Some people have suggested that Taiwan would benefit greatly from economic integration with China. On the other hand, if Taiwan builds a closer relationship with China, it may be marginalized. One possible solution would be for Taiwan to divide its labor with China, with Taiwan doing high value-added labor and China the low value-added labor. Another suggestion has been that Taiwan could serve as the gateway to China or the stepping stone for foreign countries to enter the Chinese market. All of these suggestions have the same problem. They over-estimate China's potential for development and Taiwan's ability to control the Chinese market. They also neglect China's attitude and strategy. They are really just thinking wishfully. As China is still a totalitarian power with deep-rooted hostility towards Taiwan, Taiwan should maintain an appropriate distance from China to avoid harm. The reason some in Taiwan wish to unite with China, other than their pro-China thinking, is that they have over-evaluated China; they praise China as the greatest economic entity in the world. However, this perspective lacks solid evidence. I once heard someone say, “The 21st century will be the century of China. China will be the biggest economic entity in the world.” I objected jokingly: “When I was small I learned that the 20th century was the century of Chinese.” We cannot regard a slogan or subjective wish as fact. Although China's economic growth has been rapid, it is still far from being the biggest economic entity in the world. This goal may not necessarily ever be attained. Although one day China's economy may be as big as that of the US, it can only happen in the remote future. Whether China would then be as important as the US is still an open question. In the past, the US constituted half the global economy, and now it represents a third. All countries depend on the US. If some day China's economy develops to the scale of that of the US, by that time the distance between Western Europe, Eastern Europe, Southeast Asia, India, Central and South America, Japan as well as the four small dragons of Asia will also have shrunk. The US and China will then each represent only a seventh of the world economy. That is to say, the world will be a multi-centered. Although China's economy will be important, it will be neither the biggest nor the only center. It is therefore not necessary for Taiwan to put hope in a place that is still hostile to us. Economic and commercial activities give rise to a beneficial concentration effect. The concentration possible in China's huge market of course renders the attractiveness of Taiwan's manufacturing market comparatively low and may marginalize it. However, China's market can also be separated into different centers of concentration. With the liberalization of the international arena and its entrance into the WTO, China has to open itself further, minimizing its separation from other regions. China will not become a black hole, sucking everything into its huge market. International trade and commerce will develop in multiple centers. From the perspective of population and aggregate income, Taiwan is not a small market. We have the ability to make ourselves into a center for certain businesses. We do not have to be marginalized by China's growth. Based on the assumption that China will continue to develop rapidly, some people believe that if Taiwan does not build relations with China, we will not be able to compete with other countries because we are not exploiting opportunities in the Chinese market. This premise is problematic. Taiwan's annual gross exports to China represent a third of Taiwan's total exports, a higher percentage than that of other countries. Each year Taiwan's investment in China is around 2% of the GDP. Countries such as the US and Japan only invest 0.05% of their GDP. Taiwan's utilization of China's market is higher than any other country. Thus, the suggestion that Taiwan is not fully exploiting the opportunities in China and that if Taiwan does not open up the “three links” it will be marginalized, reflects ignorance of the degree to which Taiwan already exploits the benefits of China's market. The real question is whether Taiwan will be marginalized because of over-reliance on China's economy, not the possible disadvantages of not exploiting the market in China enough.
Gateway to China
With the business, professional personnel, capital, and other resources Taiwan has accumulated, it is possible for Taiwan to become a regional economic center. However, as Taiwan's international resources are highly mobile, there is always the possibility that they may relocate to the other side of the strait. Of course, China will actively endeavor to attract Taiwan's resources with its policies. If this happens, Taiwan may lose attractiveness as a business center and become marginalized. As domestic resources decrease, overall growth will slow, and Taiwan's attractiveness will be lowered as the concentration effect is lost. However, some have pointed out that the outflow of certain resources and businesses attracts other resources and businesses. For example, as the lower-stream business move out, mid- and upper-stream business will move in after them to make the supply of their products more convenient or to avoid trade barriers in other countries. With this thinking, it seems advisable to encourage investment in China, and some have suggested that Taiwan could become the stepping stone for foreign traders to enter China. Before we rush into this plan, we should first analyze whether there are advantages to being China's gateway or not. As China is not yet very open, foreign traders often encounter difficulties. Indeed, on a short-term basis, this strategy is sure to bring benefits because there are clear roles Taiwan can play in the international arena. However, in the long run, such a course may lead to a higher risk of marginalization. If we are a gateway, we are not the center. When there are communication problems between two parties, the mediator has a function. However, when both parties have already built up a sufficient mutual relationship, the mediator is no longer needed. For example, some American international enterprises such as Wal-Mart, a major department store, have already moved their headquarters in Hong Kong to Shenzhen or Shanghai. It is important for Taiwan to consolidate and build up its capability to become a center, rather than just becoming a stepping stone that will be discarded when no longer needed. Just as China permitted the Pudong development plan in Shanghai to avoid Hong Kong's continuing to act as the major gateway to China after the Tiananmen Square incident, China will not allow Taiwan to be its long-term major gateway. As China continues to develop, there will be many more places in China that are more convenient as a gateway compared to Taiwan. Back when Taiwan's government launched its Asia-Pacific Operation Center policy, some people suggested utilizing China to enhance Taiwan's development. At that time, I had already pointed out that if an enterprise regards China as its target market, no matter what channels between Taiwan and China were open or how convenient they were, they could never be as well-situated as Hong Kong or Shanghai. The enterprise's regional operation center would eventually move to China. Many international companies have already moved their headquarters from Hong Kong to China, supporting my analysis. If we still retain hope of becoming a gateway for others instead of our own house, when those people open up other gateways, we will have nothing; we will marginalize ourselves. Of course, if a cross-strait division of labor could be maintained, Taiwan would not be marginalized. In fact, Taiwan could regard China as its margin. It is a pity that such an ideal cannot be achieved because China would not want to be Taiwan’s margin. Even if the division of labor fits into our ideal for the present, manufacturers with production lines in China would move them and even their R&D divisions to China in consideration of costs or political pressure, despite the fact that the manufacturers in Taiwan possess strong capability in technology. Of course, Taiwan needs to build up relationships relating to the division of labor with many countries, including China. However, as there are still many unfair means of competition in China and as China is trying to attract Taiwan’s resources to isolate Taiwan, Taiwan should be particularly careful in building such relationships with China, and not encourage further division of labor. As Taiwanese manufacturers build up relationships relating to division of labor with counterparts in China, we should be careful not to get trapped. We should continually invest in other facets of business. For many years, our mid- and upper-stream manufacturers have been compelled to move to and invest in China after transitioning out of lower-stream manufacturing. Now China has been actively trying to attract these mid- and upper-stream manufacturers, such as those in Taiwan’s semiconductor industry. Interestingly, those who formerly suggested division of labor by leaving high value-added products in Taiwan have now changed their view. They now suggest keeping R&D in Taiwan, and allowing the manufacturers to relocate. However, R&D departments do not offer job opportunities to low-technology laborers. Furthermore, many manufacturers have already set up R&D bases in China. It is obvious that the suggestion to keep R&D in Taiwan and allow manufacturing to relocate to China is just like the old suggestion to manufacture the parts that require intensive labor in China and keep the high added-value parts in Taiwan. Based on this analysis, the social cost for Taiwan-China trade has already exceeded it social benefit. Moreover, Taiwan's exploitation of and reliance on China's economy is already much higher than that of other countries. Therefore, Taiwan should not worry about being marginalized for using China too little. On the contrary, we should worry about unemployment problems, businesses moving away, and threats of economic sanctions. We should not boldly go west. We should set rules to regulate reasonable economic exchange and commercial transactions.
Laissez-faire economic policy
Many people have suggested that laissez-faire economic policy is the best. They believe that the government should not only promote the “three links”, but also set no limits on cross-strait economic exchanges and business transactions. They believe this will produce optimal results for the economy. In fact, there is no economic theory that suggests laissez-faire policy can accomplish optimal economic development. At most, it only suggests that under certain special circumstances, a liberal and permissive economy can achieve the optimal configuration of resources. Economists have pointed out that in the absence of those special criteria (when the market does not operate properly), the government needs to employ suitable measures to address market malfunctions caused by monopolies, external costs, or improper domestic interference. The suggestion to use a laissez-faire approach to avoid marginalization is made out of misunderstanding of Taiwan's situation and economic theory. Economists realize that government interference may cause unexpected mistakes. Generally speaking, economic experts do not agree with government interference. However, when the market goes astray and the malfunction is obvious, then it is reasonable for the government to interfere. Under such conditions, the government's policies will be supported by scholars who understand the problem. For example, environmental pollution is a market malfunction caused by external cost. Few people object to the government's levying environmental taxes or fining polluters. Should there be a policy that interferes with cross-strait economic exchange and business transactions? This question should be answered through analysis of the actual situation, and not just blind faith that laissez-faire policy is best. In fact, most who advocate laissez-faire policy portray government policy as completely restrictive. For example, they suggest that the government would allow no investment in China at all. In fact, the government does not oppose all investment. On the contrary, economic exchange and business transactions between Taiwan and China are more frequent than between Taiwan and any other country. Criticisms based on appeals to the virtue of laissez-faire policy should be evaluated with caution. In suggestions for a laissez-faire approach, the most often mentioned point is the “three links”. The argument is that if China becomes the world's premiere economic center, Taiwan will be marginalized if it does not communicate with China. The implication, they say, is that Taiwan must engage the “three links” or risk marginalization. However, currently there are no direct cross-strait links and Taiwan and China still have a high degree of economic exchange. Even if one believes that opening the “three links” would benefit Taiwan, it does not mean that not opening these links will marginalize Taiwan. The free flow of resources and products can increase opportunities for division of labor, allowing more efficient use of resources. However, if there is no system of control, then free exchange can also accelerate the outflow of resources and the process of marginalization. Even if the side that employs a laissez-faire policy has the ability to attract and keep resources, it still risks an outflow of resources if the other side employs trade barriers, subsidies, or political interference to attract or even force resources to flow to its side. It is irresponsible to say that laissez-faire policy will keep Taiwan from being marginalized. In addition to minimizing manufacturers' costs and maximizing profits, the “three links” would also allow much of Taiwan's tourism and domestic consumption to migrate to China. Taiwanese people should not be under the false impression that it is necessary to build up direct links with China or that direct links will bring Taiwan maximum profit. Instead they should understand that to open direct links is to sacrifice Taiwan's national security and dignity. In theory, governments should not intentionally limit people's economic behaviors, except to solve problems related to market malfunctions. With respect to the problem of resource outflow, direct limitation is the easiest method of control. However, these limitations will be flawed and they will set unwanted bounds in matters that the government should not interfere with. Those who lose benefits because of the government's constraints will exaggerate the flaws of the policy and attack them. It is necessary to conduct a close and precise analysis of certain targets or cases before implementing a limitation policy. It is a very difficult task for a bureaucracy that tends to simplify things and wants to play the role of the good guy. Taiwan should adopt policies to prevent Chinese products from being imported on a large scale or even dumped and hurting local businesses and labor. This is a reasonable security policy under WTO regulations. We should pay close attention to the possibility that some of our manufacturers are compelled to invest in China in order to compete with the low prices or their competitors. Taiwan should pay attention to the issue of whether a single investment case will do harm to related businesses and likewise compel them to follow their steps and invest in China. Will it create cut-throat competition among businesses and compel them all to invest without increased profit? Will it upset Taiwanese business's existing monopoly status in the international arena? Will it cause our unique technology to flow out, creating barriers to future development of our technology and business? It is necessary to win manufacturers' consensus in order to regulate these concerns effectively. Otherwise, it is difficult to administer a policy to regulate investment in China when companies are attracted by market profit or China's policies. Taiwan should allow its people to understand the importance of these concerns and the long-term impact on their country. We have to avoid problems such as with the notebook manufacturers who all moved to China. Taiwan should also unite with other countries to demand China abolish unfair trade barriers and policies for awarding business to prevent our resources and businesses from being compelled to relocate to China. Taiwan should enhance its cooperation with other countries to balance its relations with China. One way to become marginalized is to get to close to a center without maintaining a balance with it. If China wants to rapidly isolate or marginalize Taiwan, it has a better chance if Taiwan is close to it. As stated, China is not likely to be the only economic center in the world. Other centers may be larger in scope and they will not attempt to drain Taiwan's resources or isolate us. It is important that Taiwan's policies emphasize cooperation with other centers. With a global plan and strong cooperation with developed countries, Taiwan will not inevitably become isolated and marginalized by China. In addition, the standard of technology and wages in developed countries is higher than ours. According to factor price equalization theory, cooperating with them will help Taiwan to expand sources of technology and minimize the risk of lowering Taiwan's wages. It is also important to improve the environment for domestic investment. In the global arena, if no countries employ unfair policies such as subsidies, then the flow of resources will be determined by factors that cannot be traded or moved. If factors such as the legal system, administrative efficiency, living environment, related businesses, the supply of human resources, transportation and communication, water, electricity, land, and public construction that do not depend on import and supply are better in a certain place, then that place will not be marginalized. If in one country these factors lag behind other countries, then the resources in that place will flow away, and it will become marginalized. In the face of China's competition, Taiwan should make every effort to improve all these non-tradable factors. However, before we are able to improve all of Taiwan, we should focus on improving certain regions to make them competitive in the international arena. Such concentrated construction will encounter political difficulties. Elected officials need much wisdom and courage to achieve such a goal.