BusinessWeek: June 30, 1997

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 International -- Asian Business: TAIWAN

HOW TO MAKE FRIENDS AND IRRITATE BEIJING (int'l edition)
Taiwan is courting North Korea to offset China's regional clout

As barter deals go, it sure is different. Yu Tai, a Taiwanese investment company, is being offered a towering pyramid-shaped hotel that looms unfinished and ghostlike over downtown Pyongyang. The 1,000-room hotel, meant to be the world's largest, was to have been a symbol of North Korean achievements, but construction stopped years ago when Pyongyang ran out of money. Now, the North Koreans want to give a stake in it to Yu Tai, owned by Taiwan's ruling Kuomintang, as payment for shipments of rice, fuel, and fertilizer.

Taiwan, not one to miss an opportunity, has good reason to be looking at North Korean projects. They are a part of its regional investment and influence offensive on China's borders. At a time when Taipei is losing diplomatic allies around the world and China is growing more powerful, Taiwan is trying to compensate by using its financial strength to recruit allies. Acquire enough friends, the Taiwanese think, and China may find it tougher to dictate how and when reunification with Taiwan will occur.

Beijing's leaders take notice whenever Taiwan makes friends abroad, but more so when that friend is an ally of 50 years right on its doorstep, like North Korea. Picking economic allies on China's borders sends a message that Taiwan intends to pursue its own regional agenda as a counter to China. "It's a natural for them," says Jerome A. Cohen, director of Asia Studies at the Council on Foreign Relations in New York. "These actions are not lost on the Chinese people on the other side of the fence."

NUKE WASTE. The warming ties with North Korea could repeat what has already happened in Vietnam, where Taipei launched an investment and foreign policy play several years ago. It began pouring money into Vietnam, a total of $4.2 billion in 290 projects, becoming the largest foreign investor there. It was a perfect match of interests. Taiwan boosted its profile as a regional rival to China and secured a nearby source of cheap labor. Vietnam, long an adversary of its northern neighbor, welcomed Taiwan as a counterweight as well as a source of capital to offset the vacuum left by the collapse of the Soviet Union.

Taiwan is now busy crafting deals with North Korea. It has negotiated a pact to send its nuclear waste to North Korea along with a heap of cash, and it has let Pyongyang open up a trade and visa office in Taipei. For Taiwan, being friendly to North Korea is also a way to counter Beijing's growing diplomatic and economic links with South Korea--and to retaliate against Seoul. The South closed its embassy in Taipei and switched diplomatic recognition to Beijing in 1992, angering Taiwan.

Making pals with one of the region's most closely watched troublemakers puts a new spin on Taiwan's foreign policy. "Taiwan can use this relationship to play a role in regional security matters," says Andrew Yang of the Chinese Council for Advanced Policy Studies in Taipei. "Taiwan is trying to diversify the risks from mainland China by establishing various contacts surrounding the Chinese territory."

IGNORED ORDER. China clearly sees all this as a provocation. It claims Taiwan as part of the mainland and strenuously objects to any moves that make Taiwan seem an independent player. "The Taiwan authorities have wanted to make use of North Korea's hardship for political gains," says one Beijing official. "The shipment of nuclear waste is an attempt to create two Chinas--or one China, one Taiwan." Last year, Beijing told Pyongyang to halt its budding exchanges with Taiwan. But the ties have increased.

Taiwan says North Korea is just one of many places where it is making economic inroads. "It's part of our effort to develop relations with all countries as a way of ensuring our survival and development in the international community," says C.J. Chen, Taiwan's deputy foreign minister. Besides, "encouraging a backward, closed society to move on the right track is the responsibility of all countries." Yu Tai, for example, may accept the hotel deal if the North Koreans let in more visitors. Whatever happens, Taiwan is sure to pursue its own unusual policy of detente.

By Jonathan Moore in Taipei, with Joyce Barnathan in Beijing and Sheri Prasso in New York
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