<html><body>China, Taiwan, and Asia Is Economics Reshaping Politics? June 15, 2005 Unedited transcript prepared from a tape recording. <TABLE width="100%" border=0> <TBODY> <TR> <TD vAlign=top align=left width="12%">9:45 a.m. </TD> <TD vAlign=top align=left width="88%" colSpan=2> Registration</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="16%"> </TD> <TD vAlign=top align=left width="72%"> </TD></TR> <TR> <TD vAlign=top align=left width="12%">10:00</TD> <TD vAlign=top align=left width="16%">Presenters:</TD> <TD vAlign=top align=left width="72%">Phillip Saunders, National Defense University</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="16%"> </TD> <TD vAlign=top align=left width="72%">Terry Cooke, Foreign Policy Research Institute </TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="16%"> </TD> <TD vAlign=top align=left width="72%">Shelley Rigger, Davidson College</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="16%">Moderator:</TD> <TD vAlign=top align=left width="72%">Dan Blumenthal, AEI</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="16%"> </TD> <TD vAlign=top align=left width="72%"> </TD></TR> <TR> <TD vAlign=top align=left width="12%">11:30</TD> <TD vAlign=top align=left width="88%" colSpan=2> Adjournment</TD></TR></TBODY></TABLE> Proceedings: MR. BLUMENTHAL:  We're going to get started here, so grab your drinks and have a seat.  I'd like to welcome everyone to the fourth in a series of, in a seminar series that AEI, with National Defense University are doing together, called China In Asia. Today, we have a very interesting topic.  Is economic reshaping politics across the strait?  And we have an extraordinary group of panelists who are going to cover this issue.   We have Phil Saunders, who's going to start off, from the National Defense University, who writes extensively on a variety of subjects related to U.S. strategy in East Asia and has done a lot of work on the issue of the triangle, if you will, between Beijing, Taipei and Washington, and specifically on the issue of whether the one China policy is still viable.  But he also is looking at issues involving how Asia is perceiving China's Taiwan strategy, and that's what he will speak about today, to set things up.    We also have Terry Cooke with us today, who is one of the leading American experts in cross-strait economic and business relations, particularly regarding the patterns of production and export in the high tech and information technology fields, and he has served as a Foreign Service officer, primarily as a commercial service officer in both Taiwan and China, and so is very well-qualified to speak to these issues.   He has a consulting business called, I guess it's GC3 Strategies, and is also a senior fellow at the Foreign Policy Research Institute.   And we have Dr. Shelley Rigger, who is one of America's top analysts of Taiwan domestic politics, and an enormously important area of expertise, considering how little I think Americans in government and outside of government actually know about Taiwan's politics.   I have been a consumer of her work, both inside government as many people are, and now outside of government, and so we are very lucky to have her today to speak about how the economic relationship is affecting politics on both sides of the strait as well.   So the panelists will get at a number of tough questions.  I think, you know, they'll get at this question of how it is that the economic relationship is so hot, yet the strategic situation is still so dicey and dangerous.   I think they will get at the PRC's deliberate policy in terms of hot economics and what happens if that doesn't work in achieving their political goals.  If the strategic situation will become even dicier.  And I think in keeping with our theme of China's Asia strategy, they'll also get at what the rest of the region perceives in terms of China's Taiwan strategy, and what happens if a heavier hand is needed in the future.   So we have a lot of ground to cover and without further ado, I'd like to pass it on to our panelists, starting with Dr. Phil Saunders.  Thank you.   DR. SAUNDERS:  Thank you.  Well, delighted to be here.  I'm going to sort of set the stage for this and put the issue of Taiwan in a broader regional context, and I want to make an argument today that Chinese leaders have two key dilemmas in dealing with the issues of Taiwan and Asia.   The Taiwan dilemma is the tension between deterring Taiwan independence, which involves the threat of using force, while at the same time pursuing the goal of peaceful unification and there's an inherent tension there, how the PRC manages that is a difficult issue for their policy, and I would argue it's been made more difficult in recent years as Taiwan has democratized, as you've had possibilities for Taiwan nationalism to be expressed, and you've had Taiwan political leaders pushing gradually for so-called creeping independence.   So this is one dilemma the PRC leadership faces.  There's another in Asia, related to this, that the military threats that the PRC leadership feels are necessary to deter Taiwan independence, undercut their Asia strategy which was built around a message of peaceful rise of mutual benefit of China as a responsible power.   So there's tensions between those two issues and today I'm going to try to elaborate on those, explain how they play out and speculate a little bit about how that might change in the future as China's economic strength and regional influence continue to grow.   But the key point is there's tensions there.  How will the PRC leadership manage those tensions?  Historically, Taiwan has been the top priority because that's an issue that cost cause leaders their job and potentially cost the party its roll in society.   I also want to note that there's different time scales at work here.  The Taiwan issue, for the PRC leadership, is a short-to-medium term issue, most of the things they worry about most, whereas China's rise and regional role is a medium to longer term issue.  So that's something to keep in mind.   And what I'll do is talk about, review very briefly China's Taiwan policy, talk about how they've pursued their objectives in Asia, assess how well they're doing, hit this point about the conflict with the PRC Asia strategy and then speculate a little bit about how that might change over time and what it means for the United States, and I'm going to do all this very quickly.   The basic elements of Taiwan policy I think are pretty uncontroversial.  It's to oppose any international recognition of Taiwan as a separate entity, to deter any moves towards de jure independence for Taiwan, and for the PRC leadership that requires credible threats to use force, if necessary.   At the same time to try to tilt the military balance in China's favor, both across the straight and in terms of developing capabilities to deter or raise the costs of U.S. intervention.   To use the cross-strait economic ties to build leverage in Taiwan and constrain Taiwan.  Although I'll note there that the PRC gave up some potential cards in that area because they opened their economy to Taiwan trade and investment very early in the 1980's to help build China's own economy.  So they lost some potential cards very early in the game.   To use united front tactics in Taiwan, to try to win political allies, and to isolate Taiwan independence advocates, and basically all of this adds up to two goals.  To make Taiwan's long-term status as a separate entity untenable, something that Taiwan can't maintain indefinitely, and thereby achieve unification peacefully without paying the costs of war.   So I think that's what the PRC is up to and I think there's a fairly uncontroversial assessment. What I want to get at today, that's maybe a little less well understood, is how is China pursuing these objectives within Asia, and I'm going to talk about the objectives in their strategy.  One is to win acceptance of the formal PRC positions on Taiwan, for instance, the one China principle, to insist upon that as a condition for diplomatic recognition, and they've been very successful in that with the major Asian countries and they've presented it in a way that resonates pretty effectively with the concerns a lot of Asian countries have about their own sovereignty, their own territorial integrity and threats of separatist groups of their own.  So that's one aspect.   Another is to limit Taiwan's international role both within Asian organizations and global international organizations.  So keep Taiwan out from formal organizations that require statehood, limit their participation in the track one and a half and two level, and use the threat of boycotting Chinese participation to push anybody into line.   Basically you try to force countries or organizers to choose--Do you want China to play or do you want Taiwan to play?  There's lots of examples. Maybe the most recent is the IISS conference, the Shangri-La dialogue, where China leaned on the organizers to limit Taiwan's participation as much as possible.   A third has to do with Taiwan's regional economic role, and the PRC has grudgingly accepted this, partly because they recognize the difficulty of trying to challenge it.  Countries want to benefit from trade and investment with Taiwan.  They don't want to give that up.   But the PRC tries to limit the degree of officialness there, and also wants to use its own growing economic influence, including the China-Asean free trade agreement as a tool of influence over Taiwan.   A fourth objective is to win acceptance of the view of Taiwan as the troublemaker in cross-strait relations, to cast this as an issue of separatism, and to point out that it is Taiwan's political leaders that are the source of the problems.   Another aspect is to cast Taiwan as an internal affair issue, as a domestic issue from the PRC point of view, and what the PRC does there has no applicability or precedence to how it will behave toward the rest of Asia.   That's been a consistent rhetorical line. It's been on that's hard to uphold, as I'll talk about a little bit later.   I would argue there's another thing going on, which is efforts to circumscribe the role of U.S. alliances in Asia in dealing wit the Taiwan conflict.   This is the thing that always causes the PRC to protest.  If there's any suggestion an alliance might play a role in Taiwan conflict, that's when the demarches come out, and sometimes worse than that.   The PRC line.  In principle, they don't like alliances, they accept them grudgingly as contributing to stability so long as they don't apply to Taiwan.  But if there's a hint that that role might be breached, then there's strong protests, and I think the most recent example is the so-called two plus two statement.   In February 2005, U.S. and Japan had a statement about how peaceful resolution of Taiwan issues was a common strategic objective and China really protested that.   What all of this adds up to is trying to reduce the international and the economic costs if the PRC does have to use force some day to resolve the Taiwan issue, and again it's a dual objective.   One part is reinforcing the efforts to deter Taiwan from declaring independence, by making the threat more credible, and second, if they do have to use it, trying to make the costs be manageable.   So these are what I see as the PRC objectives on their Taiwan policy as they play out in Asia, and then the question is, well, how effective has all of this been, and I think it varies, depending on the category we're talking about.   In terms of acceptance of the formal PRC positions, very effective.  All the major states in Asia accept the one China principle, and have limited their ties with Taiwan to informal economic ones.   Limiting Taiwan's international role, pretty effective at that.  There is some resistance, there's some resentment.  There are fora such as APEC, where Taiwan participates as an economy, but even there the PRC has often been successful in downgrading the level of representation.   As I mentioned, there has been limited success in limiting Taiwan's economic role cause countries in the region want that, and so there's a high cost of pushing that.   Getting Asian acceptance of the view of Taiwan as a troublemaker--considerable success.  In branding the source of tensions, as Li Zhaoxing [?] and Chen Shui-bien, personalizing it, it's Taiwan leaders who are at fault.   In my travels in Asia in the last year and a half, when we've been asking about this, that's a view we often heard from Asian elites in Southeast Asia and even in Northeast Asia, so I think the PRC has been somewhat successful in selling that argument.   There's an extent to which PRC policies on Taiwan are seen as something that's irrational and it doesn't always make sense, but it's a fact of life.   If you have to deal with China, you have to realize they're a little bit funny on this issue of Taiwan and you have to deal with that.   So that's an area where I think you see diplomatic success.  This point of casting Taiwan as an internal issue that doesn't involve precedence or implications, here I would say very limited success.   This is an argument the PRC has made both in official speeches and at a scholarly track two level and it doesn't go anywhere.  When they say, well, if we use force against Taiwan it doesn't have any implications for how we would treat the Philippines.  That's not an argument that reassures countries in Southeast Asia.  So not doing very well there.   Circumscribing the role of U.S. alliances in dealing with Taiwan, this is an interesting point and I think it's a mixed picture.  You have to start with Bob Sutter's point--and I think I see Bob in the audience--that U.S. allies have never been eager to get involved in a Taiwan conflict.  So what's the right basis of comparison.  They've never wanted to get dragged into this.   There's very little appetite in Asia for a confrontation with the PRC and even U.S. allies don't want to get involved in this.   Nevertheless, as I look at Chinese diplomacy, I think they have gained ground in some areas.  In South Korea, South Korea's very worried of any talk of using the U.S./ROK alliance for regional contingencies.   Regional contingencies being the codeword for Taiwan, they don't any part of that.  And Thailand the Philippines, formal U.S. treaty allies, they're not interested in a conflict with Taiwan and in fact are building their own strong strategic relations with China.   So that's an area where I see some success.  There's other areas where it's a much more mixed picture, Australia perhaps being the most interesting one.   You've gone from a situation where Rich Armitage traveled to Australia at the start of the administration and said if there's a conflict over Taiwan, Australia has to be there with us, if the alliance is going to last.  It got a little bit of attention.   Today, there's a very fierce debate going on in Australia as to whether they want to be on the U.S. side if there's a conflict over China and you see that played out on the economic side, you see it played out on the issue of the attempted Chinese diplomat who's trying to defect right now, and that's a big political issue.   So it's a little unclear there.  If you look at the case of Japan, I think that's the one area where the Chinese policy has failed.   Over the last decade, the U.S.-Japan security alliance, I would argue has become more clearly focused on the possibility of a Taiwan contingency and Japan seems to be being planned into it, and Chinese efforts to stop that or avert it have been unsuccessful.   And then the final point I had made about reducing the costs of using force, that's tougher to know but I guess my sense if limited success there.   All right.  Let me get to the point.  Are the PRC positions on Taiwan undercutting their broader Asia policy?   And I guess to address that I have to talk a little bit about what the Asia policy is.  We had a very good first session on this with David Shambaugh and Ashley Tellis [ph], so I'll be very brief.   But it seems to me the PRC is emphasizing the common goals of regional stability and economic development.  They're trying to rebut the China threat arguments that developed in '94, '95, '96, arguing that China will behave as a responsible great power that won't seek hegemony, reassuring their neighbors that they'll benefit from PRC economic growth and power, undercutting any potential coalition that might contain China, a very important goal, sometimes neglected.   Supporting regional economic and political integration and often doing so in settings where the U.S. is not a player, as in Asean plus one Asean plus three, Shanghai cooperation organization, East Asia summit.  I could go on.   So that's something else going on.  And arguably seeking to reduce U.S. influence in the region.   And we heard David Shambaugh on the first lecture argue that it wasn't necessarily a zero sum game.  He's right; it's not always a zero sum game.  But on some issues it is, and China is trying to increase its relative influence.   Now I think the hard-line policies China sometimes takes on Taiwan do have costs and do tend to undercut part of this strategy.  Part of it is the PRC ability to be flexible on Taiwan issues, depends on their assessments of where the long-term trends are headed.   If they are worried that Taiwan is moving rapidly towards independence, policy toughens up everywhere, including in Asia, and they take a tougher line and they try to send strong messages, and I think you see that in their policy.   They also are worried about what Taiwan might do that might demand a military response that the PRC doesn't want to make, and certainly looking at their Taiwan policy, they don't set red lines because they don't want to box themselves in.   One of the difficulties is if you look at their Asia diplomacy, you can argue it's been very flexible, it's been very smooth.  They have listened to what countries want, they've adapted their responses and their initiatives appropriately and have made up a lot of ground, I would certainly argue, over the last five or six years.   That's very different from their diplomacy on the Taiwan issue, which tends to be inflexible, dogmatic, stick to the principles, reluctant to compromise,a and it's partly because this is an issue where domestic politics and nationalism are very heavily involved, and whether you are the top political leader or a junior diplomat at an embassy, Taiwan is an issue where, if you mess it up, that could be the end of your career.  It could make you vulnerable.   So there's not a lot of flexibility there, and I think you see that clumsiness when the Taiwan issue comes into play.  Let me just cite two examples.  One was the Taiwan presidential inauguration in May of 2004.  A number of South Korea legislators wanted to go attend that inauguration.  PRC diplomats from the embassy in Seoul went to their offices and said don't go, don't go.  You have to make a choice.  You can go to Taiwan and attend the inauguration.  That means you're not going to China.  What's more important to you?  Choose.   And that was a very clumsy bullying that did not go over at all well in South Korea and it resonated with other things that were happening at the time.  Another example is the reaction to now Singapore Prime Minister Lee Hsien Loong's visit to Taiwan in July 2004, and the purposes of this were arguably benign.  Lee, I believe, wanted to meet Chen Shui Bien, personally, take his measure, build a personal relationship, set himself up in the future to be able to play the kind of broker role that his father, Lee Huan [ph], has at times played to ease tensions across the Taiwan strait.   So that was the objective.  They timed it before he became prime minister to make it less official.  They consulted with China at her time.  What was the PRC reaction?  Very negative.  Threats.  This destroyed the political base of relations between the PRC and Singapore.  They delayed economic meetings.  They did a bunch of things but basically were challenging Singapore sovereignty.  Do they have the right to visit where they want to visit? and China's answer was no.   And it's interesting, the Malaysian response to this.  The Malaysians unilaterally decided that they would ban cabinet-level visits by their own cabinet.  So this was a message of intimidation that didn't really shake Singapore but it did have an effect on other countries in Asia.   This tension between the two things is also reflected in the Chinese ambivalence about the so-called peaceful rise theory, which has been a controversial issue in China.  One reason this theory hasn't been officially accepted is because of the possibility of using force in Taiwan and Chinese leaders were afraid if they formally enshrined peaceful lines, that might send the wrong signal to Taiwan.   The whole kind of point of the presentation is encapsulated right there.  They want to have peaceful lines to reassure Asia.  It might send the wrong signal to Taiwan and therefore they talk about peaceful development instead or just development.   So I think the tensions do really kind a come out very clearly in policy, and I pointed out that the PRC is trying to reduce the costs of using force.   In my view, if they do use force, it really will very profoundly reshape the Asian political-military environment.  How precisely that would play out would depend on the circumstances under which a conflict started, how long it lasted, how much damage was done, and how it comes out in the end.   But if China and the United States fight over Taiwan, it cannot help but have very profound regional and global implications.  So the efforts to reduce the costs of using force, I mean, I think ultimately have not been that effective.   And there's another point to make, that one of the impacts of the Taiwan issue has actually been, I think, to distract Asian attention from PRC military modernization.  At least in my travels in the region, there's a tendency to look at the PRC military build-up as focused solely on Taiwan, and it is true that that is the short-term and near-term or medium-term focus of PRC modernization.   But a lot of those capabilities, especially naval capabilities, and to some extent missile capabilities, have other applications within the region, and I think perhaps Asian countries tend to dismiss this--Oh, that's about Taiwan, it's not about us--and in that respect it tends to distract the focus from that.   Okay.  Let me come to the end here, quickly.   Will the dynamics of this change as the PRC economic and regional influence continue to increase?  I think the PRC economic influence is likely to make this Asian dimension of their Taiwan strategy more effective, maybe both directly--although Terry'll talk to this in terms of the direct impact on Taiwan, but also I think countries may be less willing to challenge PRC positions on this due to the economic costs of this, and again, you see the debate most clearly right now in Australia, where this is a "hot" political issue.   But nevertheless, there are underlying concerns, strategic concerns about what role the PRC is going to play in Asia, that go well beyond the Taiwan issue, and countries in the region do want the U.S. to be engaged and to have a security presence there, and I don't think that's going to change as the PRC gets stronger and in fact that tendency may even increase.   So what does it mean for us, for the United States, that is?  Asian countries look for the U.S. to manage this issue, to contain it, to keep it out of the realm of conflict, and it's very clear there's no desire to contain China or to be drawn into a confrontation with China over Taiwan.   Another implication is the U.S. shouldn't count on overt support from Asia, or the use of regional bases and facilities in a Taiwan conflict.  Japan may be the one exception to that, but that it seems to me is the trend to where things are headed in Asia, and there's a clear tension there with U.S. strategic thinking in terms of military transformation, global deployments, rapid movement, forward-operating bases.   The way the U.S. is thinking about employing military power may no longer mesh very well with the geopolitical environment in Asia.  So that's an important thing for the U.S. to be thinking about.   If China does use force, I think, against Taiwan, I think U.S. credibility is involved and countries in the region will look to see how the U.S. responds.   And, finally, I want to point out, that even though countries don't want to get drawn into a Taiwan conflict and don't necessarily want to support U.S. efforts to enlist them in that effort, nevertheless, there is a pretty deep regional support for a long-term U.S. presence in Asia, that's separate from the Taiwan issue and that I think will endure after that.  Let me stop there.   MR. BLUMENTHAL:  Thank you very much, Phil, for a very comprehensive look at China's Taiwan policy and how it fits into their Asian strategy, and you've raised, I'm sure, a lot of questions for people.  We'll get to those a little bit later.   Now we're going to shift a little bit, to Terry Cooke, and get a snapshot of what the economic relationship looks like between Taiwan and China, what sort of incentives have been built to avoid conflict on both sides, and also just to get a snapshot of whether governments even have control over the economic relationships that are developing across the strait.  So, Terry.   DR. COOKE:  Thank you, Dan.  That was a wonderful introduction from the regional perspective for what I would like to say. Sandwiched as I am between two experts, I'm going to keep my points very simple.   I do hope to provide my personal answer to the question of this symposium, Is economic reshaping politics across the Taiwan straits?   I believe that the one o two generalizations that I'm going to mention about the economic interaction across the straits do bear out the points that Phil was making regionally and I hope they lead into what Shelley will do, which as I understand it, examine the impact, politically, of this economic dynamic, both in Taiwan and in China.   The main topic of Is economics reshaping politics? it's interesting, because the U.S. is at some distance from the strait of Taiwan, and this question is one that there's been fairly general consensus on, both in Taiwan and in China, for quite some time.  I think you generally hear a clear yes to that question in Taiwan and you'd hear a clear yes in China.   In Taiwan, the discussion is about hollowing out, the discussion is that we have a five-year window before China closes the economic gap on us, and there's a general feeling that the economic engagement brings with it some destabilizing concomitants.   In China, the answer also tends to be yes.  It tends to be the thinking that the economy of China is so large, that like a large space vehicle in a currently popular movie, it can just pull in with a tractor beam these smaller satellites and make them a part of China's economy.   My own answer to the question would be a resounding yes, but for very different reasons than you hear in either Taiwan or in China.  To me, it seems that the thinking in Taiwan and China is both largely politically driven, and does not really base itself on the fundamental trade and economic drivers that are determining what is happening between Taiwan, China, and beyond Taiwan and China, to the global economy involving North America and Europe.  My personal interpretation is that the Chinese--yes, it's somewhat driven by political wishful thinking, that having run up into the limits of a strategy vis-a-vis Taiwan that was heavy on military intimidation, they're somewhat hoping that they can brandish a different arrow in their quiver vis-a-vis Taiwan, and that somehow this economic engagement is going to deliver their objectives for them.   I would also argue that in Taiwan, the thinking also generally serves political purposes for mobilizing people's energy and for energizing an electorate to continue to do what they've done successfully over a 50-year period, which is to operate extremely effectively on a global economic stage.   Now I'm going to just give two minutes of my allotted time to dispatch with one point, that in my experience sometimes gets in the way of a good analysis of what's happening in cross-straits trade.   I've been working and toiling in the vineyard of cross-straits trade now for about four years and there's one issue that pops up, that frequently tends to obscure things rather than to clarify, and let me introduce this just by a New Yorker cartoon that appeared years and years ago.   There's a academic conference and instead of everybody being seated as you are, the room has been divided into two camps, one against that wall, the other at that wall, they're throwing their coffee cups and chairs at each other.  One side is yelling: Light, light.  And the other side is yelling: Water, water.  And the banner is the 17th annual convention of photosynthesis scientists.   Now clearly, the relationship between politics and economics is not a all or nothing proposition.  The challenge is to try to identify the ways in which they're feeding into one another and affecting one another.  The sterility of the water-light debate is sometimes played out in political science, in the realist versus interdependent schools of thought, or sometimes with cross-straits trade, boils down to very simple formulations like politics trumps economics or economics trumps politics.   My interest is in the interplay between them, and clearly, economics is never going to remove the possibility that a small number of political decision makers might do something that suddenly, fundamentally changes the equation.   But I am very interested in understanding how economics may be constraining the possibility of that to happen.  It's a little bit like perhaps the Magna Carta.  It's a important document, both in that it signaled a shift in relationships between the king and the nobility and it pointed to a very important long-term trend.   But no one would argue that suddenly, the king was displaced, and the feudal lords were the only one that needed to be paid attention to.  I will make one simple point about trade across the strait, but I will drill down to examine it in six specific areas.   The point about trade that I would like to elaborate is just that understanding it from the broader perspective of globalization dynamics is a key to understanding what is happening.  The tendency is to come in with a tunnel vision, listen to what people say in Taiwan, listen to what people say in China, but I think the more revealing perspective is the broader globalization perspective.   I tend to concentrate on IT, depending on how it's measured, it's anywhere between 25 and 40 percent of Taiwan's economy.  It's the area in broad industrial phases of development that has been generating the most value creation.  But I think the points go beyond just IT.  The first point that I would offer is that the complementary fit between Taiwan and China's economies is really very much to be expected and is completely natural, when viewed from a broad historical perspective.   Taiwan took much of the mainland economy with it to Taiwan in 1949-50 in terms of its global linkages to Japan, and elsewhere in the world.  The PRC essentially absented itself from the world economy in a meaningful productive way, from 1950 until the late 1970's, and then with reform in 1982.   So there's a great deal of human productive energy that is now being brought back into the global system.   The work that I've been doing recently examined a 25-year period, a four-year period and a six-month perspective in terms of the broad underlying dynamics of Taiwan's involvement with the China mainland.  This all started in the early '80s with light industrial production moving from Taiwan to the mainland.   It accelerated in the 1990's, Taiwan's so-called golden age in IT, that was given birth to by the Shinju [ph] science-based industrial park in the mid 1980's.   Now the most recent four-year period did correspond to the aftermath of the dot-com meltdown.  It also corresponded to the first administration of Chen Shui-bien.  But fundamentally, in terms of the controls that were put in place to regulate business interaction between Taiwan and China, in terms of the general upward trajectory of involvement, measured in investment flows, or in terms of the breadth of the commercial involvement, there was no major discontinuity during these periods, and even during the most recent six to ten-month period when there was the lead-up to the LY election, the underlying pattern of trade has been phenomenally little affected by the political rhetoric and the political postures that various actors have been taking during that 25-year period.   Now there's some drivers of continuity that help explain why this is.  The pillars of Taiwan's IT involvement can be thought of in very loose terms as falling into the PC area, integrated circuits, and then there's the global capital movements which are essentially the fuel for this type of industrial development.   As Jason Dean pointed out a couple of weeks ago in The Wall Street Journal, in a nice article that broke down laptop production and analyzed it in terms of the global complexity of that product, of systems integration, the Taiwan contract manufacturers of laptops and PCs do not ultimately control the decisions where they put their factories.   Those decisions are taken in tandem with their partners, the Hewlett-Packards, the IBMs, the Dell computers, and the global logic has simply dictated that over the last four-five years, the vast majority and preponderance of their manufacturing has moved to the mainland.   With ICs or integrated circuits, it is perhaps fortuitous that the dot-com meltdown, or the "tech wreck" as it's sometimes called, happened at the exact juncture that it did, because it took some pressure off what was, from a certain perspective, a very overheated situation in the U.S-Taiwan-China relationship as far as semiconductor production is concerned.   There were very legitimate trade issues that had built up during this period such as the value-added tax that China was discriminatorily applying to Taiwan.   There was not a great sense of confidence that people knew exactly what was happening in different fabs [ph] that were coming onstream in China, and what happened from 2001 to 2004 was we essentially went through one of the bust-boom cycles that characterize ICs, kind of the rice of the 21st Century, which behaves in a commodity fashion like rice.   And it's allowed for a certain sorting out of the situation and, more importantly, a political accommodation to the situation.  In some ways the IC component of Taiwan's economy represents the last wave to go across the strait into China and it was one that needed to be stage-managed very carefully and very effectively by the administration.   The fact that the speed of development slowed a bit after the "tech wreck" made it perhaps easier to do that.   Now of these drivers of continuity, probably global capital is the one that is having the biggest impact right now.  There's been a maturation in the dynamics of global capital since 2001.  At that point basically anything that had dot-com in it and anything that had "c" in it could be instantly funded and attract huge amounts of money.   After the dot-com bust, there was a rethinking and a second more cautious look that came to funding industrial projects in China, and there was increased recognition that there was an absence of exit strategies, and--    DR. COOKE:  [continuing] Taiwan has, in many ways, come in and in an arbitrage position, in helping global capital figure out how to exist successfully from the China market, they--and there's also been a rebalancing of the different markets that assist with IPO exits.   It used to be that Hong Kong really played no role whatsoever in tech IPOs.  That was the Taipei exchange's traditional strong suit, while the Chinese markets, because of problems affecting the credibility and the impartiality of those markets, have still not yet emerged as a viable IPO mechanism.   In the last couple of years, Hong Kong is playing more of a mediating role with assistance from Taiwan industrialists and financiers.  To some extent this reflects a chillier environment in Taiwan to the politics of cross-straits economic engagement.   I won't spend time on Opto [?] electronics.  There's no time.  I would simply commend that as a fascinating area to look at the most recent phase of what is happening as Taiwan pioneers Opto electronics and TFTL CD production in Taiwan, and systematically moves it across to China for the lower value parts of the assembly and the integration into the PC and laptop products.   I would try to touch briefly on two final points about the nature of the cross-strait engagement.   One is to point out that there's significantly different business models that Taiwan and China use.  China is essentially a hypercompetitive market.  If you did a simple four-way graph, and if, on one axis, you have high returns, low competition, the monopoly situation is high returns, low competition.   China's situation is high competition, low returns.  It's the exact opposite.  It's the absolutely grueling market.  One of the reasons why the Taiwanese are able to operate so successfully is because their entire business model, developed over 50 years, has been attuned to low-cost production, nimbleness of production and satisfying their Western partners.   They are better able to operate, not only in a cultural environment of Chinese language and business practices, but in a business environment which is hypercompetitive.  The Taiwan business model, though, is much more of a global market facilitator.   For 50 years, they have strategically aligned themselves with the major markets in, particularly North America, but also Europe and Japan, and they act as a middleman and facilitator for putting successful products into those markets.   The most recent example of China's attempt to emulate what Taiwan has been doing for upwards of 50 years, is the most recent wave of foreign direct investments into foreign markets, and the acquisition of brands in the global markets.  There is not much at this point to indicate that China is going to be wildly successful at this.   They have a past history in the commodity area.  Phil was just mentioning Australia.  In South America and Australia, China, because of its voracious appetite for raw materials, has long been a player, but their attempt to use local labor to support foreign direct investment in foreign markets has been poor, particularly in South America.   You recently have three state-owned companies hire, looking at Maytag, CNNOC looking at Unocal, and then most notably Legend computer or Lenovo having acquired IBM.  But the value proposition in these are these are largely prestige purchases for which too much money is being paid, and it really reflects the directive from the national level to their struggling state-owned companies to get out and make a name for yourself, and to try to use the "hot" Chinese economy as a springboard to the global markets.   I'll try just to stop there.  The point that I am trying to make is that it is the global nature of cross-strait trades that is the real driver and determinant of what is happening and it involves a much broader constituency of people than just the executive UAN [?] in Taipei, or people in Jung Nan Hai [ph].  As the decision making in China is evolving from, let's say a group of ten to a group of a 100 principal decision makers, local leaders and district leaders are directly benefiting from Taiwan's differential success on behalf of the global economy, in exploiting the opportunity of the China market.   Dan mentioned how career-ending it can be for national level officials to get the Taiwan issue wrong.   For governors and for local-level officials, the Taiwan business connection can be the single most sure-fire way of catapulting their constituency into economic growth and jobs.   My sense is in Taiwan, that there is, despite all the political rhetoric and static, I think there's a bipartisan recognition of the underlying importance of economic vitality to national survival, and I would personally offer the opinion that the somewhat mixed message between the presidential elections in the spring and the very different outcome in the fall, in the LY elections in Taiwan, reflects an electorate that does want a measure of political assertiveness but also wants to keep a strong hand on the tiller of economic growth and development.   So, thank you. MS. ROBERTS:  Thank you very much, Terry. Shelley, if we can turn over to you to explain a bit about how this economic relationship is playing out politically in both Taiwan, which obviously is more open and transparent, and also in China as well.  So, please.   DR. RIGGER:  Well, thank you very much.   It's a pleasure to be here, and it's, as always, a little dangerous to be last, because many of the things that I've been thinking about in preparing for today's event have been addressed, one way or another by the other two speakers.  So I'll try not to be too repetitive but also try not to be err on the side of completely abandoning my notes and possibly saying a lot of things that are not very well thought out.   So forgive me if i reiterate some of the excellent points that have already been made by the other speakers, starting with Phil's original, kind of opening gambit today, which is that there are a lot of dilemmas for both sides, for both Taiwan and for the PRC, and actually, as he articulated, there are dilemmas for other actors, regionally and globally as well, and this is really where I want to direct my remarks this morning, is toward the dilemmas that face both Taiwan and the PRC as they attempt to manage their economic relationship in a way that advances their political objectives.   One thing I would point out at the very beginning is that there is no straightforward pattern for how cross-strait economic interaction or integration is affecting political thinking or political outcomes on either side of the strait.   In other words, in sort of more social science jargon, the logic of interdependence is not working in an uncomplicated way in this situation.   The idea that somehow--and I think this is something that, as has already been mentioned, some folks in the PRC, and actually some folks in the United States, and many people in Taiwan are either excited about or hopeful about or worried about, depending upon which capital you happen to be in--this idea that somehow interdependence will inevitably and naturally lead to, economic interdependence, that is, the resolution of the political stalemate between Taiwan and the PRC.   And I think that that is just very wishful or paranoid thinking--wishful in Beijing, wishful maybe in Washington, paranoid in Taiwan, and that in fact these forces are much more complicated than they appear, and in some ways Terry Cooke's presentation I think illustrates that very well.   That just as we are unwise to assume that cross-strait economic integration leads inevitably to the destruction of Taiwan's economy or the absorption of Taiwan's economic vitality into mainland China, likewise, we are unwise to assume that lots of interaction in the economic realm will inevitably incline Taiwanese to somehow surrender their longstanding political objectives in favor of a pro PRC solution.   And I think that digging beneath that very broad generalization, there's actually very little data of any kind to guide us to a more sophisticated understanding.  We really need to study this question.  We really don't know how, at the level, at the micro level, either among political elites in Taiwan and China, or among non-elites in Taiwan and China, we really just don't know very much about how political thinking is being shaped by economic interaction.   So I think what I'm going to try to do today is offer more, perhaps more questions than answers.  Where are the gaps in our knowledge or what are the kinds of things that we need to be looking at?   But the one thing that we do know for sure is that this is a very tricky relationship to manage, on all sides, and that it presents everyone involved, global actors, Taiwan actors, PRC actors, with dilemmas.   But let me start with goals, and here I'm going to say a lot of the same things that Phil Saunders said, but maybe in slightly different words, because I think both Taiwan and China have short-term goals and long-term goals that are actually distinct, that we can differentiate between the short-term and the long-term objectives.   China's short-term goals are to arrest trends that make separation more permanent, or durable, and therefore make unification more difficult.  So any trend that they see, either within Taiwan, or internationally, that they think is moving Taiwan in a direction that will be hard to reverse, hard to bring Taiwan back into the Chinese fold, they must challenge, counter-arrest, if possible, and this includes, importantly, this trend that many PRC scholars and politicians are worried about, that they call desinicization.  The process by which Taiwan is somehow stripped of its Chinese characteristics through a kind of conscious political strategy by certain actors, both in the political realm but also in the cultural realm in Taiwan.  They're very worried about that.   Another near-term goal is to, obviously, to deter and prevent a strong assertion of independence, whether that takes the form of a declaration of independence or some other kind of stronger assertion of Taiwan's independence, that they must prevent, arrest at all cost.   And then the third goal is to maintain global international resistance to Taiwan independence as well.   So that's the short-term goal and that's actually not too problematic, even for a lot of people in Taiwan, although obviously some people in Taiwan feel very uncomfortable with that goal.  But the long term, China's long-term goal is a little bit more--actually, it's a lot more problematic from Taiwan's point of view, cause the long-term goal is to incorporate Taiwan into a single Chinese national unit.   That might be the People's Republic of China.  Or it might be some kind of transcendent Chinese entity that is neither clearly identifiable as the People's Republic of China, nor clearly identifiable as the Republic of China, which is the state that we know on Taiwan.  Some people would say that is incredibly naive, to even suggest that PRC leaders are serious about creating a new Chinese national entity to which Taiwan and China could belong as somehow equal partners, that in saying that this is one of the possibilities on the table, I am somehow being seduced by Chinese propaganda.   However, I think it is not yet clear that China's promise of this kind of transcendent third option is completely and permanently disingenuous.   It may be the case that this is an option and that the long-term imperative is not actually the annexation of Taiwan into the People's Republic of China, full stop, and I would be interested to hear, Phil, what you think about the idea of leaving open the possibility that the Chinese have not yet determined what their ultimate long-term bottom line is.   It's my view that this is still evolving in PRC politics, and that this, the unfixed nature of China's precise long-term objective makes things very difficult for Taiwan, since not knowing whether this sort of unification light that is currently on offer from the PRC, because Taiwanese politicians can't really discern whether this is a sincere offer or not, they can't decide what to do about it, how to respond to it in the long run, because there is always the possibility, if it is not sincere, that you'll buy into unification light only to find out that behind unification light is annexation of Taiwan into the PRC.   So China's long-term strategy is either undecided or unknowable.  Or at least unknown to me.   In any case, though, China's long-term objectives imply Taiwan's acceptance of a change in its status.  In the long run, China wants Taiwan to accept a change in status that permanently forecloses the option of independence.   Taiwan's goals.  In the near term, I think Taiwan's goal is to avoid incorporation into any entity that is defined by the PRC.   So if it is on Beijing's terms, they don't want it, because they don't trust--elites and non-elites in Taiwan do not trust the PRC to make an offer for unification light and actually mean it.   So no incorporation into any entity that's defined by Beijing, and their objective in the long run is to avoid the loss of Taiwan's autonomy.  Preserving sovereignty would be good but preserving autonomy is crucial.   The problem for Taiwan, though, because Taiwan is a democracy and a very robust one at that, is that there's no consensus about how to achieve its goals.   I would describe there major sort of streams in Taiwan thinking about the long-term objectives, and the short-term objectives as well, the sort of fundamentalist Taiwan independence position, the mainstream green or DPP, President Chen Shui-bien's political camp, mainstream DPP thinking, and then mainstream thinking in the blue camp, the KNT-dominated political force in Taiwan.   The Taiwan independence fundamentalists, in a nutshell, who are few in number but loud in volume, have this kind of logic.  We need to build a strong sense of Taiwanese national identity.  We need to persuade people in Taiwan that they are Taiwanese, that it is essential to preserve the existence of Taiwan as an independent political entity, and that everyone who lives there needs to subscribe to that idea, and to put aside any kind of lingering ambivalence about what Taiwan's relationship to China should be.  Do that first.   Simultaneously, try to persuade the international community to choose Taiwan against the PRC on this particular issue.  If you can accomplish those two things, then you can take gradual step by step actions that will culminate in the change of the name of the state to Taiwan, Republic of Taiwan, something like that.   So this is their kind of, in a very abbreviated form, their strategic vision for how you achieve Taiwan independence.   The green mainstream has a very different strategy.  Their strategy is to basically defer any resolution of the cross-strait conflict or issue as long as possible.  So stalling is really an essential part of the strategy.  You stress Taiwan identity as a way of reducing Beijing's influence and leverage over Taiwan society.   You don't want Beijing to be able to create a constituency for unification within Taiwan by seducing Taiwanese people to think of themselves as, ah, well, maybe we are Chinese after all.   So you emphasize Taiwan identify as a way of kind of strengthening the resolve of Taiwanese people to resist seduction by Beijing.   You look for opportunities to negotiate with the mainland or to have dialogue with the mainland, that won't reduce Taiwan's freedom of action, and that also won't lead to a resolution, cause what you're trying to do is stall.   And what you're stalling for is you're hoping that something will change in China, something will change in the international  community, that will lead to either an opportunity for Taiwan independence or for, at the very least, a decent and forcible deal between Taiwan and the PRC, and I think for most people in the DPP, their preference would be for the world to change in a way that Taiwan independence is possible.   But failing that, at least you want the world to change in such a way that the PRC will kind of be willing to leave Taiwan alone, will not go for a kind of maximalist outcome.   So I think what we see the DPP trying to do at a kind of operational level is to participate in a kind of minimal engagement.  However much engagement Beijing requires to be pacified and to be presented from escalating tensions is okay.  To buy time.  To buy time for what?  For the situation to change.   The blue mainstream also believes in pacification and stalling, so this is the KMT, the PFP, and so on.  But I think their idea of what we're stalling for is more active.  It is we're stalling because we are--and we are engaging in the hope that we can actually produce a good outcome, that we may be able to negotiate or to dialogue or to, you know, tango our way to an outcome that really is an enforceable and meaningful unification light.  That is to say, a deal that satisfies Beijing's desire for unification but preserves, fully, Taiwan's political autonomy.   And I think, you know, if we want to talk about sort of operational strategy or tactics for carrying this out, we can look at the recent visits of the two party chairmen in the blue camp, KNT Chairman Lian Jan [ph], and PFP head, James Soong, to the PRC.   I think what Lian Jan's visit showed was that engagement with China, at a relatively symbolic level, because there isn't really the possibility for Lian Jan to negotiate anything seriously, implementable, with people in China.   But this kind of symbolic engagement is actually very useful for reducing tension and for diminishing the degree to which people in the PRC demonize Taiwanese leaders and Taiwanese people generally.   James Soong's visit I think shows that if you push too far, if you shoot for too much, if you're too ambitious in that kind of interaction, you end up giving away the store and you destroy your own political credibility back in Taiwan.   And I think James Soong's specific statements in China pretty much had that effect, of undermining his ability to function as a mainstream political leader in Taiwan, cause you just--he said too many things that were dictated by leaders in Beijing.   Where is the public?  Where is public opinion on this spectrum?  I think it's between the mainstream green and mainstream blue positions, that either approach is okay with most people, if it works.   So engage more, engage less, you know, as long as you're pacifying the PRC, as long as you're stalling, as long as the strategy is working to maintain our autonomy, and to avoid a crisis, then it's a good strategy, and so the political leaders are then left in this really relatively narrow space of specific policy options to kind a battle back and forth to show who can get things done.   Now on the dilemmas side, Beijing's basic dilemma is that their short-term goals contradict their long-term goals; right.  How do you abort, foreclose, deter, prevent, coerce Taiwan from taking actions you don't like, without reducing your long-term ability to seduce Taiwanese into a deal?  So that's their dilemma, and this is where the economic dimension comes in.  Clearly, Taiwan's economy is deeply and increasingly intertwined with mainland China's, and that could become the foundation--as President Chen Shui-bien himself said, early in his first term in office, this economic integration could become the foundation for social and political integration in the future.   But A, this doesn't necessarily mean unification and it may not be enough to satisfy the nationalistic aspirations of many people in the PRC.   We have to look no farther than our own northern border to know that people with a similar cultural and historical genesis, who have intense economic interdependency, do not necessarily seek political unification.  You know.  The Canadian impulse to unify with the United States is, as far as I can discern, absolutely absent.   So what I think-- MR.      :  [Off-mike comment.] [Laughter.]   DR. RIGGER:  Fair enough.  So the point is that yes, economic interactions, person to person engagement, marriage--right?--this is another big trend in Taiwan, are cross-strait marriages.  These kinds of interactions don't necessarily lead to political unification but, on the other hand, they may reduce tension, hostility, resentment, anger, resistance to unification light in Taiwan.   So they don't necessarily provoke Taiwanese people to seek unification but they may diminish the resistance people in Taiwan feel to beginning a process of engaging the PRC in a conversation about the two sides ultimate future.   So in the long run, this economic engagement is probably the best hope China has for securing a diminished resistance on the part of Taiwanese to some kind of discussion about the future.   But you don't get that if you send the message to people in Taiwan that you're hostile and that your intentions are ultimately to annex and to hurt Taiwanese people.  So something like the anti-secession law which basically says, you know, if you ultimately, if you don't do what we want, we're going to kill you--undermines a lot of the good work that has been done by cross-strait business partnerships over the year.   Taiwan's dilemma is how do you maintain a robust flourishing economy and society without exploiting the China option to the point where you become vulnerable to political pressure from the PRC?  If you let your economy get drawn too close to China's, you may lose your autonomy.  But if you don't let your economy integrate with China's, then you become marginal in every way, because Taiwan doesn't have the economic weight in the world to be an independent actor and to not use its leverage and its sort of comparative advantage as this--how did you put it?--global market facilitator vis-a-vis China.   Do you can become an economy on the margin of China, or you can become a marginal economy, and neither of these options looks good.  And, on the other other hand, Taiwan has to think about this.  China's power increases in every way, every day.  They become more militarily powerful, more politically powerful, more economically powerful, more culturally powerful, more regionally powerful, more globally powerful.  They are powerful in space, these days.   What does Taiwan do?  In the absence of any kind of serious long-term exit strategy, what do you do?  Maybe you sit down and say we're not going to get everything we want.  We're going to have to negotiate our way out of this dead end.  I don't think people in Taiwan are ready to say that yet but, increasingly, in Taiwan, I sense, at least, and, you know, what I sense is like not very important, so don't write it down because what do I know?   But my sense, being in Taiwan, is that there is a growing feeling of resignation, that the current strategy of non-engagement or minimal engagement that's being pushed by the greens is not sustainable indefinitely and that we're going to have to start looking at things like Lian Jan visiting China as the necessary first step toward a new process of stalling, which we'll, you know, try to keep going as long as possible, but which may actually not be permanently sustainable.   And I think I'm just going to leave it right there because I'm sure that there are plenty of people who have questions and comments, so let's get on with it.   MR. BLUMENTHAL:  Well, thank you very much, Shelley.  I'm going to take the prerogative to ask the first question and I'm going to push a little bit on this issue that you've written a lot about cause I just, Shelley, which I've just finished reading a chapter in the book, Dangerous Strait, on democratic consolidation.   It seems like the elephant in the room here is democracy.  I mean, much of the way you explain in that book what the DPP is trying to do is actually focused on democratic consolidation, democratic reform, and that explains, actually, a lot of their behavior vis-a-vis Taiwan identity and vis-a-vis China.   And so I guess my question is how much of this changes or how much of this is sort of--I guess how much of the relationship and people's views on Taiwan are constrained by the fact that they're facing, you know, a one-party dictatorship still?  You know, how much of Taiwan's democratic project, on the one hand, which is taking up, you know, so much of its effort, versus a China that's putting pressure on them, that is still, you know, not very good on the issues that Taiwanese have grown to enjoy?   DR. RIGGER:  First of all, I think that it certainly puts Taiwan at sort of an operational disadvantage, because Taiwan doesn't have a strategy.  Taiwan has about 23 million strategies, which is to say one for everybody.  Right?  Everybody has a different idea, and the problem with democracy is they all get to talk about it, and they all get to argue about it, and many of these ideas, some of the best and some of the worst, get institutionalized in politics, and so there is no strategy for the long term, that we can identify.  This is what Taiwan is doing, this is what Taiwan is up to, despite the fact that sort of conspiratorial thinkers in many world capitals, which shall remain unnamed, imagine that Taiwan's leaders, especially Chen Shui-bien and the people around him, have a strategy that they are inexorably pursuing toward independence.   They really don't, and even if they imagine one, even if they wanted to have one, even if they've got it in a secret notebook somewhere, they can't implement it because it's a democracy.   China, on the other hand, is not only not a democracy, but on this issue it is a monolithic actor, almost, although I think Terry speaks importantly to conflicting interests among central and more provincial and local governments on this issue.   But I think if you're asked to sign the loyalty oath on the Taiwan issue, no matter where your economic bread is buttered, you will sign the loyalty oath on Taiwan anywhere in the PRC.  So it does put Taiwan at a real disadvantage in terms of winning.   The other thing I would say is I was privileged to attend a meeting yesterday at which Congressman Jim Leach spoke on this issue, and he said something that I think is really very important and profound and distressing, which is that Taiwan can have--and I'm summarizing, not quoting, paraphrasing, not quoting--Taiwan can have either democracy or independence but not both.   And the way he put it is self-determination or independence.  They can have self-determination so long as they say we're not going to put for independence, because if we push for independence, then our democracy will be destroyed by Chinese aggression.   And this is very uncomfortable from a kind of philosophical standpoint, because we tend to think of democracy and self-determination as being two sides of the same coin.   But I think what we see in Taiwan is a very sort of aggravated or inflated example of something that's probably true a lot, which is that even in a democracy a lot of things are not really on the table.  During the Cold War, many policy options that many Americans would have liked to have pursued were completely absent from the political discourse in our country because the threat of Soviet aggression was so accepted as this overwhelming priority.   And I think what Taiwan is is it's a good example of that same phenomenon at work.   MR. BLUMENTHAL:  Let me open it up now to questions.  We've got Rupert in the back right there.  The ground rules are state your name and affiliation and please ask a question rather than--leave the pontificating to the panelists.  I'm sure Rupert won't pontificate, but, please--   QUESTION:  No pontificating, rest assured.   Rupert Harmon-Chambers for the U.S.-Taiwan Business Council.  I have a question for Terry.  Terry, could you elaborate a little bit more on what you feel Taiwan's future critical advantages are vis-a-vis further integration with the Chinese economy, and draw out a little bit more the strategies that Taiwan companies can pursue over purchasing intellectual property and brands, over developing their own IP, and building their own brands.   DR. COOKE:  You're saying something that Shelley said as a springboard to that question.  Taiwan's dilemma, as an economy on the margin of China, or as a marginal economy.  There's no question that that is the perception and the political reality that people are grappling with right now in Taiwan.   One of the interesting things about where all this is going to go, economically and commercially, is that there really are not national economies in terms of business decision making right now.   There's a global economy, and different places provide different resources and skill sets for the global conduct of business, and that's the root of the tension between what's happening, economically, commercially, on the one hand, and politically.   I would personally say that it is there's a tradeoff, over time, between the conditions which lead to business flourishing.  When you're setting up businesses, it's very attractive not to have to deal with 23 million constituents, and if you want to put in a factory in a certain place, and if the current inhabitants of that plot can quickly be removed, that's attractive.  It's a predictable environment that makes the rational accounting for business decision making easier.   China has used that advantage very, very effectively over the last 20 years and has a globally first-class infrastructure to support global business.   The place where they're starting to bump their heads against the ceiling is that in addition to a hard infrastructure, global business requires a productive soft infrastructure of accountability, norms of behavior which are also elements of predictable behavior, and that's where, of course, China is struggling, and Taiwan is very well-positioned.  That's one element of an answer to your question.  The second element is it has to be kept in perspective, the ramifications of the different scales of the two places.   Business will always be interested in China, because like India, the population base is so big, that it provides a clear path to future sustained growth over the long term.   A Taiwan, or for that matter, a Singapore, is never going to be attractive to business in that sense.  But the fact that business plants a flag in China for the long-term market and consumption potential doesn't mean that at the same time it is displacing Taiwan from a position in the global value chain, and I think what is happening is that Taiwan is doing very well capturing the lower costs of land, labor and facilities in China, and maintaining its position as a quality and dependable producer for global markets in global supply chains.   But at another level, U.S., Japanese, European firms look past Taiwan for the long-term growth potential that the China market presents.  So in a nutshell, the democracy play with Taiwan I think will serve Taiwan very well, long term, in its position in the global supply chain.  Domestically, China has its own attractions, like India has a huge market, and it will at some point have to grapple with the pressures for accountability that Taiwan went through at an earlier phase of its development and India has already gone through.   MR. BLUMENTHAL:  Yes; right here.  Just wait for the mike.   QUESTION:  I have a question for Phil.   MR. BLUMENTHAL:  Your name and affiliation.   QUESTION:  I'm sorry.  Walter Lohman [ph], QS Asean Business Council.   Is there any broader significance to D. Pien Lee's (ph) visit to Taiwan in 2004?  What I mean by that is he clearly and explicitly was saying we're with you on the one China policy.  You don't have any better in Asia, but we set our own foreign policy.  He sort of drew a line in the sand.  Did that have any impact or significance beyond just Singapore's relationship with Taiwan and PRC?   MR.          :  It was an act of assertiveness.  I think there is also a generational element there as I suggested, that he was about to move into the position of Prime Minister.  He's being positioned as the successor to this father, almost as Asia's grand statesman.  So there was that element there.  But part of it I think was to build that kind of personal connection so that the channel was available if it needed to be there in the future.   If you look at how this has worked out long-term, there was clearly tension in Singapore's relations with China.  There is in other areas as well.  Singapore looks at things strategically and is concerned about the implications of a strong PRC that's not balanced by other regional actors, and so asserting independence and autonomy from PRC pressures I think supports that strategy.   So I think there were some longer-term strategic elements to it.  I'm sure they informed the PRC ahead of time they were going to do this.  They were told it's not a good idea to do it.  They went ahead and did it anyway and I think calculated the costs and the benefits in making that decision.   MR. SETTER:  I'm Bob Setter (ph) with Georgetown University.  This has really been a great panel.   Shelly emphasized China's power.  I wanted to ask the group what they thought about this proposition as far as China's influence in Asia and particularly in the Taiwan case.  I had the impression that at the end of last year that China's approach to Taiwan really wasn't working very well at all.  They looked very weak to me as far as stopping Taiwan from moving in the direction that Taiwan was moving politically.   So these constraints didn't seem to register very much, the business constraints, the threat of force, this kind of thing just didn't seem to work.  It seemed that the United States was very important.  It was really the United States that put this thing back in the box, if you see what I mean, by intervening very strongly as the administration did at the end of last year.   If you look out over the next couple of years at least, this is short-term, not long-term, it's the United States that's going to keep this thing in the box.  It's not China.  So it helps me at least to think about the relative influence and power of China versus the United States in an area that is critically important for China in Asia.  I'd like some comments on that, please.   MS. RIGGER:  Let just say that that's a very important part of obviously Taiwan's stalling strategy, is to have U.S. reinforcement and acquiescence in deferring serious action or dialogue toward action on cross-strait relations.  Certainly many people in Beijing would tell you that if it weren't for the U.S., Taiwan would have quit stalling a long time ago and had been reincorporated into the Motherland.   So it's an irritant for China that the U.S. plays this role, it's a kind of support for Taiwan, but it creates confusion in some quarters in Taiwan where many political elites in particular are unsure what the U.S.'s long-term goal or intention is.  Does the U.S. want Taiwan to stall forever because it's in the U.S.'s strategic interest to have Taiwan separate from China?  Or is the U.S. simply trying to stabilize the situation but hoping ultimately that it will be resolved some other way?  People talk about it in both ways in Taiwan.   MR.          :  There is one sense in which you're clearly right, Bob, that China has had trouble setting clear red lines and stopping the Taiwan strategy of creeping independence.  Until recently, the economic aspect hasn't really played a role.  They have relied on the one hand on threats and then more recently on U.S. diplomatic intervention to get Taiwan's political leadership to knock it off, but has sometimes been forthcoming and not as forthcoming as China wanted.   I think it's possible that something may be changing here, and I don't disagree with what Shelley said, you should not expect economic integration to magically spill over into the political realm and solve all problems.  But I do think you can perhaps make an argument that some of what Taiwan was doing to push the envelope was starting to have economic costs and that did start to register and play a role with the electorate and maybe also within Taiwan's executive branch.   For a long time I have puzzled over this, how you could have public opinion polling that shows 80 percent wants the status quo and 50 percent plus some small margin would vote for a politician for president who seemed determined to keep pushing and trying to change the status quo.  One answer is it depends on what you mean by the status quo and how you define it, but there seems to me to be a question there of why wasn't democracy pulling Taiwan's policy toward China back toward the middle and one can argue over the last 6 to 8 months you've started to see that and maybe the economics are a significant part of it.   I'm still very tentative on this, but I think that's part of the answer.  It's certainly not going to take you all the way from the PRC perspective the promised land of all Chinese, we ought to be together, but I think it is starting to have a constraining effect on Taiwan politics.   MR.          :  My name is--National Defense University.  Economic integration--China only make itself the economic international integration in order to gain the political objectives.  For example, I heard Taiwan businessmen changed their attitude towards the independence.  Or for example, in Japan, China is giving pressure not to go to--shrine through business leader to Prime Minister Koizumi.   Or today I was very surprised that Microsoft is assisting China to stop their website when.  For example. Taiwan independence is on the chatroom, Microsoft is assisting to stop like this.  So China effectively use their company to gain the political objectives, and could you explain the situation which the company is vulnerable in China?  That is my question.   MR. BLUMENTHAL:  A question about using economic coercion rather than integration.   MR.          :  Your question is getting a contribution because China frequently says to Taiwan you separate economics and we will deal with you successfully economically, but if you inject politics then it will not work, and then they turn around and inject politics into economics.  So there is that contradiction.   The ability of them to leverage that contradiction for specific government controlled policy purposes seems in my view to be seriously constrained.  During the first election of--when Beijing leaned on--it was very unproductive.  They stepped back from it quickly.  There was feedback from the global supply chain, don't put your foot down here.   The issue with Japan to me, although I have no expertise on the subject whatsoever, seems to be a somewhat separate issue because it seems to be something that quickly jumped the track of specific policy objectives that Beijing was trying to orchestrate and got into a more complex phenomenon.   MS. RIGGER:  I would just add that a lot of the ways in which Taiwanese business leaders have used their influence in politics, a lot of the issues that they're interested in are really business issues.  They look like cross-strait political issues, but they're really about promoting their business interests, so the most fundamental one is the direct links.   Taiwanese businessmen are determined to have direct flights across the Taiwan Strait and some people have interpreted that as they're working for Beijing, and some people in Taiwan make this accusation by promoting this policy change you are working on behalf of Beijing to undermine Taiwan's interests.  But I think it's very clearly their own interests that's at stake in reducing the cost and inconvenience of doing cross-strait business.   When Taiwanese business leaders are asked to make statements on what are clearly representations on behalf of Beijing, I think they are just totally discounted in Taiwan.  So--writes a letter and says I have completely changed my position on all issues and I now agree with Beijing, that's not precisely what he said but he came pretty darn close, everybody in Taiwan said they made him say that.  He doesn't really think that.  We know that.  We've seen this before.   So it's really not a very effective tool if there's not something real at stake for those Taiwanese business leaders who are making the representation.   MR. BLUMENTHAL:  Thank you all very much and I thank the panelists for a very, very interesting discussion.</body></html>