On March 22, a Ministry of Economic Affairs committee convened to look at whether Taiwanese firms should be allowed to invest in eight-inch silicon wafer manufacturing plants (often called "fabs") in mainland China. After scrutinizing the issue for three hours, the committee recommended leaving the conditions for liberalization unchanged. However, the committee added that the relevant agencies should come up with a strictly implemented "effective management regime" as quickly as possible. Once this regime is in place, the government will give priority to permitting the relocation to the mainland of eight-inch fabs utilizing less advanced technologies.

The committee adopted five principles of "effective management" to assure Taiwan's security and economic stability: total quantity controls, reciprocal investment, direct management, the retention of research and development facilities in Taiwan, and technology controls in line with international standards. Implementation of these principles will involve the promulgation of new regulations, revisions to existing laws and new legislation. For this reason, a timetable for liberalization is probably a few months away, which eases fears of a rapid pullout by the economically critical semiconductor industry. On the other hand, for the chip industry, the delay represents yet another test of the patience of firms that feel they need to internationalize their operations to maintain their competitive edge.

The debate began in 2000 when local businessmen including Richard Chang and Winston Wang set up Semiconductor Manufacturing International Corporation (SMIC) and Grace Semiconductor Manufacturing Corporation (GSMC) in Shanghai's Zhangjiang high-tech industrial park. Taiwan Semiconductor Manufacturing Corporation (TSMC) and United Microelectronics Corporation (UMC)-the two titans of Taiwan's chip industry-adamantly stated that they were not considering following suit and that they had no need to build fabs in China.

Two years later, mainland China's IT industry is experiencing explosive growth, and Taiwan's high-end desktop PC, notebook PC and cellphone manufacturers are, overtly or covertly, busily building mainland production facilities. Chipmakers too are now calling in ever-louder voices for the gradual liberalization of their industry. The potential business opportunities are enticing: Within the next five years, China is expected to become the world's second-largest market for semiconductors, and it currently relies on imports to meet 90% of its chip demand. Moreover, by relocating to the mainland, Taiwanese businesses can lower their overall tax rate by roughly 20% and better serve clients who are already in China. As a result, these firms are not only becoming more interested in "going west," but are also feeling more pressure to do so.

Last August, the Economic Development Advisory Conference (EDAC) recommended changing the central tenet of cross-strait economic policy from the old "no haste, be patient" to "active opening, effective management." The new policy should permit Taiwanese firms to make their own decisions with respect to expanding their operations in China. The issue of investment in eight-inch fabs is viewed as a barometer of the government's determination to liberalize investment policy.

Since the EDAC made its recommendations, a number of sectors, including notebook computers and laser-disk manufacturers, have seen an easing of rules on China investment. Only a few industrial sectors remain tightly regulated, but these include the more-than-NT$500-billion semiconductor industry (including IC design, manufacturing, packaging, and testing), and upstream petrochemicals manufacturers, whose products are critical to many other industries in Taiwan. Those who support liberalization emphasize the importance of "global positioning" and "maintaining a competitive advantage." Those opposed stress instead "putting Taiwan first" and "national security." Are economics more important than politics? How do we protect both the national interest and corporate profits? These are hot-button issues for the ruling party.

On one side of the debate are business heavyweights such as Formosa Plastics' Y.C. Wang, TSMC's Morris Chang and the Evergreen Group's Chang Yung-fa. They believe that the fact that Taiwan and the mainland share a common language and culture facilitates cooperation. They therefore advocate utilizing the mainland's production and market resources to accelerate the upgrading of Taiwan's industries, therefore increasing Taiwan's capabilities for globalization.

On the other side are nativist political parties such as the Taiwan Solidarity Union and the Democratic Progressive Party, some of whose legislators have led marches demanding that businesses keep jobs, capital and technology in Taiwan. They don't want local firms investing in a PRC that "is hostile to Taiwan." They have even called for the resignation of those policymakers who advocate liberalization, such as Vice Premier Lin Hsin-yi and Vice Minister of Economic Affairs Chen Ruey-lung.

Taiwan currently has some 21 eight-inch fabs. A number are already obsolete, and two or three have closed as a result of the economic downturn. Keeping these fabs in Taiwan is costly. But if the fabs could be relocated to the mainland, where costs are lower, they could meet the China market's demand for mid- and low-end chips.

This proposal raises many questions: Can the nine 12-inch fabs currently being planned or under construction in Taiwan be up and running soon enough? Or will eight-inch wafer fabs relocate to China before 12-inch wafer technology has matured? Will capital be diverted from 12-inch fabs in Taiwan to 8-inch fabs in mainland China? Will jobs in Taiwan be lost? There is also the question of human resources. People are critical to the high-tech industry. If many senior engineers move to the mainland with the fabs, they take skills and experience with them. Could this corroborate Mainland Affairs Council chairwoman Tsai Ing-wen's fear that: "If we let the two tigers (TSMC and UMC) out, they will return to gobble us up."

Former president Lee Teng-hui stated that Taiwan must wait for 12-inch production to stabilize before allowing eight-inch fabs to move to China. The crux lies in requiring firms to keep their key resources in Taiwan: Firms would have to complete construction of a 12-inch fab before moving an older eight-inch fab to mainland China. The total capital Taiwanese firms export to China could not exceed NT$200 billion (equivalent to ten eight-inch fabs), and production technology would be limited to 0.25 microns and above. There would also have to be discussion of a law on industrial espionage, as well as severe punishment for firms (such as SMIC and GSMC) which have already dodged restrictions on investment. Proponents hope these measures would minimize the impact that the relocation of portions of the semiconductor industry would have on Taiwan.

While struggle over policy drags on, industry changes rapidly. In the last two years, SMIC and GMSC have lured more than 100 senior engineers from Taiwan to Shanghai, and SMIC announced in mid-March the acquisition of 0.18-micron technology through tie-ups with Toshiba and Fujitsu, shrinking the advantage of Taiwan's manufacturers. SMIC has also announced a strategic alliance with a major American chip packager and tester, ChipPAC.

GSMC, also located in Shanghai, has signed a cooperation agreement with another major American packager and tester, Amkor. The two companies will refer clients to one another.

The chip packaging and testing industry is also awaiting the results of the current policy debate. Major local packagers and testers such as Advanced Semiconductor Engineering and Siliconware Precision Industries are claiming that they have lost the initiative in working with Taiwanese manufacturers in China. Unless policy is clarified soon, such mid- and downstream firms will find their development hampered.

And new certainty arose when Christine Tsung resigned as minister of economic affairs, to be replaced by Political Vice Minister of Economic Affairs Lin Yi-fu. However, a firm policy may be on the way. At the recent World Taiwanese Congress (WTC), President Chen made clear what Taiwan's future direction would be.

President Chen told the WTC that Taiwan must look outward and not fear liberalization, and that the more Taiwan internationalizes, the more secure it will be. He said that once a decision is made on how to exercise "effective management," Taiwan's chipmakers would be able to vie for a share of the China market and for global dominance. Chen said he hoped that Taiwan would quickly establish its next wave of key industries, such as biotechnology and IC design. Only by continually moving forward and reaching ever higher can Taiwan maintain its technological edge.

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The Taiwan Solidarity Union took to the streets to protest the relocating of eight-inch silicon wafer fabs to China. The marchers advocated the continuation of the "no haste, be patient" policy, and called for local firms to keep their roots in Taiwan.

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Shanghai or Suzhou? Taiwan must make a decision on its mainland investment policy before chip-manufacturing giants TSMC and UMC can choose.