrate its economy with a country that threatens it. In the 1980s and 90s, the two sides were not as close as there are today, but Taiwan enjoyed a strong economic boom because it found a unique niche in the technology industry. Since China became its most important trading partner and investment destination, Taiwan has suffered a sluggish economy because the products of the two sides are highly interchangeable. Chinese companies have already caught up on the learning curve, and now are directly competing with Taiwan.

Solely relying on China’s market and cross-strait economic integration is not the solution to Taiwan’s economy. The fundamental remedies are industry transformation and technological innovation. If Taiwan continues this trend of leaning toward China for an “economic fix,” its economic (as well as political) doom is predictable. It is time for the Taiwanese government and Taiwan’s industries to halt and rethink their plan. Taiwan must find its next economic niche and march on its own path again.

Ricky Yeh is an Economic Analyst at the Japan Center For International Finance and an alumnus of Johns Hopkins University’s School of Advanced International Studies.