Emerging Economic and Political Federation between China and Taiwan


Economics is playing a vital role in the relationships of the whole world. Economics also plays crucial role in the sustainable solutions of disturbing affairs of the world. It is also a main actor even in the two enemies. The relationships between Taiwan and China are economically hot and politically cold. Right now China is following the policy of “Greater China” and Taiwan is trying its best, not the join China. Their ever-increasing economic ties and increasing volumes of trade demand far better political relations. There are healthy trade flows and adversarial political relationships between the two countries. Economic feasible federation should be first and foremost duty of both the countries in order to defuse the high levels of geo-political uncertainties. But it is seemed that political federation is still far away.

A workable political federation would mean more autonomy for Taiwan than Hong Kong. International economists say that it would mean the revolutionary concept of a unified China with multiple power centers. Under a universal federal system, Taiwan would keep its own government, military, judicial and other systems. Its political leadership would not bow to Beijing. In short, it would be a political partnership between equals. Both political entities would be subject only to a "federation" law. In his recent visit to China, the main opposition leader of Taiwan, Kuomintang [KMT] chairman “Lien Chan” surprised everybody in Taiwan and the world with his bold journey for peace in China. His stroke of political brilliance to initiate the dialogue between China and Taiwan has become a critical turning point for the future of China. And I think that it would be first, right step towards geo-political and geo-strategic reconciliation.

For the past decade, trade between China and Taiwan has increased at an impressive rate. According to estimates from Taiwan’s Ministry of Economic Affairs, total trade between China and Taiwan totaled over $40 billion to $100 billion representing approximately 16.9% of Taiwan’s total trade and 6.2% of China’s total trade. At a glance, the trade relationship between China and Taiwan appears to exhibit expected trends for trade partners that are in close geographical proximity to one another, have complementary comparative advantages, and share a common language and socio cultural roots. However, China and Taiwan are also political adversaries, and lurking behind the growing cross-strait trade relationship lies a dispute over the official status of Taiwan’s sovereignty that threatens to erupt into a military crisis. The Chinese succession law is solid step towards the Greater or One China.

Because of political and military hostilities, economic exchange between Taiwan and China was virtually nonexistent between 1949 and 1979. On 1 January 1979, after adopting reforms and open policy in late 1978, China proposed establishing the three links direct trade, postal, and transportation between Taiwan and China. In 1980, China organized a mission to Hong Kong and purchased $80 million worth of Taiwanese products. In the same year, to further encourage trade, China announced a tariff-free policy on Taiwan-made imported goods. However, the zero tariff policy lasted for only one year. Taiwan’s indirect trade with China via Hong Kong was only $460 million in 1981 and $279 million in 1982. Thereafter, cross-Strait trade increased tremendously to $3.9 billion in 1989, $17.9 billion in 1994, $31.2 billion in 2000, and $37.4 billion in 2002. Between 1981 and 2002, Taiwan’s trade with China has increased 134 fold. Taiwan has enjoyed a continuous and large trade surplus with China for the past two decades. In 1981, Taiwan ran a trade surplus of $310 million, with $385 million of exports to, and $75 million of imports from, China. In 1989, Taiwan ran a trade surplus of $2.7 billion, with $3.3 billion of exports to, and $587 million of imports from, China. In 2002, Taiwan ran a trade surplus of $21.6 billion, with $29.5 billion of exports to, and $7.9 billion of imports from, China.

Economically, Taiwan and China are well connected and inter-dependent. The China is Taiwan’s biggest trading partner as well as its No 1 export market. In 2004, total cross-strait trade reached US$61.6 billion, a jump of 33.1% over 2003; of which Taiwan’s exports accounted for $45 billion. Besides ever-increasing trade, foreign direct investment [FDI] is another major activity. In 2004 alone, Taiwan Industries invested $6.94 billion in China. According to latest reports (2005) and official data, Taiwan’s total investment stood at about $40 billion in 2004. But according to independent sources, it as high as over $100 billion.

Since 1993 China has become Taiwan’s third largest trading partner, after the United States and Japan. In 2002, Taiwan’s trade with the United States, Japan, and China was $44.9 billion, $39.3 billion, and $37.4 billion, respectively. In addition, since 1993 China has also become Taiwan’s second largest export market, next to the United States. In 2002 China became Taiwan’s largest export market for the first time. According to Taiwan’s official figures, in 1991 Taiwan’s outward foreign direct investment [FDI] into China was only $17 million. Since 1992, however, China has become the largest recipient of Taiwan’s outward investment. In 1993, the numbers increased dramatically to nearly $3.2 billion, which was 66 percent of Taiwan’s total FDI for that year. By the end of 2002, Taiwan’s cumulative FDI in China was $26.6 billion, or 43.4 percent of total Taiwan outward FDI. In just one decade, China became the destination with the most accumulated Taiwan’s outward FDI.

Taiwan’s FDI in China involved more and more large enterprises with high capital and technology intensities, companies looking for both overseas manufacturing bases and access to China’s huge potential market. For instance, in 1995, only 14 percent of Taiwan’s information technology [IT] products were produced in China; in 2003, 63.3 percent were already produced in China. As of June 2003, Taiwan’s accumulated contracted investment in China was $65 billion, 57,856 projects, of which $35.2 billion was actually utilized, with an average contracted amount of $1.12 million per project average project size has grown by about 39 percent. In addition, the share of Taiwan’s cumulative realized investment in China was 7.4 percent of total FDI in China. Taiwan was the fourth largest source of FDI in China, next to Hong Kong 45.2 percent, the United States 8.9 percent, and Japan 8.2 percent.

Behind the ever-increasing trade, there is an ever-increasing tide of investment from Taiwan Inc. China is its biggest destination already and it now has over 60,000 Taiwan enterprises. It also has more than 1 million Taiwan residents as well. Shanghai alone has more than 300,000 Taiwan residents. Living and working opportunities in China will only increase for the Taiwan residents, as there are more opportunities for them over there. This cross-strait trade has made a huge difference in the island’s economic health. According to latest reports of ADB (2005), nearly all the Taiwan’s growth has been attributed to China’s trade. In particular, cross-strait trade has created 1 million jobs in Taiwan. There are vast additional benefits as well.

With Taiwan and China entering the World Trade Organization [WTO] in late 2001 and Taiwan’s increasing direct investment in China, trade between Taiwan and China has been growing rapidly. Based on the MAC’s estimate, Taiwan’s exports to China witnessed a 34.3 percent jump in 2002, followed by a jump of 28.3 percent in the first seven months of 2003; Taiwan’s imports from China witnessed a 34.7 percent jump in 2002, followed by another jump of 35.3 percent in the first seven months of 2003. Accordingly, Taiwan’s exports to China accounted for 24.0 percent of Taiwan’s total exports, while Taiwan’s imports from China accounted for 8.3 percent of Taiwan’s total imports.

Like Hong Kong and Macau, Taiwan is moving fast in integrating its economy with that of China. This process has been accelerating year after year. Taiwan has gained enormously and its economic benefits will directly promote better political relations. The current cross-strait difficulties are caused by the unfinished business of the long-term civil war between the Communist Party and the Kuomintang [KMT], the nationalist party that lost the Chinese civil war and fled to Taiwan. For now, the KMT has become more involved, officially visiting China.

Despite all the frictions between Beijing and Taipei, the roads for peaceful resolutions are wide open. The recent trip to China by the Kuomintang chairman Lien Chan is a very healthy start. It also opens a wider door for more direct exchanges between Beijing and Taipei. For both parties, being Chinese is their greatest strength and nothing is more significant. For now, there are also positive signs from Taipei. In particular, Taipei is considering widening access for Chinese tourists. Also, more political groups from Taiwan are on their way to visit China. As such, widening peaceful contacts and dialogues are emerging. All this points to bright prospects for both sides.

The fears are very high among the main regional and global stakeholders like Japan and US on the issue of unification of Taiwan with China. US has multidimensional geo-political and geo-strategic short and long terms interests in Taiwan. Right now on US pressure and Japan’s accusations Taiwan is afraid to become a "local government" under a central government. The Taiwan issue has also become a key indicator for future Sino-U.S. relations. China reacted with anger and dismay when the US State Department criticized the Anti-Secession Law passed by the National People’s Congress. It is seemed that cold war is being carried out between US and China. The issue of “Arms Embargo”, “Trade Imbalances” and now Taiwan issue has already created gulf between the relationships of both the countries.

For Beijing, the ultimate concern is more about political unity and unification of Taiwan with it. It has become very pragmatic in its thinking and dealings. This position of Beijing means that it has walked out on the traditional mentality that a unified China must be governed under one centralized government. This change in mentality and policy lays down the very political foundation for a federation.


Economics and politics go side by side. On the issue of “Survival” old enmity turns in to unlimited sea of friendship. Impassable “Gulf” of hatred and “Confederation” becomes ocean of deep love and functional federation. The rational resolution of the cross-strait tension will enhance global peace and progress, not just for China. For many decades, and even centuries, the Taiwan issue has been a key de-stabilizing factor for East Asia and beyond. A peaceful and progressive outcome would bring benefits to the entire world. Last but not the least China can not ignore the US’s factor of Taiwan in the days to come.