WASHINGTON — In recent weeks, Taiwan has taken two steps to prepare for the transformation of its economy. Taipei's decision to lift many of the restrictions on investment in the mainland and the island's entry into the World Trade Organization will produce fundamental shifts in the way Taiwan conducts its business. The results will modernize the Taiwanese economy; they could trigger political shifts as well.
The process was set in motion last summer when a high-profile 120-member economic council called for the aggressive expansion of commercial ties with the mainland. Traditionally, the Taiwanese government has imposed limits on direct investment in China; currently, any project over $50 million requires government approval. Those restrictions were adopted to prevent Taiwan from succumbing to the allure of cheap labor in China and becoming overly dependent on the Chinese market; that would have given the Beijing government leverage over decision making in Taipei.
The policy enjoyed limited success: It prevented some investments, but many Taiwanese companies merely set up offices in third countries and routed funds through them. As a result, Taiwanese companies have officially invested about $60 billion in the mainland; unofficial estimates put the total at two to three times that amount. Taiwan has become the fourth-largest source of foreign direct investment in China.