COVER: Changing the Neighborhood

Taiwan and China will almost surely enter WTO at nearly the same time, shaking up long-running cross-strait business ties and speeding transformations already long in progress: delivering another blow to the beleaguered traditional industries here while opening up even more opportunities in China. Can Taiwan stay ahead of the curve, leading rather than following China's development?


By Laurie Underwood

The chairman of a successful Taiwan-based electronics company recently met a delegation of potential investors at his factory in China. Since the delegation included executives from both Taiwan and Singapore, he offered his insight into how the two groups of investors would likely fare in breaking into the PRC.

"I'll tell you the difference between Singaporean businessmen who try to do business in China and those from Taiwan," said the Taiwanese chairman. In Singapore, he explained, the local government "lays the road out for you," providing investors with facilities, technology patents, and even introducing customers. "In Taiwan, it's just the opposite. You have the government blocking our road every single step along the way," he told the group. "Red tape here, obscure regulations and prohibitions there." In other words, Taiwanese businessmen are generally at home working through the obstacles of starting in China, while Singaporeans are often out of their depth.

The electronics entrepreneur was illustrating why Taiwanese companies such as his own can provide newcomers to China with an ideal joint venture partner. It is a sales pitch that many Taiwan businesspeople with China operations will likely be delivering as China nears accession into the World Trade Organization (WTO). After all, there will be an onslaught of foreign companies buying tickets for China after it joins the WTO, and Taiwan could benefit substantially by posing as a middleman.

Taiwan's potential role as an icebreaker in China seems to be the best news out there for those predicting how its economy will change after both China and Taiwan join the WTO -- and is a bright ray in the island's cloudy overall economic forecast these days. Analysts, officials, and businesspeople agree that, especially in the early stages, Taiwan can use the past decade of aggressive investing in China, and its shared culture and language, to great advantage with incoming foreign investors to the PRC. While China must agree to WTO terms in opening its markets, and cut tariffs and subsidies, it will still remain a confusing, frustrating, obstacle-laden operating environment for many newcomers.

"China's not going to make its labyrinth of procedures any simpler -- they will just make it more open to anyone who wants to work through it," say Peter Kurz, chairman of "Any opening [of China] is going to be relatively good for the Taiwanese. The pie is getting bigger and, if nothing else, their piece will not get any smaller." Kurz points to operations such as the *Wolson Mi-hwa Fiber Optics factory in China, a joint venture between a Japanese technology provider, the Nanking government, and a Taiwanese partner. In forming the company, the Japanese partner preferred to let the Taiwanese handle manufacturing, sales, marketing, and credit. Kurz believes the allocation of duties and ownership is right, and he expects the operation to emerge as one of top optical fiber optics suppliers in China.

Frank Chen, director of the National Association of Small & Medium Enterprises, agrees that Taiwanese companies stand to benefit from China's WTO accession. Chen is chairman of Pershing Systems Corp. software company, but began as a textile manufacturer. His knitwear company was one of Taiwan's top producers during the early 1980s, but suffered after Taiwan's land and labor costs rose. In 1986, he moved production to the Philippines and in 1993 relocated to Shanghai, where his business now flourishes. In Shanghai, Chen's company is a joint venture with the Max Mara fashion label.

Chen says the joint venture makes a logical division of duties, so that all parties win. "We know how to deal with Chinese, we don't have the language gap, and we know how to use the guanxi to make things happen. We can speed things up, make them successful," Chen says. In the venture, a Japanese partner oversees R&D and marketing while Chen's company handled setting up the factory, management, and dealing with the Chinese partner. Chen says understanding Chinese business culture, with its emphasis on relationships and renwei, or human factors, rather than rules, is still very useful across the Strait. "China is not like the other countries, which are run by a system. Sometimes it is individuals who make the decisions," he says. He adds that China has recently "improved very much" because of foreign investment into China, and that guanxi-based business dealings will likely decline more after WTO accession, but gradually.

For how long could Taiwan benefit from a middleman role following WTO entry? Mainland Affairs Council Chairwoman Tsai Ing-Wen says this advantage will be short-lived. "In the longer term, the Chinese are going to develop the ability to deal with foreigners themselves," she says. "I'm sure people in Shanghai or Hong Kong will provide China with this sort of capability." She says Taiwanese businesses now can offer hard-to-match expertise in manufacturing capability, marketing, management and integration, but warns that manufacturing ability will be the first advantage Taiwanese companies lose. "The technology now can be transferred very quickly," she says. "Taiwan must continue to maintain its competitive edge over China. But China is moving fast and we are facing economic slowdown. We have to ask ourselves how long we can maintain this competitive edge. My best estimate is three to five years."

Cross-strait Advantage

Taiwan's potential as a foreign company's bridge into China is just one of the ways Taiwan's economy will be impacted when China enters the WTO. In fact, Peter Kurz says China's accession will affect Taiwan's economy even more than Taiwan's own accession. He believes China will prove "the main factor" changing Taiwan's own economy. "First, it will be easier for Taiwan companies to finance their operations [in China] and to supply their China facilities with equipment and raw materials," says Kurz. "More importantly, it will also open up the domestic market for these products." Eventually, he says Taiwan companies with facilities in China will benefit both by operating more efficiently for the export market and also gaining greater access to the domestic market.

A significant percentage of Taiwan companies stand to gain by riding China's investment boom following WTO. The island now has 50,000 investors in China, including 24,000 of the island's 80,000 manufacturers, according to the Chinese National Federation of Industries (CNFI).

Some analysts, including Council for Economic Planning and Development Chairman Chen Po-chih, warn that Taiwan's investors in China will face far greater competition from incoming foreign investors across the strait after WTO, and may therefore suffer. But others maintain that Taiwan has a cross-strait advantage to exploit. Peter Kurz stresses that one of the biggest problems faced by incoming manufactures is supplying their factories with raw materials or parts. Too often, foreign companies "come in and plunk down a factory in China," he says, then discover difficulties in sourcing materials.

Here again, Taiwanese investors have already established a solid network of upstream and downstream suppliers for manufacturing, especially in the industrial centers in Shenzhen, Shanghai, Suzhou, and Nanking. The Taiwanese-to-Taiwanese network allows companies to buy products that are of international standards but are made in China, rather than imported. The network also cuts down on financial risk because transactions are made between Taiwan companies. Kurz says by the time supply problems are sorted out in China, Taiwanese investors will enjoy a substantial head start.

Hello Direct Links, Goodbye Go Slow?

In practical terms, WTO accession for both sides of the Taiwan Strait will bring about several significant changes to the current status. One misconception is that joining will mean an end to Taiwan's 50-year ban on certain imports from China. The Taiwan government lifted its all-out ban on Chinese imports in 1988, now allowing 5,807 items to enter Taiwan shores from across the straits (although they must still be transported indirectly). The no-no list now still covers 4,537 items, including 2,927 industrial items and 1,610 agricultural products. Tsai Ing-Wen says the MAC has not yet decided whether to invoke the "non-application clause," a tool allowing WTO members the flexibility to override WTO terms in case of a national security concern. So Taiwan could continue to ban certain imports from China if it receives approval to invoke the clause. "We understand that if we do decide to invoke that, it would be a major problem between the two sides," Tsai says. And even if this method is used, some sectors will likely be opened to Chinese imports, offering cheaper alternatives to such Taiwan-made products as Chinese medicines and other culturally based items.

On direct links, despite Premier Chang's statements tying WTO accession to the opening of direct transportation channels, Tsai stresses that direct shipping and airlinks are not covered by WTO and that, after accession, Taiwan's first goal will to normalize relations not to arrange direct flights. Tsai also cautions that direct links can harm rather than hurt Taiwan's economy. "The short term impact is something we have to be careful about," she says. Direct flights and shipping will have a real impact on Taiwan's agriculture and traditional industries, and could hinder services, leisure, and tourism - industries that have been widely predicted to benefit from WTO. "If you can fly from here to Shanghai in two hours, everyone will go there on weekends because it's cheaper," she says. "Who will stay here? Taxi drivers will not find passengers, restaurants will not find customers. We don't want to see this happen."

The flip side of the tourism equation would be to open the Taiwan market to incoming China tourists, an idea that is "under planning," says Tsai. But she warns against being overly optimistic about the potential for this sector. While tourism may help ease unemployment, opening Taiwan's doors to Chinese visitors could pose a national security threat.

One sure benefit for Taiwan investors is that WTO accession will provide a forum for handling trade and investment disputes with China. The lack of clear guarantees for mainland investments has been one of the gravest concerns for local investors, especially given rocky cross-strait relations in recent years.

The potential for opening two-way capital flow is one of the biggest potential changes linked to the WTO. Through the past 14 years of investing in China, investment has been strictly one way: Taiwan to China. Finally opening the local market to investment from China could mean a huge boost to Taiwan's economy. As one analyst puts it, "If you want to buy votes, that is the best way of doing it. That would be such a strong shot in the arm to the stock market that it would be a good way of gaining positive sentiment toward the DPP before the coming [legislative] elections."

As Tsai Ing-Wen explains, the opening of such long forbidden investing weighs economic gain against national security risk. "On the one hand, you see the need for allowing Chinese elements into your market so your relationship with them will be more balanced. And you provide additional impetus to your industrial development and economic development," she says. "On the other hand, it is a national security issue. You don't want our industries or our markets controlled by people we don't have enough confidence in."

Still, the government is considering allowing Chinese investment into real estate, allowing Chinese service companies to operate in Taiwan, and allowing Chinese investment in the local manufacturing industry. Less likely in the short term, is allowing mainland banks to operate in Taiwan or allowing Chinese investment into local capital markets.

Getting Shanghaied

Could WTO accession be moving Taiwan's economy toward China's too far, too fast? Most businesspeople say no, saying ties to China have for years been Taiwan's main source of economic growth. CNFI Chairman Lin Kuen-Chong says trade and national security are two different issues. "Despite rocky political situation, there are now nearly 50,000 Taiwanese investors in China," he says. "Economic and political relations have developed independently." Manufacturers in the CNFI are pushing for accession "as soon as possible."

Ultimately, MAC Chairperson Tsai Ing-Wen says it is not the WTO but simple economic development that is transforming Taiwan's economic ties to China. As China matures, Taiwan is finding fewer cooperative ventures and more competition from China itself. One of the biggest concerns of local businesspeople is the steady talent drain drawing Taiwan's workforce to China, especially to booming business centers such as Shanghai.

"This [talent outflow] is happening with or without WTO," says Tsai Ing- Wen. Joining the trade organization will only speed up changes already under way in Taiwan's business ties with China. "We are in a keen competitive position with China now," she says. "If we lose in the competition, we lose. But if we manage to develop our economy and to make this place a better place for investment, we will be able to keep our talent here." Her mood, as Taiwan and China near entry to the WTO, reflects the edginess common now among businesspeople and analysts. "The IT industry is highly competitive and time, for us, is running out," she says. "It is too early to say that we will be the loser at the end of the day, but we should be alert to this challenge."

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