A Stable Squeeze: How Beijing Hopes to Exert Economic Pressure on Taiwan without Killing Trade Ties

June 14, 2016

Image source: David Hillman https://www.flickr.com/photos/dazzy1960/5922809930/
Image source: David Hillman https://www.flickr.com/photos/dazzy1960/5922809930/

Since 1979, when China’s central leadership first proposed establishing direct trade with Taiwan as one of the Three Links, Beijing has seen cross-Strait commerce as instrumental in helping it to achieve its long-term goal of unifying Taiwan with China.  And while Beijing has periodically brought its economic leverage to bear on Taiwan, such as when it briefly threw Taiwan’s stock markets into chaos during the Third Taiwan Strait Crisis, it has never sought to reverse the now decades-long trend of increasing cross-Strait trade and investment.  Speaking at China’s prestigious Tsinghua University in Beijing last week, President of the Association for Relations Across the Taiwan Straits Chen Deming (陳德銘) indicated that Beijing remains committed to preserving cross-Strait economic ties irrespective of how it feels about Taiwan’s new government.  Beijing may still believe that stable economic ties with Taiwan serve China’s grand objective of unification, but that does not mean that Taiwan’s new administration will experience smooth sailing on the economic front and will be able to implement its economic policies unimpeded by Beijing.  To the contrary, there are at least two areas where the Chinese government is bound to squeeze Taiwan economically in order to win political concessions from Taipei and maintain China’s enormous economic leverage over Taiwan.


The first area lies within the cross-Strait relationship itself.  Certain links between China and Taiwan which if restricted could result in considerable economic and political costs for Taiwan but would most likely have only marginal costs for China are prime targets for Beijing’s pressure.  Two examples of these links are Chinese tourists and transit flights to Taiwan.  There have been several media reports in recent months that China has started to curtail the number of tourists it allows to travel to Taiwan.  According to one such report by Taiwan’s Central News Agency, the number of Chinese visitors to Taiwan dropped 15 percent year-on-year in May.  Taiwan’s new government has already responded to the looming tourism troubles.  Earlier this month, Taiwan’s Minister of Transportation and Communications Hochen Tan (賀陳旦) pledged his ministry’s support to local tour operators to help them cope with the downturn in the number of Chinese tourists visiting Taiwan.  Considering that more than 4 million mainland Chinese tourists visited Taiwan last year, accounting for approximately 40 percent of all tourists to the country, China has the ability to inflict serious pain on Taiwan’s tourism industry.


During its last two years in power, the Ma Ying-jeou administration pushed Beijing to allow Chinese airline passengers to stop over in Taiwan en route to other destinations.  Initially, Beijing tried to link flight route “optimization” to its transit flight negotiations with Taipei.  By “optimization” Beijing meant the establishment of new cross-Strait routes that would run directly across the median line of the Taiwan Strait, in contrast to the circuitous existing routes.  Taipei objected to the new routes out of concern about the threat that they would pose to Taiwan’s national security.  In the end, Beijing acquiesced; and in February, China began to allow its citizens traveling from three Chinese cities to make transit stops in Taiwan.


The resulting economic impact of Chinese transit customers has thus far been considerably less than what Taiwan had hoped for.  Taiwan’s largest airport Taiwan Taoyuan International Airport had set itself a target of servicing 20,000 Chinese transit customers in its first year as a transit hub for Chinese travelers.  However, according to Taiwan’s Mainland Affairs Council, Taiwan’s two main carriers China Airlines and EVA Air had only serviced approximately 200 Chinese transit customers in the first three months since Beijing allowed the transit stops.


It is Taiwan’s ambition to become a regional air hub, and Taoyuan International Airport is currently building a third terminal in anticipation of burgeoning passenger traffic.  But without transit flights from Shanghai, Beijing, and Shenzhen, it may be difficult for Taiwan to remain competitive in the regional airline industry.  China’s leaders are likely to demand major concessions from Taipei before they will permit China’s largest airports to service transit flights through Taiwan.  It is plausible that Beijing may even want to revisit the flight route optimization issue.


The second area where China is bound to pressure Taiwan’s new government is Taiwan’s economic relations with other countries.  Previous Taiwanese presidents Lee Teng-hui and Chen Shui-bian both sought to decrease their country’s economic dependence on China by promoting greater trade and investment ties with other countries, particularly Southeast Asian countries.  Tsai Ing-wen has likewise expressed an interest in diversifying Taiwan’s trade options.  In her May 20th inaugural speech she stated that her government’s New Southbound Policy “will elevate the scope and diversity of our external economy, and bid farewell to our past over-reliance on a single market.”  Beijing, although somewhat skeptical of the New Southbound Policy, appears to be reserving judgment.  But once Chinese officials have had a chance to learn more about this new economic strategy and Taiwan’s government begins to implement it, expect to see some pushback from Beijing anytime it thinks the strategy is seriously undermining China’s economic leverage over Taiwan.


Efforts by Taiwan’s government to form new bilateral free trade agreements (FTAs) will almost certainly elicit pushback from Beijing.  FTAs have historically been a key tool that Taiwan has used to diversify its trade.  Under Chen Shui-bian’s leadership Taiwan signed FTAs with Panama, Guatemala, Nicaragua, Honduras, and El Salvador.  The Ma Ying-jeou administration was able to form additional FTAs with New Zealand and Singapore.  Chen succeeded because he chose the low-hanging fruit, i.e. small, less-developed countries that had full diplomatic relations with Taiwan and were therefore less vulnerable to Beijing’s pressure.  Ma, on the other hand, was able to seal trade agreements with two non-allies that had more advanced economies only because he had reached a modus vivendi with Beijing.  It is possible that Beijing will want to see passage of the long-stalled Cross-Strait Services Trade Agreement and the Cross-Strait Trade in Goods Agreement as well as blockage of the pending supervisory regulations on cross-Strait agreements bill before it will sit back and let Taiwan pursue similar bilateral FTAs (let alone multilateral FTAs like the Trans-Pacific Partnership).


As DPP officials have argued, the idea of Taiwan shifting away from a state of extreme concentration of trade and investment with one partner to more diversified economic relations is simply a sound economic strategy, regardless of whether or not there is an underlying political objective to the plan.  Yet, seeing that Beijing wants to maintain, if not deepen, its economic influence over Taiwan, China’s sympathy for Taiwan’s economic ambitions has obvious limits.  Recognizing this, Taiwan’s partners, especially larger countries that are less constrained by China’s political and economic might such as the United States, Japan, and India should be prepared to assist Taiwan in its efforts to develop a stronger economy.  This assistance could involve working with Taiwan to help it realize its goal of becoming a key transit hub, promoting tourism exchanges with Taiwan, and possibly even developing bilateral free trade agreements, just to name a few.


Taiwan’s goal of reducing its economic dependence on China is at odds with China’s aim of promoting unification through economic integration.  Rather than expect Taiwan’s new government to make concessions to Beijing that are either unfeasible from a political perspective or unconscionable from a security perspective just to maintain decent economic growth, Taiwan’s partners can support it as it blazes a new trail in the global economy.


This article was first published on the Taiwan Security Research website.

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