Trading places - Beijing and Taiwan make surprisingly good partners

FOR almost 60 years, their rivalry matched the Cold War enmity between the US and Russia. Each coveted the others' territory, claiming it as their own.

Twice they brought the world to the brink of war. In 1995, China fired missiles across the Taiwan Strait landing just short of Taiwan, to warn there would be war if its island neighbour declared independence.

But yesterday in the Chinese city of Chongqing, these bitter enemies signed a path-breaking free-trade agreement. It's an outbreak of peace fiercely opposed by many Taiwanese, who fear China is pursuing free trade to try to bring the island back under its control.

Almost unnoticed by the rest of the world, China's President Hu Jintao and Taiwan's President Ma Ying-jeou have set aside their nations' long enmity to accept a political status quo and work to make the most of their formidable economic partnership.

China has many free-trade agreements on its plate. It has been negotiating one with Australia since 2004. A free-trade agreement with the 10 ASEAN nations took effect this year. But an FTA between China and Taiwan is something different.

In Taiwan, the government hopes it will open the way for trade agreements with the rest of the world. Foreign Minister Timothy Chin-tien Yang told The Age he hopes Australia will now start negotiating its own free-trade agreement with the island our seventh largest export market.

In China, the government hopes this agreement and those that will follow as the two sides pursue their relationship will, over time open the door for Taiwan to submit peacefully to Beijing's authority. But that goal is vehemently opposed by most Taiwanese, led by the opposition Democratic Progressive Party (DPP).

Their goal is full independence from China. In office from 2000 to 2008, the DPP was held back from declaring independence only by pressure from Washington, Taiwan's military protector.

The agreement signed yesterday is not dramatic, and for political reasons, is heavily lopsided in Taiwan's favour. It is the early harvest of what is planned to be a cascading series of agreements to open trade and investment across the Strait.

China will remove tariffs on 539 export lines from Taiwan, while Taiwan ends tariffs on 267 export lines from China. Both sides will open up some service sectors. China will stop its companies copying patented designs, products and processes from Taiwanese companies.

But to opponents, the agreement goes to the heart of Taiwan's identity crisis: is it part of China, the land of its ancestors, yet which has ruled it for just four of the past 115 years? Or is it an independent country, which the world and China should accept as free? To supporters, the agreement, known as the Economic Co-operation Framework Agreement or ECFA, is a pragmatic acceptance that the status quo will not be changed any time soon. Close relations with China are the best guarantee of peace, prosperity, and acceptance of Taiwan by the rest of the world.

Opinion polls suggest its supporters are in the majority. But on Saturday, nearly 100,000 people marched through Taipei in opposition to the treaty, which DPP leaders say will lock Taiwan into dependence on China.

"ECFA will open the door to unification", Hsiao Bi-khim, adviser to DPP leader Tsai Ing-wen, told The Age. "We would lose other options.

"They have expansionist ambitions over Taiwan. ECFA would give the Chinese greater leverage over Taiwan. Many people made sacrifices to try to bring about the kind of democracy we have today. We feel very strongly about defending that."

FOREIGN Minister Yang rejects that. "We are not talking about unification", he says. "We will leave these issues for future generations. We are engaged in confidence-building measures, step by step."

Taiwan's chief negotiator, Chiang Pin-kung, says opinion polls show that rather than opt for independence or unification, most Taiwanese want to keep the status quo, and the free-trade agreement will not alter that.

"Our export markets are concentrated in Asia, but we have no free trade agreement with any country in Asia," he says. "Mainland China is a huge market, and since it signed a free-trade agreement with ASEAN, we have lost competitiveness. And ECFA will make it easier for us to sign other FTAs."

It is ironic. President Ma is the head of the Kuomintang, the party that ruled China before being overthrown by the communists in 1949. Former Chinese leader Chiang Kai-shek fled to Taiwan with China's gold stocks and a million or more followers, and set up a rival government under US military protection.

Taiwan evolved into a rich country and a vibrant democracy. It is formally recognised only by about 20 developing countries dependent on its aid, yet its 23 million people now make up an economic powerhouse that is one of the world's 20-largest economies, with a GDP per head that this year will overtake Japan.

It is a giant in IT and electronics. It produces many of the world's flat screens and silicon chips. All the world's notebooks, whatever the brand, are made by Taiwanese companies in factories in China.

China still views Taiwan as a rebel province, but recognises that it cannot invade without risking war with the US. Most Taiwanese see their country as independent, but their government cannot declare it as such without risking war with China.

So, under the table, they have formed one of the world's strangest but strongest economic partnerships. It began in 1992, when in Singapore, they signed four agreements to pave the way for Taiwanese firms to invest in China an agreement that has become instrumental in making China the workshop of the world.

In the past two decades, even as China installed 1300 missiles facing Taiwan and threatened to invade, Taiwanese companies were invading the mainland. They organised millions of cheap Chinese workers to assemble Taiwanese components into the world's computers, TVs and mobile phones.

China became the world's biggest manufacturing base. Taiwan became its biggest foreign investor. Taiwanese companies now export close to $100 billion of goods a year from their factories in China.

Yet until President Ma was elected in 2008, their governments were fiercely hostile. Taiwan is only 120 kilometres from China, but there were no flights or ships between then, so all travel had to be via Hong Kong. Taiwanese companies invested more than $100 billion setting up plants in China, with uncertain security. And almost 1 million Taiwanese managers, technicians and their families have settled in China to run this vast empire.

A classic example is the iPad. It is made in China, for a US company, Apple. But Apple contracts production to Taiwanese electronics giant Hon Hai, known in the West as Foxconn. The components largely come from Taiwan but are assembled in Hon Hai's plants in China.

To business, economists and strategic thinkers in Taipei, these investments and the government's embrace of China, are the right way for Taiwan to go. "The logic is very clear", says Academia Sinica economist Chu Wan-wen, co-author of a study on Taiwan's economic growth, Beyond Late Development . "It's normal to have anxiety about China's growth, but we have to enter some kind of agreement to avoid being totally marginalised."

Strategic analyst and former minister Lin Chong-pin sees the agreement as a Chinese initiative. "In the summer of 2002, Beijing made two crucial decisions on hard choices," he says. "First, in relations with Washington, co-operation would take priority over conflict. And second, economic development was more important than unification with Taiwan.

"These decisions were not made easily. But Beijing has learnt, through trial and error, that to buy Taiwan would be cheaper than to attack it. And related to that, to pressure Washington to constrain Taipei is better than to pressure Taipei directly."

Foreign Minister Yang, who spent five years in Canberra as head of Taiwan's de facto embassy, sees the warming of relations across the Taiwan Strait as positive for Asia and the world. "They used to threaten us, and stage military exercises across the strait," he says. "They're not doing that any more. Both sides are showing goodwill to each other."

He hopes it will also end Taiwan's diplomatic isolation illustrated last year at the Copenhagen climate conference when its environment minister was admitted only as the representative of an NGO.

"My message to our Australian friends is, 'Please, take Taiwan seriously'," he says. "We need moral support from the world, so that we have the confidence to go forward with this policy."

Mr Yang wants Australia to resume ministerial visits to the island, ended by the Howard government after Chinese pressure, to consider negotiating its own FTA with Taiwan, and to back its bids to join international bodies such as the UN climate change negotiations.

Australian sources are sceptical about the idea of negotiating an FTA with Taiwan. They point out that Australia's exports to Taiwan are mostly coal, iron ore, and other minerals, which face virtually no tariff barriers while Taiwan would never agree to end tariffs on Australian farm exports.

But for the world, the real test of President Ma's embrace of China is whether it becomes accepted across the divide of Taiwanese politics.

OPINION polls show only 19 per cent of Taiwanese want ultimate reunification with China, whereas 45 per cent want long-term independence, and the rest hope to preserve the status quo indefinitely. The argument is not likely to end soon.

But back at the Australian National University in Canberra, Taiwan analyst and former head of the Department of Foreign Affairs and Trade, Stuart Harris, cites a very different poll: fewer than 30 per cent of Americans are prepared

to go to war with China to defend Taiwan.

"People in Taiwan privately concede that Taiwan has to make a deal with China," he says. "They've got 99 per cent of what you need to be an independent country. Does the other 1 per cent really matter enough to risk a war?"

Tim Colebatch, economics editor, visited Taiwan as a guest of the Taiwanese government.