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China's Gravitational Pull on Taiwan


A new pact would deepen Taiwan's ties to its largest trading partner

(The sixth paragraph of this story has been updated to include the Democratic Progressive Party.)

China has 1,400 missiles pointed at Taiwan, a stark reminder that Beijing still views the neighboring island as a renegade province that will someday be absorbed, by force if necessary. The two economies, however, have rarely been more in sync. Since Taiwanese President Ma Ying-jeou took office in May 2008, direct air, shipping, and postal links have been established, and mainland tourists now throng Taiwanese cities.

On June 13 the two sides successfully wrapped up a fourth round of negotiations in Beijing on the Economic Cooperation Framework Agreement, aimed at lifting tariffs on either side of the Taiwan Strait. The deal, which Ma's administration has said may be signed this month, would lower tariffs on more than 200 items, including car parts, petrochemicals, and machinery heading from China to Taiwan—and on about 500 items going the opposite way.

Taipei was keen to reach the trade and investment deal with China in order to get its companies the same preferential treatment the mainland now offers 10 Southeast Asian countries. In January a separate free trade pact took effect between China and the Association of Southeast Asian Nations (which excludes Taiwan), lowering tariffs on two-way trade. Beijing is seeking similar trade arrangements with Japan and South Korea.

China is Taiwan's largest investment destination and trading partner, accounting for 40% of its exports. That export market will be placed at risk if Taiwan doesn't get its own trade pact with China. "It's vital for us economically. It's a matter of life and death," says Philip Yang, a political science professor at National Taiwan University in Taipei.

For its part, China has long used economic incentives, in addition to military threats, to draw Taiwan closer into its embrace. "The economic track and political track are separate," says Liu Bih-rong, a professor of political science at Soochow University in Taipei. "The communists in China may hope economic links will lead to political negotiation, but in Taiwan the majority don't want to move that fast."

Taiwanese leader Ma will need to move cautiously as he tries to improve relations with China. The opposition Democratic Progressive Party has accused the president of selling out to China and has called for a June 26 protest rally, claiming that small and medium-sized businesses will get hurt by the pact.

The bottom line: China hopes to integrate its massive economy with Taiwan's to such an extent that political unification will be inevitable.

Balfour is Asia correspondent for Bloomberg Businessweek in Hong Kong.

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