Uncertain Future for Cross-Strait Relations

Over the past few decades, China has overwhelmingly received the largest portion of Taiwanese accumulated investments. From 1991 to August this year, approved historic investment into China stood at a whopping US$205.7 billion, with over 45,000 projects involved, the Mainland Affairs Council says in notes emailed to TOPICS

Economists say the real figure may be much higher, as many Taiwanese companies have listed in tax havens, such as the Cayman Islands, to evade government scrutiny when entering the Chinese market. To date, China remains Taiwan’s largest trading partner and largest export market.  

However, Taiwan’s investment in China has dwindled from a peak of 83.8% of total foreign investment in 2010 to 17.6% as of August, the Council says. In 2022, Taiwan’s investment in Southeast and South Asian nations targeted by the New Southbound Policy at US$5.27 billion surpassed investment in China, marking the first time this has happened in almost two decades.  

Analysts note that the waning interest in China from Taiwanese businesspeople has less to do with politics and more with the rising cost of Chinese labor and the growing need for diversification. As is the case for most of the world, Taiwanese companies are hedging against more supply chain disruptions following pandemic-related lockdowns in China and increasing U.S.-China trade tensions. Taiwan also complies with the CHIPS and Science Act, a U.S. export regime that bans the sale of many advanced chips to China.  

Despite a decision in 2009 for Taiwan to allow certain investments from China, the accumulated Chinese investment in Taiwan at US$2.59 billion as of the end of August this year was much smaller than Taiwan’s investment into China. Now, Chinese investment in Taiwan is also showing a downward trend.  

“Taiwan’s trade and investment have more to do with China’s current economic situation and downturn rather than the deteriorating [political] relationship between Taiwan and China,” says Stephen Tan, managing director of International Policy Advisory Group, a Taipei-based geopolitical risk and policy consulting firm. 

Tan adds that although Taipei and Beijing are not communicating with each other through their approved negotiating agencies, many of the laws governing cross-Strait relations drafted in the early 1990s remain intact.  

“If you look at the framework that has been established between Taipei and Beijing for a long time, it hasn’t changed that much,” he says. The framework includes laws governing the Straits Exchange Foundation, a non-government organization created in the early 1990s to be Taiwan’s authorized negotiation agency for dealing with China. Since President Tsai Ing-wen of the ruling Democratic Progressive Party (DPP) took office in 2016, China has stonewalled the foundation.  

During the 2008-2016 rule of President Ma Ying-jeou and the Chinese Nationalist Party, Kuomintang (KMT), these two negotiating agencies signed 26 cross-Strait business and technical agreements. So far, none of the agreements have been formally scrapped, although these days there are significantly fewer cross-Strait interactions involved in enforcing them.  

Among the cross-Strait agreements is a deal for direct flights. During the pandemic, the Mainland Affairs Council says, the Taiwan government scaled down direct flights to many places in China, leaving only Shanghai, Beijing, Chengdu, and Xiamen as destinations. But in March this year the government announced that flights would resume to 10 more Chinese cities, including Chongqing, Hangzhou, and Ningbo. Cross-Strait aviation links are now busy, with an average of 74 direct flights to China per day in August, the Council says. 

Another agreement signed by Beijing and Taipei in 2008 once led to hordes of Chinese visiting Taiwan, once considered a money-spinner, has since taken hits from politics and the pandemic. Citing the current state of relations with Taiwan, Beijing’s Ministry of Culture and Tourism said in 2019 that independent tourists from 47 Chinese cities would no longer be allowed to travel to Taiwan. China then banned tour groups from visiting Taiwan in 2020.  

The Taiwan government also banned tour groups from China in January 2020 due to concerns about the emergence of Covid-19. Taiwan will once again allow groups from China to visit starting March next year, but it is unclear if China will relax its own restrictions if the DPP’s presidential candidate Lai Ching-te wins the presidential election. Should one of the opposition presidential candidates win, Taiwan could possibly see a return of Chinese tourists. 

This year has seen a renewed focus on the Economic Cooperation Framework Agreement, or ECFA, effectively the framework for a future Taiwan-China free-trade agreement inked by the Ma administration and China in 2010. In a so-called “early harvest” program, 539 Taiwanese products, including petrochemicals and textiles, along with 267 Chinese items, received early tariff-free treatment.  

Taiwan’s Mainland Affairs Council says that between 2011 and April 2023, Taiwan saved US$9.6 billion in tariffs thanks to the early harvest program, while China saved about US$1.07 billion. 

Five services sectors, including finance, were also liberalized early under the agreement, the Council adds. For example, as of August 2023, 16 Taiwanese banks had received approval from the Financial Supervisory Commission to set up branches or subsidiaries in China, while three Chinese banks operate in Taiwan. Further negotiations on the ECFA that included proposed deals for trade in services and full liberalization of merchandise trade were stalled in 2014 amid public anti-China backlash. 

In August this year, Beijing’s Taiwan Affairs Office spokesperson Zhu Fenglian threatened to scrap the early harvest program. The announcement came amid a trade spat over Taiwanese bans on imports of over 2,500 Chinese goods involving agriculture, textiles, coal, and minerals that were implemented this year. Taiwan’s Ministry of Economic Affairs immediately said the threat was politically motivated, according to Focus Taiwan. 

Tan says it is not within Beijing’s political interests to terminate the early harvest agreement as it benefits ordinary people and industries rather than the Taiwan government, and China’s Communist leaders want to win the hearts and minds of Taiwan’s people. However, he adds that the early harvest program has had minimal economic impact, and discontinuing it would primarily serve as a symbolic gesture. “Beijing can give its notice, but whether Beijing will do that, I don’t know.”