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The United States and Taiwan: Richard C. Bush, Chairman and Managing Director, American Institute in Taiwan, Conference on "Taiwan: Your Gateway to the Asian Market" St. Louis, Missouri May 20, 1999

BG9907E | Date: 1999-06-09

I am very happy to have the opportunity to speak today to the conference on "Taiwan: Your Gateway to the Asian Market." I am pleased, as always, to share the speaking duties with my good friend and colleague, Stephen Chen, Taiwan's representative in the United States. I am also pleased to welcome to the United States the 25-member trade mission from Taiwan composed of executive directors and directors of the Importers and Exporters Association. And it is a great honor to witness along with Representative Chen the agreement on mutual cooperation that was just signed by Mr. Fleming and Mr. Lee. I believe that close contacts and communication between organizations like the St. Louis Regional Commerce and Growth Association and the Importers and Exporters Association of Taipei will allow companies on both sides of the Pacific to realize the potential for economic interchange that exists between the United States and Taiwan.

What is AIT? What is TECRO?

I am sure that the Americans in the audience are asking themselves what is AIT and what is TECRO? Why are these special organizations necessary? The answer lies in politics and foreign policy, as I will explain in a second. But bottom line is the unique institutional arrangements between the United States and Taiwan have in no way blocked us from realizing the shared potential for economic cooperation.

To explain AIT and TECRO, I must inflict some history on you, but it is history that remains relevant down to the present day. Some fifty-plus years ago, when Harry Truman was President, China was wracked by civil war. On the one side was the Nationalist government led by Chiang Kai-shek; on the other was the Communist party and army, led by Mao Zedong. President Truman sent General George Marshall to try to mediate that dispute, but his effort failed because of deep mistrust between the two parties. In the end, the Communists won and established the People's Republic, the Nationalist government retreated to the island of Taiwan, which was populated by ethnic Chinese but had been a Japanese colony from 1895 to 1945. With the onset of the Korean War, the United States sided with Chiang Kai-shek's government, with which we continued to have diplomatic relations and with which we soon concluded a mutual defense treaty.

Then in the 1970s, the United States decided that our national interests required a better relationship with the People's Republic. We did so because Soviet expansion. We did so because of Vietnam. And we did so because we thought East Asia would be more stable and peaceful. The problem we faced was that Beijing insisted that we have no official relations with Taiwan when we recognized the PRC as the sole legal government of China. So we severed diplomatic relations. We terminated the mutual defense treaty. And we withdrew the U.S. military installations on the island. The United States vowed that commercial, cultural, and other relations -- even arms sales -- would continue, but on an unofficial basis. And that is the origin of the American Institute in Taiwan and the organization that is now called TECRO. Each was set up to maintain and expand the important substance of our relationship in the absence of diplomatic relations.

As authorized by the Taiwan Relations Act of 1979, AIT is a non-profit organization with a headquarters in Rosslyn, Virginia, just a subway ride away from the Department of State. When my friend Stephen Chen, as Taiwan's representative, needs to meet with a State Department officer, he asks me to arrange the meeting, which I gladly do, and the business is conducted under AIT's aegis. AIT also has a large office in Taipei and a smaller office in the southern port city of Kaohsiung. In each, there is an aggressive commercial section that promotes U.S. exports and investment. AIT is staffed in most cases by individuals who normally work for U.S. government agencies but who separate for those agencies in order to work for AIT, after which they return to their home agencies. Pursuant to the Taiwan Relations Act, their time accumulated toward their government retirement has grown by the amount of time that they spent working for a non-governmental organization.

Now our friends on Taiwan were extremely unhappy that the United States broke relations in 1978, necessitating these new arrangements. There was no certainty at the time that the unofficial relationship would serve the interests of both. The United States for its defense since the early 1950s was particularly concerned about its future security. And it is fair to say that Taiwan would prefer to have diplomatic relations today. Yet with the benefit of hindsight, there is widespread agreement that the framework created in 1979 has succeeded far beyond anyone's expectations. The two sides preserved the substance of their relationship in absence of diplomatic relations, to the point that fundamentally our ties are stronger than they have ever been. The foremost reason for this success is the resilience of the leaders and people on Taiwan. They have taken advantage of the opportunities open to them and rebounded from periodic setbacks with new vigor.

Economic Issues

This success story is probably clearest in the economic realm. Indulge me again in a little history. The United States has had a commercial relationship with Taiwan from the time that the island was open to foreign commerce in the middle of the nineteenth century. Indeed, an American company was the first foreign firm engaged in the export of sugar. The main commodity exported from northern Taiwan in the late nineteenth century was Formosa Oolong tea, which was in great demand in the United States. During the 1950s, it was American aid and American advisers who urged Taiwan in the direction of export-led growth. The Taiwan government had sound macroeconomic policies, a cadre of smart economic technocrats, and a relative absence of corruption. In this environment, thousands of small and medium-sized family-based enterprises took the plunge and began producing labor-intensive goods for foreign markets, creating what has become known as the Taiwan economic miracle. That miracle continues today, but on a grander and more sophisticated scale.

You have no doubt heard the rankings today: nineteenth largest economy with a per capita GNP of over $13,000; fifteenth largest trading economy; foreign exchange reserves of $93 billion; seventh largest investor; the third safest market for investments; seventh largest trading partner of the United States; and fifth largest customer for American agricultural products. What is truly astounding is that this impressive economic activity is occurring on an island that is one-fifth the size of the state of Missouri with four times the population. Actually, most of Taiwan's people live on and work on perhaps one-third of the land, since most of the island is mountainous. Also impressive is that fact that Taiwan with 22 million people buys significantly more U.S. exports than the People's Republic of China with 1.2 billion people.

The Taiwan Economy
I am not a salesman for Taiwan, but the picture I will paint for you today is optimistic. The Taiwan economy is strong. The market is opening wider, both for sales and investment, and U.S. firms are doing well.

It is important for you to know that Taiwan is an affluent newly industrialized society struggling hard to make the leap from a protected export-dominated economy to an open highly competitive international economy.

At the moment, the struggle is half won. Firms from Taiwan's private sector rank among the world's best. For example, the small island of Taiwan is the third largest producer of computer equipment in the world, after only the United States and Japan. Also, the island continues to increase its focus on high value technology exports. For example, more than $50 billion worth of semiconductor fabrication plants are planned for construction right now. This is the norm in Taiwan today. Less than 30 percent of the gross domestic product is in manufacturing and almost all of that is in the technology industries. More than 62 percent of GDP is in the service industries, while less than 10 percent is divided between basic industries and agriculture.

At the same time, Taiwan's public sector has not kept pace. Aging infrastructure--all elements of an earlier era--have combined to make Taiwan a closed high cost environment. Furthermore, the island's shortcomings in financial services, design and construction services, government contracting, all helped to make the case that Taiwan had been closed to the outside for too long.

The island's well-educated leaders understand that they have no choice but to finish the transformation of Taiwan's economy. These leaders all agree that failure to make this adjustment will result in a Taiwan with a high cost structure which would doom its competitive position in the world market, and they have taken significant action to combat these economic problems.

For example, to increase efficiency the government has set out to privatize the power, telecommunications, petroleum, and other state managed industries. The best example of this has been the recent awarding of $1.3 billion of wireless telephone franchises.

Taiwan's leaders understand that they must improve the island's infrastructure in order to preserve competitiveness. They have set aside hundreds of billions of dollars for public works projects designed to enhance the economy and improve the quality of life. Although this is sometimes a two-step ahead -- one large step back process, Taiwan has made steady progress. The government has established a Public Construction Commission to deal with the contractor's issues, passed a Government Procurement Law, opened infrastructure projects to foreign investment, passed legislation allowing foreign ownership of local construction companies, and drafted a new Arbitration Law. This new framework can be seen in the recently awarded franchises for a $12 billion high speed rail line running the length of the island and a $1.2 billion high speed commuter line between Taipei and the international airport.

Another key action by Taiwan's leaders was the establishment of the Asian Pacific Regional Operating Center concept. APROC is a plan to turn Taiwan into a competitive regional commercial hub. Under this plan, the government has identified six key liberalization themes which when implemented will lower costs, improve services, and privatize key state controlled industries.

These then are examples of where Taiwan's economic development is. Foreign expertise "as financiers, operators, and developers" is being matched with Taiwan's abundant capital reserves, highly skilled labor pool, and desire to become a much larger force in the international market. And it is worth noting that this process of liberalization and internationalization has occurred at the same time as a transition to a democratic political system.

The U.S.-Taiwan Economic Relationship
You have heard in the various presentations today the details of the U.S.-Taiwan economic relationship, the reasons for Taiwan's economic success even in the face of the Asian economic crisis, and the opportunities for the future. I therefore will not bore you by repeating what you have probably already heard. All the more so since I am a big-picture man and have little knowledge of economics. From a broad perspective, however, I am impressed by the complementarity of our two economies. This is true in the area of products, the most striking example being the area of electronics and information technology. Around one-third of our exports to Taiwan and one-third of Taiwan's exports to us are in this broad area. Clearly, we are working together to maximize our respective strengths and share the benefits of cooperation. Our industrial structures are remarkably similar -- each dominated by small and medium sized enterprises. These firms and the entrepreneurial leadership that goes with them are best suited to competing in a global economy that places a premium on flexible, technology-intensive manufacturing. And in many cases, these firms are already working together through joint ventures, investment relationships, and strategic alliances.

I must tell you that Taiwan restricts foreign investment. Foreign capital in most ventures rarely exceeds 30 percent, and AIT calculates U.S. investment at over $8 billion. Last year, U.S. firms invested heavily in electronics manufacturing and telecommunications franchises. The value of the telecommunications franchises alone exceeds $1 billion. Conversely, Taiwan firms have invested $20 billion in the United States, which, by the way, benefits U.S. firms. The Taiwan limits continue to be relaxed and when Taiwan enters the WTO there will be a greater degree of predictability, transparency, and guaranteed market access.

The U.S.-Taiwan economic relationship will grow even stronger and more mutually beneficial when Taiwan joins the World Trade Organization. Certainly the WTO will be stronger for the membership of such a strong global trader, and Taiwan's drive for internationalization will benefit from the stimulus of WTO rules. American companies, workers, and farmers will certainly benefit.

The U.S.-Taiwan bilateral agreement concluded in February 1998 as a prelude to Taiwan's WTO entry includes both immediate market access and phased-in commitments, and will provide substantially increased access for U.S. goods, services, and agricultural exports to Taiwan. For example, the agreement permits imports from the United States of previously banned pork, chicken, and variety meat products. It also provides improved access to the automobile, telecom, government procurement, beer, spirits, and wine markets.

In connection with its accession to the WTO, Taiwan has agreed to join the Agreement on Government Procurement (GPA). Adherence to the GPA's procedures should improve the transparency of the bid process on major government procurement contracts.

Taiwan's march to WTO membership took another significant step last week at a meeting in Geneva of the multilateral working party established by the WTO to consider the application. Only a few very minor substantive issues remain to be resolved. The question that must then be addressed is the timing of Taiwan's entry in relation to that of the People's Republic of China. The PRC has more ground to cover than Taiwan, but it has made great progress in the early months of this year in its bilateral negotiations with the United States. The Administration hopes that even more progress can be made, but also believes that the PRC's accession to the WTO should be on a sound commercial basis.

Clearly, the smoothest solution would be one in which the PRC and Taiwan enter at the same time, and there remains an opportunity to do that this year if the United States and the PRC are able to conclude their bilateral negotiations quickly. The trickier scenario would occur if on the merits the PRC is not ready to join this year and Taiwan is ready. The United States government's view is consistent and long-standing. The two applications should be considered independently and on their commercial merits. When Taiwan is ready, it should join. Yet the PRC takes the position that Taiwan should not enter the WTO first, and the WTO is a multilateral organization. If a significant share of the WTO's membership takes the PRC view, then the outcome may not work in Taiwan's favor. But I am an optimist by nature, and I hope that whatever the scenario, there will be broad recognition that Taiwan deserves to enter the WTO this year.

Taiwan's Security

>From this discussion of the intricacies of Taiwan's entry into the WTO, it should be clear to you by now that although the ties that bind the United States and Taiwan together are strong and substantive, our relationship is also shaped by sensitive factors that have nothing to do with trade or investment policies. To a great extent, our economic cooperation runs on its own steam, driven by the shared interests. At the same time, this economic engine runs on tracks defined by the regional environment. American companies, in preparing assessments of possible new ventures with or toward Taiwan cannot avoid addressing the impact of international politics. And it is to this broader, non-economic context that I would like to turn.

For the past five decades, the United States has sought to create an environment in East Asia that promotes peace, stability, prosperity, and democracy. We have done this through the forward deployment of our forces in the region, through alliances with friends and engagement of past adversaries, through our aggressive pursuit of global economic liberalization, and through our promotion of human rights and political freedom. Over the past two-plus decades, a key element of this larger policy has been the pursuit of good relations with the People's Republic of China. This was done not as a favor to Beijing but because it contributed to U.S. economic and security interests. On balance, East Asia has been a far more peaceful region in the past twenty years than during the previous thirty.

In part because of the environment that the United States helped create, there has occurred in the last dozen years spectacular progress on Taiwan and a significant thawing of relations between Taiwan and the Mainland. On Taiwan itself, we have seen a process of political liberalization and democratization that I mentioned before, one of the remarkable examples of positive political change since World War II.

At the same time, the barriers that existed between Taiwan and the PRC to any kind of contact have gradually decreased. Taiwan residents who hail from places on the Mainland have returned in the millions. Trade has grown to $22.5 billion in 1998 with Taiwan enjoying a hefty surplus; the PRC is now Taiwan's third largest trading partner. More importantly, Taiwan businessmen who faced rising labor costs on the island were able to relocate their production across the Taiwan Strait, to the point that today 30,000 Taiwan firms have contracted for more than $30 billion in investment in the PRC, and over three million mainland Chinese are employed in Taiwan-invested firms. Over 200,000 Taiwan business people now live and work in the PRC.

This economic interdependence has helped to improve the climate between Taiwan and the PRC but it alone has not resolved the fundamental disagreement. The dispute, to put it simply, is how (and, for some, whether) Taiwan should be a part of China, and over what means will be used to resolve the dispute. The PRC has proposed that Taiwan agree to be a special administrative region of the PRC with substantial autonomy to run its own affairs. This is in essence the same arrangement that has already been implemented for Hong Kong. Beijing most fears that Taiwan will seek to become an independent nation-state. In order to deter that outcome Beijing reserves the right to use force against Taiwan. For example, the U.S. government concluded in March 1996 that the PRC was conducting intimidating missile tests because it believed that Taipei was taking steps toward permanent separation.

The leaders in Taipei believes that Taiwan is a part of China, and that the People's Republic of China is another equivalent part. With broad public support, it opposes Beijing's Hong Kong formula for reunifying China because, they believe, that would surrender too much of Taiwan's freedom and so undermine Taiwan's way of life. Moreover, Taipei is wary of Beijing's intentions as long as the PRC government does not renounce the use of force, and says that a final settlement should await democratization on the Mainland. Finally, I should note that there is another view in Taiwan, a minority view, that the island is in no way a part of China and should be a totally separate country.

What, you may ask, is the approach of the United States government toward this disagreement across the Taiwan Strait relations? Five principles are at work.

First of all, of great importance to anyone thinking about a long-term business relationship with the island, the United States has insisted and will insist that the Taiwan Strait issue be resolved peacefully. It was in part to re-emphasize this principle that President Clinton sent two carrier battle groups to the Taiwan area in March of 1996. And just last month, the President said, "Our interests lie in peace and stability in Taiwan and in China, in the Strait and in the region, and in a peaceful resolution of the differences. We will do what is necessary to maintain our interest."

The second principle is that constructive and meaningful dialogue between Taipei and Beijing is the best way to resolve differences that exist between them. Dialogue fosters an atmosphere in which tensions are reduced, misperceptions can be clarified, and common ground can be explored.

The third principle governing the U.S. role in the Taiwan Strait issue is that the issues that divide Beijing and Taipei "substantive and otherwise" should be resolved by the two sides themselves. Whereas the United States has played a central role in trying to end conflicts in the Middle East, Northern Ireland, and Cyprus, in this case our interest in peace and stability are best served by not taking a seat at the table. We take this approach in the belief that Beijing and Taipei should exercise creativity and pursue understandings that reflect their common interest in peace, stability, and cooperation in economic and other fields. I believe, moreover, that any arrangements achieved by Beijing and Taipei alone are more likely to endure than those facilitated by an American go-between.

Similarly, and this is my fourth principle, the United States will remain even-handed in its approach to cross-Strait dialogue. We will neither support one side over the other, nor pressure one side to make concessions that it does not wish to make.

My fifth principle is a corollary of the fourth. Part of the Administration's approach of evenhandedness on cross-Strait dialogue is a belief that any arrangements concluded between Beijing and Taipei should be on a mutually acceptable basis. In any successful negotiation, in fact, each party should believe that its fundamental interests have been protected and that it is better off because of the bargaining that has taken place. Also, as a corollary of this principle of mutual acceptability, the Administration understands that because Taiwan is a democracy, any results of cross-Strait dialogue will have to have broad public support.

I can report to you that there are signs of hope in relations across the Strait. I have mentioned the growing economic cooperation between companies in Taiwan and companies on the Mainland, which will provide a cushion in times of political difficulty. Even in the more political area, there was progress in the early 1990s in setting up an institutionalized mechanism to address common problems. That effort was suspended in 1995 when tensions increased, but it resumed last fall with the visit of a Taiwan senior statesman to Shanghai and Beijing. His counterpart is scheduled to visit Taiwan some time this fall. On the other hand, the PRC is anxious about the results of presidential elections that will be held on Taiwan in March of next year and the policy changes that might occur as a result. Beijing's actions, particularly the deployment of increasing numbers of missiles across from Taiwan, only heighten the sense of insecurity of people on the island. So this is a long-term process that will require caution, creativity, and sensitivity all around. Still, the situation is far from hopeless and the United States will continue to work to create an environment in which a durable peace can be built.

In conclusion, let me make three brief points:

-- Taiwan is a good friend of the United States and we continue to build a rich, substantive relationship even in the absence of diplomatic relations.

-- Taiwan continues to be an economic success story, powered by good policies, strong human and financial resources, growing integration with the American economy, and a recognition that survival in the global marketplace demands continued liberalization and internationalization.

-- Although Taiwan lives in an unsettled neighborhood, its interdependence and dialogue with the Mainland plus a constructive contribution by the United States should sustain an environment of peace and stability that is good for business.