**The Impacts of China's Economic Growth and Cross-Strait Economic
Integration on China-Taiwan Relations:**

**Implications for U.S. Economic and Security Interests in the
Asia-Pacific Region**

**Testimony Before U.S.-China Economic and Security Review Commission**

**Hearing on "China's Growth as a Regional Economic Power: Impacts and
Implications"**

**December 4, 2003**

## Peter C.Y. Chow

Department of Economics

The City College and Graduate Center

City University of New York

Convent Avenue and 138 Street

New York, New York 10031

E-mail: chowpeter@yahoo.com

\*\*\*

I.  **Extent to which Taiwan's domestic manufacturing sector is being
    "hollowed out" by China's economic growth**

> Taiwan and China are at different stages of economic development with
> different endowments of natural and human resources. Hence, there is a
> complementarity as well as competitiveness between these two
> economies. Since the mid-1980's, Taiwan has transformed itself from a
> capital importing into a capital-exporting country. Meanwhile, China's
> economic reform and open door policy also transformed itself into an
> emerging market economy, and to attract foreign capitals for its
> development.
>
> The first wave of Taiwanese foreign direct investment (FDI) in China
> was mostly engaged in small scale with an average dollar amount of
> less than \$ 1 million per case, and mainly in labor-intensive
> industries which Taiwan had no longer had its comparative advantage in
> the world market after its currency appreciated in accordance with the
> Plaza Accord in 1986. The second wave of FDI in China was gradually
> expanded to relatively larger scale of production with an average
> dollar amount of \$ 2 millions or more per case, and was expanded to
> more technological-intensive industries and some lower-end sectors of
> high-tech industries.
>
> Many economists in Taiwan believed that the threshold of outward FDI
> in China occurred in 1994 when China's Reminbi ( RMB) devalued nearly
> 40% against with the U.S. dollar. China's unilateral devaluation of
> its currency in 1994 accelerated Taiwanese FDI in China to take the
> advantage of new competitive edge on the world market in general, and
> in the U.S. in particular. The worldwide recession of information
> industry in 2001 made the third wave of Taiwanese FDI in China. The
> new wave of outward FDI was dominated by investment in electronic and
> information industries, which accounted for nearly 40% or more of
> Taiwan's total FDI in China. In the past three years, the scale of
> Taiwanese FDI in China was increased to an average of \$ 3 million per
> case.
>
> In order to compete for the orders from the " fabless semi-conductor
> firms, computer and information industries in the U.S., many Taiwanese
> foundries and manufacturing firms were forced to engage in offshore
> production and outsourcing for cost advantages. By 2002, more than 40%
> of Taiwan's total outward FDI were destined to China. The
> ever-increasing trend of concentrating FDI in China was aggravated
> after Taiwanese government deregulated its foreign investment policy
> \-- the so-called" active openness and effective management" \-- in
> China in 2001. Statistics of the total amount of FDI varies, but it
> was estimated from a conservative of \$ 40 billions by Taiwan's
> Ministry of Economic Affairs (MOEA) to \$ 67 billions by its Central
> Bank. The accuracy of FDI statistics also depends on whether or not to
> include those indirect FDI in China by Taiwanese firms through some
> tax heaven places such as U.S. Virgin Islands and Cayman Islands.
>
> While globalization is not without legacy and no transition is pain
> free, Taiwan, with its economic structure dominated by small and
> medium enterprises (SMEs), certainly would have more pains and take
> more time to overcome its painful transformation process. The
> incumbent government in Taiwan has been facing an unprecedented
> challenge of internal and external constraints to overcome its
> globalization syndrome. In addition to macroeconomic stabilization
> policies, Taiwan would need to implement the necessary structural
> adjustment policies and manpower programs to retrain those dislocated
> workers in the "niche industries" in the next 5 years so to transform
> itself into an island of "Green Silicon" and to generate another
> economic miracle in the 21^st^ century.
>
> Economists have no consensus on the so-called " hollowing out"
> phenomenon. The question of whether Taiwanese manufacturing industries
> have been "hollowing out" due to accelerated outward FDI flows and
> offshore production was further complicated by ideological
> polarization and national identity among scholars in Taiwan. If
> "hollowing out" means de-industrialization, then it is true that there
> is a declining share of manufacturing sector in Taiwan's total Gross
> Domestic Product (GDP), which dropped from 33% in 1980's to 25% in the
> late 1990's. But that phenomenon is exactly the course of
> industrialization, which had occurred in most OECD countries when
> their economies became matured and service sector took the lead as the
> most significant sector of their economy.
>
> Nevertheless, Taiwan's government has been worried that China might
> exploit its economic leverage by using economic sanctions to achieve
> Beijing's political goals. Beijing's strategy of "exploiting the
> public to pressure the official" and "exploiting the businessmen to
> encircle the government" ( *yi min bi guan, yi shang wei zheng,*
> **以民逼官，以商围政**) has been a big concern in Taipei. Therefore,
> Taiwan should not, and could not follow the footsteps of Hong Kong,
> which depends a lot on its expanding service sector to absorb those
> labor forces displaced from manufactured industries amid its high
> unemployment) \-- the offshore production of its manufacturing
> industries in China reduced its total number of manufacturing firms
> from more 80,000 to about 18,000 due to its integration with the Pearl
> River Delta. For its survival in the globalization, Taiwan has to
> upgrade its knowledge-intensive industries and to maintain its
> technological lead in those high-tech industries less its itself be
> Hong Kong-ized, economically and politically.
>
> What Taiwan needs to watch out for is its economic integration with
> China has led to an "asymmetric trade dependence" on China's market.
> Asymmetric trade dependence referred to the fact that Taiwan's trade
> dependence on China's market is much greater than China's trade
> dependence on Taiwan's market. Taiwan's exports to China accounted for
> 22.56% of its total exports, whereas China's exports to Taiwan only
> accounted for 2.44% of its total exports. This is mainly due to the
> relative market sizes between Taiwan and China. Since the 1990's,
> China has replaced the U.S. as the largest market for Taiwan's
> exports. Lopsided dependence on China's market could possibly
> implicate its domestic politics toward China, on the controversial
> issue of "national identity" and even its de facto "political
> sovereignty". Historical examples of such "hollowing out" and the
> subsequent political fallout are numerous, but Taiwan authority has
> had a hard time to convince its business entrepreneurs to diversify
> its outward FDI due to geographic proximity and cultural affinity with
> China.
>
> Moreover, Taiwanese economists are relatively sharper in micro
> managements of cost benefit analysis, rather than in macro planning
> for a grand strategy for its national development. Topics such as on
> externality resulted from FDI in a hostile country on economic and
> national security were not too popular at all in the media network and
> opinion forum, which have been reportedly alleged to be penetrated by
> Chinese capital from the mainland. Proposals on controlling technology
> diffusion to China, on imposing an upper limit and to levy a national
> security tax on FDI in China were hard to implement on an immature
> democracy like Taiwan under which the incumbent has not controlled the
> majority in the legislative body.

II. **Manner in which economies of both China and Taiwan benefit from
    the unique dynamics of Cross-strait economic relations**

> According to State Council of the People's Republic, China has more
> than 317 millions of agricultural surplus labor to be employed. This
> is a typical model of "unlimited supply of labor" in development
> literature. From the dynamics of Cross-strait economic interactions,
> China gets

i.  Inward FDI to fill up the gap between domestic savings and
    investment for its target rate of growth.

ii. Technology transfers from Taiwanese subsidiaries as they became more
    and more localized with their host economies

iii. Limited training of migrant workers who were previously agrarian
     workers and were insulated from the world economy prior to China's
     economic reform.

iv. Support of foreign invested enterprises (FIEs), which provide new
    available factory jobs for China's working population by adopting
    some standardized production techniques.

> It was estimated that one percentage point of economic growth in China
> would generate an additional one million new jobs in China. An 8% of
> economic growth is a miracle in the rest of the world outside China,
> but is just about right for China to absorb its ever increasing
> migrant labors and those laid-off from China's ailing state-owned
> enterprises ( SOEs). Hence, inward FDI would help China to absorb that
> surplus labor, and mitigate its socio-political pressure of
> unemployment.
>
> It was estimated that foreign enterprises in China have created nearly
> 23 million jobs for China since China's economic reform and open door
> policy. By the end of 2002, FIEs contributed 52.2% to China's total
> exports. If Taiwan's FDI in China was accounted for 10 to 15% of
> China's total inward FDI, then one probably could argue that Taiwanese
> firms in China have generated 2.3 to 3.5 million jobs in China.
> Nevertheless, Taiwan domestic unemployed people was estimated to be
> near half million only, or 800,000 at a broader definition of
> unemployment. But, in order to maintain their international
> competitiveness, those Taiwanese firms have had to engage in offshore
> production rather than stay at home to be driven out from the world
> market. This is a process of structural transformation in Taiwan as
> its economy has been highly open and closely integrated with the
> global economy.
>
> However, since most FIEs in China are either export-oriented or aiming
> at its potential domestic market, the market orientation of FIEs in
> China has strong repercussions on China's economy, on regional as well
> as global economies too. China as a factory of the world economy would
> create significant impacts on the trade and economic structures as
> well as labor employment in its neighborhood countries and its trading
> partners including the U.S.
>
> In economics literature, the trade theory of " factor-price
> equalization" implies that with freer trade and investment flows, many
> of China's trading partners including the U.S. would suffer from lower
> wages and higher unemployment rates, especially, in their import
> substitution industries. Moreover, while freer trade will benefit both
> trading partners, income distribution will be deteriorated between the
> trade and non-trade sectors and between the export and
> import-substitution sectors unless appropriate social welfare policies
> are implemented. The ongoing U.S. economic recovery may move faster
> than anticipated, but the unemployment rate would remain stubbornly
> high due to dislocation of labor in those import-competing industries.
> Integrating China into the global economy has generated much more
> significant impacts on the world economy than did the four little
> tigers (Hong Kong, Korea, Singapore and Taiwan) combined in the period
> from the 1960s through 1980s.
>
> For Taiwan, additional pains of trading with China occurred in its
> ailing real estate and housing market due to the emigration of half a
> million affluent multinational employees residing in China. The
> declining real estate and housing market, many of which have been
> serving as collateral for direct finance, led to the ever-aggravating
> non-performing loans in many of its commercial banks. Taiwan's
> domestic financial crisis is not inevitable, but much of its problems
> were rooted from over-lending to those firms invested in China. To
> provide a safety net for those unemployed people, Taiwan's government
> has to expand its unemployment compensation benefits and suffer from a
> swollen government budget deficit in recent years \-- though the
> cumulative government debt, as a percentage of total GDP was limited
> to 40% by law.
>
> Since the 1990s, electronics and electrical appliances sectors have
> been accounting for more than 40% of Taiwan's total outward FDI in
> China. Technological diffusions through "spillover effects" of FDI are
> exemplified by engagements of Taiwanese IT subsidiaries in China in
> expanding R & D functions. China has taken over Taiwan in some lower
> end of production lines in some of those IT industries. Many Taiwan's
> IT subsidiaries in Beijing, Shanghai and other parts of the Yangtze
> Delta have created a set of strong " industrial clusters" for China.
> In fact, China was able to adopt the "leapfrogging competition"
> strategy which has enabled itself to surpass other rivals through
> bypassing certain stages of technological trajectory, and to jump
> straight into a new generation of high tech industry by the end of the
> 20^th^ century.
>
> Certainly, much of Taiwan's exports to China were induced by its
> outward FDI in China. Taiwan has been enjoying a substantial trade
> surplus against China in a bilateral trade of \$41 billion, Taiwan has
> a trade surplus of \$ 25 billion against China in 2002. But, on the
> capital account, the nearly unidirectional capital flows to China have
> offset its trade surplus a bit. The overall balance, which includes
> both current and capital accounts, is much less than what has been
> shown in any official trade statistics. Until Taiwanese investors are
> free to send their profits through remittance back to their homeland,
> the macroeconomic benefit of investing in China is subject to public
> scrutiny.
>
> In terms of competing for technology upgrading, Taiwan has contributed
> more for China than the other way round. While Taiwan's major sectors
> are characterized by their vertical disintegration and pursuit of
> OEM/ODM contracts for brand names without access to the final market,
> China was able to take the advantage of " de-linking manufacturing and
> R & D" by many Taiwanese subsidiaries. In spite of the fact that
> Taiwan-based firms may still remain in the driver's seat in terms of
> profit distribution, its global supply chain could become vulnerable
> to probable China's economic sanction, if Beijing intends to pursue
> its reunification of Taiwan at all costs as Premier Wen Jiabao
> declared recently.
>
> It is a unique development to have both economies became more and more
> integrated, but both governments in Beijing and Taiwan could not even
> negotiate with each other. The dilemma of having an economic
> dependency on China's market and political aspiration of maintaining
> "independent sovereignty", de facto or de jure, has aggravated since
> the Taipei lifted its indirect trade with and investment in China.
> Consequently, the paradox of "economic dependence, but political
> hostility" has undermined Taipei's leverage in dealing with China.

III. **Impact of China's economic development on Taiwan's role in the
     global supply chain**

     a.  What ***has been*** Taiwan's role in the global supply chain?

Taiwan took several steps before it reached what it is today. From
technology of transistor radios from RCA in the early 1960s to the third
largest producer of IC products in the 1990s, Taiwanese firms benefited
from U.S. technological assistance and a "reverse brain drain",
especially during and after the recession in the 1981-82 in the U.S. By
developing from manufacturing, assembly, etc. in the lower end of those
IT industries, Taiwan now has the capability to manufacture the highest
quality IT products for world-class companies like Dell, IBM, Compaq and
Hewlett Packard. The evolutionary change of Taiwanese IT firms by
engaging in offshore production and outsourcing in recent years has
expanded the international horizon of their grand strategic planning
globally. Peace and Stability in the Taiwan Strait is imperative to
maintain the sustainability of that global supply chain.

b.  Why should the US care about Taiwan's role in the global supply
    chain? Why is this important to us?

Because many U.S. computer and information industries have been relied
on Taiwan as one of their major suppliers in recent past, Taiwan has a
direct linkage with American economic and strategic interest. When the
electric fuse failure disrupted the chip production at Hsin Chu Science
and Industrial Park during the September 21 earthquake in Taiwan in
1999, the stocks of many U.S. computers companies were crumbling on Wall
Street.

> The points that I would like to make here are;
>
> i\. China's cheap labor is fine for producing technically simplistic
> and standardized commodities like shoes, textile/clothing and other
> labor-intensive products, but production of sophisticated components
> of high-tech such as chips and other computer peripherals require more
> stringent training, quality control, management, etc. Taiwanese
> subsidiaries in China would have to insure that OEM production of
> these parts and components in China have met the quality standard and
> delivery schedule required by their customers. Disadvantage of
> dependence upon one single country, as supplier of choice for one
> industry is similar to U.S. import dependence on oil and gas from OPEC
> if China decides to run against U.S. strategic interests in the
> region. While the risk of U.S. dependence on fossil fuels, of course,
> is different from that of its imports dependence on chips and IC
> products, there is still a potential to adversely impact the industry
> that undergoes very rapid and short business cycles. Who could foresee
> that Iran would become a hostile country to the U.S. when Washington
> had a honeymoon with the deposed Shah Pahlavi in the 1960s and 1970s?
>
> ii\. Risk of political unrest or upheaval in China could
> disproportionately affect the global supply chain. The current
> logistic operation of global supply chain is systemically organized in
> such way; the innovative design made by those " fabless "
> semi-conductor firms and design houses in Silicon Valley, California,
> subcontracted to wafer foundries in Taiwan through OEM and OBM, and
> then manufactured, tested and assembled by Taiwanese subsidiaries in
> China is a subset of globalization of high-tech industries. Taiwanese
> firms were the largest producers of more than 14 IT products in the
> global supply chain, most with greater than 50% of world market
> shares. Any probable disruption on the global supply chain of IT
> products- from Silicon Valley in California through Hsin Chu Science
> Industrial Park in Taiwan, and to Kunshan nearby Shanghai, would
> create significant impact on the IT market/ industry in the world.
> Therefore, to insure the sustainable growth of IT and other high-tech
> industries, it is advisable for U.S. to intervene with Taiwan IC
> industries by mandating them to diversify their offshore production
> sites, and not to over concentrate their production sites in China
> alone. This goal could be achieved easily, if the U.S. firms would
> require that Taiwanese sub-contractors to really control the
> "strategic components" on those IC products at their home base in
> Taiwan, and to allow those less essential parts and components to be
> scattered around South East Asian countries so as to maintain regional
> balance and stability. By doing so, U.S. economic and security
> interests in Asia-Pacific region will be better insured without paying
> any premium as additional costs from its taxpayers.

IV. **The economic and other forces driving the steady flow of
    investment capital into China from Taiwan**

    a.  Is there a need for much explanation here? What are the primary
        reasons? Obviously, there are push forces internally and pull
        forces externally. Geographic approximate and cultural affinity
        led Taiwanese investors destined to China. Taiwanese firms were
        motivated by economic incentives of profit maximization without
        political consideration-though the resultant impact of offshore
        production in China on domestic politics is substantial.

    b.  Do many businesses decide to open in China so they can avoid
        environmental regulations? This would be a good argument for
        requiring a proportion of manufacturing products to be
        originated from countries where the regulations are stronger
        and/or regulatory authorities are less corrupt, etc.

    c.  China adopted a strategy of "substituting market access with
        technology" by inducing FIEs to invest in China through
        government control of licenses on cello-phones. In fact, this
        policy is against the "national treatment " under the WTO. But,
        few people realized it and the issue have not been brought to
        the attention of the WTO yet.

V. Whether Taiwan perceives China's pursuit of regional and/or bilateral
Free Trade Agreements, in Southeast Asia for example, as regional
economic catalysts or as threats to Taiwanese economic and security
interests

Undoubtedly, China has never felt comfortable about Taiwan's aspiration
of being an active participant in the regional/ global supply chain.
China signed a free trade agreement with ASEAN countries \-- the ASEAN
plus China, and a Closer Economic Partnership Arrangement (CEPA) with
Hong Kong and Macao. But, China has never made them "open regionalism"
as mandated by the trading framework of the WTO. Meanwhile, by blocking
other individual members states of ASEAN such as Singapore from signing
bilateral FTA with Taiwan, China has been trying to marginalize Taiwan
from Asia- Pacific region, and undercut U.S. strategic interests in
maintaining regional stability and balance.

> Moreover, one should point out that by excluding the U.S. from the
> ASEAN plus one, and or ASEAN plus three (China, Japan and Korea), both
> the U.S. and Taiwan were equally suffering from China's rising
> hegemonic power in the region. It was argued that China's initiation
> of CEPA is directly against APEC, not just in the opposite alphabetic
> wording, but also in its deeds. As every American citizen understands,
> the U. S. government has been pushing for an APEC-FTA in 2010 among
> developed countries and 2020 among all developing APEC members in the
> region. But, China chose to exclude the U.S. from participating in the
> regional trading bloc as an important partner. Therefore, China's
> hegemonic economic integration, either under ASEAN plus one and CEPA,
> is threatening to U.S. strategic interests. China's motivation today
> is similar to that of Japanese military regime in the 1930s when it
> initiated the " Greater East Asian Co-Prosperity Sphere" in South East
> Asia.
>
> To avoid of being marginalized from regional trading blocs and to
> further integrate its economy with the global one, Taiwan signed a FTA
> with Panama in September 2003 as a symbolic achievement in its efforts
> to expand international horizon in Latin America. Taiwan is helping
> the American backyard in Latin America by expending its trade and
> investment flows with countries in the Southern Hemisphere. On the
> other hand, the Capital Hill charged the US. International Trade
> Commission to conduct a study on the probable impact on the
> U.S.-Taiwan Free Trade Area. It is important for both the U.S. and
> Taiwan to resume their trade negotiations on TIFA (Trade and
> Investment Framework), and to resolve those pending trade issues such
> as rice import of rice from the U.S., the intellectual property rights
> protection (IPRs), pharmaceutical products and liberalization of
> telecommunication so that a U.S.-Taiwan Free Trade Area Agreement
> could be signed any time soon. By signing a FTA with Taiwan, which
> could serve as a "hub of regional operation center" for many U.S.
> firms in the Asia-Pacific region, the U.S. could better protect its
> strategic and economic interests in the region. The U.S. government
> should, at least, offer Taiwan a FTA agreement on similar conditions
> as it has offered in the U.S.-Chile FTA agreement signed in 2002.
> Policy assessments on the impacts of FTA should be based on
> macro-dynamic and overall national interest, rather than microeconomic
> analysis of cost-benefit for individual sectors or industries.

VI. **The implications of increasing cross-strait economic cooperation
    and interdependence on the US-Taiwan relationship**

> The trade pattern across the Taiwan Strait has been dominated more and
> more in intra-industry trade as projected by many model simulations.
> In general, trade friction is much easier to resolve under
> intra-industry than inter-industry trade because of inter-relatedness
> between trading partners. Hence, economic mutual interdependency
> between China and Taiwan will further increase in the foreseeable
> future. How would that development affect the U.S.-Taiwan
> relationship? I have the following points to make:
>
> American and Taiwanese people have shared a common value of freedom,
> peace and democracy. Since Taiwan's democratization gained its
> momentum under former president T.H. Lee in the early 1990's, Taiwan
> has consolidated its democratic foundation and political
> infrastructure to make its socio-political system more and more
> compatible with the U.S. The U.S. has been and still is the most
> important ally for Taiwan in its pursuit of economic prosperity and
> democracy. Yet, the increasing cross-strait economic cooperation has
> made China as the largest trading partner for Taiwan. China and Taiwan
> is a unique pair of trading partners-closer economic relations amid
> political hostility. Never before have any two rival regimes engaged
> in so close economic integration between them as China and Taiwan have
> had.
>
> While economic integration across the Taiwan Strait has mitigated the
> possibility of military confrontation, it has not resolved the
> political dispute on Taiwan independent sovereignty, de facto, if not
> de jure, So far, China is not willing to negotiate with Taiwan, and
> has still as not followed the "rules of game" under the WTO to
> negotiate with Taiwan faithfully on trade-related issues, despite the
> fact that the U.S. has been working so hard for both of them to gain
> access to that world trading body.
>
> If the U.S. intends to identify the stabilizing forces in the
> Asia-Pacific region, then the U.S. would have to count on Taiwan's
> continued prosperity with freedom and democracy, not to observe the
> probable development of Taiwan's being integrated with a totalitarian
> regime in China. The U.S. should try to help Taiwan to overcome its
> structural transformation in its economic development and democratic
> consolidation, not to observe it to be merged with a Communist regime,
> which has no timetable to legitimize its leadership by any format of
> democratic process. The bottom line is for the U.S. to recommend that
> both China and Taiwan to utilize the WTO as a platform to resolve
> their trade-related issues and to institutionalize their trade regimes
> to make their bilateral trade flows become compatible with the WTO
> framework.

VII\. Summary and Conclusion: A Pareto Optimum on Cross Strait Economic
Integration

> Economic and trade relations across the Taiwan Strait have been
> undergoing an evolutionary process from indirect, quasi-direct to
> direct and open trade. In spite of political hostility, trade and
> investment flows have been increasing steadily, and both economies in
> China and Taiwan have become more and more integrated informally. As
> trade and investment flows across the Taiwan Strait have been
> increasing steadily, economic mutual interdependence between China and
> Taiwan has been deepening as well, though there is an asymmetric trade
> dependence on China's market.
>
> A Pareto optimum on economic integration across the Taiwan Strait
> means both China and Taiwan can be benefited, and neither is adversely
> affected by the trade and investment flows. Under such circumstance,
> no other trade-off could make one better off without making the other
> worse off. Hence, Pareto optimality is an ideal paradigm of maximum
> social welfare for all. The status quo of the trade regimes across the
> Taiwan Strait is that China and Taiwan, in spite of political rivalry
> on Taiwan's sovereignty, are two WTO members who have been trading
> steadily with each other without normalizing their trade and
> commercial relations. A Pareto improvement for Taiwan means to enhance
> its welfare without losing others' benefits including the status quo
> of Taiwan's de facto independent sovereignty
>
> Due to China's military intimidation to attack Taiwan, a political
> offensive to lure Taiwanese compatriots for unification, and
> diplomatic isolation to undercut Taiwan's international status, Taiwan
> has to consider the "spillover effect" or " externality" in trading
> with a political rival such as China. The externality of trade with
> and investment in China includes both economic and non-economic
> interests. Hence, it is necessary for Taiwan to internalize these
> externalities by defining Pareto improvement in all aspects of social
> welfare including the tangible and intangible benefits of Taiwan's "de
> facto" independent sovereignty. A Faustian trade-off between economic
> integration and political sovereignty is not a Pareto improvement for
> Taiwan.
>
> Trade is a two-way traffic and expansion of the bilateral trade flow
> must be a "non-zero sum game" or a "positive sum game". It is naïve
> for either trading partner to think that one could take the advantage
> of further economic interactions at the cost of the other under the
> trading framework of the WTO.
>
> Trade and investment flow could not, and should not be politicized as
> an instrument for China's drive for unification. To further smooth the
> trade and investment flows across the Taiwan Strait, it is necessary
> to institutionalize the systemic mechanism on trade and economic
> issues by setting aside any other political disputes. Hence, the WTO
> provides an excellent platform for both China and Taiwan to deal with
> each other on trade-related issues without affecting the status quo of
> their political relations, and to serve as a buffer stock for both of
> them to resolve their trade disputes if needed. Hence, the U.S. could
> push both China and Taiwan to pursue a probable paradigm shifts toward
> a Pareto optimum in the era of post WTO entry.
>
> .
>
> Since democracy is a universal value for all human societies, I am
> sure that both American and Taiwanese people have strongly believed
> that freedom and democracy will eventually overcome authoritarianism
> and totalitarianism. I hope that that China eventually follow the "
> rules of game" of the WTO trading framework without imposing any
> pre-conditions on Taiwan's sovereignty to engage in its trade
> negotiation with Taiwan. China has to understand that WTO is not a
> political arena but rather a platform for trade negotiations, under
> which China has to deal with all its members including Taiwan on equal
> basis.
>
> China should not underestimate the political wisdom of Taiwanese
> people whenever foreign threat and invasion become a reality. The
> rising of Taiwanese nationalism and the aspiration of Taiwan identity
> will become stronger and stronger as long as China continues to
> antagonize Taiwan. China has to realize that its illegitimate claim of
> Taiwan's sovereignty is totally counter-productive for further trade
> and investment flows across the Taiwan Strait. And its military
> intimidation and diplomatic isolation against Taiwan will generate
> more resentment among Taiwanese people, nurture Taiwanese nationalism,
> and the syndrome of Asian Orphan among Taiwanese. All these policies
> are detrimental to further economic and trade relations across the
> Taiwan Strait. China needs to move more vigorously by expressing its
> "good will" to negotiate with Taiwan without any pre-condition so as
> to reach a Pareto optimum on the cross Strait trade.
>
> Finally, I must reiterate that U.S. has a strong economic and security
> interest to maintain the smooth trade and investment flows along the
> global supply chain. As a Pacific power, the U.S. would certainly like
> to maintain the peace and stability in the Asia-Pacific region under
> which the relations across the Taiwan Strait is a central focus.
> Therefore, American support on Taiwan's structural transformation is
> crucial, and an U.S.-Taiwan FTA would reinforce Taiwan's confidence in
> upgrading its economy as a "Green Silicon Island". Moreover, as the
> U.S. has supported both China and Taiwan to access to the WTO, the
> U.S. should further push both of them to fully exploit the WTO as a
> platform to negotiate with each other faithfully.