Good News For Cross Straits Relations

I haven’t seen many headlines, but make no mistake about it, the relationship between the Republic of China (“ROC” or “Taiwan”) and the People’s Republic of China (“PRC” or “China”) has never been better.

I spent the last few days in Taipei, the capital of the ROC, speaking to financial and business leaders, and the mood there is decidedly upbeat. The main cause for optimism is the constructive relationship that has developed between Taipei and Beijing, as evidenced by the imminent signing of the Economic Cooperation Framework Agreement (“ECFA”), which will eliminate many tariffs and encourage investment flows between China and Taiwan.

Unlike Hong Kong, a former British colony, and Macau, a former colony of Portugal, whose fates were decided by treaties between Great Britain and China, and Portugal and China, respectively, the ultimate fate of Taiwan has been uncertain. While no one knew what life in Hong Kong and Macau would be like afterwards, there was no question that Hong Kong would officially become part of China in 1997, and that Macau would follow two years later. In the case of Taiwan, economic forces have been drawing it closer to China since China’s opening in 1978, while political forces have tended to pull in the opposite direction.

Between 1895 and 1945, Taiwan was a Japanese colony. As its first overseas colony, Japanese intentions were to turn the island into a showpiece “model colony,” and much effort was made to improve the island’s economy, industry, public works and change its culture. After the defeat of Japan during World War II, however, Taiwan was surrendered to the Allies, and the ROC, which was established in 1911, proclaimed the “retrocession” of Taiwan to the Republic of China and established the provincial government at Taiwan.

Unfortunately, events in the post World War II period caused Taiwan to become a source of contention between the United States and China. Ever since President Harry S. Truman pledged to protect Taiwan against a possible PRC invasion during the first year of the Korean War, Taiwan has been a strong ally of the United States. Taiwan has provided a valuable Pacific base for U.S. missiles and has benefitted from massive American aid and trade. For its part, the PRC has always regarded Taiwan a part of its sovereign territory and has had full reunification as its objective.

Under the leadership of Taiwan President Ma Ying-jeou, Taiwan is moving in that direction — at least economically. Over the past two years, President Ma and his government have concluded 12 agreements with China on flights, food safety, opening Taiwan to tourists from the rest of China and mutual judicial assistance in the past two years. “All these agreements contribute to prosperity and stability in Taiwan and nothing in these agreements compromised Taiwan’s sovereignty or autonomy,” President Ma said in an exclusive interview with CNN’s Christiane Amanpour which was aired last Friday.

In that same interview, President Ma told Ms. Amanpour that “We will continue to reduce the risks so that we will purchase arms from the United States, but we will never ask the Americans to fight for Taiwan. This is something that is very, very clear.” President Ma added that the risk to the United States of a conflict between China and Taiwan is the lowest in 60 years as a result of his government’s efforts to build a rapprochement with Beijing.

Direct flights between major cities in China like Beijing and Shanghai and Taipei are one sign that the two economies are drawing closer together, and tourism in both directions is flourishing as a result. For example, flights between Taipei and Shanghai are full as Taiwan tourists flock to the Shanghai Expo. The flow of capital from China to Taiwan which is expected as a result of ECFA will further strengthen economic ties.

The practical impact of the improved relationship between Taiwan and China is a big economic boost to Taiwan companies. Less cross-straits tensions will reduce the risk of investing in Taiwan and should lead to higher stock market valuations. Moreover, Taiwan companies will benefit from increased sources of capital, and the elimination of many tariffs that will better enable them to integrate their factories in Taiwan with those in China.