Wednesday, November 5, 2003

Taiwan Ignores China at Its Own Economic Peril

Pacific News Service, Commentary, George Koo, Posted: Nov 05, 2003

Editor's Note: Taiwan's impressive economic gains are poisoned by its refusal to increase ties to mainland China. U.S. influence in the region is similarly diluted by divisive cross-strait relations.

Taiwan President Chen Shui-bian flew halfway around the world to shake hands with Secretary of State Colin Powell in Panama, but he won't or can't reach across the Taiwan straits to Beijing. Unfortunately for the United States, potential American influence in Asia is being diluted by this contradiction.

Recently, Taiwan's Ministry of Economic Affairs organized a business alliance conference to attract foreign direct investments. Absent were representatives from China, Taiwan's biggest economic partner.

A parade of multinationals dutifully marched up the stage to announce plans to invest in Taiwan. Particularly impressive was the message that Taiwan has moved up the high tech food chain toward increasingly higher value-added economic activity.

Taiwan pioneered the idea of making semiconductor devices as a service for others, and now owns up to three quarters of the world's semiconductor fabrication capacity that is for hire. A complete industry sprang up around the now-renowned Taiwan Semiconductor Manufacturing Corporation, a multibillion dollar company. Because of TSMC, Taiwan has become a major semiconductor power to rival the United States, Japan and Europe.

Fabless Semiconductor Association came to the Taipei conference to announce the formation of its first office outside the United States, in Taipei. A "fabless" semiconductor company concentrates on the design of new chips for new applications and contracts the making of the devices to the likes of TSMC.

Taiwan has made an even more amazing leap forward in the manufacture of flat panel displays, capturing over 30 percent of the world market by 2002 and surpassing Japan to become the second largest supplier of the displays, behind South Korea.

Flat panel displays are used in laptops and notebook PCs, camcorders and other electronic gadgets. Their next huge application will be on hang-on-the-wall color TVs.

Yet, Taiwan's future in both semiconductors and flat panel displays rests squarely on its symbiotic relationship with China. China just surpassed Japan as the major supplier of IT (information technology) products to the United States. More than 65 percent of these products were exported by Taiwan companies operating on the mainland.

At the business alliance conference, Vice Minister Yen-shiang Shih was asked if Taiwan could maintain its $30 billion trade surplus with China -- an annual surplus that has more than covered Taiwan's deficit with the rest of the world.

Yen candidly replied that Taiwan will continue to provide the high tech computer innards and consumer electronic appliances that are assembled and exported from China. So long as China keeps its competitive manufacturing edge, Taiwan will continue to have an outlet for its sophisticated semiconductor chips and flat panel displays.

Of course, it's not just in China's export of high tech products that Taiwan serves as the crucial partner. Taiwan also has the insider advantage in serving China's vast domestic market. From fast food to fashion to consumer electronics, Taiwan's presence can be seen in all walks of China.

More than a million Taiwanese now live and work in China. Thousands of young Taiwanese flock to Beijing or Shanghai for graduate school. Despite these developments, the Taipei government would rather look elsewhere for its economic partnerships.

According to Taiwan's own statistics, only 145,000 mainland professionals have been permitted to visit the island in last 10 years. About twice that number of visitors goes from Taiwan to mainland China every month.

Taiwan companies have invested over $100 billion in China. China has made zero investments in Taiwan because local regulations forbid it.

Tourists out of China already represent the third largest in the world, but none are allowed to visit Taiwan. Every year about 10 million mainlanders visit Hong Kong. If one out of 10 were to visit Taiwan, it would more than double the number of tourists Taiwan receives annually. Taiwan's economy would easily get a billion-dollar shot in the arm.

At the conference, Taiwan made clear its desire to develop its tourist industry. Yet the most obvious source of tourism, from across the strait, was ignored. In contrast, about two out of every three Taiwanese who go abroad for vacation went to the mainland.

China's economic boom has benefited everybody in the region, not just Taiwan. Trade with neighboring Asian countries is increasing at 50 to 100 percent per year. Everybody seems to understand the importance of China as part of the integrated regional economy except the Taiwan government.

In action and in rhetoric, Chen Shui-bian tends to dismiss China's importance and point to Taiwan's own supposedly more democratic and by implication superior economic system. The United States has heretofore supported Chen's delusion. Instead, the Bush administration should be telling Taiwan to listen to the wise counsel of Singapore's senior statesman Lee Kuan Yew.

Recently, the former prime minister publicly urged the current Taiwan government to face economic reality and play less politics in its cross-straits relations. Whether it's high tech, low tech or no tech, Taiwan's future lies in maximizing its relationship with China, not minimizing it.