Since 1978, when information about mainland China gradually started to become more available, it has been its economy which has attracted the most attention. In the space of six years, foreign trade has shot up from US$20 to US$50 billion, making it the eighteenth largest trading nation in the world, drawing near the fifteenth place Republic of China. Corporate giants from Japan and the U.S., such as Toshiba and IBM, have invested in the mainland.

Mainland China's economy first began changing in 1978, when following the fall of the Gang of Four, Teng Hsiao-p'ing put forward his program of economic reform. His first step was to loosen control on peasants, allowing them to keep or sell whatever produce they harvest in excess of the quota to be given to the state. The policy gave new motivation to rural producers, and production figures have shown an average increase of 9% over the past six years. Local urban producers have also been given a measure of limited freedom, particularly in the area of textiles. The regime aims to quadruple per capita income by the year 2000, but given the lack of capital technology, substantial amounts of foreign aid will be required to even approach that goal.

Mainland China has already announced the opening of four special economic zones and fourteen seaports to foreign trade (a delay in opening 10 of the 14 was recently announced), and later of three "Golden Triangles"--the Yangtze and Pearl River deltas and the area around Amoy in Fukien. Foreign investors will receive favored treatment, such as lowered taxes, the freedom to hire and fire employees, subsidies, and other such capitalist benefits, all of which highly resemble conditions found in Taiwan's export processing zones. Those similarities are not accidental; behind closed doors bureaucrats say, "In economics, study Taiwan.

Despite the recent changes, there are serious problems, which worry Chinese and foreigners alike. Inflation, increasing foreign debt, political uncertainty, and corruption among middle and lower levels of the bureaucracy threaten the future progress of the reform policies. Moreover, although mainland China has a cheap and abundant labor force, its workers lack skills and technical expertise, largely owing to suspension of education during the Cultural Revolution. Capital is also relatively scarce. The Republic of China, by contrast, has the fourth highest wage level in Asia, behind only Japan, Singapore and Hong Kong. In the critical areas of capital formation, technical expertise, and education, only Japan surpasses Taiwan.

"The Republic of China has already passed the stage where its comparative advantage lies in a cheap labor supply," says Wu Hui-lin of the Chung-hua Institution for Economic Research. "We've moved into a period where technologically advanced and capital-intensive industries are more important. For mainland China in the short term to compete with us in the area of heavy industry would just be matching their weak point against our strongest."

However, in labor-intensive industries, Taiwan operates at a distinctive disadvantage and must move toward making more upscale products, in the same way that Japan converted toward production of high fashion clothing after Taiwan had replaced it as Asia's textile center.

Wu Hui-lin further adds, "Even if there were no mainland China, we would still have to face Indonesia, Malaysia, the Philippines and other developing countries. Our problem isn't mainland China, it's the speed with which we can transform our own economy."

Many believe that the rate of this transformation is too slow. Taiwan relied on labor-intensive industry to begin its economic take-off in the 1960s, and although the economy grew for an extended period, it was done with a relatively simple level of technology. Today the main export industries still remain textiles, footwear, and other labor-intensive areas. While the quality of Taiwan's goods now is better than that found on the mainland, one economist says mainland Chinese goods in this area could catch up with Taiwan within a period of only five years.

"We've been talking about upgrading the level of our economy for ten years," says Wang Chao-ming of the Council for Economic Planning and Development, "and we're still in the same transitional stage. This is primarily because we had a ready market, and manufacturers only cared about increasing production. Now people are paying attention to competition from the mainland, and this could make producers improve their skills and equipment and accelerate the whole process, making it a blessing in disguise."

At present, direct competition between Taiwan and mainland China products is limited, since they occupy different parts of the market. "More important is the question of how the mainland China economy affects that of our more direct competitors, such as South Korea and Singapore," points out Chang Jung-feng, associate researcher at the Chung-hua Institution for Economic Research. To cite one example, mainland China exports cotton to South Korea at a price 20% lower than that quoted on international markets, thus allowing South Korean textile producers to undersell their Taiwan counterparts.

The Republic of China government has long kept to a policy of non-interference regarding indirect trade. Council for Economic Planning and Development Chairman Chao Yao-tung has said, "Our nation favors free trade. The government has no right to interfere in the import of products ordered from Singapore, Hong Kong, or Japan. There is no way we can check whether or not the goods imported are from mainland China. We can only remind manufacturers that political motives may lie behind some of the orders they receive."

The mainland China Ministry of Foreign Economic Relations and Trade, the Overseas Chinese Committee, and the United Front Work Department (basically a propaganda department aimed at Taiwan) have already established divisions relating to trade with Taiwan. Article Two reads in part as follows: "Favorable conditions shall be granted for the purposes of unification", while Article Three states, "The aim of commerce is political."

Many problems exist for foreign companies doing business with mainland China. Bureaucratic procedures are complex and slow, corruption is rising, and housing is in short supply. IBM in Peking is forced to rent 70 rooms in a hotel in lieu of no office space, with the total bill coming to a figure of over US$7000 per day. There is virtually no protection of private property, as mainland China in law remains firmly a communist regime, recent reforms notwithstanding. The transportation, communication and energy industries continue to be underdeveloped. Nevertheless, regardless of how economists and researchers view the nature and the immediacy of the economic threat from mainland China, all agree that the Republic of China must renew its efforts to upgrade its economy.

(Mark Halperin)

[Picture Caption]

Chiahsing, Chekiang, 1984

Taoyuan, Taiwan. 1985.

Shenyang, 1984.

Hsinchu, Taiwan, 1985.

Liaoning University, 1984.

Taipei, 1985.

Hsinchu, Taiwan, 1984.

The Imperial Palace, Peking, 1984

Taoyuan, Taiwan. 1985.

Shenyang, 1984.

Liaoning University, 1984.

Hsinchu, Taiwan, 1985.

Taipei, 1985.

Hsinchu, Taiwan, 1984.

The Imperial Palace, Peking, 1984.