Economic Strategic Triangle: China, Hong Kong, Taiwan

Executive summary

China’s rapid economic growth

China has an exceptional position the today’s world’s economy. There are several reasons for what makes the Chinese economy unique. These are the rapid growth rate, the characteristics of the Chinese economy and how china’s economic reforms resulted in increased productivity despite government control.

Hu and Khan, 1997 analyzed the reasons for the Chinese economy’s rapid growth. They suggested that the economic boost in China is a reality and it began in 1978 (economic reform program). The annual growth rate increased by 3 to 7% and the individual annual income increased four times. There are factors helping the rapid growth of the Chinese economy, first is the political stability of the post-1978 era compared to the environment before. Change from Marxism to Mao ideology; the Chinese-Russian conflict; the Cultural Revolution and the Great Leap are examples of political instability economic reform started in 1978. Second, before 1978, China directed most investments to urban areas, because of the economic reform policy, starting from 1978 the government directed investments to rural areas and the government encouraged rural and private businesses investments. This produced an increase in China’s capital assets in the form of new factories and industrial machinery besides increasing the number of skilled workers. Third, developments in China’s economy are not stationary; the dynamically progressing economy reflects that the Chinese government transferred the preliminary productivity gains to develop another economic area. Fourth is the change in workers’ patterns and distribution, before 1978 80% of Chinese workers practiced agricultural work, in the post-1978 era only 50% are working in agriculture. Fifth, enterprises managers were given autonomy to determine their goals, sell some goods in the private market at competitive prices; however full-scale pricing reform remained the responsibility of central authorities to contain the possibilities of inflation. Finally, China’s Open-Door policy gave advantages to investors (tax, open coastal areas, impose free-market economic policies) resulting in increased investment, more jobs, more factories, and increased links with international markets.

If that is the case, what made China’s authorities reevaluate the strategy of economic growth? In 2004 Chinese officials expressed their view that rapid economic growth cannot be maintained, not in the sense of slowing it down, but more to restructure demands and augment the efficiency of investments (Lardy, 2007).

Lardy (2007) explained four factors that lead to the Chinese reevaluating their rapid economic growth. First, accrual evidence displayed that investment-driven growth (occasionally called an extensive pattern of growth) resulted in lesser competence in managing China’s resources. Second, this reevaluation aims at increasing individual spending and improving the income difference gap between Chinese workers. The third reason was to look at the small gains in terms of employment compared to growth rates. Finally, the ever-increasing energy consumption and its effects on economic development and of equal importance on the ecological environment is another driving factor for reevaluation.

What is a strategic economic triangle?

The geometric definition of a triangle is a three limb polygon where the three sides link end to end and have three vertices and any of the three limbs can be its base. Applying this to economical triangles, carries the meaning of equality non-dominant relationship that is based on mutual benefit and respect of interests. In other words, it is an integration process not an amalgamation or a combination one (Cheung, Chin, and Fuji, 2003).

The different countries’ triangle in international politics points to the inclusive foreign policy objectives of the relationship configuration among certain countries. These countries have special strengths that can affect or induce power either global or regional. After the Vietnam War and the economic boost of the Chinese economy, the USA and other countries realized that China’s effect on the world economy can be contained or controlled by alliances. Furthermore, such alliances may help to achieve stability at least in the region of East Asia, so triangles like US-China-Japan and Sino-Japanese-Russian triangles were formed. The native indigenous political, cultural and religious concepts of the region of East Asia are different from western and even Russian concepts (Vogel, Ming and Tanaka 2004). Despite political and economic differences, it would seem natural and logical if a strategic triangle is formed among China, Hong Kong, and Taiwan.

Research question and aim of the Work

The aim of this thesis is to provide a deeper look to the principle of one China, China, Hong Kong and Taiwan economic strategic triangle. The research question is whether economic, political, social, and cultural differences are diversities or synergistic and how to create synergy with the advantages each limb of the triangle has. In this pursuit, The researcher will review the literature on the principle of one China, its modification to one China and two systems, what are the difficulties facing the greater China and the full implementation of the China-Taiwan-Hong Kong strategic economic triangle (cultural, political, social, and economic), what are the advantage for each limb of the triangle, and how to make it work. The researcher concluded the principle of one China needs to be redefined to ensure Taiwan’s symmetrical international representation and reject transforming the political conflict into a military one

The principle of one China

The concept of China’s mainland sovereignty over all China land dates from the late 19th and early 20th. Century (the late period of Qing Dynasty reign 1644 to 1911). During World War II, the Cairo declaration (1943) and the Potsdam declaration (1945) recognized that all Chinese land occupied by Japan was to return to the sovereignty of the Republic of China when the war ends. In 1949, the communists ended the era of the Republic of China and exiled the nationalists led by Chiang Kai-shek to Taiwan, and China’s mainland is now the People’s Republic of China (PRC). The strict communist rule and involvement of the PRC in the Korean and Vietnam wars deepened the belief that Taiwan is an essential ally to the west. So the PRC suffered a western world boycott during the period of the cold war and therefore, deepened the economic, political and cultural differences between China and Taiwan (Jue, 2005).

The principle of one China: Basic keys

The core of the one China principle as declared by the Central People’s Government and stated in China’s constitution is all Chinese land including Taiwan is one land. The duty of all Chinese people is to complete the process of unifying the nation. In simple words, the whole essence is Taiwan is a part of China. It rejects the state-to-state or special state-to-state treatment of the Taiwan Government and rejects the two Chinas or one China, one Taiwan alternative, or the independence of Taiwan. Based on recognizing this principle, China’s mainland will decide its diplomatic relations with other countries. Other key points are: the only way to achieve a peaceful reunification is the recognition and compliance to the one-China principle. Second, the Chinese government supports people’s contacts, economic and cultural exchange, third, recognizing this principle, all issues and matters are liable to the discussion. Fourth, after the unification of all Chinese land, the principle of one China two systems can be applied to Taiwan as with Hong Kong and Macau. However what rose worries was the statement that China does not rule out the use of force if need calls (The Taiwan Affairs Office of China – The Information Office of the State Council, (2000).

One China – two systems

In 1984, the Chinese leader Deng Xiaoping suggested the concept of unifying China into one country with two systems (economic and political). That was during the talks with the British and Portuguese Governments before returning Hong Kong and Macau to Chinese sovereignty in 1997 and 1999 respectively (China Government document, 1984). The Chinese leader suggested there will be one China, however, areas like Hong Kong and Macau (special administrative regions-SARs) will enjoy keeping their economic and political systems which are not socialism. SARs will also enjoy a high degree of self-government for 50 years after integration with China’s mainland. Deng Xiaoping included Taiwan for the same principle applies in case talks of unification succeed (China Government document, 1984). The two special administrative regions (Hong Kong and Macau) are responsible for their local domestic affairs, but not international diplomatic affairs and defense. Nevertheless, representatives from these two regions can take part (as members of China mainland’s delegation) in negotiations that affect their regions. The governments of China and Hong Kong consider the principle is applied successfully since 1997. The constitution of the People’s Republic of China included this principle (Article 31), recognizing the need to establish SARs in the future and authorizing the PRC government to take necessary actions (Luo, 2004).

One China principle: The Taiwan Issue

The Montevideo Convention on the Rights and Duties of states (signed in 1933 and came to implementation in 1934) defined that a state must have a permanent population, a defined territory, a government and the competence of managing international relations. Taiwan’s people and officials believe that their country has all the criteria of being an independent state. As China’s position and the economy grows, Japan and USA recognized the one-China principle. In this way, they recognized that the PRC is the sole representative of the Chinese people (Joint Communiqué of the Government of Japan and the Government of PRC and Shanghai’s Communiqué in 1972 respectively). According to the one-China principle, countries that have diplomatic relations with China cannot do the same with Taiwan. This puts pressure on the Taiwan government besides worries because of repeated China’s threats to use force to achieve unification. Many observers think that applying the principle of one China two systems can significantly contribute to solving this issue (Chao and Myers, 2000).

Is One China a marketing reality

From an economic viewpoint, the Boyden report argued considering China mainland as one market for western investors and companies. The argument bases are not only just because of being too large but also because of other factors. The report states there are more than 200 languages in China with too much slang. Climate and agricultural crops in addition to lifestyles and ways of behaving are clearly different in China’s different regions. In fact, China resembles a continent in its diversity. What characterizes china as a local market from other big markets (like the US), is diversity with ranging social, economic and cultural population characteristics. Of equal importance, the pattern of population spending is different in different regions and provinces of China. The long-time low investments in infrastructure and lack of nationwide distribution facilities and systems may drive investing companies to distribute their products to nearby customers. As the Senior Vice President, Sanofi-Aventis, Asia Pacific pharmaceutical company division, suggested achieving success in marketing strategies China should not be looked upon as one country market. Instead, it should be looked upon as many markets (the Boyden Report, 2007

Learning from the past

Stages of development of China’s economy

During the 1840s, China was defeated in the Opium War and forced to unequal treaties with European countries; the 1901 treaty (Boxer, or Xin Chou) settled this series of treaties. This treaty was humiliating to the Chinese people and considered by many historians consider treaty the main reason for the 1911 revolution. It included paying 450 million silver taels; a Chinese weight equals about 38 grams, destroying Taku Forts, an embargo on arms imports and punishing government officials for crimes or tried crimes to foreign subjects). (Chow, 2001).

With the end of the Qing Dynasty and the rise of the Republic of China, a new era of the Chinese economy began. In this era, the main activities of the Chinese economy were agriculture, handicraft and trade. Coastal cities especially Shanghai and Tianjin received foreign investments and developed factories for textiles, paper, wool and leather industries. Because of this, these cities’ officials had the ability to build and improve the infrastructure. In the 1920s, there were two major banks (the Bank of China and the Communication Bank) in addition to many other small banks, and by the 1930s, the Shanghai Stock Market was actively in business. This era (1911-1937) was characterized by political instability, however, because of the people’s ambitions, hard labor and ingenuity, China’s economy progressed. This points to an important fact, which is the Chinese human capital and market economic foundations are enough to boost China’s economy. In 1937, Japan attacked China and the economy declined steadily and in 1949, the communists ruled china and another era began (Chow, 2001).

This interval from 1949 (end of World War II) and the year 2000 can be divided into two further stages of China’s economic development. The determining element is the economic reform policy adopted in 1978. The characteristic of the first part (1949-1978) was central planning and the people’s ownership of all production facilities (Cooperatives and Communes as described in the Great Leap, 1958). This period was economically characterized by high death rates (17 per 1000, in 1962), repeated famines in various regions and provinces and general failure of the Chinese economy (Chow, 2001).

In 1978, President Xing Xiaoping took over the leadership of the Communist Party to start the policy of economic reform. There were five reasons for the economic reform to start at that time, first, the Cultural Revolution was unpopular and the new party leadership had to detach from this revolution’s bad repercussions. Second, by that time, the inadequacy of the central planning policy was clear and change had to occur. Third, the successful economy of the nearby Asian countries especially Taiwan and Hong Kong gave an example of what economic reform can provide China. Fourth, the Chinese people were drained and ready for the change; finally, the new Chinese leadership adopted practical and realistic rather than fixed political and social approaches to boost China’s economy (Chow, 2001).

China’s economy: The Hong Kong factor

In 1997, the Office of Public Affairs, US Department of Treasury issued a report on the role Hong Kong can play to reshape the Chinese economy. The report explained five reimbursements Hong Kong’s economy can offer to boost that of the motherland. First, the vast Hong Kong experience in managing large-scale economic systems, which included several sub-factors. 1) The careful practical management of finance, 2) successful management of economic surplus, 3) experience in managing capital flow. In addition to these sub-factors, the Hong Kong open system of foreign exchange and the availability of personnel who can transfer this know-how to China’s mainland were valuable assets. Second, Hong Kong’s supervisory body knowledge and understanding of financial systems, improving market administration and overcoming free-market economy were valuable experiences needed by the Chinese leading economists. Third, Hong Kong was ahead of China as to the government’s role in boosting the free economy, which sets an example for China to follow. Fourth, Hong Kong’s economy was a good example to follow as regards incorporation with the global economy; China needed that after a long period of Communist rule that kept China apart from the world community for a number of years. The final benefit is the deep understanding of Hong Kong businessmen and economists needed by Chinese counterparts of how markets are presumably working (Office of Public Affairs, US Department of Treasury, 1997). This is particularly true knowing that foreign investment started to flow after economic reforms in 1978 (Berkeley, 2006).

In addition, Berkeley, 2006 suggested that Hong Kong’s importance to China’s economy stems from being the next-door neighbor most related to the mainland. A reunion would benefit neighbors, creating more jobs for the Chinese and transforming Hong Kong’s economy into a service-oriented economy instead of being a manufacturing one. Trade between China and Hong Kong is important for both economies as it points to the degree of partnership and the success of one China two system approach. The rising value of Shanghai as a center of trade in East Asia is a challenge and motivation at the same time to Hong Kong business. The main difference between the Hong Kong factor and the Taiwan issue is Hong Kong has transformed from a British Colony to a Chinese-specific administrative region. Meanwhile, Taiwan still does not fully accept the transformation from an independent state to a Chinese SARs (Berkeley, 2006).

Hong Kong’s economy pre and post-1997

After the defeat in the Opium War, the Emperor of China signed the treaty of Nanjing in August 1842 with the British. The Treaty allowed British Merchants to live and trade in cities like Canton and Shanghai with British Counsels supervising their welfare and communicating with Chinese authorities (Article II). According to Article III of the same treaty, Hong Kong became a port for British ships and was ceded to Her Majesty Queen Victoria and Her Heirs and Successors. Until 1949, Hong Kong was the bridge between China and the western world for the import of western made industrial goods and export of textiles, silk and tea from China to the world through British companies. The socioeconomic structure during that period was colonial. In 1949, the communists came to power and Chang Kai-shek took Taiwan as an exile for him and his fellow nationalists. Common people who did not trust communism fled to Hong Kong via Shanghai port, which increased the population to 2 million by the end of the 1940s. During the period of the Leap Forward, a further million fled to Hong Kong from China. As the Chinese economy was not getting better at that time, Hong Kong, under the umbrella of British democracy, became the center of trade in the greater China region and enjoyed a free business environment with minimum British interference. The human wealth of education and technical resources boosted the economic growth of Hong Kong in the fifties. By 1976, Ding Xiaoping came to power (after the death of Mao and the decline of the Gang of Four), and start the policy of economic reform. The trade between Hong Kong and China increased enormously and because of the low wages of Chinese labor while preserving the good quality, Hong Kong investors started to transfer the know-how, investing in China and gaining good profit margins. So profitable that by 1992 Hong Kong Foreign Exchange was at 61 billion dollars daily balance. By the end of 1997, Hong Kong suffering already political instability, suffered from economic instabilities as well. In October 1997, Hong Kong suffered from the economic depression that assaulted the Asian economy and the stock market fell by 17% in five days. In the 1990s, China opened the door widely to direct foreign investments, so Hong Kong as a trade and investment partner feared to be put aside. To overcome this difficulty and cope with the rapidly growing Chinese economy, Hong Kong companies that considered China as a production base because of the facilities given by the government and the low wage working hands, transferred management teams and infrastructure to China (Chan, 2003).

The links between Hong Kong economy and the Chinese economy are mainly direct Hong Kong investments in China, Hong Kong as the main trade partner to China and immigration of workers from the motherland looking for a more prosperous environment (Sung and Wong, 1998). There is a notable direct investment of Hong Kong capital in China, based on Chinese figures, most of Hong Kong’s foreign direct investment is directed to China. In the USA-China Business Council report (2004), Hong Kong ranked first in foreign direct investing economies in China, South Korea was third, Japan and USA were fourth and fifth respectively. The volume of trade between China and Hong Kong is enormous. The APEC (Asia-Pacific Economic Cooperation) outlook in 2005, states that the migration volume of exports of goods and services between China and Hong Kong reached 15.3 billion US dollars (compared to 4.4 billion in 1999). The report displays the volume of import of goods and services was 13.8 billion US dollars in 2004 (compared to 7.5 billion in 2002) (APEC outlook, 2005). The migration of workers from China to Hong Kong relates to employment rates. In 1982 Chinese government enforced the limitation of the migration rate to 75 per day to enforce Hong Kong investors to relocate to China. This rate increased in 1993 to 105 a day and in 1995 to 150 a day so the number of Chinese labor hand increased to a total of 45.700 in 1995 and reached 61.500 in 1996 (Sung and Wong, 1998). In 2005, the employment rate went up by 2.2% and the unemployment rate went down to 5.7 % (APEC outlook, 2005). However, the number of Chinese immigrants dropped to 34000 in 2005 and more to 25000 in 2006 (US Bureau of Consular Affairs, 2007).

Hong Kong Economy: the China factor

Relocating Hong Kong industry in China was mainly because of the low wages working power and advantage offered by the Chinese government in taxes and low land rental rates compared to Hong Kong. Industrial relocation helped Hong Kong’s economy in maintaining capital outflow which would have been subjected to instability if remained in Hong Kong. Relocation of Hong Kong industry fortified Hong Kong industrial restructuring; this resulted in rising in the grand domestic product rate of 5.7% in 2002, despite industrial relocation in China. The second China factor is expansion and redirection of trade. A statistical bias originated from the fact that Hong Kong economists calculated exports from industries relocated in China as re-exports coming from China. On this basis, Hong Kong’s domestic and total exports show a decline while the Hong Kong share of re-exports shows a concurrent rise. In 1989, the Hong Kong government considered outward processing re-exports from China to be included in trade statistics. In 1998, the Asian financial crisis hit most Asian economies including Hong Kong and Taiwan. However, official statistics from Shanghai displayed that overall foreign investment ventures based in Shanghai exports rates to the US and EU have increased by 20 to 47 %. Thus the strong economic recovery of Hong Kong in 1999 can be attributed to industries and ventures relocated in China. Finally, the decision of the Chinese government not to devalue the Chinese currency helped the Hong Kong dollar not to be subjected to ups and downs (Kueh and Ng 2002).

History of Taiwan’s economic development

Taiwan’s economy has developed over the years to become one of the strongest 20 economies in the world. This economic growth passed into phases, the first (1945-1952) is the immediate post-World War II period. When Taiwan recovered from Japanese occupation, the island was devastated and infrastructures like railways, harbors and roads were damaged and working with nearly half the capacity. Prices went high and basic goods (rice and sugar) fell to nearly 60% of the production rate during the Japanese occupation. When communists took over in China to become the PRC and the Republic of China government established in Taiwan (1949), millions of immigrants came to Taiwan increasing the problems of unemployment and inflation. Furthermore, the communist government of China cut off all sorts of relations between the two sides of the strait, causing a further shortage of supplies and basic materials. The second phase of Taiwan’s economic development (1952-1980), is characterized by transformation from an agricultural to an industrial economy. This period can further be divided into two periods, before 1962, the agriculture share of the gross domestic product was around 32%, while the industrial share was about 17%. In 1961, the agriculture share became 25% and the industrial share became around 24%. Between 1952 and 1961 the main industrialization efforts were related to agriculture and Japan was the greatest export partner and the US the largest import one. The rate of agricultural growth was nearly 4.5 % while the industrial growth rate was 12.4% with a total economic growth rate exceeding 9% yearly. In 1962 the industrial production value exceeded the agricultural value and the Taiwan industrial era began. In 1973 and 1979, the first and second energy crises hit the world economy including Taiwan with increased inflation and economic recession. Despite that Taiwan’s economy displayed the greatest rapid growth of economy between 1963 and 1980, this continued further so by 1986, the industrial share of the gross domestic product reached over 47%. The transition from light to heavy industries took place in the period 1981 to 1995 (third phase of development of Taiwan economy). In 1986, the ratio between light industries value to heavy industries value was 51.52% to 48.48%, and in 1995, the ratio became 33.63% to 66.37%. Technology-related industries showed the highest growth rate from 54.9% in 1986 to 66.9% in 1995 (Government Information Office in Taiwan, 2005).

The Taiwan economy took advantage of the political changes after World War II. Communism as an economic application has either been enforced (Eastern European countries) or encouraged through the infiltration of communist groups and parties. The world has been divided into two camps, the free democratic and the Marxist communist or socialist, Taiwan in the face of communist China has a similar role, with differences, of West Germany facing East Germany. With the support of the USA, Britain and other free world countries, products and manufactured products exports went smooth. Taiwan had almost no competition in international markets (Korea came to the scene in the late 1960s) (Government Information Office in Taiwan, 2005).

Taiwan-China economy interdependence

Starting from 1990, the cross Taiwan Strait (a sea passage of 180 km width between Taiwan and China mainland) investment and trade between China and Taiwan grew significantly. By 2002, China became the third trading partner to Taiwan and the total volume of trade (both ways) exceeded 30 billion US dollars compared to $ US 6 billion in 1990 and $ US 26 billion in 2000. The most important part of this cross Taiwan Strait trade is computer electronics. This industry has developed significantly in Taiwan that most of Taiwan’s top 20 leading industrial firms specialized in the electronic industry, and about 60% of the world’s trade in notebooks, motherboards and computer accessories are made in Taiwan. To maintain its position in the world market, Taiwan had to take advantage of the mainland’s work power (being cheaper and more skilled). This boosted the cross-strait trade between the two countries (U.S.-China Economic and Security Review Commission, 2002).

About investments, despite restricting rules from both sides, Taiwan businessmen got around them in many ways. Investing in Hong Kong is a Chinese SAR or another area as a third party (like the Cayman Islands). Taiwan’s government estimated investments in China by 17 billion US dollars, However, officials and non-government sources raise the figure to $ US 60-70 billion representing almost 40% of total Taiwan out investments (U.S.-China Economic and Security Review Commission, 2002).

Taiwan’s economic dependence on China is best illustrated in the high technology and computer industry. China represents a low-cost production center to Taiwan businessmen, furthermore, China is a huge consumer market to Taiwan technology products. This mutual benefit is not without risks of restricting the cross-strait trade and investment by China government to put pressure on the Taiwan government to accept the one-China two systems policy. The presence of large numbers of Taiwan businesses in China mainland represents another security problem to Taiwan. Furthermore, if Taiwan personnel working in China are forced to return home, this may cause an employment crisis. However, the benefits China gets from its cross-strait trade and investment are significant. An example is China’s information technology production reached $ US 25.5 billion in 2000, 70% of which because of Taiwan investments. According to Taiwan government officials, Taiwan investments in China created 3 million jobs. The flow of trade and investments across the Taiwan Strait depends on mutual economic benefits. This protects it from changes of policies; therefore both countries realize the importance of encouraging cross trade and investments (U.S.-China Economic and Security Review Commission, 2002).

Cultural, social, political and economic differences among China, Hong Kong, and Taiwan communities

Culture is the framework of overt and understood ideas and meanings shared among a group of people that they use to construe the world and which function to model and outline this group’s behavior. Many factors contribute to making a people’s culture like values, laws and rules, social categories and the ways of thinking imposed by each category. Other inherent understood factors are tacit models, and assumptions (Halsall, 1995).

Cultural characteristics of China, Hong Kong and Taiwan

Chinese culture dates back thousands of years in history. Over time, this culture has displayed that its artistic quality is the most pertinent trait. It is clear in writings, drawings, statues and music those Chinese artist’s principle attention was the positive perception of beauty or creative presentation showing beauty in things rather than real facts. In approaching their work, Chinese artists focused on instincts, perceptions and their minds’ eyes. A characteristic of Chinese culture is the blend of the artist overlapping the scientists controlling most cultural features, yet both the artist and scientist can not be separated. Furthermore, the artist in most Chinese people formed Chinese morals giving rise to the Chinese family goodness, traditions, and values (known as filial piety). The morals of the Chinese culture have four standards that together put the foundation and shaped the Chinese culture. These standards are artistic, humanistic, self-control and harmonization standards. In most of the western and other countries, God (or occasionally spirit) is the eventually final moral authority. In Chinese culture, this authority is the world of mankind, pointing to the fact that practicing morality is not to follow God or spiritual authority, but to follow beliefs based on human consideration and understanding (Wu, n.d.).

The question is can cultural findings of China be generalized to Hong Kong. Hong Kong has been under British management for almost 150 years, what were the effects and was there a real change of culture. Tyler (2006) inferred that despite the long period of British administration, the people of Hong Kong still consider themselves as either Hong Kong people of Chinese origin or descent or Chinese people. The local culture of Hong Kong is Chinese with some differences from the traditional one. However, these differences are no greater than those between the two Chinese provinces.

Taiwan suffered from Japanese occupation for 50 years (1895-1945). Long before that, Dutch traders settled in 1624 as a commerce station between Dutch trade and Japan and the Chinese coast. In 1626, the Spanish traders did the same and were driven out in 1642 by the Dutch. Migration from China began earlier than any (500 AD). This unique position in world trade has affected the Taiwanese culture, making it a mixture of Chinese, western and Japanese effects (U.S. Department of State, 2008).

Hong (1996) suggested that the cultural relationship between Taiwan and China mainland passed through 4 stages according to political and economical relations between the two countries.

  1. Before 1980: By all means, the cultural relationship starting from 1949 to1980 was perhaps one of the worst because of three reasons:
    1. The communist party came to power in China and the Kuomintang (KMT) led by Chiang Kai sheik was exiled to Taiwan, with the differences in concepts, foreign policies, economic objectives being vast.
    2. Both authorities banned all sorts of exchange media and cultural materials and words like smuggling, illegal and jail penalty was the rewards of such exchange.
    3. Until the mid-1980s, China’s media treatment of Taiwan was criticism, and an atmosphere like Cold War prevailed for over 30 years in the media of the two countries.
  2. This conflict gave rise to two cultural observable facts:
    1. Media was underdeveloped in communist China and depended on the speeches and direct forms of attack on the policy and economy of Taiwan.
    2. China’s communist authorities and media feared the transfer of democracy and open economy concepts from Taiwan.
  3. After the decline of Mao Marxist-Leninist concepts and the failure of the Gang of Four, changes occurred in the Chinese concepts of free trade and the principle of one China came to the theatre. This mandated some changes in the cultural relationships between China and Taiwan.
  4. The stage of transfer from confrontation to acceptance: Occurred as a result of China’s open door policy and Taiwan ending the martial law. This change in a relationship was preceded by China’s authorities’ acceptance to exchange Hong Kong cultural materials. And by the mid-1980s, China’s authorities allowed Taiwan’s cultural materials to pass and Taiwan authorities did the same.
  5. The stage of change from constraints to lesser constraints: In the early 1990s, two government organizations were developed across the strait namely, the Strait’s Exchange Foundation in Taiwan and the Association for Relations Across the Taiwan Strait in China. This marked the Chinese change to one China two systems with implications on cultural exchange.
  6. The fourth stage was the rationale step of separating cultural relations from political conflicts and relations.

Social characteristics of China, Hong Kong, and Taiwan

China Social Changes

Despite China’s rapid economic growth and increasing trade balance, a social phenomenon appeared in the last few years. The China society unrest in nonurban (rural areas) developed and was reported by many authorities. Jiang (2006) reported that regional unequal individual income is a risk to continuous economic growth and the increasing urban-rural income gap came to serious risky levels. The author added that according to the UN development program, the individual income, and life expectancy (collectively called Human Development Index) display disparity between rural and urban communities. Fan (2006), reported that Chinese officials recognized 87.000 incidents of social unrest in 2005. The causes of these incidents vary from interest conflicts between local governments and the people of the provinces to unequal distribution of benefits of the increasing trade volume. Lum (2006), in the CRS report to the US Congress, that expression of such social unrest included demonstrations, strikes and groups appealing to the authorities to modify the status of living. In one province (Guangdong), a number of rural peasants were killed during a riot which points to how people are angry and how authorities show incapability of taking wise actions. Opinions regarding the reasons for such social unrest vary.

Keidel (2005) suggested that a hesitant uncertain economic growth may be the cause. The author considered the decrease in the number of events in 2003 compared to the period 1997-1999, proof that social unrest will eventually be contained. Another explanation suggested by Keidel (2005) is rapid economic growth with an increasing rate of socioeconomic reforms can result in regional microeconomic faults during the growth and stationary phases of economic growth. Jianrong (2007) suggested that according to the social conflict theory, social unrest and conflict when an unequal social group collides over opposing conflicting interests. In addition, the local and central governments being unable to meet the increasing demands, ambitions, and anticipation of rural people may lead to frustration and eventually mobilization. Lum (2006) in his report expressed his hopes that China’s mainland government can in the near future contain such unrest events through policies that ensure continued economic growth and a fair distribution of benefits. Most economic and political experts do not anticipate such rural events to turn into a nationwide conflict, however, the question remains is China’s mainland pattern of political control with the rapidly growing economy and ruling a population sector out of the benefit distribution is accepted by other communities (like Taiwan) who are achieving rapid economic growth rates with fair distribution.

Taiwan social characteristic

The characteristic social feature of the Taiwanese community is the growing awareness of national identity evidenced by developing an ethnic splitting up between native Taiwanese and those who came with the Kuomintang (KMT) during the 1940s. There are various reasons for growing national identity, historical, demographic, economic and political, however, the questions remain will it continue to grow, what is the effect of the incident of February 1947, what might happen when the native Taiwanese population increases and takes over the total population? Dreyer (2003) disagreed about the time of development of Taiwan’s national identity and stated it dates back to more than 100 years. A major contribution to the development of habits and attitudes different from those of China mainland was by the Japanese occupation for over 50 years. A second major contribution was the influx of the nationalists (KMT) and the tragic incident of February 1947 (when thousands of Taiwanese were killed by KMT). This particular incident woke up the nationalization movement despite the efforts of Chiang Kai sheck to define Taiwanese as Chinese. Finally, Taiwan democratization in 1986 has released a new wide-ranging national identity social current.

The state-society relation of Taiwanese national identity was approached by Gold (2003). He suggested what makes the social phenomenon strong is that it developed from the people and was not imposed by a political movement or party. This, in reality, was the reason why Kai Sheck’s trials to redefine who is Taiwanese failed. Kai Sheck’s notion of making Taiwan a part of the Republic of China also failed because of the same reason.

Rigger (2003) separated the national identity social phenomenon into parts, namely: the provincial origin of the phenomenon rather than a central one. The feeling of nationality and citizenship among the people not imposed by authority and political preferences of the Taiwanese people after democratization are other parts of the phenomenon.

Hong Kong social build-up

Taking the number of taxpayers and the total amount of money collected as taxes from the total population of Hong Kong (nearly 6.5 million), Berthier, 2003 inferred that less than 10 % of the population are paying taxes. Although this is a rough pointer, it casts a shadow over the prosperous community Hong Kong authorities claim to be. With no doubt, this is opposed by the opinion that not everyone pays the proper taxes, or Hong Kong is not a developed country, although it may be on the top of developing countries. Yet this raises the question of fair distribution of wealth. Berthier (2003) looked into the possible real reasons for such a discrepancy in individual’s income and suggested that up to the mid-1990s, the Hong Kong government underestimated the population number to account for less investment in public sector services and counted the whole trade economy as the national income. So that by the mid-1990s, the individual income was greater than that in the UK and thus, the pre-individual income rate becomes falsely increased or inflated. This situation has created social strata of the elite or rich Hong Kong businessmen or employees and the common working-class (80% of the people of Hong Kong share 43.5% of the national income). The hazard of this situation is it can be a pointer to decreasing social agreement and synchronization (Berthier, 2003).

Political structure in China, Taiwan and Hong Kong

Zweig (2002) examined the political structure and democratic values in China, Hong Kong and Taiwan. He inferred that the presence of a small group of people who together govern a society, province, or nation with self-centered purposes (oligarchs) is one characteristic of East Asian politics. They control or try to influence elections in the campaigning or voting stages to be certain that social forces appealing to the public can not use democratic institutions to take actions or follow the path of people’s interest. Official government instruments may weaken the political structures so that extra-parliamentary coalitions, local political groups, or oligarchies with central connection (to a party or economic industrial group) control political outcomes of elections and decision making. In the shadow of these conditions, people take informal procedures as alternatives like supporting legal, non-governmental organizations (NGOs), or instead turn to social unrest and illegal political activity to gain compromises from political leaders.

About China, Zweig (2002) put two questions to examine, first what is the scope of developing democratic values in the Chinese society. The political impact of Chinese culture on political choices is preset and somewhat passive and the privileged influential group rules by moral example. This influential group (elite) argues the social disorder that may result from the full application of democracy justifies the present forms of political procedures. Furthermore, social pressures for democracy, in the presence of the government as the only legal source of all power, become illegal and can be resisted. The second argument about Chinese politics is about the nature of the recognized official political structures. The claim that election in rural areas is a form of democracy is not true as winners can not practice their activities for reform and achieving rural people’s ambitions in the face of the oligarchs. Besides the number of participating parties, the rates of campaigning, and the contributions in resources (as regional budgets) are all absent from Chinese political life since there is one party that rules.

The electoral system, multiparty political environment, party political structure, and how elected officials can impact, with varying degrees, public policies differ in Taiwan and Hong Kong. In Taiwan, the implantation of a democratic system started in the 1990s. There are elections among different parties’ competitors for all offices including the president and rural people contribute to elect their political authorities (village committees) although their role is limited to local economic issues (Zweig, 2002).

The political situation in Hong Kong is midway between China’s and that of Taiwan. It is true that there are parties and democratic elections for public offices; however, it is not possible for the winning party to carry out many of the functions laid down on it through the democratic process particularly distributing resources and making policies. The reason is the constitutional array enforced on Hong Kong by the British Basic-Law (mini-constitution) and later on by China (Zweig, 2002). This has created a special attitude for Taiwanese participation in alternative democratic procedures as NGOs. Taiwanese depend on official democratic procedures as the principal mechanism for political participation, while the significance of protests, picketing, and strikes as signs of social unrest have decreased (Zweig, 2002).

Economic questions in the economic integration among China, Hong Kong and Taiwan

One country has two systems from an economic perspective

From an economic viewpoint, the political principle of one country’s two systems should be discussed as one country two (or more) monetary systems. Along with its economic history, China’s mainland as one country knew the multiple monetary systems. During the Chinese civil war, the areas occupied by the communists used a monitory system different from that in other areas. China’ communist government authorized foreigners to use certificates named foreign exchange certificates, which despite being valued by the nation monitor unit (the Renminbi) can be considered as a pseudo-monitory system. This was canceled by the economic reforms of 1994. On unifying with Hong Kong, 1997 and Macau, 1999, there became two recognized monitory systems besides China’s mainland monitory system, The Hong Kong dollar (pegged or attached to the US dollar), the Pataca in Macau (linked to the Hong Kong dollar). This created asymmetry between China’s and Hong Kong’s economies but as the economic gap is narrowing, and synergistic economic actions are taking part the asymmetry id declining. Monitory union is not without obstacles at least at this stage where the Hong Kong dollar is pegged to the US dollar and stands as a convertible currency in international markets, a situation that can not be applied to China’s Renminbi (Shu-ki, 2001).

China-Taiwan joining the World Trade Organization (WTO)

Skanderup (2004) examined the question of the relationship between China and Taiwan with the WTO. The author considered resolving the issues between the two countries within the WTO a model of what can generally be done to the relationship between the two countries. He inferred that:

  1. China should accept member to member relationship with Taiwan as a part of its strategy towards globalization.
  2. China should acknowledge the necessity of preserving the future possible role of Taiwan’s role in achieving China’s economic goals.
  3. The problems Taiwanese firms face in China may divert Taiwan’s investments to other localities.
  4. At the same time, Taiwan economists should understand that in order to compete with China for rising markets, Taiwan needs to enforce policy reforms that make its service segment stronger.
  5. Taiwan should play a more active role and be more transparent in cooperating with the ASIAN plus Three economic alliances. Such cooperation can be a chance to build confidence and demonstrate how serious the two countries are in developing their relationships with each other and with Asian partners.

Diversities or synergy: The example of Quebec

The term social assets or capital refers to the social features of a society that affect its economy (Skidmore, 2000). Skidmore (2000) showed how the social capital of societies or nations differs in the naturally gifted bequest with varying degrees of economic reinforcement. National identity (nationalism) is a social phenomenon in Taiwan and Quebec province. However, the difference in response to economic reforms and freeing trade is great. In Taiwan, the rapid growth of China’s economy has increased the economic interdependence with China’s mainland and decreased the nationalist change of force in searching for economic autonomy. In Quebec, nationalists looked at reforming free trade and making it less strict a way to go through an independence schema. Taiwan and Quebec’s experiences with nationalism differ as in the case of Quebec the difference in language and cultural structure of the community is greater than in the case of Taiwan with China. In both, Taiwan and Quebec economic reforms gave the nationalists the opportunity to counteract the mainland (China or Canada) and assert their national identity. However, economic reform and growth mandate involves regional and sub-regional alliances. The natural alliances in both cases are with Canada and China mainland (Leung 2001).

The greater China: China-Taiwan-Hong Kong triangle

China adopted a policy of economic integration with Taiwan and Hong Kong since the last economic reforms even before Hong Kong’s reunification with China’s mainland. A considerable amount of international capital as direct investment, syndicated loans, and bond finance has been directed to china and a major part of it was through Hong Kong. Despite political, ideological and social differences, economic links have increased between Taiwan and China since the 1990s. Taiwan became China’s third source of foreign investments, over the US and second only to Hong Kong’s investments. Based on the current economic trends, China has or will soon go on top of the US as Taiwan’s largest export market (Cheung, Chin, and Fuji, 2003).

This incorporating integration process is the core of the Greater China term or the China-Taiwan-Hong Kong triangle, which continues on the basis of reality effects rather than imaginary planned steps. China joining the WTO represents China’s obligation to stand by the international standards in trade with its impact on how the Chinese economy behaves. In the opinion of many researchers, this is an expression of China’s need to continue the integration process with Taiwan and Hong Kong (Cheung, Chin, and Fuji, 2003).

What China can offer to the greater China?

  1. China surfacing as a regional motivating force of trade and investment resulted in increased foreign investments. In 1990, foreign investment to China was nearly 20% of total foreign investments in developing Asia (compared to 60% to South East Asia), by the year 2000, the figures are the opposite (U.S.-China Economic and Security Review Commission, 2002).
  2. Chinese exports in the area of light and technology intensive industries are growing so that (as expressed by experts) China is turning into a black hole that absorbs the world’s industrial facilities (U.S.-China Economic and Security Review Commission, 2002).
  3. China’s expanded trade to other Asian countries like Singapore, Indonesia, Thailand and Malaysia qualifies it to play an important role as a capital exporter to Asia (U.S.-China Economic and Security Review Commission, 2002).
  4. The rapidly growing Chinese economy has made the Chinese regional influence greater to compete with that of Japan and the USA (U.S.-China Economic and Security Review Commission, 2002).
  5. The growing Chinese influence is not only economic, it is also political both globally and regionally. This produces pressure on Taiwan (failure to join WHO as an example) and perhaps the worldwide recognition of the principle of one China is a representation of such influence (U.S.-China Economic and Security Review Commission, 2002).
  6. China has long been known and still is, a low-cost industrial producer with a strong commercial fortitude. China became an innovator of service, not just a podium (The Boyden report, 2007).
  7. Reciprocal industry and trade expansion: In the same way international companies are expanding into China taking advantage of low-cost production, wide market (s), and economic reform environment, Chinese companies are expanding outside China provide excellent economic chances of Taiwan and Hong Kong limbs of the triangle (The Boyden report, 2007).

What Taiwan can offer?

The developed Taiwan semiconductor high technology industry stemmed from the research and development efforts of a tripartite coalition. The Industrial Technology Research Institute, supported by the Taiwan government, United Microelectronics, and Taiwan Semiconductor Manufacturing has contributed to putting Taiwan in the first place as manufacturers of microchips. Taiwan’s share of the global market of microchips industry grew from 21% to 70% between 1995 and 2000, and despite the global market falling in 2001, Taiwan was not affected, on the contrary, its market share rose up to 73%. Taiwan’s development of the semiconductor industry is not only a story of manufacturing; it also includes testing, design, and packaging. Taiwan is considered the first in the world in this area, with a global market share of over 35%. The capital of Taiwanese companies that design and sell, but do not produce, microchips have increased from $ US 700 million to $ US 3.6 billion in the period 1995 to 2001, corresponding to a rise in the global market share from 12% to 26% for the same period. In 2003 Taiwan government granted Taiwan Semiconductor Manufacturing consent, with restrictions, to launch a factory in China. This will contribute to boosting both economies, especially Taiwanese as China can not compete in this industry with Taiwan for at least for a few years to come (Cavey, 2003).

Taiwan joining the triangle: Analysis of hopes and fears

The discussions on Taiwan-China full economic cooperation focus on the three links ban (transportation, trade, and postal). This pivot is misleading is the opinion of many researchers, including the economist intelligence unit. Cavey (2003) suggested a few reasons to consider this pivot a misleading one, about transportation; cross-Taiwan strait flights are continuous and active. Starting from 1997 (Hong Kong rejoining China mainland), sea journeys and trade ships are running from Taiwanese Kaohisiung harbor to Xiamen and Fuzhou harbours in China, with restrictions of passing through Matsu and Kinmen islands. Furthermore, concentrating on these three links ignores the potential for economic growth to both countries if cross Taiwan Strait trade is liberalized (Cavey, 2003).

A second focus of the debate is the political differences, in which scope there are two opinions. Those who oppose building up to full economic cooperation with a political different system aiming for domination, and those who believe in developing a pan-Chinese body tolerating the differences and accepting both China mainland and Taiwan. There are fears that expanding economic relations with China may crave out Taiwan’s economy, especially in the high technology industry area (known as the hollowing out effect). However, in the light of foreign companies entering the Taiwanese high technology research and development market, Taiwan would remain the world’s top market leader in this field of industry (Cavey, 2003).

Low working hands cost, the policies of China economic reforms, the Chinese market (s), the expansion of China’s industry and trade, and the increased foreign investments in China remain to attract factors to Taiwan investors. Collectively these factors are called the China factor, which represents an opportunity to knock the door on bigger markets and establish Taiwanese products. China’s economy is not without defects (economic and social) which mandated a Chinese look at rebalancing the economy; therefore, Taiwanese advantages and China’s weakness will secure most Taiwanese investors linked to china at least for a few years to come (Cavey, 2003).

How did Hong Kong supersede difficulties after unification?

It is true that the production sector of the Hong Kong industry nearly disappeared since reunification with China mainland, yet this did not result in excavating (hollowing out) of Hong Kong industry. Moved industrial facilities to China resulted in the need to expand support services in Hong Kong. This transformed Hong Kong from a top maker of cheapest products to one of the world’s largest services centers. Moreover, Hong Kong’s economic difficulties after 1997 were not a direct result of reunification, as a result of greater competition or closer accessibility to the Chinese economy. Rather the difficulties were because of transferring lower-end production to China while keeping and developing higher-end industries in Hong Kong. In this way, Hong Kong’s economy is pushing the Chinese economy to further reforms, despite having virtually no control over the cartel on service prerequisites. Finally, the fact that Hong Kong harbor remains the region’s largest despite development in Chinese harbors, added to the complex hard and soft Hong Kong’s infrastructure, lead to developments in the logistics industry. These led Hong Kong economists to develop their airports to move beyond the competition in the area of sea and air transport (Cavey, 2003).

China-Taiwan-Hong triangle: How to make it work?

The basic argument is the claim that Hong Kong achieved a successful outcome of the one-China two systems concept and Taiwan should follow the same path. Against this is Hong Kong has been a part of China rented to the British and returned back to the mainland in 1997 when the 99 years lease period ended. While Taiwan formerly Known as Formosa or Republic of China has been a sovereign member state of the UN, Security Council, and other international organizations. The political differences are vast between Taiwan and China, besides the incident of KTM in February 1947 is still alive and feeding the Taiwanese social national identity (Stockwin, 2002).

The answer to the question of why greater china is important to all triangle limbs should provide a way to achieve it. First, the Chinese principle of one China put as an anti-secession (anti-withdrawal) law states that there is only one China to be recognized, it that includes Hong Kong and Taiwan and other Chinese land should be interpreted in a more flexible interpretation. This can be achieved following one of two models, the European Union as a union between different governments and nations having the characteristic of being supranational. Alternatively, it may follow the model of peaceful integration (non-military) between the Aland Islands and Finland (Jakobson, 2005). A second basis to design the greater China and make it work is loosening the asymmetrical international representation and recognizing Taiwan’s rights to be represented internationally (in the same way EU countries are represented internationally and in the European parliament). In simpler words, China has to reject the status quo (the way things are) and recognize the Taiwan de facto state (how things really are). It seems that Taiwan’s political systems are rejecting the Hong Kong example of being a self administrative region (SAR) fed by the political differences and the national identity and do not accept Chinese sovereignty with China’s terms and political system. Because there are interests, and cultures in common, economic cooperation is proceeding in a calculated manner so as not to be completely dependent on China’s mainland ((Jakobson, 2005).

Taiwan National Identity-China’s restoration of sovereignty: The EU example

The European Union (EU) as an economic and political community has the characteristic of being supranational with intergovernmental integration, has become more than a customs union formed to establish uniform import tariffs but less than a mainland or a greater Europe. One of the problems the EU faced is the national identity problem (citizenship problem), knowing how member states compromised to overcome it might enlighten the road to how China and Taiwan should approach this problem. The basic question is accepting national identities transitional preceding one identity or is it accepting identities within a greater community. An intermediate view supports a greater community national identity is different from regional national patriotism because of common cultures, and history. However, despite being attractive, the last view is incomplete and needs adding an understanding of the concept of greater Europe (or greater China) by groups of different political and or social beliefs in one society. The way Europeans see their citizenship can be applied to the China-Taiwan controversy. Citizenship rights of the EU are the right of non restricted movement and residence within the EU states, and the rights of having diplomatic safety and security outside the member states. In addition, the rights of free democratic participation in political life and the right of appeal to the parliament or non governmental complaint civil societies (Bauböck, 2002). China and Taiwan can follow this example with or without modification, examine the emerging problems in a peaceful way. This should guarantee symmetric international representation and preservation of national identities under the umbrella of common economic benefits of the greater China.


The concept of having an economic coalition or a triangle among China, Hong Kong and Taiwan looks logical and natural. The benefits for each limb of the triangle are evident to know to all; however, a basic contradictory issue is the way China and Taiwan look at the one-China principle even if China recognizes that there can be one country with two systems. China looks at the one-China principle simply as a restoration of sovereignty and whatever concessions made accepting two systems does not mean two countries. This is well displayed in denying Taiwan’s recognition by the world, linking diplomatic and trade relations with other countries with their recognition of the one-China principle, and threatening to militarize the unification with Taiwan. On the other hand, Taiwanese with their national identity social feeling, different political system, and the economic progress and prosperity they achieved reject China’s view of the one-China principle. Both countries have achieved recognized economical progress and became two of the world’s economic leading countries, however, an economic alliance including Hong Kong should their economies further and achieve more to their peoples. Both countries understand the benefits and therefore are keeping cross Taiwan trait economic relationships, which is progressing yet not completely liberalized. Taiwan worries can be alleviated by redefining the one China principle, following the European Union model in ensuring a supranational intergovernmental cooperation preserving national identities and removing forms of asymmetrical representation of the countries. Demilitarizing the conflict is another important factor that would ensure the Taiwanese people, following Finland – Aland Islands model. So to apply the one China two systems, the question remains how China would combine Taiwan’s keeping national identity and political system with symmetrical national representation.


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