Chapter IV. Findings: Trade, Convergence, and Hollowing Out

IV.3. Interdependence and hollowing-out

As trade across the Taiwan Straits has increased over the years the principle actors, namely Taiwanese firms and authorities and Chinese central and provincial authorities, have developed a path dependency that has tied economic growth, employment, stability, and productivity together between several different economies. The nature of this arrangement is naturally asymmetrical, but the forces of development and profit within an ever globalizing division of labor are seeing rational actors pursue their interests. Despite the great amount of trade between the two parties, it is very imbalanced.

The emphasis on manufacturing ever larger amounts and the growing levels of technological sophistication (often via the Hong Kong route) have encouraged a shift in the types of firms that invest in China. While the swarm of Taiwanese SME networks are still the largest factor on the mainland there has been a steady increase in larger Taiwanese enterprises entering the field. The combination of larger proportions of Taiwanese enterprise (both SMEs and larger firms) and the increasing levels of manufacturing sophistication that are invested in China leads to a scenario where more and more of Taiwan’s industry is lost to mainland economies that can do the same work cheaper. Reid and Rigger identify that even by 2003, of Taiwan’s 250 largest enterprise groups, thirty-six per cent of their 4,074 overseas subsidiaries had been established on the mainland.143 They highlight that by 2005 71.3 per cent of all “publicly traded Taiwanese IT and electronics conglomerates” had established manufacturing enterprises in the PRC, and that

by 2006 63.3 per cent of Taiwan’s publicly traded traditional manufacturers had also established operations in China.

Taiwan’s IT industry has picked up in pace at the end of the 1990s as Taiwanese investors were returning to China. The Taiwanese IT industry followed manufacturing into China and became global hardware leaders because of their use of the PRC’s manufacturing base. They had found a winning formula, and by the beginning of the 21st Century between 60 to 80 per cent of Taiwan’s IT hardware was being produced in China.

Trade interdependence between Taiwan and China is incredibly complex and quite often subtle or clandestine. While many taishang operate openly and freely within the mainland, there are still many hidden routes that Taiwanese FDI penetrates China. Offshore havens have long remained a preferred route for investments. Hong Kong has been one of the major locations for Taiwanese investment to pass through since the 1980s. Other tax and regulatory havens include the British Virgin Islands, Panama, and the Cayman Islands. Figures indicate that Taiwanese clandestine investors were responsible for nearly 70-80% of British Virgin Islands investments to China.144 The recently leaked “Panama Papers” comprised of 11.5 million leaked documents from the Panamanian investment-facilitating firm Mossack Fonseca have named over 16,000 Taiwanese customers.145 Taiwanese firms also manage to get around imposed restrictions into China by registering as multinational firms with business units registered in several different countries. Taishang are driven by returns on investments. The bottom line creates the many paths found. Taishang investment in Guangdong, for example, officially made up only 3.38% of the province’s inbound FDI in 2004, but through intermediaries such as the British Virgin Islands the total was closer to 23%.146 Any disruption to these forces would be devastating for China.

The trade balance between the two parties has also become increasingly asymmetrical.

Figure 5 shows the percentage of cross-strait trade compared to total global trade for both Taiwan and China from 1990-2015. Chinese imports of Taiwanese products are shrinking as Taiwan continues to shift its industry to the mainland. According to Wilson this is due to two key factors: First, to keep costs on factors such as land and labor down, many Taiwanese firms operating in the mainland have reduced their supply imports from Taiwan and instead focus on items provided by mainland-based suppliers. Taiwanese companies in China have a growing

144 Reid and Rigger, pp. 5, 11-14.

145 Lisa Wang, “PANAMA PAPERS: More than 16,000 Taiwanese appear in Panama Papers,” 5 April 2016.

146 Reid and Rigger, 9.

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preference to buy goods locally than to import from Taiwan. In 2002 only 15 per cent of goods purchased came from local sources. By 2010 over 60 per cent of goods purchased came from local sources. Second, China’s import structure is changing. China’s economies are moving up the value chain. The “intermediate” goods that are purchased from Taiwan are less and less sought after as higher-end goods are becoming more necessary for higher-sophistication production.147

1990 341,687,677 121,929,180,127 0.28% 115,440,000,000.00 0.30%

1995 3,467,857,572 215,203,771,718 1.61% 280,860,000,000.00 1.23%

2000 10,440,540,918 288,321,181,753 3.62% 474,290,000,000.00 2.20%

2005 63,736,408,872 381,034,544,003 16.73% 1,421,910,000,000.00 4.48%

2010 112,879,654,027 525,829,376,825 21.47% 2,974,000,000,000.00 3.80%

2015 115,392,430,915 508,999,362,766 22.67%

Sources: Republic of China, (Taiwan), Bureau of Foreign Trade,;

People’s Republic of China, National Bureau of Statistics of China, China Statistical Yearbook,

China has scared taishang away in some cases due to measures undertaken through its tax reform system or local fees levied on Taiwanese firms in order to even the field for local business. The restructuring of the corporate income tax in 2008 is a prime example of the fragility of the system. Taishang were heavily affected by new rules which reduced tax rebates and the efforts to create similar rates between foreign income tax and domestic income tax rates.

Due to the nature of the local-central revenue collection system in China, and the lack of redistribution from the center to the provinces following reforms in the 1980s, localities had begun to levy their own fees on Taishang in order to make up for the lack of revenue sharing.

The hike in central income tax rates forced some Taishang to pull out of China, creating a precarious situation for the central government to manage.148

On some levels we can find that Taiwan holds some leverage over the mainland economies. The taishang are a very important factor in creating local-level stability, especially in terms of economies and exports, and Taiwan is disproportionately influential in China’s most productive provinces. The local-center divide on the mainland may impact policies relevant to the taishang. The center may be disconnected from the realities of the provinces, though it is assumed some officials may have an understanding as they have risen through the ranks from their provincial posts.149

The Hollowing out of Taiwan

The rates at which Taiwan is losing manufacturing indicates a very real threat of industrial hollowing-out. What makes Taiwan particularly susceptible today is that there are fewer and fewer restrictions on FDI and technological outflow to China. Tsai explains further:

“Owing to linguistic and cultural similarities as well as Taiwan’s liberalization of various policies toward China in recent years, the movements of Taiwan’s capital, techniques, and personnel to China have become increasingly free. There is almost no restriction on these outflows any more.”150 One of the last barriers was struck down in June 1, 2013, when the Cross-Strait Agreement on Trade in Services was signed and “laid the foundation for the final realization of liberalization of trade in services between both sides of the Strait.”151

The hollowing out of Taiwan may be a conscious strategy of the PRC to forcefully integrate Taiwan using peaceful means. The PRC has had three successes in its attempts to economically annex Taiwan through the ECFA. First, China has succeeded in relocating Taiwan’s traditional businesses to the mainland. Consumer goods for example, once a staple of production in Taiwan, are all largely relocated in the PRC. Second, China has successfully brought much of Taiwan’s IT and high-tech industry to the mainland’s shores. DPP policy was broken by the PRC with promises of another “economic boom” and fears of a “dead end” for Taiwan should it not engage in liberalization policies. As a result, the DPP issued permission for 7,078 “industrial products” to invest in China between 2000 and 2008 including high-tech consumer electronics. Finally, China has successfully established the core-periphery principle across the strait, using its vast markets as a magnet to pull Taiwanese economic interests ever

149 Reid and Rigger, p. 22.

150 Tsai, p. 65.

151 Consulate General of Switzerland Guangzhou.

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closer.152 China’s economic game may also be to “undermine Taiwan’s long-term economic importance” and erode its social resources to render it economically dead to significant levels of trade by moving the most productive elements of Taiwanese industry to the mainland.153 In these ways, China may be actively exploiting and forcefully hollowing out the Taiwanese market.

On the other hand, recent evidence suggests that hollowing out may have been a natural, though periodically inevitable phase wherein a unique economic trade model such as cross-strait trade facilitation is attempted. Between 2009 and 2012 over one hundred Taiwanese firms returned to Taiwan each year suggesting that ECFA, tax incentives, and development parks were not strong enough tools for China to convince firms to stay. Hsiung and Hsu have found that between 2011 and 2012 71% of Taiwan’s reinvestment was coming from the manufacturing industry, and an additional 19% was coming from the service sector. Reinvestment in Taiwan had been growing since 2006, and more than 27,000 jobs had been created by 2012. While the return of jobs has been praised, the challenge is to turn the returning manufacturing industry into high value-added manufacturing or else Taiwan will have to rely on cheap foreign labor. They find that one large benefit of the return of industry is its impact on expanding and rejuvenating the local upstream and downstream sectors.154

Hollowing-out across the strait is has been found to be particularly dangerous for Taiwan as its recent trade liberalization policies have created a scenario where there is “almost no restriction on these outflows anymore.” This level of cross-strait free-movement is unheard of and abnormal for most countries. It is evident that Taiwan’s integration with China has reached a level seen only in domestic region-to-region trade regimes. 155 Taiwan’s manufacturing industries, from consumer goods and commodities to machine tools, have all begun shifting their full manufacturing operations directly into China. Taiwan is facing a dilemma, as these are the backbone industries that are crucial to Taiwan’s ability to engage in international trade, particularly for its role in specialization with other trade partners.156

152 Huang, 2010, p. 81-82.

153 Tanner, p. 19.

154 Jimmy Hsiung, and Cindy Hsu, “Taiwanese Industry Returns from China,” 20 September 2012.

155 Tsai, pp. 64-66.

156 PhD research conducted on Taiwanese industrial cluster growth.

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This thesis has covered many of the policy developments and identified the trends occurring that are contributing to Taiwan-China economic integration. Case studies are provided in this next section in order to determine whether or not further integration is beneficial for either or both parties. The Pingtan port area of the Fujian Pilot Free Trade Zone is chosen to examine the nature of China’s latest round of incentives, and because it has been specifically tasked with targeting Taiwanese investment with the explicit purpose of bringing Taiwan into China’s economic fold. The second minor study looks at Hong Kong’s experience with CEPA and its integration with the Greater Pearl River Delta is necessary in order to draw lessons that are applicable to the ECFA and Fujian developments.

Pingtan Pilot Free Trade Zone

Chinese marketing for the Pingtan Pilot Free Trade Zone project is semi-nationalistic and calls for greater participation in regional trade. As part of the larger OBOR and 21st Century Maritime Silk Road projects, Pingtan will act as a sea-railway link for an economic belt that spans from Taiwan to Europe. The intent is a Chinese drive to re-internationalize Taiwan under Chinese terms.157

Chinese President Xi Jinping has stated Pingtan is a window of China’s opening up as well as a site for Taiwanese-Fujian collaboration. Vice director of the management committee for the Pingtan Comprehensive Pilot Zone, Lin Jiangling, has stated Pingtan’s purpose is for

“providing policies and measures that can promote liberalization of investment, trade and personnel exchanges between Fujian province and Taiwan.”

Fang Ming, a member of the management committee for the Pingtan Comprehensive Pilot Zone has stated, “The current goal of the Pingtan free trade area is to deepen economic exchanges with Taiwan. But we will look at the whole world with the development of the free trade area.”158 The Pingtan Area has established new industrial parks specifically targeting Taiwan, taking advantage of the proximity of Pingtan Island.159 It has established many preferential policies for investment there, such as opening the entire island to foreign ports and

157 See China Daily, “Pingtan a window to Taiwan and Europe,” 6 November 2015.

158 Ding.

159 Lavan.

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foreign port service providers, improving infrastructure, and guaranteeing land availability for international development.160

There are four aspects of reform that authorities are putting into place in Pingtan. First, it will “ease market access” for all foreign companies, including shipping, trade, and services aspects. Second, Pingtan-Taiwan trade will not need to be inspected to clear customs. Instead, goods can be declared and enter port. Third, Pingtan “deepens cross-strait financial cooperation by encouraging Taiwanese financial institutions to set up branches in Pingtan, launching pilot projects for cross-border, two-way yuan lending between Pingtan and Taiwan, and allowing firms registered in Pingtan to accept yuan-denominated loans issued by Taiwanese banks.” The term “deepening” is equivalent to coaxing Taiwanese business to move completely to Pingtan.

Fourth, Pingtan will be transformed into an “international tourism island” akin to an adult playground with shopping, theme parks, and extreme sports venues.161 Pingtan is intended to deepen trade ties with Taiwan while acting as a hub to serve the global economy.

Hong Kong and the CEPA effect

Hong Kong signed the Closer Economic Partnership Arrangement (CEPA), a prototype for ECFA, with China in 2003. Since integrating with the mainland economically, Hong Kong’s manufacturing industry has declined noticeably, from 168,000 employed in 2003 to 123,000 employed in 2010. Hong Kong’s exports to China shrank by nearly half, from HKD$44.6 billion to HKD$26.6 billion between the years 2005 and 2009.162 Hong Kong’s “socioeconomic interaction” with the mainland is limited primarily to the Pearl River Delta area, linked through a century of “business, family, and migration ties.” By 2001 85 per cent of Hong Kong economic activity in the PRC was occurring within the Pearl River Delta. The Pearl River Delta has become a major destination for Hong Kong outbound migration.163

More than a decade after its establishment, CEPA highlights some of the dangers inherent in ECFA for Taiwan’s growth. CEPA, like ECFA, was pushed by authorities who argued that reducing tariffs to zero would lead to a return of industry to the Special Administrative Region.

160 Fujian Provincial Department of Foreign Trade and Economic Cooperation, p. 52.

161 Ding.

162 Tsai, p. 72.

163 Chun Yang, “Multilevel governance in the cross-boundary region of Hong Kong-Pearl River Delta, China,” 2005, pp. 2148, 2151, 2154.

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Instead, CEPA has hurt Hong Kong’s manufacturing sector, bringing manufacturing’s percentage of GDP down from 12.67 per cent in 2002 to 10.17 per cent in 2007.164

Development fever in the Pearl River Delta has created an incredibly “severe” amount of competition among the port facilities that are all vying for international access within the same geographic area. There are “five international airports and the same number of deep-water container ports, all vying for the goods and passengers of South China.” Throughout this intraregional competition regime Hong Kong has been ignored and no establishment of a system for intraregional communication to address issues has been established. Due to competition, Hong Kong has become isolated and insulated from the PRD region but still functions as the dynamo for the region’s growth. By 2004 local governments in the Pearl River delta were reluctant to acknowledge Hong Kong’s important position as “the key economic city in the region.” Despite Hong Kong’s role in the development of the PRD, we see the region is trending toward intraregional competition with Hong Kong as industries and networks converge.

By 2004 Hong Kong had strong business links but still no government-to-government channels. “Since 1997 the management of the boundary between [Hong Kong the Pearl River Delta region] has continued to resemble an international border as it was before 1997 (Shiu and Yang, 2002).” Hong Kong worries that an always-open border for trade flow would have a serious impact on the operation and nature of its economy.165

Hong Kong’s 1997 political integration with China had no impact on Hong Kong’s economy. However, with the introduction of economic integration under CEPA six years later, confidence in Hong Kong’s economy returned and economic integration “raised Hong Kong’s annual real GDP by about 4%.” Hsiao et al. state that the Hong Kong model is unique due to its special size, and that although it is “a tiny city relative to other countries and regions,” they conclude that “whatever happened in Hong Kong will have no bearing on other countries.”166 Hong Kong proposed CEPA, which has been beneficial for the SAR, giving it greater preference and incentives than the WTO standards. One benefit that Hong Kong has seen is the desire of well-educated, talented, and professional mainlanders to migrate to Hong Kong.167 The

164 Huang, 2010, p. 86.

165 Yang, pp. 2155, 2159, 2161, 2163.

166 Cheng Hsiao, et al., “A Panel Data Approach for Program Evaluation: Measuring the Benefits of Political and Economic Integration of Hong Kong With Mainland China,” 2011.

167 Yang, pp. 2154-2156.

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introduction of CEPA rebuilt confidence in Hong Kong’s economy after a long period of low growth. Service trade liberalization “further stimulated capital investment.168

Trade flow irregularities between Hong Kong and China come from Beijing’s attempts to control the type of capital being imported and that it manipulates exchange rates to protect the economy of the PRC. Structural impediments, trade figure manipulation, and FDI

“roundtripping” are the sources of China’s “trade figure discrepancies.” Half of FDI comes from Hong Kong, and “roundtripping” investments are a significant factor to consider when looking at Hong Kong’s FDI figures. Mainland SOEs are the worst offenders. Irregularities include China’s underreported exports, overstated imports, offshore “roundtripping” of self-reinvestments which creates a large proportion of reported FDI, and certain blocks on direct international trade.

Export understatement figures have become less of a problem in recent years, however import overstatements have become worse. Fung et al. find that the “removal of import tariffs seems to have encouraged Chinese firms to increase the amount of import overstatement.”169

While Hong Kong may have lost significant sections of its manufacturing sector, CEPA has promoted greater trade in the service sector with the service industry either exporting to China or trading with China. Most of the service industries moving to China are traditional areas such as tourism, however, while financial services have remained largely in Hong Kong.

Traditional services still make up the bulk of service trade between Hong Kong and the mainland, but within that area the types of traditional services have changed.

Looking at it from another perspective, one could argue that the emphasis on traditional services indicates that Hong Kong is protecting its natural advantage within high-tech and modern services. CEPA has promoted tourism services to a great extent, however other forms of

Looking at it from another perspective, one could argue that the emphasis on traditional services indicates that Hong Kong is protecting its natural advantage within high-tech and modern services. CEPA has promoted tourism services to a great extent, however other forms of

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