Dialogue: Economics drawing Taiwan and China closer

By VAUGHAN YARWOOD

Taiwan has long seemed to be a country where economics would win out over political will, where growing business ties with China would eventually bind the breakaway state in a web of relationships leading inevitably to political union with the mainland.

At first glance, Taiwan's decision to finally allow its computer chip makers to invest in China is proof that Beijing's strategy of gradual integration may be working.

China's US$10 billion-a-year ($22.8 billion) chip market (7 per cent of world sales) is projected to double in size by 2005 and semiconductor companies such as Taiwan Semiconductor Manufacturing Co and United Microelectronics Corp - the world's two biggest chip makers - are keen to get some of the action.

In reality, the island's attempts to insulate its economy by restricting investment in China never really succeeded.

Taiwanese companies merely set up offices in third countries and channelled money through them. It is estimated that two to three times the official total of US$60 billion ($137 billion) has been invested in the mainland.

The worst economic crisis in Taiwan's post-war history last year forced President Chen Shui-bian to dispense with the fiction that China's low-cost labour market could be ignored.

The lifting of restrictions on the chip makers is the latest move in a sanctioned expansion of commercial links with the mainland.

But there are caveats to such links. Only older technology will cross the strait, and just three plants are to be built in China over the next three years.

Most of Taiwan's smaller companies make computer memory chips which rely on advanced technology and therefore cannot be transferred, largely because of US-sponsored restrictions on the export of so-called dual-use equipment which can be used to make advanced weapons.

Even TSMC and UMC are building their new state-of-the-art plants in Taiwan.

Able to make chips with 0.13 micron circuitry on larger silicon wafers, the factories will lower the production cost per chip by almost a third.

The easing of investment restrictions which began last year was also a useful and prudent prelude to Taiwan joining the World Trade Organisation.

WTO membership requires that China and Taiwan extend most favoured nation status to each other.

WTO membership promises a fundamental transformation of the way Taiwanese companies do business. Ironically, the very process may undermine Beijing's strategy and build a resistance to assimilation by encouraging Taiwanese companies to become more competitive and to act in new ways.

The increasing effectiveness of Chinese enterprises - such as Shanghai start-ups Grace Semiconductor Manufacturing Corp and Semiconductor Manufacturing International Corp - will force the Taiwanese to work more smartly.

China's entry into the WTO will also introduce greater transparency in decision making and may well spell the end of Taiwan's ability to exploit guanxi (connections).

* Vaughan Yarwood can be contacted at hiero@ihug.co.nz