Monday, March 17, 2008

An Obsolete Mindset

The George W. Bush administration got a welcome early Christmas present last year in the election of the conservative candidate, Lee Myong-bak, as president of South Korea. It seems set to receive an Easter gift in Sunday’s presidential elections in Taiwan with the election of Ma Ying-jeou.

By most accounts, the former Taipei mayor and leader of the Kuomintang Party will defeat the ruling Democratic Progressive Party’s presidential candidate, Frank Hsieh, in the island’s presidential contest, March 22. It’s fair to say that both Lee’s predecessor, Roh Moon-hyun in South Korea, and Taiwan’s current president, Chen Shui-bian, were the Bush administration’s least favorite democratically elected Asian leaders.

Washington has been alarmed over Chen’s provocative moves concerning China, as recently exemplified by the referendum Sunday asking Taiwan voters if they want to join the UN under the name “Taiwan.” But it is even more concerned about what it perceives to be Taipei’s neglect of its own defenses.

Bush came into office promising to “do whatever it takes” to defend Taiwan. Early on, his administration proposed an extensive – and expensive – arms package, which inevitably raised objections in Beijing. Yet Taipei has repeatedly failed to appropriate the funds needed to acquire the weapons.

To be fair, it is the Kuomintang which has used its control over the legislature to block the appropriations, either out of concern that Beijing would consider the arms purchases as unnecessary or, more likely, out of sheer obstinacy. That may change once a KMT president is in office.

Of equal concern to Washington has been the fact that Taiwan’s defense budget steadily declined both in absolute terms and as a percentage of gross domestic product in the Chen years – just as China’s military budget has expanded exponentially. For his part candidate Ma has promised to raise defense spending to 3 per cent of GDP if he gains office. It had fallen to around 2.4% of GDP in recent years.

One thing that one can almost surely count on, whoever wins on Sunday, is a relaxation of the restrictions, restraints and disincentives placed in front of businesses investing more in China. Taiwan, of course, already has a massive stake in China. By some estimates the investments total more than $100 billion.

The pro-independence DPP, since it came to power eight years ago, has tried to discourage investment in the mainland and redirect it to other parts of Asia for fear that the island would become overly dependent on its arch-rival across the Taiwan Strait.

It has imposed investment caps, dragged its feet on regulations governing Taiwan’s investment in mainland banks, blocked efforts to establish direct transportation links, recoiled in anger when China lowered tariffs on such things as fruit and tried to direct investment inward through “invest in Taiwan” programs, or away from China toward Southeast Asian countries through its “Look South” campaigns.

None of this has been very successful in countering the extraordinary magnetic energy field of China’s vast and rapidly growing market just 90 miles across the Strait. Even before the election, the government was showing signs of bending on these restrictions in order to burnish its candidate’s credentials in the business community.

The government is lifting some of the restrictions that have prevented the island’s banks from taking full advantage of the liberalized banking market on the mainland. That has forced some banks to make an end run around the rules by investing in Hong Kong banks that have increased access to China under the Comprehensive Economic Partnership Arrangement.

As president, Ma will almost certainly enlarge on these measures and introduce others such as expanding the existing “charter” flights between Taiwan and the mainland and possibly going all the way by allowing direct transportation links. It is time to give up the obsolete mindset of the past few years and see China for what it is, the gateway to the region’s and the world’s markets.


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