World view: Taiwan plays a risky game

Market expectations for Taiwan are deceptively mixed. Standard & Poor's lowered the outlook on Taiwan's debt to negative in December, citing the island's record budget deficit and its troubled relations with China. Taiwan still enjoys a debt rating of AA-, however, the fourth highest of S&P's 10 investment grades.

But President Chen Shui-bian's willingness to test Beijing's patience with aggressive steps regarding Taiwanese independence is creating substantial political and economic risk. He is losing the backing of allies in the US and Asia and the confidence of much of Taiwan's business community. In short, Chen may be leading Taiwan into a dangerous corner.

Increasingly, Chen and his Democratic Progress Party (DPP) are challenging the “status quo” in Taiwan's relations with China. He announced just six days before December's parliamentary elections his intention to change the name on all the island's government agencies from “Republic of China” to “Republic of China (Taiwan)”, and replacing “China” with “Taiwan” in the names of state firms. He has also vowed to rewrite Taiwan's constitution, a move intended to demonstrate the island's independence and sovereignty.

There is no mystery about why Chen is so willing to play this nationalist card: he believes it is a vote-winner. Despite poor economic performance and strong warnings from the Bush administration, the DPP's calls for a strengthened Taiwanese identity has increased its share of seats in December's parliamentary elections. Surveys conducted by Taiwan's National Chengchi University show a remarkable shift in Taiwanese self-identification over the past dozen years. The number of those identifying themselves as Taiwanese has risen from 17 per cent to 41 per cent. Those who see themselves purely as Chinese have dropped from 26 per cent to 6 per cent.

Even as he is winning votes at home, Chen's words and deeds are losing him substantial goodwill abroad notably from the Bush administration. Gone are the days when Bush made a point of saying, as he did in a Republican primary debate in 2000, that “The United States must help Taiwan defend itself . . . The Chinese can figure out what that means, but that's going to mean a resolute stand on my part.” The US president Bush is more apt to target his warnings at Taipei, as he did in December 2003, when he spoke out against “comments and actions that indicate [Chen] may be willing to make decisions unilaterally that change the status quo, which we oppose”.

Taipei assumes the US would militarily support Taiwan in an armed conflict with China, but that is increasingly open to debate in Washington. When the Bush administration took office in 2001, it believed it was China that threatened the cross-straits status quo. It now appears the greatest challenge to that delicate balance comes from the populist politics of Chen and the DPP. Now that the balance of economic and political power between China and Taiwan has shifted strongly in Beijing's favour, Chen is losing the support of traditional allies in the region. Australia and Singapore each indicated last August they could not be relied on to defend Taiwan in the event of a Chinese attack. Despite concerted efforts to win recognition in Central America, the Caribbean, and Africa, only 26 states still maintain formal relations with Taiwan. China is pushing hard to narrow that list further.

Chen is also isolating himself from his own business community. Taiwanese businessmen strongly favour the economic-integration-friendly policies of the opposition Kuomintang (KMT) party especially since the DPP has pronounced itself ready to sacrifice the island's economic well-being in a struggle for Taiwanese sovereignty. Economic growth figures in Taiwan are flat. The government itself predicts growth will slow to 4.6 per cent in 2005 from an estimated 5.9 per cent in 2004.

The level of foreign direct investment is falling as capital flows abundantly into China.

Some of that capital flow is coming from Taiwan. The island's business community is unlikely to produce much change on Chen's administration, because it doesn't spend much of its time and resources on lobbying. Instead, the community is voting with its feet: more than 1,000,000 Taiwanese now live on the mainland, and have invested an estimated $100bn of capital there. In other words, those who might back the DPP away from its policy of confrontation with China are increasingly voting themselves off the island.

China's strategy, of course, is to facilitate this movement. China doesn't need capital from anywhere nowadays; it's swimming in cash. But it continues to do everything possible to pull investment dollars away from Taiwan, because it believes economic ties will eventually bind Taiwan to the mainland.

The DPP doesn't seem to have noticed its government's increasing isolation, the slowdown in the island's economy, or that Chen is driving Taiwan's entrepreneurs to the mainland. The timeframe of greatest danger for investment in Taiwan is the period from 2006, when Chen pushes forward the new constitution, to 2008, when his second term comes to an end. Chen would be foolish to assume Beijing's Olympics will prevent it from taking hostile action on Taiwan. Nor does Chen seem to recognise the dramatic shift in the balance of power between Taiwan and the mainland. In Taipei recently, foreign minister Mark Chen assured me the island is committed to the status quo in its relations with Beijing but that if Taiwan were completely isolated by China, it wouldn't just sit in a corner. Since the corner is precisely where Chen's government seems to be leading his people, the minister's comments should reassure no one.