Throwing a straw against the wind? How Taiwan responds to China’s economic statecraft

Introduction

The People's Republic of China (PRC) is often described as the master of economic statecraft. After surpassed Japan and grew the second-largest economy globally, PRC became one of the most important trading partners in the Asia-Pacific region. The ever-growing economic capacity has routinely concerned the China observers and regional actors about its intention and influence. The worry is justified. With the growing economic weight, China's use of coercive power over other states is also expanding in both scope and intensity. For example, the Chinese government canceled the trade meeting with the Swedish government after the Swedish literary association awarded a prize to a Hong Kong bookseller detained in mainland China in 2019[1]. In addition to leveraging its consumer market access to pressure foreign governments, China also implements export quotas, import restrictions, travel ban, and safety investigation over South Korea, Taiwan, the Philippines, and Norway[2].

Taiwan is at the front of China’s economic statecraft targets. To Beijing, Taiwan is not just a matter of national sovereignty and national security, but also an important part of regime legitimacy. As stipulated by Xi Jinping, the chairman of the Chinese Communist Party, on January 2, 2019, the reunification of Taiwan is the foundation for the national rejuvenation of China and the “China Dream.” To fulfill this objective, Beijing will promote reunification by resorting diverse means, which includes cross-Strait trade and economic cooperation, establishing a common market, granting favorable treatment, and the use of force[3]. Meanwhile, from another side of the Strait, Taiwan’s business activities (Taishang) are highly dependent on the mainland’s consumer market and, therefore, share a strong interest in preserving a stable cross-Strait relation[4]. Taiwan serves as a prominent exemplification for analyzing Chinese economic statecraft and examining how a medium-small actor can respond to Chinese economic coercion and incentives. To be more specific, this paper aims to answer the following questions:

1. How do Beijing’s economic statecrafts impose on the targeted country?

2. How weaker states counter China’s economic statecraft?

Most of the realism’s scholarship echoes the Melian Dialogue, in which the strong do what they can, and the weak endure what they must. This paper tests this wisdom by presenting Taiwan’s case. It provides an alternative approach in analyzing economic statecraft from the perspective of smaller states. In other words, even though Taiwan is a relatively weak state, it utilizes its economic statecraft to counter Chinese influence. This contributes to the understanding international relations and political economy from the perspective of small and medium-size power.

The following paper is structured as follows. First, the paper reviews scholarships of power asymmetry regarding economic statecrafts. Second, it surveys how China uses economic statecrafts to Taiwan. Third, it presents how Taiwan responds to China’s sanctions and incentives. Lastly, it concludes the research.

Economic Statecraft Under Power Asymmetry

Power asymmetry is a crucial concept adopted by political scientists in analyzing bilateral and multilateral relations. After World War II, Albert O. Hirschman analyzed asymmetric trade relations as an instrument of national power. In his book National Power and the Structure of Foreign Trade, he argues that the stronger country can gain from “seemingly harmless” trade relations with the smaller country by leveraging the dependence of smaller for a strong power[5]. In other words, the economic interdependence forged by trade relations, can be utilized as means of political influence. The pursuit of political influence is also called economic statecraft, as defined by David Baldwin[6]. However, stronger states do not always achieve the preferred result. As revealed in Dianne Pfundestein Chamberlain’s Cheap Threats: Why the United States Struggles to Coerce Weak States, stronger states fail to influence the weaker states as the threats are too cheap to signal stronger states’ resolution, which undermines the credibility of the threat[7].

Although the asymmetric framework seems to be a powerful explanation to international power dynamic, it only captures half of the story in state interactions. The outcome of the economic statecraft is not solely determined by economic power asymmetry[8]. Following the above logic, as China’s economic power becomes increasingly stronger vis-à-vis Taiwan, a small country like Taiwan, is neither capable nor competent to counter the influence from China. Due to the high-level of economic dependency, economic sanctions and selective incentives, implicitly or explicitly imposed by Beijing, would successfully generate compliance from the Taiwanese government and the public. However, in reality, Taiwan is still a break-away island, and Beijing is still demanding unification.

Exchanging trade flows to political influence is not a linear process. As pointed out by Kahler and Kastner, diverse type of engagement policy and economic interdependence generate different result in restricting the policy options of the targeted state[9]. Thus, studying the response of Taiwan is also vital to not just the understanding of cross-Strait relations but also the power dynamic in world politics.

The economic statecraft scholarships experience two limitations. First, although the political economy and policy analysis research identifies the relationship between economic measures and political results, they are insufficient in explaining when and how those measures succeed or fail in the recipient countries. The dynamic political environment within the targeted state may alter the desired outcome. Second, most of the economic statecraft literature investigates the use of economic leverage from the direction of a stronger power to weaker power. Not many works pay attention from another direction, the response of smaller actors to the economic measure of the powerful actor. The agency of smaller states is overlooked. The reaction of the weaker state often plays a critical role in transforming economic policies into political outcomes. This paper examines economic statecraft from the perspective of the weaker state. By adopting Taiwan as a case study, the paper presents how the weaker state resists economic coercion and incentives from the stronger state, China.

Chinese Economic Statecraft on Taiwan

China and Taiwan share strong business ties, albeit asymmetrical. In 2018, China shared 24.2 percent of Taiwan’s foreign trade, whereas Taiwan only accounted for nearly 5 percent of China’s foreign trade. China is also Taiwan’s largest foreign direct investment destination. China is also the top working destination of Taiwanese. In 2018, over 400 thousand Taiwanese people worked in China, which share 54.9 percent of the total overseas working population. PRC is also the largest source of tourists for Taiwan. In 2019, 26 percent of the total visitors were Chinese citizens. The strong economic connection fosters a noticeable political constituency with commercial stake in China[10]. In addition, through business exchanges, Taiwan businesspeople who reside in the mainland, establish linkages for both sides [11]. Taiwan’s investment in China also causes a “hollowing out” effect on Taiwan’s competitiveness[12]. With substantial talent outflow to China, Taiwan also suffers from brain drain.

Given the high economic cost, presumably the situation assures Beijing that Taiwan will not unilaterally change the status quo. However, Beijing shift from deterring Taiwan from seeking independence to achieving unification, after Xi overtakes power[13]. Beijing applies two-level of economic statecraft in pursuing unification: bilateral and third-party.

Bilateral Relations

Since the early 1990s, China has adopted economic coercion and incentives in its Taiwan policies. One of the prominent strategies is providing quid pro quos to anyone who displays patriotic speech and actions toward China, such as granting market access, licensing, and other forms of privileges. In 1999, the Beijing government warned Taiwanese companies which share a close relationship with the Democratic Progress Party (DPP) from banning them from entering the Chinese market[14]. Chi Mei and Acer were the two prominent victims of Chinese sanctions. Acer’s products were removed from major shopping malls. Chi Mei had to endure consistent tax audits, which damaged regular business operation [15]. The targeted sanctions toward Taiwanese companies close to DPP sent out the signal that only by aligning with Beijing’s Taiwan policy could companies do business in China. Later, in 2005, China adopted a “soft policy” which loosen up the loan requirement for Taiwanese who was residing in the mainland and promoted several preferential trade policies[16]. Three years later, Beijing issued residence permits to Taiwanese residents, with various housing and medical benefits[17]. In the subsequent year, China proposed the Economic Cooperation Framework Agreement, which granted preferential trade policies to Taiwan. In the agreement, China lowered the tariffs on Taiwanese agricultural products. In 2011, China further purchased US$4.57 million worth of milkfish from Tailam, where is the traditionally pro-DPP city[18]. After Xi Jinping assumed office, China adopted a harsher stance toward Taiwan. China suspended tourism from 47 Chinese cities to Taiwan[19]. This policy caused an estimated 22% lesser travelers from China to Taiwan from 2016 to 2017[20].

Apart from state-level policies, China’s economic statecraft also succeed at the society level. In 2018, Wu Pao-Chun, an award-winning baker, wanted to establish bakery branches in China. To appease Chinese netizens, he announced in a statement that he was born in “Taiwan, China” and proud to be a “Chinese.” He also advocated for promoting “Cross-strait economic and cultural ties”[21]. Another prominent example is the “Yifang Fruit Tea event.” In 2019, one Yifang Fruit Tea branch in Hong Kong placed a sign that advocated “Stand with Hong Kong people.” After the image of the sign was spread in China, the Chinese netizens were furious and categorized Yifang Fruit Tea as supporting “forces that split national sovereignty and violence” in Hong Kong. Chinese citizens called for a boycott on the brand, which later spread to other Taiwanese bubble tea brands, such as Gong Cha, HeyTea, CoCo, and A Little Tea. After few days of the boycott, Yifang Fruit Tea issued an official statement that firmly supports “one country, two systems” and “opposes the protests and strikes in Hong Kong.[22]”

Entertainment industry in Taiwan is heavily influenced by China’s economic statecraft. Taiwanese celebrities who work in China have to support official China’s stance in every issue (Biaotai). For example, after the Permanent Court of Arbitration announced outcome to South China Seas, Taiwanese celebrities had to post a picture with a map of the territory and slogans: “China: we cannot lose a single inch of territory. [23]” Both Golden Horse Film Festival and Golden Melody Awards were censored and suspended broadcasting after a Taiwanese director and singer made an “independence-leaning” and pro-democracy speech[24].

China also utilizes licensing and customs inspection to force Taiwanese companies to promote the “One China Principle.” Taiwan’s export to China must be label as “Taiwan, China” or “Taiwan Area, China” rather than “Made in Taiwan” or “Made in Taiwan, ROC.” If the companies refuse, they may suffer from extra duties or extra-long inspection time. In some extreme case, Chinese customs destroy Taiwanese product which does not contain “Taiwan Area, China” label[25].

Third Parties

China successfully applies monetary benefit and economic inducement to isolate Taiwan on the international stage politically. Beijing offered a substantial amount of financial assistance to the Dominican Republic, one of Taiwan’s diplomatic allies, in exchange for breaking diplomatic relations with Taiwan[26]. Moreover, China also actively rejects Taiwan’s diplomatic presence at the World Trade Organization, International Civil Aviation Organization, and World Health Organization [27]. It also pressures multilateral companies, such Delta, United Airlines, and Marriot, to treat Taiwan as a province of PRC in their websites [28].

Taiwan’s responses: The Economic Statecraft of Taiwan

Although Taiwan is a tiny country in East Asia, it manages to counter China’s growing influence on economic statecraft. During Tsai Ing Wen’s presidency, her administration has managed to diversify the sources of foreign investors, leverage Taiwan’s comparative advantage in the global supply chain, and conduct infrastructure-building projects. As Blanchard and Ripsman (2008) argue, the result of successful economic coercion primarily depends on the target state’s level of stateness[29]. Building upon their work, this section investigates how Taiwan responds to China’s economic statecraft. Instead of relying on China’s goodwill, Tsai actively decreases economic dependence on China and develops Taiwan’s economic resilience.

Credit: Stellint

Diversifying Economic Structure

With the growth of the Chinese economy, Taiwan’s economic structure, like other countries globally, becomes strongly dependent on China’s market. Tourism, agricultural, and manufacturing industries, therefore, are highly vulnerable to Chinese sanctions. As a result, diversifying Taiwan’s economy and upgrading economic structure are essential to achieve sustainable economic growth and safeguard national security. As president Tsai once said, “you would not put all your eggs in one basket.[30]”

Until 2016, tourism in Taiwan relies heavily on Chinese tourists, which grants the Chinese government substantial leverage for its economic sanction. After Beijing curtailed group tours to Taiwan, it led to large-scale protests from traveling business that strongly dependent on Chinese tourists[31]. Even though the Taiwanese government could not retaliate the economic sanction by altering bilateral trade policies, as the asymmetric trade balance, it initiated a structural change for the businesses that previously heavily dependent on Chinese business. Since 2018, the Tourism Bureau provides travel subsidies that cover both group travelers and individuals to boost domestic tourism[32]. For example, travelers who reside at local hotels where are near to night markets, will receive vouchers for the trip [33]. The Ministry of Transportation and Communication also waives fuel surcharges for tour buses that engage in domestic travel, which previously were significantly hit by Chinese economic sanctions.

The “New South Bound Policy” serves as Taiwan’s economic grand strategy in countering Chinese economic dominance by redirecting trade and investment to Southeast Asian countries and Western countries. As indicated by the Bureau of Foreign Trade, in 2019, the bilateral trade between Taiwan and ASEAN countries increased substantially from 1.5% in 2018 to over 12.1% in 2019. The EU and the United States have also become crucial economic partners[34]. By lowering the visa requirements for ASEAN countries, promoting education exchange and tourism, and special loans to Taiwan’s companies, Taiwan has successfully mitigated the loss from Chinese business[35].

Apart from trade policies, Taiwan also announced a “5+2” innovative industries plan. Contrary to Made in China 2025, the “5+2” is more “people-centric.” Five flagship programs are stipulated in the plan, including innovation industries, medical cooperation, policy forums, and youth exchanges, regional agriculture, and talent cultivation-showcasing Taiwan’s soft power appeal[36]. Through this plan, Taiwan and India establish economic cooperation, in which Taiwan educated industrial talents work in India to advance India’s semiconductor and smartphone design [37].

Apart from “people-centric” policies, Taiwan also upgrades its infrastructure program to increase its economic resilience in facing China’s economic statecrafts. The policies targets to improve Taiwan’s industrial base from manufacturing to value-added sectors, such as clean energy, biotechnology, and the Internet of things, by funding and building basic infrastructure in the next 30 years. All three programs are essential parts of Taiwan’s economic statecraft in building an economy that lesser rely on the Chinese economy, in turn, lower the vulnerability to Chinese economic sanction.

In short, China’s economic statecraft is a threat to Taiwan’s economy. However, it is also an opportunity. On one side of the coin, Chinese sanction imposes substantial damage to Taiwan’s economy. On the other side of the coin, the sanction exposes the vulnerability and fragility of Taiwan’s economy and instigates the Taiwanese government to undertake a structural change in countering such threats.

Conclusion

China’s rapidly stretching global economic presence, notably when partnering with economic coercion, may exacerbate strategic fear and doubt across the globe. Although large counties may enjoy the capacity and autonomy to stand up and counter Chinese influence, smaller countries are in struggles. This article focuses on Taiwan, a small country at the forefront of Chinese economic statecraft, and how Taiwan utilizes its economic statecraft to respond to the challenges. This research may carry policy implication to Asia-Pacific countries which hope to access Chinese market but not willing to scarify their economic autonomy. Specifically, Taiwan’s case indicates that China’s economic statecraft may be less effective when states respond actively and divert the pressure from within.

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