RAND Study Says China's Attempts at Economic Coercion of Taiwan Have Only Limited Success

For Release

February 15, 2007

China has had only limited success in using economic pressure to win political concessions from Taiwan, although Taiwan's increasing ties with China leave it vulnerable to economic coercion, according to a RAND Corporation study issued today.

China's limited success is not necessarily good for Taiwan or U.S. interests in the region, said Murray Scot Tanner, a RAND senior political scientist and author of the study, “Chinese Economic Coercion Against Taiwan: A Tricky Weapon to Use.”

“China has moved to a much more conciliatory and seductive policy toward Taiwan in the last 18 months or so,” Tanner said. “But if China comes to feel that economic and other non-violent levers aren't going to be effective, then it might use greater force in the future.”

The study by RAND, a nonprofit research organization, finds that China and Taiwan are currently in a state of “asymmetric interdependence.” For the past two decades, Taiwan has tried to balance two goals: avoiding excessive dependence on mainland China while trying to take advantage of China's booming economy to rescue Taiwan's own competitive position.

Both Taiwan's current president, Chen Shui-bian, and his predecessor, Lee Teng-hui, have struggled to limit Taiwan's dependency on China even in the face of exploding cross-strait economic ties.

“Although Taiwan is, overall, more economically dependent upon mainland China than China is on Taiwan, there are key regions and sectors of China's economy that are enormously dependent upon Taiwan investment — most notably China's information technology sector — and these would suffer very badly in the event of a serious cutoff of trade and investment,” the study notes.

Officially, the People's Republic of China (PRC) maintains that it is the legitimate government of all Chinese territories, including Taiwan, and believes that Taiwan and China will eventually be reunified.

Taiwan, however, officially considers itself the “Republic of China,” but for the most part operates as though it were a de facto independent state. Beijing fears ethnic Taiwanese will try to establish a legally independent Republic of Taiwan, and both Presidents Lee and Chen have repeatedly asserted that Taiwan is a state separate from the PRC.

Beijing has repeatedly employed or threatened economic coercion to prevent any formal declarations of independence. Taiwan's economy is more vulnerable to some forms of economic pressure than others, including:

  • Selective harassment or intimidation of Taiwanese businesspeople who are heavily invested in the mainland (called Taishang).
  • Mainland sanctions against Taiwan's imports.
  • Mainland sanctions against Taiwan's investments.
  • Economic disruption, damage and sabotage of Taiwan's stock and financial markets or its information networks.

In the early 1980s, Taiwan's mainland investments were small and often involved labor-intensive products like footwear, textiles and toys. There usually was a technological gap between what was produced in China, and what was produced in Taiwan.

But in the early 1990s, Taiwan's mainland investments began to shift toward high-tech and infrastructure, increasing the average value of the investments. Currently, 95 percent of Taiwan's CD-ROMS are produced in China, 94 percent of its digital cameras, 74 percent of its notebook computers and 52 percent of its desktop computers.

Cross-strait, two-way trade has grown from an estimated $950 million in 1986 to more than $46.3 billion by the end of 2003, representing 17.1 percent of Taiwan's total trade. China is Taiwan's top venue for foreign investment and the main production base for its most profitable exports, including information technology.

Chinese officials have put pressure on the Taishang, but so have some Taiwanese officials, accusing them of being more loyal to China, a technique known as “red hatting.” In response, the Taishang have become adept at “flying under the radar” politically, attracting as little attention as possible from either side.

And despite increasing economic ties, there has been dwindling support among Taiwanese voters for reunification under Beijing's preferred term, called “one country, two systems.”

“When China has used economic leverage in a more benign, seductive way, it tends to do reasonably well,” Tanner said. “But when it uses it as a blunt instrument, like arresting Taiwanese businessmen, it ends up backfiring and strengthening the political hand of people like President Chen, who can point to mainland coercion and say, ‘See what happens when you do business with these guys?' ”

The United States' position remains that both Taiwan and China need to work out their differences peacefully and that Taiwan should not be forced into reunification. But Tanner says there are lessons the United States can learn from the current standoff.

“While we like to think that economic coercion and sanctions can pressure countries into making major policy concessions, the evidence from history suggests that economic pressure, used by itself, is rarely very effective,” Tanner said. “It tends to be least effective in wringing out major concessions on fundamental issues of sovereignty, control of territory, or war and peace. None of this bodes well for China's periodic efforts to economically pressure Taiwan into concessions regarding reunification.”

Tanner notes that one major potential source of tension is that “hardline pro-independence Taiwanese politicians would absolutely disagree with the main conclusion of my study — they sincerely fear that growing cross-strait economic ties could soon allow the mainland to dominate Taiwan and permanently crush dreams of independence. Therefore, some of them believe that the time to take bold steps to establish independence must be soon, while they still have a chance.”

The other key concern is whether Beijing has the self-restraint to continue with its recent more seductive use of economic power, or whether it will lapse back into threats and harassment the next time it is disappointed with political events in Taiwan.

This has happened repeatedly in the past, such as when the pro-independence Chen Shui-bian won the 2000 and 2004 presidential elections. Faced with these setbacks, some in China argued that Beijing needed to use more naked forms of force. Taiwan's 2008 presidential elections and upcoming efforts to revise the Taiwan government's constitution will certainly test Beijing's patience.

Tanner's analysis was prepared for the Intelligence Policy Center of the RAND National Defense Research Institute, a federally funded research and development center sponsored by the Office of the Secretary of Defense, the Joint Staff, the Unified Combatant Commands, the Department of the Navy, the Marine Corps, the defense agencies and the defense intelligence community.

The study is available at www.rand.org.

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