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Federation for China and Taiwan?

By George Gu - posted Tuesday, 1 November 2005

The realities between Taiwan and mainland China are "economically hot, politically cold". Their ever-increasing economic ties demand far better political relations, not to mention other things. One highly feasible resolution is a "federation". Would it work? The answer: economically, the time is right; politically, it is only a few steps away.

A federal system would mean more autonomy for Taiwan than Hong Kong and Macau enjoy. For Beijing in particular and China as a whole, it would mean the revolutionary concept of a unified China with multiple power centres. Under a federal system, the island would keep its own government, military, judicial and other systems. Its political leadership would not bow to Beijing. In short, it would be a political partnership between equals. Both political entities would be subject only to a "federation" law. And anything is open for discussion under the "one China" principle.

Taiwan's love affair with the mainland

Economically, Taiwan and mainland China are well connected. The mainland is Taiwan's biggest trading partner as well as its No 1 export market. In 2004, total cross-strait trade reached US$61.6 billion, a jump of 33.1 per cent over 2003; of which Taiwan's exports accounted for US$45 billion, by Taiwan's own accounting.


Besides ever-increasing trade, investment is another major activity. In 2004 alone, Taiwan Inc invested US$6.94 billion in the mainland. Officially, Taiwan's total investment stood at about US$40 billion by 2004. But some people estimate it as high as over US$100 billion. This discrepancy in numbers comes from numerous government restrictions on Taiwan investment in the mainland. As a result, many members of Taiwan Inc may go to the mainland from a third location. One popular way is via tax-shelter islands.

Behind the ever-increasing trade, there is an ever-increasing tide of investment from Taiwan Inc. The mainland is its biggest destination already and it now has over 60,000 Taiwan enterprises. It also has more than one million Taiwan residents as well. Shanghai alone has more than 300,000 Taiwan residents. Living and working opportunities in the mainland will only increase for the Taiwan residents as there are more opportunities for them over there.

This cross-strait trade has made a huge difference in the island's economic health. Lately, nearly all the island's growth has been attributed to mainland trade. In particular, cross-strait trade has created one million jobs in Taiwan. There are vast additional benefits as well.

In reality, there is huge room for improvement, as there are numerous restrictions in Taiwan opposing bilateral trade and investment. For example, its largest energy company, China Power, is allowed only to buy up to one-third of the coal it needs from the mainland. As a result, China Power must spend more money to buy the additional coal from places further away. If such bans were lifted, cross-strait trade could easily double. In reality, better political ties are demanded for both sides to enjoy all the benefits from their huge economic cooperation.

A big step towards a solution

Like Hong Kong and Macau, Taiwan is moving fast in integrating its economy with that of the mainland. This process has been accelerating year after year. Taiwan has gained enormously and its economic benefits will directly promote better political relations.

The current cross-strait difficulties are caused by the unfinished business of the long-term civil war between the Communist Party and the Kuomintang (KMT), the nationalist party that lost the Chinese civil war and fled to Taiwan. For now, the KMT has become more involved, officially visiting the mainland.


Despite all the political uneasiness, the general direction can hardly be reversed. Indeed, in the past six decades, there have been dramatic improvements, from past exchanges in bombshells to vast human and economic exchanges, as is the case today.

Simply put, more rational measures will only offer the island's political leadership more advantages. Despite all the frictions between Beijing and Taipei, the roads for peaceful resolutions are wide open. The recent trip to the mainland by the Kuomintang chairman Lien Chan is a very healthy start. It also opens a wider door for more direct exchanges between Beijing and Taipei. Immediately following Lien’s trip, James Soong led his People First Party for an extensive trip on the mainland.

For both parties, being Chinese is their greatest strength and nothing is more significant. There are also positive signs from Taipei. In particular, Taipei is considering widening access for mainland Chinese tourists. Also, more political groups from Taiwan are on their way to visit the mainland. As such, widening peaceful contacts and dialogues are emerging. All this points to bright prospects for both sides.

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About the Author

George Zhibin Gu, a business consultant based in China, is an author of several new books on China and globalisation, including: China and the new world order, China's global reach, and Made in China. He can be reached at

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