Highlights
– China and Taiwan sign a third round of agreements on economic issues
– Tensions between the two Chinas easing, but still palpable
– Security discussions not likely until at least 2012-13
Summary
On May 2, 2009 China and Taiwan signed three agreements covering mutual financial services investments, increased frequency of direct commercial flights, and cooperation in criminal investigations. The two governments also reached a consensus on allowing mainland companies to invest in Taiwan. Such agreements could help reduce cross-straight tensions in the near-term if they coincide with a reduced military posture by both sides. Despite such an opportunity, we do not assess as likely either country offering resolution to the cross-straits security situation in the near to medium-term.
Low Hanging Fruit
In the third round of talks between high level representatives of the Chinese and Taiwanese governments, the two countries announced three agreements:
1. Financial services firms may open branches in each other’s territory and create a currency-clearing mechanism.
2. Direct flights will increase from 108 to 270 per week and new routes will be opened to Taiwan from six mainland cities.
3. Cooperation in criminal investigations will be permitted.
Meeting in the Chinese city of Nanjing, representatives from China and Taiwan also created the framework to allow Chinese banks to enter the Taiwanese market and acquire shares of Taiwanese financial and manufacturing firms.
The talks were the third round of high-level negotiations between China and Taiwan since Taiwanese President Ma Ying-jeou took office in May 2008. In earlier rounds, both agreed to begin daily charter flights and direct sea and postal service and to increase the number of Chinese tourists visiting Taiwan. The next round of meetings is scheduled to take place in Taipei in the latter half of the year.
The current economic slowdown has forced Taipei to take bold market-opening measures, even though Taiwan has long feared China could gain control of the island’s economy. Taiwanese officials have said they hope to limit the Chinese control of a local firm to 10-20 percent. We expect Taiwanese officials to announce at what level Chinese firms will have access to the island’s companies in the coming weeks.
Taiwan had hoped the mainland would also agree to allow Taiwanese financial institutions to invest in China’s banking, securities and futures as well as insurance sectors. Representatives at this weekend’s meeting agreed to list the Economic Cooperation Framework Agreement (ECFA) as a discussion topic for the next round of talks.
A final topic of discussion was Taiwan’s participation in the World Health Organization as an observer. Based on the mood of relations, China will likely allow Taiwan observer status at the World Health Assembly, which convenes from May 18, after previously blocking its application.
Missing Missile Milestones
Although success in economic discussions signals continued improvement in bi-lateral relations, this may not necessarily lead to greater security and stability in the region. Military tensions remain a major threat to regional stability and relations between China, the United States, Japan, and Australia. The strategy for these talks is to address concrete issues that can stabilize relations, but avoid any discussion of Taiwan’s sovereignty or security. Powerful forces on both sides remain opposed to full rapprochement, including the Chinese People’s Liberation Army (PLA) and Taiwan’s opposition Democratic Progressive Party (DPP).
In an interview with Taiwan’s China Times newspaper, published on April 29, 2009, Taiwan’s President Ma Ying-jeou said “cross-strait talks would focus only on economics in the next four years, as these alone would take years to be discussed.”
Ma had campaigned on a reversal of his DPP predecessor, Chen Shui-bian’s, fiercely pro-independence stance, which had infuriated China during Chen’s eight years in office. Ties have improved markedly since Ma took office in May.
However, that has not translated into any reduction in military tension between the two countries. Both sides are increasing their military capabilities in order to conduct or repel an invasion. This includes 1,300 Chinese ballistic missiles aimed at Taiwan, and the fact that the Chinese have deployed state-of-the-art air superiority fighters near the island. China will not scale back its military build-up against Taiwan in the near to medium-term. Beijing continues to hold the use of force against Taiwan as one of its options if the island declares de jure independence from the mainland.
The United States is very supportive of President Ma’s initiatives to establish ties linking Taiwan to Mainland China. The Obama Administration will continue supporting efforts that may reduce the likelihood of war between the two Chinas in order to avoid having to show its cards on whether or not the United States would defend the island against a Chinese attack. Japan and Australia are also keen to see tensions in the straits diminish, and will maintain their support for President Ma as long as he continues his policy of opening up to the Mainland.
Going Forward
The two sides will likely enhance exchanges in trade, culture, education, science and technology unrelated to military hardware in an effort to strengthen cross-strait ties. Domestic political considerations on both sides will slow any discussions of security issues. President Ma will prefer to wait until his second term in office to launch security talks with China because he will no longer need to be concerned with running for reelection against a determined DPP.
The Chinese appear to be satisfied with improved relations coinciding with their increasing military capability to threaten the island. Therefore, they will defer any military action unless Taiwan or an outside power incites conflict in the near to medium-term; a situation we deem unlikely.
Overall, we expect economic relations between the two countries to continue improving over the coming years. Such improvements will strengthen economic conditions in both countries, allowing for increased growth potential and more sustainable and reliable supply chain management for international businesses operating in the region.
