Really Going WTO?  (c) Simon Xi Zhang, 2002

Some in Taiwan are worrying that investment in mainland causes negative trade diversion effect to Taiwan. For example, with Taiwanese footwear manufacture shifting to China, Chinese footwear occupied 45% in American market in 1994 and later jumped sharply to 77.5% in 2000 while Taiwanese footwear occupies now only a slim 0.7% share of American market. Similar situation happens to toy manufacture industry, too.[45] However, they are labor-intensive industries in which China has comparative advantage over Taiwan. Taiwan should encourage such industries shifting their manufacture bases to China, even though the out-bound investment policy is not a topic in WTO context.

Taiwan is leading in world semi-conductor manufacture. Taiwanese have invested huge amount of capital in building semi-conductor factories in China, too. This explains why electronic product is the major goods traded across the Taiwan Strait in both directions[46]. Advanced technology is preserved within Taiwan and old-type chips are now produced in China. The division between two sides has positioned well in the global commodity chain and production network[47].

The increasing investment activities and its consequence -- close interdependence relationship in trade -- result in a win-win situation for both sides. More jobs are created in coastal provinces and China expands exports to third countries with the help of production in Taiwanese-owned factories. Taiwan forms vertical manufacture division chain with China and readjusts its own industry structure. Downstream manufacturers have reallocated to China. Indirect import from China brings in products needed by upstream industries and causes no market interference effect to Taiwan[48]. Cheap labor and utilities in China help the entire domestic Taiwanese industry (upstream and downstream) become more effective.