During his stay on the mainland, the prominent industrialist met with Kwang-tung Governor Yeh Hsuan-ping, Fukien Governor Wang Chao-kuo, and Amoy Mayor Chou Erh-chun. Wang raised the possibility of setting up a special economic zone for Taiwan businessmen along the southern coast of the mainland. The zone would accommodate a naphtha cracking plant and various midstream and downstream processing industries.
One month later, when the January trip was still a hot topic of public discussion, Wang made a trip to the United States to inspect his American operations. While there, he was reported to have concluded a giant investment agreement with a group of ranking communist Chinese officials sent there for the occasion by the Peking authorities. Under the reported agreement, which FPG spokesmen have refused to comment on, Formosa Plastics would invest US$7 billion to build the above-mentioned industrial facilities in the city of Amoy in Fukien Province over the next 15 years.
The FPG mainland investment case has plunged the ROC government into turmoil. Under existing law, which bans local companies from investing in mainland China, the government cannot approve Wang's plan. And even if the government could grant approval, it might prefer not to do so. If the FPG were to carry out its substantial investment projects on the Chinese mainland as now committed, the company would inevitably make considerable cuts in the expansion of its Taiwan facilities. This would have a major impact on Taiwan's petrochemical industry, a sector which accounts for one-third of the ROC's manufacturing output.
Moreover, should a large industrial group like FPG invest in mainland China, it might encourage other conglomerates to do the same and initiate a mass outward movement of large corporations. This would weaken Taiwan's manufacturing industrial base and do serious damage to the whole economy.
Officials at the Ministry of Economic Affairs have said they will do everything possible to persuade Wang not to invest in mainland China. But their chances of success seem remote. One major reason was given by Wang himself in a bylined article entitled "Why We Proceeded to Survey the Investment Climate in Mainland China," which appeared recently in major local Chinese newspapers, including the China Times of March 13, 1990. Wang wrote that he was interested in moving some of his operations to the mainland because many of his customers in the plastics and textile processing industries have already moved offshore to Southeast Asia and mainland China.
The plastic footwear industry provides a good example. The total number of factories in Taiwan has dropped from 1,400 in the peak year to the present 700, primarily because companies have moved to overseas locations. By setting up a special zone on the mainland, FPG, as a petrochemical producer and supplier, hopes to attract these processors, prevent the further drainoff of existing customers, and recapture lost sales. Many of Wang's downstream customers have already left because Taiwan's rising wages and skyrocketing land costs have made it impossible for labor-intensive industries to be competitive. Given this situation, there is little the government can do to help Wang keep his customers from moving out and switching to new suppliers close to their offshore bases of operations.
Another reason Wang is seeking to build a naphtha cracking plant on the mainland derives from his frustration after a fruitless two-year search for a cracker site in Taiwan. Local residents have blocked plans for two proposed sites, saying they did not want pollution brought to their doorsteps. The government can do very little about providing an effective solution to this problem, especially since it is facing the same difficulty itself. The government has encountered strong opposition from villagers in southern Taiwan over the proposed construction of a naphtha cracker by the state-run Chinese Petroleum Corporation in that region.
Because there is only a remote chance of solving the two major problems of Taiwan's rising labor costs and the unavailability of land even at inflated prices, it is only a matter of time before the FPG follows through on its mainland investment projects. That can be expected to occur when the government allows local companies to invest on the mainland through their sister corporations registered in third countries. The FPG will be able to invest in mainland China legally through its American subsidiaries, among other channels. Mainland projects will become even more convenient when the government finally lifts the ban on direct investment in mainland China by Taiwan companies.
Amoy in Fukien Province is one of many promising locations for offshore investors in search of cheap land, low labor costs, and minimal worries about the environment.
Ever since Wang's secret mainland trip came to light, the government has been under increasing pressure from the business community to further relax its mainland China trade and investment policy. In response, the government has recently removed restrictions on commercial travel to the mainland, allowing businessmen to attend trade exhibitions and related activities there. Now the government is about ready to grant permission for indirect Taiwan investments in mainland China when made through third countries.
These moves come amid growing public criticism that by retaining the ban on investment in mainland China, the government has failed to respond to the growing needs of investors faced with deteriorating business conditions in Taiwan. Some examples: the New Taiwan dollar has appreciated more than 50 percent; wages have been increasing by 15 percent per year; land costs have multiplied threefold; and pollution-control expenses have increased sharply amid growing public demands for stronger environmental protection. All this has considerably boosted production costs, making the manufacture of labor-intensive products no longer competitive. It explains why numerous local companies have in the last few years branched out overseas to Southeast Asia and mainland China where production costs are much lower. There are also problems that go under the rubric of the "deteriorating social order," a euphemism for varying social pathologies such as violent political demonstrations, other forms of public disorder, and most frightening of all, gangland extortion of businessmen through threats of kidnapping or other criminal action. These conditions have prompted some businessmen to think of moving themselves and their families out of Taiwan, not only sitting their manufacturing operations offshore.
Many businessmen have chosen mainland China over Southeast Asian countries as an offshore location because the mainland, aside from having cheap land and labor, shares the same basic Chinese culture and language with Taiwan. It is widely believed that this would make it much easier for local investors to operate businesses there. Some analysts with knowledge about the vicissitudes of business life under the present system in mainland China think otherwise. They predict businessmen will discover they have more in common with the free enterprise system in "foreign" countries than with the "Chinese" polity of mainland China, especially with its policy instabilities.
Critics who call on the government to liberalize the existing ban on investment in mainland China have still another reason: the restriction only affects law-abiding businessmen. Thousands of companies with considerably less respect for the law have deliberately flaunted the law by moving their investment capital and technology to the mainland, and they have thus far escaped punishment. The latest figures announced by Peking show that more than 2,000 Taiwan companies have invested in mainland China in recent years, with a cumulative total of investment capital rising to US$1 billion from some US$100 million in 1987. Taiwan's investments in mainland China are expected to undergo another upsurge this year, in large part a result of the government's recent liberalization of business travel to the mainland.
Various industry associations are already organizing investment missions to the mainland for the months ahead. Among them is a 20-day trip planned for July by the Chinese National Federation of Industries. The mission includes some of Taiwan's leading industrialists and is scheduled to visit Hainan, Kwang-tung, Fukien, Chekiang, and Shantung Provinces as well as Shanghai and Peking.
Taiwan's indirect trade with mainland China is also expected to surge again as a result of the further relaxation of the government's mainland policy. Bilateral trade, which totaled US$3.8 billion last year, has slowed somewhat, partly because of Peking's June 4 violent crackdown on the pro-democracy movement and partly because of the severe austerity program which the mainland authorities have introduced.
As in the case of Taiwan investment on the mainland, businessmen are pressing the government to allow direct trade between Taiwan and the mainland. They complain that indirect trade conducted through third countries is too time-consuming and costly.
Businessmen and many other people think the government has been too conservative and too slow in changing its mainland trade and investment policy. They complain that whatever changes the government has made over the years came only as a result of public pressure to make policies correspond with what had already become the reality.
But unlike businessmen who tend to consider only their own commercial advantage, the government has a greater responsibility. It has to take into account the security of Taiwan and the interests of the whole people. Because of this responsibility, the government must consider the dangers attending a rapid growth in trade and investment relations with the mainland. Among other things, Peking has consistently refused to renounce the use of military force against Taiwan. The government believes that Taiwan cannot allow its trade with mainland China to develop to the point that Taiwan relies on the mainland as an export market or a source of raw materials. Authorities also worry that a rapid flow of investment capital and technology from Taiwan to mainland China would boost the competitiveness of mainland companies, ultimately posing an economic threat to Taiwan exporters in the international market.
According to a new study conducted by the Ministry of Economic Affairs, the technical level of Taiwan's investment in mainland China is already rising rapidly. In the past, when Taiwan investors set up factories on the mainland, they used old machinery brought from their parent companies in Taiwan. But now most of the Taiwan investment projects approved by the mainland authorities feature new production equipment.
In addition, Taiwan's investment on the mainland is no longer limited to labor-intensive manufacturing or simple assembly operations. It has expanded to include capital-intensive businesses, such as the production of petrochemicals and the manufacture of small trucks. Some of the latest mainland investment from Taiwan also calls for the manufacture of precision machine tools and computers.
Besides concerns that the massive flow of capital and technology to mainland China could eventually increase its competitiveness, there are other motives for restricting mainland-bound investment. The mainland's backward transportation systems, the underdeveloped supporting industries, and the raw material shortages outweigh the advantages of cheap labor and low land costs. These problems have already contributed to the failure of many Taiwan companies operating on the mainland, including some 30 toy manufacturers who shut down their mainland factories and returned to Taiwan in the last two years or so.
Another reason the government wants to restrict businessmen from investing on the mainland results from its inability to protect investment activities on the mainland in the absence of political links with Peking. This is the reason that the government's liberalization plans will oblige businessmen to invest on the mainland through companies registered in third countries. Such an arrangement would put Taiwan investors in a more favorable position by enabling them to secure legal protection from Peking through other countries.
The plan to allow indirect investment on the mainland is expected to be approved after July 1990, when President Lee Teng-hui will convene the Conference on National Affairs to review various pressing national problems, including the government's overall mainland China policy. If the prevailing public mood is any indication, the government is likely to be pressed to adopt a more liberalized mainland policy. At the official level, however, the government is expected to maintain its long established policy of the Three No's—no contact, no negotiations and no compromise—as long as Peking sticks to its four cardinal principles and refuses to renounce its threat of military force against Taiwan.