Vol. 2, Issue 38
The Global Taiwan Brief Volume 2, Issue 38
By: Russell Hsiao
Taiwan Takes Economic Action Against North Korea
By: David An
Chinese Burgeoning Undersea Threat Against Taiwan
By: Richard D. Fisher, Jr.
Tackling Taiwan’s “Brain Drain”: The Role of SOE Privatization
By: Michael Reilly
Russell Hsiao is the executive director of the Global Taiwan Institute and the editor-in-chief of the Global Taiwan Brief.
President Tsai Ing-wen Calls for “New Mode” of cross-Strait Relations on ROC National Day as PRC doubles down on “One China Principle”
On October 10, in her second National Day address as president of Taiwan (ROC), Tsai Ing-wen called on Beijing authorities to consider “new modes” of cross-Strait relations. Double Ten Day (雙十節)—also referred to as National Day (國慶日) in Taiwan—celebrates the start of the Wuchang Uprising (武昌起義) in 1911 that precipitated the collapse of the Qing Dynasty and led to the establishment of the ROC government. In her remarks celebrating the 106th anniversary of the government’s formation, President Tsai reemphasized her administration’s commitment to maintaining the cross-Strait status quo based on “four nos”: “Our goodwill will not change, our commitments will not change, we will not revert to the old path of confrontation, and we will not bow to pressure.”
Marking the 30th anniversary of cross-strait exchanges, Tsai stated:
As we face new circumstances in cross-Strait and regional relations, leaders from both sides should together work to display the political wisdom that has carried us through over the years. We should search for new modes of cross-strait interactions [emp. added] with determination and patience. This will lay a more solid basis for long-term peace and stability in the cross-Strait relationship.
President Tsai’s remarks at the National Day celebration were closely monitored, as earlier in the year her administration had begun calling for a “new model of cross-Strait interactions” (兩岸互動的新模式)—ostensibly to replace the so-called “1992 consensus”—and observers believed that she intended to elaborate on what such a “new model” might look like during her speech. In her first National Day address, President Tsai forcefully called on Beijing’s leaders “to face up to the reality that the Republic of China [ROC] exists.”
In remarks delivered at the National Day celebration at Twin Oaks (雙橡園) in Washington, DC on October 4, the chairman of the American Institute in Taiwan (AIT), James Moriarty, noted:
My interactions with President Tsai have reaffirmed my conviction that she is a responsible, pragmatic leader. The United States appreciates her determination to maintain stable cross-Strait ties in the face of increasing pressure from the PRC on a number of fronts. It’s clear that the current cross-Strait relationship suffers from a lack of trust and communication. The United States will continue to urge both sides to engage in constructive dialogue and to demonstrate patience, flexibility, and creativity in finding ways to engage with each other, in order to avoid miscalculation and resolve their differences.
Despite expectations, President Tsai speech did not include any reference as to what the Taiwanese president thought a “new model” should look like, but a local media report published before National Day indicated that she will use another forum later this month to respond to the Chinese Communist Party’s (CCP) Taiwan policy, which will be officially unveiled at the 19th Party Congress.
Beijing placed a freeze on high-level governmental dialogue in June 2016 in spite of President Tsai’s public commitment to the spirit of the 1992 meeting and to over 20 years of interactions and negotiations, the ROC Constitution, and the Act Governing Relations Between the People of Taiwan Area and the Mainland Area (臺灣地區與大陸地區人民關係條例) as the legal and policy framework of her administration’s approach to cross-Strait relations.
At a conference in Washington, DC, on October 12, former Pentagon official and executive director of the Project 2049 Institute, Mark Stokes, observed that the Tsai administration’s cross-Strait policy, which is based on the ROC Constitution and the Act Governing Relations between the Taiwan Area and Mainland Area was a “significant concession [to Beijing]” and “implicitly … a form of a ‘One China’ policy.” As such, Stokes questioned the PRC’s complaints, asking “why the pressure on the Tsai administration to adopt the so-called ‘1992 consensus,’ which in effect is the ‘One China’ principle?”
In response to President Tsai’s National Day address, the PRC’s State Council spokesman, Ma Xiaoguang (馬曉光), stated: “only by upholding the one-China principle and opposing ‘Taiwan independence,’ can both sides promote communication and cooperation.” The spokesman reportedly added that the critical issue is to clarify the “nature of cross-Strait relations” and recognize that “Taiwan and China belong to One China” (台灣與中國同屬一個中國).
While the spokesman’s comments made no reference to the oft-repeated “1992 consensus”—which has typically accompanied any official statements on cross-Strait relations over the past year—an article on Taiwan policy penned by the CCP Central Committee’s Taiwan Work Office and appearing in Qiushi (求是), a bi-monthly periodical published by the Central Party School and the CCP Central Committee, during the 18th Party Congress under Xi Jinping, referred to the “1992 consensus” a total of 10 times.
In the article, the CCP’s Taiwan Work Office stated:
“Peaceful unification, one country two systems” is the basic principle of our [the CCP’s] solution to the Taiwan issue and the best way to achieve national unification. The national unification we seek is not only unity in form, more importantly, it is in harmonizing the soul of compatriots on both sides of the Taiwan Straits. The key to ensuring peaceful development in cross-Strait relations is to adhere to the “1992 consensus,” and opposing ‘Taiwan independence’ as the common political foundation. The ‘1992 Consensus’ embodies the one-China principle, clearly defines the nature of cross-Strait relations, and serves as the anchor of cross-Strait relations.
Despite early speculation that the CCP may have abandoned the “1992 consensus,” the tacit agreement appears to remain a central tenet of the PRC’s policy towards Taiwan. It is unlikely, at this point, that any major change in Beijing’s policy towards Taiwan will come out of the 19th Party Congress, although signals of a shift towards a hardline approach over the course of the past year are evident and will likely continue through with the appointments of senior personnel to the PRC’s Taiwan policy apparatuses that will be made sometime after the 19th Party Congress and the National People’s Congress, to be held early next year.
The main point: President Tsai calls for a “new mode” of cross-Strait relations as the PRC doubles down on ‘one country, two systems,’ the so-called ‘1992 consensus,’ and its “One China” principle.
PRC Ambassador to UN Liu Jieyi Appointed as TAO Deputy Director
On the heels of the opening for the Chinese Communist Party’s (CCP) 19th Party Congress, the website for the Taiwan Affairs Office (國台辦) in the State Council—the central government of the People’s Republic of China (PRC)—revealed that the current PRC Ambassador to the United Nations, Liu Jieyi (劉結一), has been appointed as a deputy director (minister rank) of the agency charged with implementing the government’s policy towards Taiwan. Liu’s appointment adds fuel to speculation that he will be in line to replace the beleaguered current director Zhang Zhijun (張志軍), who has been under fire for the policy failures of the Xi administration over the past five years, which have seen the return of the Democratic Progressive Party (DPP) to power in Taiwan.
The current makeup of the TAO’s senior management includes the director (minister rank) and four deputy directors (with one deputy with the rank of minister), and an assistant to the director. The director has held his position since 2013 and is not on any publicly available list of delegates to the 19th Party Congress, as such it seems all but certain that Zhang will retire somewhere between the 19th Party Congress and the first quarter of 2018. It is speculated that Zhang may become the vice chairman for the advisory-body, the Chinese People’s Political Consultative Conference’s Committee for Liaison with Hong Kong, Macao, Taiwan and Overseas Chinese (全國政協港澳台僑委員會副主任).
The other three non-minister ranked deputy directors in TAO include: Chen Yuanfeng (陳元豐, b. 1963) who has worked at the TAO since 1994 and as a deputy director since 2009 and Zheng Shanjie (鄭柵潔, b. 1961), who served as a vice minister of the National Energy Administration and was only appointed to his current deputy director post in April. The third deputy director without a minister rank is Long Mingbiao (龍明彪, b. 1962), who joined the TAO in 1997 and previously served as assistant (2009-15) to current Foreign Minister Wang Yi (王毅), when he was the TAO director from 2008-13; he became deputy director in 2015. The current assistant to the director is Zhou Ning (週寧, b. 1960), who concurrently serves as the head of the policy research division. Zhou began his work on Taiwan issues in 1987, first at the CCP Central Committee’s Taiwan Work Office, subsequently entering the TAO in 1994.
Liu could begin his new TAO post as early as this November or as late as the next CCP Central Committee’s Taiwan Work Conference (中共中央對台工作會議), which is typically scheduled in the first quarter of the new year. As a previous brief noted, Liu is a career diplomat who served extensively within the PRC’s Mission to the United Nations and in other posts within the Foreign Ministry that largely involved North American affairs. In 2009, however, Liu was transferred to serve as vice minister of the CCP International Liaison Department, and in 2013 was appointed the PRC’s ambassador to the United Nations where he currently serves.
Despite the prevailing assessment that Liu will replace Zhang, the former’s notable absence from any publicly available list of delegates to the CCP’s 19th Party Congress, which include a list published by the state-run media Xinhua News Agency, raises questions about Liu’s eligibility to serve in a senior party position such as the director of the CCP Central Committee’s Taiwan Work Office (中共中央台辦). Members of the CCP Central Committee are chosen from and elected by delegates to the Party Congress. The head of the CCP Central Committee’s Taiwan Work Office—which is directly subordinate to the CCP Central Committee—doubles as the State Council’s TAO. Members of the senior management of the TAO, including Liu, are also members of the CCP’s Central Committee Taiwan Work Office.
It remains to be seen whether Liu—presumably a non-delegate member to the 19th Party Congress—will be eligible to serve as the head of a CCP Central Committee’s Taiwan Work Office without being a central committee member, and whether he can become a central committee member before being elected as a delegate to the party congress. The practice of having the director of the CCP’s Taiwan Work Office serve concurrently as head of the State Council’s Taiwan Affairs Office has been in place since 1991 when Wang Zhaoguo (王兆國) served as TAO’s director.
The main point: Liu’s appointment follows in line with a pattern of assigning officials with a high-degree of expertise in international affairs to the Taiwan portfolio. It remains to be seen whether Liu—a non-delegate member to the Party Congress—will be eligible to serve as the head of a CCP Central Committee Taiwan Work Office without first becoming a Central Committee member.
 An earlier report indicating that the current TAO director is a delegate to the 19th Party Congress is inaccurate. The individual that appeared on the list of delegates is from Baishi city, Jilin province. See, e.g., http://district.ce.cn/newarea/sddy/201706/03/t20170603_23404022.shtml.
Update [October 24, 2017]: Liu Jieyi has been ‘elected’ as a full member to the 19th CCP Congress Central Committee (see e.g., http://news.xinhuanet.com/politics/19cpcnc/2017-10/24/c_1121848878.htm). This development coupled with his recent appointment as deputy director of TAO (see, e.g., http://globaltaiwan.org/2017/10/18-gtb-2-38/#RH101817) make it almost certain that Liu will eventually replace Zhang Zhijun as head of the CCP’s Taiwan Work Office and the State Council’s Taiwan Affairs Office.
Taiwan Takes Economic Action Against North Korea
David An is a senior research fellow at the Global Taiwan Institute and was previously a political military officer at the US Department of State.
As North Korea continues to test nuclear weapons of increasingly higher yields and missiles with farther ranges, with the declared intent to target the United States and US partners, Taiwan has moved in concert with the United States and its partners to phase out all trade with North Korea, in accordance with United Nations sanctions. Yet, Taiwan is not bound by the same United Nations commitments as the 193 member countries since Taiwan no longer has a seat in the UN. Taiwan is voluntarily standing in solidarity with the United States and the majority of the world to take measures aimed at “denouncing North Korea’s recent successive nuclear tests and actions that jeopardize regional security,” as stated by Taiwan’s Ministry of Economics.
The Growing North Korea Threat in Taiwan’s Vicinity
Over the past year, North Korea has tested advanced nuclear weapons, along with a large series of missiles that could deliver those weapons to ever greater distances. North Korea tested its most powerful atomic weapon to date on September 3, which it claimed to be a hydrogen bomb. The South Korean government measured a 5.7 magnitude earthquake to correspond with that test. A year earlier, in 2016, North Korea conducted two other nuclear warhead explosions.
Missiles go hand in hand with nuclear warheads, and in the defense industry, missiles are also called “delivery vehicles.” As North Korea develops nuclear weapons, it becomes a threat to the United States when they are integrated with missiles that can reach US territory. Missiles travel at great speeds and can transport a payload—such as a nuclear warhead—over a long distance within minutes. When North Korea publicly stated that it was drawing up plans to fire long range missiles at Guam’s exclusive economic zone (EEZ), those missiles would have made a journey of over 2,000 miles in just around 20 minutes.
As nuclear tests have proven successful, the focus has turned to improving delivery vehicles. Therefore, in recent years, the number of North Korean nuclear warhead tests pales in comparison to the number of its missile tests. There have been at least 13 missile tests in 2017. If North Korea has already tested its missiles by flying them over Japan, and if North Korea threatens to target Guam’s EEZ, then by logic Taiwan is also within range of an attack. Taiwan’s officials have thus voiced concerns.
Taiwan’s Concerns and Sanctions Against North Korea
Taiwan’s leaders are taking the North Korean nuclear issue very seriously. Immediately following North Korea’s sixth nuclear test on September 3, 2017, President Tsai called a lengthy 70 minute national security meeting at the Presidential Office. Participants included then-Premier Lin Chuan (林全), Chief of the General Staff Lee Hsi-ming (李喜明), Deputy Foreign Minister Paul Chang (章文樑), National Security Bureau Director-General Peng Sheng-chu (彭勝竹) and Mainland Affairs Council Minister Chang Hsiao-yueh (張小月).
Taiwan is right to be concerned and should be more involved when it comes to the North Korean threat because its security interests are also at stake. After the September 3 emergency meeting at the Presidential Office, Tsai publicly condemned North Korea for its actions, and urged Pyongyang to cease any moves that could undermine security in the region. She added that Taiwan will work closely with the international community on efforts to help maintain order and stability in the region.
The helpful economic measures that Taiwan has taken against North Korea are encouraging. On September 26, Taiwan’s Executive Yuan announced a comprehensive ban on all trade with North Korea that would come into force immediately. A week before that, on September 19, Taiwan suspended exports of its liquefied natural gas, crude oil, and refined oil; it also suspended clothing and textile imports from North Korea.
Taiwan’s actions were taken to compliment new United Nations sanctions against North Korea levied on September 11, 2017 that imposed a ban on North Korea’s textile exports and capped trade of crude oil to 2 million barrels a year. The UN decision could cost North Korea US $1 billion a year, which is a third of its income from foreign sources. Even China’s Foreign Minister warned North Korea: “Do not violate the UN’s decision or provoke the international society’s good will by conducting missile launching or nuclear tests.”
Since Taiwan is not a member of the United Nations, it is not technically party to the sanctions. Taiwan’s recent actions demonstrate that, when it comes to North Korea, Taiwan has gone above and beyond UN sanctions levied on the regime even when it is not obligated to do so.
Cutting Off a Legacy of Trade with North Korea
Taiwan’s trade with North Korea was previously very limited, but has now been completely eliminated. Taiwan imported $1.2 million in goods from North Korea in the first half of 2017, and exported $36,000 in goods in the same time period. According to all available data from Taiwan’s Bureau of Foreign Trade (經濟部國際貿易局) reported to the United Nations Trade Statistics Database, Taiwan’s total trade with North Korea was $559 million, cumulative over the time period from 1989 to mid-2017 (a fraction of Taiwan’s total global trade at $9.6 trillion during the same time period). Such actions show that Taiwan stands in solidarity with the majority of countries in the world in condemning North Korea.
Last year, Taiwan was North Korea’s fourth largest trading partner in the world, judging by North Korea’s global exports. Based on 2016 data, North Korea’s top export destination was China, to which it exported $2.6 billion in goods, and with India in second at $87.4 million, and the Philippines third, at $51.8 million. Taiwan was fourth at $12.2 million.
Taiwan’s Bureau of Foreign Trade indicates that North Korea’s top exports to Taiwan were mineral products at 73 percent of items, vegetable products at seven percent, base metals at 13 percent, textiles at three percent. In the opposite direction, Taiwan’s exports to North Korea were composed of 37 percent chemical products, 30 percent textiles, 12 percent machinery, and three percent plastic and rubber articles.
North Korea even operated a [North] Korea International Chamber of Commerce (KICC) office in Taipei to facilitate trade. Its website stated that the office conducted “business activities, but also acts as a facilitator between DPRK and the outside world for important international events.” When asked about KICC, former Director of the American Institute in Taiwan Bill Stanton said, “I didn’t know the North Koreans had an office here.” He continued, “I am pretty sure Washington was unaware or I would have thought it would have become an issue. If nothing else, people would have wondered why.”
Reporters visited the KICC office in February, and news articles appearing as recently as May have mentioned KICC as operational. However, KICC’s official website has since been shut down and its operating status is now in question, especially in light of Taiwan’s new comprehensive ban on all trade with North Korea.
It is unlikely that Taiwan’s new comprehensive trade sanctions will provoke a backlash from North Korea since the trade between Taiwan and North Korea was already low, at 1.6 million US dollars in the first half of 2017. Also, Taiwan does not stand out to North Korea since Taiwan is acting in unison with the international community.
Taiwan has also cooperated in interdicting contraband trade shipments to North Korea in the past. In 2003, Taiwan acted on a US request to seize 158 barrels of a dual-use phosphorus pentasulfide contraband shipment at the port of Kaohsiung that was bound for North Korea.
Taiwan is in lock step with the international community when it comes to implementing economic and trade sanctions against North Korea. As North Korea becomes more desperate, Taiwan could benefit by working with North Korea even more; yet, Taiwan has wisely chosen to join the international community to sanction North Korea in condemnation of its nuclear tests and missile launches, which destabilize the region.
My next article on North Korea will address the puzzle of why Taiwan does not appear as worried about the North Korean nuclear and missile threat as their neighbors, and will also examine the implications Taiwan’s future defense posture.
The main point: Taiwan is playing a helpful role in voluntarily enforcing trade sanctions against North Korea, even though Taiwan is not technically bound by United Nations commitments.
Chinese Burgeoning Undersea Threat Against Taiwan
Richard D. Fisher, Jr. is a senior fellow with the International Assessment and Strategy Center and a member of the Global Taiwan Institute’s Advisory Board.
In his critical volume of warning, The Chinese Invasion Threat, Project 2049 Institute analyst Ian Easton makes clear that most Chinese plans for an invasion of Taiwan depend on the People’s Liberation Army (PLA) having first successfully imposed a blockade, to allow for a bombing campaign to be followed by invasion. While Easton makes clear such a Chinese decision to invade depends on myriad factors, such as assurance of victory, it is also clear that PLA Navy (PLAN) submarines will make a crucial contribution to the blockade phase and to the interdiction of American naval forces coming to Taiwan’s aid.
In part to increase Taiwan’s anti-submarine defenses, in April 2001 President George W. Bush decided to sell Taiwan eight new conventional submarines (SSKs). By 2006 there were eight new conventional submarines on the Taiwan Strait, but they were the PLAN’s Russian-built Kilo 636M SSKs armed with the deadly supersonic Novator 3M-54E (SS-N-27 Sizzler) Club anti-ship missiles. Again, 16 years later as Taiwan finally commits to build eight indigenous SSKs, China is poised to accelerate its maritime threats to Taiwan by leapfrogging ahead in its undersea warfare capabilities.
When built through the next decade, Taiwan’s modern SSKs would be its most effective anti-submarine warfare (ASW) system. However, the blockade potential of the PLAN’s 51 SSKs is already formidable. In addition to eight Kilo 636M and four earlier Kilo 887/636 submarines, the PLAN has about 11 of the older Type 035 Ming class last acquired in 2003, 13 Type 039/036G Song class SSKs acquired by 2006, and may soon have 15 of its most advanced Type 039A Yuan 1 and Type 039B/C Yuan 11 SSKs.
At slow submerged speeds and with quiet electric power, most SSKs are quite difficult to detect. On 26 October 2006 a Type 039G Song surfaced undetected about 9km or well within weapons-firing range, of the USS Kitty Hawk (CV-63) aircraft carrier. One key SSK vulnerability is the need to surface every few days to recharge their batteries, but this is changing with the increased use of battery-charging Air Independent Propulsion (AIP) systems. The latest Type 039B/C Yuan II SSK is equipped with a Chinese version of the Stirling Engine AIP system, which can extend underwater endurance a week or more. Since 2015, Yuan SSKs have undertaken occasional patrols into the Indian Ocean.
Though simple, Stirling engines are noisy and bulky, so the PLAN has sought to develop other AIP systems. The PLAN is known to have investigated—but not adopted—AIP systems like fuel cells, which power modern German SSKs and are silent though complex and expensive, and the French MESMA (Module Energie Sous-Marine Autonome), which produces turbine-driving steam from ethanol and oxygen but is complex, noisy and expensive.
Instead the PLAN may be developing a nuclear-powered AIP system to power batteries for a new class of small submarines. This was revealed in university lecture slides delivered by retired PLAN Rear Admiral Zhao Dengping（趙登平), posted in late August on Chinese web pages like CJDBY and FYJS. While his actual comments were not shared, Zhao, who is currently a senior adviser to the China International Institute for Strategic Society (中國國際戰略學會), is a credible source as he may currently serve as a commissioner on the weapons-developing and procuring General Armaments Department of the Science and Technology Commission, and as vice chairman of the Navy Informatization Committee.
In one slide Zhao offers a chart indicating that a nuclear-powered AIP system-equipped submarine may have advantages over a usual nuclear reactor and steam turbine powered submarine. Compared to the later, the nuclear- powered AIP module uses a low-pressure and low-temperature “integrated reactor” to generate electricity that has “high” safety and “low” noise. While submarine speed will be “low” consistent with SSKs, the nuclear AIP will have “unlimited” endurance like a nuclear reactor powered submarine. In practice, submarine endurance will be limited by crew-sustaining supplies, but a nuclear AIP system could enable three or more weeks of submerged patrols.
Were Admiral Zhao’s nuclear-powered AIP system to prove successful, it could enable a new class of smaller, less expensive nuclear-powered assisted submarines with potentially far greater underwater endurance than conventional SSKs. Such endurance is tactically useful, in that submarines could be deployed to possible patrol zones surrounding Taiwan well before the commencement of a blockade or other military operations. As this new class of submarine could be similar in size to the Type 039B, it may be much less expensive than a nuclear-powered attack submarine (SSN), meaning more could be built. Reportedly, the PLAN could build up to 14 of its more expensive next-generation 7,000+ ton Type 095 SSNs, but a successful nuclear-powered AIP system could enable the PLAN to more rapidly transition to a full “nuclear-powered” submarine fleet.
The blockade potential of the PLAN’s more modern SSKs and SSNs has also been enhanced by the adoption of a submarine-launched version of the China Aerospace Science and Industry Corporation (CASIC) YJ-18 supersonic anti-ship cruise missile. Its adoption also confirmed by Admiral Zhao’s slides, the YJ-18 is a close copy of the Russian Novator 3M-54E. It shares the latter’s three-stages: booster, subsonic cruise and then Mach 3 speed supersonic third stage, which greatly complicates ship defense. But while the Russian missile has an advertised 220 km range, in 2015 the US Department of Defense reported the YJ-18 could have a “290 nautical mile” or 537 km range.
Gathering long-range targeting data against Taiwan Navy ships and submarines will be a main mission for the PLAN’s developing network of underwater and sea-bed moored sensors, called the Underwater Great Wall (UGW). Similar to the US Navy’s Sound Surveillance System (SOSUS) of moored sonar, dedicated to finding Cold War Soviet submarines, when complete, the PLAN version will exploit modern digital electronics, fiber optics, and ground-based supercomputers to more efficiently process signals. It will also be integrated with unmanned undersea vehicle (UUV) surveillance craft, anti-submarine sensors on ships, and new anti-submarine warfare (ASW) aircraft.
It should be expected that the PLAN will build UGW networks in extended areas around sensitive maritime areas like south of Hainan Island, into the Taiwan Strait, and the East China Sea approaching the Senkaku/Daiyoutai Islands. In the shallow but acoustically challenging waters of the Taiwan Strait, a UGW network of sensors could give the PLAN a significant ASW advantage. But an additional concern should be the potential for the UGW to be extended to the very deep-water regions East of Taiwan (3,000 to 5,000 meters) and in the South China Sea. China’s deep-sea research program, which includes the manned Jiaolong submersible—capable of reaching a depth of 7,000 meters—also supports PLAN military objectives.
When complete, extended to international water, and coordinated with other ASW forces, the PLAN’s UGW could effectively deny operations by Taiwan, US, and allied submarines. In addition to more rapidly targeting Taiwan’s submarines for attack by ASW ships, aircraft and submarines, in the future the PLAN could introduce long-range anti-submarine ballistic missiles. In 2014, China’s Poly Technologies began marketing a 100 km range land-based ASW torpedo-equipped ballistic artillery rocket, cued by ASW platforms and sensors. Extending UGW sensors could allow the PLAN to develop a much longer-range ASW ballistic missile.
Had the Bush Administration’s ambition to help Taiwan rebuild its submarine fleet not been defeated by politics in Taiwan followed by a collapse of leadership in Washington, the Taiwan Navy would today be taking delivery of new submarines. Just as important, Taiwan would have rebuilt submarine construction and design skills that would allow it to consider development of smaller, less expensive and more numerous UUVs that are now required to redress an undersea warfare balance that could rapidly shift in China’s favor.
The reality is that the PLA has used the last 16 years to develop the means to build the next generation of submarine and ASW capabilities. Consistent with the 1979 Taiwan Relations Act and with US interest in deterring war on the Taiwan Strait, it is necessary for Washington to exercise the leadership required to organize adequate sales of appropriate technology to help Taiwan more rapidly complete its indigenous submarine programs. It may also be necessary for Washington to exercise leadership in responding to the potential expansion of China’s Underwater Great Wall to international waters.
The main point: In the 2000s, China leapt ahead of Taiwan in underwater warfare capabilities by introducing eight highly capable Russian-build Kilo-class conventional submarines while both Taipei and Washington faltered in realizing the Bush Administration’s ambition to sell eight new submarines to Taiwan. Again, China is set to possibly leap ahead of Taiwan in undersea warfare capabilities, first by developing a new nuclear-powered auxiliary power unit to enable a new class of cheap “nuclear powered” submarines, and by building an Underwater Great Wall of anti-submarine sensors. It is time for Washington to exercise the leadership necessary to help Taiwan complete its submarine program as a first line of undersea defense.
 Ian Easton, The Chinese Invasion Threat: Taiwan’s Defense and American Strategy in Asia (Alexandria, VA: Project 2049 Institute, 2017), 95.
 For a useful review of AIP systems see H.I. Sutton, “World survey of AIP submarines,” Covert Shores Web Page, March 19, 2016, http://www.hisutton.com/World%20survey%20of%20AIP%20submarines.html
 These lecture slides were posted by Poster “052D Hefei ship,” CJDBY Web Page, August 21, 2017, https://lt.cjdby.net/thread-2408457-1-1.html; Poster “Kyushu universal,” FYJS Web Page, August 21, 2017, http://www.fyjs.cn/thread-1879203-1-1.html.For selected slide translations, see Poster “Cirr,” Pakistan Defense Web Page, August 21, 2017, https://defence.pk/pdf/threads/2014-the-beginning-of-a-new-era-for-plan-build-up.294228/page-114.
Tackling Taiwan’s “Brain Drain”: The Role of SOE Privatization
Michael Reilly is a former British diplomat; from 2009–2015 he was a senior representative of UK defense company BAE Systems.
An article in Time from August highlighted the growing problem of the exodus from Taiwan of many of its best and brightest young talents, attracted by the lure of better prospects overseas, above all in China. It is not a new problem but one the article suggested is growing, not declining, driven not only by better opportunities in the Chinese economy but also, it would seem, by deliberate Chinese government policies aimed at drawing Taiwan ever more tightly into its sphere of economic dependence.
The challenge for Taiwanese policymakers is how to tackle it, not least because of the vicious cycle it risks creating. Taiwan already has one of the lowest birth rates of any developed country, an aging population and a near-bankrupt pension system. Without highly educated younger people contributing to the economy, the ability to provide for the elderly and educate the young people of tomorrow grows ever harder.
It is probably scant comfort to the government that Taiwan is not alone in this respect. The problem is similar to that faced in the past by Ireland, which for decades saw its brightest and most ambitious youngsters move to the UK and the United States in search of better opportunities there. But rather than simply blame China, Taiwan could do worse than study what Ireland has done to overcome the challenges it faced. For, as in Taiwan, Ireland’s brain drain was caused overwhelmingly by lack of opportunity at home where a slow-growing, largely agricultural economy offered few attractions for young people. This was reversed over several years, thanks to a consistent policy of attracting foreign investment, especially in high-tech industries, through a combination of low taxes and generous grants for research and development (R&D), all aimed at stimulating export-led growth.
Taiwan’s historic success was also built on export-led growth but ironically this has masked the problems that now contribute to the “brain drain.” Between 2005-14, Taiwan’s economy was growing at an annual average rate of almost 4 percent, healthy by global standards, especially given the global slowdown following the financial crisis of 2007-8. But, according to Taiwan’s national statistics, almost two-thirds of this growth came from trade, despite the economic slowdown, uncertainty, and rising protectionist sentiment worldwide. This was only achievable because of the sacrifices made by the Taiwanese workforce: in addition to the low and stagnant wages mentioned in the Time article, Taiwanese work the third-longest hours of any employees worldwide, exceeded only by those of Mexico and Costa Rica. Both the long hours and low wages are a reflection of the Taiwanese business model, in which mainly small companies (almost half of Taiwan’s companies employ fewer than 30 staff) win orders by cutting costs and profit margins to the bone. Unfortunately, it is no longer a sustainable, much less successful, model. In Taiwan’s biggest export market, China, its exports have been growing more slowly than have those of the rest of the world generally, notwithstanding the much-touted benefits of the ECFA.
One challenge, clearly, is to reform and rejuvenate Taiwan’s export sector and to lessen its dependence on China, an obvious aim of President Tsai’s “New Southbound Policy. But a deeper question is, why is Taiwan’s domestic sector growing so slowly? And would not faster domestic growth generate more opportunities for Taiwan’s young, reducing the incentive for them to seek fame and fortune across the Taiwan Straits?
Unfortunately, the success of Taiwan’s exporters has distracted attention from the stagnant domestic economy. Yet the difference between the two is striking, for whereas the export sector is dominated by private firms, state-owned or state-controlled enterprises (SOEs) dominate the domestic sector. They account for around 60 percent of the financial services industry, for example, and the government holds 40 percent of the shares in Chungwha Telecom (中華電信), even though it is listed on the New York Stock Exchange, giving the state effective control. Perhaps the most extreme case is that of Taisugar (台灣糖業公司), which runs hypermarkets, convenience stores, gas stations, pig breeding and much more. But nearly 90 percent of its profits come from its core business of producing and refining sugar and this production is, in turn, protected by Taiwan’s highest tariffs—nearly 50 percent, according to the WTO.
Many of the SOEs are operated more on civil service than enterprise lines, with promotion based on time served rather than merit-based and budgets centrally set, stifling initiative and enterprise. If Taisugar is in any way emblematic of the rest of Taiwan’s SOEs, they are less efficient than private sector companies would be and heavily reliant on regulations and controls to stay in business—regulations which also serve to stifle private enterprise and discourage foreign investment. Many of them owe their origins to the KMT’s authoritarian past and the ruling party’s desire to control the economy, ostensibly for its own benefit, but to date it appears to have suited both main political parties to leave them untouched. Academic research has also shown that overall output from Taiwan’s SOEs has been consistently lower than in the private sector.
Could privatization of some SOEs help stimulate domestic growth and improve job opportunities? A common assumption and fear about privatization is that it will lead to job losses, one reason why public-sector unions in Taiwan have fiercely opposed it until now. But research from the OECD shows that on the contrary, in the long run privatization creates new, additional employment opportunities because of the expansion in output that it generates. These new jobs more than offset any short-term losses; furthermore, the new jobs are usually more highly skilled, better paid and therefore more attractive to young, new entrants to the workforce. Nor is this confined to OECD countries. A study of Vietnam’s privatization of SOEs in the 1990s also found that both employment and employee income increased after privatization, albeit modestly. More and better domestic job opportunities mean less reason to emigrate. They also help stimulate domestic demand, boosting the economy further.
This is not to suggest that wholesale privatization of Taiwan’s SOEs is the only answer to the lack of domestic opportunities. Privatization alone will not put an end to Taiwan’s ‘brain drain.’ Younger or more ambitious people will always be tempted to seek opportunities overseas, even when times are good. That has been Ireland’s experience. Other factors, such as the high cost of housing, might also be reasons for people to move overseas. Sometimes it is simply the pull of a larger market. But Ireland’s experience has been that more domestic opportunities mean fewer members of the critical 15-24 age group emigrate and, just as importantly, more of those who do emigrate return home in later years, bringing with them additional skills and experience they have gained while overseas.
There are also sound reasons for some industries—those in national defense, for example, to be under the control of the state, nor is privatization an automatic panacea. UK evidence, for example, suggests that the benefits of electricity privatization have been modest, especially for consumers, something the Taiwan government might consider given its plans to privatize Taipower. In the case of Taipower, some if not all of the benefits of privatization might be achieved simply through regulatory changes, especially as Taiwan scored very highly in the 2016 World Bank Doing Business report for the provision of electric power to consumers. Given the success of privatization in many OECD countries, there is surely a debate to be had in Taiwan about the role of SOEs in the modern economy and whether privatization and deregulation would stimulate private enterprise and encourage foreign investment, in turn opening up more opportunities for young Taiwanese to seek their fortunes at home, instead of in China, to China’s benefit.
The main point: Taiwan’s past success as an export-driven economy masked the underlying problem of state-owned enterprises at home, which have led to stagnant growth in the domestic economy. Addressing the domestic economy is key to stopping the brain drain of Taiwan’s young talent.