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Where Will China and Taiwan Go from Here?

Three Scenarios for What Will Come from Economic Cooperation

SOURCE: AP/Peng Peng

China's Association for Relations Across the Taiwan Strait Chairman Chen Yunlin and his counterpart Taiwan's Straits Exchange Foundation Chairman Chiang Pin-kung sign documents during a signing ceremony on June 29, 2010.

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China and Taiwan signed a historic pact earlier today that opens the way to reducing trade barriers between these two neighbors. The Economic Cooperation Framework Agreement is more than a trade agreement—it is a symbol of the strengthening ties between Taiwan and China.

But what is not yet clear is what the long-term implications of this bond may be and how it could affect the chances of a conflict in the Taiwan Strait between the two neighbors.

There are three primary scenarios that we could expect. The increasing economic interdependence could help to cement the political status quo, it could begin a slow move toward reunification, or it could cause public backlash in both neighbors. The risk of armed conflict is reduced in the first two scenarios, which is something that the United States, China, and Taiwan should all welcome. But the third is less positive, and it is perhaps the scenario that all three should work to avoid.

The pact signed today is another step toward warmer relations between the two neighbors. The pace of increased economic cooperation over the last few years has been phenomenal. There were no direct flights between Taiwan and China just two years ago, and now there are over 300 flights every week. There are now also direct postal links.

China is now Taiwan’s largest trading partner, with Taiwanese exports to China amounting to over $80 billion. A million Taiwanese now work on the mainland managing Taiwanese business’ multi-billion dollar investments in China. The new pact can only accelerate that—it promises to eliminate trade barriers on around $14 billion of Taiwanese exports to China and $3 billion worth of trade in the other direction within two years.

That does not mean that relations are “normal”—China does not recognize Taiwan, and no country that does so is able to have diplomatic relations with China. Taiwan is not a member of the United Nations or many other international fora. And where Taiwan is a member or an observer, there is a constant debate about the right name to use when referring to Taiwan—“Chinese Taipei,” “Taiwan, China,” or “Taiwan, Province of China” are all alternatives that Beijing prefers.

Scenario one: Greater economic interdependence cements the political status quo

The reduced trade barriers could further deepen economic interdependence between China and Taiwan. There are already significant trade flows between the neighbors, but the pact accelerates the process further with greater investment flows, and an increasing number of tourists and workers helping both economies prosper.

There will be also be increased adjustment costs—especially in Taiwan—as more firms locate operations on the mainland. The Taiwanese authorities will need to help its economy move up the value chain, retraining workers for new roles and supporting them through the human transition of job loss and finding new work.

It would become increasingly clear as the two economies integrate further that it serves neither China nor Taiwan’s interest to disturb the political status quo—even if it’s a norm that they would not choose. Rising political tensions would just heighten the risk of undermining the economic investment that both neighbors have made in each other’s economies. Both neighbors would have to find ways to avoid touching on the more sensitive political issues, and Taiwan would remain in the halfway house between independent nation and province of China.

But the status quo would slowly change in one respect. If China can sign an agreement to reduce trade barriers with Taiwan, then it is hard to see why other countries cannot, as well. Many countries have shied away from similar pacts with Taiwan because they are fearful of China’s reaction. But that risk neutralizes itself—and as a result, trade pacts would emerge with regional economic partners as well as other countries, including the United States. All that would help Taiwan’s economy prosper further.

Scenario two: Greater economic interdependence slowly leads to reunification

This scenario is in many ways similar to the previous one. But the key difference is that the deepening economic links between China and Taiwan would have a spillover effect on political relations between the two neighbors. They would, in effect, build a unified economy and people would begin to wonder whether that should be the basis of a more unified political system.

The Taiwanese would perhaps believe that reunification is not such a bad thing as the number of Taiwanese residents on the mainland increases. And perhaps China is able to offer unification that is consistent with the Taiwanese people maintaining their way of life—in particularly maintaining the strong democratic system that has emerged and offering genuine autonomy to Taiwan.

Reunification would lead to Taiwan becoming part of China, but self-governing with its own legislature and executive branches. Aspects of foreign and defense policy might be run from Beijing, but everything else might remain the same.

Scenario three: Greater economic interdependence creates backlash in both neighbors

This scenario is quite different. The process of acceleration in economic interdependence leads to a significant backlash in both neighbors in this scenario.

There could be increased joblessness in Taiwan as companies accelerate the process of relocating operations to the mainland where labor is cheaper. With little policy to address that risk, rising unemployment could lead to public anger. There could be confusion in China about why the fruits of the Chinese workers’ labor should lead to ever-increasing profits for Taiwanese-owned businesses.

Worker discontent in both neighbors would lead political leaders to adopt stronger protectionist stances, and the process of increasing economic interdependence would go into reverse gear. Flights would be suspended between the two neighbors, and rows would flare up in international fora at an ever-increasing frequency. The risk of military conflict in the Taiwan Strait would be heightened—and the United States would find that it is left having to make difficult choices. To what extent will it protect its friend and ally Taiwan? And how would that affect relations with China, which has become a very important trading partner?

Conclusion

It has been about 60 years since Chiang Kai-Shek fled mainland China for Taiwan—leading to one of the world’s most enduring political standoffs. That standoff has at times threatened to spillover into military action. But the immediate risk of military conflict seems somewhat reduced with the thawing of tensions and a new pact to reduce trade barriers that will accelerate economic interdependence. The key looking forward will be for the two neighbors—and their allies, including the United States—to continue to work toward maintaining reduced tensions.

Jitinder Kohli is a Senior Fellow at the Center for American Progress.

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