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(1)The Emergence of The Chinese Economic. Area and The Implication for Regional. Economic Integration. Fu-Kuo Liu Associate Research Fellow. Institute of International Relations,. National- Chengchi University. ,. ". It.. This paper analyzes the newly emerging geopolitical concept of the "Chinese Economic Area" (CEA) on the assumption that there are industrial advantages to economic integration,1 and demonstrates that the process of economic integration has been driven by private enterprises' profit motives rather than governments' political motives. Defining the process of industrial integration therefore is the main focus here. Although the precise factors contributing to this part of regional economic integration are yet to be con­ firmed, industrial activities have undoubtedly been one of the major influ­ ences. The CEA's increasing intra-regional trade and investment flows are due to its diverse levels of development, notably based on mutual indus­ trial complementarities between China, Taiwan, and Hong Kong. This complementarity was made up of China's comprehensive, yet elementary, industrial ability, and affluence in land and work forces; Taiwan's tech­ nology, financial power, and manufacturing ability; and Hong Kong's international marketing skills. While businessmen, investors, and econo­ mists are looking closely at all intra-regional transaction flows and their implications for the economies as a whole, there has been an increasing focus on the industrial level of integration (Jones, et al., 1993; Kao, 1992; Stewart, 1993). For many people who live in the region, any programme for integration beyond the economic level is part of a more distant dream of Chinese national reunification. In the process of forming the CEA, any moves beyond mere business considerations may reflect political intentions, since Beijing is particularly eager, though not openly so, to project its own unifi­ cation perspective onto economic activities, a view to which Taipei is espe­ cially sensitive. On many occasions scholars, particularly from Taiwan and Hong Kong, have been very much concerned that this hidden political inten­ tion could hurt fledgling economic cooperation. One author boldly points out that Beijing tends to politicize all economic activities as if trade were an instrument of unification. The increasing flow of Taiwan investment to China has been seen as "a prelude to economic and political unification". L. 4S.

(2) 46. Chinese Political Science Review. (Alperowicz, 1993: 28). The CEA's actual devel~pment has been ins~i~ed for decades largely by business or market forces rather than by polttIcal . intentions, because of this political conflict Since the economies of Hong Kong, Taiwan and China complement each other well, intra-economy links and close economic relationships are already flourishing (Li, 1992:11). The network for economic cooperation, therefore, has already arisen and is quickly intensifying as a result of an "unstoppable tide" of trade crossing the Taiwan Strait (Baum, 1993). Al­ though in most of this research "economic integration" and "economic. coop­ eration" are sometimes interchangeable in terms of trade bloc formation of, the former is likely to be determined by "the intensity of relations between participating states and the manner in which those relations are organized and managed" (Laffan, 1992: 3). According to a recent study on the CEA's development, Hong Kong, Taiwan and China have already collectively formed an interdependent economy through trade, foreign direct investment, and financial flows (Jones, et aI, 1993). By and large, there has been regional industrial division of labor which is traditionally regarded as tantamount to the first stage of economic integration (Marer, and Montias, 1988: 156). Since this formation has so far been led by private sector profit seeking, in the years ahead a trans-party organisation will likely appear through business association links rather than political negotiation. Nevertheless, this should merely be treated as building the foundation for starting the economic inte­ gration process. According to Karl Deutsch, a "community" requires a certain transac­ tion volume to reach a "threshold" level before a group of countries can be considered to be at the inception stage of integration (Deutsch, 1954: 39). Although he was mainly concerned about political community formation, for which transaction volume is meaningful only in accordance with the establishment of transnational institutions, it is not implied that the applica­ tion of economic integration should be removed from the threshold require­ ments. What he did not clarify was the relationship between transaction volume and the threshold. However, the development of the CEA gives evidence of a different profile. To begin with, a certain threshold level for confirming integration is clearly necessary everywhere. It is yet to be proven that political involve­ ment is a necessary condition for transaction volume to lead to transnational institutions. There have been a large amount of transactions taking place within the CEA, but it seems unlikely that transnational institutions with governments' involvement will be determined by present transaction flows. This is not to suggest that, without clear schedules for creating transnational institutions, economic integratiori in the CEA will be blocked forever. With its different characteristics from the EC, in terms of the shape and integration process, the CEA is advancing towards its own particular form of integration. Economic development is driving similar economies to create. The Emergence of the Chinese Economic j. an integrated regional econom: to be answered. Why is pursu and necessary for its three eco "low" political activities buildil sphere of continued political integration imply? Is the CEP gration in accordance with n work?2 (Balassa, 1962). The Origins of 1. Fomented by ever great appearance of regional tradi~l forcing Asian Newly Industm ANICs and including Hong K realize that future business de' was, since their export-led eCI tional markets and free tradf neighbors on the basis of deve up to the competitive challen! concept of the CEA, which OJ ment, was initiated by academ: have attempted to develop a integration theory to regulate tween the economies. The listed concepts in 1 from Hong Kong and TaiwaJ ization, are coincidentally pre competition and industrial co tributing to industrial compl these ambiguous concepts see The incentives for regional : international competition, in( tional politics jointly providin! l. r \. vInternational Competition a,. Economically, unlike tl countries has been quite hete the OECD for decades, the A Philippines, and Thailand),3 ( Laos, and Cambodia) are stil to GDP per head in Table : extent, a mutual complemen.

(3) Chinese Political Science Review. The Emergence o/the Chinese Economic Area and It's Implication. devel~pment. has been inspired forces rather than by political. an integrated regional economy. Nevertheless, there are some questions left. to be answered. Why is pursuing economic integration in the CEA possible. and necessary for its three economies? How are economic transactions and. "low" political activities building up confidence in the CEA despite an atmo­. sphere of continued political hostility and tension? What will industrial. . integration imply? Is the CEA heading towards a process of economic inte­. gration in accordance with Bela Balassa's "conventional progress" frame­. work?2 (Balassa, 1962). Taiwan and China complement lose economic relationships are vork for economic cooperation, y intensifying as a result of an liwan Strait (Baum, 1993). AI­ tegration" and "economic coop­ ;rms of trade bloc formation of, .e intensity of relations between h those relations are organized to a recent study on the CEA's hina have already collectively trade, foreign direct investment, ld large, there has been regional lally regarded as tantamount to arer, and Montias, 1988: 156). private sector profit seeking, in ~ likely appear through business ttion. Nevertheless, this should for starting the economic inte­. lity" requires a certain transac­ )re a group of countries can be Itegration (Deutsch, 1954: 39). )olitical community formation, . only in accordance with the is not implied that the applica­ ed from the threshold require­ 'ationship between transaction. , gives evidence of a different el for confirming integration is proven that political involve­ 'olume to lead to transnational it of transactions taking place transnational institutions with by present transaction flows. ules for creating transnational rill be blocked forever. EC, in terms of the shape and vards its own particular form Ig similar economies to create. 47. The Origins of The "Chinese Economic Area". I•. Fomented by ever greater international competition in trade and the appearance of regional trading blocs, economic integration in this region is forcing Asian Newly Industrialised Countries (hereafter referred to as the ANICs and including Hong Kong, Singapore, Taiwan, and South Korea) to realize that future business development is not going to be as easy as it once was, since their export-led economies are heavily dependent upon interna­ tional markets and free trade. Through industrial cooperation with their neighbors on the basis of developmental complementarity, they seek to face up to the competitive challenge posed by international rivals. The evolving concept of the CEA, which originated in this context of economic develop­ ment, was initiated by academics from Hong Kong, Taiwan and China. They have attempted to develop a framework in accordance with conventional integration theory to regulate the rapid increase of business transactions be­ tween the economies. The listed concepts in Table 1, which were to a large extent derived from Hong Kong and Taiwan's wishful thinking about Chinese industrial­ ization, are coincidentally presented in the context of fierce international competition and industrial complementarity. As business transactions con­ tributing to industrial complementarity have intensified in recent years, these ambiguous concepts seem to have become more useful and accessible . The incentives for regional integration have tended to be external, with international competition, industrial restructuring, and changes in interna­ tional politics jointly providing a catalyst for regional economic integration. Vlnternational Competition and The Context for Integration in East Asia Economically, unlike the EC, the development of the West Pacific countries has been quite heterogeneous. While Japan has been a member of the OECD for decades, the ANICs, ASEAN countries (Indonesia, Malaysia, Philippines, and Thailand),3 China, and the Indo-China countries (Vietnam, Laos, and Cambodia) are still among the list of developing countries (refer to GDP per head in Table 2). However, their economies enjoy, to some extent, a mutual complementarity in terms of their industrial development.

(4) The Emergence ofthe Chinese Economic Area. Chinese Political Science Review. Table 1. Tbe Evolution of The Chinese Economic Area The Chinese International Community 1980 C. L. Huang (HK) The Chinese Economic Community 1987· K. Y. Chen Chinese Sphere (Asian Research Centre, HK U.) 1988 C. Y. Cheng Greater China Common Market (Asian Studies Committee, Ball U., Indiana, USA) China Economic Sphere 1988 I. T. Chen (Taiwan Research Institute, China Academy of Social Science, Beijing) 1988 H. C. Kao Asian Chinese Common Market (Global Views Magazine, Taiwan) 1989 H. S. Zhin Economic Sphere for Both Sides of the Taiwan Strait (Asia-Pacific Economic Research Institute, Fujian Academy of Social Science, China) 1989 F. G. Chou Southeast Cnina Free Tree Area (Southeast Information Centre, HK) Southern China Economic Sphere 1990 C. S. Wong S. P. Hsu South China Economic Collaboration Area (Taiwan Research Institute, Xiamen U., Fujian) 1991 C. C. Lee China Economic Sphere Chinese and Hong Kong Economic Sphere C. H. Chiu Economic China 1992 H. C. Kao Source: l.Economic Daily News (June 21, 1992). 2.Kuo Gi Ging Gih Ching Shih Chou Boa (International Economic Trend Weekly) 977, pp. 9-10. 3.Ging Gih Chien Zhan (Economic Outlook) 7: 4 (September 1992), pp. 10-19.. !, I. Table 2. East Asian Countries' 1995 Per-capita GDP in Four Groups (in US$) 21,350. Singapore Hong Kong Taiwan South Korea. 21,493 23,080 13,235 10,534. Malaysia Thailand Philippines Indonesia. 8,763 6,870 2,800 3,690. China 2,660 North Korea 2,000* Cambodia 1,266 Vietnam 1,263. Note: *North Korea's was in 1990. Source: Based on UNDP information, see "Survey: Asia," The Economist, ( October 30. 1993), p. 6; Asiaweek (May 31, 1996), p. 67.. structures, which make different s Japan, the most highly develope( technologies which its neighbourin Japan needs, and is desperately sl and basic labour forces which t abundance. One has to understand that t the main incentive for regional int development, there are the ANI( been enriched by capital and tecb high-technology industries, durin~ 75-79). At the bottom, ASEAN trlally through the same process labour-intensive and low-technol< did in the 1960s and 1970s.5 An international division throughout East Asia in the past f. division of labor is emerging amo as China. For example, Japanes consumer electronics manufactur, parts are produced through an j the ANICs and ASEAN countrie between Japan's manufacturing I materials is becoming less pror labour, the vertical division of 1; duction process which combine downstream, manufacturing, ind terised not only by different level variety of industrial structures a more, the different levels of tech for further industrial cooperatic zontal division of labor in East A between manufactured products labour, even Japan has increase( electrical machinery by intra-fil Corporations (TNCs), parent fi economies (Drobnick, 1992: 22 between different products wi horizontal division of labor, e.g. industry, electronic parts in the auto industry. Thirdly, there i the same kind of manufactured e.g. the ANICs and Japan in p simple designs and the latter witl. I I I. r. r. 1.

(5) The Emergence ofthe Chinese Economic Area and It's Implication. Chinese Political Science Review. omic Area tional Community. lie Community. Ion Market. ndiana, USA). ere. :ademy of Social Science,. IOn Market. Both Sides of the Taiwan. titute, Fujian Academy of. : Tree Area. omic Sphere. ic Collaboration Area. J., Fujian). ~re. )fig Economic Sphere. I. Itional Economic Trend Weekly). I. i (September 1992), pp. 10-19.. GDP in Four Groups (in 8,763 6,870 2,800 3,690. China 2,660 North Korea 2,000* Cambodia 1,266 Vietnam 1,263. " The Economist, ( October 30.. 41). structures, which make different sorts of division of labor possible. In fact, Japan, the most highly developed economy, possesses the most advanced technologies which its neighbouring countries are especially thirsty for. What Japan needs, and is desperately short of, is raw materials, overseas markets and basic labour forces which these other regional countries possess in abundance. One has to understand that the practical advantages of cooperation are the main incentive for regional integration. At the middle level of economic development, there are the ANlCs, whose industrial structures have already been enriched by capital and technology-intensive industries and even some high-technology industries, during the 198084 (Chowdhury, and Islam, 1993: 75-79). At the bottom, ASEAN countries and China are catching up indus­ trially through the same process of moving from resource-based exports to labour-intensive and low-technology manufacturing industries, as the ANICs did in the 1960s and 1970s.5 An international division of labor has therefore been established throughout East Asia in the past few decades. A new model for the horizontal division of labor is emerging among Japan, the ANICs, and ASEAN, as well as China. For example, Japanese automakers Toyota and Mitsubishi and consumer electronics manufacturer, Matsushita have set up systems in which parts are produced through an international division of labor right across the ANICs and ASEAN countries. The traditional vertical division of labor between Japan's manufacturing products and other regional economies' raw materials is becoming less prominent (Unlike the horizontal division of labour, the vertical division of labour refers industrial cooperation to pro­ duction process which combines upstream, obtaining raw materials with downstream, manufacturing, industrial operation.). This model is charac­ terised not only by different levels of economic development, but also by the variety of industrial structures amongst the regional economies. Further­ more, the different levels of technological development offer a good reason for further industrial cooperation. There have been three types of hori­ zontal division of labor in East Asia so far. Firstly, there is a division of trade between manufactured products. Unlike the previous vertical division of labour, even Japan has increased its imports of manufactured goods largely electrical machinery by intra-firm trade between Japanese Transnational Corporations (TNCs), parent firms, and their affiliates in other regional economies (Drobnick, 1992: 22). Secondly, there is a division of trade between different products within the same industry, an inter-industry horizontal division of labor, e.g. trade between yarn and fabric in the textile industry, electronic parts in the electronics industry, and spare parts in the auto industry. Thirdly, there is the horizontal division of labor between the same kind of manufactured products with different factor combinations, e.g. the ANICs and Japan in producing video equipment, the former with simple designs and the latter with more advanced ones (Shi Chun Li, 1990: 22)..

(6) 50. The Emergence of the Chinese. Chinese Political Science Review. Overall economic development and industrial structures in East Asia have been ,:idely seen as a "flying geese" pattern (where industrial laggards follow 10 the footsteps of the industrialleaders)6 (Okita, 1991: 25-37; Joseph Romm, 1992; Steve Chan, 1990: 41). While Japan leads the international division of labor in East Asia, the ANICs and the rest of the regional econo­ mies are more or less tied into the regional industrial structure. Conse­ quently, it seems that the emergence of regional economic integration is the preferable outcome of the rapid developing industrial division of labor in East Asia. The Johnsonian approach, one of the traditional approaches to regional economic integration, believes that the motive for integration between smaller economies and developing countries is derived from integrating members' collective objectives.7 The most obvious of these is "a collective desire for industrialization" (Joseph C. Brada, and Jos, A. M. ndez, 1993: 187). Basically, regional economic integration is a vehicle by which members of a region may collectively tackle obstacles to economic development and thereby increase their collective well-being. But why should they work to­ gether? The answer lies with the similarity of developmental experience and with the international division of labour which ties up the industrial bases of member states into a more effective and stronger economy. In terms of the TNCs, Japanese companies have maintained the head­ qu~rters of their businesses in Japan itself, manufactured components in TaIwan, and assembled products in Malaysia or Thailand. As part of their global strategy, Japanese Hitachi and Sanyo have established on interna­ tional .network .for ~heir ?ivision of labour by improving the technology level of theIr operation 10 TaIwan and moving assembly operations from Taiwan to Mal~ysia (Higashi and Lanter, 1990: 344). In other cases, Japanese compames have gone to Taiwan for components which are produced by Taiwanese manufacturers in China or Southeast Asia. For example, the pr~curement. of Cyclepress, the Japanese bicycle industry giant, from !alwan .fo~ bIcycles and components valued at ¥ 20 billion (Japanese Yen) 10 1993 IS 10 the context of Taiwan's industrial division of labor, i.e. "Taiwan taking orders, China producing and exporting to Japan"s (Central Daily News, ~6 August, 1993). Originally equipped with Japanese capital goods, the TaIwanese also possess a rich and experienced OEM (Original Equip­ ment Manufacturer)-oriented infrastructure9 that "is remarkably adaptable to changes in worldwide demands" (Importing from Taiwan, 1989: 43, 52-57). . ~or. the same reasons, the Japanese through Hong Kong, either via Subsldlanes or agents, have invested in China, improving industrialisation in the region and also establishing an international division of labour. For example, C. Itoh & Co. Ltd., an investment bank co-funded by Japanese, and Mo~gan Stanl~~ Groups, an American securities firm, decided in May 1993 to IOvest 1 bIlhon Japanese Yen in Chinese Strategic Investment Co., an Indonesian overseas Chinese enterprise in Hong Kong, in order to access. > r. r I. ,. r i. the Chinese market. , China through overse companies with mach: industrial division of 1 Japanese have been a competitiveness agair China pattern, Mitch( being drawn into a (Bernard, 1991: 365). Upgrading tech to raw materials an country or an industr technology-intensive industries, has been Recently, internation including Philips, M Machines (IBM), ha' Kong, Taiwan, and CI News, November 13, the need for industr: existing production 1 economies in markel strategic alliances. Against this bal integration by tying t ing extent setting ul Japanese involvemer South Korea have de regional economy wi technology, and expe the manufacturing b( the United States. l\ Southeast Asia and l investors in the regio just as Japan was in t1 All the ANICs commonly handicapi resulted in their cu: industries, while Ch abundance of labm sectors. With the ex! as the main labour looking to gain com has resulted in the I.

(7) The Emergence ofthe Chinese Economic Area and It's Implication. Chinese Political Science Review. rial structures in East Asia have ttern (where industrial laggards lers)6 (Okita, 1991: 25-37; Joseph ile Japan leads the international nd the rest of the regional econo­ nal industrial structure. Conse­ ~ional economic integration is the Ig industrial division of labor in. :raditional approaches to regional motive for integration between ries is derived from integrating obvious of these is "a collective .a, and Jos, A. M. ndez, 1993: 187). a vehicle by which members of a to economic development and . But why should they work to­ of developmental experience and ich ties up the industrial bases of mger economy. tanies have maintained the head­ If, manufactured components in ia or Thailand. As part of their yo have established on interna­ y improving the technology level ssembly operations from Taiwan ~44). In other cases, Japanese )onents which are produced by Ltheast Asia. For example, the e bicycle industry giant, from :J at ¥ 20 billion (Japanese Yen) ial division of labor, i.e. "Taiwan ting to Japan"s (Central Daily ted with Japanese capital goods, ~rienced OEM (Original Equip­ 9 that "is remarkably adaptable Ig from Taiwan, 1989: 43, 52-57). through Hong Kong, either via La, improving industrialisation in lational division of labour. For It bank co-funded by Japanese, securities firm, decided in May linese Strategic Investment Co., n Hong Kong, in order to access. ~. 51. the Chinese market. According to C.Itoh & Co. Ltd., the strategy to access China through overseas Chinese was to supply some 180 Chinese national companies with machines and raw materials in order to tie them into their industrial division of labour (Mou Yi Kuai Shuen,1993). In these ways, the Japanese have been able to cut their costs of production and increase their competitiveness against Western competitors. Through this Japan-Taiwan­ China pattern, Mitchell Bernard notes, "Other parts of Asia are increasingly being drawn into a hierarchical network of production and exchange" (Bernard, 1991: 365). Upgrading technology, expanding market shares and managing access to raw materials are always the basis of restructuring industry within a country or an industry itself. But, a new wave of severe competition in some technology-intensive industries, such as electronics, electrical, and computer industries, has been pushing economies towards industrial integration. lO Recently, internationally recognized computer and information companies including Philips, Microsoft, Hewlett-Packard, and International Business Machines (IBM), have been trying to integrate related industries in Hong Kong, Taiwan, and China into their "Greater China" operation (Central Daily News, November 13, 1992). On the supply side, the competition has aroused the need for industries either to cut production costs or to upgrade their existing production technology. On the demand side, the need for scale economies in marketing networks has forced industries undertake various strategic alliances. Against this background, East Asia is entering a new era of economic integration by tying up capital, resources, and manpower, and to an increas­ ing extent setting up an outward macroeconomic policy. In addition to Japanese involvement in the region, Singapore, Taiwan, Hong Kong, and South Korea have decisively contributed since the mid-1980s to the booming regional economy with their massive inflows of inward investment, mature technology, and experienced management. Taiwan, for example, used to be the manufacturing base for Japanese companies through OEM exporting to the United States. Now, with most of its OEM manufacturers moving to Southeast Asia and China, Taiwan has become not only one of the biggest investors in the region but also a capital- and technology- intensive economy, just as Japan was in the 1970s. All the ANICs - Hong Kong, Taiwan, Korea, and Singapore are commonly handicapped by high wages and a shortage of labour which have resulted in their current economic problems, notably in labour-intensive industries, while China and the countries of Indo-China possess a super­ abundance of labour derived mostly from liberalizing their agricultural sectors. With the existing complementary labour markets, China has served as the main labour supplier for neighbouring ANICs manufacturers in looking to gain competitiveness in related labour-intensive industries. This has resulted in the relocation of ANICs manufacturers to China. Even so,.

(8) S2. Chinese Political Science Review. The Emergence ofthe Chinese Economic t. over the past few years, China has exported some of its excess labour abroad, some even through Korean enterprises (Beijing Review, September 13-19, 1993: 28). According to information collected in April 1992, there were 4,000 migrant workers from Mainland China working in Japan and another 25,000 working in Hong Kong (Far Eastern Economic Review, April 2, 1992: 21). In late June 1993, the number of Chinese working abroad hit 148,000 (Beijing Review, August 16-22, 1993: 29). It is said that a great number of illegal emigrants from China have been working in neighbouring countries, Le. South Korea (The Economist, November 20, 1993: 86, 89) and Taiwan. As economic transactions are intensified in the CEA, the trend of exchanging personnel, workers, technicians, scientists, scholars, between China, Taiwan and' Hong Kong, is set to rise rapidly. Over the last few decades, Taiwan has accumulated huge capital reserves from export earnings and fast-expanding trade with all major economies. Taiwan's Japanese manufacturing base, which led to a Japanese dominated "Japan-Taiwan­ USA" trade relationship during the 1960s and 1970s, has been diluted and foreign investment and industrial production exports to other regional developing economies have shaped Taiwan's leading role in a new "Taiwan­ China-USA" trade pattern. The story of Taiwan's manufacturing base moving to China is similar to Hong Kong's. On the one hand, it has sought to cut production costs in order to increase competitiveness. On the other hand, it has sought to share China's trade preferences - Most Favoured Nation (MFN) , General System Preferences (GSP), and quotas - in developed markets, so as to cir­ cumvent possible protectionist obstacles. However, evidence has emerged of an American investigation into its trade deficit with China. Over the period 1987 - 1991, the US trade deficit with China increased sharply, while its trade deficit with Taiwan and Hong Kong had decreased (Table 5). This clearly implies a large scale transfer of manufacturing from Hong Kong and Taiwan to South China (Harding, 1992: 22). In other words, in the Hong. Table 5. The US trade defici billion). I. I. r. Table 4. The "Taiwan-China-USA" pattern of trade. Taiwan China USA. capital, technology, management OEM, labour-intensive manufacturing, GSP export market. 1987 3.4 18.9 6.5. 19~. 3 12 4. Source: Department of Commerce, 1. f. I. r. r. Table 3. The"Japan-Taiwan-USA" pattern of trade. Japan =: capital, technology, management, marketing Taiwan :::: OEM, labour-intensive manufacturing, GSP USA export market. US with China US with Taiwan US with H K. r. Kong government's own estill China's MFN status, "the terri trade, up to $2 billion in income 14). Above all, China's huge J ducers to take up Chinese bran China's market is large enough attempts to establish its own 1 Shing Shoes Co., Y. K. Chen, ] shoes made in Taiwan, he is brand name away from an OE1\ 1993:8). The Chairman of the this view: "You cannot allow . bringing a new brand name to t expand production and mark (Commonwealth, March 1, 19~ as yet untapped economic p within the CEA seem likely. Restructuring industries and oS opportunities. In spite of the the booming trade flow betwe nomic cooperation. While 1 trade" mostly via Hong Kong, China in July 1997, has been unification," whether intentiOl proximity to China, has long b nology for China's closed c recognised as a financier, tradi ment centre for China. Burns Revolution era. Moreover, H< cial expertise, a well-develop importantly, proximity to ChiI to China and Southeast Asia Trade Department has summ.

(9) Chinese Political Science Review. The Emergence ofthe Chinese Economic Area and It's Implication. (ported some of its excess labour !rprises (Beijing Review, September ttion collected in April 1992, there tland China working in Japan and g (Far Eastern Economic Review, number of Chinese working abroad 2, 1993: 29). It is said that a great have been working in neighbouring list, November 20, 1993: 86,89) and ntensified in the CEA, the trend of ~ians, scientists, scholars, between to rise rapidly. Over the last few ipital reserves from export earnings or economies. Taiwan's Japanese panese dominated "Japan-Taiwan­ )s and 1970s, has been diluted and luction exports to other regional m's leading role in a new "Taiwan­. Table 5. The US trade deficit with China, Taiwan, and Hong Kong ($ billion) US with China US with Taiwan US with H K. I. nent, marketing lfacturing, GSP. ern of trade. 1ent lfacturing, GSP. 1987 1988 1989 1990 1991 1992 1993 1994 3.4 3.5 6.2 10.4 12.7 18.9 12.6 13.0 11.1 9.9 6.5 4.6 3.5 2.7 1.1. Soaree: Department of Commerce, USA, 1992.. 19 base moving to China is similar .s sought to cut production costs in the other hand, it has sought to Favoured Nation (MFN) , General in developed markets, so as to cirHowever, evidence has emerged ide deficit with China. Over the ith China increased sharply, while )ng had decreased (Table 5). This manufacturing from Hong Kong ~: 22). In other words, in the Hong. tern of trade. 53. t. Kong government's own estimation, if the United States were to revoke China's MFN status, "the territory would lose up to $15.7 billion in overall trade, up to $2 billion in income, and as many as 60,000 jobs" (Balinger, 1992: 14). Above all, China's huge market potential is encouraging Taiwan's pro­ ducers to take up Chinese brand names in international markets. The size of China's market is large enough to support Taiwan's industrial production as it attempts to establish its own reputation. For instance, the owner of Shin­ Shing Shoes Co., Y. K. Chen, has stated that with China's market favouring shoes made in Taiwan, he is sufficiently confident in establishing his own brand name away from an OEM position (Central Daily News, September 10, 1993:8). The Chairman of the Fu-Ta Umbrella Co., T. F. Chen, also shares this view: "You cannot allow your turnover to be decreased at the time of bringing a new brand name to the market. So, the only way forward here is to expand production and market shares through manufacturing in China" (Commonwealth, March 1, 1992:40). These developments suggest that with as yet untapped economic potential, further moves toward integration within the CEA seem likely. Restructuring industries and strengthening competitiveness through market opportunities. In spite of the political hostility between Beijing and Taipei, the booming trade flow between China and Taiwan is prompting moreeco­ nomic cooperation. While Taiwan and China are carrying out "indirect trade" mostly via Hong Kong, the British colony, which will be returned to China in July 1997, has been tied into the network of Chinese "economic unification," whether intentionally Qr not. Hong Kong, with its geographic proximity to China, has long been an outlet for capital, know-how and tech­ nology for China's closed economy (Hong Kong has been generally recognised as a financier, trading partner, middleman, facilitator, and invest­ ment centre for China. Bums, 1993: 29), even during the turbulent Cultural Revolution era. Moreover, Hong Kong, an entrepot with outstanding finan­ cial expertise, a well-developed communications infrastructure and, most importantly, proximity to China, serves as a launch pad for foreign investors to China and Southeast Asia. Accordingly, the Hong Kong Government Trade Department has summarized seven important facts in its relation to.

(10) Chinese Political Science Review. The Emergence of the Chinese Econc. China: "Hong Kong and China are each other's No.1 trading partner; China is a market for Hong Kong goods; China is a base for outward processing activities; Hong Kong is an important market for Chinese goods, an im­ portant entrepot for China, an important location for Chinese interests, and the largest investor in China" (Hong Kong Government Trade Department, ! 1993). The Japanese have been eyeing Hong Kong's economic links with China, as more than a quarter of Japan's exports to China have been chan­ nelled through Hong Kong (Far Eastern Economic Review, June 28, 1990: 70). Hong Kong's ties to China's economic power house, Guangdong Province, are even more impressive: an investment of US$17 billion in the province, , control of 30,000 enterprises, and employment of three million workers I (Walsh, 1994: 35). Many foreign investors are using Hong Kong's stock market as a way into China, because "it has more listed companies than any other stock market in the world involved in China, the region's fastest growing economy" (Holberton and Harverson, 1993: 19). Above all, many Hong Kong companies with exposure to the Chinese economy have been targets for investors, such as China Light & Power, Hong Kong Telecom, Hong Kong Electric, and HSBC Holdings. Even its business characteristics express its willingness and availability in being a bridge between China and • the rest of the world. For instance, the Chairman of Whad (Holdings) Ltd., Peter K. C. Woo, said:. t r. !I. i,. .(. "With the continued integration of the economies of China and Hong Kong, Wharf intends to act as a bridge to develop business between its mainland Chinese partners and business associates from other parts of the world" (1992 Report, The Wharf Ltd).. Since Beijing's 'open door' policy was announced in 1979, the first wave of Hong Kong investment, mainly led by small and medium enterprises, has poured into nearby Guangdong, and Fujian Provinces. Not only have Hong Kong businessmen swarmed to find manufacturing bases in China, but other investors, including Japan, America, and Taiwan (at a later date), have been flocking there in search of low cost production. They have brought their management expertise and marketing experience in lower level technology as well as labour-intensive industries which could hardly survive at home (where they were once called "sunset industries"). Examples are toys, textiles, umbrellas, consumer electronic components, dyes, and foot wear. Hong Kong's advantages for China. As far as Hong Kong businessmen are concerned, booming Chinese investment means high profits, the survival of their sunset industries, and circumvention of American trade protection. According to analysts on the Hong Kong stock market, many companies have more than one manufacturing base in China and can normally expect payback from investment in only two to three years (Hong Kong Economic. Daily, September 28,1991) managing director of Johm turers of micro-motors, sai( "many times over" and reve: had been 20 percent over investors believe that thest effects of scale economies dt investors are normally able smaller amount of capital 1 and the larger market tend of production in order to China's prospect as a hi~ Kong's continuing prospeJ China, Hong Kong's bush: industrialization in accord economic groups. While China's "Open ment, most of Hong Kon~ namely soaring wage and If labour (Aoki, and Ohashi, China's less developed eCl cheap labour, but lacks d expertise for which Hong have begun an unpreceden industrial division of labour. "(Hong Kong ent their Western customer. territory simply ran ou clothing, and other labo low-cost labour pool be~ at first, then with growin. Gradually, Hong Kor Some listed companies wt computer hard disks, and t, China (Hong Kong Econo large amounts of capital t According to the Chinese eration, foreign investment the period 1979-1992, abo biggest investment sources In 1992 alone, Hong Kong' of China's total US$11.3 bi.

(11) Chinese Political Science Review. The Emergence ofthe Chinese Economic Area and It's Implication. other's No. 1 trading partner; China na is a base for outward processing market for Chinese goods, an im­ It location for Chinese interests, and mg Government Trade Department,. Hong Kong's economic links with 's exports to China have been chan­ t;;conomic Review, June 28, 1990: 70). power house, Guangdong Province, It of US$17 billion in the province, )loyment of three million workers tors are using Hong Kong's stock has more listed companies than any ved in China, the region's fastest lerson, 1993: 19). Above all, many J the Chinese economy have been 1t & Power, Hong Kong Telecom, :s. Even its business characteristics being a bridge between China and :hairman of Wharf (Holdings) Ltd.,. of the economies of China and Honl develop business between its mainland ; from other parts of the world" (1992. ~. ,. s announced in 1979, the first wave ;mall and medium enterprises, has n Provinces. Not only have Hong 'acturing bases in China, but other 'aiwan (at a later date), have been uction. They have brought their erience 'in lower level technology :::h could hardly survive at home ldustries"). Examples are toys, Iponents, dyes, and foot wear. far as Hong Kong businessmen. It means high profits, the survival. m of American trade protection.. stock market, many companies. , China and can normally expect. 'ee years (Hong Kong Economic. ,\. ~. L. S5. Daily, September 28,1991). One successful businessman, Patrick Wang, the managing director of Johnson Electric, one of the world's leading manufac­ turers of micro-motors, said that his investment in China has been paid back "many times over" and revealed that Johnson's post-tax return on investment had been 20 percent over the last few years (Holberton, 1993: 3). Many investors believe that these high profits have been earned largely from the effects of scale economies derived from China's huge market. In China, foreign investors are normally able to expand their businesses to a larger scale with a smaller amount of capital than in Hong Kong. Low cost production factors and the larger market tend to encourage producers to go for a larger volume of production in order to ensure a stable market share. For Hong Kong, China's prospect as a highly industrialized environment supports Hong Kong's continuing prosperity, and more importantly, future stability. For China, Hong Kong's business efforts are accelerating its progress towards industrialization in accordance with the emerging massive and booming economic groups. While China's "Open Door" policy accelerated its economic develop­ ment, most of Hong Kong's industries were suffering the "NICs disease," namely soaring wage and rent costs, and, more seriously, a severe shortage of labour (Aoki, and Ohashi, 1992: 27). In terms of economic development, China's less developed economy has plenty of land and almost limitless, cheap labour, but lacks the capital, management and applied technology expertise for which Hong Kong is renowned. Both economies, therefore, have begun an unprecedented process of economic cooperation through an industrial division of labour and complementary economies in which: "(Hong Kong entrepreneurs) brought their capital, their know-how, and their Western customers. Their motives were straightforward: the tiny British territory simply ran out of enough workers to make all the toys, cameras, clothing, and other labour-intensive products the West wanted to buy. When a low-cost labour pool became available across the border, they tapped it, slowly at first, then with growing enthusiasm." (Worthy, 1992: 34). Gradually, Hong Kong industrialists have moved production to China. Some listed companies which produce stereos, televisions and accessories, computer hard disks, and toys, have completely relocated their operations in China (Hong Kong Economic Daily, 28 September, 1991). As a result, the large amounts of capital that China has been longing for have flowed in. According to the Chinese Ministry of Foreign Trade and Economic Coop­ eration, foreign investment in China totaled US$37 billion (utilized value) in the period 1979-1992, about $21.2 billion of which was contributed by the biggest investment sources from Hong Kong and Macao (Holberton, 1993). In 1992 alone, Hong Kong's investment in China accounted for 68.3 per cent of China's total US$II.3 billion utilized foreign direct investment ll (Financial.

(12) 56. The Emergence of the Chirn. Chinese Political Science Review. Times, July 7, 1993: 3; Financial Times, August 5, 1993: 15; The Economist, April 16, 1994: 103). Up to early 1994, Hong Kong had accounted for 64 per cent of the US$135 billion committed to China ventures since 1979 (Walsh:1994; Hong Kong and Macao account for US$147.27 billion out of $216.91 billion all contracted investment in China. See Financial Times, May 20, 1994: 7). Hong Kong investment in industrial manufacturing in China alone accounted for about a quarter of HK$I00 billion by 1993 (Simon Davies, 1993: 4). It was this investment and accelerated industrialization that made Southern China and Hong Kong into a borderless economic area. One economic survey stated: "The most striking element of the Dengist reforms is their extraordinary dependence on foreign trade and foreign investment as engines of development" (The Economist Year Book 1993: 155). The part China plays in this economic interdependence is as a manufac­ turing base, while Hong Kong supplies management, marketing, technology, and, above all else, capital and finance. In addition, although China's prefe.­ ential trading status is subject to political quarrels with the US over human rights performance (Awanohara, 1994a: 56-57; Goldstein, 1994: 51-52; Awanohara, 1994b: 18-20; and Business Week, April 18, 1994: 14-15), its enjoyment of GSP and MFN has persuaded manufacturers from Hong Kong and Taiwan to "shelter" in China, e.g. using China's export quotas in the case of textiles and garments (Economic and Social Commission for Asia and Pacific, United Nations, 1993: 64). Erstwhile sunset industries from Taiwan and Hong Kong, most notably dyes, umbrellas, foot wear, and electronics, have been revived in this way and are becoming stronger and more com­ petitive. Subsequently, bigger firms have followed suit, bringing about a further wave of investment. More recently, with a more promising policy announced for preferential access to markets and profits, the Chinese authorities have favoured foreign direct investment in infrastructure. This sort of investment symbolizes business confidence in China's economic future, e.g. Hopewell's superhighway project, Wharf's power station and road (Haragreaves, and Holberton, 1993: 19; Shin Pao, December 16, 1992), and Hutchison Wbampoa's US$1.1 billion container terminal project for Shang­ hai (Goldstein, 1992b: 60). Hong Kong accounts for over 80 per cent of foreign investment and trade in Pearl River Delta, the most prosperous part of Guangdong (Worthy, 1992: 35), and is the biggest investor in China as a whole, though some uncalculated investment flows have been redirected from China itself via Hong Kong agents back to China12 (Serrill, 1993: 38). In return, Chinese firms mostly from Guangdong, which are at the moment the leading investors in Hong Kong, have invested in various sectors - mainly tertiary industries, real estate and financial services. Mainland Chinese investment in Hong Kong was up from US$12 billion in 1991 and $15 billion in 1992 to $18 billion in 1993 (figures show only the first six months of 1993). Moreover, Chinese "hot money" deposited in Hong Kong banks was also up from US$4. r r. r. rI. billion in 1990 to ne ment and deposit fil 1992, Chinese firms have estimated that t 1997 (Far Eastern E. Hong Kong and Taj over Hong Kong a control. Indeed, Ch in the last few yeal smoothly, but also: munity of its persiste One of the "sp cerned is the rise of tion here created f: about exchanges of simple economic COl ago, manufacturers colony and none in , about 700,000. Bu 30,000 factories in G tionship, without dr. and the deepening a and Hong Kong tod: tion, they are alread~ Taiwanese Indl Nationalist governn with China; since t Because of the onl businessmen on bot other via a third pa increased, Hong K( Since most of Taiv through Hong Kon! flowing into Hong Company Ltd). T political impasse T ensure policy flexib economy from bec 1993: 20). Second munity for trade wi prises, have set up to conduct busines suit. For example, manufacturers, has. r. ri. I.

(13) Chinese Political Science Review. 5, 1993: 15; The Economist, Kong had accounted for 64 China ventures since 1979 )r US$147.27 billion out of :l. See Financial Times, May ial manufacturing in China 00 billion by 1993 (Simon lccelerated industrialization a borderless economic area. ng element of the Dengist foreign trade and foreign omist Year Book 1993: 155). lependence is as a manufac­ ent, marketing, technology, >0, although China's prefer­ Is with the US over human 7; Goldstein, 1994: 51-52; April 18, 1994: 14-15), its manufacturers from Hong China's export quotas in the 11 Commission for Asia and .set industries from Taiwan foot wear, and electronics, g stronger and more com­ ..ed suit, bringing about a 1 a more promising policy and profits, the Chinese mt in infrastructure. This nce in China's economic rf's power station and road 'ao, December 16, 1992), ~nninal project for Shang­. )f foreign investment and rt of Guangdong (Worthy, 1S a whole, though some ted from China itself via : 38). In return, Chinese ment the leading investors mainly tertiary industries, nese investment in Hong Ilion in 1992 to $18 billion 993). Moreover, Chinese was also up from US$4. TIre Emergence a/the Chinese Eco1lOmic Area and It's Implication. 57. billion in 1990 to near $10 billion in the first quarter of 1993 (Both invest­ ment and deposit figures were based on Time graphic). In the first half of 1992, Chinese firms bought property worth about US$ 6.6 billion. Brokers have estimated that they will own 20 per cent of all property in Hong Kong by 1997 (Far Eastern Economic Review, July 23, 1992: 49). For many people in Hong Kong and Taiwan, this is a sign the Chinese are detennined to take over Hong Kong and dominate the capitalist society after it reassumes control. Indeed, China's pouring more than US$ 10 billion into Hong Kong in the last few years is seen as its intent to take over the British colony smoothly, but also a political statement to the Hong Kong business com­ munity of its persistence in capitalism (Kraar, 1992: 41). One of the "spillover" effects with which theoretical integration is con­ cerned is the rise of industrial integration. Not only has industrial integra­ tion here created frequent interaction networks, but also it has brought about exchanges of employment in the labour markets. In other words, simple economic cooperation has encroached into society. About a decade ago, manufacturers in Hong Kong employed about 900,000 workers in the colony and none in Guangdong. Now, "their Hong Kong payroll is down to about 700,000. But they have employed three million workers at some 30,000 factories in Guangdong" (Walsh, 35). One can see in this close rela­ tionship, without dressing progressive integration, is its economic potential and the deepening and widening trend in the division of labour. As China and Hong Kong today have become each other's largest investment destina­ tion, they are already "inextricably linked" in economics (Kraar) . Taiwanese Industrial Investment In China Via Hong Kong. In 1987, the Nationalist government in Taiwan liberalized the policy limiting contact with China; since then, a full range of economic transactions has resulted. Because of the ongoing political stalemate between Taiwan and China, businessmen on both sides of the Taiwan Strait have had to trade with each other via a third party. As the "two way" trade and investment flows have increased, Hong Kong has become the third party for this indirect trade. Since most of Taiwan's trade with and investment in China are directed through Hong Kong, recently there have been more Taiwanese investments flowing into Hong Kong itself (1993 Annual Report of Majestic Trading Company Ltd). There are two reasons for this: firstly, under the existing political impasse Taipei only allows business flows through Hong Kong to ensure policy flexibility, provide bargaining chips with China, and prevent its economy from becoming too dependent on China (Business week, May 3, 1993: 20). Secondly, as the actual need in the Taiwanese business com­ munity for trade with China has grown, Taiwanese small and medium-enter­ prises, have set up branches or connections with local agents in Hong Kong to conduct business in China. Most recently, even big firms have followed suit. For example, Walsin Lihwa Co., one of Taiwan's leading cable & wire manufacturers, has acquired a 64.2 per cent interest in the publicly listed.

(14) 58. Chinese Political Science Review. Success Holdings in Hong Kong. The purpose of such acquisition was to use Hong Kong as a base for further overseas investment in China and the rest of the Asian region (Walsin Lihwa Corporation 1992 Annual Report). Local businessmen believe that without any Taiwanese banking pres­ ence in Hong Kong to support investment in China, there must be an individual financial management office in Hong Kong to manage the capital flow in and out of ChinaP It is also necessary for this office to be located in Hong Kong to comply with Taipei's policy of no direct links with China. Growing trade between China and Taiwan has lured Taiwanese businessmen to set up about three thousand intermediary companies in Hong Kong in the past five years (Commercial Times, May 21, 1993). Amongst them, there are over two thousand companies which focus on trade (The Indepen­ dent Weekly Post, March 25,1994). Since Taiwan officially bans direct Taiwanese investment in China, there has been a great deal of "illegal" investment conducted through various channels without official permission. In spite of offical restrictions. there has been little sign that investment flows have been slowing (Table 6). Due to recognition of the important role of Taiwanese investment in China, three of Taiwan's state-owned commercial banks, Chang-Hua, the First, and Hua-Nan, set up representatives in Hong Kong in 1992. Since September 1993, Hua-Nan Commercial Bank has been operating its first Hong Kong branch which is starting to assist Taiwan's investors with financial manage­ ment services (Central Daily News, September 24, 1993). Up to May 1994, a total of seven Taiwanese banks established operations in Hong Kong, mainly providing financial services for Taiwanese businessmen and investors. 14. The Emergence of the Chinese. I I. r'. Further financial inH soon. As many of its in labour-intensive in mercial Bank - one e office in Hong Kong i: and establish links wi tative, Vance Chin, st: (China and Taiwan) is Since 1987, Taiv Hong Kong is reflectec exports to Hong Kong I trade surplus with the diversify export mark.. Table 7. Trade betwt Hong Kong year. 1987 1988 1989 1990 1991 1992 1993 1994 1995. Table 6. Taiwanese Investment in China Year 1983-87 1988 1989 1990 1991 1992 1993 1994 1995* Total. Agreed Projects 80 435 552 1,011 1,737 6,430 10,948 6,247 3,052 30,492. Agreed Capital (US$ million) 190 520 437 892 1,391 5,540 9,970 5,397 2,783 27,140. Note: "The figure shown is only up to September. Source: derived from the data of the PRC's Ministry of Foreign Trade and Economic Cooperation. See Liang An Gin Gih Tong Gih Yueh Bo (Economic Statistical Monthly Report of Taiwan and China), Council of Mainland Affairs, February 1996.. r. exports to amount % re­ arne 4,274 5,687 6,614 7,447 9,563 11,301 12,204 13,936 16,573. 1,2 2,2 2,8 3,2 4,6 6,2 7,5 8,5. 9,~. .Source: International Tn Custom Statistics Monthly Report c. Table 8. Hong Kon (share of tI Destination/years China Japan Taiwan. Source: Hong Kong 199.

(15) Chinese Political Science Review. The Emergence ofthe Chinese Economic Area and It's Implication. e of such acquisition was to use :stment in China and the rest of .992 Annual Report). : any Taiwanese banking pres­ . in China, there must be an ng Kong to manage the capital 'I for this office to be located in of no direct links with China. has lured Taiwanese business­ liary companies in Hong Kong ray 21, 1993). Amongst them, 1 focus on trade (The Indepen­. iwanese investment in China, Ivestment conducted through In spite of offical restrictions, s have been slowing (Table 6). aiwanese investment in China, lks, Chang-Hua, the First, and Ing in 1992. Since September Jperating its first Hong Kong restors with financial manage­ 24, 1993). Up to May 1994, a !rations in Hong Kong, mainly businessmen and investors. 14. Irce: derived from the data of the ooperation. See Liang An Gin Gih lly Report of Taiwan and China),. Further financial integration programmes should be brought into being soon. As many of its customers had already invested in China, particularly in labour-intensive industries, the Taipei-based private China Trust Com­ mercial Bank one of Taiwan's top ten banks - opened its representative office in Hong Kong in November 1993 such as to better serve its customers and establish links with its mainland counterparts. Its new chief represen­ tative, Vance Chin, states that "Closer relations with banks from both sides (China and Taiwan) is ultimately unavoidable" (Sender, 1993: 81-82). Since 1987, Taiwan's booming trade relationship with China through Hong Kong is reflected in economic indicators. Around 40 percent of Taiwan's exports to Hong Kong have been routed to China (See Table 7). While Taiwan's trade surplus with the US has recently been reduced following pressure to diversify export markets, Taiwan has increased its trade surplus with Hong. Table 7. Trade between Taiwan and Hong Kong, and Taiwan's Sbare of Hong Kong Re-exports to and from China (unit: $ million) year. ;. greed Capital (US$ million) 190 520 437 892 1,391 5,540 9,970 5,397 2,783 27,140. 59. 1987 1988 1989 1990 1991 1992 1993 1994 1995. exports to HK amount % re-export to China amount % export toHK 4,274 5,687 6,614 7,447 9,563 11,301 12,204 13,936 16,573. 1,226.5 2,242.2 2,869.5 3,278.3 4,667.2 6,287.9 7,585.4 8,517.2 9,882.8. 28.7 39.4 43.4 44.0 48.8 55.6 62.2 61.1 59.6. amount. 1,242 1,812 2,113 2,724 3,175 3,397 3,659 3,700 4,581. imports from HK % import from China % import amount from HK 288.9 478.7 586.9 765.4 1,126.0 1,119.0 1,103.6 1,292.3 1,574.2. 23.3 26.4 27.8 28.1 35.5 32.9 30.2 34.9 34.4. Source: International Trade Bureau, Ministry of Economic Affairs, R O. C., based on HK Custom Statistics, 1993. Liang An Gin Gih Tong Gih Yueh Bo (Economic Statistical Monthly Report of Taiwan and China), Council of Mainland Affairs, February 1996.. Table 8. Hong Kong Re-Exports to its Major Asian Trading Partners (share of the total in %) Destination/years China Japan Taiwan. 1989 29.9 6.4 4.8. 1990 26.8 5.9 5.1. 1991 28.7 5.5 4.6. Source: Hong Kong 1992 and Hong Kong 1993, HK Government.. ·1992 30.7 5.4 3.8.

(16) 60. Chinese Political Science Review. Kong and China. In 1990, Taiwan's trade surplus with China accounted for 20.11 per cent of its global trade surplus, and its surplus with Hong Kong 56.90 per cent. In 1992, the trade surplus with China reached 54.53 per cent, and with Hong Kong 143.8 per cent of its global surplus (Mainland Affairs Council, The Executive Yuan, 1993). Moreover, Hong Kong's re-exports to China and Taiwan have accounted for over one-third of its total re-exports; its "middleman" position for the "two Chinas" is thus crucial (Bums, 1993: 29). From the perspective of trade development, China, Taiwan and Hong Kong have already become very important partners, a trend likely to be intensified in the future. Al­ though trade relationships do form transaction networks between partners, this alone is not a sufficient condition for economic integration. Above all, Taiwan, Hong Kong, and China (to a lesser extent) have established outward-looking economies which have directly resulted in their successful economic development. Their continuation of trade with the rest of the world remains as crucial as their intra-regional trade. When the world was twice hit by rising oil prices and economic reces­ sion in the early 1980s, the rise of protectionism in developed economies threatened international trade. These changes in the global economic situation intensified international competition, driving trade partners to seek industrial strength through closer cooperation. The formation of the CEA was accelerated by increasing intra-regional trade flows, foreign invest­ ment, and, above aU, the industrial division of labour which has created mutual complementary economies (Hartland-Thunberg, 1990: 97-98). The ratio of intra-industry trade between China and Taiwan to Taiwan's total commodity trade in manufacturing sectors rose from 5.53 per cent in 1985 to 28.78 per cent in 1991, and non-manufacturing sectors rose from 28.18 per cent to 56.54 per cent in the same period. In 1991, the horizontal division of labour accounted for 75.42 per cent of total Taiwanese investment in China and Hong Kong, and vertical division of labour for about 18.49 per cent. According to some empirical surveys, Taiwanese businessmen investing in China procured 80 percent of the materials, components and equipment they needed for operation from Taiwan; and only about 15 percent came from Chinese local industries (Economic Yearbook for The Two Sides of the Taiwan Strait, 1992, 1993: 84-89). Among other industries, footwear, umbrel­ las, and toy manufacturers, procured for 90 percent of their materials from Taiwan; those industries for plastic, electronics, and vehicles were amongst the highest procuring from China for their local operations (about 20 per­ cent). Like Hong Kong, Taiwan since the early 1980s has also suffered the "NIC's diseases," which in manufacturing sectors has turned out to be serious. Because the history of Taiwan's economic development has been based more on the growth of labour-intensive manufacturing industries, growing wages, soaring land prices, and a shortage of labour have hit related industries very hard, resulting in the exodus of many indigenous industries. The Emergence of the Chinese 1. r r I. tl. r. to South East Asia and C Taiwan general m by the changing trends maintain competitiven Cutting production COl some time. Unfortunat surplus against the US, pressure, dramatically I in 1983 to NT$ 25.40 in a crisis for Taiwanese e relatively long period. faded away. Furtherm( a "Labour Standards I trating most employers. Ching, Taiwan's leadinl warned that the law hal the diligent habit of lal relied (Central Daily N trade unions movement The cost of laboUI percent in US dollars b were desperate, becaus bankruptcy. Moreover active during the 19801 were introduced (Yu, 1 tion, Wus Printed Cif! company in the countl stopping production fe tection Administration confirmed was the big near Shanghai (Tian, 1 As Taiwanese Cl money" released from immediately directed 1 stock market and real speculators, there Wl soaring property price; trial tycoon, WangYt billion comprehensiv special economic zom River in 1992, the 1atl fear of moving about Views, December 15, Wang's China bid der.

(17) Chinese Political Science Review. The Emergence ofthe Chinese &onomic Area and It's Implication. with China accounted for surplus with Hong Kong la reached 54.53 per cent, mrplus (Mainland Affairs. hina and Taiwan have its "middleman" position 9). From the perspective )fig have already become lsified in the future. AI­ :works between partners, c integration. Above all, xtent) have established suIted in their successful Ide with the rest of the. ices and economic reces­ in developed economies in the global economic ~iving trade partners to I. The formation of the ide flows, foreign invest­ bour which has created )erg, 1990: 97-98). The aiwan to Taiwan's total 5.53 per cent in 1985 to ors rose from 28.18 per le horizontal division of ~se investment in China out 18.49 per cent. e businessmen investing Jonents and equipment about 15 percent came Jr The Two Sides of the tries, footwear, umbrel­ of their materials from vehicles were amongst :rations (about 20 per­ Is has also suffered the has turned out to be development has been [lufacturing industries, labour have hit related , indigenous industries. ~. t i. I. I. 61. to South East Asia and China. Taiwan general manufacturers' export orientations are largely shaped by the changing trends of international markets. Therefore, in order to maintain competitiveness, production factors are always cost sensitive. Cutting production costs has been the ANICs' competitive strategy for some time. Unfortunately, since the mid-1980s, due to Taiwan's huge trade surplus against the US, the New Taiwan Dollar has been under American pressure, dramatically appreciating against the US Dollar from NT$ 40.32 in 1983 to NT$ 25.40 in 1992 and NT$27.27 in 1995. This has brought about a crisis for Taiwanese exporters, although appreciation has occurred over a relatively long period. In terms of price, Taiwanese competitiveness has faded away. Furthermore, Taipei's government in the mid-1980s introduced a "Labour Standards Law" to legitimise labour's fundamental rights, frus­ trating most employers. 15 In a public letter to the government, Wang Yeung­ Ching, Taiwan's leading industrialist and chairman of Formosa Plastics Co., warned that the law had not only increased business costs, but also changed the diligent habit of labour on which Taiwan's economic development had relied (Central Daily News, February 22, 1993: 3). Wage rates rose and the trade unions movement became active as a result. The cost of labour in Taiwan's manufacturing sectors rose more than 60 percent in US dollars between 1986 and 1988 (Schive, 1993: 33). Employers were desperate, because they were facing diminished profit margins or even bankruptcy. Moreover, as the environmental protection movement became active during the 1980s, more restrictive environment protection standards were introduced (Yu, 1992: 6). For example, due to serious industrial pollu­ tion, Wus Printed Circuit Co. Ltd., ranked as the 48th biggest electronic company in the country (Commonwealth, June 5, 1993), was coerced into stopping production for one month by the Taiwanese Environmental Pro­ tection Administration in 1992, which the company's chairman L. K. Wu confirmed was the biggest push for the company to relocate in Kuenshang, near Shanghai (Tian, 1993: 36). As Taiwanese currency appreciated in value (refer to Table 9), "hot money" released from sunset industries circulating around the country was immediately directed towards an illegal gambling lottery, and later into the stock market and real estate (Yu, 1992). Consequently, owing to property speculators, there was less available land for industrial expansion, and soaring property prices halted private investors' programs. Taiwan's indus­ trial tycoon, Wang Yeung-Ching, for example, was even bidding for a US$7 billion comprehensive industrial zone first in Fujian Province's Xiamen special economic zone for his 6th naphtha cracker, and later in the Yangtze River in 1992, the latter subsequently banned by the Taipei government for fear of moving about one third of Taiwan's industrial base to China (Global Views, December 15, 1992: 46-47; Baum, 1992: 75). Part of the reason for Wang's China bid derived from his failure to find a suitable site to expand his.

(18) 62. The Emergence of the Chin,. Chinese Political Science Review. Table 9. A Comparison of the Average Foreign Exchange Rates of China, Taiwan, and Hong Kong (National Currency Per U. S. Dollar) YEAR 1983 1986 1988 1989 1990 1991 1993 1994 1995. RMB 1.98 3.72 3.72 3.76 4.72 5.32 5.77 8.45 8.32. NTD 40.32 35.55 28.17 26.17 27.10 25.74 26.63 26.24 27.27. HKD 7.27 7.79 7.78 7.82 7.79 7.76 7.73 7.74 7.73. Soul'ee: deriv:d fr?m The C~ntral Bank of China, R.O.C., & Da Kun Po, H. K. See Liang An Gm Glh Tong Glh Yueh Bo (Economic Statistical Monthly Report of Taiwan and China), Council of Mainland Affairs, February 1996.. business in Taiwan. Another ambitious investment plan in China by the Cathay Insurance and Construction Group, the largest in these businesses in Taiwan, was blocked (Goldstein, 1992a: 23). All in all, these changing economic factors have boosted production costs higher than ever. Mr. G. C. Liao, Chairman of Chen-Chou Enterprise Ltd., has argued that due to the fast speed of urbanization, fewer and fewer employees wish to work in a traditional factory. Similarly, Mr. L. L. Liao, Chairman of Merry Electronic Co. Ltd., has told the same story that the reason he located in China was not because of lower social costs, but the serious shortage of labour (Commonwealth, March 1, 1992: 32). Even the world's leading bicycle maker, Giant Machinery Co., has suffered a labour shortage in its most significant manufacturing site in Taiwan (Global Views, December 15, 1992: 42). In Taiwan, too-frequent hiring and firing of workers in manufacturing industries has resulted in instability in production procedures and quality. Even foreign buyers have urged their Taiwanese sub-contractors to move to China in order to maintain the quantity and quality of their production. 16 For most profitable labour-intensive industries in Taiwan, their Achilles heel is the shortage of labour. These disadvan­ tageous factors over time appear to be incentives, if not positive advantages, for the formation of the CEA. To begin with, Taiwan's currency appreciation has raised its buying power overseas, and therefore brought about a stimulus for foreign investment. The .climate for domestic investment has also deterio­ rated, which has led to complaints by industrialists and demands for remedial action. In 1992, a survey of the 1000 largest Taiwanese companies showed industrialists' concerns about future industrial development. 17 Most respon­. ! r. I I. ,r I I. dents were frustrate choose a foreign loc the top of the list. investment of com) percent of all Tai, favourable destinat: turers have been dr found a more faVOl even closed all thei headquarters in Ta orders, marketing, I Only manufa. Entrepreneurs have companies in the i seeking relocation Taipei's Ministry a turers had nearly al industry has also n Although Taipei fe out Taiwan's indus (Mudie, 1992: 3),19 pointed out that al been importing rna Taiwan's headquan developments, fror division of labour " & watch industry Sl the CEA: productic and exportation in 1994). The result of investment in Chin lower level technc cost production f~ flows have ten de. markets. This re trend for upgradi markets and teet Foods and Giant Taiwan's numbel investing in Chin network equippe( the market. Acco] market is support:.

(19) The Emergence ofthe Chinese Economic Area and it's implication. Chinese Political Science Review. reign Exchange Rates of China, lal Currency Per U. S. Dollar) NTD 40.32 35.55 28.17 26.17 27.10 25.74 26.63 26.24 27.27. HKD. 7.27 7.79 7.78 7.82 7.79 7.76 7.73 7.74 7.73. l. .O.c., & Da Kun Po, H. K. See Liang Statistical Monthly Report of Taiwan ,bruary 1996.. vestment plan in China by the he largest in these businesses in ctors have boosted production. rman of Chen-Chou Enterprise. f urbanization, fewer and fewer. ory. Similarly, Mr. L. L. Liao,. s told the same story that the. . of lower social costs, but the. March 1, 1992: 32). Even the. ery Co., has suffered a lab~ur. site in Taiwan (Global Views,. frequent hiring and firing of. ted in instability in production. s have urged their Taiwanese. to maintain the quantity and. ble labour-intensive industries. ~ of labour. These disadvan­. res, if not positive advantages,. 'aiwan's currency appreciation. fore brought about a stimulus. ic investment has also deterio­. llstrialists and demands for. aiwanese companies showed. levelopmentP Most respon-. l i. 63. dents were frustrated by their operating costs in Taiwan, and when asked to choose a foreign location for their industrial expansion, most placed China at the top of the list. Another survey in 1993, on the trends of foreign direct investment of companies listed on the stock market, confirmed that 58.8 percent of all Taiwanese companies thought that China was the most favourable destination for investment. 18 While labour-intensive manufac­ turers have been driven out of the country, some of them have immediately found a more favourable climate for manufacturing in China. Some have even closed all their businesses in Taiwan, but most have maintained their headquarters in Taiwan from where they manage capital flows, overseas orders, marketing, R&D, assembly and transportation. Only manufacturing operations are conducted from Chinese bases. Entrepreneurs have suggested that, by early 1992, at least 80 percent of the companies in the footwear, briefcase, toy, and umbrella industries were seeking relocation in mainland China (Commonwealth, March 1, 1992: 16). Taipei's Ministry of Finance' calculated that Taiwan's footwear manufac­ turers had nearly all relocated to China, and about 80 per cent of the textile industry has also re-oriented themselves in China (L. C. Wang, 1992: 101). Although Taipei feared that these capital investments in China could hollow out Taiwan's industrial base and result in economic dependence on China (Mudie, 1992: 3),19 Chao Yao Tung, former minister of Economic Affairs, pointed out that almost all Taiwanese companies relocating to China had been importing materials and machinery from Taiwan and depending upon Taiwan's headquarters for commercial R&D (Wang). In other words, these developments, from a positive point of view, were creating an industrial division of labour within the CEA. Perhaps the relocation of Taiwan's clock & watch industry serves as a typical example of the division of labour across the CEA: production in China, design and marketing in Taiwan, and finance and exportation in Hong Kong (The Independent Weekly Post, March 25, 1994). The result of an earlier survey suggested that by 1992 most Taiwanese investment in China would derive from labour-intensive industries delivering lower level technology and used equipment, and taking advantage of low cost production factors in China. Nevertheless, more recent investment flows have tended to target China's domestic market instead of export markets. This recent survey clearly demonstrates a changing investment trend for upgrading the industrial division of labour in terms of target markets and technology involved, e.g. recent investments by President Foods and Giant Manufacturing (Goldstein, 1992a: 24). President Foods, Taiwan's number one food industry has been mainly concerned with investing in China's scale economies, and has been building a business network equipped with its advanced food processing technology to access the market. According to its Chairman C. Y. Kao, the huge Chinese domestic market is supporting its long term strategy of internationalization. Through.

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