The Problems of the Two Chinas: Counting the Bargaining Chips

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(1)~i~CP~~~~ll.i~eSJ;t~rc~m. .3:..Jii 1'~. rgm:tLitt~€l *~~~~~~~'pjfi~f1~. The Problems of the Two Chinas:. Counting the Bargaining Chips*. Shu G. Wang". ABSTRACT 1n this paper we develop a simple trade model and a two-player-two strategy normal form game to investigate how capital investment from Taiwan to Mainland China, motivated by self-interest consideration in private sectors and complicated by competition from capital owners from tbe rest of the world , can be utilized as strategic tools by either government to exercise political leverage against the other.. Under the adopted fram ework, it turns out that the. best thin g for both sides to do is do notbing and let the invisible hand bandJe everything.. Limitations and extension possibilities of this paper are also. discussed .. • An earlier version of this paper was presented in the Chung-Hua Institution for Economic Research and the. Institute of Economi cs at Academia Sinica (lE AS ),. Comments and opinjons raised by participants in these two. sem inars have been very help ful and are greatl y appreci ated, In particular, the author thanks Dr. Sheila Hsiao Hsien Lin and Dr, Yeong-Yuh Chi,ang of lEAS, Opinion expressed here belongs to the author alone and the institute where he is affiliated with shall not be held responsible, •• Associ ate Professor, Department of Economics, National Chengchi University, Taipe i, Taiwan, R.O.C ,.

(2) -. ~J'L t:p U-f:;~~Hfrt4!¥flU. 222. t~. ~. The Problems of the Two Chinas: Counting the E(U"gainillg Chip. 223. I. Introduction. 2$:3tMH~-~fm!f1l¥Jfi~~&~~'!j:.fq]*~~#i~~j$i&Jf,fjiJtl. In the past decade we have witnessed tremendous changes in the. f1.$r~:f£OOW~~~2fs:M~W E3 fIHJ\~~""fl¥J EI ~'!j:~*~IJJ{1=m~ Ift.. relationship between Taiwan and Mainland China.. {£*~~Jiiiip1T11=~iTti'€:iB:IJJ15t~PJlIg~~. · !tfflj~~,*. bring together the two Chinas have grown stronger than ever and, at the same. 3tcpt:t*)(ff:Jmffjljt).:&. time, political outcry inside Taiwan yearning for total independence from. 0. :tE*)(:l¥J~~""f. Wtt~~ff:J{1=~1.&=F~m~3t7}~f1JL~t:Jj]lI~. PJi5 [ $ff:JtiE 1J iliiIH1=T~~. 0. Economic ties that tend to. Mainland China-or at least a referendum on this issue-has also grown louder. 0. than ever.. So far economists from Taiwan have largely focused their attention 1. on economic issues and it was not until recently did they start looking at the politicaiJy touchy issue of self-determination.. Chu (I 993) points out. important aspects and directions that people in Taiwan should look into if they are to seriously contemplate the issue of political independence from, or unification with, Mainland China.. Wang (1995) goes even further to provide. and to promote the idea of an economic feasibility study on that issue.. Lin. and Lo (1998) propose a simple 2 X 2 one-shot Nash game -with governments from Taiwan and MainJand China as the two players, cooperation and defection in the econom ic domain as the two strategies available to the players - to explore strategic interaction possibilities between the two sides.2. Though. intuitive and interesting, their research was written from the perspective of political science and differs from economics on what constitutes an empirical. See as an example Kao, Lee and Lin (1992), Kao, Lin, Hsu and Lin (1995) and references cited there. These two books focus on the performanoe of Taiwan's capital investment in Mainland China. Some valuable data and case studies are also included. Needless to soy, economic reform currently underway in Mainland China is eye-opening too and must have caught the attention of economIsts beyond southeastern Asia such as Japan, U.S.A and most European countries thal have great economic stake in Mainland China. Westc:rn Economic Association International's Pacific Rim Conference held in Hong Kong in January of 1994 devoted a panel session on this topic and attracted much audience. See Cheung (1 995), Lin ( 1995), Sheng(l995) nod Wong (1 995).. I. 1. The author would like 10 thank one of the referees for referring him to th,S article.. -. -.

(3) [WJ\[!:pLl!*¥ff,f~ij.~*tU. 224. test.. The Problems of the Two Chinas: Counting the Bargaining Chip. 225. II. Model Descriptions of Taiwan, Mainland China and the Rest of the World:. Besides, in their paper, people from either side of the Taiwan Strait play. no role in shaping their government's undertakings in that game of strategic interaction.. We consider a one-output-two-input world consisting of Taiwan (denoted Lying ahead of people from the two Chinas concerning the issue of by T), Mainland China (denoted by M) and the Foreign Sector (i.e., the rest of indepen dence/un ifi cation is a two- fol ded di lemma.. On the one hand, a closer the world, denoted by F) whicb share a common Cobb-Douglas techno logy of. economic tie naturally grants leaders from either side a greater political Q = f(N ,K) = N aK(l-a). leverage in exercising upon the other economy and its leaders; however, on the. with a E(O, l). other hand, difference in economic performances on both sides will no doubt influence public attitudes toward this issue.. where N and K represent the amounts of labor workers and capital used in the. Should either government simply. production.. do nothing and let the free market mechanism work out the magic of resource allocation for the economy it represents?. KF are respectively the capital stocks of Taiwan, Mainland China and the. Or, should it try to push around the. Foreign Sector.. private sectors in order to exercise a self-interest leverage against its rival across th e Taiwan Strait?. and fully concentrate on competing capital investments and their roles as. the government, capitaJ owners and labor workers from either side may have. political leverages without being sidetracked by competing final outputs.. confl icts in interests with one another, "cross-strait alliances" between parties. without the awareness of the parties involved.. Such cross-strait alliances are. The assumption. on immobility of the final output enables us to greatly simplify the demand side. Since. from different sides yet sharing common interests are likely to emerge even. Neither labor workers nor the final output are mobile.. Immobility o f labor workers more or less reflects the reality.. In this paper, a simple 2 X 2 one-shot normal form. game based on trade relations is proposed to answer these questions .. NT' NM and NF are respectively the work forces and Kn KM and. Capital is the only perfectly mo bile commodity in this world and payment to capital invested overseas can be easily aud costlessly transferred back and 3. forth so long as both the host country and the home country permit. perfect candidates for use as political leverage that either government can. oF are respectively the percentage of capital owned by Taiwan and the Foreign. manipulate to its favor against its rival government by initiating political. Sector that are poured into Ma inland China. pressure from within the private sector of the other side.. 0 T and. Negative values of 0 T and/or. This paper also OF ind icate that Mainland China has net capital export, as proportion to KT. contains elaborations on this interesting phenomenon.. and/or KF, to Taiwan andior the Foreign Sector respectively.. Therefore, K ~. = K M+ 0 TKT+ 0 FK F, K; = (1- 0 T)K T and K:- = (1- 0 F)K F are respectively effective capital inputs available to Mainland China, Taiwan and the Foreign. 1. Also for the sake of sim ple modell ing..

(4) !fJ1I. cp 1l4*~ffr±-at~*fU. 226. Sector for the purpose of production.. The Problems of the Two Chinas: Counting the Bargain i n~<::~ip. 227. e :(1,_KM +K r ) KF. As capital is essential in the Cobb. Douglas technology, we must have (2. K~ ~ O, K; ~O and K~ ~ O. = 0(1) u. OU) n OU) = ¢ for. 0(2) u 0(3) u 0(4). Thus, the feasibil ity set for ( 6 T, 6 F) can be defined by. i ;l; j. Figure 1. o =: (copoF) e R21 K;/ 2 0,K; 2:0,K; 2 0}. = {(O r'O F· ) e R 2 KM +07· K 7 1. Markets in these three sectors are all assumed to be perfectly competitive.. + o FKF >O'Or~l'OF ~l}. Output prices in these three pLaces are all normalized into 1 (i.e., prices of other. 0 can be further partitioned. where R2 is the 2-dimenslonal Euclidean space.. commodities - here ttte two input factors - are measured in terms of the amount of output that can be purchased by one unit of either input factor.). into four mutually disjoint sets of. following Debreu (1959) commodities available in different places are different. 0(1) = {( 6 T' 0 F) e 0 16 T ~ O, 6 F ~ O},. commodities and therefore will have different prices,. 0(2) = {( 0 T' 0 F)e 0 10 T< O, 0 F ~ O},. normalization on the. and the available technologies are not of increasing returns to scale.. O (4) ={( o T,6 F)e 0 1 6T~O,6F<0}.. Based on. the above information we summarize the econom ic performances of these three sectors in Table 1.. See figUre 1 for an illustration on these sets.. Table 1. OF. .a 0(2). OUT. output in all three places remains valid as long as capital mobility is costless. 0(3) = {( 0 T, 0 F)e 0 10 T< O, 0 F< O}, and. b.. Though. 10(1). ~"'~--t~. 6r. 0(4). Mainland China. Taiwan. The Foreign Sector. Work force. NM. NT. NF. Capital. Kid. KT. K.. Effective. K~ = KM +OrKr +OFKf". K; =(1- oT)K T. K; ::(l-o F)K F. Q = N a K" (1-a) M M M. Q = N aK ,,(I-a). QF. =a {K~ - - }(I-a). {K; w1• -_ a - }(l-a) NT. wF-a-. WPr. Wlj=wFNF. Capital Input Output. -Labor Wage. e. a: (1,1). b:(_ KM+K,.. Kr ,1). . (_ KM ,0) C. Kr. WM. Wage Payment to. d'(O . , -KM -) KF. Labor Workers. NM. WPM =:wMNM. T -. T. =:. r. wrNr. =:. N;K; \l-a). _ {K ; }(I-a ) NF.

(5) ~1r cp ~l-l7dl~ffr± ifrt4~~flj. 228. Capital Rent. rM. Rent Payment. K" = (1 -a){~}( -a ) NM. CP M. to Capital. K" rr = (l - a){_ T}(-a) Nr. rF. CPT. CP F. = (1 -. K a){-L} (-a) NF. GNPM = WPM + CPM. Real GNP. GNPr. private capital owners in Taiwan and the Foreign sector either to invest in M ainland China (for positive 6 negative. (The values of CPw CPT and CP, are given below.). Owners. 0 T and 6. T. and 6 p) or to attract capital from there (for. In the following section we will discuss how they are. F)'. determined with or without government intervention.. =WP. j. + CPr. GNPF. 229. The Problems of the Two Chinas: Counting the Bargaining Chip. =WPF + CP. For sim plicity, the. government of the Foreign Sector is also assumed to be absent from operating. F. behind scene in backing up or constraini ng its capita l owners.. if. rM K M. (0 r> 0 F) E 0 (1) rMK M + (rM - rr )Or K l' if (OpO F) E O(2) * CPM == 'rMK. + (rM - rr)orKr + (rM - rF)OFKF rMK M + (rM - rF)OFKF. **. ={ rr Kr + (rM - rr )~rKT r. 'CP. if. rrKr. ***. if. if. In our model the Foreign Sector competing with Tajwan for capital. .. inve stment in Mainland China will consist of most developed countries.. (0 7·,O F) E O(3) ,. is natural to assume (1) Kr ,KF. (O r,OF)E O(4). > KM _ which. NT NF and (2) N F, NM > NT'. if. (Or,OF) E O(l) u O(4) . (O T, OF) E 0(2) u O(3) ,. implies that. NM. K r + KF NT +NF. So it. > KM. ;. NM. Assumption (1) says that Taiwan and the Foreign Sector,. either individually or jointly, are more capital intensive than MainJand Chi na is; assumption (2) says that the Foreign Sector and Mainland China are both more. CPr = {rFKF + (rM -rF)OFKF if (Op OF) E O(1) u 0(2). rFK F if (Op OF) E O(3)uO(4). populous than Taiwan is.. It is worth noticing that in Mai nland China, Taiwan and the Foreign Sector,. III. Outcomes With or Without Government. Intervention:. we have. Average variable cost Output price. = Wage Payment to Labor Workers = a. <1. Output. suggesting that these three economies will all keep operating (i.e., producing).. 3.1 A General Description:. Also, the profit (i.e., the output net of wage payment to labor workers and rent payment to effective capital input) earned by any of the three economies acting. Either the Mainland Chinese government or the Taiwanese government. as a firm is necessarily .zero which is no surprise at all since the technology is. has the option to or not to intervene in economic affairs and we will denote. of co nstant returns to scale.. these options as, respectively, Hands-on and Hands-off strategies.. The Labor Wage condition, the Capital Rent. So the four. condition and the Demand Equilibrium condition (i.e., Zero-Profit condition). situations, as Figure 2 shows, are Hands-on for both governments, Hands-off. then represent the market clearance conditions for production factors and the. for both governments, Hands-on for Mainland China but Hands-off for Taiwan,. final output.. and Hands-off for Mainland China but Hands-on for Taiwan .. So far we simply assume some given choices of 0. T. and 0. F. by.

(6) IilJt r:p tlJ*~tcttf1~U. 230. T he Problems of the Two Chinas: Counting the Bargaining Chip. 1 Mainland China Hands-off. O~=. Hands-on. KrNM -Nr (KM +OFKF) ~if K T(NM+Nr ). rM{:}rr or. o. 23 I. if{~:}C}{~~}. It:l oI ~. ~. ~. Baseline. To see this, notice that if we introduce an indicator function defined by. Situation. ;:c. .~. .9 (w. f-". .I. A) ". g. WE. if. weA. Head-to. c:. oI. <i). -head. "Q. ~. A},. if. then CPTcan be reformulated into. Situation. CPr ~ rrKT + (r~ -rr)OT K r 9 «or, OF)1 0(1) u 0(4». Figure 2. Similarly, the representative capital owner in the Foreign Sector solves the. We shaU start with the Baseline Situation with Hands-off for both. problem of. Since perfect competition is assumed in all the three markets,. governments.. maxuruze. 0 ... prices such as capital rents rM, rT and rF are all beyond the control of any private sector from any economy.. Thus, they are taken as exogenous in rent payment. CPF. 51.. ~ = (l - oF)K F and. (oT,oF) e O. whose solution is. maximization problems for representative capital owners from Taiwan and the Foreign Sector.. 1. Furthermore, Taiwan's capital owners can not affect the. decision making of capital owners from the Foreign Sector (i.e., the choice of. oF) and vice versa (Le., capital owners from the Foreign Sector can not affect the choice of 0 T either).. O~ =. K J.' N M -NF(KM + o r Kr) KF(NM + N F ). o. if ru{:}r, or if{~:}{:}{~~ }. In short, the solutions to the above two maximization problems fully. The representative capital owner in Taiwan solves the problem of. depict the equilibrium conditions that 'Confront capital owners from Taiwan and the Foreign Sector - under pure economic concern - in their decisions to invest. maxuruze. Or. CPT. s.t,.. K;=(1-or)K r. and. (Or,OF)eO. in Mainland China. of sets as. whose solution is. Such behavioral conditions can be rewritten in the form.

(7) ~ :lrr:pw * ~H1tf-4~*fU. 232. K1' _ KM IRr == {Copo F). E. 0 (1) U O(4)1 rM = rT}U {(O,o F) E. n O)1N1' K NM ~ 0 F~ I} _F. NM for Taiwan's capital owners, where. The Problems of the Two Chinas: Counting the Bargaining Chip. higher returns.. 233. And the flow ojcapital will continue until returns to capital at. various places finally converge as the law oj diminishing marginal return. assures us.. Now we shall·take a closer look at the above two first order. conditions.. For Taiwan ' s capital owners, their maximum rent payment occurs. at. Kr _ KM {CO,OF)EO(l)I NT v NM. < op~l}=¢. K T _KM>KF. NT NM NM '. of. E... Or. =. K1'NM - NT(KM +G,;K F ) K r (NM + N r ). or. NM K1'(_ l_+_l_ )o r + KF OF NM NT NM. and. K". K p _KM IRF={Cor'OF)EO(I) u O(2)1 rM=rF}U{ (OpO) EnCl)INF K NM _. <oT~ l}. 1'. = K1' _ KM NT. (denoted as LT). NM. KA. where rM = r1' or, eq uivalently, ~ = _ 1' NM N r. As for capital owners from the. Foreign Sector, sim ilarly, their maximum rent payment occurs at. NM OF. for capital owners from the Foreign Sector, where. = K FNM -. NFCKM + o rKr ) K r:(NM + N F ). or. KF _ KM {(OnO) E O(l)I. NF KT. N}A < or ::;;1 } =¢. K F KM Kr if ---->-. 1. NF. NM. NM. K r Or + KF(_l_+_l_)OF = K F _ KM NM NM NF NF NM. NM where rM. = rF. or, equivalently, . It is also worth noticing that the IRT an d IRF sets will be used to construct the constraint sets for the Taiwanese government and the Mainland Chinese governm ent in their strategic interactions. The above results - 51' ~. °. K~ = K;. NM. (denoted as L r ). See Figure 3 for an illustration.. NF. Also note that the assumption of K T , K F > KM made in Section II can assure N r NF NM . us that the L,- and LF lines necessarily intersect the two coordinate axes at theiT. for Taiwan and 5 F ~ 0 for the Foreign. Sector - suggest that capital owners from Taiwan and the Foreign Sector have no incentive to introduce capital from Mainland China.. Our main interest then. is the effect of cross-border investment into Mainland China .. No such. investment is possible unless the Mainland Chinese market grants investors. positive half-lines..

(8) ~1L r:p 0..J*~ffi±fr*~~*fU. 234. OF. The Problems of the Two Chinas: Counting the Bargaining Chip. OF. 23 5. The solutions to the above two rent payment maximization problems may. A. take various forms. rM < fF. Depending on the signs of. Kr. KM. KF. KF. K }.f. K. NT. N f.,.f. NM. NF. NM. NM '. - - -- - - - and - - -- - - . we may have three cases for each of the IRT set and the IRF set. rM >. fT. offers a complete illustration of all these possibilities.. rM > r F. OT. D OT. KM + K. KT _ KM. B:(l - NMK+ NT ,0). A:(O, NT K NM) N}.f. OF. OF. KM+ K F. c :(0,1. _T. F. Figure 4. NT. NM + N F ) KF NF. b. <. a. .. • •. b ........ KF _ KM D:(NF. '\<. NM ,0). I" '-,. ), -,. OT. ==-=.D 0 T. ,. .. I ~. Kr NM slope. d 0 F] = _ K r (1 + N M) < (j.. [ dOT Lr KF NT. e. e slope. [. d 0 F] . = _ K r ( . 1 ) < 0.. dO T I' F K F 1+ N M. NF. At{~'}' A". KKK . . K K +K K --L, - T > -.M... lmpiJes ---L > M F > -.M...and N F N r NM NF NM + N F NM. Kr Ku + K r KM - > >-- . N r N}.f + Nr NM. Possible IRT sets:. K r [ dO F LT is stee per than LF is since dO F ] [ dOT Lr > K F > d OT. l. At{~'}'. KT _ KM {:} Kr: NT NM < NM. eA" u A' A", eA', eA *. a: ( l ,1) b: (_ KM + KF. Kr. ,1). c: (-. Possible IRFsets:. ~ ,0). IF Figure 4. Figure 3. KF _ KM NM. D" NF. d:. {:}~ <. NM. bD" u D' D",bD',bD *. (0,- KM ) KF. e:. (1,- KMy+' Kr) F.

(9) ~::;,[ CPI1l*¥Wr±\tf4~*flJ. 236. 237. The Problems of the Two Chinas: Counting the Bargaining Chip. It is easy to see that LT and LF intersect at point E of Direction of Increasing. LT. NM + NF Ku + KF NM + NT KM+ Kr. Nr Kr NF KF. ) (o ~, o~ ) = ( l+ NM + NF l+ NM + Nr NT NF KM + KT + K F = (1 - NM +Nr +NF 1 Kr ' NT. OF rM fM. < rT < rF. II. KM + K r + KF. rM> fT. NM + NT + NF) KF NF. rM > rF. KM+ K T+ KF When E: (o~ ,o~. ) = (1. with o;{=}o ¢:> K r {=} KM + Kp ¢:> KT {=} KM + KT + KF , NT NM+NF NT NM+NT +NF. <. , d ,m. <. <. -. <. OT. K M +Kr+ K r:. N M +~ + NF ,1 - NM NT . ~. {:}o. u F. IV. III. fM > r F. Direction of Increasing. +~ +NF )E n(l).. NF. Figure 5. KM + K r ¢ : > KF- {:} KM + KT + K F . ¢:> - K F {:} NF NM + NT Nr: NM +Nr+ N r:. <. <. It can also be shown that. Note that point E of( o~, 0(3).. o ~) may fall into 0 (1) or 0(2) or 0 (4) but not. This is assured by the fact that the. Lr and LF lines both have. slopes and have positive intercepts with the 0 r and 0 F axes. is clear.. negative. O;KT + O~. KF· = (NT + Nf.)[ K T + KF _ KM + K r + K j- ] 0 N T +NF NM +N T+ N F > ,. The meaning. For Taiwan and the Foreign Sector, either will remain a net capital. as assured by our earlier assumption of Kr + KF > K M • NT+NF NM. This means that, in. exporter to (or, a net capital importer from) Mainland China as long as it keeps. the absence of intervention fro m any government, Mainland China will be a net. more (or, less) capital intensive than are the rest ofthe world combined and the. capital importer as long as it remains less capital intensive than is the rest of. whole world combined.. See Figure 5 for an illustration of (o;, o~ ) E n (I).. the world combined.. 3.2 Discussions on Strategic Interactions: Depending on the position of point E, as indicated by Figure 4, fiv e.

(10) ~:lz:cp 0J *~ffcttrt~*f1j. 238. The Problems of the Two Chinas : Counting the Bargaining Chip. 239. possibilities for the intersection of the IRT and IRF sets need be taken into. incorporated into economic models such that implications can be drawn for. account.. policy evaluation and recommendation concerning the "two-China" issue.. See Figure 6 for an illustration.. Further discussions in this regard will all be made on these five possibi lities.. OF. OF. OF. 0' T and 0' F are used as control variables in the GNP maximization problems A=C=E. C. for governments and in the rent payment maximization problems for capital owners.. The investment instrument for the private sector is. direct flow of (fmancial) capital. are more diverse.. OT. B. O' T. B. B 1 O'T Possibility 3. Possibility 2. Possibility 1. improvements. in. cross~border. The policy instruments for the public sector. Tax/subsidy instruments, foreign exchange policy, in.frastructure. such. as. highway. construction. and. communication and power supply, bureaucratic efficiency, trade relation with. O' F. LT line. 0' FI. other countries and many others can all be used to redirect flows of capital and have effects equivalent to changing 0 T andlor 0' F'. LF line. Needless to say, the. Taiwanese government can only control c5 T but not c5 F while the Mainland. C. C. Chinese government can control both of them.. Moreover, the flow of capital. from Taiwan to Mainland China is possible only when Taiwan's capital owners have economic incentives to invest in Mainland China, the Taiwanese. OT. Possibility 4. government is willing to let go and the Mainland Chinese government is. Possibility 5. willing to let in. Possibility 1; o~ < 0 < o~ < 1. Possibility 2:. 6; == 0 < o~. < 1,. Possibility 3 : 0 < 6;, 6~ < 1, Possibil ity 4: o~. = 0 < 0;. < 1,. Poss ibility 5: o~ < 0< 6; < 1,. investments are reflected by differences in capital rents; that is, rM > rr and. IR r n IR F = {C}. IRr n IRF == {A} = {C} IR r nJR F. =. = {E},. =. {D}. rM > rF signal new profit opportunities to capital owners in Taiwan and the Foreign Sector who then will redirect their investments in pursuit for higher. {E} ,. IRr n IRF = {B}. In this paper economic incentives for cross-border. = {E},. IRr n IR F = {B} .. Figure 6. gains in Mainland China.. Such cross-border flow of capital continues until. rM = rr and rM = rF as a result of diminishing marginal returns.. Though. the private sector of the Foreign Sector is always pushed around by the two public sectors in Taiwan and Mainland China in strategic interactions to suit. The main purpose of this paper is to demonstrate how strategic interactions between the governments on both sides of the Taiwan Strait can be. their own purposes, its economic incentive compatibility condition can never be compromised.. To the Taiwanese government, capital owners from the Foreign.

(11) ~J1: r:p w *~jfcr.~f4!¥ *fIJ. 240. Sector will not be lured into nor dri ven out of Mainland China as long as. The Problems of the 1\..,0 Chinas: Counting the Bargaining Chip. 241. For Mainland China.. Mainland Ch ina promises a high er rate of returns for their in vestm ent than their home economy does.. To the Mainland Chi nese govern ment, a similar. Iso- WPM curve. slope:. dOF -] [ do r. =- Kr. K.F. Iso-WP, .. principle concerning the econom ic incentive compatibility conditions for capital owners from Taiwan and the Foreign Sector apply too .. Therefore. Iso-CP M curve. slope:. policy constraints are respectively. TC == {(O p OI' ) E fRyl rM ~ rp}n (Q(1 )u n(2». Iso-GNP Mcurve. slope:. dO F [ dOT. Kr. ]. d OF ] [ d OT. = -. Iso- CP". Iso-GNI~11. KF. KT = - KF. ={(opop)EfR T nn(1)1 rM ~rp} 8WPM > 0, aWPM > 0, aCPM < 0, aCPM < 0, fJGNPM > 0, 8GNPM > 0. 85T a5 F 85T a5F a5r aO F. for the Taiwanese government; and, in a similar fashion,. MC == TC u {(or,o F) E fRF n 0(1)1 r M ~ rr } for the Mainland C hinese government.. For Taiwan,. That the TC and MC sets being both. Iso- WP T curve. subsets of (2 (1) indicates that, as far as strategic interactions are concerned, the foc us of attention will be exclu sively on the set of (2 (1).. This echoes the. slope:. [. d5 F do y. 1. = +00. Iso-WP,. five possib ilities suggested in Figure 6. suggesting that the iso- WP T curve is a vertical line. From an aggregative perspective, the three economies are under the influences of policies adopted by any government.. In particu lar, market prices. ISO-C PT cu rve. such as capital rents and labor wages and distri butional issues concerning rent payments to capital owners as a whole and wage payments to labor workers as a whole are now all affected by the choices of 0 T and 0 governments along the Taiwan Strait.. F. by the two. F d8slope: -. [ dOT. KM. arMoTK F K'. With these effects in mind we now. 1_a_8_~~T ' {:}~; ,. They wi ll be very useful in determining the strategic. behaviors of the two Chinas in th eir interactions. we only need to focus on (0 T ' 0 f ) E n(I).. Again, as mentioned earlier,. See Appen dix A 1 for a proof.. 1. M. provide some results on the slopes of various curves and the signs of various comparative statics.. 10-"". =. (l -a5T~1' )rM -(I- a)rT {>}. <=>. I-a. < rM. =. °. <.

(12) ~:1I CP ilJ*~*±tH4~*fU. 242. dOF [ do. . . fy mg ' el·th er . > 0 at pOints satls. ]. r. '1' -< ru ' or. rr > ru. Iso- CPr. The Problems of the Two Chinas: Counting the Bargaining Chip. 243. > l - a -- > °rKT { } r 8CP = 0 <=> K~ = !L ; BOT { } I-a rM < <. but with sufficiently small (rr - r,..., ).. = rM. If r... '. . . fv_Ing ' . her -BCP - r > 0 at pOints satls elt BOT. then. dO F [ dOt. ]. = OF + ~ =[(_1 _1) NA! _ll Kr. '. Or. Iso-CPr. K Fo r. Nr. Or. JK. B~. N A! N .. +NA!. F ]. [ dO r. ¢:). K. --~-)'-1\1. Iso- GNP r. (1 - a. - rr. {. arA!OTKF ~. -. KM. oK.. ~~ I). >. <. OT~T ){:}~ ; KA! <. ~. or rr < r M but. with sufficiently small (ru - rr );. =0 < when 01'. rr . >} ~"f' {. = 0,. {>}. {>}. BGNP1' BO : 0 <=> rA! : r.. r. Based on what obtained here, it is clear that. :. < 0 at points satisfyin g rr. do ] [dO r. [dO-r ]. ~ rA!. ,or rr < rA!. +. = -. Iso - CPr. dol'. Iso-GNPr. a rr a ' MOTKF. l. K~. '. A!. Iso- GNPT. but with suffi cien tly small (ru - rr)'. If rr = rA!' then. ~ rM •. }. __ F. F ] dO[ dOl'. (I - a. BOr. °7 ·r Ku 'Slope: ' dO .. {:}o~. 0 satl,sfy mg 0 rr when Us: r > 0, aGNPr < 0 at pomts. (1 - a. but Wit .h. suffi ciently sm all (rr - rA! ).. F. Iso-GNP T curve. '1' > rM. >0. BGNPr suggesting that we must have Or <. '1':$ rM' or. dO ] [d8 F T. KT'. = - Kr:. acPr oar. oGNPr + a 'rK1';. Bar. and there must also exist two lines L I an d L2 sufficiently close to line LT>. IJo-GNPr. parallel to it and on the two sides of it, such that,. BWPr < 0 BWPr = 0 BCPT < 0 BGNPr < 0. Bor ' Bo F ' Bo F ' Bo F '. for (or,6 p). E. LT n n(l) with, 6 T > 0, we have.

(13) !jJJl: r:p U-i * ~td:~4~ ,*fIJ. 244 . The Problems of the Two Chinas: Counting the Bargaining Chip. aCPT > 0 for points to the left of Ll, a8T. . _ OCP To the left of L1 hne: _ T > 0, [dO __ I:. a0. aGNR . . _ -,--T < 0 for pomts to the rIght ofL2, a8T. T. 245. J. d OT. > O.. Iso- CPr. _. aCP c . T > 0 an d aGNPr < 0 lor pomts a8T a8T. .. 10. . . : aGNPT < 0, [ _d O_I-' J To the fight of L2 hne. a<5 r. b etween L 1 and L2.. d 0y. < O. Iso-GNPr. In between L1 and L2 lines: See Figure 7 for an illustration.. aCP - T> 0 aGNPT <. a0 T. 1- a 8r K y. K a -OTK " , ) . (1. •. M. •. •. >} aOT {. ac~. =. <. (I - a a r K. ¢:>. 1- a. K AT ) < 1 <. r\1. < '. I-a. M. •. TT. °'d[-d 00-J F T. Here we co nsider (Op o F). E. Iso - CPr. 0 [d0 -F J > < 0. ' d 0 t Iso - GNP?. LT n n(l) with 0 T> 0 only.. rM. °rKT K~ {>} = r1". I-a. K M" I-a. 'a 0 T. WNf.{=} ¢:>(1-a OTKTi=~T aOr ~ r <. <. M. A Su mmary of these Qualitative Results and their Implications; (1). aT~T. KM I- a. Figure 7. if Mainland China is a net capital importer.. As shown earlier, we have fo r Main land Ch ina tbe foll owi'ng results of. aWPM > O,awPM > 0, aCPM < 0, aCPM < 0, aGNPM > 0, aGNPM > 0:. a8T a8 F a8 r a8 F a8 T a8 F. OF The Mainland Chinese government and its labor workers welcome capital investments from Taiwan and the Foreign Sector since such investments will ...... L1 line. A. Area in between 1 and L2 lines. boost their GNP and wage payment to the labor workers.. Mainland China 's. capital owners will not like the introduction offore ign capital "investments since that means more competition.. L2 1ine. ~. Direction to the right of L2 line. Direction to the left of Ll line 4 '{. B. (ii) As shown earlier, we have for Taiwan the following results of. LT line. OF. • Novertheless, since state-owned capital counts a great proportion in Mainland China, the concern for GNPM wi ll probably outweigh that for CP M ..

(14) 246. li ttr cp Lll*!Jifd: 1t13.j.~*fU. BWPT < 0 BWPr = 0 BCPT < 0 BGNPT < 0. BOT 'BoF 'Bop 'Bo F '. >. OCPr = 0 ~ 801' { } <. 8GNPr oar . K~. I -a. rM. <. I-a. M. r.. = ~) rM. for Taiwan's capital to be poured into Mainland. China. Taiwan 's labor workers earn all their incomes from jobs created by Taiwan 's capital owners.. {=}o~ (1 - a OT~r ){:}~: KM <. a ~---"--. by (. = !L ,. <. oTKr K". 1-. I -a - - { >} OrK1'. 247. The Problems of the Two Chinas: Counting the Bargaining Chip. More capital investment flowing into Mainland. China mepns less available at home which then translates into lower wages.. ~. So they are worse off when more capital leaves Taiwan for Mainland China. Taiwan 's labor workers feel indifferent to the level of capital investment' that. Notice that Taiwan 's GNP is the sum ofthe wealth created in Taiwan and the wealth its capital investment creates in Mainland China.. More capital. the Foreign Sector pours into Mainland China because that has nothing to do with the wage payment or job opportunities available to them.. investment from Taiwan into Mainland China means more of Taiwan's GNP will come from Mainland China than from within Taiwan itself.. However,. such a trend will come to a halt due to diminishing marginal returns in the production technology. So, as far as GNPT is cancerned, there is an optimal level of investment determined by. oK (1 - a. 1' " l'. KM. Taiwan's capital into Mainland China.. r. = --I-). for the outflow of. rM. More capital investment from the. Foreign Sector means more competition in the Mainland Chinese market and thus will lower the value ofthe wealth that Taiwan's capital in Mainland China can bring home.. 8WP M. > 0 and. aGNP M. > 0 suggest that, as far as. 0 0 1'. OaT. Taiwan 's capital investment in Mainland China is concerned, the Mainland Chinese government and its labor workers have common interests in more of Taiwan's capital investment in Mainland China; while the results of OWP. 8CP __ 1' < 0 and _ _ M_ < 0 suggest that Taiwan 's labor workers and Mainland Oa T o ar China 's capital owners have common interests in less of Taiwan's capital investment in Mainland China. From the results of. So the Taiwanese government and Taiwan's capital owners. all prefer less capital investment in Mainland China that comes from the Foreign Sector.. (iii) The results of. Though Taiwan's capiial owners find niches in Mainland. China, it is not worth investing all their capital there, again, due to the simple fact of diminishing marginal returns in the production technology.. > OCPT = 0 o ar { } <. ~. I-a-- > > O) .K T { } { K~ = !L and OGNp, ::::} 0 ~ (1 I-a rM o ar < <. So, as far we have. as CPTis concerned, there also exists an optimal level ofinvestment determined OCPT 0 oGNPr 0 --> > oar ' Oa T. if !L«I_ a OrK l' ) rM. K"M. •. > { a OT~r ) ::::} !L, KM rM <.

(15) ~J1: r:pLll *~iii±~f4!~E~fU. 248. arK r _T) < ---.L < if (l - a KM rM. .. W ith. oGNP r 001'. I. aK. r.. =0. K". iv£_. - A. I-a (iv) For each government, that its concern for GNP performance may conflict. 8CP. when ---.L = (I- a~) and _ _ r rM KM oar. =0. when. with interests of either its capital owners or its labor workers provides room for political leverage which its rival government on the other side of the Taiwan Strait can manipulate againsi it.· Depending on the ratio of. I-a orKr L=. M. I-a. oCPr 0 OGNPr 0 --< < oar 'Oar. if. o rKr. E..ir.s1. when. r. KM <---.L --- -A. I-a. and Taiwan's capital owners concerning capital investment in Mainland China r.. depend on the ratio of ---.L.. They have common interests when. r,. !L < (1- a orKr ) K wi'. I -a~ _ _M. or. I-a. r. ~ A r) ~ L ~ Ai. rM. oCPM <0. oar. owners will oppose the idea of increasing cross-border capital investment from But both governments, Taiwan's capital owners and Mainland. There will not be strategic conflicts. between the two governments because they share·common interests here.. rM. I-a orKr ~A Secondly. when - - -KM I-a. orKr. a-. <!L , we have rM. A. oC~. 0 OGNPr oOWPM 0 OGNPM 0 oWPr 0 -- < , < , > • > ,-- < oar oar OOr 0 01' oar. KM. I-a. where further capital investment in Mainland China benefits Taiwan's capital owners but hurts Taiwan's GNP performance. further result of. and. Under this situation, Taiwan's labor workers and Mainland China's capital. China's labor workers w ill all welcome it.. rr <_,. and have conflicting interests when 1-. a. K < (1 - a~) , we have rM KM. r L. oCPr > 0, oGNPr > O,oWPM > 0, oGNPM > 0, oWPr < 0 o ar oar oar oar 001'. Taiwan.. orKr. aK. of the. rM. which in tum suggests that the relative positions of the Taiwanese government. rM. rM. following three cases may happen.. I-a. (I-a. !L , any. KA. r. rM. 249. Oepr _ oGNPr + a rrKr. oar - o ar. I_a orKT. OCPT > 0, oGNPr < 0 o Or oar. The Problems of the Two Chinas: Counting the Bargaining Chip. This is consistent with the. and. oCPM < 0. oar. Under th is situation, neither the public sector nor the private sector in Taiwan like the idea of increasing cross-border capital investment from Taiwan. is also th e attitude of Mainland China's capital owners.. This. But the Mainland. Chinese government and its labor workers have a different view.. There will be.

(16) IIJJL cp w*~ffr± \tf4~*fU. 250. no strategic coriflicts between the two governments either because, on the one. The Problems of the Two Chinas: Counting the Bargaining Chip. 251. It requires further investigation in order to reveal more subtJ e outcomes of. hand, the Taiwanese government will not act against its own interest and, on. the strategic interactions bemeen the two Chinas.. the other hand, there is no way the Mainland Chinese government can act to. Sections 3.3 and 3.4.. This wiU be the purpose of. reverse the incentive compatibility concern of Taiwan 's capital owners. 5. Thirdly, when. °. K r (I-a--Y-) ~....I...- ~ KM rM. oCPr ~ 0, oGNPr ~ o,oWPM > 0, oONPM. oOr. OOr. 3.3 A Simple One-Shot Nash Game Theoretical Model:. I_ao rKr. OO t. OOr. K~M , we have. Now we shall direct our attention to possib le strategic interactions. I-a. > 0, oWPr <. OO r. ° and. between the two Chinas.. There are four situations to be considered here.. oCPM < 0.. OOr. Situation 1:. Both Goyernments Hands-off. Tbis baseline situation will lead to a strategic equil ibriu m at the Under this situation, Taiwan' s capital owners, Mainland China's labor workers. intersection point of IRr and LR F .. and the Mainland Chinese government have common interests while the Taiwanese government, Taiwan's labor workers and Mainland China's capital owners share common interests.. There will be strategic conflicts between the. two governments because, on the one hand, the Taiwanese government has an. Situation 2:. Taiwan Hands-off and Mainland China Hands-on. With the Taiwanese government hands-off, the Mainland Chinese government then cbooses. °. T. and 0 F to maximize-its real GNP by solving. incentive to restrict cross-border investment in order to maintain its GNP perfo rmance at home while, on the other hand, this strategy directly conflicts the interest ofthe Mainland Chinese government which will certainly find ways to respond. General Observation:. mruuffilze. or. OF. Situation 3:. S.t.. (O r,OF ) E MC.. Taiwan Hands-on and Mainland China Hands-off. r. The value of the ratio ...L determined by the fre e rM. market mechanism is a very fine signaling index for conflict alert between the two Chinas.. With the Mainland Chinese government bands-off, the Taiwanese government regulates Taiwan's capital investment in Mainland China by choosing. °. T. to maximize its real GNP to solve. maximize. or S. GNPM. GNPr. s1.. (0T>0F ) E TC.. Though the Mainland Chinese governm ent can subsidize Taiwan's capital owners in order to attract more cross border investment, th is is not a right way to do in a free market economy because it will necessarily lead to nuther inefficiency elsewhere concerni ng the use of resources in the economy.. Sjtuation 4:. Both Goyern ments Hands-on.

(17) ~ J1: cp (.11:* ~ffct"@i4~*fiJ. 252. Under th is situation, the Mainland Chinese government solves the same problem as that in Situation 2 and the Taiwanese government solves the same problem as that in Situation 3.. 253. The Problems of the Two Chinas: Counting the Bargaining Chip. inval idated by the excl usion nor further clarified by the inclusion of these mixed strategies, they are totally ignored for the' sake of simplicity.. As mentioned in Section 3.2, there are indeed. occasions w hen the two governments have conflicting interest in their respective GNP perfonnances.. Main land China. The problem of j ust exactly whose will shall. prevail is answered by the following simple facts.. In the eyes of the. Taiwanese government, it can restrict or encourage capital investment in. tt::o '" -0. Mainland China. Hands-off. Hands-on. Situation. Situation. I. Mainland China by Taiwan's capital owners but can never force Main land. t:. In the eyes of th e Mainland Ch inese. government, sim ilarly, it can restrict or encourage capital investment from. t:. ro. 1:. :r:. Poi nt. 2:. Point C. C. abroad but can never force Ta iwan nor the Foreign Sector to invest in Mainland. Situation. Situation. '". 1:. 2:. ~ ::I:. Point. Point. E. E. Situation. Situation. 3:. 4: Point. ~. c. o. Situation. '". 3:. Situation. ~. "0. §. ::r::. Point. 4:. Point. o. -0. ~. C. B. t:. J,. I. China.. !t:: o "0. ~. ~. ~. Hands·oon. I. ro. China to accept Taiwa n's capital.. Hands-off. Point. E. B. A Summary of the O utcomes of the Strategic Interactjons Possibiljty 3. Possibility 1 In short, the outcomes of the strategic interactions between Taiwan and Mainland China can be summarized in Figure 8, Tab le 2 and Table 3. 8 provides the solutions to the four situations discussed earlier.. Note that. N ash equilibrium outcomes take place at Situations 2 and 4 in Possibilities 1, 2. !;t:::. o. and 3 and at all the four situations in the remaining two possibilities . WPM'. Tab les 2. C P M for Ma inland China and the. orderings of GNPr. WPT, CPT for Taiwan at various feasible points under those fi ve possibil ities .. See Appendices A2, A3 and A4 for a proof of the orderings In fact, most of the orderings can be easily derived. from the slopes of various iso-valued curves, the. Lr and. of various comparative statics discussed in Section 3.2.. Situation. Situation. t:. ro. Hands-on. 1:t:: o. Situation. Situation. '"t:. 1:. I. 1:. ::r:. A=<:=E. Point. 2:. Point. -0. A=C=E. t:. Situation. ~. ro. Point. Point. ~. B= D =E. B =D=E. t:. oI. '"t:. Situation. t:. Situation. Situation. 3:. Point. Point. J,. -0. t:. ro. ro. ::r::. 4:. o. B. A=C=E. ::r::. 3: Point B=D=E. Rigorous ly speaking,. H owever, as our results are not. 2:. ~. ~. ~. Hands-off. LF lines and the signs. mixed-strategy equilibria - merely convex combinations of pure-strategy equili bria - also exist in our model.. Hands-on. '". -0. -0. listed in these two tables.. Hands-off. I. §. and 3 give the orderings of GNP M ,. Mainland China. Mainland China. Figure. Possibility 4. Possibility 2. Figure 8. 4:. Point. B = D =E. I.

(18) ~JL cp U-!. 254. *- ~W,±tff4~ *fU. The Problems of the Two Chjnas: Counting the Bargain ing Chip. 25 5. Table 3. Orderings of certain points in the TC set.. Mainland China. !:t: o I. en. -,:). Hands-off. Hands-on. Situation. . Situation. 1:. 2:. ~. Point. WPT Ordering. CPT Ordering. B >A=C. A = C >B. B>A=C. 2. B> A =C=E. A =C=E> B. B> A = C = E. 3. B>E. E> B. B >E. 4. B = D =E. B=D= E. B = D =E. 5. B. B. B. B. ::c. B. .~ ~. c. Situation. Situation. 3:. 4:. o. GNPT Ordering. Point. c. ~. Possibility. I. en. "1:j. Po int. Point. Q. ~. ::c. B. B. Possibility 5. Figure 8(contimed). 3.4 Economic Interpretations on Strategic Interactions: A c lose look at Figures 6 and 8 wil l lead us to a very interesting. Table 2. Orderings of certain points in the MC set.. Possibility. 2. Kr d OF ] > 3.al[ dOr Be KF dO F 3.bl [ d Or. Kr. ]. Be. KF. conclusion. In Possibilities 1 and 2, rM ~ rr implies rM ~ rF. .. It means that in the. GNPM Ordering. WPMOrdering. CPM Ordering. C>A>B. C >A> B. B>A>C. Mainland Chinese market Taiwan ' s capital is not as competitive as its. A =C=E> B. A =C=E>B. A=C= E > B. com petitor from the Foreign Sector because the latter can still find profit. E>C> B. E >C >B. B >C>E. opportunities even when the form er cannot.. T his can be seen by the fact that. there is a non-empty reg ion where rr > rM but rM ~ rF. •. A s national product. lost at hom e as a result of the cross-border inve stment can be easily made up E>B=C. E>B=C. B=C>E. for by what is earned in Mainland China, the Taiwanese government has an incentive to encourage capital investment in .Ma in land Ch ina. '. . I[d F] I 3.c -0. <Kr -. E>B>C. E>B>C. C>B>E. 4. B= D = E >C. B=D=E>C. C>B=D= E. 5. B> D >C. B > D >C. C>D> B. dOr. Be. KF. H owever, the. Mainland Chinese gov ernme nt prefers the more productive capital from the. J. In Possibilities I and 2, the value of 0 T at point B is much higher than that points A or C..

(19) IiJJ1:CPlU*~ffr±fn4~*fU. 256. Fore ign Sector and will not sit and watch it being driven out of Mainland Ch ina by the un ilateral action taken by Taiwan's authority. block the entry of Taiwan ' s capitai.. It w ill take measures to. Also note th at the head-to-head situation. The Problems of the Two Ch inas: Counting the Bargaining Chip. simple .. 257. Perfect competition in a laissez-faire environment always leads us to. an equilibrium where resources in use are equally competitive (i.e., equally effiCient in their uses).. The only way that the Taiwanese government can. where both governments do somethi ng leaves us the same outcom e as the. intervene and make real differences is by subSidizing some of its less. baseline situation where neither government does anyth ing.. This comes with. competitive home capital to encourage its entry into Mainland China in. no surprise at all since in a laissez-faire envi ronment the less productive. exchange for higher returns later earned there to cover the cost of subsidy.. Taiwanese capital will eventually be driven out of the Mainland Chinese. Such measure hurts Mainland China which can and will counter simp ly by. market.. barring entry of further Taiwanese capital.. In Possibilities 4 and 5, rM. ~ rF. implies rM. ~. rr'. By a similar. For the capital-thirst Mainland China, its best chance stays with a laissez. reasoning we know that Taiwan 's capital here is more productive than its. fa ire perfectly competitive environment.. competitor fro m the rest of th e world .. of cap ital from abroad, embracing the most productive and competitive. Notice that all the four situations in. either of these two possib ilities lead to the same equil ibrium outcom es. is no surprise either.. This. On the one hand, the Ma in land Ch inese authority has no. investors is always the best policy.. Sinoe it has full control of the inflow. As for the Taiwanese government, it does. not need to do anything if Taiwan ' s capital is sufficiently competitive, and it. On the other hand, the. can not help an yway if its home capital is not competitive enough because any. Foreign Sector now loses its value as an econom ic leverage that the Mainland. measure that it takes can be eas ily countered with by the Mainland Chinese. Chinese government can manipulate for its own political purpose because. government.. capital investment from the Foreign Sector is no match of Taiwan's cap ital and. environment and letting the market mechanism to work itself out is probably. is destined to be dr iven out from th e Mainland Chinese market.. the eas iest thing to do.. incentive to restrict cap ital inflow from Taiwan .. As fo r the. So. staying. with. a. laissez-faire. perfectly. competitive. Deliberate strategic actions will onJy trigger furth er. Taiwanese government, it certainly would like to see its more competitive home. interaction that leads to an equilibrium outcome no different at aU economically. capital to excel in Mainland China.. yet much worse politically.. In Possibility 3, capital fro m these two sources are true riv als as either one outperforms the other in some region and is outperformed in some other region . With boosting measures taken at hom e by the government to facilitate or even. IV. Conclusion, Limitations and Extension Possibilities:. encourage investment in Mainland Ch ina, Taiwan's capital can really do better - as far as GNP T is concerned - than it could if w ithout such help. can be easily countered w ith by Mainland China.. But that. The reason why the. Mainland Ch inese authority will defini tely take countering actions is very. The maj or contribution of this paper is to further our understanding of the interactive nature of the relationship between Taiwan and Mainland China. The model proposed here is capable of demonstrating the kind of strategic.

(20) ~JL CPUJ*~~±fr.t4~*fU. 258. The Problems of the Two Chinas: Counting the Bargaining Chip. 259. interactions that is likely to happen in reality between Taiwan and Mainland. "worst" thing th at Taiwan can anticipate is the perfectly competitive outcome. Ch ina.. under the baseline situation where both governments adopt the same hands-off. Our simple model can be easily reformulated and put to use for. applied economic analysis 2 and policy recomm endation.. strategy.. As fo r Mai nland Chi na, the same outcome is also its best hope since. it completely re lies on capital investment from abroad to help boosting its GNP The reason for the treatment as adopted here reflects our own interest in investigating how capital investm ent from Taiwan can be manipu lated by both governments as a political leverage upon each other.. The idea is very simple.. Notice that any policy taken by the Mainland Chinese government intended to. at home.. The best strategy it can adopt will be embracing the most. competitive player in town which j ust means leaving the market mechanism to work itself out.. Whether this conjecture truly reflects the reality is a matter of. belief and deserves further empirical testing.. regulate the· flow of cap ital investment from Taiwan to Mainland China will necessarily affect the p rofit prospect of Taiwan's capital owners who, as a result,. Despite of our confidence in the proposed model, we acknow ledge that. will form a pressure group to push around the Taiwanese govern ment in. there remain noteworthy limitations - which aJso mean extension possibilities. subm iss ion to political request from the Main land Chinese government.. The. - that should be taken into account if a full -scale model is to be developed for. Taiwanese government can also counteract with similar regulation, again us ing. the purpose of policy recommendation by either government or even interest. Taiwan's capital investment in Main land Ch ina as a leverage, in order to get. groups from either side aJong the Taiwan Strait.. even with its opponent.. Here are some of them_. The opposite story that Taiwan man ip Ulates its capital 1) In a more real istic model, strategic instruments such as import tariffs,. investme nt in Mainland China and inv ites countering measu res from the latter export subsid ies, non-tariff entry barriers, foreign exchange rate is equally possible too .. Under the theoretical framework adopted here, it manipulation, wage contro l, credit quota, income tax scheme and. appears that the best thing the two governments can do is do nothing and let the many other economic po licy tools should all be taken market determine the outcome .. into. Taiwan's strength lies on the com petitiveness consideration.. Further, the governments, capital owners and labor. of its capital investment in Mainland China as compared with that from the workers may have concerns other than, respectively, GNPs, rent Foreign Sector.. The more competitive it is, the more the economic situation is payments and wage payments.. toward its favor.. For example, GOP an d em ployment. If it is not competitive enough, there is really nothing that rate may take higher priorities to either government, capital ow ners. the Taiwanese government can do about as any measure it takes can be easily may be more interested in market shares than in profits and labor countered with by the Mainland Chinese government.. Nevertheless, the workers may also have interest in fringe benefit program s. 2) The five. 2. The author believes that computable general equilibrium (CGE) models will be a good approach to compute those policy-related variables such as WPs, CPs, GNPs or other variables requi red for analyses like ours or any derivative models revised from it. Shoven and Whalley (1992) and references listed in that book is a good source for consultation on the theory and applications ofCGE models.. possibil ities discussed. developments.. here exhaust all. conceivable. On the one hand, by checking most current economic. statistics, we can figu re out wh ich particular possibility that the status.

(21) ~1L CPrli*~ffLt~f-!~~fU. 260. The Problems of the Two Chinas: Counting the Bargaining Chip. References. quo fits most into and d irect implication can then be immediately drawn .. On the other hand, all exogenous model parameters will. change over time as both economies progress.. By monitoring thl?. changes we can "project into the future" regarding possible developments and prepare for it.. With the multiplicity an d the. heterogeneity in commodities being formally built into the model to reflect market reality, we may find other robust yet non-trivial imp lications which are missing here. 3). 1. Cheung, Steven N . S. ( ~1i m-) 1995 "Economic Interactions: China vis-a-vis Hong Kong," Contemporary Econom ic Policy, 13(1), 1-9, (January). 2. Chu, C. Y. Cyrus (*~- ) 1993 "Unification or Independence : An Econom ic Analysis," l ournal of Social Science and Philosophy, 6(1), 75 95 , (December). (in Chinese). (r ~~g,-E[QJI¥J*~~7tifJT J ' ( ,A,3t&ffrr. .~• • ~ ) ,m~~m -m, m~1i ~ft1i B' ~~ A+ = ~+ =. H. 0. ). The Fore ign Sector may not be all that naive as assumed in the paper.. 3. Debreu, Gerard. Any third country coveting the mass econom ic interest of doing. 4. Kao, Charles H. c., Chu-Chia Steve Lin, Cher Hsu and Wennie Lin (~W ~ , # ffLEl. B ' ~~~ '#3tIfj) 1995 TheTaiwanInvestmentEx perience in Mainland Chi na, Commonwealth Publishing Co ., Ltd.: Taipei. (in Chinese). « i5'itM~~ -~li*Ili I¥J JJl~¥~~ ) , 7(~3t 1td::Ht&M:171 ~ ~0P] , 1995 ~. business in/with Mainland China wi ll necessarily consider Taiwan as its rival and is sure to take actions to secure its interest in Mainland China.. That Main land China being implied to be a net capital. impo rter can be re laxed too in a more realistic model.. 1959. 0. 5.. Kao, Charles H.. Theory of Value, Wiley: New York.. ). c., Joseph S. Lee and Chu-Chia Steve Lin. ~ ' #fft§.~). 4). 261. In th e normal form game " played" by the two governm ents we consider only the Nash equilibrium concept.. Game theorists have. 0. developed. many. different. equilibrium. concepts.. (or. ,. '*. ). more. appropriately, refineme nts of the Nash equilibrium) to depict a mass variety of mentality, rationality and knowledge in the players.. ( ~ W~. 1992 An Empirical Study of Taiwan Investment on (in Main land China, Commonwealth Publishing Co., Ltd.: Taipei. Chinese). « -El JIIg;g ~ - mi¥*~ jfi!§m ) , 7( ~ 3t 1tteJt&~151~~0 p] , 1992 ~. All. these seem to be good matches to the kind of complexities so. 6. Lin, Jib-wen and Chih-cheng Lo (#.3tWR~i&) 1998 "Zero-sum or Win-win? A Reinterpretation of Cross-strait Economic Exch ange," Journal of Social Science and Ph ilosophy, 10(1), 33-77, (March). (in Chinese). (r ~W~f§!. ? mw*~jfXmt~m J ' < ,A,3tN:.ffrr.f!f-j.~. f U) ' m +~m-m, ~-=_~tt][ , ~1~JJ\+t~ - H 0 ). com monly seen in political reality and are worth being form ulated into the gam e.. 7. Lin, Justin Yifu 1995 "Can China' s 'Mini-Bang' Contemporary Econom ic Policy, 13(1), 10-1 4, (January).. Succeed?,". 8. Sheng, Andrew, 1995 "China's Economic Refonn: The Troika," Contemporary Econom ic Policy, 13(1), 15- 17, (January). 9. Shoven, John B. and Jo hn Whalley 1992 Cambridge University Press : New York.. Applying General Equilibrium,. 10 . Wang, Shu G. 1995 "An Economic View on the Political Stability Along.

(22) 262. the Taiwan Strait over the Independence/Unification Issue," Journal of Social Science and Philosophy, 7(1 ),289-324, (March). 11. Wong, Yue-C him Richard 1995 "China's Econom ic Re fo rm : The Next Step," Contemporary Economic Policy, 13(1), 18-27, (January)..

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