兩岸經濟互動: 保護主義下與中國南方形成整合體制的可行性 - 政大學術集成

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(1)國立政治大學亞太研究英語碩士學位學程 International Master’s Program in Asia-Pacific Studies College of Social Sciences National Chengchi University. 碩士論文 Master’s Thesis. 立. 政 治 大. ‧ 國. 學. ‧. 兩岸經濟互動: 保護主義下與中國南方形成整合體制的可行性 Economic Interaction across the Strait: The Feasibility of an Integration Regime in Southern China Among Protectionist Trends al iv n Ch engchi U. n. er. io. sit. y. Nat. Student: James Xavier Morris Advisor: Professor Chung-min Tsai. 中華民國 105 年 7 月 July 2016.

(2) 兩岸經濟互動: 保護主義下與中國南方形成整合體制的可行性 Economic Interaction across the Strait: The Feasibility of an Integration Regime in Southern China Among Protectionist Trends. Student: James Xavier Morris. 學. Advisor: Tsai Chung-min. ‧. io. sit. y. Nat. 國立政治大學. er. ‧ 國. 立. 政 治 大. n. a. v. l C 亞太研究英語碩士學位學程 ni. hengchi U 碩士論文. A Thesis Submitted to International Master’s Program in Asia-Pacific Studies National Chengchi University.

(3) Acknowledgements I would like to thank my advisor, Professor Tsai Chung-min, for his assistance and support in organizing this research and thesis. His guidance has helped to keep this research focused and on track in this new and relatively unexplored area of study. In addition, I would like to thank my committee members, Professors Leng Tse-kang and Su Yu-hsuan, for their feedback and suggestions. I could not have asked for a more supportive team of experts to provide their insight on trends, research methodology, and style.. 立. 政 治 大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. i. i n U. v.

(4) Abstract The introduction of the Economic Cooperation Framework Agreement (ECFA) signed between China and Taiwan in 2010 has added a significantly important economic element to cross-strait relations. Little research has been done on cross-strait integration from an economic standpoint, and to analyze the potential for successful economic integration between the parties it is necessary to determine whether their political economies are compatible for integration. In this research comparative studies of the political economies of Taiwan and China are conducted with focuses on industrial orientation, market mechanisms, and the motivations driving major economic actors. This research focuses on Fujian and Guangdong, Taiwan’s closest economic. 政 治 大 study conducted on Hong Kong-China integration due to similarities of economic integration 立 mechanisms. This study uses models constructed by scholars on Chinese provincial. partners on the mainland and the cornerstones of Beijing’s integration incentives, with a minor. ‧ 國. 學. protectionism and trade barriers to determine whether Taiwanese integration with the “Common China Market” will be mutually beneficial for the economies on both sides of the Taiwan Strait.. ‧. Economic indicators, trade trends, and economic policy incentives indicate that integration under ECFA is amplifying trade asymmetries and is stalling real economic growth in Taiwan. Findings. y. Nat. sit. also show that trade liberalization has allowed major trade barrier and protectionism-creating. al. er. io. phenomena that were once limited to the mainland to contribute to cross-strait competition. n. regime among the economies studied. This research contributes to the fledgling body of. Ch. i n U. v. academic research on cross-strait economic integration and its impact on the parties directly. engchi. impacted by it. Implications of this study show that it would be beneficial for the speed of ECFA integration to be reigned in, and for Taiwan to use the trade agreement as a counter to pursue bilateral regional trade that can ensure its competitiveness.. ii.

(5) Table of Contents Chapter I. Introduction..............................................................................................................1. I.1.. Background and Research Motivation.....................................................................1. I.2.. Literature Review.....................................................................................................4. I.3.. Analytical Framework and Methodology..............................................................14. Chapter II.. Findings: China......................................................................................................18. II.1.. Economic Strategies of the People’s Republic of China.......................................19. II.2.. Overview of the Political Economies of Fujian and Guangdong..........................30. Chapter III. Findings: Taiwan...................................................................................................39. III.3.. 治 政 Failing economy.....................................................................................................42 大 Taiwanese steps 立 toward integration.......................................................................44. III.4.. FDI and the Taishang.............................................................................................47. Chapter IV.. Findings: Trade, Convergence, and Hollowing Out..............................................53. III.2.. Economic strategies of Taiwan..............................................................................39. 學. ‧ 國. III.1.. ‧. IV.1. Sources of industrial convergence and protectionism across the strait..................53 IV.2. Manufacturing, trade, and industrial trends...........................................................58. Nat. sit. y. IV.3. Interdependence and hollowing-out.......................................................................64 IV.4. Findings: Minor Case Studies................................................................................69. io. Ramnifications under ECFA..................................................................................74. Chapter VI.. Conclusion.............................................................................................................83. al. iv n C hengchi U ................................................................................................................................88 n. Bibliography. er. Chapter V.. iii.

(6) List of Figures Figure 1. Percentage of SOE contributions to Provincial level GDP Output, 2011.....................................................34 Figure 2. State Owned Enterprise contributions to GDP in Fujian and Guangdong 2000, 2005, and 2010…….…...36 Figure 3. Comparison of Top Five Taiwanese OFDI Industries (January-April 2015, 2016)......................................43 Figure 4. GDP figures for Taiwan, Guangdong, and Fujian.........................................................................................54 Figure 5. Breakdowns of industrial sectors to GDP, changes between 2000 and 2010................................................55 Figure 6. Top recipients of approved Taiwanese OFDI cases (January-April 2016)...................................................59 Figure 7. Comparison of Approved Taiwanese OFDI for Guangdong and Fujian, January-April 2016 and 2016…..60. 政 治 大. Figure 8. Hong Kong, Macau, and Taiwan Funded Enterprises in Fujian...................................................................62. 立. Figure 9. Hong Kong, Macau, and Taiwan Funded Enterprises in Guangdong...........................................................63. ‧ 國. 學. Figure 10. FDI in Guangdong Originating from Hong Kong and Taiwan...................................................................64 Figure 11. Cross-Strait Trade Values as Percentage of Global Trade Values for Taiwan and China..........................66. ‧. n. er. io. sit. y. Nat. al. Ch. engchi. iv. i n U. v.

(7) Abbreviations. Association of Southeast Asian Nations Closer Economic Partnership Agreement Democratic People’s Party Economic Cooperation Framework Agreement Foreign direct investment Free trade agreement Free trade zone Kuomintang (Nationalist Party) One Belt, One Road One Country, Two Systems Outbound foreign direct investment Pilot free trade zone Peoples’ Republic of China Pearl River Delta Republic of China Small and medium enterprise State-owned enterprise Taiwanese business associations Wholly foreign-owned enterprise World Trade Organization. 學 ‧. ‧ 國. 立. 政 治 大. n. al. er. io. sit. y. Nat. ASEAN CEPA DPP ECFA FDI FTA FTZ KMT OBOR OCTS OFDI PFTZ PRC PRD ROC SME SOE TBA WFOE WTO. Ch. engchi. v. i n U. v.

(8) CHAPTER I. I.1. INTRODUCTION. BACKGROUND AND RESEARCH MOTIVATION. Cross-Strait economics in the era of ECFA For three decades the core of cross-strait relations has centered around economic integration. Taiwanese foreign direct investment (FDI), initially intended for exportmanufacturing, has found itself evermore intended for domestic Chinese consumer goods and services. The development of China’s middle class since its post-2000 economic boom has. 政 治 大 cannot meet. As a result, Taiwanese manufacturing ventures have become more and more China立. created an insatiable demand for consumer goods and services that mainland-owned firms simply oriented. China’s traditional role as a global factory has been important for continued Taiwanese. ‧ 國. 學. growth and Taiwanese manufacturers have found a cheap source of labor and an expanding market for their products. Taiwanese investments in manufacturing are building up China’s. ‧. indigenous manufacturing sophistication, bringing China’s more developed industry sectors up the value chain. While Chinese industry has found a model for growth and stability, many. y. Nat. sit. economists realize this has been at the expense of Taiwanese industrial hollowing out. In recent. al. er. io. years, as China has developed, a shift has occurred in the cross-strait trade model caused by. n. active policy implementation and passive market forces, resulting in a new trade dependency. Ch. i n U. v. orientation. The economies of Taiwan and China, particularly the provinces of Fujian and. engchi. Guangdong, are becoming more and more integrated. Taiwan has been struggling for over a decade to revitalize its stalled economy, and China has been one reliable regional market that Taiwanese firms have found themselves able to count on for growth. In its pursuit to prevent any perception of de jure Taiwanese independence China has followed a policy that constricts Taiwan’s ability to pursue bilateral trade agreements in the greater global market, effectively forcing reliance upon the mainland for engagement in international economic activities. Cross-strait economic integration was formalized with the 2010 signing of the Economic Cooperation Framework Agreement (ECFA). ECFA is based on an earlier trade agreement between Hong Kong and China and is meant to facilitate trade within the context of China’s “One Country, Two Systems” (OCTS) policy, and is a formal arrangement that has. 1.

(9) removed trade and investment barriers between the two parties. China has sought to implement a model such as ECFA for years, and found success with former Taiwanese President Ma Yingjeou (2008-2016) who saw ECFA as a means to facilitate greater cross-strait trade, a tool for releasing Taiwan from China’s constricting pressure on global market participation, and an assurance that Taiwan would be able to engage in its own bilateral international free trade agreements (FTAs). The initial ECFA framework has been followed up by several additional trade agreements. For all the benefits of ECFA, Taiwan is further placing itself in an evermore asymmetric integration with the mainland and will have to face down many of the same domestic barriers that China’s provincial economies experience. Taiwan also has to contend with the uncontrollable nature of its own primary economic. 政 治 大 authorities actively pursue incentive 立 policies aimed at coaxing greater participation of taishang actors, Taiwanese investors living on the mainland known as the taishang (台商). Chinese. in the Chinese market. The push and pull of market mechanisms that entice development are not. ‧ 國. 學. making it any easier for the Taiwanese to steer themselves away from the current path toward disadvantageous interdependence. Chinese policy attempts to coax Taiwan into a path. ‧. dependency heavily connected with investment incentives in Fujian and Guangdong. Despite the. y. Nat. semi-incentivized, semi-forced nature of Taiwan-China integration, a great number of factors. sit. have been ignored which could prove unsustainable or even resource-exhausting, including the. al. er. io. unusually high levels of protectionism existing among Chinese provinces.. v. n. As Taiwan continues to trade with China it is finding itself less and less in a position of. Ch. i n U. economic security as it enters the integrated market, particularly as China’s provinces continue to. engchi. match their industrial sectors with that of the island. China’s most advanced provinces are turning into Taiwan’s competitors rather than partners, and as Taiwan is pulled further into China’s “Common China Market” it will begin to experience the same phenomena that have created high levels of protectionism amongst the mainland’s provinces. Protectionism in the People’s Republic of China develops in order to remain competitive in the global market.. Purpose of research Taiwan and China now exist in the era of ECFA, and in the wake of its establishment there are many trends that must be evaluated in order to determine the short-term and long-term impacts that ECFA will have on the economies of China and Taiwan. This thesis will identify the. 2.

(10) benefits and and disadvantages of integration under the first few years of ECFA and determine whether or not the cross-strait economic interdependence trend can overcome potential trade impediments. It will also determine whether further integration is possible without reducing any party’s ability to project itself. The problem this thesis seeks to address is whether or not both parties are moving toward a sustainable and beneficial economic policy. The World Bank has predicted that for the 20162018 period the Asia-Pacific region’s average growth rate will decelerate to 6.2 per cent from its 2016 6.5 per cent rate.1 This 6.2 per cent growth rate can be used as a benchmark for identifying whether or not economic integration is helping the economies concerned exceed this figure, or whether it is allowing economic growth to decelerate at a greater level. In short this it asks: Is. 政 治 大 would the economies of Taiwan and China be able to integrate successfully? 立. further integration between Taiwan and China beneficial from an economic standpoint, and. ‧ 國. 學. Contributing to the academic body. The amount of literature available on China’s reforms, decentralization, national. ‧. development initiatives, and domestic trade barriers is vast. Equally voluminous is the amount of writings in recent years on ECFA, and cross-strait integration. What is missing, however, and. Nat. sit. y. what this paper seeks to contribute to the field, is an analysis of the feasibility of cross-strait integration in light of the behavior of Taiwan’s and China’s economic actors, in particular how. io. n. al. er. China’s domestic provincial-level trade barriers will exert influence on Taiwan’s willingness to. i n U. v. trade with the provinces now that ECFA has brought the island’s economy into the seemingly dysfunctional economic fold.. Ch. engchi. The next sections will identify the themes already explored by scholars on this subject, and followed by an explanation of the hypothesis, its measurements and the methodology of how this research has been conducted before exploring the data and trends.. 1. See The World Bank, “Global Economic Prospects: Divergences and Risks,” 2016.. 3.

(11) I.2. LITERATURE REVIEW. Economic foundation. Economic fundamentals are at play in cross-strait relations. We find that the taishang and other actors all operate in their own self-interest: the taishang for greater profits, authorities for economic growth and domestic stability, SOEs for their continued profits and rent agreements. Smith (1776) wrote that self-interest drives market forces, and that self-interested behavior eventually creates benefits and goods for society. Society is a result of profit-seeking behavior, and political economy (in our case the structures guiding economic decisions and market orientation in China, Taiwan, and the provincial case studies) demotes politics while raising. 政 治 大 unseen forces that operate better and more efficiently than public policy could direct. Later 立 studies on the invisible hand would define it as “coordination without collusion” (Friedman society. Smith conceived of the “invisible hand” analogy, in that market behavior is guided by. ‧ 國. 學. 1953). Smith found that collusion between the state and companies generates money but no economic growth, effectively working against economic efficiency and the benefit of society.. ‧. Steuart (Works, 1805), a contemporary of Smith, finds that social changes come from social processes and forces, and that there is a role for the state in that it must recognize and guide. Nat. sit. io. er. the decisions itself.. y. society through the changes, to help the system along correct path dependencies, but not to make. al. n. iv n C This research assumes that a fully-integrated h e n g c h Taiwan i U may have to contend with the. Chinese trade barriers and protectionism. mainland’s endogenous border effects that limit domestic trade. A review of theories and. research on these phenomena is necessary to draw conclusions regarding the potential success of integration. The study of Chinese provincial protectionism and the rise of trade barriers among the provinces is a relatively new subject. Trade barriers can be considered as any impediments to the free flow of service and goods including tariff-like regulations, outright prohibitions, and geographic obstructions (Young 2000, Poncet 2001, Sun 2013). The rise of this field originates in provincial disparity studies, the roots of which have been linked to China’s liberalization reforms and its fiscal decentralization. The reforms have been found to have also created a direct positive correlation between greater budgetary autonomy of decentralized provinces and the higher rates of trade barriers between the provinces (Poncet 2001, 2003, 2005). The rise of. 4.

(12) interprovincial trade barriers has been found to be a result of provinces abandoning their natural advantages and varied factor endowments in favor of central policies stemming from the 1980s and 1990s that have encouraged provinces to develop their industries and move downstream in the production cycle. This has fostered similar and converged production structures and domestic competition (Young 2000). This study has made social scientists reconsider their classification of the Chinese economy from one monolithic unit to many separate economies. Studies agree that the best strategy for reform was correctly thought to be continued international integration, but given China’s complexities this had the effect of making the provincial economies more outward looking, further establishing conditions for the low levels of domestic trade we still see in China today (Guthrie 2006). Path dependency in economic. 政 治 大. development has had the effect of locking provinces into their preferential political economy. 立. (Goodman 1997).. ‧ 國. 學. Economic decentralization. Excitement over the Chinese market has often developed into self-perpetuating myths. ‧. about a singular, large market existing in China, that China will modernize through investment, and that market forces have taken control over the economy. China’s economy exists as a. Nat. sit. y. continental system, and its scale is so great that many of its provinces dwarf Europe’s largest. io. er. states in many categories. Taking these and the previous factors into account, it is better to think of the PRC as a series of fragmented markets under the direction of provincial level officials than. n. al. i n U. v. as a single national economic system (Goodman 1997, Young 2000, Oizumi 2010, Wong 2012).. Ch. engchi. China’s center of gravity for economic activity exists largely at the provincial level since post-Maoist decentralization handed the reigns of revenue collection and resource allocation over to the provinces as a way to incentivize overproduction for provincial coffers. Decentralization of economic affairs to the provinces had the effect of acting as a surrogate market mechanism, with incentivization acting as a “functional equivalent of privatization” (Cai and Treisman 2007). Scholars have found that China’s reforms are limited, piecemeal, and incomplete. Nor have they replaced the old system with a functionally better model (Young 2000, Dreyer 2010). The new system does not distribute evenly, and stability and predictability are low. Central government shifts between mass mobilization models and professional development models have established the current incomplete reform arrangement experienced in the PRC today (Wang 2002). Some. 5.

(13) scholars have found that popular enthusiasm for further reforms are low among many of the population, as real change has not happened, and the government has favored “tinkering” with “easy” reforms rather than addressing major structural overhauls. In either case the central government could regain the power to initiate reforms if it wanted to, but the means to recentralize the economy have “passed from its hands” (Dreyer 2010).2 Scholars have found this semi-reformed market structure has allowed the continued presence of SOEs at provincial levels. SOEs and rent-seeking behavior of private enterprises within the incentivized provincial industrial systems have created high levels of protectionism within the provinces. The defeat of the hard liners during the 1980s created the conditions for SOEs, rent, and capture to develop (Guthrie 2006). Measuring China’s trade barriers. 立. 政 治 大. Interprovincial protectionism studies have discovered that not only do domestic barriers. ‧ 國. 學. exist, but their rates have increased over the past several decades. Application of the border effect model finds that globalization has driven local governments to adopt market segmentation. ‧. policies resulting in international trade that “crowds out” interprovincial trade (Poncet 2005, Shantong and Shaojun 2011). Provinces are following a dual-preference for trade that reinforces. Nat. sit. y. domestic barriers. International trade is preferred, especially for investments, but provincial. io. er. officials further push trade barriers up by incentivizing consumers choose local, same-province products over international or interprovincial products (Poncet 2005). These findings indicate. n. al. i n U. v. that significant border effects and barriers still exist despite mandated stipulations from the. Ch. engchi. World Trade Organization (WTO) that China enact policies to permit the free movement of market goods among the provinces (Poncet 2005). Wong’s measurements of trade barrier effects from 2012 find that domestic protectionism and trade barrier levels are not as bad as previous studies have suggested, however these rates are rising as provinces continue to increase their presence in the global market. Wong uses the gravity equation, wherein “the ratio of the local purchases of two regions over their respective bilateral trade” gives an “expression” of trade barriers. Her study finds that similar domestically manufactured goods will have different prices in different provinces. She concludes that this indicates extremely limited levels of cross-border trade throughout China. Wong’s study finds. 2. June T. Dreyer, China’s Political System: Modernization and Tradition, 2010, p. 137.. 6.

(14) that SOE presence, rather than geography, is the most important factor in creating trade barriers (Wong 2012). Other studies have found that interprovincial administrative trade barriers grew as market reforms have deepened due to provincial protectionism before relaxing slightly between the years 1991 and 2007 (Fang, Qi, and Lin 2013). Other studies have shown that geographic considerations significantly impact the development of market mechanisms. For example, one study has found that the coastal provinces are much more liberalized and express a lower rate of SOE interference due to their proximity to the coast and international transportation networks. This same study finds that the general opening up of the inland provinces has eroded the advantages enjoyed by the coastal provinces as investment locations have generally started trending westward (Sun 2013). In this study it appears that economic disparity and the resulting. 政 治 大. SOE and protectionist phenomena are a product of the combination of geographic, policy, and. 立. network factors.. The assertion that China’s general opening up has reduced the advantages of the coastal. ‧ 國. 學. provinces needs further investigation. Several contemporary studies have found that the coastal provinces have managed to retain their advantages. In one study the trend of greater investment. ‧. heading inland has only been identified along the inner fringes of the coastal provinces and not necessarily throughout the inland provinces themselves (Oizumi 2010). Sun and Oizumi both. y. Nat. sit. identify cities located along rivers as being the catalysts for local growth. Oizumi’s study in. al. er. io. particular identifies the inland prefecture-level cities of China’s coastal provinces as being the. n. main beneficiaries of China’s general opening up, achieving rapid growth since 2010. His. Ch. i n U. v. research highlights the inward movement of investment, and its reluctance to leave the relative. engchi. assured safety of the coastal political economies. Additional research finds other reasons for the slow pace of investment and trade to penetrate inland has been due to investor confidence. Coastal provinces are still the more preferred areas for investment due to their longer experience with market liberalization, fewer SOEs, and the compounding factor of FDI accumulation generating greater profits (Poncet 2003, 2005, Shantong and Shaojun 2011). Some studies have shown that trade liberalization efforts in China have been relatively unsuccessful. Flow irregularities have been discovered between Hong Kong and China where WTO commitments and domestic policy aimed at trade liberalization have been sidestepped in favor of controlling the types of capital imported. Manipulation of exchange rates to protect the mainland economies have also proven difficult for investors to avoid. A recent study has. 7.

(15) identified that major irregularities are due to underreporting of exports and overstatements of imports, often associated with offshore “roundtripping” that creates inflated FDI figures. Fung, Yau, and Zhang have found that firms are incentivized to export excess money offshore to return as overstated inbound FDI. Their work has identified the worst offenders of trade irregularities are SOEs (Fung, Yau, and Zhang 2011). Guanxi business practices. The concept of guanxi (關係) is an often overlooked element when considering trade with China and general business practices. Studies have found that guanxi exists in business culture and transactions on both sides of the Taiwan Strait and can have a strong impact on trade. 政 治 大 and is a key organizational principle in Chinese culture. It allows individuals to grow networks 立 beyond the family (Hamilton 1998) and creates networks of obligation and indebtedness through. flows and investment networks. Guanxi is a principle used more and more in mainland business. ‧ 國. 學. social relations and can be thought of as a social tool to keep social networks open for “instrumental ends” (Guthrie 2006). In China guanxi is important for securing business. ‧. transactions, though it does not drive market relationships. The work-unit system of communist China was made of patron-client guanxi relations for securing resources, and guanxi was. y. Nat. sit. essential in creating transactions in a post-Mao China that had a lack of experience with. er. io. business. As the PRC moves further away from organizing around the family, party-state, and work-unit systems, the guanxi system comes more and more into play (Guthrie 2006).. n. al. Role of the Taishang in China. Ch. engchi. i n U. v. The taishang in China have been subject to many studies on cross-strait relations as well as business behavior and economic development within the mainland. Findings are straightforward and tend to agree that the taishang are some of the catalysts for China’s developing production industries as well as the engine for massive growth in China. Conclusions as to the implications of taishang in China have been mixed as they are seen on both sides of the strait as both the drivers of Taiwan’s economy as well as a tool for the PRC to manipulate and penetrate Taiwan. Several studies indicate the most crucial aspect of taishang migration to the mainland has been in the transfer of talent. Chinese industry has learned how to advance and how to do business from the taishang in areas of technological know-how and management operations 8.

(16) (Reid and Rigger 2008). Taishang have proven incredibly difficult for the government in Taipei to control, and the government often having to play “catch up” to the taishang’s behavior, essentially acting as a rubber stamp of approval for their activities (Guthrie 2006). Taishang will use intermediaries for investments if direct investments cannot be made. Reid and Rigger (2008) estimate that in the first decade of the 2000s 75 per cent of British Virgin Islands and Cayman Islands investments, and 15 per cent of Hong Kong investments in China are in fact Taiwanese in origin.3 This lack of control over taishang investment and their movements with market forces has allowed scholars to identify them as significant indicators or bellwethers for locations with proper market mechanisms for investment.. 治 政 大 and particularly of “Go South” In its pursuit of investment locations starting in the 1980s, 立 and “Go West” investment policies in the 1990s, Taiwan has been found to be one of the leading Regional trade. ‧ 國. 學. initiators of regional trade structures in east Asia. The regional proliferation of FTAs is creating a new trend in regionalization and international division of labor and supply chains. “Factory. ‧. Asia” is driven by intra-regional trade, and that regionalization is driven by FDI investors.. Nat. sit. regional economic interdependence (Wu 2010).4. y. China’s entrance in the regional trade architecture in the 1990s has only served to deepen. er. io. ECFA’s benefits and weaknesses. al. n. iv n C across the strait. Reading any further into often brings up conflicting conclusions h ethenanalyses gchi U At the core, academics understand ECFA as a tool to facilitate trade and investment. among scholars. As a subject of study it is clear that not enough time has passed in order to give ECFA a fair assessment. Some view ECFA as an annexation tool of the PRC (Huang 2010). Others assess ECFA as an economic tool with a heavy political nature (Tsai 2010, Huang 2010). The international community views the trade agreement in a positive light, considering it beneficial. Critics of this trade agreement have made many foreboding and ominous predictions, and critics have seen Ma’s policies as resulting in the fall of Taiwan to the PRC (Sutter 2011). PRC strategy is to force Taiwan into one direction, into the “One China Market” (also referred to as 3 4. See Toy Reid and Shelly Rigger, “Taiwanese Investors in Mainland China: Creating a Context for Peace?,” August 2008, p. 9. Rong-I Wu and Tsai-Lung Hong, “Economic Integration in East Asia—Taiwan Perspective,” 2010, p. 33.. 9.

(17) the “Common China Market”) China’s tactics have been called “boar hunting” in which Beijing’s harassment and international blockades of Taiwanese bilateral agreements is similar to a hunter forcing a boar into a trap where the only route for “escape” is to continue further into it so the hunter can easily capture his prey (Huang 2010). Critics argue that Chinese domination over Taiwan’s economy through the ECFA will impact the role Taiwanese small and medium enterprises (SMEs) traditionally play such as speeding up the rate that Taiwanese companies in China will buy from local intermediary suppliers rather than relying on imports from Taiwanese networks for their production supplies (Wilson 2014). Hollowing out and interdependence. 治 政 to this research are the concepts of core-periphery theory大 and the trend of region-to-region 立 hollowing out, two theories proposed by scholars relating to asymmetrical trade theory. CoreCentral to critics’ appraisals of Taiwanese-Chinese economic integration, and thus central. ‧ 國. 學. periphery theory applies trade asymmetry in cases where one economy behaves as a magnet for other economies’ activity. Core-periphery theory states that large markets will make smaller. ‧. regional economies into peripheries through their size advantages, and that markets mean ample economic growth opportunities (Huang 2010). ECFA critics argue that China is coercing Taiwan. Nat. sit. y. into a trap, and that core-periphery theory is what really benefits the PRC. Huang suggests that. io. er. ECFA is simply a peripherization tool China is using. Additional arguments suggest that ECFA will allow asymmetrical interdependence to expand, drawing Taiwan further to the core (Sutter. n. al. i n U. v. 2011). Hong Kong, for example, has not been able to shake itself out of the periphery role that it. Ch. engchi. has fallen into (Yang 2005). Scholars note that because Hong Kong is not a centrally-controlled city within the PRC it has slipped in importance into a periphery role, and as of 2010 social inequality and poor living standards have been allowed to continue for over 1.2 million Hong Kongers (Huang 2010).5 Within the mainland Guangdong was found to be the center for the domestic core-periphery model with both positive and negative spillover effects occurring between it and its neighboring provinces (Ying 2000), however additional tests could not determine that Guangdong itself was the sole core for spillover effects experienced by other provinces (Groenewold et al. 2008). Regardless many scholars recognize the effects of China’s pull over Taiwan. Tan (2016) has developed a model showing that Taiwan’s economic fate. 5. Tien-Lin Huang, “ECFA and the Core-Periphery Effect,” 2010, p. 86.. 10.

(18) would be sealed to peripheral status should it lose its mechanical manufacturing backbone. Her model suggests that Taiwan should seek FDI from more advanced economies while it is similarly approving outbound FDI (OFDI). Critics of ECFA have also highlighted that the type of hollowing out that Taiwan is experiencing is different from the industrial hollowing out that has plagued Japan since the 1980s. Taiwanese and Japanese hollowing out are frequently compared, but some recent research suggests that the Taiwan-China model is much more dangerous to Taiwan’s national growth and security. Nobel Prize-winning economist Paul Krugman proposed that region-to-region trade is different from international trade in that it creates much more severe hollowing out effects that are often seen in local-level cases, similar to how one city may drain the economy of another. 政 治 大 intention is mutually beneficial rather than competitive (Tsai 2010). The migration of many 立 nearby city. International trade is different in that while it may create some hollowing out, its. talented Taiwanese to the PRC has led to economic security vulnerabilities including a. ‧ 國. 學. hollowing-out of the Taiwanese economy and low domestic growth rates (Chu 1999). Tsai points out that the high rates of cross-strait free movement is unheard of in international scenarios and. ‧. suggests that Taiwan and China trade has shifted to a region-to-region model. Using the computer chip industry as an example, Tsai explains how Taiwan’s trade interaction with China. y. Nat. sit. is different from that with the United States and warns that ECFA will kill Taiwan’s economy in. al. er. io. the same way that other region-to-region trade models kill smaller economies.6. n. The phenomena and theories addressed so far lead the paper to the next area, one which. Ch. i n U. v. has been written about extensively, and is central to the analysis of the benefits and. engchi. disadvantages of trade integration between Taiwan and China. Interdependence between the parties, pressure exerted by economic actors upon other actors, and the hollowing out effect that Taiwan experiences in its moves toward greater trade relations with the mainland are all events that are interwoven and must be reviewed together to make sense of the trends that scholars have helped to uncover. Cynical observers have put forward the argument that Taiwan has always remained dependent upon other economies and has simply shifted from dependence on the American economy to the Chinese economy (Wilson 2014). As much as critics of integration push their case that Taiwan is the only party that experiences dependence in the model, it is not true. While 6. I-Ju Tsai, “The Impact of ECFA on Taiwan’s Economy,” 2010, pp. 64-66.. 11.

(19) provincial gains in GDP grow year upon year due to their export nature, they still rely on Taiwanese operations to drive their manufacture, upgrade their sophistication, and provide provinces with a greater global reach and diversity (Poncet 2005). Interpenetration of the economies of Taiwan and China mean that the Taiwanese can equally apply pressure on China. The depth and variety of areas that are interpenetrated mean that Taiwan has “many options for exerting economic pressure” (Tanner 2007).7 Another avenue for approaching interdependence between the two economies is that it revolves around the preference of the taishang to operate in China (Tanner 2007). The degree to which a province depends upon Taiwanese investments has been summed up by Reid and Rigger in six points: The percentage of FDI in a province that comes from. 政 治 大 degree to which a province or economic sector depends upon FDI, the importance of Taiwanese 立. Taiwan as opposed to other locations, the dependence of a province upon FDI in general, the. investment as opposed to similar investments from potential substitute sources, the diversity of a. ‧ 國. 學. province’s overall industrial sectors, and the ease and ability for a Taishang-invested enterprise to “pack up” operations and move elsewhere. “FDI dependence” and “Investment dependence”. ‧. are two measures Rigger and Reid use for their results. The trend appears that Taiwanese firms will target smaller locations where they have more influence over the local economy. Traditional. y. Nat. sit. and built-up locations are often less accommodating. Taiwan invests in places where it cannot be. al. er. io. substituted, so economies with specific needs that Taishang can fulfill are often the targets for. n. investment (Reid and Rigger 2008). This analysis stands in contrast to the assumption that firms seek areas of proven capital returns.. Ch. engchi. i n U. v. From a larger perspective economic interdependence will make “permanent separation” from China incredibly difficult (Reid and Rigger 2008). Economic integration is often considered key to development and economic security, but some schools of thought believe it can often leave one or both parties vulnerable to “deliberate manipulations” of external parties and “larger systemic forces” in general. This creates a greater “economic security dilemma” across the strait (Crawford 1994, Narine 2007). Both China and Taiwan can fall victim to this trap. Reid and Rigger determine Taiwan is more vulnerable across the board given the way in which it depends on China. Taiwan is more susceptible to economic disruptions in cross-strait. 7. Murray Scot Tanner, Chinese Economic Coercion Against Taiwan: A Tricky Weapon to Use, 2007, p. 16.. 12.

(20) relations, and it has a much larger proportion of its economy invested in China than China does in Taiwan due to the size of both economies (Reid and Rigger 2008). Chinese pressure is often cited as a source of Taiwanese economic woes, but Chinese pressure, policies, and sanctions may not be effective as forms coercion against Taiwan. Chinese enforcement of coercion may see high rates of failure due to the general wealth of Taiwan and its important role in global manufacturing. In addition, Taiwan can undermine Chinese efforts at coercion by offering “free rider” and “defector benefits” to Chinese authorities and business partners. Furthermore, failure at coercion may also occur if Chinese sanctions hurt or impact domestic interests. Beijing has greater success with Taiwan when it uses restraint, though Tanner finds that it rarely does this as the PRC cannot ignore Taiwan’s international behavior (Tanner. 政 治 大 that Hong Kong has suffered more from hollowing out than Taiwan has, and that despite its 立. 2007). Chen finds that industrial hollowing out has not been as bad as scholars presume, finding. unemployment figures, Taiwan did not experience significant levels of industrial hollowing out. ‧ 國. 學. until 2005 (Chen 2012).. ‧. Subaltern realism. One must keep in mind that China is still technically a developing state, even if its. Nat. sit. y. wealthiest provinces appear to be closing in on full industrialization. As a developing state,. io. er. Chinese behavior is dependent upon its success in developing. “Subaltern realism” is a theory developed out of Asia-Pacific studies which posits that developing states are more focused on. n. al. i n U. v. state-building and establishing political legitimacy, and that their domestic politics determine. Ch. engchi. their international actions (Narine 2004, 2007). Under subaltern realism, China’s economic initiatives serve to provide security against economic problems such as the 1997 Asian financial crisis. Additionally, economic cooperation cannot yet be said to remove regional threats of force. Current efforts at cooperation and integration are not mature enough yet to determine whether this is so (Narine 2007). It is possible that China is doing both. It seeks economic cooperation at the threat of force because it seeks domestic political legitimacy.. 13.

(21) I.3. ANALYTICAL FRAMEWORK AND METHODOLOGY This thesis sets out to determine whether further economic integration between China and. Taiwan is beneficial for both parties’ economies. In order to do so it must identify benefits and disadvantages of further integration. A secondary objective of this research is to determine if further integration is possible and whether or not it will it be possible for Taiwan to protect its economy. The operating question asks whether or not further economic integration between Taiwan and China would be mutually beneficial, and if the economies of Taiwan and China would be able to integrate successfully. Definitions and Variables. 政 治 大 dependent variable. In addition,立 this research has identified four independent variables that are. This thesis identifies the likelihood of successful economic cross-strait integration as its. deemed contributing factors toward successful integration: The number of taishang workers in. ‧ 國. 學. the local Chinese economies, the number of state-owned enterprises (SOEs) in the local Chinese economies, the level of domestic trade barriers among China’s provincial economies, and the. ‧. manufacturing and operating costs of integrating Taiwanese operations in China.. Nat. sit. y. Hypothesis and subhypotheses. This thesis hypothesizes, based on the variables listed above, the developing trends of the. io. er. path dependency of the cross-strait trade structure and the political economy of China’s. al. n. iv n C to a mutually-beneficial cross-strait tradehrelationship i U integration is pursued further. e n g c hif economic. provincial trade system, particularly the influence of endogenous protectionism, would not lead. In addition, this thesis identifies four sub-hypotheses based on its independent variables: First, it hypothesizes that a greater presence of taishang living and working in the local mainland economies has an overall positive effect on successful cross-strait integration. Second, it hypothesizes that provincial economies with large numbers of SOEs will engage in protectionist policies, stalling Taiwanese integration particularly to protect their own interests. Third, it assumes that any high endogenous trade barriers in the mainland economy will discourage crossstrait integration. Fourth, it hypothesizes that there is a limitation to how far Taiwanese investors are willing to locate their operations before it is deemed too costly or inefficient. That is to say, Taiwanese investors take geographic proximity and operating costs into account when considering economic integration. 14.

(22) Measuring success. In order to measure the success of this thesis several benchmarks must be established. Using the World Bank’s estimate for a regional average of 6.2 per cent growth this thesis will determine whether or not the parties studied, Taiwan, Guangdong, and Fujian, three of the AsiaPacific’s most robust and advanced economies are able to meet this criterion. This thesis has established four measurements that must be met. First, all parties should benefit from growing trade volume. Should trade decrease, integration under ECFA can be assumed to do harm. Second, both Taiwan and China would need to maintain healthy economic indicators. This measurement includes GDP growth, and strong performance among industrial sectors (primary, secondary, and tertiary production). Third, both parties must do their best to avoid creating. 政 治 大 ensure that no systemic shocks occur. Shocks may include phenomena such as industrial 立 hollowing out, or subsequent sector transformations.. asymmetrical conditions and actively avoid exploiting disadvantages. Finally, integration must. ‧ 國. 學. Research methodology. The focus of this research is to update the literature and explore current phenomena on. ‧. cross-strait integration. Its primary focus is on cross-strait integration in the “ECFA era,” and. y. Nat. looks at economic trends rather than government policy. Policy is provided as supplemental. io. sit. information if necessary, but in the course of conducting research it has been noticed more often. n. al. er. than not that cross-strait trade occurs despite and in spite of official policies. It has found that. i n U. v. economic forces and actors in nearly all cases disregard policies and restrictions, or find ways to work around them.. Ch. engchi. This research structures itself as a comparative literature review with quantitative data presented to help provide a solid understanding of cross-strait trends. Findings are largely qualitative because determinants of cross-strait integration tend to emphasize behavioral trends, therefore the majority of this work’s findings are derived from policy reports and academic papers. Additionally, due to the contemporary nature of this research, many sources cannot yet be found in journals or databases. It therefore relies on news reports, communiques, and press releases in order to identify current trends. Due to the peculiarities of Taiwan’s nature, acting as both a sovereign body in the Taiwanese narrative and as a local-level economy in the Chinese narrative, it is important to consider all cases herein studied as units of political-economies rather than as political bodies.. 15.

(23) The provinces of Guangdong and Fujian are the primary case studies used in this analysis. Their proximity to Taiwan, cultural linkages, and long history as investment locations from the earliest stages of opening and reform make them ideal. Sustained Taiwanese investment in these provinces and their gradual convergence with Taiwanese industry make them important cases in order to understand the greater trends Taiwanese business will likely face on the mainland in coming decades. As such, case studies on the mainland will often refer to only Guangdong and Fujian’s provincial figures and trends, though it is unavoidable to make references to the People’s Republic of China when discussing greater trends or policies. Hong Kong has been used as a minor case study due to the similarities of its Closer Economic Partnership Agreement (CEPA) and integration with that of Taiwan’s ECFA. The Pingtan Pilot. 政 治 大 aimed at facilitating deeper integration with Taiwan. 立. Free Trade Zone is given special examination due to its operation as a strategic special economy. ‧ 國. 學. Research limitations. This research runs into several limitations, primarily in accessing specific datasets from. ‧. mainland sources. China’s reports are notoriously delayed, and in many cases they do not present data in an orderly fashion. Some developments, particularly ECFA, are too recent to articulate. sit. y. Nat. quantifiable trends, and in other instances developments are too recent to give a full fair appraisal. Databases have been used when possible and qualitative reports have been used to fill. io. er. the gaps or supply supplemental data to help create a greater narrative. By looking at trends and. al. n. iv n C U often do not have standardized Taiwanese investment preferences. Taiwan h e nandg China c h i quite certain values it is possible to determine a fairly accurate picture of the development of. measurements for their reports, and qualitative terms for native industries on both sides of the. strait must be viewed with some understanding of exaggeration or inaccuracy in certain cases. Reports from China are inconsistent in their years reported, and most recent data reported in for some measurements vary by several years. Additionally, the language barrier in conducting this thesis adds limitations to the research being conducted. Organization of the Thesis. This thesis is organized as follows. Chapter II will introduce qualitative and quantitative findings regarding the political economies of China, with special attention given to the Provinces of Guangdong and Fujian. Development and incentive policies will be analyzed to gain an. 16.

(24) understanding of the mainland’s orientation towards integration. Chapter III looks at the political economy of Taiwan and its orientation toward integration. Attention is given to Taiwan’s primary economic actors, the taishang, and its small and medium enterprise-driven (SME) economy. Chapter IV explores findings related to cross-strait trade and current patterns of hollowing out. It explains how convergence is related to the development of today’s asymmetric trade flows. It then gives additional attention to the development of the Pingtan Pilot Free Trade Zone and the details of Hong Kong’s experience with integration with the People’s Republic of China (PRC, also referred to as the mainland, mainland China, or China) through CEPA. This thesis will then discuss the ramifications of integration under ECFA in Chapter V. Chapter VI will provide concluding remarks.. 立. 政 治 大. ‧. ‧ 國. 學. n. er. io. sit. y. Nat. al. Ch. engchi. 17. i n U. v.

(25) CHAPTER II.. FINDINGS:. CHINA Chinese incentives to attract Taiwanese FDI and ultimately integrate Taiwan’s economy occurs at a time when the PRC is attempting to push an internal shift in the economic structure. Taiwanese investment is incentivized for both internal and coastal locations. Internally the PRC seeks Taiwan to do what it had done in the coastal areas and join the coast as it transitions into inland investors. Dually, Beijing pursues integration at the coast and hopes Taiwan will continue to deepen its trade ties there. undisputable fact that the economies of the parties across the strait. 治 政 大PRC views integration as an end functioning and growing investment and trade structure. The goal of unification that can 立 provide benefits in the form of industrial investments and are becoming ever more intertwined with one another. Both parties seek progress in developing a. ‧ 國. 學. technological upgrading of its existing manufacturing structures from the more sophisticated Taiwan. For Taiwan integration is a double-edged sword. China provides a close and easy source. ‧. of manufacturing labor for its export-driven market, but it also has also weakened Taiwan’s hand over its own economics.. sit. y. Nat. China’s decentralization has left the central government ill-equipped to address fiscal. io. er. issues, demographic changes, and slowing national growth. Central spending has found itself needing to outpace its ability to collect revenue, driving the center into greater debt and deficit,. n. al. i n U. v. and often relying more and more upon a deficit model to sustain its activities giving the. Ch. engchi. provinces greater economic autonomy. By 1993 it had become apparent to the central government that additional reforms were necessary in order to address banks’ debts but local government opposition prevented the central government from adopting new fiscal systems,8 so the Chinese leaders recognized that continued international integration was the best option they had for driving reform programs.9. 8 9. Chen-yuan Tung, “China’s Fiscal Predicament,” 2003, pp. 25-53. Doug Guthrie, China and Globalization: The Social, Economic and Political Transformation of Chinese Society, 2006, p. 26.. 18.

(26) II.1 Economic Strategies of the People’s Republic of China Economic integration, The China narrative, & China’s “One China Market”. The People’s Republic of China (hereafter referred to as PRC, the mainland, or China) has long proposed “One Country, Two Systems” as a model for “Greater-China” integration. OCTS is a PRC-centric narrative aimed to fulfill Beijing’s nationalistic goals. China’s national narrative holds that Taiwan is an integral part of China and seeks its eventual reunification with the PRC. The PRC’s model has been rejected by Taipei since its proposal, however it has been applied fully for Hong Kong and Macau. China uses Taiwan’s separation from the mainland as an excuse for China’s domestic problems.. 政 治 大 in order to convince the leadership to play by their rules or otherwise suffer economic pain. 立. To coax Taiwan into its sphere of influence China applies economic pressure on Taiwan. Beijing does not always apply restraint on its cross-strait pressure however, and this oftentimes. ‧ 國. 學. emboldens the Taiwanese to seek other avenues. In some cases, China has harassed Taiwanese businesspeople on the mainland whose personal interests do not involve cooperation with China.. ‧. Harassment of pro-Democratic People’s Party (DPP) taishang during the presidency of the Taiwan’s Chen Shui-bian occurred often. The PRC would often engage in industrial sabotage. y. Nat. sit. and constantly threaten to enact policies that could disrupt Taiwanese economic activity,. al. er. io. including making overt gestures to the Taiwanese to disrupt stocks, communications systems,. n. and transportation, and to withhold business. 10 The PRC has set as one of its goals the. Ch. i n U. v. incorporation of Taiwan into its “One China Market” and has sought many different strategies to. engchi. integrate Taiwan. China often vetoes Taiwan’s attempts to engage in international trade agreements. Many times when Taiwan joins international organizations, the World Health Assembly for example, it is only because China has dropped its opposition. This has set a dangerous precedent for Taiwan’s lack of international agency and has created a dependence upon China in world affairs.11 Domestically the People’s Republic of China pursues active and passive strategies that often pursue greater provincial autonomy over economic pursuits. As mentioned above, although local economies fall under the aegis of central policies they are often free to pursue their own strategies for growth. The central government uses “macroeconomic tools” to enact regulations 10 11. Tanner, pp. 18-19. Robert Sutter, “Taiwan’s Future: Narrowing Straits,” 2011, p. 18.. 19.

(27) on market forces. Wang sites the single price systems for coal and oil as an example of such central regulations.12 On the other side, the autonomy over incentives to draw investments in the Pingtan Pilot Free Trade Zone, which will be examined later, is an example of further moves toward local economy. For the most part the central government’s role in the national Chinese economy has been limited to the Five-Year Plan system for growth along with incentive policies to encourage growth in targeted provinces and industrial sectors. Infrastructure projects have been used as drivers of growth in less developed regions where investment is believed to be a necessary driver.13 Beijing otherwise leaves the provinces to pursue their own growth models. National level initiatives. 治 政 大 such as pilot free trade zones sweeping national level initiatives for economic growth. Projects 立 (pilot FTZs, PFTZs) in coastal provinces highlight the emphasis placed on continuing economic. To achieve the goals set out in its Five-Year Plan, the central government pursues. ‧ 國. 學. growth. PFTZs now permit wholly foreign-owned enterprises to operate financial services and trade facilitation, and they act as entryways for ambitious trade programs such as the Asian. ‧. Infrastructure Investment Bank, the Eurasian Continental Bridge, One Belt One Road (OBOR), and the 21st Century Maritime Silk Road. Nat. sit. y. National economic policy has largely moved toward regional initiatives and growth. io. er. promotion. A policy of “general opening up” has been pursued that allows the initial market reforms and globalization links experiments from the 1980s to be applied throughout all of the. n. al. i n U. v. PRC’s 31 economies. While national economic policy officially trumps local policies, China has. Ch. engchi. allowed administration of economic matters to slide into provincial hands, further affirming economic decentralization. If China’s performance as a global factory is to be secured, more avenues for trade must be established to connect the nation with the global economy. Initiatives such as OBOR and the 21st Century Maritime Silk Road seek to establish new permanent networks between China and potential partners while enticing Taiwan to enjoy the benefits of the Chinese project.. 12 13. James C.F. Wang, Contemporary Chinese Politics: An Introduction, 2002, p. 309. See Bloomberg News, “China Regions Show Economies Differ as Slowdown Deepens,” 10 November 2014.. 20.

(28) Market reforms and growth. Taiwan’s participation in China’s market reforms has proven that Chinese central leaders today are responsible to provincial economic forces and actors. The “selectorate” within China’s authoritarian system are susceptible to the international influence of globalization Shirk and Kastner both identify that provincial officials are particularly influenced by globalization trends due to their “increasing stake in access to global markets”. 14 International economic interests play a much greater role in Chinese policy consideration and its reform process has been a global phenomenon. 15 Ming-Jer Chen is cautious to remind China-watchers that “the national government is not uniformly interested in all business activities” and that the central government still has specific “pillar” interest projects. China is still transitioning, and market forces in the. 政 治 大 under a communist party, and as 立a transitioning system it is still a perilous situation for foreign. PRC are a “myth.” Business is still driven by social-political concerns. The PRC is still socialist. businesses entering the economy. Navigation of the Chinese economy is not simple. Constant. ‧ 國. 學. changes create an unreliable long-term investment market which create a debate on whether or not China is a “lost cause.” China has had heavy clout, but the ratio of business success to failure. ‧. by the beginning of the 21st century was one-to-one by some estimates.16. y. Nat. Since its economic takeoff China has joined Taiwan in becoming a regional exporter of. sit. FDI. Wilson finds that since 2000 China’s outbound FDI has increased from “almost nothing” to. al. er. io. $90 billion in 2013. Taiwan, unfortunately is not a mutual recipient. China’s large state owned. n. enterprises and champions of industry cannot benefit from Taiwan’s significantly smaller. Ch. i n U. v. market, and thus are not interested in making investments across the strait.17 Taiwan, for its part,. engchi. blocks many different types of mainland-originating investments anyway. 11th and 12th Five Year Plans. China’s central 11th and 12th Five-Year Plans span the period of 2001 to 2010 and have sought to address China’s major developmental issues, mainly innovation-modernization and the rectification of regional disparity. These are enormous tasks that were facilitated partially thanks to the enormity of growth occurring within China at this period which could buoy many of these pursuits. It was the perfect combination of the right place and the right time. 14. Scott L. Kastner, Political Conflict and Economic Interdependence Across the Taiwan Strait and Beyond, 2009, pp. 25-26. Doug Guthrie, p. 330. 16 Ming-jer Chen, Inside Chinese Business: A Guide for Managers Worldwide, 2003, pp. 160-161, 172. 17 William T. Wilson, “Market Solutions Should Be Central to U.S.’s Taiwan Policy,” 1 August 2014, p. 8. 15. 21.

(29) The 11th Five-Year Plan (2006-2010) focused generally on improving the strength of the Chinese economy rather than the scale. With domestic trade, expanding the socialist market system, balancing the development of primary, secondary, and tertiary industries, increasing rural development, and focusing on domestic consumption and domestic demand as the key goals.18 The 11th Five-Year Plan marked a shift in China’s thinking about growth, placing an emphasis on innovation and domestic commerce and trade expansion rather than heavy reliance on international investment and industrial resource exploitation. At that time, Ma Kai, Minister of National Development and Reform Commission stated that the 11th Five-Year Plan acted as a “solution targeting at the irrational industrial structure of China” and called for growth based on innovation and conservation, stating that the success of reform and opening up was the “impetus. 政 治 大 The 12th Five-Year Plan (2011-2015) was oriented toward fostering the goals achieved in 立. of growth” for the promotion of greater reform-based growth throughout China.19. the previous plan while expanding their benefits throughout China. The new plan had more of a. ‧ 國. 學. focus on developing the same industrial structures in central and western China as the coastal provinces had enjoyed 20 and restructuring the economy to be more reliant upon domestic. ‧. consumption, as officials realized that “relying on Western consumer demand to sustain domestic growth is untenable.” 21 Modest when compared to previous plans, the key concept. y. Nat. sit. behind the 12th Five-Year Plan has been to transform China’s coastal economies from a “global. al. er. io. factory” role into consumers and providers of services, moving the “factory” inland. To a certain. n. degree the 12th Five-Year Plan has achieved many of its goals. Where it has fallen short is that. Ch. i n U. v. the interior provinces did not achieve “factory” levels that the coast had seen. It may also be. engchi. likely that its goals were achieved due to China’s reliance on market mechanisms rather than any incentives from the center. In fact, during this period China saw many low-sophistication manufacturing jobs leave the coastal provinces for other locations in the global supply chain. An article from McKinsey explains with one example: “The challenges for low-skill assemblers in Guangdong and Zhejiang are well documented. They are downsizing, as countries from Bangladesh to Kenya gain share.”22 China in general was becoming more expensive at this time.. See The State Council of The People’s Republic of China, “Key points of the 11th Five-Year Plan,” 7 March 2006, available at http://gov.cn/english/2006-03/07/content_246929.htm. 19 See Kai Ma, The National Development and Reform Commission of The People’s Republic of China, “The 11th Five-Year Plan: Targets, Paths and Policy Orientation,”19 March 2006, available at http://www.gov.cn./english/2006-03/23/content_234832.htm. 20 Christina Nelson, “Economic Development Policies for Central and Western China,” 1 November 2010. 21 See US-China Business Council, “China’s Priorities for the Next Five Years,” 1 July 2010. 22 Gordon Orr, “What could happen in China in 2015?,” December 2014. 18. 22.

(30) China’s coastal provinces, however, were able to establish themselves in the right place in the supply chain per the plan’s recommendations. The flight of low-tech manufacturing sectors from the coastal provinces at this time shifted the focus of their industrial structures into highersophistication manufacturing and services. China Slowing Down. Standing between China and its goals are a variety of economic factors that have led to China’s shrinking growth rate. While still impressive, growth numbers are well below the impressive double digits seen at the beginning of the century. At its peak China’s economic growth rate remained above 10% for five years starting in 2003, with it’s highest rate hitting 14.2. 治 政 大it has been on a backslide. The growth rate had risen to tap the 10% mark again. Since then 立 World Bank’s latest available measurement, 2014, places China’s growth rate at 7.3 per cent,. in 2007. Figures show that the global financial crisis did not impact China and as late as 2010 its. ‧ 國. 學. roughly half of what it had experienced a decade ago. Nevertheless, The World Bank places China’s 2014 GDP at US$10.35 trillion. 23 By comparison the United States’ GDP was. ‧. US$17.42 trillion.24. All provinces missed their economic targets in the first three quarters of 2014. Because of. Nat. sit. y. the different degrees to which provincial targets were missed the aggregate national growth rate was less noticeable than individual provincial rates. The real estate market in northeast China. io. n. al. er. collapsed that year with a “double digit drop” in development. The previous year the region had. i n U. v. had a real estate industry matching Indonesia.25 Inland locations were doing better comparatively. Ch. engchi. due to ongoing investments made to their infrastructure. What this slowdown highlights is that the central government is fine with allowing the market system run itself rather than artificially pumping growth into it. A Chinese report issued for Quarter 3 of 2015 indicated that Chinese growth rates were at 6.9 per cent, sending pundits and economists into a debate about the future of China’s growth, particularly whether China’s reporting over its stellar performance a decade earlier was entirely accurate.26 At the same time China’s economy has marked an impressive shift toward service industry orientation. A 2016 report indicated that for the first time the service industry made up See The World Bank, “China,” figures available at http://data.worldbank.org/country/china. See The World Bank, “United States,” figures available at http://data.worldbank.org/country/unitedstates. 25 Bloomberg News, “China Regions Show Economies Differ as Slowdown Deepens.” 26 Chris Devonshire-Ellis, “China’s GDP Growth – More Shocks Ahead,” in China Briefing, 26 October 2015. 23 24. 23.

(31) more than half of the economy, 50.5 per cent, up more than two points from 2014, while manufacturing dropped to 40.5 per cent.27 A recent report from China indicates its economy may be slowing down at an even greater rate. Investment has slowed down to a record low since 2000 prompting debt fears and worries that China will be able to even maintain the modest 6.5 per cent projected growth rate it expected to maintain for its “new normal.” Central planning had been oriented around this figure. The central government has been pumping stimulus money into the economy, but nowhere near the amounts from 2008’s crisis or the 1997 Asian financial crisis. Whether China will push for more rapid integration from Taiwan is yet to be seen but it may significantly impact the crossstrait investment dynamics.28. 政 治 大 moving China’s industry up the technology ladder, particularly in coastal provinces where 立 China cannot claim its rise due to its own momentum. Skyrocketing inbound FDI is 29. market and trade liberalization policies have been pursued with the greatest intensity. China’s. ‧ 國. 學. dependence upon FDI is now highlighting the issues that it had sought to address with the 12th Five-Year Plan, though the shift to domestic consumption and moving “factory China” inland. ‧. has not happened soon enough due to policy and market forces. The 13th Five-Year Plan, begun in March 2016, has placed an emphasis on consumption-led growth, highlighting that. y. Nat. sit. manufacturing growth is shrinking to what has been referred to as the “new normal.” 30 Proposed. al. er. io. reforms for the latest Five-Year Plan include reform of SOEs which the Chinese Communist. n. Party views as “bloated” and inefficient. Today SOEs provide China with 60 per cent of its. Ch. i n U. v. annual revenue and upwards of 150,000 SOEs are managed by local government and provincial. engchi. authorities.31 The Communist Party Central Committee and The State Council issued guidelines on their plans to develop a mixed ownership system over SOEs by 2020.32 Despite generating US$2.48 trillion in profits in 2014 the central authorities say SOEs are too inefficient and take up too many labor resources that could slow future potential growth.33 Reforms in 1992 and 1993 allowed SOEs to compete in a market economy, but these reforms have had negative side effects and have allowed harmful developments such as SOE Mark Magnier, “As Growth Slows, China Highlights Transition From Manufacturing to Service,” 19 January 2016. Kevin Yao and Elias Glenn, “China investment slows to 15-year low, more stimulus seen despite debt fears,” 13 June 2016. 29 Reid and Rigger, pp. 2-3. 30 See CCTV News, “Xi expounds on guideline for 13th Five-year Plan,” 3 Nov. 2015. 31 Alice De Jonge, “China’s grip still tight on state-owned enterprises,” 17 September 2015. 32 See Seewebnew, “CPC Central Committee and State Council issued the ‘Guidelines on Deepening the Reform of state-owned enterprises’,” 13 Sept. 2015, available at http://www.seewebnew.com/news-10533820.html. 33 Andrew Moody, “Dissecting China’s Five-Year Plan,” 23 November 2015. 27 28. 24.

(32) subsidiary systems to arise, often with incompetent or corrupt management (Wang 2002).34 A 2004 study on SOE workers’ attitudes toward their “organization citizenship” in the mainland found that on average SOE employees “expressed more interest in social welfare participation and showed less concern about taking initiatives, protecting enterprise properties and saving company resources.” Jin explains that this is an indicator of the low-priority for productivity that exists within Chinese SOE culture, and highlights the pressure that government-owned business places upon other government sectors. Workers in highly-innovative foreign-owned companies in China have a high-turnover rate, indicating that despite the high salaries, workers are more concerned with benefits than with productivity.35 This shows a tendency that the general attitude on the mainland is to allow overseas firms to foster sector and industry development while local. 政 治 大 China appears committed to its market reforms. Although the less developed and less 立. firms and SOEs provide social services.. market-oriented provinces are the targets of central development initiatives, Beijing has stuck to. ‧ 國. 學. its guns on permitting the more developed and market-oriented provinces to continue ahead with their economic autonomy. The recent negative market events are evidence that market forces are. ‧. at greater play in certain areas of China.. sit. y. Nat. Interior development initiatives. io. er. China has been facing an income disparity crisis over the past decade. Although the gap between the coast and inland regions has been increasing since the 1950s, in recent years the. n. al. i n U. v. growth of regional disparities has become a policy concern and has led the central government to. Ch. engchi. address a “co-ordinated regional policy.”36. The current economic strategy of the PRC is to allow market forces to drive provincial growth while guiding incentives for investment inland. China’s inland investment initiatives are not as successful in attracting overseas investment as is hoped. Taiwanese investment in the mainland highlights a global trend. Investors prefer to place FDI in areas of relatively cheap, high-sophisticated manufacturing which can benefit their overall high-sophistication output, such as the coastal provinces or diversifying investing elsewhere where the international division of labor can be taken advantage of and where labor is as cheap as the inner Chinese provinces with. 34. Wang, 2002, pp. 324-325. Putai Jin, “Worker Motivation During Changing Periods: The Role of Psychological Capital in China’s Economic Reform,” 2010, pp. 106-107. 36 Nicolaas Groenewold, et al., Linkages between China’s Regions: Measurement and Policy, 2008, pp. 1, 28. 35. 25.

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