By Invitation

Taiwan and China - potentially solid ties, but handle with care

Taiwan has come a long way in 50 years. It is a great asset for China, as its experience in development can be useful - if both sides handle their relationship wisely.

Next year, 2017, will mark the 50th anniversary of my first visit to Taiwan. I have returned often in the ensuing decades, but it had been a few years since my last visit.

I was in Taiwan last month participating in the GES-Taipei Workshop, on "Dealing with Social and Economic Challenges to Achieve Green Growth". It was jointly organised by Kiel University's Global Economic Symposium and Taiwan's Industrial Technology Research Institute.

Watching Taiwan today and having seen where it has come from, it seemed an occasion to pause for thought on some retrospectives, before speculating on perspectives. This is all the more so as Taiwan is about to undergo a major transition with the inauguration on May 20 of its first female president, Ms Tsai Ing-wen, who is from the autonomy-inclined Democratic Progressive Party (DPP).


It was a real pleasure to be back in Taiwan. I have known virtually all East and South Asian countries for a half-century. There have been tremendous transformations and achievements virtually everywhere: Think of Vietnam in 1967, for example, and today; or for that matter 1967 China in the throes of the Cultural Revolution and today!

While there is much to applaud on many fronts, most countries still have acute problems to address. Taiwan, along with South Korea, is rare in having successfully undertaken profound and progressive economic, political and social transformations: from poverty to prosperity, from dictatorship to democracy and from oppression to freedom.


By no means was it obvious in 1967 that Taiwan would embark on this journey. It was then very poor, with per capita GDP lower than Singapore or Hong Kong. Main economic activities included acting as a base for American soldiers on rest and recuperation from the Vietnam War and as a destination for Japanese sex and dental tours. (Dentists in Japan were very expensive while Taiwanese dentists, apart from being cheaper, also spoke fluent Japanese as a result of Taiwan having been a Japanese colony for half a century.)

Chiang Kai-shek was the head of state and seemed no more than just another tin-pot military dictator (of which there were many on all continents at the time), with a not very enviable reputation. His United States-appointed adviser during the war, General Joseph ("Vinegar Joe") Stillwell, referred to him as "the peanut", while in American government circles, he was known as General Cash My Cheque. His government in China during the 1930s was seen as having caused an inflationary inferno leading to economic mayhem, which was viewed as one major reason why the communists won in 1949.

Taiwan, in other words, was typically and rather hopelessly "Third World". Thus, it was against all expectations that Taiwan rose to become one of the four so-called NIEs (newly industrialising economies) and one of the very few in the world to have escaped not only poverty, but also the middle-income trap. Today, it is a democracy, part of the "First World" and with a society living in harmony.

How Taiwan got to where it did has been the subject of many studies - I can mention in passing a recent publication by Joe Studwell, How Asia Works. What follows is no more than a very brief summary of "key learning points".

Taiwan (like Japan and South Korea) undertook radical rural reform - thereby freeing up labour when industrialisation set in and modernised its society. Significant investment in basic education - for both sexes - was another critically important dynamic of the growth and development strategy.

While initial primacy was given to basic education, there were also considerable efforts in tertiary education, especially engineering and economics. Many Taiwanese studied in the US, giving rise to the joke that MIT stood for "Made in Taiwan"! In the 1980s when I was frequently in Taiwan, it was reckoned to have one of the world's highest proportion of engineers per capita. The government included technocrats with PhDs in economics from top American universities who were highly professional and responsible for policymaking and execution.

In adopting an export promotion economic development policy - as did the other three NIEs - the Taiwanese elites became outward looking, keen to enhance performance in global markets and to learn about foreign technologies and management skills.

The sizeable Taiwanese diaspora provided a very significant network. This, among other things, made Taiwan a pioneer in developing global supply chains, especially in textiles, electronics and plastics.

As Taiwan's labour costs increased and production aimed for higher value-added - making Taiwan a high-tech powerhouse - it invested heavily in creating manufacturing capacities elsewhere.

In addition to all these economic, social and political achievements, there have been significant cultural developments. There are numerous well-curated museums, Buddhist and Taoist temples are well looked after and well attended - there is an important spiritual dimension to society there - and there is also a very lively musical scene, ranging from popular music to high-performing world renowned Western classical music orchestras.


Of course, not everything is hunky-dory. Some Taiwanese reading this column might be surprised at my optimism. Indeed, I found among a number of people I spoke to a certain malaise and anxiety about the future.

Much of the malaise, naturally, revolves around the numerous challenges posed by China. Taiwan was instrumental in China's growth and development - through investment, technology transfer, management skills and exports - but China has also been beneficial to Taiwan.

Political tensions notwithstanding, the economic relationship has been very dynamic. Now, it is not just that the Chinese economy is slowing down, but as Chinese production becomes higher value-added, Taiwanese producers wonder if the customers of yesterday are becoming the competitors of today and tomorrow.

Taiwan needs to diversify its economy and technology orientations, for example, into energy, environment, health, oceanography, services and techniques such as mass customisation. It is proving nevertheless difficult for Taiwanese corporations to wean themselves off their electronics comfort zone.

Unfortunately for Taiwan, China has much more muscle than it has. While Taiwan's competitors, notably South Korea, are signing multiple free trade agreements (FTAs) with other countries, Taiwan is hampered from doing so. No country dares to upset Beijing, which considers Taiwan a renegade province under its political domain. This makes it difficult for Taiwan to foster its own trade and economic arrangements, at a time when protectionism is growing, with the world market being carved into multiple regional and mega-regional agreements.

Thus, for example, Taiwan is currently not included in the Regional Comprehensive Economic Partnership, a trade agreement between Asean member countries and their FTA partners including Australia, China, India, Japan, Korea and New Zealand. This isolation may put Taiwan at a net competitive disadvantage.

Taiwanese have to worry about many things - ageing population, new economic challenges - including their future. What is going to become of Taiwan? The situation vis-a-vis China is unique. There is no precedent one can turn to, no historical illustration, and no legal position. General Chiang declared his government in Taipei to be that of the Republic of China. His party, the Kuomintang, has officially held to the "one China" policy. By 2019, Taiwan and mainland China would have had seven decades of separate existence and development.

Anxiety about the future is not diminished when the Taiwanese see what is happening in neighbouring Hong Kong under the "one country, two systems" post-1997 regime. The outlook with a DPP president makes it even cloudier.

When I asked a young Taiwanese professional what her perspectives were of the future, she told me two things, which I think are representative of her generation and that underline the conundrum.

First, in terms of identity she sees herself as a citizen of Taiwan. Taiwan is her home; Taiwanese values are those with which she associates. She does not identify with the rhetoric or sentiments behind the notion that Taiwan is the "Republic of China" and inalienably connected to the mainland.

Second, when she was a university student, she did not worry too much about the future as she assumed that within a few years China would become a democracy - as Taiwan had. Two democracies would succeed in sorting things out peacefully and constructively. In the spring of 2016, that assumption seems a bit hazardous.

So, what is going to happen?

The risks are considerable, but not only for Taiwan. How Beijing handles the relationship may go a good way to determining how China's future unfolds.

Taiwan is a very precious asset. One can even consider that there is a "Taiwan Model of Development", as Taiwan can serve as an inspirational model not only for the developing world in general, but indeed also for China.

Taiwan could be a strong constructive force in helping China achieve two of its most important goals: enhancing innovation capacities and skills, and escaping the middle-income trap.

The relationship is potentially very solid, but currently fragile: It must be handled with care.

  • Jean-Pierre Lehmann is emeritus professor of international political economy at IMD, Lausanne, Switzerland, and visiting professor at Hong Kong University.
A version of this article appeared in the print edition of The Straits Times on May 10, 2016, with the headline 'Taiwan and China - potentially solid ties, but handle with care'. Print Edition | Subscribe