Sea and air transport comprise the nervous system of economic trade. After Hong Kong reverts to mainland Chinese control in 1997, will air links between Taiwan and Hong Kong continue? Who will fly this air route? How will they fly? And how should shipping transport be managed? These are some of the questions which has most troubled the people of Taiwan. In the wake of this month's new Taiwan-Hong Kong commercial air pact, a blueprint for the future seems to have appeared.

[By Air]

The short hour-and-a-half flight from Taipei's Chiang Kai Shek International Airport to Hong Kong's Kai Tak International is one of the most lucrative airline routes in the world. China Airlines and Cathay Pacific by themselves schedule 30 flights a day. With flights taking off as often as trains from a station, they still have an average occupancy rate of 70%. Tourists, people visiting family in the mainland, and Taiwanese businessmen doing commerce on the continent, all board these planes. During holiday seasons or heavy tourist periods, even a single ticket is hard to acquire. Yet most travelers are unaware that up until the middle of June, the status of this air route had been put on hold day after day for a whole year, left in the limbo realm of "Who knows what will happen?"

Will the pact hold water after '97?

On June 13, under the supervision of former Civil Aeronautics Administration (CAA) director-general Tsay Ching-yen, China Airlines and EVA Air formally put the new Taiwan-Hong Kong commercial air pact into effect. Their Hong Kong counterparts, Cathay Pacific and Dragonair, only appeared on the scene to witness the event, and the principal participants from those companies did not even show their faces. In fact, they had actually signed the agreement the day before in Hong Kong. The pact was delivered to Taiwan after it had already been signed.

The signing ceremony was extremely low key, seemingly disproportionate with the high value of this cash-cow air route. Nevertheless, Director-General Tsay could scarcely hide his excitement. As he put it, this airline agreement which is "beneficial to all parties" was bogged down in confusion and prevarication for a year and a half, but finally all the pieces fell into place. At one fell swoop, the pact was extended beyond the year 2000, quelling fears of severed air links after 1997. The many twists and turns along the way are hard for outsiders to comprehend.

At the end of April 1995, the old Taiwan-Hong Kong commercial air pact expired. Because the new five-year pact would remain in effect beyond 1997, the present British Hong Kong government could not fully sanction the accord. It needed to be ratified by the Sino-British Joint Liaison Group (JLG), which had the participation of PRC officials. The entangled disputes among the three major parties--Beijing, the present Hong Kong government and Taipei--over sovereignty and privileges stretched out deliberations over the new pact and made breakthroughs difficult. They could only extend the old pact a few months at a time, shoring it up on an emergency basis. By the time the new agreement was signed, the old agreement had been extended seven times, setting a record in world aviation history.

It has been termed an air transport pact, yet because the Republic of China has never recognized Britain's colonial governing status over Hong Kong, in the future it will be impossible for the ROC to recognize the government of the Hong Kong Special Administrative Region set up after mainland China regains the territory. At the same time, neither Britain nor Beijing recognizes the sovereign status of the ROC. Lacking the endorsement of diplomatic relations, the pact was strictly speaking a commercial agreement signed by members of the private-sector airline industry, based upon mutual benefits. And during the process of deliberations, government officials from Taiwan and Hong Kong never met with each other, but could only use private-sector business people as intermediaries. At the signing ceremony, it was not the Ministry of Foreign Affairs, nor the CAA, but representatives of two commercial airlines from Taiwan and Hong Kong that signed the document. This is what made the ceremony such an odd affair.

Two become four

As for the many obstacles which repeatedly came up during the process, who was it that was stirring up trouble? Tsay Ching-yen analyzes this question according to the two aspects of "commercial interests" and "political considerations." Quite the opposite from what outsiders suspected, the principal reason for prolonging talks was in fact claims of "unfair commercial advantages." The seemingly sensitive questions of sovereignty and political rivalry were actually secondary.

The Taiwan-to-Hong Kong route is known to all as a gold mine in the sky, and those in the airline business who had no piece of the action were naturally raring to put up a struggle for an open market and fair competition. Under these circumstances, the new air pact established early on that the current two companies (in Taiwan, China Airlines, and in Hong Kong, Cathay Pacific, part of the Swire Group) would be increased to four companies.

Taiwan quickly decided upon EVA Air as its second participating enterprise. But because Hong Kong's commercial air traffic charter was based on the principle that "Hongkongers govern Hong Kong," the decision fell under the purview of the Hong Kong government, which only needed the approval of the Sino-British Joint Liaison Group. Therefore, under the shelter of the Hong Kong government, Cathay Pacific offered "a boon to its own kin," selecting one of the Swire Group's subsidiary organizations, Dragonair, to serve as the second company.

So it was that in October of last year, China Air, EVA Air, Cathay Pacific and Dragonair happily signed a draft agreement. Little did they suspect that when the draft was sent to the JLG, the representatives from Beijing had quite a few objections: The British colonial government will soon be gone and done with, but as the moment for their departure approaches, they are still trying to snatch an unauthorized piece of future business. A mainland Chinese concern (the CITIC Pacific Group) did hold a major part of Dragonair stock (46%), but another mainland conglomerate, China National Aviation Corporation (CNAC)--the private-sector affiliate of the government giant CAAC--has long had an interest in setting up operations in Hong Kong, to be used as an entry point into the Taiwan-Hong Kong air route. But confronted with impediments from many different parties in the Hong Kong government, they were not allowed to set up operations in the colony. CNAC then went up the line of command to Beijing, asking them to "help them get their fair share." In this way, many extra variables were added to the new Taiwan-Hong Kong commercial air pact.

During March of this year, when Taiwan held its presidential elections and Beijing conducted intimidating missile launches off the island, cross-strait relations became tense, and the commercial air pact was naturally held off even longer. "Could it be that Beijing had an interest in using the air pact as a bargaining chip, intentionally obstructing its passage to force Taiwan to the negotiating table after '97?" For some time, such suspicions could not be eradicated.

Starting with the "Macao model"

The reason that CNAC wanted to enter Taiwan by being listed itself as a Hong Kong company is that currently Taiwan does not allow direct commercial, transport, or postal links with the mainland. They absolutely must find a roundabout path through some "third territory." Nevertheless, simply changing the point of registration is not enough; if the amount of mainland capital in a company exceeds fifty percent, then it counts as a "mainland China-based enterprise" and is still officially barred from entering Taiwan. While the Taiwan-Hong Kong agreement slowly lumbered toward completion, however, the Macao International Airport, having recently gone into operation in the middle of last year, sneaked into the lead by concluding its own commercial air pact with Taiwan. Many ground-breaking features of the Taiwan-Macao pact indirectly laid down a "path of resolution" for the Taiwan-Hong Kong pact.

"Companies capitalized in the mainland are 'on principle not allowed into Taiwan,'" Tsay Ching-yen explains, "but if the Executive Yuan agrees to a special request from the Ministry of Transportation and Communications, it's still possible. But in the past, these kinds of cases were eliminated as much as possible."

After the Macao airport was completed, Taiwan's travelers gained a new gateway to the mainland. This will be very helpful in balancing off against Hong Kong after 1997. But Macao itself has no airline. The only company based in the colony was Air Macau, 51% of whose stock is owned by CAAC. With no other option available, "Taiwan could either accept Air Macau or forget about flying there." Under the principle of equal access, the Executive Yuan agreed and allowed EVA Air and TransAsia Airways to act as representative signatories.

Now, does an airplane owned by a company managed by the PRC, flying to Taipei from a "third territory" count as "flying direct"? Will the five-starred PRC flag be able to slip into Taiwan, which is still extremely sensitive to such symbols, on the airplanes' wings? Will the flight crew and service personnel, carrying PRC passports, be allowed to enter Taiwan according to standard international protocol for the purposes of recreation and flight duty? An even more thorny aspect is that Macao does not operate its own air traffic control zone, but rather lies within the parameter of Guang-zhou's zone. When ROC airplanes fly to Macao, they must communicate with a mainland Chinese air traffic controller. While Taiwan and the mainland maintain an antagonistic relationship, will this be lumped in the general category of "communicating with the enemy"?

Tsay Ching-yen had well-laid designs in mind for surmounting these barriers. He arranged for special-case permission for such matters as allowing flight crew into the country and contacting air traffic control personnel. As for such symbols of sovereignty as the national flag and the official country name, Taiwan and Macao both "had a very strong tacit understanding" of self-limitation "without anyone bringing it to the table for discussion." That is, both sides would avoid using their national flag or country name on the aircraft itself or inflight documents, and both parties would remain very much in accordance with the ROC's imperative principles of "equality" and "respect."

Straight (as possible) to the mainland

Another aspect of the Taiwan-Macao air route that has drawn attention is that those who fly Air Macau can reach their final destination in a single aircraft. In other words, although passengers must buy two tickets, they only need to stop over in Macao, wait for the plane to change its insignia and then fly directly to the mainland without having to disembark.

"A complete journey on a single aircraft" is extremely enticing. Unfortunately, only foreign-registered craft can do this, after they have flown back to their base. Without permission from the Legislative Yuan, no ROC-registered airline could enjoy such a convenience. In view of the fact that the ultimate destination of most travelers who fly to Macao is in fact the mainland, will EVA Air and TransAsia be able to compete with Air Macau?

"Although Air Macau has its strong points, we are also increasing our efforts," comments TransAsia Airway's public relations office. After passengers reach Macao, in addition to the conventional method of disembarking and boarding a second flight to mainland China, TransAsia also offers a free bus service which takes their customers straight to Guangdong's Zhuhai City in little more than an hour. From Zhuhai's newly completed Sanzao International Airport, one can then fly to all the major cities in mainland China. Compared to Air Macau, which only has four airplanes flying to four destinations--Taipei, Xiamen, Shanghai and Beijing--flying from Zhuhai offers a greater selection.

When the Taiwan-Macao route opened up, most of the Taiwan-Hong Kong route's monopolistic advantage immediately disappeared. And while Hong Kong visas are hard to acquire, Macao requires no visas at all. To attract more Taiwanese visitors, Macao has opened up an even more convenient avenue: When travelers reach the Macao airport, they can go to the China Travel Agency service counter and immediately receive special Taiwanese visitor's passes to the mainland, without having to pass through Macao customs. Although there are relatively few flights from Taiwan to Macao (80 flights per week), it has quickly come to seem more attractive than Hong Kong, becoming the most highly regarded transit point between Taiwan and the mainland.

Flying past the hurdles of '97

With the "Macao model" smoothly set in motion and political impediments already cleared, private-sector airlines heaved a sigh of relief. What remained were purely problems of the Communist Party's internal bureaucracy and disagreements between Beijing and Britain over unequal advantages. Taiwan could afford to view these struggles without great concern; it had no way of exerting influence, but conversely had no psychological feeling of urgency.

Several more months passed with affairs stuck in this state. Finally, at the end of April of this year, the Swire Group reached an agreement with their Chinese counterparts, giving up 36% of Dragonair stock to CNAC. That is to say, CNAC altered its exterior form, becoming Dragonair's largest stockholder and controlling director. The other company, the CITIC Pacific Group, lost stock in Dragonair, but increased its holdings in Cathay Pacific as compensation. Although the Swire Group ceded part of its territory, they were able to maintain good relations with mainland China, so the deal was worthwhile overall. The new commercial air pact has now been finalized and approved by the Sino-British Joint Liaison Group, under the condition that it "meet the needs of all parties involved."

With the new Taiwan-Hong Kong commercial air pact in effect, one huge hurdle of "'97" has been smoothly leaped. Unless their is a major regression in cross-strait relations, within the next five years, there should be no concern that airplanes cannot fly between Taiwan and Hong Kong. Although the opportunity for direct communication and transportation links with mainland China has yet to arrive, in the mean time, the cross-strait commercial air network becomes increasingly compact and tight, with less and less isolation. Its overall impact should be positive.

[By Sea]

Now that the new presidential cabinet has been formed, several major concepts have floated to the surface one after another. One which has drawn the most attention is the idea of creating a "Cross-Strait Trade Zone," tentatively designated to be made part of the Kaohsiung Harbor facilities. A number of mainland Chinese-invested businesses would be allowed to set up shop within the harbor area itself, engaging in export processing. This follows in the footsteps of another breakthrough last year, when the Ministry of Transportation and Communications decided to open an "offshore shipping center," which would allow foreign-registered ships to directly transport cargo between Taiwan and the mainland. Although it has only been designed on paper, it has opened the eyes of many people in the industry who anxiously await further developments.

From a "ship-to-ship, point-to-point" shipping center, to a special trade zone, an agenda is already becoming very apparent of first establishing links with the mainland through sea transport, and letting direct air links follow in due course. Yet to date since the offshore shipping center has been approved, not a single enterprise has actually "made a successful crossing." This indicates just how bizarre the inside story is.

Of flags and papers

Analyzed in detail, "sea transport is very different from air transport. It doesn't have the problem of getting permission for take-off and landing. It's completely businesslike and technical in nature," comments Yangming Marine Transport Corporation president Frank Lu. Although it is not embroiled in such sensitive questions as the right to pass through other countries' air space, sea transport still involves the two problems of "flags" and "papers."

The so-called "flag" question refers to which national flag a given ship is flying. This is similar to the question of which country's passport a tourist may be carrying. Compared to the countless indecipherable emblems that airplanes carry, the national flag aboard a shipping vessel is an "irrefutable proof of nationality" that is hard to mistake. The "papers" in question are harbor entry certificates. These are issued by the port authority at every harbor where a ship docks, indicating that the ship has permission to approach, anchor and enter the harbor.

Currently, trade between Taiwan, Hong Kong and mainland China is becoming increasingly closely knit. The shipping lanes between Hong Kong and Taiwan are nothing short of the ROC's economic lifeline. Nevertheless, except for the standard mode of transhipment (shipping to Hong Kong, unloading goods, going through customs, final processing, then loading goods on a different ship bound for the mainland), once a boat enters the high seas, its course is completely open, far more difficult to regulate than an airplane, with its cargo divided according to one seat per passenger.

For instance, many Taiwanese firms in Hong Kong are only paper companies. Many times, cargo vessels carry raw materials or components from Kaohsiung Harbor, nominally destined for sale in Hong Kong. In fact, the so-called Hong Kong company is only a single person, and after the ship enters Hong Kong, no one comes to pick up the goods. Neither does the cargo need to pass through customs; after going through the motions of transhipment, it continues on its journey to mainland China. The detour to Hong Kong is taken merely for the purpose of stamping some documents, and to comply with the regulation that "ships must dock in a third territory and cannot cross the strait directly."

"If the mainland factory is in Guangdong, then it's okay. But if it's set up in Fujian or Jiangsu, then isn't it just like throwing your money into the water, a complete waste of capital?" complains one businessman. What makes this model of "transshipment without going through customs or switching ships" even more grievous are the special privileges enjoyed by foreign-registered vessels. A ship flying the ROC flag would not only be prohibited by Taiwan from making the passage, but would also be barred by the mainland from docking.

A tug-of-war with time

And looming in front of our eyes is Hong Kong's return to mainland China a year from now. The majority of Taiwan's ships that still fly the ROC flag certainly have no guarantee that after 1997 they will be allowed to legitimately enter Hong Kong harbor. If all of Taiwan's ships were to acquire so-called "flags of convenience" by registering under other nationalities and flying foreign flags, it would of course be little problem in terms of paperwork, and it would help maritime operators curtail custom duties. But if this were to occur, it would be the same as destroying the great reputation Taiwan has as a shipping giant. It would also have a disadvantageous effect on the government's tax revenues.

Under these circumstances, the government's offshore shipping center may well have opened up a crack in the door for cross-strait shipping. Ships flying a foreign flag that have received government permission can sail straight from Kaohsiung Harbor to the mainland. What has not changed is that vessels flying the ROC flag, as always, cannot cross the strait, and crafts flying the five-starred PRC flag are not allowed into Taiwan. The problems of "flags" and "papers" have still not been resolved.

After the plan for the offshore shipping center was brought before the public, the PRC government, which up until then had been constantly calling for direct cross-strait shipping to be established, based on the definition of a "domestic shipping line," reversed its attitude 180 degrees. Since the regulation was passed over one year ago, not even one commercial ship has succeeded in crossing the strait.

"Originally, the situation shouldn't have been this complicated," explains Frank Lu. Beijing had devised a rough draft of the "Regulations for Taiwan Strait Direct Shipping Management." In theory it stated that if maritime operators complied with the separate regulations of both governments, they could proceed to ship directly. Deliberation between the two governments was not necessary. However, he believes that in the last half year, cross-strait relations have simply been too murky. Because of the need to "save face," and the influence of political factors, the PRC has become hesitant and has balked at granting approval.

Frank Lu, who continues to actively negotiate with Beijing, remains hopeful: "The people in the mainland are always saying, soon, soon, very soon you'll be given permission. Maybe when the political climate turns for the better, the very next day we'll be allowed to go."

Compared with the breakthroughs in commercial air pacts with Hong Kong and Macao, direct cross-strait shipping is a more challenging step. As the final countdown to 1997 begins, Taiwan must not only wrestle with its counterpart across the strait, it must also play a tug-of-war with time.

p.23

The new Taiwan-Hong Kong commercial air pact, which extends beyond the year 2000, finally reached the stage of an official signing ceremony in June of this year. At center is former ROC Civil Aeronautics Administration director-general Tsay Ching-yen, who supervised the process. (photo by Hung Jen-mei)

p.25

Planned for use in 1998, the new Chek Lap Kok airport has required an investment of nearly HK$100 billion, and was developed by the agreement of Britain and Beijing.

p.26

Last year an estimated 13 million standard container units were transhipped through Hong Kong harbor, the highest number in the world. In the future, after a number of large-container terminals are completed, Hong Kong's position as a major transhipment center will be even more secure.

Last year an estimated 13 million standard container units were transhipped through Hong Kong harbor, the highest number in the world. In the future, after a number of large-container terminals are completed, Hong Kong's position as a major transhipment center will be even more secure.