China, Taiwan and the AGP. 

Two underlying policy stances guide the discussion of the One China principle, first is the “One Country, Two Systems Theory” which is essentially a policy stance that Taiwan will one day become a formal part of China in accordance with the examples set by Hong Kong and Macao.  The other less translucent formulation is the “Two States Theory” first floated by former President Lee Tung-hui during a visit to Germany during 1999.  The Two States Theory is, for obvious reasons, a highly charged political issue and it is further complicated by a variety of linguistic and historical subtleties that color the definitions of word for “state” and for the word “country” in the Chinese language.  This paper will not delve into these interpretations of nuance except to say that China favors the One Country, Two Systems Theory and not the Two States Theory.  Crucially, Chen has neither officially supported nor distanced himself from the Two States Theory introduced by his predecessor.  His unwillingness to engage in formal dialogue with China under the One China principle is a focus of Chinese foreign policy, and the fact that China will not renounce the use of force to engage this issue is a position on which China will not yield.

From China’s reunification oriented outlook, Taiwan’s accession to the AGP can be assessed in terms of: supporting the policy goal of reunification; detracting from it; or exerting a neutral influence.  As illustrated in the Issue section of this paper, there is evidence to suggest that the manner in which Taiwan’s government entities appear on Annex I of Taiwan’s AGP accession documents could detract from the policy of reunification or the One Country, Two Systems policy.  The existence of “central government entities” on Taiwan clearly fits more closely with the Two States Theory, and thus would seem to confound rather than support the objective of reunification.

China’s objective is reunification, and its policy is One Country, Two Systems.  If China is in fact influencing Singapore or Israel, as suggested in the History, Taiwan’s AGP accession will be dependent whether it exerts a supporting, or at least neutral, influence on China’s One Country, Two Systems policy. 

The lack of a clear policy by the US with respect to the One China principle.

US policy on the relationship between Taiwan and China is often characterized as one of “creative ambiguity.”  The policy of creative ambiguity can be summarized as a position in which the US neither supports nor entirely rules out independence for Taiwan, but is committed to some form of protective action if Taiwan is threatened militarily.  It also reveals that whereas Presidents have tended to lean towards the Chinese position, Congress is more sympathetic to the concept of the Two States Theory. Four items are useful to understanding the evolution of the US policy of creative ambiguity.  This paper has already touched upon the Shanghai Communiqué in which Nixon “acknowledged” the One China principle in the Issue section.  Signed into law on April 10, 1979, the next important addition to US policy on Taiwan is the Taiwan Relations Act (TRA), which came in concert with the decision by the US to formally de-recognize the ROC and to establish diplomatic links with the PRC.  Significantly the TRA: 

• indicates that any non-peaceful actions to determine the future of Taiwan would be viewed with “grave concern” by the US 

• commits the US to provide Taiwan with arms of a defensive character; and 

• indicates that the US will maintain the capacity to resist any resort to force or other forms of coercion that would jeopardize the security, or the social or economic system, of the people on Taiwan.[1] 

The balance of US policy on Taiwan seemed to shift in the direction of the Chinese perspective during a visit by President Bill Clinton to China in 1998 during which he announced the “Three No’s” policy in which he declared that: 

We don't support independence for Taiwan, or 'two Chinas', or ‘one Taiwan, one China', and we don't believe that Taiwan should be a member in any organization for which statehood is a requirement.[2] 

Finally, and most recently, President George Bush has declared that he would do “whatever it takes" to defend Taiwan from Chinese attack.[3]

The implications of America’s policy of creative ambiguity on Taiwan’s accession to the AGP are uncertain.  The current Administration has taken a less accommodating stance towards China than previous Administrations.  In sum, the policy equation faced by Taiwan’s accession to the AGP within the context of US policy on Taiwan is fluid.  On the one hand, Taiwan’s accession to the AGP would provide US commercial interests with access to a lucrative government procurement market.  It will also bring an additional US$6.6 billion[4] of world government procurement within the disciplines of AGP rules thus moving forward a process of enhancing economic liberalization and strengthening transparency within the global economy.  On the other hand, overly vigorous efforts to assist Taiwan’s accession to the AGP could risk increasing Sino-US tensions.  

Broader US and Chinese commercial, security/foreign policy interests that may be impacted by increased Sino-US political tensions.[5] 

The manner in which Taiwan’s accession to the AGP is conducted may have implications on China’s claim of sovereignty over Taiwan.  Due to its possible repercussions on the sensitive issues of sovereignty and territorial integrity, China may consider US efforts to secure Taiwan’s accession to the AGP a national security issue.  By involving the possibility of increased Sino-US tensions, the manner in which the US pursues this issue may have implications on policymaking up to the national level.  Below, we review the broad national commercial and security policies and objectives that could be impacted by increased Sino-US tensions both in the US and China. 

Commercial - United States 

Bilateral trade between the US and China amounted to US$121 billion in 2001 and China is America’s fourth-largest trading partner.  China is the ninth-largest market abroad for US goods.  As part of its WTO accession commitments, China is reducing industrial tariffs of greatest importance to US businesses from 25 percent to 7 percent.  China is reducing agricultural tariffs of greatest importance to US farmers from 31 percent to 14 percent.  China is opening important parts of its service sector, including banking, insurance, telecommunications, and professional services, to American firms.  The sheer magnitude of the commercial relationship existing between the US and China points to the fact that if Sino-US tensions were to rise, China would not be without commercial policy options that could impact US commercial interests in China. 

Security/Foreign Policy – United States 

Since the September 11^th attack on the World Trade Center in New York, US security and thus foreign policy has been re-constituted with a heavy focus on the “War on Terrorism.”  If this security policy is to be successful, the US will be dependent on cooperation from a broad coalition of countries.  With a not insignificant standing within the international community, cooperation from China in the War on Terrorism is a valuable asset.  Conversely, increased Sino-US tensions could negatively impact the conduct of the War on Terrorism.  Below, we highlight a few areas in which cooperation from China is or has been significant to US security/foreign policy: 

Iraq 

The US has worked hard to fashion a multinational approach to disarming Iraq.  Without China’s vote, United Nations (UN) Security Council resolution 1441 (which put Iraq on a timetable to comply with its obligations regarding weapons of mass destruction) could not have passed and US efforts to implement a multilateral approach to the War on Terrorism would have received a heavy blow. 

Pakistan 

In the early days following September 11^th, Chinese efforts facilitated Pakistan’s entry into the international coalition supporting the War on Terrorism.  US policymakers continue to encourage China to use its influence to support efforts by Pakistan to crack down on infiltration across the Kashmiri Line of Control, thus reducing the likelihood of a nuclear conflict between India and Pakistan. 

North Korea 

The recent escalation of tensions between the US and North Korea regarding concerns that North Korea is refining or preparing to refine weapon-grade plutonium makes China a pivotal player in any solution to this emerging foreign policy challenge.  China provides 70 percent of the North's oil and is likely to remain its biggest supplier of food for the foreseeable future.  The economic sanctions that the US has been advocating against North Korea would not be possible without Chinese assistance, North Korea's main provider of fuel and food aid. 

Commercial - China 

China has quadrupled its Gross Domestic Product (GDP) since 1978 when it began its general policy of economic reform.  Real GDP growth averaged around 9 percent per year between 1978 and 1995.  Today, China’s GDP stands at more than $1.1 trillion.  China’s foreign trade grew at about 13 percent per year over the same period, making China the world’s fourth-largest trading nation.  In the 1990s, China became the world’s second-largest recipient of foreign direct investment.  Total US foreign investment into China was at US$63.41 billion by the end of May 2001.[6]

China’s national commercial interests are all structured around supporting the growth and modernization of its economy.  The economic reforms beginning in 1978 under Deng Xiaoping are now entering a phase that demands large cuts in public sector employment.  The only viable solution to dealing with the rapid growth in social and economic dislocation generated by these reforms is continued economic growth and thus job creation in the private sector.

The sheer size of the economic relationship existing between the US and China as indicated above suggests that the success of continued economic reform in bringing about rapid economic expansion and modernization will be closely linked to the quantitative and qualitative development of this significant bilateral economic relationship.  Increased Sino-US political tensions could generate uncertainties for this vital bilateral economic relationship. 

Security – China 

The national security issue for China is the subject of this paper itself.  China would view Taiwan’s accession to the AGP in a manner that weakens its claim of sovereignty over the island as a direct and grave challenge to its territorial integrity and a clear national security issue.

Commercial Backgrounder

For the purpose of this section, products that may be sold without “restriction” to the US government means products that may be sold without restrictions of the sort described in the Scenario section, and does not refer to general import restrictions.  For the purposes of procurement, the US government would not necessarily apply restrictions on all of the US$15.5 billion products GT sources from Taiwan.  This is because a variety of products sourced from Taiwan are intermediate products which will be “substantially transformed”[7] in the US or certain third countries, and thus be made eligible for sale to the government without restriction.  Under these circumstances, the precise cost of Taiwan’s non-AGP status to GT can be broken down into three overarching categories: 1) the cost of implementing a separate supply chain management system for products designated for sale to the government, 2) the cost of sourcing products from producers in countries that are less efficient than those in Taiwan and 3) the cost resulting from a US law designed to protect the government from purchasing at higher prices than the private sector.  Below, we will highlight the contours of US government procurement law and then move on to discuss the manner in which these laws create costs for GT. 

US Government Procurement Law. 

Under the Buy America Act of 1933, only products produced in the US are eligible for sale to the government without restriction.  However, the TAA authorizes the President is to waive restrictions on procurement from non-US sources primarily to allow for implementation of the AGP, the North America Free Trade Agreement (NAFTA), the U.S.-Israel Free Trade Agreement and the WTO Agreement on Civil Aircraft.  A 1994 amendment to the TAA gave the President the power to waive the provisions of the Buy America Act for non-AGP signatories.  Thus, while not all TAA countries are AGP countries, all AGP countries are TAA countries. 

A product wholly produced in a TAA country[8] is, of course, eligible for sale to the government without restriction.  Alternatively, a product derived from parts or materials from a non-TAA country, but that has been “substantially transformed”[9] within a TAA country is also eligible for sale to the government without restriction.  Thus, under TAA rules, if a product sourced from Taiwan is substantially transformed[10] within the US or a TAA country, it would become eligible for sale to the government without restriction. 

The legal standard for substantial transformation varies from product to product.  But, particularly in the case of sophisticated IT products and systems, the substantial transformation thresholds can vary greatly.  As a result, companies sourcing components from non-TAA countries with the intention to substantially transform them within TAA countries for sale to the US government must maintain meticulous records across the entire production process in order to avoid restrictions.

Finally, US procurement law provides that products with the same production identification codes (even if produced in different countries and at a higher cost) cannot be sold to the government at a higher price than to the private sector.  Although this law has a reasonable objective in protecting the government from purchasing goods more expensively than the private sector, it imposes an unintended deleterious effect on companies selling to the government.  This is because the cost of creating an entirely new product code within a company’s supply chain management system is very high and administratively burdensome.  Thus, a company intending to source a product normally produced in a non-TAA country from a TAA country in order to sell to the government, cannot charge the government a higher price for products produced in a higher cost country, unless it also implements an expensive new product identification code for that product. 

The Costs to GT. 

The variety of factors indicated above work in tandem to make GT efforts to move the production of products normally sourced in Taiwan to TAA countries, a costly undertaking.  At the administrative level, GT applies a three-tiered solution.  First, in the case of products that are sold in high volumes both to the commercial and government sector, such products are assigned separate product identification codes in order to designate those produced in Taiwan for commercial sale, and those produced in the US or a TAA compliant country for government sale.  In this case, the government pays a higher cost for the same product (although assigned a different product identification code and produced in a TAA country), than the private sector.  Second, in the case of low volume products for which government sales make up a disproportionate level of sales, GT simply maintains production of those entire product lines within a TAA compliant country and passes the higher production costs both to the government and the private sector.  Finally, in the case of products for which government sales would be very low and a cost benefit analysis would not justify it, TAA compliant versions of the products in question are not produced, and the government is left to either find a supplier of a TAA compliant version of the product or to purchase the products from GT under the restrictions indicated in the Scenario section.

As indicated above, these costs can be broken down into three components: 1) the cost of implementing a separate supply chain management system for products designated for sale to the government, 2) the cost of sourcing products from producers in countries that are less efficient than those in Taiwan and 3) the cost resulting from a US law designed to protect the government from purchasing at higher cost than the private sector. 

The cost of implementing a separate supply chain management system: 

• Administrative resources must be expended to design and implement a supply chain management system that differentiates between products sourced in TAA countries and non-TAA countries. 

• Administrative costs will be created in identifying and assessing the supply chain of products of interests to the government out of a large array of products sourced from both non-TAA and TAA countries. 

• Where the final product is created from intermediate goods sourced in non-TAA countries, the supply chain management system must be designed, or altered, to be able to account for the extent to which the new products legally meet the substantial transformation criteria, which varies from product to product. 

• The system once created must be constantly maintained and updated as the fluid procurement strategies in today’s market place lead to rapid shifts in sourcing from TAA to non-TAA countries, or vice versa. 

• The need to maintain an extra inventory of segregated parts will also generate additional costs. 

The cost of sourcing products from producers in countries that are less efficient than those in Taiwan. 

• An ongoing inefficiency penalty is created in terms of higher production costs for products that would normally be more efficiently produced in non-TAA countries. 

• Additional shipping expenses will be accrued in cases where intermediate products must be shipped to third countries assembled and then re-shipped to the US. 

• Depending on the substantial transformation threshold, components and sometimes even subcomponents may need to be sourced from higher cost TAA countries. 

• Extra warehousing expenses will be created by the need to either keep records specifically for TAA compliant goods within the warehousing system, or to store the products separately. 

• Additional buffer stocks of TAA products will need to be maintained in addition to those already existing for non-TAA counterparts. 

The cost resulting from a US law designed to protect the government from purchasing at higher prices than the private sector. 

Administrative cost: 

• Decisions must be made on whether it will be cost effective to implement a new product identification code along with shifting the entire production line to a TAA country for each of the relevant products, or merely to shift entire production lines to a TAA country.

Economic cost: 

• For products for which it is not cost effective to implement new product identification codes, and for which sourcing is moved to TAA countries in order to attain eligibility for sale to the government, the company must adsorb reduced profits for government sales. 

• For products for which it is cost effective to implement new product identification codes, the cost of implementing the new code is passed on to the government. 

Unintended consequences of the law. 

• Oftentimes, companies decide not to produce “TAA compliant” versions of certain product lines for sale to the government because it would not be profitable. 

• Perhaps the most peculiar effect of this law pertaining to government procurement is that the government sometimes cannot find suppliers of TAA compliant versions of products that are readily available on the commercial market.

Economic Backgrounder 

In this economic backgrounder, we will begin by examining the magnitude of the domestic liberalization involved in Taiwan’s accession to the AGP, as well the increased market access for Taiwanese producers that would compete in the government procurement market represented by the AGP membership.  We will then move to look at the possible domestic macroeconomic impact of Taiwan’s AGP accession as well as the economic benefits it may bring.  Next, we take a firm level perspective and examine how Taiwanese industries may be affected by continued non-AGP status at the sectoral level.  Finally, we examine the overall macroeconomic situation of Taiwan’s transition from a manufacturing to a service-based economy, the challenges that this transition has brought to Taiwanese macroeconomic planners, and the potential for AGP accession to assist Taiwan throughout this transition.

The potential macroeconomic impact of Taiwan’s AGP accession. 

By acceding to the AGP, Taiwan will liberalize access to a domestic government procurement market estimated at US$6.6 billion in return for access to the US$200 billion[11] government procurement market represented by the AGP signatories.   It is useful to note the existence of a discrepancy between the US$200 billion cited as the amount of liberalization offered by AGP members and the figure of US$2 trillion figure that this paper has independently derived in the tables presented within the Annex.[12]  This discrepancy suggests that the combined effect of the threshold levels[13] and the limited coverage offered by AGP signatories leaves 90 percent of government procurement by AGP members outside of AGP disciplines.  This point is significant to this case as we will discuss further below within this subsection.  That said, the effect of this opening up will not only provide Taiwanese commercial interests with access to an AGP market thirty times the size of the one it would liberalize, it would also assist efforts to make Taiwan a more competitive economy overall, a point which we will elaborate in the two subsections following this. 

The most pronounced effects of Taiwan’s accession to the AGP would be in its construction industry.  It is generally accepted that the capacity of the domestic construction industry to engage in the large modern construction projects that Taiwan needs today is not adequate to meet the needs of the rapidly maturing and increasingly service-based economy that reflects Taiwan today.  The key draw for US and European Union (EU)[14] support behind Taiwan’s accession to the AGP is access to the lucrative construction market represented by the Taiwanese economy. 

By the same token, Taiwan’s notable comparative advantage in producing high-technology products suggests that Taiwan would likely realize significant benefits from joining the AGP, particularly in the personal computer sector where Taiwanese manufacturers currently represent an estimated global market share of 47 percent.[15]  Had Taiwan been a party to the AGP in 2001, the US government procurement market for Taiwan-sourced personal computers would have amounted to US$824.18 million.[16] With a total US government procurement market for personal computers worth an estimated US$1.8 billion annually,[17] Taiwan’s accession to the AGP might translate into much greater dynamic gains for its share of the US government procurement market for personal computers.  This would be due to Taiwan’s exceptional competitiveness in this product line and, more importantly, the fact that many Taiwanese computers are sourced by US computer manufacturers.  Because US firms (such as GT) source a large proportion of Taiwan’s personal computers, such products would likely not be subject to the limitations on the coverage of government procurement liberalizations discussed in the first paragraph of this subsection.[18]  Although not all AGP members enforce restrictions against procurements from non-AGP members as strictly as the US, it is important to note that the figure for government procurement of computers by the entire AGP membership is US$5.2 billion[19] or roughly 4.3 percent of Taiwan’s total merchandise exports of goods for 2001.[20]

It is also important to be aware of the reality that portions of Taiwan’s manufacturing capacity are rapidly moving off shore to China, which is not (yet) an AGP member.[21]  To put this migration of manufacturing capacity into perspective, one might note that 48 percent of the desktop computers produced by Taiwanese manufacturers were procured from China during 2001.  Such computers would prima facie not be eligible for sale to the US government without restriction, and would at best represent a second choice alternative within the procurement markets of other AGP members.  That said, Taiwan has adopted a strategy similar to that of Japan’s China strategy, which is to keep the high value-added portions of production at home.  The calculus of how this migration of capacity to China will fit into the immediate benefits that Taiwan would gain from accession to the AGP is unclear.  However, it is clear that if Taiwan accedes to the AGP before China, Taiwanese personal computer manufacturers will have an incentive to maintain a larger proportion of their production within Taiwan.  This would be a politically attractive side effect of early accession to the AGP. 

The significance of GT’s stake within the Taiwanese macro economy. 

To put the significance of GT’s US$15.5 billion procurement from Taiwan into perspective within the context of Taiwanese macroeconomic circumstances, one may consider that this figure represents 13 percent of Taiwan’s total goods exports for 2001.[22]  A poverty of data due largely to the fact that private corporations are normally not prepared to disclose data on production costs leaves us with the task of extrapolating from available data.  The US government represents roughly 19.49[23] percent of national production and by economic identity 19.49 percent of consumption.  If we make the general assumption that the government consumes approximately the same composition of products as the private sector,[24] the fact that GT sources US$15.5 billion[25] in products from Taiwan leads to a very rough estimate of US$3 billion as the proportion of GT products that are affected by the fact that Taiwanese products receive restrictions on sale to the US government under the TAA and thus the AGP.[26]

This estimate is conditioned by the fact that GT procures from Taiwan with the understanding that Taiwan is a non-AGP member and thus does not procure final products from Taiwan for sale to the government.  By this logic, GT would have procured much more from Taiwan if Taiwanese products were eligible for sale to the US government as well as the private sector.  We might consider US$18.5 billion[27] as an approximation for total procurement from Taiwan in the case where all Taiwanese products are eligible for sale to the US government.  This figure is, of course, overstated because the original $15.5 billion figure already incorporates a portion of intermediate products that GT procured from Taiwan in order to substantially transform within the US or a TAA compliant country for sale to the US government (as described in the Commercial Backgrounder section).  Still, it is clear in light of the above that Taiwan would experience a substantial increase in exports if it were part of the AGP.

Clearly, a variety of other factors including (but not limited to) the composition of the IT industry in terms of products produced by various IT companies and the proportion of their respective product lines that are of interest to government procurement, and their relative competitiveness vis-à-vis GT products are relevant to the thumbnail analysis presented here.  Suffice it to say, the estimate of US$3 billion as GT’s Taiwan sourced production that is impacted by TAA rules is only an estimate designed to provide an appreciation of the magnitudes involved in this case.  Put another way, Taiwan’s non-AGP status negatively impacts roughly US$3 billion in Taiwan’s actual and potential exports in the case of GT alone.  We will address the economy-wide impact of Taiwan’s non-AGP status in the Economic Analysis section. 

Benefits held by Taiwan’s accession to the AGP. 

The potential macroeconomic benefits that the AGP represents to the Taiwanese economy are best understood within the context of Taiwan’s current level of economic development.  Taiwan followed a pattern of economic development similar to the mature developed countries of the West.  Towards the end of World War II, Taiwan was largely an agrarian-based economy.  At that time, Taiwan was important to Japan (under which it was a colony) as an important producer of rice to fuel the Japanese war effort and a significant producer of sugar as a cash crop and foreign exchange earner.  Beginning in the 1960’s, Taiwan transitioned into a major center for light manufacturing, and then during the 1970-80’s into a modern industrial economy.  Today, Taiwan is rapidly becoming a service-based economy.  To meet the competitive pressures represented by the highly cost-efficient manufacturing centers blossoming throughout East and Southeast Asia – and most notably, China – Taiwan must upgrade its domestic infrastructure to compete effectively in the fluid economic division of labor characterizing today’s world economy. 

In the following, we will outline the Asia Pacific Regional Operations Center (APROC) plan and discuss how Taiwan’s accession to the AGP may enhance the effectiveness of the APROC plan.  The APROC plan is an evolving policy developed by Taiwanese policymakers in response to the challenges posed by Taiwan’s transition into a service-based economy.  First, announced in the early to mid-90’s as a response to the increasingly competitive manufacturing economies blossoming throughout the Asia Pacific Region, the APROC plan is designed to make Taiwan an attractive location for large multinationals to establish their Asia wide headquarters.  The APROC plan is a multifaceted strategy designed to enhance the capacity of Taiwan to serve the needs of the diverse community of multinationals operating in the Asia Pacific Region.  One government information document describes the six prongs of the APROC plan in the following manner: 

• Given Taiwan's manufacturing resources, the Manufacturing Center is at the very core of the plan: it is, in effect, the heart of the Island of Science and Technology.  

•  The Sea and Air Transportation Centers are the limbs of the island: the arms and legs that will carry and move people and goods.  

• The Financial Center acts as the arteries, circulating capital to keep the whole economy healthy and strong.  

• The Telecommunications Center is akin to the island's central nervous system, permitting contacts and flows of information across nerve-like networks that span the globe. 

• And the Media Center is to the island as eyes and ears, for providing entertainment and information by sight and sound.[28]

Taiwan’s accession to the AGP may support the APROC plan and assist it in facing the challenges posed by its evolving economy by: 

• enhancing efforts to upgrade domestic infrastructure; 

• increasing transparency and reducing corruption; 

• elevating the efficiency of the domestic economy; and  

• strengthening export competitiveness as a result. 

Enhancing efforts to upgrade domestic infrastructure. 

Taiwan needs the advanced skills and technologies of large and experienced international construction companies to develop world-class infrastructure under the six areas indicated above.  One of the most publicized of recent projects is the impending construction of a high-speed rail system linking Taipei and Tainan, which are at the north, and south ends of the island respectively.  Accession to the AGP will enhance the likelihood of implementing reliable and cost-effective public works projects of such scale by keeping them open to competitive international bidding.

Increasing transparency and reducing corruption. 

With respect to corruption in Taiwan, the most recent issues of the Euroview magazine published by the European Chamber of Commerce in Taiwan is clear: 

Private analysts say that billions have been lost through corruption. In 2000, ROC Minister of Justice Chen Ding-nan estimated that one-third of all government monies or US$16.2 billion was lost to corruption or wasted funds.

A 1997 Asia Inc. report stated that Taiwan triads, crooked officials and politicians together have siphoned off US$26 billion in the past six years from public works projects, around 30 percent of the US$87 billion spent by the bidders.

Transparency International buttresses these figures and has given Taiwan a relatively low score of 3.8 on its 2002 Bribe Payers Index.[29] 

To put this into perspective, the figures provided in the Asia Inc. report would mean that every individual in Taiwan paid a corruption tax of US$1161 over the six-year period leading to 1997.  This figure is roughly 12 percent of Taiwan’s average per-capita income in 2000.[30]  If accession to the AGP reduces corruption on the US$6.6 billion (over which Taiwan has negotiated liberalization commitments under its AGP accession package) by half, a family of four will save US$1768 over the next ten years.[31]

By implementing transparency measures and opening bidding on government procurement by a host of public agencies above designated thresholds and on construction projects above a threshold of approximately US$7 million,[32] opportunities for corruption will be greatly reduced.  It should be noted here that the AGP contains procedures that allow for the initiation of binding dispute resolution proceedings within the WTO that are nearly identical to those existing for trade issues.  As such, an effective international enforcement mechanism will back transparency commitments made by AGP signatories. Taiwan’s accession to the AGP would serve as an effective means to reduce domestic corruption. 

Increasing the efficiency of the domestic economy. 

By bringing the costs of public procurement down through competitive bidding and reducing corruption, the burden on taxpayers will be reduced.  The more important effect of reducing corruption will be the selection of projects based on cost as well as the competence of the bidders to perform the project effectively.  Decreasing the cost and increasing the quality of infrastructure projects would enhance the efficiency of the domestic economy overall. 

Strengthening export competitiveness as a result. 

Importantly, the benefits to society of well executed public construction projects and other procurements will likely outweigh the costs to society due to the corruption itself, and will have positive implications for the efficiency of the economy as a whole.  As an economy: 

• deficient in natural resources; 

• dependent on exports of goods and services for roughly half of its GNP;[33] 

• in which total trade in goods and services accounted for 98 percent of GNP;[34] and 

• which is one of the most densely populated in the world, 

Taiwan is dependent on an efficient economy in a way that is different than that of larger and/or more resource abundant economies which are more able to rely on domestic consumption for economic growth.  Taiwan’s accession to the AGP would be a key strategy for creating efficiency in an economy that is facing increasing challenges to its traditional manufacturing based economic infrastructure.  Accession to the AGP would bolster the effectiveness of the APROC blueprint to upgrade Taiwan’s infrastructure.  It would also play an important role in nurturing the onset of the service economy which must make up an increasingly large proportion of Taiwan’s economy and exports if Taiwan is to continue to enjoy the strong economic growth it has experienced for over the past two generations.

Political Backgrounder 

This political backgrounder seeks to provide the reader with a sense of the political landscape that must be navigated if Taiwan is to accede to the AGP.  Within Taiwan, the emergence of a dynamic democratic process in recent years translates into a situation where choices by politicians are strongly influenced by electoral politics.  The current elected government faces a constituency that would be sensitive to changes to the names appearing on Taiwan’s Annex I list central government agencies.  In China, the political reality is a One China policy that no actor in China’s political economy will challenge: Taiwan’s AGP accession must be sensitive to One China sensibilities.  In the US, a Presidency generally pragmatic about China is balanced against a Congress that is normally sympathetic to Taiwan.

Taiwan 

The Politics of the AGP.

 The problems associated with Taiwan’s accession to the AGP were highlighted in early February 2002 within the Taiwanese press.  The issue of Taiwan’s accession to the AGP was framed as one in which Taiwan was suffering yet another humiliation at the hands of China.  Media reports indicated that if Taiwan were to join the AGP, it would have to change the titles of its government entities which connoted central governmental authority.  Against the backdrop of an already vibrant domestic political dialogue on the issue of Taiwan’s political future, this event was framed in a way that even individuals with pro-reunification sympathies would find hard to accept without reservation.  

Below, are summaries of the political players and electoral processes that have influence over the possible modification of government agencies appearing in Annex I of Taiwan’s AGP accession package. 

The Pan Green Alliance and the Pan Blue Alliance. 

The landscape of Taiwan’s domestic political process is colored by two major political groupings, the “Pan Green Alliance” and the “Pan Blue Alliance.”  The former is known for its pro-independence sympathies and the latter either for sympathies towards eventual reunification or the status quo.   The Pan Green Alliance is composed of the Democratic Progressive Party (DPP) and the Taiwan Solidarity Union (TSU), while the Pan Blue Alliance is composed of the Kuomintang (KMT) and the People First Party (PFP).[35] 

The President. 

President Chen is a member of the DPP.  Known for his plain language, Chen made his name and political career as a lawyer defending pro-independence activists that were imprisoned during the era of martial law which began in 1949 and was only lifted in 1987.[36]  Elected in 2000, Chen will face re-election in 2004.  During the next election, he will likely require the support of the TSU, a political party known for unwavering pro-independence philosophy. 

The next Presidential elections[IESC1] . 

Presently, the two contenders Chen is likely to face in the next elections are Mr. Lian Chan of the KMT and Mr. Soong of the PFP.  Formerly a member of the KMT, Mr. Soong suffered such humiliating political attacks by the former President Lee Tung-hui (then a member of the KMT) that he decided to organize his own party, the PFP.  Mr. Soong’s decision to break with the KMT was a crucial event as it split off votes that would otherwise have gone to the KMT candidate, Mr. Lian, in the 2000 presidential elections.  Without this split in the KMT vote, Chen could not have won the 2000 election.

News coverage to date suggests that there may be a cooperative effort between Mr. Soong and Mr. Lian during the next elections.  If such a scenario persists, Chen will face uncertainty during the next election.  Presently, there do not appear to be any alternative candidates within the Pan Green Alliance that would be in a position to challenge Chen. 

The Legislative Yuan (the Legislature). 

The recent December 2001 election of the Legislative Yuan marks a trajectory of increasing strength in the number of seats held by the Pan Green Alliance.  With 100 seats in the 225-seat body, the Pan Green Alliance now commands 39 percent of the Legislative Yuan.  Still, the Pan Blue Alliance now commands 50 percent of the seats, which means that support for Chen within the legislature is in the minority.  The next election of the Legislative Yuan will coincide with the next presidential election in 2004. 

China 

To the extent that China is able, it will not allow Taiwan to accede to the AGP in any manner that would further compromise its claim of sovereignty over Taiwan.  For China, this issue is not one in which much compromise is possible; regardless of whether the issue is viewed from the international, national or the individual level.  At the international level, the answer to the question of whether Taiwan is part of China will determine the existence of one or two states.  At the national level, the question of the relationship between Taiwan and China will determine if there is a nation or two nations.  Those familiar with the “Who Lost China?” debate that initiated the political disquiet associated with the McCarthy era can only begin to conceive of the depth and the breadth of the political ramifications that a “Who Lost Taiwan?” debate would wreak within the domestic Chinese political system.

Any official with responsibility or influence over Taiwan’s accession to the AGP would face severe consequences if perceived as being soft on the Taiwan issue, even more so if an oversight led to a strengthening of the Taiwanese independence efforts.  The key institution responsible for official input over Taiwan’s accession to the AGP is the Ministry of Foreign Trade and Economic Cooperation (MOFTEC).  As an institution of the Chinese state, this agency will be held directly responsible for any intended – and unintended – outcomes resulting from Taiwan’s accession to the AGP.[37]

The 15^th Party Congress. 

Any political backgrounder on China must recognize the 15^th five-yearly congress of the Chinese Communist Party (CCP) that took place late in 2002.  Made up of 151 full and 191 alternate members in 1997, a new Central Committee was elected late last year.  The Central Committee is the decision making body of the CCP which parallels and supervises the formal government and the legislature.  Together, the Central Committee and the elite nine member Politburo Standing Committee (PSC) hold decision-making authority over China.  As predicted by many analysts, Hu Jintao succeeded Jiang Zemin as head of the PSC and assumed the premier leadership position within the Chinese political structure.[38] 

United States 

At present, the topic of Taiwan’s AGP accession does not command a great deal of attention within the domestic political debate.  Still, it is worth noting that it was the US that first encouraged Taiwan to join the AGP.  And the completion of the bilateral agreement between Taiwan and the US that remains unconsummated due to Taiwan’s inability to accede to the AGP puts the US in a situation where it must balance its policy objectives of economic liberalization and transparency against possibility of political friction with China.  The fine line between economic and political diplomacy intertwined within this issue means that a policy decision that is prima facie commercial in nature, could potentially have significant political consequences for US-China relations. 

As discussed in the Policy Backgrounder section, US policy on Taiwan is one of “creative ambiguity.”  Whereas US Congress tends to be sympathetic towards Taiwanese interests, US Presidents have tended to view Taiwan as an aspect and not a focus of its international relations strategy.  The traditional primacy of “high-politics” (security) over “low-politics” (economics) as the basis by which leaders of state assess and address challenges posed by international relations, suggests that the commercial issue involved in Taiwan’s accession to the AGP would normally take a backseat to international relations challenges facing the White House, particularly within the context of Sino-US relations.

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