Letter from Taiwan: 100 Million Manufacturing Employees Next Door

03/18/2010 05:12 am ET | Updated May 25, 2011

China has now undercut the two major international negotiations of this decade. First, they stopped the Doha Round trade negotiations cold in the summer of 2008. China, along with India, insisted on a special "safeguard" right to prevent imports of agricultural products into their countries from the United States and elsewhere. The United States, rightly, could not give into that demand because the exception would have swallowed much of the agricultural market access benefit the Round was designed to achieve. And now, China's refusal to allow monitoring of carbon emissions in the proposed Climate Change agreement, a kind of monitoring which is a standard part of any international agreement, has stymied progress in Copenhagen. Ed Miliband, UK Energy and Climate Change Secretary, said in the Guardian newspaper that China had led a group of countries that "hijacked" the Copenhagen negotiations. What I heard on a trip to Taiwan when I was there earlier this month rings true, "Why are you asking if this will be the Chinese century?" a friend asked, "This is already the Chinese century."

What is happening in Taiwan has lessons for us in the United States. Despite living in the shadow of mainland China, and being only a fraction of its size, Taiwan for years has had a vigorous economy, focusing on the manufacture of electrical appliances, steel, machinery, textiles and other sophisticated products. And it has had a vigorous political culture, with real debate, elections, and a rather rambunctious free press. It is one of the truest democracies in Asia and it feels like it. No one hesitates to say anything. There was a local election earlier this month, and all the headlines about vote buying and arrests (about 174) for vote buying made me think of Chicago, in a good way. None of this occurs in China. There's no need with only one candidate on the ballot.

Pressure from China at one time seemed to create an incentive for Taiwan to be more than it would otherwise be. The Taiwanese built what is now the tallest building in the world, Taipei 101 (it will be surpassed next year by a skyscraper in Dubai if the debt crisis there doesn't undercut the construction). Only about 23 million people live on Taiwan, but it has one of the largest electronics industries in the world and one of the largest semiconductor industries in the world, comprising more than 18% of world semiconductor production. And Taiwan has been very creative in the way they have organized their economy. They invented the business model that has come to dominate semiconductor production, the "foundry" model in which designers and inventors of semiconductors out-source the actual manufacturing to third party foundries like those in Taiwan.

Taiwan prides itself on being a merger of Chinese, Japanese and Western culture. There is definitely a feel of all three in the country. The United States used to have a special relationship with the small state, though that has definitely faded. Now, for Americans, perhaps the most important thing about Taiwan is what its younger generation is saying. Speak to people in their twenties or early thirties, and they basically have given up on resisting China. They think the game is over and that it would be better to simply merge in some way with the mainland. This marks a dramatic shift from about ten years ago, when one engineer I was working with on Taiwan said "China, we hate China. We don't want to have anything to do with them. They are so poor." The mainland was viewed as backward, uneducated, and politically oppressed. Now the concern is almost the reverse.

Most young people believe there will be no future without being part of China. Some talk about a merger into China in 50 years. The standard of living on the mainland, long much lower than in China, is catching up. In the Shanghai region, most often compared to Taiwan, the yearly GDP per capita is within several thousand dollars. Yes, there is a catch. Ask a young Taiwanese what they think about freedom of speech and political rights, clearly denied in China as made strikingly clear by the eleven year sentence given to Chinese dissident Liu Xiaobo last week. They shrug, "yes, those are important, but..." And then it seems hard for them to finish the sentence. They usually get around to saying, with some hesitance, that economic prosperity and economic security are more important than "rights," and, anyway, what can they do about the inexorable march of "progress."

It probably will not take 50 years for China to take over Taiwan, and China would probably not put up with the situation for that long. Now will they have to. China's business model is working against Taiwan, as it is working against the rest of the world, but faster and more effectively. The de facto merger is occurring, in part, as a result of industrial relocation into China by the major Taiwanese manufacturers, the companies that had comprised much of the Taiwan "economic miracle" of the 1980's and 90's. China, flush with money from it's aggressive mercantilist trading strategy, has provided a host of incentives to Taiwanese companies, making them offers they can't refuse. The Chinese have created special government run industrial parks just for Taiwanese companies. They have created an entire section in their laws on providing incentives to the Taiwanese to build-up industries within mainland China. And they have a special set of grants and benefits they give to what they call "off-shore" Chinese who are bringing their companies back to China. Coupled with benefits on the cost of labor, almost every Taiwanese company comes knocking on China's door.

One case in point is Foxconn, the largest manufacturer of computers and electronics in the world, manufacturing the iPhone, the iPod, and computers and motherboards for Dell, HP, and Intel. Foxconn is a Taiwanese company, started in Taiwan in 1974 as a manufacturer of plastic products. But they now have over 200,000 employees in Guangdong, China, just outside Hong Kong. From that factory and others in China, they have worldwide revenue of over $78 billion. To like effect is TSMC, the crown jewel of Taiwan's semiconductor manufacturing industry and the world's largest semiconductor foundry company. But TSMC has been seeking a mainland Chinese presence for a long time. They already have one semiconductor foundry on the mainland and recently bought into a solar cell joint venture there.

But the real and the most frightening question for Americans is why not be in China? Why not make everything at all in China? After all, with about 100 million manufacturing employees, China has more people at work in manufacturing than the United States, Canada, Australia, Japan, France, Germany, Italy, Netherlands, Sweden, the UK, and Taiwan combined. (They total only about 55,400,000 manufacturing employees by last count.) It will become increasingly efficient to be in China, just considering the economies of scale.

In this sense Taiwan is becoming the canary of our own economic future. As their economy disinvests, and as their political culture becomes unable to combat the influence of China, ours will or already has. Coupled with the major "American" companies who make all their products in China or get almost everything from there--Apple, Dell, Intel (at least with respect to one large fab, built with Chinese government assistance) and Wal-Mart among them--the Chinese of course own a disproportionate amount of our debt, close to 10% overall and more than any other foreign creditor. And they provide major incentives to blue-ribbon U. S. companies to locate in China, as they have done for the Taiwanese. With over two trillion dollars in trade reserves they have an unlimited budget to do that with. So it is no surprise that when we have a battle with them in Copenhagen on the future of emissions policy no one wins. The dangerous moment will come when we have a battle with them, on a key world policy issue, and they win.