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China-Taiwan Trade: No Dire Straits

World economy: As tensions between the two longtime foes have increased, commercial ties have flourished.


TAIPEI — The frostier relations get between Taiwan and mainland China, the faster their trade and investment links seem to grow.

In recent months, Beijing has tried to bully Taiwan's voters, cajole its newly elected government and, at one point, even threatened to use force if Taipei didn't agree to start talks on unification with the mainland. Taiwan has stared down the bullying and unleashed some verbal zingers of its own.

A high-level defense review paper issued Monday by Beijing summed up the political relationship between the two as "complicated and grim."

The effect of all this on economic ties? A 20%-plus jump in two-way trade across the Taiwan Strait during the first five months of the year, a steady rise of Taiwanese direct investments on the mainland and strong evidence of more growth to come.

And now, Taiwan is poised to legalize trade for the first time between two of its outermost islands and the mainland--a development heavy with symbolism for the future.

At a time when trade and commercial relationships have an increasingly important role in defining the global order, there are few places in the world where business so ignores the political tensions surrounding it. In a very real way, the link represents a triumph of commercial self-interest and the need for economic growth over ideology.

Few expect any changes soon.

"In the medium or longer term, we will need a [political framework], but not for the short term," said Tsai Ing-wen, the respected chairwoman of Taiwan's Mainland Affairs Council, the body mainly responsible for relations with mainland China.

Added Timothy Conlin, chief economist at ING Baring, who tracks the cross-strait relationship from Hong Kong: "I see nothing to suggest this is going to change."

The cross-strait commercial link thrives for one simple reason: It benefits both sides. For Taiwan, the mainland offers cheap but efficient labor in a nearby country it understands all too well. For the mainland, Taiwanese investment brings jobs, growth and technology at a time China is in desperate need of all three.

With U.S. companies such as Dell, IBM, Compaq and Hewlett-Packard purchasing as much as $20 billion a year worth of components from Taiwan, American industry and American consumers are also benefactors.

Among the recent developments expected to drive further expansion:

* Taipei has pledged to legalize trade and commercial ties between its two outermost islands, Matsu and Quemoy (also known as Kinmen), and the Chinese mainland by the end of this year. Such a move would be small in trade terms--mainly fishing and agricultural products, much of which already goes on in open smuggling across the few miles of water that separate them from the Chinese mainland. However, observers believe making the trade legal would spur new port and cargo-handling construction that would quickly lead to expanded trade.

"There's the likelihood that this area will [eventually] become a free-trade area . . . an industrial area for Taiwanese businesses who already have investments on the mainland," Tsai said in an interview.

As the first legal trade across the strait in nearly half a century, the move's symbolic value is also considerable. Trade between Taiwan and the mainland has been routed through Hong Kong since it first resumed 13 years ago.

Taipei has recently decided to allow a limited number of Taiwanese banks to open a "representative" office on the mainland. Initially, these offices will not offer traditional banking services, but Taiwan President Chen Shui-bian's government sees the move as a possible first step toward full-scale banking subsidiaries on the mainland.

* The mainland's third-largest air carrier, China Eastern Airlines, recently received official approval to sell a 25% stake in its cargo operations to Taiwan's leading airline, China Airlines. The China Airlines board of directors must still sign off on the deal, which company spokesman Charles Chen described as "too sensitive to discuss at this stage." If it goes through, it would break new ground in the cross-strait relationship.

Establishment of direct passenger, cargo and telecommunications ties between Taiwan and the mainland--the so-called three links--has been near the top of the political agenda in both capitals for some time.

* Taiwan entrepreneur Winston Wong last month announced that his company, Grace THW, plans a $1.6-billion computer chip foundry in Shanghai. His mainland partner: none other than Chinese President Jiang Zemin's son, Jiang Mianheng. The venture would bring Taiwanese chip production to the mainland for the first time in a marriage of Taiwanese production technology and skilled, cheap mainland labor.

Economists see this as a model for the future.

"Authorities in Taipei recognize that if they are moving into a knowledge economy, it means you have to ship production across the straits," Conlin said. "How long it takes for this deal to come to fruition is another question."

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