Posturing aside, Taiwan clasps hands with China

Politicians may talk tough about rival nations, but business people’s actions may be a better barometer of international relations.

That’s one conclusion of Steve Chan, a political science professor at the University of Colorado who says conventional political theories don’t explain why China has become Taiwan’s most important trading partner, edging out both the United States and Japan.

In 2005, China accounted for 40 percent of Taiwan’s exports and 70 percent of its foreign direct investment, according to PBS’s Nightly Business Report. Official sources give lower estimates of trade, but even those numbers are significant:

Mainland China reported that trade between China and Taiwan reached $108 billion in U.S. dollars in 2006, an 18-percent jump from 2005. These trends are continuing, Chan says, and they show that Taiwan’s commercial ties with China are “both highly salient and asymmetrically important to its economy.”

What the numbers don’t explain, however, is why this burst of commerce is occurring between these longtime rivals. Mainland China claims Taiwan as its own territory, but Taiwan has been living as a de facto separate state for five decades.

What’s more, the government of Taiwan has been officially opposed to expanded trade with China. Taiwan’s Democratic Progressive Party, which held power until March 2008, espoused official Taiwanese independence and discouraged trade with China.

Last year, Taiwan voters replaced the DPP with the Kuomintang—also called the KMT or Nationalist Party—which also has historically discouraged trade with China.

Given this political landscape and that history, Chan notes, the rapid rise in cross-Strait trade is “baffling.”

In the September issue of International Relations of the Asia-Pacific, a scholarly journal, Chan argues that the political theories of realism and liberalism cannot easily account for this phenomenon.

Realism, a political theory that contends that states protect their interests by pursuing a balance of power with rivals, would not have predicted thriving commerce between Taiwan and China, Chan notes. That’s because Taiwan lacks China’s power, and trading with China could leave Taiwan vulnerable to Chinese pressure.

The theory of liberalism fares no better, Chan suggests. Classical liberalism emphasizes the role of property rights and contract enforcement, systems that ensure that the free market won’t become hostage to government fiat. Such systems don’t buttress cross-Strait trade.

So why is Taiwan trading so much with China when the same cannot be said of other longtime rivals—including North and South Korea, Syria and Israel, Cuba and the United States?

A key difference, Chan argues, is that business leaders have a good sense of the safety of their investments abroad. Further, they can distinguish between politicians’ “cheap talk” and their governments’ real commitments.

“The actions of the business community are more credible because unlike government officials, entrepreneurs are unlikely to sacrifice profit for the sake of political posturing or ‘cheap talk,’” Chan writes.

A Taiwanese president may “speak to the gallery” about his intention to pursue formal independence from China, thereby jeopardizing trade. But business people will know whether that tough talk is accompanied by equally restrictive action.

Chan asks, “What would a president who is seriously determined for independence do?” He would not overlook cross-Strait commerce, Chan contends.

In that sense, the nation’s public messages differ from information known to private institutions. Stock markets pay close attention to political events, Chan notes. As health-care reform is debated on Capitol Hill, insurance companies’ stocks are probably re-assessed hourly.

In June 2007, Taiwan’s DPP government announced its intention to conduct a referendum on whether Taiwan should apply for U.N. membership under the name “Taiwan” rather than “Republic of China,” Chan observes.

The referendum was defeated along with the DPP in March 2008. If Taiwan’s business community had been seriously worried about the referendum’s passage (and Chinese reprisals) the stock market should have reflected this concern.

It didn’t.

Chan compares the price of the Taiwan Greater China Fund with Fidelity’s Spartan 500 index fund between June and October of 2007. The Taiwan Greater China Fund did not fall with the news of the referendum. Instead, it rose until mid-July, when concerns about the U.S. financial sector prompted a sell-off.

Meanwhile, the Taiwan Greater China Fund tracked closely with the Fidelity fund. If investors were worried about rising cross-Strait tension, this would have been a time to show it. Chan sees this as evidence that the stock market found the politicians’ rhetoric to be phony.

“These are objective indicators, because they are not partisan.”

The extent of cross-Strait trade is more than a reliable indicator of the state of Taiwan-China relations he adds; the rising level of commerce is also encouraging.

“Peacefully inclined people get into trading relations in the first place,” Chan says. “This is where the rubber meets the road.”

But the fact that cross-Strait trade is a positive sign does not imply that the international community should necessarily encourage trade between rivals, which in other cases might not be peacefully inclined.