October 6, 2001

I am greatly honored to have been invited to speak before this convention of the Chinese Institute of Engineers. You have chosen a very timely and important theme: “Embracing Cutting-Edge Technologies – Transforming challenges to business opportunities?” You have raised the crucial question stated in the Convention announcement: “How can we participate in the technological and economic development opportunities in China? How will relations between China and Taiwan change?”

This evening I will try to answer these two questions. Before giving my answers in detail, let me summarize my general perspectives on the topic. We all understand that technologies and political-economic development are mutually interdependent. Economic development is pushed forward by technological advances. It also provides an institutional setting which makes technological advances possible. Economic development in China has proceeded, and will proceed, at a phenomenal rate. Together with it has been an extremely rapid rate of progress in technology, including the several areas discussed in this convention. The rate of technological progress and the opportunities available are better than most outside observers can imagine. Concerning the relation between mainland China and Taiwan, I will review the problems facing the establishment of a smooth political relation but will conclude with a positive note.

First, a few words about China’s rapid economic development, a subject which I have tried to cover in my new book China’s Economic Transformation to be published by Blackwell Publishers in January. Since economic reform started in 1978, the annual rate of output growth has been a phenomenal 9.5 per cent on average. Many provinces or municipalities of China, including Guangdong, Shanghai and Shandong, have grown at double-digit rates and surpassed the growth rates of the “four little tigers” of Taiwan, South Korea, Hong Kong and Singapore two decades earlier. Although China’s real output per capita is still low, only about 3,400 US dollars in purchasing power parity in 1999 as compared with 13,200 for Taiwan, economic conditions and technological development in certain areas are as good if not better than Taiwan’s. For example, a traveler can compare Shanghai with Taipei and may come to the conclusion that Shanghai is a more advanced modern city.

The point to note is that China’s potential for the purpose of developing cutting-edge technologies is not measured by averages over the entire country, but by the averages of the most advanced areas. The main factor contributing to China’s rapid advances has been and will be its rich human capital. Here I do not mention China’s political and economic institutions. These institutions have many shortcomings, but in spite of the shortcomings, the strength of China’s people is sufficient to bring about rapid economic growth. China’s human capital includes both its skilled and unskilled labor force, its energetic and resourceful entrepreneurs and its creative scientists and engineers. Outside observers are continuously catching up with how far China’s has gone and China’s immense future potential. An example is a remark by Taiwan’s TSMC chairman Morris Chang in August that China will dominate the manufacturing of semiconductors in the next decade while only in June Morris still had reservations about China’s capability. A second example is the rapid growth of Legend, a Chinese personal computer company, which last year already overtook IBM in sales in the market of South East Asia. My message is that China has an abundance of both economic and technological potential for you to take advantage of.

Next, I will discuss the relation of mainland China and Taiwan in five parts, (1) the current state, and its historical basis, (2) recent developments, (3) the role of continued dialogues, (4) prospects in the near future, and (5) long-term possibilities. Understanding the material in the first three parts will be helpful in forming one’s own assessment of future prospects.

1. The Current State and Its Historical Basis

Concerning the current state, two statements summarize the situation. Economic relations are excellent and have made great progress. Political relations are characterized by conflicting stands and not making progress.

Since mainland China started its economic reform and adopted an open-door policy in 1978, it has promoted foreign trade and welcomed foreign investment. The total volume of foreign trade, or the total value of exports and imports, increased from 9.8 percent of GDP in 1978 to 37 percent in 1999. The 1999 value amounts to 361 billion US dollars. Taiwan is an important trading partner of mainland China. Of the mainland’s total imports of 166 billion USD in 1999, about 12 percent was from Taiwan. This accounted for about 16 percent of Taiwan’s total exports, but according to Taiwan official statistics, exports to the mainland accounted for 21 percent of Taiwan total exports in 1999.

Foreign direct investment increased from almost nothing in 1978 to 42.4 billion USD in 1999. Of this amount, 17.4 billion or 41 percent was from Hong Kong and 2.8 billion was from Taiwan. In 1997 Taiwan was the third largest investor, next to Hong Kong and Japan but above the US (the US overtook Taiwan in the third place in 1998). Like investors from other areas, Taiwan investors try to take advantage of the low cost labor in the mainland, but they have the advantage of being very near the mainland and knowing the Chinese culture and human relations.

Just opposite to the positive economic relation the political relation is mainly negative: the two sides hold opposing stands. From the mainland government’s point of view, Taiwan is a province of the People’s Republic of China. From Taiwan’s viewpoint, it is an independent nation.

The historical basis of the PRC’s claim is the well-known. Before the Sino-Japanese War of 1895 Taiwan was a part of China and inhabited mainly by Chinese immigrants who had arrived during the Ming Dynasty. China gave up her sovereignty over Taiwan to Japan by the treaty signed after China’s defeat in 1895. After the defeat of Japan in the Second World War in 1945 sovereignty of Taiwan was returned to China, then the Republic of China under the Kuomintang (KMT) or the Nationalist Party. Since the establishment of the PRC in 1949, the government of PRC has claimed to be the government of the whole China, including Taiwan.

The government in Taiwan does not agree to the above claim of the Beijing government. The establishment of the PRC did not in fact include Taiwan as its territory. Since 1945 Taiwan’s government has always been the government of the ROC. Besides the above factual and legal argument, a large number of people in Taiwan do not wish to be a part of the PRC. The government of the PRC adopted policies in the mainland that these people do not like, although the dislike has probably diminished to some extent after the PRC government adopted more liberal policies. In addition, the dislike of mainlanders including those who have moved to Taiwan with Chiang Kei-shek in 1949 has partly come from the strong rule of the Chiang government. Chiang Kei-shek’s rule was imposed on the Taiwan people. In his government native born Taiwanese were under-represented. Why should Taiwan be a part of mainland China? The people of Taiwan are proud of their own heritage and economic accomplishment and they would like to have their own identity. Many observers, including the economist Simon Kuznets, believe that the Chiang government has contributed significantly to Taiwan’s economic development in spite of some politically unpopular policies. The contribution of the Chiang government was derived from the large number of talented people who had come with the government from the mainland, including some of the ablest people selected from the very large population in the mainland. These people helped run the successful agencies responsible for Taiwan’s economic development, including the Commission for Rural Reconstruction JCRR and the Ministry of Economic Affairs. However, this assessment is called to question today by scholars in Taiwan who dislike the Chiang rule up to the 1970s.

2. Recent Developments

Given these two different viewpoints, what have been the major recent developments? Partly because of the close economic relations, both sides desire a dialogue to improve relations. The PRC government wishes to use the dialogue to convince Taiwan to be a part of China, and the Taiwan government is interested in protecting the interests of the Taiwan investors. There has been a semi-government channel through two organizations (Strait Exchange Foundation SEF established in Taiwan in February 1991 and Association for Relations Across the Taiwan Strait ARAT established in the PRC in December 1991, headed respectively by Koo Chen-fu and Wang Daohan, order mentioned above according to dates of establishment). The meetings of Wang and Koo led to the signing of a written agreement in April 1994 on economic and cultural relations. Since then two events occurred which worsened the relation. First, in June 1995, President Lee Teng-hui visited the United States and made a speech while receiving an honorary degree from Cornell University. The PRC government was objecting to the US welcoming, even in an unofficial capacity, the President of a country with which it had agreed to terminate diplomatic relations. Also it was offended by the derogatory tone of Lee’s Cornell speech which was critical of the PRC. Lee’s visit and speech led to the PRC government carrying out military exercises by firing missiles near the Taiwan island.

Second, in the summer of 1999, Lee Teng-hui made a statement to a German reporter that the two sides should engage in dialogues on a “state to state” basis. This statement can be interpreted to mean that there are two countries. Lee’s statement was made in anticipation of the visit of Wang Daohan to Taiwan in the Fall of 1999, as a return visit of Mr. Koo to China in October 1998. Koo’s visit had succeeded in reaching a four point agreement, to maintain dialogue covering political, economic and other areas, to carry out exchanges involving the staffs of ARATS and SEF, to set up communications and assistance on issues concerning the security and properties of individuals from both sides, and Mr. Wang agreeing to visit Taiwan. Lee’s statement caused Beijing to cancel Mr. Wang’s visit and discontinue the dialogue.

In May 2000, Chen Shui-bien became the President in Taiwan. Today the mainland’s position is that the dialogue will continue only after Taiwan accepts the principle that “there is only one China.” President Chen Shui-bien has not agreed to this principle. In 1992 both PRC and ROC claimed to be the government of China. Then they agreed that there was only one China. The agreement was “One China, two interpretations.” Today, neither side seems to agree to this compromised formula as they did before. A tougher mainland position, sometimes expressed but not consistently, is “one China, PRC being the government.” In the summer of 2000 Wang Daohan in answering questions from reporters hinted that the two sides could talk first by sidestepping the question who represents China as long as both agree that there is only one China, but this position is not reiterated by any top leaders in Beijing. Chen Shui-bien also hinted that he wanted to compromise but did not yet express agreement on the “one-China” principle even with two different interpretations. The prospect of continuing dialogue depends on some compromise on both sides not yet reached.

3. Role of Continued Dialogues

At this point the prospect of re-opening dialogue is uncertain. The PRC government shows no sign of being willing to give up the “one-China principle” as a precondition to the resumption of negotiations. How can PRC officially accept “two China’s?” Its policy is to apply the one-country two systems formula to Taiwan. The Taiwan government is in a weak position. There were three main political parties contending for the Presidency with a term beginning in May 2000: the KMT which has ruled Taiwan since 1945, the People First Party PFP formed by James Soong and consisting of former KMT members and the DPP with Chen Shui-bien as its candidate. Chen won the election with 39 percent of the votes, slightly higher than Soong. He is serving as a minority president with the legislature dominated by KMT members. The PRC government has been suspicious of him because his party once advocated Taiwan independence, although Chen does not declare Taiwan independence today. Up to this point Chen has not been able to forge a unified policy towards the mainland, not even an agreed statement concerning the “one-China” principle. The best hope is that Chen can express agreement to a “one-China principle” without specifying its interpretation and when it will apply. When the mainland insists on a “one-China principle’ with its own interpretation, Chen might express agreement to the former part and remain silent on the latter part. Such a pair of compromise positions might not be acceptable to the mainland government, and might not be achievable by Chen today. However, there are continued pressures on both sides to reach some form of agreement in order to resume the dialogue. The pressures will be discussed below.

Why is a continued dialogue important? It is to prevent deterioration of political relations and to safeguard the continuation of economic relations. The PRC government has said that as long as the dialogue continues and as long as progress is made towards unification it is unlikely to use force, and it has not openly given up the use of force for the unification of Taiwan. As long as there is a dialogue the leaders in Beijing can claim that they are making progress in the unification of Taiwan, an objective shared by the majority of the people in the mainland. In this sense the mainland government is under pressure from its own people. The pressure on Taiwan is the continued military threat which has led to political and economic instability and is bad for the Taiwan stock market and the Taiwan economy in general. It is these pressures on both sides that will cause them to seek ways to reopen the dialogue. Like any bargaining situation, both sides would like to come in with a strong position. Hence both would like to maintain a position more favorable to its own side as a precondition of the dialogue.

Lee Teng-hui’s remark on “state-to-state” discussion and the mainland’s insistence on a “one-China principle” are moves to establish a strong position before the dialogue begins. However, there are costs of delaying the dialogue on both sides. The cost seems harder for Taiwan to bear at this point because the effect on its economic and political stability is greater than the effect on the prestige of China’s leaders. The mainland government cannot conclude from this circumstance that Taiwan will soon offer a compromise position to resume the dialogue because there are conflicting forces which make a compromise difficult unless it is good for all major parties in Taiwan. In short, Taiwan bears a high cost of not reaching a position to resume negotiation with the mainland but it cannot easily agree on such a position unless it is considered favorable by all major parties and the majority of the people in Taiwan. The mainland government pays a lower cost by waiting but it cannot hope to get an easy bargain from Taiwan because the conflicting political parties will not agree to it. Pressures on both sides will force reopening of talks or some equivalent form of discourse on the relation probably within a year. A sign of such pressures was the change in Taiwan’s mainland policy in the August 24-26 2001 conference to advise President Chen Shui-bien from “no haste, be patient” to “aggressive opening.” There are signs recently that lower ranking officials of the Taiwan affairs office in Beijing visited Taiwan and talked privately with mainland affairs officials of the Taiwan government.

Before the semi-official talks resume, the relation can be improved by other means. One is the opening of direct trade, transport and postal service between the two sides, an issue in discussion for ten years without an agreement. In a speech on the promotion of foreign investment which I gave on September 8, 2000, in the International Forum on Foreign Trade Investment held in Xiamen, I suggested that the Beijing government alone, without having to obtain consent from the Taiwan government, can achieve direct trade, transport and postal service by simply unilaterally allowing ships and planes from Taiwan to come to the mainland directly without going through Hong Kong. It would be difficult for the Taiwan government to stop this for at least three reasons. The business community in Taiwan is strongly in favor of this. The official Taiwan government policy to the international community including the US in particular is in favor of promoting further cooperation with the mainland government. Thirdly it would be awkward for the Taiwan government to prevent international airlines and ships passing through Taiwan to go directly to a mainland port as the next stop. I hope that the mainland government will consider taking this step seriously, to its self interest and to the interests of the Chinese people and the Taiwan business community.

4. Medium Term Prospects

What are the possible developments in the next 5 to 10 years? It could range from military conflict to continuation of the status quo with gradual improvement by negotiation but not unification. The worse case is military conflict. This appears to be very unlikely for several reasons. First, most leaders in China realize that military conquest of Taiwan is a bad idea for the purpose of getting support from the Taiwan people, and it is not worth the cost. The mainland government has a difficult and demanding task of developing the economy and improving the political and legal systems in the mainland itself. Second, the military in the mainland may not have the capability to conquer Taiwan as it requires a much stronger navy and airforce than Taiwan’s. Third, in case of military conflict there is the possibility of Taiwan receiving US military aid, at least in the form of naval blockade. The second possibility, short of military attack, is naval blockade of Taiwan, possibly accompanied by military exercises near Taiwan. The blockade can at least be partially effective and can put pressure on the government and people of Taiwan at the expense of their cooperation and good will. This possibility has been talked about often by people in the mainland. It would a threat to Taiwan’s economy. Furthermore the business community in Taiwan asserts a force on the governments of both sides to find non-military solutions.

The third possibility is a continuation of the status quo with possible improvements in economic and cultural cooperation through time. By status quo I mean Taiwan retaining its current political status as an independent nation in reality, although very few nations officially recognize it as a separate nation. Unless something like the first or the second possibility occurs, this is the remaining outcome. It may last for 5 to 10 years. The main reason for the status quo to continue is that the first two alternatives are very costly to both sides. The second alternative of blockading Taiwan will not only hurt the mainland’s trade with and investment from Taiwan, but also its image and status in the international community, even if it does not generate open hostility from some of its members including the United States.

5. Long Term Possibilities

If the status quo is likely to continue in the near future, when will it end? In the longer run, say 20 to 30 years from now, what can happen to the political relation? There are two possibilities. One is that the two sides will become one China under some political arrangement. The arrangement need not be “one country two systems.” It might be some form of federation, or some union of the republics of China, or some Chinese commonwealth. Currently such forms are unacceptable to the Beijing government because it fears that some of its autonomous regions especially Tibet might be influenced by such an example. In the long run such fears will diminish if the government’s authority over the autonomous regions becomes even more firmly established. In the mean time economic and political conditions in the mainland will become more similar to those in Taiwan, making some form of political union more easily achievable. Continued and expanding economic and cultural exchanges will add to the forces working towards a union.

The second possibility is that the two sides will still remain politically separate even with the above mentioned developments. The Taiwan people will desire to maintain their own identity while being friendly with people in mainland China. Their leaders will prefer to be heads of a nation rather than that of a region of another nation. For one China to take place eventually the people and government of Taiwan must have something to gain by giving up the current status, unless they can be forced to do so. One possible development is for future political leaders of China to offer Taiwan something attractive enough for them to join in. For example, the union will have a higher chance of realization if the President of PRC in Beijing is the head but Taiwan is given more, rather than less, international status such as membership in the United Nations – this is possible because some members of the former Soviet Union were also members of the General Assembly of the UN while the Soviet government was a member of the Security Council.

[If Taiwan were to become a part of China under the leadership of the PRC, it would be to the advantage of the PRC government to promote Taiwan’s international status as it does Hong Kong’s today.] At present, however, the PRC government is opposed to such an idea. Even if it were to favor it, this would not be sufficient to forge a union from Taiwan’s point of view. Only time may change their positions. Instead of offering more benefits to Taiwan for joining the PRC under some form of political arrangement the PRC government has relied on the use more pressure and threats. We might disagree on whether the threat of force is capable of achieving a unification, but we can all agree that taking the interest and wishes of the Taiwan people into account in future dialogues will improve the chance of having a union consisting of the two governments.

In the mean time the forces of technology and economics are propelling some form of a union. This is related to the topic of this convention. Scientific and technological progress in the mainland is taking place so rapidly that Taiwan will lose out if it does not participate in this development. In 20 to 30 years from now mainland China will become an economically powerful and politically modern nation that the Taiwan people may be proud of, and can benefit from, being a part of a greater China. This convention is an important step towards building more cooperation between the two sides of the Taiwan Strait through the promotion and development of cutting edge technology and your entrepreneurship. Therefore, I can end this talk with a positive note, that is, the fundamental economic and technological forces at work will eventually help unify the two sides of the Taiwan Strait.

Acknowledgement: I would like to thank Cyrus Chu and Sheng-cheng Hu of Academia Sinica, Hu Shouwei of Zhongshan University, Anloh Lin of Chunghua Institution for Economic Research and Wentong Zheng of Stanford University for helpful comments without implying that they necessarily agree with the views here expressed.