William J. Holstein

China Watch: Profound Changes in Taiwan-Mainland Relations
APRIL 9--I've been watching relations between Taiwan and China since I was posted to that part of the world when Jimmy Carter "normalized" relations with Deng Xiaoping. Although there has been a gradual engagement between the two arch-enemies, now the stage is set for the most dramatic transformation since I've been following the story. And it has big implications for the Americans.

Taiwan President Ma Ying-jeou is pushing an Economic Cooperation Framework Agreement with the mainland that will open up the economic floodgates between Taiwan and China, while attempting to maintain politics and diplomacy on an entirely different footing. Taiwan is at risk of being marginalized economically by China's continued rapid growth and by its attempt to strike a trade agreement with the countries of Southeast Asia.

This was the subject of a video panel discussion I had the privilege of moderating this week in New York. From the American side were Douglas Paal, former U.S. "ambassador" to Taipei from 2002 to 2006, and Daniel Rosen, a Chinese-Taiwanese economic specialist from the Peterson Institute for International Economics. On the video monitor from Taiwan were Bih-jaw Lin, vice president of National Chengchi University; Philip Hsu, executive director, Center for China Studies, National Taiwan University; and Tain-Hy Chen, professor at National Taiwan University. The Taipei Economic and Cultural Office sponsored the event and for purposes of full disclosure paid me an honorarium for my services.

If the agreement is finalized, Taiwan's petrochemical and textile industries would be fully integrated with the mainland's, for example. Taiwan already has 1 million people on the mainland mostly running factories and many of its industries have located at least some of their operations on the mainland. Now the way would be clear to increase the size of Taiwan's investments and their relative sophistication. Travel would be opened up much more. Taiwan would have access to many key service sectors on the mainland. Rosen estimates that the agreement could increase Taiwan's annual economic growth rate by 5.2 percent by 2020.

There are hazards for both parties--one danger is that Taiwan's economy becomes so enmeshed with the mainland that Beijing is able to exert political or diplomatic sway over Taipei's decision-making. Another is that Taiwan "infects" the mainland with its ideals of democracy and pluralism. Both sides obviously will remain on guard.

And there are big implications for the Americans, which is being mostly ignored in the U.S. media. This is great news in the military sense. It defuses, although does not eliminate, one of the tensest military standoffs in the world. The Seventh Fleet will not have to sail in to prevent a conflict. But in another sense, this is a reflection of America's diminishing power and influence. Washington is not driving the process of trade liberalization in Asia. It has taken a backseat role. It's not likely that the Americans will choose to embrace any new free trade agreements. So we may be even further marginalized in the fastest growing economies of the world.

It's time for the Americans to understand what is happening and to seek to remain engaged in the important structural changes occuring in Greater China.